-----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, Lo5gRzkt/3xeOiu173Q++GjQGtJrAUX4BcxvwpNvWS16PvFugYsZ0GnExflBA1ja YiLpbevkbXgIJmHZH3u3/Q== 0000007789-99-000009.txt : 19990517 0000007789-99-000009.hdr.sgml : 19990517 ACCESSION NUMBER: 0000007789-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99622050 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 March 31, 1999 ---------------------------------------- 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) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of registrant's common stock, par value $0.01 per share, at April 30, 1999, was 63,373,548 shares. ASSOCIATED BANC-CORP TABLE OF CONTENTS Page No. -------- PART I. Financial Information Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets - March 31, 1999, March 31, 1998 and December 31, 1998 3 Consolidated Statements of Income - Three Months Ended March 31, 1999 and 1998 4 Consolidated Statement of Changes in Stockholders' Equity - Three Months Ended March 31, 1999 5 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K See Footnote (5) in Part I Item I Signatures PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: ASSOCIATED BANC-CORP Consolidated Balance Sheets (Unaudited) March 31, March 31, December 31, 1999 1998 1998 ---- ---- ---- (In thousands, except share data) ASSETS Cash and due from banks $ 253,330 $ 297,600 $ 331,532 Interest-bearing deposits in other financial institutions 5,600 89,627 200,467 Federal funds sold and securities purchased under agreements to resell 33,225 33,301 4,485 Investment securities: Held to maturity-at amortized cost (fair value of $520,819, $745,401, and $562,940, respectively 512,340 734,928 550,775 Available for sale-at fair value (amortized cost of $2,492,237, $1,978,559, and $2,320,240, respectively) 2,516,992 2,024,805 2,356,960 Loans held for sale 127,893 101,833 165,170 Loans 7,463,922 7,167,327 7,272,697 Allowance for possible loan losses (103,064) (93,415) (99,677) --------- --------- --------- Loans, net 7,360,858 7,073,912 7,173,020 Premises and equipment 140,455 125,822 140,142 Other assets 351,501 210,440 328,116 --------- --------- --------- Total assets $11,302,194 $10,692,268 $11,250,667 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing deposits $ 948,173 $ 841,968 $ 998,379 Interest-bearing deposits 7,488,487 7,651,453 7,559,440 --------- --------- --------- Total deposits 8,436,660 8,493,421 8,557,819 Short-term borrowings 1,815,020 1,181,363 1,671,093 Long-term debt 27,848 30,150 26,004 Accrued expenses and other liabilities 119,135 150,508 117,030 --------- --------- --------- Total liabilities 10,398,663 9,855,442 10,371,946 Stockholders' equity Preferred stock -- -- -- Common stock (par value $0.01 per share, authorized 100,000,000 shares, issued 63,389,734, 63,389,734 and 63,389,734 shares, respectively) 634 507 634 Surplus 225,757 221,850 225,757 Retained earnings 663,328 592,169 646,071 Accumulated other comprehensive income 15,716 29,287 23,369 Treasury stock at cost (58,826, 163,070 and 503,158 shares, respectively) (1,904) (6,987) (17,110) --------- --------- --------- Total stockholders' equity 903,531 836,826 878,721 Total liabilities and stockholders' equity $11,302,194 $10,692,268 $11,250,667 ========== ========== ========== 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, 1999 1998 ---- ---- (In thousands except per share data) INTEREST INCOME Interest and fees on loans $ 150,372 $ 151,057 Interest and dividends on investment securities: Taxable 40,177 44,296 Tax exempt 4,728 2,439 Interest on deposits in other financial institutions 161 577 Interest on federal funds sold and securities purchased under agreements to resell 539 255 ------- ------- Total interest income 195,977 198,624 INTEREST EXPENSE Interest on deposits 77,398 86,297 Interest on short-term borrowings 21,340 17,370 Interest on long-term borrowings 442 441 ------- ------- Total interest expense 99,180 104,108 ------- ------- NET INTEREST INCOME 96,797 94,516 Provision for possible loan losses 4,451 3,758 ------- ------- Net interest income after provision for possible loan losses 92,346 90,758 NONINTEREST INCOME Trust service fees 9,581 7,915 Service charges on deposit accounts 6,915 6,370 Mortgage banking 11,813 10,896 Credit card and other nondeposit fees 4,548 3,986 Retail commission income 3,886 3,390 Asset sale gains, net 282 185 Investment securities gains, net 3,589 5,311 Other 4,003 3,523 ------- ------- Total noninterest income 44,617 41,576 NONINTEREST EXPENSE Salaries and employee benefits 38,221 36,263 Occupancy 5,926 5,168 Equipment 3,693 3,409 Data processing 5,322 4,654 Business development and advertising 3,058 3,266 Stationery and supplies 1,877 1,396 FDIC expense 862 830 Other 20,034 16,589 ------- ------- Total noninterest expense 78,993 71,575 ------- ------- Income before income taxes 57,970 60,759 Income tax expense 19,019 20,899 ------- ------- NET INCOME $ 38,951 $ 39,860 ======= ======= Earnings per share: Basic $ 0.62 $ 0.63 Diluted $ 0.61 $ 0.62 See accompanying notes to consolidated financial statements ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statement of Changes in Stockholders' Equity (Unaudited) Accumulated Common Other Stock Retained Comprehensive Treasury Amount Surplus Earnings Income Stock Total - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 634 $ 225,757 $ 646,071 $ 23,369 $ (17,110) $ 878,721 Comprehensive income: Net income -- -- 38,951 -- -- 38,951 Net unrealized holding losses arising during the period -- -- -- (8,376) -- (8,376) Add back: reclassification adjustment for net gains realized in net income -- -- -- (3,589) -- (3,589) Income tax effect -- -- -- 4,262 -- 4,262 Comprehensive income 31,248 Cash dividends, $0.29 per share -- -- (18,477) -- -- (18,477) Common stock issued: Business combinations 3 10,664 (1,469) 50 15,351 24,599 Incentive stock options -- -- (1,662) -- 2,749 1,087 Retirement of treasury stock in (3) (10,664) (86) -- 10,753 -- connection with business combination Purchase of treasury stock -- -- -- -- (13,647) (13,647) --------------------------------------------------------------------------- Balance, March 31, 1999 $ 634 $ 225,757 $ 663,328 $ 15,716 $ (1,904) $ 903,531 ===========================================================================
See accompanying notes to consolidated financial statements. ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements Of Cash Flows (Unaudited) March 31, 1999 1998 ---- ---- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 38,951 $ 39,860 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 4,451 3,758 Depreciation and amortization 4,399 3,884 Amortization (accretion) of: Mortgage servicing rights 2,258 1,748 Intangibles 1,703 1,460 Investment premiums and discounts 350 248 Deferred loan fees and costs 378 82 Gain on sales of securities, net (3,589) (5,311) Gain on other asset sales, net (282) (185) Gain on sales of loans held for sale, net (5,847) (5,865) Decrease in loans held for sale, net 43,124 18,033 Decrease in interest receivable and other assets 6,551 12,563 Increase (decrease) in interest payable and other liabilities (75) 21,316 ------ ------ Net cash provided by operating activities 92,372 91,591 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in federal funds sold and securities purchased under agreements to resell (17,340) (21,790) Net (increase) decrease in interest-bearing deposits in other financial institutions 194,883 (84,607) Net increase in loans (86,817) (100,970) Mortgage servicing rights additions (4,731) (4,915) Purchases of: Securities held to maturity -- (10,019) Securities available for sale (373,775) (84,737) Premises and equipment, net of disposals (4,393) (1,899) Proceeds from: Sales of securities available for sale 35,054 57,090 Maturities of securities available for sale 220,841 180,821 Maturities of securities held to maturity 38,225 47,380 Sales of other real estate owned and other assets 1,853 1,961 Net cash received in acquisition of subsidiary 3,956 -- ------- ------- Net cash provided (used) by investing activities 7,756 (21,685) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits (273,271) 98,144 Net increase (decrease) in short-term borrowings 126,213 (156,265) Repayment of long-term debt (234) -- Proceeds from issuance of long-term debt -- 15,500 Cash dividends (18,477) (14,695) Proceeds from exercise of stock options 1,087 4,768 Purchase of treasury stock (13,648) (9,942) ------- ------- Net cash provided by financing activities (178,330) (62,490) ------- ------- Net increase (decrease) in cash and cash equivalents (78,202) 7,416 Cash and due from banks at beginning of period 331,532 290,184 ------- ------- Cash and due from banks at end of period $253,330 $297,600 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $102,651 $102,596 Income taxes 2,168 2,146 Supplemental schedule of noncash investing activities: Loans transferred to other real estate 5,503 3,035 ======= ======= See accompanying notes to consolidated financial statements. ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Notes to Consolidated Financial Statements NOTE 1: Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Associated Banc-Corp's ("Corporation") financial position, results of its operations and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in the Corporation's 1998 annual report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the allowance for possible loan losses and the valuation of investments and mortgage servicing rights. NOTE 2: Reclassifications Certain items in the prior period consolidated financial statements have been reclassified to conform with the March 31, 1999 presentation. NOTE 3: Business Combinations The following table summarizes completed transactions during 1998 and through March 31, 1999: Consideration Paid --------------------------------- Date Method of Cash Shares of Total Assets Intangibles Name of Acquired Acquired Accounting (In Millions) Common Stock (In Millions) (In Millions) - ------------------------------------------------------------------------------------------------------------------------------------ Windsor Bancshares, Inc. ("Windsor") 2/99 Purchase $ --- 799,961 $ 182 $17.4 Minneapolis, Minnesota Citizens Bankshares, Inc. ("Citizens") Shawano, Wisconsin 12/98 Purchase 16.2 448,571 161 11.9 - ------------------------------------------------------------------------------------------------------------------------------------
On March 10, 1999 the Corporation announced the signing of a definitive agreement with Riverside Acquisition Corp. to acquire Riverside Acquisition Corp. of Minneapolis, Minnesota ("Riverside"). Riverside has approximately $336 million in total assets, and operates in five locations in the Minneapolis metropolitan area. The stock-for-stock merger transaction is contingent upon approval of regulatory authorities and the shareholders of Riverside. The transaction, expected to be completed in the third quarter of 1999, will be accounted for using the pooling-of-interests method. Since the transaction is not expected to be material to prior periods' reported operating results, previously reported results are not anticipated to be restated following consummation. NOTE 4: Adoption of Statements of Financial Accounting Standards ("SFAS") On January 1, 1999, the Corporation, as required, adopted 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." 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. There was no material impact on the Corporation's financial statements. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued 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. SFAS No. 133 is effective for all quarters of fiscal years beginning after June 15, 1999. Earlier application is encouraged, but is permitted only as of the beginning of any fiscal quarter that begins after the issuance of the statement. This statement should not be applied retroactively to financial statements of prior periods. The adoption of SFAS No. 133 is not expected to have a material impact on the Corporation's financial statements. NOTE 5: Earnings Per Share Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options. Presented below are the calculations for basic and diluted earnings per share: For the three months ended March 31, ------------------------------------ 1999 1998 ---- ---- (in thousands, except per share data) Net income available to common stockholders $38,951 $39,860 ======= ====== Weighted average shares outstanding 63,214 63,281 Effect of dilutive stock options outstanding 538 782 --- --- Diluted weighted average shares outstanding 63,752 64,063 ====== ====== Basic earnings per common share $0.62 $0.63 ===== ===== Diluted earnings per common share $0.61 $0.62 ===== ===== NOTE 6: Segment Reporting In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," was issued, requiring selected financial and descriptive information about reportable operating segments. The statement replaces the "industry segment" concept of SFAS no. 14 with a "management approach" concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the enterprise's internal organization, focusing on financial information that an enterprise's chief operating decision -makers use to make decisions about the enterprise's operating matters. The Corporation's reportable segment is banking, conducted through its bank, leasing, mortgage, insurance and brokerage subsidiaries. For purposes of segment disclosure under this statement, these entities have similar economic characteristics and the nature of their products, services, processes, customers, delivery channels and regulatory environment are similar. The "other" segment is comprised of smaller nonreportable segments, including asset management, consumer finance, treasury, holding company investments, as well as inter-segment eliminations and residual revenues and expenses, representing the difference between actual amounts incurred and the amounts allocated to operating segments. Selected segment information is presented below. Consolidated Banking Other Eliminations Total ----------------------------------------------- As of and for the three (In thousands) months ended March 31, 1999 Total assets $11,784,724 $1,259,667 $(1,742,197) $11,302,194 ========== ========= ========== ========== Interest income $ 198,209 $ 4,872 $ (7,104) $ 195,977 Interest expense 102,272 4,012 (7,104) 99,180 Net interest income 95,937 860 -- 96,797 Provision for loan losses 4,460 116 (125) 4,451 Noninterest income 40,832 29,156 (25,371) 44,617 Depreciation and amortization 6,428 1,921 -- 8,346 Other noninterest expense 71,952 24,066 (25,371) 70,647 Income taxes 17,889 1,523 (393) 19,019 ---------- --------- ------- ------ Net income $ 36,043 $ 2,390 $ 518 $ 38,951 ========== ======== ========== ========== As of and for the three months ended March 31, 1998 Total assets $11,139,861 $1,472,447 $(1,920,040) $10,692,268 ========== ========= ========== ========== Interest income $ 205,065 $ 2,582 $ (9,023) $ 198,624 Interest expense 111,399 1,732 (9,023) 104,108 Net interest income 93,666 850 -- 94,516 Provision for loan losses 3,883 -- (125) 3,758 Noninterest income 34,412 16,794 (9,630) 41,576 Depreciation and amortization 7,163 701 -- 7,864 Other noninterest expense 59,838 12,990 (9,117) 63,711 Income taxes 19,665 2,129 (895) 20,899 ---------- --------- ---------- ---------- Net income $ 37,529 $ 1,824 $ (507) $ 39,860 ========== ========= ========== ========== ITEM 2. Management's Discussion and Analysis of Financial Condition and the Results of Operations Forward-Looking Statements Forward-looking statements have been made in this document that are subject to risks and uncertainties. These forward-looking statements describe future plans or strategies and include Associated Banc-Corp's expectations of future results of operations. The words "believes," "expects," "anticipates," or 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 Associated Banc-Corp (the "Corporation") and could cause those results to differ materially from those expressed in the 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. Overview The following discussion and analysis is presented to assist in the understanding and evaluation of the Corporation's financial condition and results of operations. It is intended to complement the unaudited financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The following discussion refers to the impact of the Corporation's business combination activity (see Note 3 of the notes to consolidated financial statements). On November 12, 1998, the Corporation completed the conversion of First Financial Bank ("FFB") systems and the distribution of FFB assets into its various affiliates. Results Of Operations - Summary Net income for the three months ended March 31, 1999 totaled $39.0 million, or $.62 and $.61 for basic and diluted earnings per share, respectively. Comparatively, net income for the first quarter of 1998 ("1Q98") was $39.9 million, or $.63 and $.62 for basic and diluted earnings per share, respectively. Operating results for the first quarter of 1999 ("1Q99") generated an annualized return on average assets ("ROA") of 1.42% and an annualized return on average equity ("ROE") of 17.44%, compared to 1.53% and 19.51%, respectively, for the comparable period in 1998. The net interest margin for 1Q99 was 3.78% compared to 3.79% for the comparable quarter in 1998. Financial results on a sequential quarter basis showed improvement, following the FFB conversion in late 1998. Net income for 1Q99 was up $1.2 million over the fourth quarter of 1998 ("4Q98"). Diluted EPS was $.61 compared to the $.60 for 4Q98. In addition, ROA and ROE were improved by 4 basis points and 36 basis points, respectively, over the ratios for 4Q98, with the net interest margin increasing 6 basis points over the 3.72% for 4Q98. - -------------------------------------------------------------------------------- TABLE 1 Summary Results of Operations: Trends (Dollars in thousands, except per share) 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1999 1998 1998 1998 1998 - -------------------------------------------------------------------------------- Net income (Qtr) $38,951 $ 37,756 $ 38,400 $41,004 $39,860 Net income (YTD) $38,951 $157,020 $119,264 $80,864 $39,860 Earnings per share - basic (Qtr) $0.62 $0.60 $0.61 $0.65 $0.63 Earnings per share - basic (YTD) $0.62 $2.49 $1.89 $1.28 $0.63 Earnings per share - diluted (Qtr) $0.61 $0.60 $0.60 $0.64 $0.62 Earnings per share - diluted (YTD) $0.61 $2.46 $1.86 $1.26 $0.62 ROA (Qtr) 1.42% 1.38% 1.44% 1.56% 1.53% ROA (YTD) 1.42% 1.48% 1.51% 1.54% 1.53% ROE (Qtr) 17.44% 17.08% 17.51% 19.36% 19.51% ROE (YTD) 17.44% 18.33% 18.77% 19.43% 19.51% Efficiency ratio (Qtr) 56.18% 57.59% 53.64% 52.17% 54.10% Efficiency ratio (YTD) 56.18% 54.37% 53.29% 53.11% 54.10% Net interest margin (Qtr) 3.78% 3.72% 3.77% 3.77% 3.79% Net interest margin (YTD) 3.78% 3.79% 3.77% 3.78% 3.79% Net Interest Income and Net Interest Margin Net interest income ("NII") for the three months ended March 31, 1999 was $96.8 million, up $2.3 million over the comparable quarter last year. Fully taxable equivalent ("FTE") net interest income for 1Q99 increased by $3.6 million to $99.6 million, compared to 1Q98. As indicated in Tables 2 and 3, changes in the volume and mix of earning assets ("EAs") and interest-bearing liabilities ("IBLs") (principally due to acquisitions) contributed $5.8 million to FTE NII, while changes in the rate environment impacted FTE NII unfavorably by $2.2 million. Given the timing of completed acquisitions, average EAs and IBLs of 1Q98 do not include Citizens or Windsor. EAs, excluding the acquisitions, increased $106 million over 1Q98, or 1.1%. Loans, representing 71.6% of average EAs for 1Q99, accounted for essentially the entire earning asset growth. Loans, excluding the acquisitions, grew $79 million, or 1.1% from 1Q98. The net interest margin for 1Q99 was 3.78%, down from 3.79% in the comparable first quarter of last year. The interest rate spread (the difference between the average earning asset yield and the average rate paid on interest-bearing liabilities) increased 6 basis points, attributable to a 42 bp reduction on IBLs offsetting a 36 bp decrease on EAs. Net free funds contribution decreased by 7 bp in 1Q99, which was caused by both lower average balances of net free funds and lower value (rate on total IBLs) of these funds. The $100 million investment in bank owned life insurance ("BOLI") made in 4Q98 also impacts the comparison between first quarter periods. The funding of BOLI increased interest expense by approximately $1.3 million between quarters. Thus, adjusted for the NII impact of BOLI, the 1Q99 net interest margin would have been 3.83%, or 4 basis points higher than 1Q98. - -------------------------------------------------------------------------------- TABLE 2 Net Interest Income Analysis (Dollars in thousands) - -------------------------------------------------------------------------------- Three months ended Three months ended March 31, 1999 March 31, 1998 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate - -------------------------------------------------------------------------------- Loans $ 7,499,055 $150,588 8.06% $7,201,930 $151,307 8.44% Investments and other 2,979,190 48,170 6.47% 2,873,236 48,826 6.81% --------- ------- --------- ------ Total earning assets 10,478,245 198,758 7.61% 10,075,166 200,133 7.97% Other assets, net 675,974 507,243 ------- ------- Total assets $11,154,219 $10,582,409 ========== ========== Interest-bearing deposits $ 7,467,572 77,399 4.20% $ 7,550,146 86,297 4.64% Wholesale funding 1,746,911 21,782 4.99% 1,285,347 17,811 5.54% --------- ------ --------- ------ Total interest- bearing liabilities 9,214,483 99,181 4.35% 8,835,493 104,108 4.77% ------ ------- Demand, non-interest bearing 906,204 778,885 Other liabilities 127,509 139,494 Stockholders' equity 906,023 828,537 ------- ------- Total liabilities and equity $11,154,219 $10,582,409 ========== ========== Interest rate spread 3.26% 3.20% Net interest income and net interest margin $99,577 3.78% $96,025 3.79% ====== ====== Tax equivalent adjustment $2,780 $1,509 - -------------------------------------------------------------------------------- TABLE 3 Volume / Rate Variance (Dollars in thousands) - -------------------------------------------------------------------------------- Comparison of Three months ended March 31, 1999 versus 1998 --------------------------------------------- Income/ Variance Attributable to Expense ------------------------ Variance Volume Rate - -------------------------------------------------------------------------------- INTEREST INCOME Loans $ ( 719) $ 6,109 $(6,828) Investments and Other ( 656) 1,907 (2,563) ----- ----- ------ Total interest income 1,375) 8,016 (9,391) INTEREST EXPENSE Interest-bearing deposits $(8,898) $(3,598) $(5,300) Wholesale funding 3,971 5,835 (1,864) ------ ------ ------ Total interest expense (4,927) 2,237 (7,164) ---------------------------------------------- Net interest income $ 3,552 $ 5,779 $(2,227) ============================================== The change in interest due to both rate and volume has been allocated proportionately to volume variance and rate variance based on the relationship of the absolute dollar change in each. Provision For Possible Loan Loss The provision for loan loss (PFLL) for the first quarter of 1999 was $4.5 million, up slightly from 4Q98 of $4.2 million and up from 1Q98 of $3.8 million. The PFLL recorded in the first quarter of 1999 exceeded net charge-offs recorded in the same quarter by $1.4 million. The PFLL is a function of the methodology used to determine the adequacy of the allowance for loan losses. See additional discussion under the "Allowance for Loan Losses" section. Noninterest Income Noninterest income increased $3.0 million or 7.3% over the comparable first quarter of 1998. Noninterest income, excluding net investment securities gains, increased $4.8 million, or 13.1%. Most other categories of noninterest income increased compared to 1Q98. Trust service fees increased $1.7 million or 21.0% compared to the same quarter last year, as a result of higher trust assets under management and general market conditions. Income from BOLI, purchased in October 1998, accounts for $1.3 million of the increase between first quarter periods. BOLI income is included in other noninterest income. Mortgage banking income consists of servicing fees, gains on sales of loans, and production related revenue (origination, underwriting and escrow waiver fees). Mortgage banking income increased $917,000, or 8.4% versus 1Q98. The increase was principally a result of increased servicing fees. The mortgage portfolio serviced for others increased to $5.4 billion compared to $5.0 billion at March 31, 1998. Mortgage production between the two first quarter periods was similar at $484 million for 1Q99 and $495 million for 1Q98. Net investment securities gains were $3.6 million for 1Q99, down $1.7 million from 1Q98. - -------------------------------------------------------------------------------- TABLE 4 Noninterest Income (In thousands) - -------------------------------------------------------------------------------- 1st Qtr. 1st Qtr. Dollar Percent 1999 1998 Change Change - -------------------------------------------------------------------------------- Trust service fees $ 9,581 $ 7,915 $ 1,666 21.0% Service charges on deposit accounts 6,915 6,370 545 8.6 Mortgage banking 11,813 10,896 917 8.4 Credit card and other nondeposit fees 4,548 3,986 562 14.1 Retail commissions 3,886 3,390 496 14.6 Asset sale gains, net 282 185 97 52.4 BOLI income 1,278 --- 1,278 100.0 Other 2,725 3,523 (798) (22.7) ------ ------ ----- ----- Total, excluding securities gains $41,028 $36,265 $ 4,763 13.1% Investment securities gains, net 3,589 5,311 (1,722) (32.4) ------ ------ ----- ---- Total noninterest income $44,617 $41,576 $ 3,041 7.3% - -------------------------------------------------------------------------------- Noninterest Expense Total noninterest expense ("NIE") increased $7.4 million, or 10.4% over 1Q98. All categories of NIE, with the exception of business development/advertising, increased when compared to the first quarter of last year. The timing of the Citizens and Windsor purchase acquisitions added approximately $2.7 million to total NIE for 1Q99 compared to 1Q98. Without the acquisitions, NIE would have increased over 1Q98 by $4.8 million, or 6.7% Personnel expenses increased $2.0 million, or 5.4% when compared to 1Q98. Approximately $1.4 million of the increase is due to the additional staff of acquired entities, with the remainder attributable to base merit increases. Occupancy and equipment increased to $9.6 million, or $1.0 million over 1Q98, primarily due to increases in various rental expenses, contract maintenance, and depreciation on furniture, fixtures and equipment. Data processing for 1Q99 was $5.3 million, or $668,000 over 1Q98. Higher volumes to process, software costs, and the timing of the acquisitions account for the majority of the increase. Professional and legal fees, included in other expense, were up $1.5 million between the comparable first quarters, principally due to Y2K efforts and acquisitions. The remaining increase in other NIE is due to intangibles amortization (additional goodwill recorded with the acquisitions, and increased capitalized mortgage servicing rights), and various volume-related costs (e.g. credit bureau, recording and filing fees). - -------------------------------------------------------------------------------- TABLE 5 Noninterest Expense (In thousands) - -------------------------------------------------------------------------------- 1st Qtr. 1st Qtr. Dollar Percent 1999 1998 Change Change - -------------------------------------------------------------------------------- Salaries and employee benefits $38,221 $36,263 $ 1,958 5.4% Occupancy 5,926 5,168 758 14.7 Equipment 3,693 3,409 284 8.3 Data processing 5,322 4,654 668 14.4 Stationery and supplies 1,877 1,396 481 34.5 Business development and advertising 3,058 3,266 (208) (6.4) FDIC expense 862 830 32 3.9 Other 20,034 16,589 3,445 20.8 ------- ------ ----- ---- Total noninterest expense $78,993 $71,575 $7,418 10.4% - -------------------------------------------------------------------------------- Balance Sheet At March 31, 1999, total assets were $11.3 billion, an increase of $610 million, or 5.7%, over March 31, 1998, while assets grew $52 million over December 31, 1998. The growth is in part due to the timing of the purchase acquisitions. Citizens and Windsor accounted for $354 million of the increase between comparable first quarter periods, while Windsor accounted for $182 million of the increase since year end 1998. Citizens was acquired in December 1998 (total assets of $161 million; loans of $105 million; deposits of $117 million). Windsor was acquired in February 1999 (total assets of $182 million; loans of $113 million; deposits of $152 million). Goodwill intangibles increased by $17.4 million in 1Q99 for Windsor and by $11.9 million at year end 1998 for Citizens. On average, total assets for 1Q99 increased to $11.2 billion, or $572 million (5.4%) over 1Q98. Excluding the acquisitions, total assets were up 2.1% on average. Average earning assets for 1Q99 were $10.5 billion which, excluding the acquisitions, increased $106 million over 1Q98, and increased $227 million over 4Q98. Loan growth in the first quarter accounted for essentially all the earning asset growth. On average, loans were $7.5 billion for 1Q99, growing $297 million over 1Q98 (4.1%) and $260 million over 4Q98 (14.6% annualized). Without the acquisitions, average loans grew 1.1% over 1Q98 and at a 4.5% annualized pace over 4Q98. Loan growth has come primarily from commercial loans. Historical trends support a seasonal first quarter dip in average deposit balances compared to fourth quarter. On average, deposits were $8.4 billion for 1Q99, decreasing $130 million versus 4Q98 (down 6.2% annualized) and increasing $45 million since 1Q98 (0.5%). Without the acquisitions, average deposits were down 16.5% on an annualized basis for the sequential quarters and down 2.7% for the comparable first quarters. For the periods under comparison, average balances of NOW accounts were up while time deposits were down in part in response to the Corporation's disciplined pricing philosophy in 1999. - -------------------------------------------------------------------------------- TABLE 6 Period End Loan Composition (Dollars in millions) - -------------------------------------------------------------------------------- March 31, % of March 31, % of Dec. 31, % of 1999 Total 1999 Total 1999 Total - -------------------------------------------------------------------------------- Commercial, financial & agricultural ("CF&A" loans) $1,122 15% $1,061 15% $ 962 13% Real estate-construction 472 6 332 4 461 6 Real estate-mortgage 5,214 69 5,072 70 5,245 71 Installment 759 10 785 11 751 10 Leases 25 -- 19 -- 19 -- ----- -- ----- -- ----- -- Total loans (including loans held for sale) $ 7,592 100% $7,269 100% $7,438 100% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE 7 Period End Deposit Composition (Dollars in millions) - -------------------------------------------------------------------------------- March 31, % of March 31, % of Dec. 31, % of 1999 Total 1999 Total 1999 Total - -------------------------------------------------------------------------------- Demand $ 948 11% $ 842 10% $ 998 12% Savings 930 11 994 12 937 11 NOW 773 9 428 5 835 10 Money Market 1,322 16 1,415 16 1,165 13 Time 4,464 53 4,814 57 4,623 54 ----- -- ----- -- ----- -- Total deposits $ 8,437 100% $ 8,493 100% $ 8,558 100% - -------------------------------------------------------------------------------- Allowance For Loan Losses The loan portfolio is the Corporation's primary asset subject to credit risk. Credit risk is controlled and monitored through the use of lending standards, thorough review of potential borrowers, and on-going review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, further ensures appropriate management of credit risk and minimization of loan losses. As of March 31, 1999, the allowance for possible loan losses ("AFLL") was $103.1 million, representing 1.38% of loans outstanding, compared to $93.4 million, or 1.30% of loans at March 31, 1998, and $99.7 million, or 1.37% at year end 1998. At March 31, 1999, the AFLL was 225% of nonperforming loans compared to 275% and 185%, at March 31 and December 31, 1998, respectively. The AFLL was increased in part by balances acquired of $2.0 million related to Windsor (included as of March 31, 1999), and $3.6 million related to Citizens included as of December 31, 1998). Table 8 provides additional information regarding activity in the AFLL. The AFLL represents management's estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. Management's evaluation of the adequacy of the AFLL is based on management's ongoing review and grading of the loan portfolio, consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, current economic conditions, the fair value of underlying collateral, and other factors affecting borrowers which could result in potential credit losses. In general, the increase in the AFLL is a function of a number of factors. First, total loan growth was moderate (4.1% increase between comparable first quarters, or 1.1% increase excluding the acquisitions; and 10.7% annualized growth since year-end 1998, or 4.3% excluding the acquisitions). Loan growth has been predominantly in commercial-oriented loans (CF&A loans, commercial real estate and real estate construction loans) which by their nature carry greater inherent credit risk. Also, nonperforming loans increased by $11.9 million between March 31, 1999 and 1998, while declining since year end 1998 (further discussed under section "Nonperforming Loans and Other Real Estate Owned"). Net charge-offs have remained unchanged ($3.1 million for March 31, 1999 and 1998). Finally, the AFLL was impacted by balances acquired in the acquisitions as described above. - -------------------------------------------------------------------------------- TABLE 8 Allowance for Loan Losses and Nonperforming Assets (Dollars in thousands) - -------------------------------------------------------------------------------- At and for the At and for the three months ended Year ended March 31, December 31, - -------------- ----------------------------------------------------------------- 1999 1998 1998 ---- ---- ---- Allowance for Loan Losses (AFLL) (In Thousands) - -------------------------------------------------------------------------------- Balance at beginning of period $ 99,677 $ 92,731 $ 92,731 Balance related to acquisitions 2,037 -- 3,636 Provision for possible loan losses 4,451 3,758 14,740 Charge-offs (3,679) (4,030 (17,039) Recoveries 578 956 5,609 ------- ------ ------ Net loan charge-offs (NCOs) (3,101) (3,074) (11,430) ------- ------ ------ Balance at end of period $103,064 $ 93,415 $ 99,677 Nonperforming Assets - -------------------------------------------------------------------------------- Nonaccrual loans $ 39,749 $ 30,072 $ 48,150 Accruing loans past due 90 days or more 5,358 3,414 5,252 Restructured loans 776 455 485 ------ ------ ------ Total nonperforming loans (NPLs) 45,883 33,941 53,887 Other real estate owned (OREO) 10,568 4,265 6,025 ------ ------ ------ Total nonperforming assets (NPAs) $ 56,451 $ 38,206 $ 59,912 Ratio of AFLL to NCOs (annualized) 8.20 7.49 8.72 Ratio of NCOs to average loans (annualized) 0.17% 0.17% 0.16% Ratio of AFLL to total loans 1.38% 1.30% 1.37% Ratio of NPLs to total loans 0.61% 0.47% 0.74% Ratio of NPAs to total assets 0.50% 0.36% 0.53% Ratio of AFLL to NPLs 225% 275% 185% - -------------------------------------------------------------------------------- Nonperforming Loans And Other Real Estate Owned Management's identification of nonaccrual and problem loan identification philosophy, which is embodied through the ongoing monitoring and reviewing of all pools of risk in the loan portfolio to ensure that problem loans are identified quickly and the risk of loss is minimized. Nonperforming loans ("NPLs") are considered an indicator of future loan losses. NPLs are defined as nonaccrual loans, loans 90 days or more past due but still accruing and restructured loans. The Corporation specifically excludes student loan balances that are 90 days or more past due and still accruing and that have contractual government guarantees as to collection of principal and interest, from its definition of NPLs. The Corporation had $11 million, $13 million and $8 million of these loans at March 31, 1999, December 31, 1998, and March 31, 1998, respectively. Table 8 provides detailed information regarding nonperforming assets. Total NPLs at March 31, 1999 were down from year end 1998. Half of this decrease is due to one large commercial property that was transferred into OREO in 1Q99 from the nonaccrual category in 4Q98. The increase in NPLs between the first quarter periods is in part due to the $3.3 million of NPLs acquired at year end 1998 from Citizens as well as from increases in real estate nonaccrual loans (particularly residential real estate). OREO was up from 1Q98 to 4Q98 primarily due to the 4Q98 classification of certain bank properties carried as real estate. OREO increased additionally in 1Q99 due to one large commercial property described above. 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, 1999, potential problem loans totaled $71 million. The loans that have been reported as potential problem loans are not concentrated in a particular industry. Management does not presently expect significant losses from credits in this category. Liquidity Liquidity refers to the ability of the Corporation to generate adequate amounts of cash to meet the Corporation's needs for cash. The Corporation must meet maturing debt obligations, provide a reliable source of funding to borrowers, and fund operations on a cost effective basis. Management believes that sufficient resources are available to meet the Corporation's liquidity objectives. Management is not aware of any events or uncertainties that are reasonably likely to have a material impact on the Corporation's liquidity, capital resources or operations. Special consideration is also being given to Year 2000 liquidity issues (see "Year 2000"). Liquidity, particularly at the banking subsidiaries, is predominantly derived from deposit growth. Deposits as a percentage of total funding sources (which includes deposits, short-term borrowings and long-term debt) was 81% on average for 1Q99. Another substantial source of liquidity is the investment securities portfolio, totalling $3.0 billion in 1Q99. These securities could be sold for liquidity or pledged to provide additional funding. Management may continue to reposition the investment portfolio in order to enhance future results of operations with no expected material impact on liquidity. The Corporation and its affiliates also have multiple funding sources that could be used to increase liquidity and provide additional financing flexibility. These sources consist primarily of established federal fund lines with major banks, advances from the Federal Home Loan Bank ("FHLB"), federal funds purchased from a sizable network of correspondent banks, and securities sold under agreements to repurchase obtained from a base of individual, business and public entity customers. 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. At March 31, 1999, the parent company had $225 million of established lines of credit with non-affiliated banks, of which $143 million was in use for nonbank affiliates. Capital Stockholders' equity at March 31, 1999 increased to $903.5 million, compared to $836.8 million at March 31, 1998. The change in equity between the two periods was primarily composed of the retention of earnings, the issuance of common stock in connection with acquisitions, the exercise of stock options, along with the payment of dividends and the repurchase of common stock. Stockholders' equity also included unrealized gains, net of tax, on securities available for sale (included in accumulated comprehensive income) of $15.7 million at March 31, 1999, compared to $29.3 million for the comparable prior year period. The ratio of period-end equity to assets at March 31,1999, was 7.99%, compared to 7.83% at March 31, 1998. Cash dividends of $0.29 per share were paid in 1Q99, representing a pay-out ratio of 46.77% for the quarter. The adequacy of the Corporation's capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic conditions in markets served and strength of management. The capital ratios of the Corporation and its banking affiliates are greater than minimums required by regulatory guidelines. The Corporation's capital ratios are summarized in Table 9. - -------------------------------------------------------------------------------- TABLE 9 Capital Ratios - -------------------------------------------------------------------------------- Tier I Capital Total Capital Tier I Leverage - -------------------------------------------------------------------------------- March 31, 1999 10.79% 12.15% 7.49% December 31, 1998 11.05% 12.28% 7.56% March 31, 1998 10.89% 12.14% 7.34% Regulatory minimum requirements 6.00% 10.00% 5.00% - -------------------------------------------------------------------------------- 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 noninformation 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 $8 million has been expended as of December 31, 1998. Additional expenditures 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. A liquidity contingency plan is being written and will be tested, including working with the Federal Reserve to ensure that adequate currency will be available to meet anticipated customer needs, as well as ensuring adequate access to funding as needed by the Corporation. 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. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Corporation has not experienced any material changes to its market risk position since December 31, 1998, from that disclosed in the Corporation's 1998 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, 1999. 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, 1999 /s/ H. B. Conlon ---------------------------------------- H. B. Conlon Chairman and Chief Executive Officer Date: May 14, 1999 /s/ Joseph B. Selner ----------------------------------------- Joseph B. Selner Principal Financial Officer EX-27 2
9 0000007789 ASSOCIATED BANC-CORP 1,000 3-mos DEC-31-1999 MAR-31-1999 253,330 5,600 33,225 0 2,516,992 512,340 520,819 7,463,922 (103,064) 11,302,194 8,436,660 1,815,020 119,135 27,848 0 0 634 902,897 11,302,194 150,372 44,905 700 195,977 77,398 99,180 96,797 4,451 3,589 20,034 57,970 57,970 0 0 38,951 0.62 0.61 7.61 39,749 5,358 776 70,979 99,677 3,679 578 103,064 103,064 0 0
-----END PRIVACY-ENHANCED MESSAGE-----