SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
- --------
For the quarterly period ended September 30, 1997
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
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Associated Banc-Corp
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
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(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
112 North Adams Street, Green Bay, Wisconsin 54301
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(Address of principal executive offices) (Zip code)
(414) 433-3166
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of registrant's common stock, par value $0.01
per share, at September 30, 1997, was 22,480,918 shares.
<PAGE>
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Statements of Financial Condition -
September 30, 1997 and December 31, 1996
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Statements of Financial Condition
(Unaudited)
September 30, December 31,
1997 1996
---- ----
(In Thousands)
ASSETS
Cash and due from banks $ 177,558 $ 236,314
Interest-bearing deposits in
other financial institutions 2,527 670
Federal funds sold and securities
purchased under agreements to resell 32,637 27,977
Investment securities:
Held to maturity (Fair value of
approximately $442,668 and $417,541
at September 30, 1997 and
December 31, 1996,respectively) 440,684 417,195
Available for sale-stated at fair value 415,105 437,440
Loans, net of unearned income 3,516,733 3,159,853
Less: Allowance for possible loan losses (50,813 (47,422)
------ ------
Loans, net 3,465,920 3,112,431
Premises and equipment 78,653 75,987
Other assets 122,812 111,065
--------- ---------
Total assets $4,735,896 $4,419,079
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 643,274 $ 655,358
Interest-bearing deposits 3,078,507 2,852,683
--------- ---------
Total deposits 3,721,781 3,508,041
Short-term borrowings 508,868 444,066
Accrued expenses and other liabilities 66,803 52,697
Long-term borrowings 5,868 21,130
--------- ---------
Total liabilities 4,303,320 4,025,934
Commitments and contingent liabilities --- ---
Stockholders' equity:
Preferred stock --- ---
Common stock (par value $0.01 per share,
authorized 48,000,000 shares issued
22,480,918 and 22,059,191 shares,
respectively) 225 221
Surplus 168,321 164,514
Retained earnings 253,164 222,348
Net unrealized gains on securities
available for sale 10,866 6,980
Less: Treasury stock (-0- and
26,226 shares at cost) --- (918)
--------- ---------
Total stockholders' equity 432,576 393,145
--------- ---------
Total liabilities and stockholders'
equity $ 4,735,896 $ 4,419,079
========= =========
(See accompanying notes to Consolidated Financial Statements.)
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands) (In Thousands)
INTEREST INCOME:
Interest and fees on loans $75,454 $66,207 $215,732 $193,987
Interest and dividends on
investment securities:
Taxable 10,248 10,082 30,833 29,716
Tax exempt 2,225 2,120 6,852 6,708
Interest on deposits in other
financial institutions 42 16 111 45
Interest on federal funds sold
and securities purchased under
agreements to resell 231 223 737 905
------ ------ ------- -------
Total interest income 88,200 78,648 254,265 231,361
------ ------ ------- -------
INTEREST EXPENSE
Interest on deposits 34,331 30,629 97,918 90,322
Interest on short-term borrowings 6,590 4,949 18,717 14,499
Interest on long-term borrowings 257 385 895 1,419
------ ------ ------- -------
Total interest expense 41,178 35,963 117,530 106,240
------ ------ ------- -------
NET INTEREST INCOME 47,022 42,685 136,735 125,121
Provision for possible loan
losses 1,488 1,011 3,697 3,055
------ ------ ------- -------
Net interest income after
provision for possible
loan losses 45,534 41,674 133,038 122,066
NONINTEREST INCOME
Trust service fees 7,089 6,175 21,020 18,534
Service charges on deposit accounts 3,387 3,218 9,998 9,222
Investment securities gains, net 171 52 832 428
Mortgage banking activity 3,979 2,913 9,741 9,728
Retail investment 1,026 628 2,836 2,025
Other 3,389 2,605 9,260 7,536
------ ------ ------ ------
Total noninterest income 19,041 15,591 53,687 47,473
------ ------ ------ ------
NONINTEREST EXPENSE
Salaries and employee benefits 20,360 18,563 60,664 55,972
Net occupancy 2,930 2,796 9,071 8,375
Equipment rentals, depreciation
and maintenance 2,166 2,037 6,467 5,740
Data processing 2,280 2,076 6,928 6,198
Stationery and supplies 1,025 755 2,767 2,442
Business development and advertising 923 876 2,641 2,626
FDIC 103 14 315 50
Other 9,677 7,345 26,620 22,744
------ ------ ------- -------
Total noninterest expense 39,464 34,462 115,473 104,147
------ ------ ------- -------
Income before income taxes 25,111 22,803 71,252 65,392
Income tax expense 8,925 8,143 24,817 23,210
------ ------ ------ ------
NET INCOME $16,186 $14,660 $46,435 $42,182
====== ====== ====== ======
Per share
Net income $ .72 $ .67 $ 2.07 $ 1.91
Dividends $ .29 $ .24 $ .82 $ .71
Weighted average shares outstanding 22,470 22,031 22,455 22,034
(See accompanying notes to Consolidated Financial Statements)
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1997 1996
---- ----
(In Thousands)
OPERATING ACTIVITIES
Net income $ 46,435 $ 42,182
Adjustments to reconcile net income to
net cash provided by
operating activities:
Provision for possible loan losses 3,697 3,055
Depreciation and amortization 7,326 6,246
Amortization of mortgage servicing rights 2,167 1,721
Amortization of intangibles 2,057 2,304
Net amortization and accretion of premiums and
discounts on investment securities 51 332
Gain on sales of investment securities, net (832) (428)
Increase in interest receivable and other assets (12,354) (3,275)
Increase in interest payable and other liabilities 12,173 2,473
Amortization of loan fees and costs (1,252) (1,097)
Net (increase) decrease in mortgage loans
acquired for resale (2,407) 12,116
Gain on sales of mortgage loans held for resale (2,734) (2,434)
------ ------
Net cash provided by operating activities $ 54,327 $ 63,195
------ ------
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell $ (235) $ 42,560
Net increase in interest-bearing deposits in other
financial institutions (1,857) (13)
Purchases of held to maturity securities (158,955) (87,295)
Purchases of available for sale securities (227,873) (172,108)
Proceeds from sales of available for sale securities 6,744 2,776
Maturities of held to maturity securities 135,239 99,984
Maturities of available for sale securities 278,658 190,714
Net increase in loans (316,042) (198,125)
Proceeds from sales of other real estate 1,211 1,138
Purchases of premises and equipment, net of disposals (7,037) (17,576)
Mortgage servicing rights additions (4,728) (4,912)
Net cash received in acquisition of subsidiary 5,051 461
------- -------
Net cash used in investing activities $(289,824) $(142,396)
------- -------
FINANCING ACTIVITIES
Net increase in deposits $ 146,091 $ 42,526
Net increase in short-term borrowings 49,540 43,816
Cash dividends (18,352) (15,253)
Proceeds from issuance of long-term borrowings --- 3,500
Proceeds from exercise of stock options 1,046 704
Purchase of treasury stock (1,584) (1,329)
----- ------
Net cash provided by financing activities $ 176,741 $ 73,964
------- ------
Net decrease in cash and cash equivalents $ (58,756) $ (5,237)
Cash and due from banks at beginning of period 236,314 214,411
------- -------
Cash and due from banks at end of period $ 177,558 $ 209,174
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 114,668 $ 105,608
Income taxes 25,688 25,042
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate $ 1,160 $ 1,229
Loans made in connection with the disposition of
other real estate 53 162
(See accompanying notes to Consolidated Financial Statements.)
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements
NOTE 1: In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
Associated Banc-Corp's ("Corporation") financial position, results of its
operations and cash flows for the periods presented. All adjustments necessary
to the fair presentation of the financial statements are of a normal recurring
nature. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Estimates that are
particularly susceptible to significant change relate to the determination of
the allowance for possible loan losses.
NOTE 2: The consolidated financial statements include the accounts of all
subsidiaries. All material intercompany transactions and balances are
eliminated. The Corporation has not changed its accounting and reporting
policies from those stated in the Corporation's 1996 Form 10-K Annual Report.
NOTE 3: Business Combinations
The following table summarizes completed transactions during 1996 and through
September 30, 1997 ($ in millions):
<TABLE>
Consideration Paid
----------------------------
Date Method of Shares of Total
Name of Acquired Acquired Accounting Cash Common Stock [C] Assets Intangibles
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SBL Capital Bank Shares, Inc. [A] 3/96 Pooling of
Lodi, Wisconsin interests $ --- 399,548 $ 68 $ ---
Greater Columbia Bank Shares, Inc. [B] 4/96 Pooling of
Portage, Wisconsin interests --- 1,161,161 211 ---
F&M Bankshares of Reedsburg, Inc. [A] 7/96 Pooling of
Reedsburg, Wisconsin interests --- 641,988 139 ---
Mid-America National Bancorp, Inc. 7/96 Purchase 7.8 --- 39 1.9
Chicago, Illinois
Centra Financial, Inc. [A] 2/97 Pooling of
West Allis, Wisconsin interests --- 414,365 76 ---
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[A] The transaction 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.
[C] Share amounts have been restated to reflect the 6-for-5 stock
split effected as a 20% stock dividend paid on March 17, 1997.
<PAGE>
On October 29, 1997, the Corporation completed its merger with First Financial
Corporation. The transaction was accounted for as a pooling of interests with
the issuance of 28,943,167 shares of the Corporation's common stock. The
financial statements as of September 30, 1997, do not include those of First
Financial Corporation. Pro forma results of operations of the Corporation and
First Financial Corporation for the periods prior to the acquisition date are as
follows:
<TABLE>
Corporation as Originally Reported Corporation Restated
- ------------------------------------------------------------------------------- -------------------------------------------
Three Months Nine Months Three Months Nine Months
(In Thousands, except Ended September 30, Ended September 30, Ended September 30, Ended September 30,
per share amounts) 1997 1996 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $47,022 $42,685 $136,735 $125,121 $94,776 $90,997 $280,275 $265,129
Other income $19,041 $15,591 $ 53,687 $ 47,473 $32,422 $26,562 $ 91,212 $ 78,967
Net income $16,186 $14,660 $ 46,435 $ 42,182 $36,822 $10,963 $106,161 $ 72,714
Earnings per common share $ .72 $ .67 $ 2.07 $ 1.91 $ .73 $ .25 $ 2.11 $ 1.63
- -------------------------------------------------------------------------------- -------------------------------------------
</TABLE>
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, 1997
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
U.S. Treasury and federal agency securities $166,167 $166,838
Obligations of states and political
subdivisions 184,638 185,006
Other securities 89,879 90,824
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Total $440,684 $442,668
================================================================================
(In thousands) December 31, 1996
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
U. S. Treasury and federal agency securities $161,199 $161,255
Obligations of states and political
subdivisions 194,810 194,511
Other securities 61,186 61,775
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Total $417,195 $417,541
================================================================================
Investment Securities Available for Sale
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(In thousands) September 30, 1997
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
U. S. Treasury and federal agency securities $358,803 $360,625
Obligations of states and political
subdivisions 5,109 5,283
Marketable equity securities 33,948 49,197
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Total $397,860 $415,105
================================================================================
<PAGE>
(In thousands) December 31, 1996
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
U. S. Treasury and federal agency securities $393,934 $394,492
Obligations of states and political
subdivisions --- ---
Marketable equity securities 32,502 42,948
- --------------------------------------------------------------------------------
Total $426,436 $437,440
================================================================================
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
Months Ended For the Year Ended
September 30, December 31,
1997 1996
---- ----
(In Thousands)
- --------------------------------------------------------------------------------
Balance at beginning of period $ 47,422 $ 41,614
Balance related to acquisition 728 3,511
Provisions charged to operating expense 3,697 4,665
Net loan charge-offs (1,034) (2,368)
----- -----
Balance at end of period $ 50,813 $ 47,422
====== ======
- --------------------------------------------------------------------------------
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 changes in the balance of mortgage servicing rights is as follows:
For the Nine
Months Ended For the Year Ended
September 30, December 31,
1997 1996
---- ----
(In Thousands)
- --------------------------------------------------------------------------------
Balance at beginning of period $ 10,995 $ 7,239
Additions 4,728 6,144
Amortization (2,167) (2,362)
Sales of servicing rights --- ---
Change in valuation allowance (198) (26)
------- ------
Balance at end of period $ 13, 358 $ 10,995
======= ======
- --------------------------------------------------------------------------------
NOTE 7: Per Share Computations
Per share computations are computed based on the weighted average number of
common shares outstanding for the three and nine months ended September 30, 1997
and 1996. All per share financial information has been adjusted to reflect the
6-for-5 stock split effected as a 20% stock dividend paid on March 17, 1997. The
Corporation issued 500,995 shares of common stock to a wholly-owned subsidiary
as part of the acquisition of F&M Bankshares of Reedsburg, Inc. These shares are
not reflected on the Consolidated Statements of Financial Condition as issued or
outstanding.
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.
CURRENT YEAR ACQUISITIONS
On February 21, 1997, Associated completed the acquisition of the $76-million
Centra Financial, Inc. (Centra) headquartered in West Allis, WI. The transaction
was accounted for using the pooling-of-interests method. However, the
transaction was not material to prior years' reported operating results and,
accordingly, previously reported prior years' results have not been restated.
EARNINGS
Net income for the third quarter of 1997 was $16.2 million, up 10.4% over 1996
third quarter net income of $14.7 million, and up from the $15.5 million
reported in the second quarter of 1997. Earnings per share were $0.72 in the
third quarter of 1997, up 7.5% over the $0.67 reported in the third quarter of
1996, and up from the $0.69 net income per share reported in the second quarter
of 1997. On a YTD basis in 1997, net income and net income per share were $46.4
million and $2.07, respectively. This is an increase in net income of 10.1% and
net income per share of 8.4% over the YTD 1996 net income of $42.2 million and
net income per share of $1.91.
Return on average assets (ROA) for the third quarter of 1997 was 1.39%, equal to
the same period last year and the second quarter of 1997. Return on average
equity (ROE) for the third quarter of 1997 was 15.12%, down from 15.56% during
the same period last year. Third quarter 1997 ROE increased from the 15.10%
reported in the second quarter of 1997.
The change (increase of $1.5 million, or 10.4%) in third quarter 1997 net
income, when compared to the same period last year, was a result of higher net
interest income (up $4.3 million, or 10.2%), higher noninterest income (up $3.5
million, or 22.1%), offset by higher provision for loan losses (up $477,000, or
47.2%), higher noninterest expense (up $5.0 million, or 14.5%) and higher income
tax expense (up $782,000, or 9.6%).
The change (increase of $686,000, or 4.4%) in third quarter 1997 net income,
when compared to the second quarter of 1997, was a result of higher net interest
income (up $1.5 million, or 3.2%) and higher noninterest income (up $1.5 million
or 8.4%) offset by higher provision for loan losses (up $402,000 or 37.0%),
higher noninterest expense (up $1.1 million or 2.8%) and higher income tax
expense (up $782,000 or 9.6%).
<PAGE>
The change (increase of $4.3 million, or 10.1%) in YTD third quarter 1997 net
income, when compared to YTD third quarter of 1996, was a result of higher net
interest income (up $11.6 million, or 9.3%), higher noninterest income (up $6.2
million, or 13.1%) offset by higher provision for loan losses (up $642,000, or
21.0%), higher noninterest expense (up $11.3 million, or 10.9%) and higher
income tax expense (up $1.6 million, or 6.9%).
Net Income
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Net Income $16,186 $ 15,500 $ 14,749 $ 15,062 $ 14,660
E.P.S. $ 0.72 $ 0.69 $ 0.66 $ 0.68 $ 0.67
Return on Average
Equity - Quarter 15.12% 15.10% 14.84% 15.48% 15.56%
Return on Average
Equity - Year to
Date 15.02% 14.97% 14.84% 15.39% 15.36%
Return on Average
Assets - Quarter 1.39% 1.39% 1.36% 1.40% 1.39%
Return on Average
Assets - Year to Date 1.38% 1.38% 1.36% 1.38% 1.37%
- --------------------------------------------------------------------------------
NET INTEREST INCOME
Third Quarter 1997 compared to Third Quarter 1996:
Fully taxable equivalent (FTE) net interest income in the third quarter of 1997
was $48.4 million, an increase of $4.4 million over the third quarter of 1996
FTE net interest income of $44.0 million. The acquisition of Centra accounted
for $851,000, or 19.3% of the increase in FTE net interest income.
The increase in FTE net interest income was attributable to larger volumes of
earning assets (up $428 million) when compared to the third quarter of 1996. The
increase in net interest income due to the volume variance (change in interest
income from incremental average earning assets less the change in interest
expense from incremental volumes of average interest-bearing liabilities) was
$4.8 million. This increase was offset by a negative rate variance (change in
interest income from incremental yields on average earning assets less the
change in interest expense from incremental rates on average interest-bearing
liabilities) of $420,000. The growth in average earning assets was concentrated
in loans, with average loans increasing $420 million, when compared to the third
quarter of 1996.
<PAGE>
The net interest margin (NIM) for the third quarter of 1997 was 4.45%, compared
with 4.51% in the third quarter of 1996. The decrease in the NIM of 6 basis
points is attributable to a 6 basis point decrease in the rate spread. The rate
spread decreased as a result of the cost of funds (rate on total
interest-bearing liabilities) increasing by 11 basis points, while the yield on
earning assets increased by only 5 basis points.
Net Interest Income
Tax Equivalent Basis
(In Thousands)
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Interest Income $88,200 $84,552 $81,513 $80,371 $78,648
Tax Equivalent
Adjustment 1,406 1,377 1,428 1,239 1,338
------ ------ ------ ------ ------
Tax Equivalent
Interest Income $89,606 $85,929 $82,941 $81,610 $79,986
Interest Expense 41,178 39,003 37,349 36,237 35,963
------ ------ ------ ------ ------
Tax Equivalent Net
Interest Income $48,428 $46,926 $45,592 $45,373 $44,023
====== ====== ====== ====== ======
- --------------------------------------------------------------------------------
Average earning assets grew $428 million from the third quarter of 1996, with
$70 million of this increase attributable to Centra. Total average loans grew
$420 million, with $35 million attributable to Centra. Excluding the impact of
Centra, average earning assets and loans grew at an internal rate of 9.2% and
12.6%, respectively. The average loans to average deposits ratio increased to
95.3%, up from 90.8% in the third quarter of 1996.
The average loan growth, excluding the impact of Centra, of $385 million, was
funded by increased wholesale borrowings (funds purchased, repurchase
agreements, FHLB borrowings, and long-term borrowings) of $93 million, increased
time deposits (personal CDs and Brokered CDs) of $155 million ($70 million
increase in personal CDs and a $85 million increase in Brokered CDs), higher
balances of Savings, NOW and MMA of $60 million, higher net free funds of $50
and lower balances of investments and short-term investments of $26 million. The
average balance of brokered CDs for the third quarter of 1997 was $174 million
with a period end balance of $169 million (up $79 million from December 31,
1996).
Net Interest Margin
Quarterly Trends
(Quarterly Info Only)
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Yield on Earning
Assets 8.24% 8.28% 8.25% 8.21% 8.19%
Cost of Interest-
Bearing Liabilities 4.59% 4.55% 4.49% 4.45% 4.48%
---- ---- ---- ---- ----
Interest Rate Spread 3.65% 3.73% 3.76% 3.76% 3.71%
Net Free Funds
Contribution .80% .79% .78% .80% .80%
---- ---- ---- ---- ----
Net Interest Margin 4.45% 4.52% 4.54% 4.56% 4.51%
==== ==== ==== ==== ====
Average Earning Assets
to Average Assets 93.35% 93.28% 92.97% 92.60% 92.73%
Free Funds Ratio
(% of Earning Assets) 17.55% 17.32% 17.17% 18.03% 17.78%
- --------------------------------------------------------------------------------
<PAGE>
Third Quarter 1997 compared to Second Quarter 1997:
Fully taxable equivalent net interest income in the third quarter of 1997 was
$48.4 million, an increase of $1.5 million over the second quarter 1997 FTE net
interest income of $46.9 million.
The increase in FTE net interest income was attributable to one additional day
in the third quarter of 1997 when compared to the second quarter of 1997. This
additional day increased FTE net interest income by $516,000 in the third
quarter of 1997. The third quarter of 1997 also benefited from a positive volume
variance (change in interest income from incremental average earning assets less
the change in interest expense from incremental volumes of average
interest-bearing liabilities) of $1.8 million offset by a negative rate variance
(change in interest income from incremental yields on average earning assets
less the change in interest expense from incremental rates on average
interest-bearing liabilities) of $785,000.
The NIM for the third quarter of 1997 was 4.45%, compared with 4.52% in the
second quarter of 1997. The largest factor contributing to the decrease in net
interest margin was the lower net interest spread of 8 basis points. A yield
decrease of 4 basis points on earning assets and an increase of 4 basis points
on interest-bearing liabilities caused the rate spread to decline by 8 basis
points.
Average earning assets increased $153 million in the third quarter. Total
average loans grew $160 million in the third quarter. Average earning assets and
loans grew at an annualized rate of 14.6% and 19.1%, respectively in the third
quarter of 1997.
The average loan growth of $160 million was funded by increased wholesale
borrowings (funds purchased, repurchase agreements, FHLB borrowings, and
long-term borrowings) of $12 million, increased time deposits (personal CDs and
Brokered CDs) of $75 million ($25 million increase in personal CDs and a $50
million increase in Brokered CDs), higher net free funds of $36 million, higher
balances of Savings, NOW and MMA of $31 million and lower balances of
investments and short-term investments of $6 million.
Earning Asset and Interest-Bearing Liability Volumes
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Average Loans $3,468,948 $3,309,278 $3,198,576 $3,111,614 $3,049,213
Average Earning
Assets 4,313,560 4,160,224 4,074,879 3,955,571 3,885,717
Average Noninterest-
Deposits 578,411 551,006 550,230 583,697 564,904
Average Interest-
Bearing Deposits 3,061,987 2,956,310 2,906,460 2,835,861 2,792,780
Average Deposits 3,640,398 3,507,316 3,456,690 3,419,558 3,357,684
Average Interest-
Bearing Liabilities 3,556,723 3,439,502 3,375,380 3,242,422 3,194,672
- --------------------------------------------------------------------------------
<PAGE>
YTD Third Quarter 1997 compared to YTD Third Quarter 1996:
FTE net interest income in the first nine months of 1997 was $140.9 million, an
increase of $11.7 million over the first nine months of 1996 FTE net interest
income of a $129.2 million. The acquisition of Centra accounts for $2.5 million
of this increase. The increase in FTE net interest income was primarily
attributable to a positive impact from a volume variance (change in interest
income from incremental average earning assets less the change in interest
expense from incremental volumes of average interest-bearing liabilities) of
$12.2 million.
The NIM for the nine months of 1997 was 4.50%, compared with 4.51% in the first
nine months of 1996. The interest rate spread for the first nine months of 1997
remained unchanged from the first nine months of 1996 at 3.71%, while the
contribution from net free funds in the first nine months of 1997 decreased by 1
basis point.
Average earning assets increased $359 million in the first nine months of 1997
compared to the first nine months of 1996, with $69 million of this increase
attributable to Centra. Total average loans grew $345 million, with $36 million
attributable to Centra. Excluding the impact of Centra, average earning assets
and loans grew at an annualized rate of 7.6% and 10.4%, respectively.
The average loan growth, excluding the impact of Centra, of $309 million, was
funded by increased wholesale borrowings (funds purchased, repurchase
agreements, FHLB borrowings, and long-term borrowings) of $79 million, increased
time deposits (personal CDs and Brokered CDs) of $109 million ($53 million
increase in personal CDs and a $56 million increase in Brokered CDs), higher net
free funds of $35 million, higher balances of Savings, NOW and MMA of $67
million and lower balances of investments and short term investments of $19
million.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The loan loss provision for the third quarter of 1997 was $1.5 million, an
increase of $402,000 from the second quarter of 1997 and an increase of $477,000
from the third quarter of 1996.
As of September 30, 1997, the allowance for possible loan losses of $50.8
million represented 1.44% of total outstanding loans, down from the 1.50%
reported at December 31, 1996, and down from 1.51% reported at September 30,
1996. The combination of third quarter provision expense exceeding net
charge-offs by $870,000 and annualized third quarter loan growth of 13.3%,
caused the allowance for possible loan losses to loans ratio to decline by 3
basis points in the third quarter.
<PAGE>
The third quarter of 1997 net charge-offs as a percent of average loans of 0.07%
increased slightly from net charge-offs to average loans of 0.06% in the third
quarter of 1996. YTD net charge-offs (annualized) are at 0.04% of YTD average
loans through the third quarter of 1997.
Provision for Possible Loan Losses
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Provision - Quarter $ 1,488 $ 1,086 $ 1,123 $ 1,610 $ 1,011
Provision - Year 3,697 2,209 1,123 4,665 3,055
Net Charge-offs Recoveries
- Quarter 618 541 (125) 948 456
Net Charge-offs Recoveries
- Year 1,034 416 (125) 2,368 1,420
Allowance at Period End $50,813 $49,943 $49,398 $47,422 $46,760
Allowance to Period End
Loans 1.44% 1.47% 1.52% 1.50% 1.51%
Net Charge-offs (Recoveries)
to Average Loans
(Annualized) - Quarter .07% .07% (.02)% .12% .06%
Net Charge-offs (Recoveries)
to Average Loans
(Annualized) - Year .04% .03% (.02)% .08% .06%
- --------------------------------------------------------------------------------
NONPERFORMING LOANS
Management is committed to an aggressive 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.
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 collectability of principal or interest on loans, it is management's
practice to place such loans on nonaccrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously accrued
and uncollected interest on such loans is reversed and income is recorded only
to the extent that interest payments are subsequently received in cash and a
determination has been made that the principal balance of the loan is
collectible. If collectability of the principal is in doubt, payments received
are applied to loan principal.
Loans past due 90 days or more but still accruing interest are also included in
Nonperforming loans. Loans past due 90 days or more but still accruing are
classified as such where the underlying loans are both well-secured (the
collateral value is sufficient to cover principal and accrued interest) and in
the process of collection. Also included in nonperforming loans are
"restructured" loans. Restructured loans involve the granting of some concession
to the borrower involving the modification of terms of the loan, such as changes
in payment schedule or interest rate.
<PAGE>
Total nonperforming loans at September 30, 1997, were $23.9 million, a decrease
of $4.2 million from June 30, 1997. The ratio of nonperforming loans to total
loans at September 30, 1997, was .68% compared to .62% at December 31, 1996, and
.65% at September 30, 1996. Other real estate owned decreased in the third
quarter to $1.1 million at September 30, 1997, down from $1.7 million at
September 30, 1996, and $1.2 million at December 31, 1996.
The decrease in past due 90+ days and still accruing is primarily attributable
to a large credit returning to performing status during the third quarter of
1997. This credit was placed in past due 90+ days and still accruing during the
second quarter of 1997.
Nonperforming Loans and Other Real Estate
(In Thousands)
- --------------------------------------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
- --------------------------------------------------------------------------------
Nonaccrual Loans $22,031 $20,589 $16,492 $17,225 $17,939
Accruing Loans Past Due
90 Days or More 1,648 7,040 2,052 1,801 1,646
Restructured Loans 186 471 499 534 576
------ ------ ------ ------ ------
Total Nonperforming Loans $23,865 $28,100 $19,043 $19,560 $20,161
====== ====== ====== ====== ======
Nonperforming Loans as a
Percent of Loans .68% .83% .59% .62% .65%
Other Real Estate Owned $ 1,143 $ 1,455 $ 1,272 $ 1,173 $ 1,727
- --------------------------------------------------------------------------------
Impaired loans are defined as those loans where it is probable that all amounts
due according to contractual terms, including principal and interest, will not
be collected. The Corporation has determined that commercial loans and
residential real estate loans that have a nonaccrual status or have had their
terms restructured meet the definition. Impaired loans are measured at the fair
value of the collateral, if the loan is collateral dependent, or alternatively
at the present value of expected future cash flows. Interest income on impaired
loans is recognized only at the time that cash is received, unless applied to
reduce principal.
At September 30, 1997, the recorded investment in impaired loans totaled $20.7
million. Included in this amount is $18.0 million of impaired loans that do not
require a related allowance for possible loan losses and $2.7 million of
impaired loans for which the related allowance for possible loan losses totaled
$1.2 million. The average recorded investment in impaired loans during the
twelve months ended September 30, 1997, was approximately $18.0 million.
Interest income recognized on a cash basis on impaired loans during the first
nine months of 1997 totaled $455,000.
<PAGE>
The following table shows, for those loans accounted for on a nonaccrual basis
and restructured loans for the nine months ended September 30, 1997, the gross
interest that would have been recorded if the loans had been current in
accordance with their original terms and the amount of interest income that was
included in net income for the period.
- --------------------------------------------------------------------------------
For the Nine Months
Ended September 30, 1997
------------------------
(In Thousands)
- --------------------------------------------------------------------------------
Interest income in accordance with original terms $1,371
Interest income recognized 891
-----
Reduction in interest income $480
- --------------------------------------------------------------------------------
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, 1997, potential problem loans totaled $58.2 million compared to
$54.0 million at the end of 1996. 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, 1997, no concentrations existed in the Corporation's loan portfolio in
excess of 10% of total loans.
Real estate construction loans at September 30, 1997, totaled $272.2 million, or
7.7% of loans while agricultural loans were 1.0% of total loans.
As of September 30, 1997, 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 1997 compared to Third Quarter 1996
Noninterest income increased $3.5 million, or 22.1% over the third quarter of
1996. Excluding the impact of Centra, the increase was $3.3 million or 21.3%.
All categories increased when compared to the third quarter of 1996.
Trust service fees increased $914,000, or 14.8% compared to the same quarter
last year. This increase is primarily due to increased volumes of trust
business.
Retail investment income increased $398,000, or 63.4% over the third quarter of
1996. This increase is attributable to higher levels of revenue from offices
opened during 1996.
Service charges on deposit accounts increased $169,000, or 5.3% over the same
period last year. Excluding the impact of Centra, the increase was $103,000, or
3.2%. The majority of the increase is attributable to higher fees on business
accounts, interest checking and correspondent accounts, and lower waived service
charges.
Mortgage banking income increased $1.1 million, or 36.6% from the third quarter
of 1996. Lower origination fees (down $62,000), were offset by higher
underwriting fees (up $182,000), higher gain on sale of loans (up $757,000) and
higher loan servicing revenues (up $158,000). Mortgage loan production was $207
million in the third quarter of 1997 compared to $145 million in the third
quarter of 1996. The increase in production, combined with a more favorable rate
environment in the third quarter of 1997, created the large increase in mortgage
banking income in the third quarter.
Other miscellaneous income, from a variety of sources, increased $784,000, or
30.1% in the third quarter of 1997 compared with the same period last year. The
increase is primarily attributable to a change in the accounting for the gross
revenues of the reinsurance subsidiary (up $415,000) and higher electronic funds
transfer (ETF) fees (up $395,000). Beginning in 1997, the accounting methodology
for EFT fees was changed. In previous years, EFT expenses and revenues were
netted and booked as other income. This year, the revenues and expenses are
recorded separately in other income and other expense. Net EFT fees (increase in
EFT revenue less the increase in EFT expenses) increased by $212,000 over the
same period last year.
Investment security gains of $171,000 increased $119,000 over the same period
last year. This variance is attributable to investment security gains from the
sale of Sallie Mae stock.
Third Quarter 1997 compared to Second Quarter 1997
Noninterest income increased $1.5 million, or 8.4% in the third quarter of 1997
compared to the second quarter of 1997. All categories, with the exception of
investment security gains, increased when compared to the second quarter of
1997.
Trust service fees increased $106,000, or 1.5% during the quarter. This increase
is primarily due to increased trust business.
Retail investment income increased $104,000, or 11.3% in the third quarter of
1997. This increase reflects higher volumes of trades made in the third quarter
of 1997.
Mortgage banking income increased $1.0 million, or 34.2% from the second quarter
of 1997. Higher gain on sale of loans (up $689,000), increased underwriting fees
(up $131,000), higher origination fees (up $135,000) and higher loan servicing
revenues (up $51,000) accounted for the large increase. Mortgage loan production
was $207 million in the third quarter of 1997 compared to $178 million in the
second quarter of 1996. The increase in production, combined with a more
favorable rate environment in the third quarter of 1997, created the large
increase in mortgage banking income in the third quarter.
<PAGE>
Other miscellaneous income, from a variety of sources, increased $261,000, or
8.3% in the third quarter of 1997 compared to the second quarter of 1997.
Increased EFT fees (up $272,000) account for this increase. Beginning in 1997,
the accounting methodology for EFT fees was changed. In previous years, EFT
expenses and revenues were netted and booked as other income. This year, the
revenues and expenses are recorded separately in other income and other expense.
Net EFT fees (increase in EFT revenue less the increase in EFT expenses),
increased by $134,000 over the previous quarter.
Noninterest Income
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Trust Servicing Fees $ 7,089 $ 6,983 $ 6,948 $ 6,651 $ 6,175
Service Charges on
Deposit Accounts 3,387 3,386 3,225 3,384 3,218
Mortgage Banking Activity 3,979 2,964 2,798 2,867 2,913
Retail Investment Income 1,026 922 888 796 628
Other 3,389 3,128 2,743 3,427 2,605
------ ------ ------ ------ ------
Noninterest Income
Excluding Securities
Gains 18,870 17,383 16,602 17,125 15,539
Investment Security
Gains, Net 171 188 473 485 52
------ ------ ------ ------ ------
Total $19,041 $17,571 $17,075 $17,610 $15,591
====== ====== ====== ====== ======
- --------------------------------------------------------------------------------
YTD Third Quarter 1997 compared to YTD Third Quarter 1996
Noninterest income increased $6.2 million, or 13.1% in the first nine months of
1997 compared to the first nine months of 1996. Excluding the impact of Centra,
the increase was $5.8 million, or 12.2%. All categories of noninterest income
increased when compared to the first nine months of 1996.
Trust service fees increased $2.5 million, or 13.4%, compared to the same period
last year. This increase is primarily due to increased volumes of trust
business.
Retail investment income increased $811,000, or 40.0% in the first nine months
of 1997. This increase is attributable to higher levels of revenue from offices
opened during 1996.
Service charges on deposit accounts increased $776,000, or 8.4% in the first
nine months of 1997. Excluding the impact of Centra, the increase was $578,000,
or 6.3%. The increase is attributable to an increase in service fees on business
accounts, interest checking accounts and a decrease in waived service charges.
Mortgage banking income increased $13,000, or 0.1% in the first nine months of
1997. Decreases in loan origination fees (down $842,000) and underwriting fees
(down $41,000) were offset by higher gains on sale of loans (up $298,000) and
higher loan servicing revenues (up $586,000). Mortgage loan production was $473
million in the first nine months of 1997 compared to $540 million in the first
nine months of 1996. The growth of the servicing portfolio of the last twelve
months has helped to offset lower fees recognized due to the lower production
volumes. The additional revenue booked on the sale of mortgage loans has also
contributed to the recording of mortgage banking income in 1997 equal to 1996,
even though production volumes are 14.3% lower.
<PAGE>
Other miscellaneous income, from a variety of sources, increased $1.7 million,
or 22.9% in the first nine months of 1997. This increase is primarily
attributable to a change in the accounting for the gross revenues of the
reinsurance subsidiary (up $1.2 million), and higher EFT fees (up $721,000).
Beginning in 1997, the accounting methodology for EFT fees was changed. In
previous years, EFT expenses and revenues were netted and booked as other
income. This year, the revenues and expenses are recorded separately in other
income and other expense. Net EFT fees (increase in EFT revenue less the
increase in EFT expenses) increased by $429,000 over the same period last year.
Investment security gains of $832,000 increased $404,000 over the same period
last year. The gains for both periods are primarily attributable to sales of
Sallie Mae stock.
NONINTEREST EXPENSE
Third Quarter 1997 compared to Third Quarter 1996
Total noninterest expense increased $5.0 million, or 14.5% in the third quarter
of 1997 compared to the same period last year. Excluding the impact of Centra,
the increase was $4.5 million, or 13.0%. All categories of noninterest expense
increased when compared to the third quarter of last year.
Salaries and employee benefit expenses increased $1.8 million, or 9.7% when
compared to the third quarter of 1996. Excluding the impact of Centra, this
increase was $1.6 million, or 8.5%. Total salary related expenses increased $1.3
million, or 8.8%, compared to the third quarter of 1996 while fringe benefit
related expenses increased $465,000, or 13.1%. The 8.8% increase in salary
expense is attributable to base merit increases (approximately 4.5%),
transitional overlapping positions, and new positions added. The fringe benefit
increase was primarily due to higher 401(k) expense (up $101,000), pension
expense (up $98,000), profit sharing expense (up $31,000) and social security
tax expense (up $90,000). The increases are linked to the higher levels of
salary expense incurred and changes to benefit plans and plan assumptions.
Net occupancy expense increased $134,000, or 4.8% compared to the third quarter
of 1996. Excluding the impact of Centra, this increase was $72,000, or 2.6%. The
increase is primarily attributable to increased building depreciation related to
expenditures made for technology and customer service enhancements.
Equipment rentals, depreciation and maintenance increased $129,000, or 6.3%
compared to the third quarter of 1996. Excluding the impact of Centra, this
increase was $90,000, or 4.4%. This increase is a result of higher levels of
depreciation on computer equipment (up $171,000) and higher rental expense of
equipment (up $18,000). The increase in depreciation and equipment rental are
attributable to the expenditures incurred during 1996 as part of the investment
in technology, equipment and facilities.
Data processing increased $204,000, or 9.8%, compared to the third quarter of
1996. This increase is primarily due to the cost of processing higher volumes.
<PAGE>
Other miscellaneous expense, from various sources, increased $2.3 million
compared to the third quarter of 1996. Excluding the impact of Centra, this
increase was $2.2 million, or 29.3%. Contributing to the increase were: higher
consulting expenses, a change in the accounting for the gross expenses of the
reinsurance subsidiary, increased telephone and communication expenses, higher
amortization of mortgage servicing rights, an increase in courier service costs,
and various expense accruals.
Noninterest Expense
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Salaries and Employee
Benefits $20,360 $20,125 $20,179 $19,395 $18,563
Net Occupancy 2,930 2,937 3,204 2,443 2,796
Equipment Rentals,
Depreciation and
Maintenance 2,166 2,117 2,184 2,005 2,037
Data Processing 2,280 2,357 2,291 2,130 2,076
Stationery and Supplies 1,025 836 906 935 755
Business Development
and Advertising 923 890 828 994 876
FDIC 103 116 96 (47) 14
Other 9,677 9,013 7,930 8,383 7,345
------ ------ ------ ------ ------
Total $39,464 $38,391 $37,618 $36,238 $34,462
- --------------------------------------------------------------------------------
Third Quarter 1997 compared to Second Quarter 1997
Total noninterest expense increased $1.1 million, or 2.8% in the third quarter
of 1997. Increases in salaries and employee benefits, equipment rental,
depreciation and maintenance, business development and advertising, and other
expense, were offset by decreases in data processing and FDIC insurance and net
occupancy.
Salaries and employee benefit expenses increased $235,000, or 1.2% when compared
to the second quarter of 1997. Total salary related expenses increased $254,000
in the third quarter while fringe benefit related expenses decreased $25,000.
Salary expense is up as a result of additional accruals booked for executive
incentive programs in the third quarter.
Stationery and supplies increased $189,000, or 22.6% in the third quarter of
1997. This increase is partially due to a one-time inventory adjustment.
Other miscellaneous expense, from various sources, increased by $664,000,
compared to the second quarter of 1997. This increase was primarily due to
various expense accruals.
YTD Third Quarter 1997 compared to YTD Third Quarter 1996
Total noninterest expense increased $11.3 million, or 10.9% for the first nine
months of 1997, compared to the first nine months of 1996. Excluding the impact
of Centra, the increase would have been $9.8 million, or 9.4%. All categories
increased when compared to the same period for last year.
<PAGE>
Salaries and employee benefit expenses increased $4.7 million, or 8.4% for the
first nine months of 1997 when compared to the first nine months of 1996.
Excluding the impact of Centra, the increase would have been $3.9 million, or
7.0%. The increase (including Centra) was comprised of both higher salary
expenses (up $3.6 million) and higher fringe benefit expenses (up $1.1 million).
The increase in salary expense is attributable to base merit increases
(approximately 4.5%), transitional overlapping positions, and new positions
added. The major contributions to the increase in fringe benefit expense were:
social security expense (up $324,000), 401(k) expense (up $318,000) and pension
expense (up $204,000). The increases are linked to the higher levels of salary
expense incurred and changes to benefit plans and plan assumptions.
Net occupancy expense increased $696,000, or 8.3% for the first nine months of
1997 when compared to the first nine months of 1996. Excluding the impact of
Centra, the increase would have been $509,000, or 6.1%. Large increases were due
to additional leased space, incremental costs of remodeled workspace, and
building depreciation, building maintenance, utilities expense, land rent and
taxes, as part of the investment in technology, equipment and facilities.
Equipment rentals, depreciation and maintenance increased $727,000, or 12.7% for
the first nine months of 1997 when compared to the first nine months of 1996.
Excluding the impact of Centra, the increase would have been $626,000, or 10.9%.
The primary contribution to the increase is a result of higher levels of
depreciation on computer equipment (up $684,000) attributable to the
expenditures incurred during 1996 as part of the investment in technology,
equipment and facilities.
Data processing increased $730,000, or 11.8% over the same period for 1996. This
increase is primarily due to the cost of processing higher volumes.
Other miscellaneous expense, from various sources, increased $3.9 million,
compared to the first nine months of 1996. Excluding the impact of Centra, the
increase would have been $3.4 million, or 17.0%. The increase consists mainly
of: increased consulting expenses (up $1.4 million), increased telephone and
communication expense (up $561,000), higher amortization of mortgage servicing
rights (up $650,000) and a change in the accounting for the gross expenses of
the reinsurance subsidiary (up $1.1 million).
Expense Control
Quarterly Trends
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Efficiency Ratio
- Quarter 58.64% 59.70% 60.48% 57.98% 57.86%
Efficiency Ratio - Year 59.58% 60.08% 60.48% 58.80% 59.08%
Expense Ratio - Quarter 1.89% 2.03% 2.09% 1.92% 1.94%
Expense Ratio - Year 2.00% 2.05% 2.09% 1.98% 1.99%
- --------------------------------------------------------------------------------
<PAGE>
INCOME TAXES
The effective tax rate for the third quarter of 1997 increased to 35.54% from
34.44% in the second quarter of 1997, but down from 36.97% in the fourth quarter
of 1996 and 35.71% in the third quarter of 1996.
Income Tax Expense
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Income Before Taxes $25,111 $23,643 $22,498 $23,896 $22,803
State Tax Expense $ 1,417 $ 1,294 $ 1,227 $ 1,441 $ 1,354
Federal Tax Expense 7,508 6,849 6,522 7,393 6,789
Total Income Tax Expense $ 8,925 $ 8,143 $ 7,749 $ 8,834 $ 8,143
Effective Tax Rate 35.54% 34.44% 34.44% 36.97% 35.71%
- --------------------------------------------------------------------------------
BALANCE SHEET
September 30, 1997 compared to June 30, 1997
During the third quarter of 1997, total assets increased $141 million, or 12.1%
on an annualized basis. Loans increased $114 million, or 13.3% on an annualized
basis. The loan growth was primarily in commercial (up $113 million). The loan
growth was funded primarily by a $74 million increase in interest-bearing
deposits and a $84 million increase in net free funds.
September 30, 1997 compared to September 30, 1996
During the past twelve months, total assets increased $454 million or 10.6%.
Excluding the impact of Centra, total assets would have increased by $377
million, or 8.8%. Loans increased $426 million, or 13.8% ($390 million, or
12.6%, excluding Centra). The loan growth was in commercial (up $342 million, or
20.2%), real estate (up $64 million, or 6.4%) and consumer (up $21 million, or
5.2%). The loan growth was primarily funded by a $71 million increase in
wholesale funding, $286 million increase in interest-bearing deposits, and a
$120 million increase in net free funds.
September 30, 1997 compared to December 31, 1996
During the first nine months of 1997, total assets increased $317 million, or
9.6% on an annualized basis. Excluding the impact of Centra, total assets would
have increased by $241 million, or 7.3% on an annualized basis. Loans increased
$357 million ($321 million, or 13.6% on an annualized basis, excluding Centra).
The loan growth was in commercial (up $295 million), real estate (up $42
million) and consumer (up $20 million). The loan growth was primarily funded by
a $49 million increase in wholesale funds, a $226 million increase in
interest-bearing deposits and an $89 million increase in net free funds.
<PAGE>
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 $225.8 million, while noninterest-bearing
deposits fell $12.1 million from the seasonally high year-end balance.
As of September 30, 1997, the securities portfolio contained $358.8 million at
amortized cost of U.S. Treasury and federal agency securities available for
sale, representing 42.8% of the total securities portfolio. These government
securities are highly marketable and had a market value equal to 100.5% of
amortized cost at quarter end.
Money market investments, consisting of federal funds sold, securities purchased
under agreements to resell, and interest-bearing deposits in other financial
institutions, averaged $14.4 million in the third quarter of 1997 compared to
$18.8 million during the same period in 1996. 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, 1997, the Corporation had $35.2
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 .6% at December 31, 1996.
Short-term borrowings totaled $508.9 million at September 30, 1997, compared
with $444.1 million at the end of 1996. 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 $38.0 million in the
first nine months of 1997 and will continue to be the parent's main source of
long-term liquidity.
At September 30, 1997, the parent company had $120 million of established lines
of credit with nonaffiliated banks, of which $67.7 million was in use for
nonbank affiliates. The parent company also has access to funds from the
issuance of the Corporation's commercial paper, although such funds are also
downstreamed to the nonbank subsidiaries. Commercial paper outstanding at
September 30, 1997, totaled $1.0 million.
The Corporation's long-term debt to equity ratio at September 30, 1997, was
1.4%, compared to 5.4% at December 31, 1996. This decrease is primarily
attributable to a decrease in outstanding long-term FHLB advances.
Management believes that, in the current economic environment, the Corporation's
subsidiary and parent company liquidity positions are adequate. There are no
known trends nor any known demands, commitments, events or uncertainties that
will result or are reasonably likely to result in a material increase or
decrease in the Corporation's liquidity.
CAPITAL
Stockholders' equity at September 30, 1997, increased $39.4 million, or 10.0%
since December 31, 1996. This increase was composed of $8.1 million as a result
of the Centra acquisition, $28.1 million of retained earnings, $1.0 million from
option exercises, $3.8 million increase in the unrealized gain on available for
sale securities, reduced by $1.6 million from treasury stock purchases. Equity
to assets at September 30, 1997, declined at 9.13%, with the Tier 1 leverage
ratio climbing to 8.58%.
Cash dividends of $.29 per share were paid in the third quarter of 1997,
representing a payout ratio of 40.28%. Compared to the same period last year, a
cash dividend of $.24 per share was paid, representing a payout ratio of 35.82%.
YTD dividends paid in 1997 are $0.82, or 39.61% of net income versus YTD
dividends paid in 1996 of $0.71, or 37.17% of net income.
<PAGE>
Capital
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------
Stockholders' Equity $432,576 $419,929 $407,590 $393,145 $381,428
Average Equity to
Average Assets 9.21% 9.23% 9.19% 9.06% 8.94%
Equity to Assets
- Period End 9.13% 9.14% 9.14% 8.90% 8.91%
Tier 1 Capital to Risk
Weighted Assets -
Period End 10.78% 10.80% 11.03% 10.73% 10.75%
Total Capital to Risk
Weighted Assets -
Period End 12.04% 12.05% 12.28% 11.98% 12.00%
Tier 1 Leverage Ratio
- Period End 8.58% 8.66% 8.58% 8.41% 8.34%
Market Value Per Share
- Period End $ 45.06 $ 39.50 $ 36.75 $ 35.42 $ 33.64
Book Value Per Share
- Period End $ 19.24 $ 18.70 $ 18.16 $ 17.84 $ 17.31
Market Value Per Share
to Book Value Per Share 234.2% 211.2% 202.4% 198.5% 194.3%
Dividends Per Share
- This Quarter $ .29 $ .29 $ .24 $ .24 $ .24
Dividends Per Share
- Year to Date $ .82 $ .53 $ .24 $ .95 $ .71
Earnings Per Share
- This Quarter $ .72 $ .69 $ .66 $ .68 $ .67
Earnings Per Share
- Year to Date $ 2.07 $ 1.35 $ .66 $ 2.60 $ 1.91
Dividend Payout Ratio
- This Quarter 40.28% 42.03% 36.36% 35.29% 35.82%
Dividend Payout Ratio
- Year to Date 39.61% 39.26% 36.36% 36.54% 37.17%
- --------------------------------------------------------------------------------
The adequacy of the Corporations capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends on a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management.
As of September 30, 1997, 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, 1997, each banking
subsidiary exceeded the minimum ratios for Tier 1 capital, total capital and the
Tier 1 leverage ratio.
Management 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.
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which is
effective for transfers occurring after December 31, 1996. This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on a consistent
application of a financial-components approach that focuses on control. The FASB
subsequently issued SFAS No. 127, in December, 1996, which provides for the
deferral of the effective date of certain provisions of SFAS No. 125. The
Corporation adopted SFAS No. 125 on January 1, 1997. The impact of adoption did
not have a material effect on the consolidated financial statements of the
Corporation.
In February 1997, FASB issued SFAS No. 128, "Earnings per Share," which is
effective for financial statements issued for periods ending after December 15,
1997. This statement simplifies the standards for computing earnings per share
previously found in APB No. 15. It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Earlier application of this statement is not permitted.
The Corporation has determined that the impact of adoption will not have a
material effect on the consolidated statements of the Corporation.
In June 1997, FASB 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.
In June 1997, FASB issued 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.
On January 28, 1997, the Securities and Exchange Commission (SEC) adopted new
rules and amended current rules on disclosures about derivatives and other
financial instruments. The rules clarify and expand existing disclosure
requirements about derivatives and other financial instruments as well as
derivative commodity instruments. The amendments require enhanced disclosure of
accounting policies for derivative financial instruments and derivative
commodity instruments in the footnotes. The amendments also expand existing
disclosure requirements to include quantitative and qualitative information
outside the financial statements about market risk inherent in market risk
sensitive instruments. Applicable disclosures will be required for filings for
fiscal years ending after June 15, 1997.
<PAGE>
ASSOCIATED BANC-CORP
PART II - OTHER INFORMATION
Page No.
--------
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
(11) Statements re Computation of
Per Share Earnings
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on May 16, 1997, which included
a press release dated May 14, 1997, announcing the signing of a
definitive agreement to merge Associated Banc-Corp and First Financial
Corporation, as well as materials relating to a presentation regarding
the proposed merger made at a telephonic press conference on May 15,
1997. The materials for the press conference included a fact sheet
setting forth total assets, loans and deposits for Associated, First
Financial, and pro forma combined figures as of March 31, 1997.
The Company filed a report on Form 8-K on September 15, 1997, which
included a press release dated September 15, 1997, announcing the
receipt of all required regulatory approvals in connection with the
proposed merger of Associated Banc-Corp and First Financial
Corporation.
The Company filed a report on Form 8-K on October 30, 1997, which
included a press release dated October 29, 1997, announcing the
consummation of the merger between Associated Banc-Corp and First
Financial Corporation. Announcements of new officers and directors
were also made.
<PAGE>
ASSOCIATED BANC-CORP
EXHIBIT (11)
Statement Re Computation of Per Share Earnings
Nine Months Nine Months
Ended Ended
September 30, 1997 September 30, 1996
------------------ ------------------
As Reported:
Net income $46,434,775 $42,181,892
Weighted average common
shares outstanding 22,455,110 22,033,748
Net income per share $ 2.07 $ 1.91
Primary:
Net income $46,434,775 $42,181,892
Weighted average common
shares outstanding 22,455,110 22,033,748
Common stock equivalents 360,353 296,722
Adjusted weighted average
common shares outstanding 22,815,463 22,330,470
Net income per share $ 2.04 $ 1.89
Fully Diluted:
Net income $46,434,775 $42,181,892
Weighted average common
shares outstanding 22,455,110 22,033,748
Common stock equivalents 451,196 319,716
Adjusted weighted average
common shares outstanding 22,906,306 22,353,464
Net income per share $ 2.03 $ 1.89
Note: The primary and fully diluted numbers are not disclosed in the reported
financials because any dilution that is less than 3% of earnings per common
shares outstanding is not considered to be material.
<PAGE>
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 14, 1997 /s/ Harry B. Conlon
--------------------------------------
Harry B. Conlon
Chairman & Chief Executive Officer
Date: November 14, 1997 /s/ Joseph B. Selner
--------------------------------------
Joseph B. Selner
Principal Financial Officer
INDEX TO EXHIBITS
Exhibit No. Page No.
- ---------- -------
(11) Computations of Earnings Per Share and Average
Number of Common Shares Outstanding
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<NAME> ASSOCIATED BANC-CORP
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