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 June 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
-----------------------------------------------
Associated Banc-Corp
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
112 North Adams Street, Green Bay, Wisconsin 54301
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(414) 433-3166
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of registrant's common stock, par value $0.01
per share, at June 30, 1997, was 22,458,788 shares.
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
PART I. Financial Information Page No.
--------
Item 1. Financial Statements:
Consolidated Statements of Financial Condition -
June 30, 1997 and December 31, 1996
Consolidated Statements of Income -
Six Months Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows -
Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Statements of Financial Condition
(Unaudited)
June 30, December 31,
1997 1996
---- ----
(In Thousands)
ASSETS
Cash and due from banks $ 189,694 $ 236,314
Interest-bearing deposits in
other financial institutions 2,459 670
Federal funds sold and securities purchased
under agreements to resell 16,879 27,977
Investment securities:
Held to maturity (Fair value of approximately
$416,454 and $417,541at June 30, 1997 and
December 31, 1996, respectively) 415,898 417,195
Available for sale-stated at fair value 423,227 437,440
Loans, net of unearned income 3,402,937 3,159,853
Less: Allowance for possible loan
losses (49,943) (47,422)
--------- ---------
Loans, net 3,352,994 3,112,431
Premises and equipment 79,084 75,987
Other assets 115,151 111,065
--------- ---------
Total assets $ 4,595,386 $ 4,419,079
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 577,438 $ 655,358
Interest-bearing deposits 3,004,732 2,852,683
--------- ---------
Total deposits 3,582,170 3,508,041
Short-term borrowings 488,760 444,066
Accrued expenses and other liabilities 66,672 52,697
Long-term borrowings 37,855 21,130
--------- ---------
Total liabilities 4,175,457 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
22,473,556 and 22,059,191 shares,
respectively) 225 221
Surplus 168,254 164,514
Retained earnings 243,839 222,348
Net unrealized gains on securities
available for sale 8,139 6,980
Less: Treasury stock (14,768 and
26,226 shares at cost) (528) (918)
--------- ---------
Total stockholders' equity 419,929 393,145
--------- ---------
Total liabilities and stockholders' equity $4,595,386 $4,419,079
========= =========
(See accompanying notes to Consolidated Financial Statements.)
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands) (In Thousands)
INTEREST INCOME:
Interest and fees on loans $ 71,748 $ 64,468 $140,278 $127,780
Interest and dividends on investment
securities:
Taxable 10,249 9,824 20,585 19,634
Tax exempt 2,289 2,280 4,627 4,588
Interest on deposits in other
financial institutions 33 20 69 29
Interest on federal funds sold
and securities purchased under
agreements to resell 233 316 506 682
------ ------ ------- -------
Total interest income 84,552 76,908 166,065 152,713
------ ------ ------- -------
INTEREST EXPENSE
Interest on deposits 32,352 29,730 63,587 59,693
Interest on short-term borrowings 6,197 5,061 11,998 9,550
Interest on long-term borrowings 454 518 767 1,034
------ ------ ------ ------
Total interest expense 39,003 35,309 76,352 70,277
------ ------ ------ ------
NET INTEREST INCOME 45,549 41,599 89,713 82,436
Provision for possible loan losses 1,086 872 2,209 2,044
------ ------ ------ ------
Net interest income after provision
for possible loan losses 44,463 40,727 87,504 80,392
------ ------ ------ ------
NONINTEREST INCOME
Trust service fees 6,983 6,199 13,931 12,359
Service charges on deposit accounts 3,386 3,016 6,611 6,004
Investment securities gains, net 188 36 661 376
Mortgage banking activity 2,964 3,078 5,762 6,815
Retail investment 922 765 1,810 1,397
Other 3,128 2,500 5,871 4,931
------ ------ ------ ------
Total noninterest income 17,571 15,594 34,646 31,882
------ ------ ------ ------
NONINTEREST EXPENSE
Salaries and employee benefits 20,125 18,713 40,304 37,409
Net occupancy 2,937 2,831 6,141 5,579
Equipment rentals, depreciation and
maintenance 2,117 1,821 4,301 3,703
Data processing 2,357 2,018 4,648 4,122
Stationery and supplies 836 862 1,742 1,687
Business development and advertising 890 872 1,718 1,750
FDIC 116 24 212 36
Other 9,013 7,319 16,943 15,399
------ ------ ------ ------
Total noninterest expense 38,391 34,460 76,009 69,685
------ ------ ------ ------
Income before income taxes 23,643 21,861 46,141 42,589
Income tax expense 8,143 7,733 15,892 15,067
------ ------ ------ ------
NET INCOME $15,500 $14,128 $30,249 $27,522
====== ====== ====== ======
Per share
Net income $.69 $.64 $1.35 $1.25
Dividends $.29 $.24 $ .53 $ .47
Weighted average shares outstanding 22,455 22,044 22,448 22,035
(See accompanying notes to consolidated Financial Statements)
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
1997 1996
---- ----
(In Thousands)
OPERATING ACTIVITIES
Net income $ 30,249 $ 27,522
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for possible loan losses 2,209 2,044
Depreciation and amortization 4,862 4,031
Amortization of mortgage servicing rights 1,412 1,109
Amortization of intangibles 1,371 1,522
Net accretion of premiums and discounts on
investment securities (18) 224
Gain on sales of investment securities, net (661) (376)
Increase in interest receivable and other assets (2,928) (5,782)
Increase (decrease)in interest payable and other
liabilities 12,042 (2,518)
Amortization of loan fees and costs (537) (764)
Net increase in mortgage loans acquired for resale 1,691 10,946
Gain on sales of mortgage loans held for resale (1,320) (1,778)
------ ------
Net cash provided by operating activities $ 48,372 $ 36,180
------ ------
INVESTING ACTIVITIES
Net increase in federal funds sold and securities
purchased under agreements to resell $ 15,523 $ 29,727
Net increase in interest-bearing deposits in other
financial institutions (1,789) (4)
Purchases of held to maturity securities (97,286) (51,660)
Purchases of available for sale securities (165,768) (117,373)
Proceeds from sales of available for sale securities 1,773 2,723
Maturities of held to maturity securities 98,442 80,585
Maturities of available for sale securities 208,822 114,295
Net increase in loans (207,687) (135,614)
Proceeds from sales of other real estate 733 731
Purchases of premises and equipment, net of disposals (5,265) (10,900)
Mortgage servicing rights additions (2,781) (3,624)
Net cash received in acquisition of subsidiary 5,051 5,232
-------- -------
Net cash used in investing activities $(150,267) $(85,609)
FINANCING ACTIVITIES
Net increase in deposits $ 6,480 $ 8,590
Net increase in short-term borrowings 40,419 9,999
Cash dividends (11,838) (9,931)
Proceeds from issuance of long-term borrowings 21,000 3,500
Proceeds from exercise of stock options 739 340
Purchase of treasury stock (1,525) ---
------ ------
Net cash provided by financing activities $ 55,275 $ 12,498
------ ------
Net decrease in cash and cash equivalents $ (46,620) $(36,931)
Cash and due from banks at beginning of period 236,314 214,411
------- -------
Cash and due from banks at end of period $ 189,694 $177,480
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 75,027 $ 69,982
Income taxes 16,640 17,715
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate $ 992 $ 950
Loans made in connection with the disposition of
other real estate 35 39
(See accompanying notes to Consolidated Financial Statements.)
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements
NOTE 1: In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
Associated Banc-Corp's ("Corporation") financial position, results of its
operations and cash flows for the periods presented. All adjustments necessary
to the fair presentation of the financial statements are of a normal recurring
nature. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Estimates that are
particularly susceptible to significant change relate to the determination of
the allowance for possible loan losses.
NOTE 2: The consolidated financial statements include the accounts of all
subsidiaries. All material intercompany transactions and balances are
eliminated. The Corporation has not changed its accounting and reporting
policies from those stated in the Corporation's 1996 Form 10-K Annual Report.
NOTE 3: Business Combinations
The following table summarizes completed transactions during 1996 and through
June 30, 1997 ($ in millions):
Consideration Paid
-----------------------
Method Shares
Name of Date of of Common Total
Acquired Acquired Accounting Cash Stock [C] Assets Intangibles
- --------------------------------------------------------------------------------
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 ---
- --------------------------------------------------------------------------------
[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.
On May 14, 1997, Associated Banc-Corp ("Associated") of Green Bay, Wisconsin and
First Financial Corporation ("FFC") announced the signing of a definitive
agreement to merge in a stock-for-stock transaction (the "Merger"). The merger
agreement provides for each share of FFC common stock to be exchanged for .765
shares of Associated common stock on a tax-free basis. The merger, which
requires approval by shareholders of both companies and regulatory authorities,
is expected to be completed later in 1997. This transaction will be accounted
for as a pooling-of-interests. The merged company will retain the Associated
name. Headquarters has been designated to be in Green Bay, and it is
anticipated that significant operations will remain in both Stevens Point and
Green Bay. Pursuant to the execution of the definitive agreement to merge, both
companies executed a stock option agreement providing for the purchase of 19.9%
of each other's common stock under specified circumstances. This merger-of-
equals will result in an institution with combined assets of approximately
$10.5 billion, equity capital of approximately $900 million and a network of
over 220 full-service banking locations throughout Wisconsin and Illinois.
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) June 30, 1997
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
U.S. Treasury and federal agency securities $167,063 $167,061
Obligations of states and political subdivisions 176,156 176,375
Other securities 72,679 73,018
- --------------------------------------------------------------------------------
Total $415,898 $416,454
================================================================================
(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
- --------------------------------------------------------------------------------
Total $417,195 $417,541
================================================================================
Investment Securities Available for Sale
- --------------------------------------------------------------------------------
(In thousands) June 30, 1997
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
U. S. Treasury and federal agency securities $373,689 $373,785
Obligations of states and political subdivisions 5,221 5,375
Marketable equity securities 31,464 44,067
- --------------------------------------------------------------------------------
Total $410,374 $423,227
================================================================================
(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 Six Months For the Year Ended
Ended June 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 2,209 4,665
Net loan recoveries (losses) (416) (2,368)
------ ------
Balance at end of period $ 49,943 $ 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 Six Months For the Year Ended
Ended June 30, December 31,
1997 1996
---- ----
(In Thousands)
- --------------------------------------------------------------------------------
Balance at beginning of period $10,995 $ 7,239
Additions 2,781 6,144
Amortization (1,412) (2,362)
Sales of servicing rights --- ---
Change in valuation allowance 6 (26)
Balance at end of period $12,370 $10,995
- --------------------------------------------------------------------------------
NOTE 7: Per Share Computations
Per share computations are computed based on the weighted average number of
common shares outstanding for the six months ended June 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.
EARNINGS
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.
Completed in July 1996, accounted for using the pooling-of-interests method, was
the acquisition of the $139-million F&M Bankshares of Reedsburg. However, the
transaction was not material to operating results for years prior to the
acquisition and, accordingly, results of operations for years prior to the
acquisition have not been restated.
On July 31, 1996, Associated completed the acquisition of the $39-million asset
Mid-America National Bancorp Inc. (Mid-America), Chicago. This transaction was
accounted for using the purchase method. Accordingly, the consolidated financial
statements include the results of operations of Mid-America since the date of
acquisition.
Net income for the second quarter of 1997 was $15.5 million, up 9.7% over 1996
second quarter net income of $14.1 million, and up from the $14.8 million
reported in the first quarter of 1997. Earnings per share were $0.69 in the
second quarter of 1997, up 7.8% over the $0.64 reported in the second quarter of
1996, and up from the $0.66 net income per share reported in the first quarter
of 1997. On a YTD basis in 1997, net income and net income per share were $30.2
million and $1.35, respectively. This is an increase in net income of 9.9% and
net income per share of 8.0% over the YTD 1996 net income of $27.5 million and
net income per share of $1.25.
The change (increase of $1.4 million, or 9.7%) in second quarter 1997 net
income, when compared to the same period last year, was a result of higher
net interest income (up $4.0 million, or 9.5%), higher noninterest income,
(up $2.0 million, or 12.7%), offset by higher provision for loan losses
(up $214,000, or 24.5%), higher noninterest expense (up $3.9 million, or
11.4%) and higher tax expense (up $410,000, or 5.3%).
The change (increase of $751,000, or 5.1%) in second quarter 1997 net income,
when compared to the first quarter of 1997, was a result of higher net
interest income (up $1.4 million, or 3.1%), lower provision for loan losses
(down $37,000, or 3.3%), higher noninterest income (up $496,000, or 2.9%)
offset by higher income tax expense (up $394,000, or 5.1%), and higher non-
interest expense (up $773,000, or 2.1%).
The change (increase of $2.7 million, or 9.9%) in YTD second quarter 1997 net
income, when compared to YTD second quarter of 1996, was a result of higher
net interest income (up $7.3 million, or 8.8%), higher non-interest income (up
$2.8 million, or 8.7%) offest by higher provision for loan losses (up $165,000),
or 8.1%), higher noninterest expense (up $6.3 million, or 9.1%) and higher
income tax expense (up $825,000, or 5.5%).
Return on average assets (ROA) for the second quarter of 1997 was 1.39%, up
from 1.38% during the same period last year. Second quarter 1997 ROA
increased from 1.36% in the first quarter of 1997. Return on average
equity (ROE) for the second quarter of 1997 was 15.10%, down from 15.51%
during the same period last year. Second quarter 1997 ROE increased from the
14.84% reported in the first quarter of 1997.
Net Income
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Net Income $15,500 $14,749 $15,062 $14,660 $14,128
E.P.S $ 0.69 $ 0.66 $ 0.68 $ 0.67 $ 0.64
Return on Average
Equity - Quarter 15.10% 14.84% 15.58% 15.56% 15.51%
Return on Average
Equity- Year to Date 14.97% 14.84% 15.39% 15.36% 15.25%
Return on Average
Assets - Quarter 1.39% 1.36% 1.40% 1.39% 1.38%
Return on Average
Assets - Year to Date 1.38% 1.36% 1.38% 1.37% 1.36%
- --------------------------------------------------------------------------------
NET INTEREST INCOME
Second Quarter 1997 compared to Second Quarter 1996:
Fully taxable equivalent (FTE) net interest income in the second quarter of 1997
was $46.9 million, an increase of $3.9 million over the second quarter of 1996
FTE net interest income of $43.0 million. The acquisition of Centra accounted
for $788,000, or 20% of the increase in FTE net interest income.
The consolidated increase in FTE net interest income was attributable to larger
volumes of earning assets (up $334 million) when compared to the second quarter
of 1996. The increase in net interest income attributable to the volume variance
(change in interest income from incremental earning assets less the change in
interest expense from incremental volumes of interest-bearing liabilities) was
$4.0 million. This large increase was offset by a small negative rate variance
(change in interest income from incremental yields on earning assets less the
change in interest expense from incremental rates on interest-bearing
liabilities) of $131,000. The growth in earning assets was concentrated in
loans, with loans increasing $319 million, when compared to the second quarter
of 1996. The net interest margin for the second quarter of 1997 was 4.52%,
compared with 4.52% in the second quarter of 1996. The rate spread and the
contribution from net free funds in the second quarter of 1997, remained
unchanged from the second quarter of 1996, at 3.73% and 0.79%, respectively.
Net Interest Income
Tax Equivalent Basis
(In Thousands)
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Interest Income $84,552 $81,513 $80,371 $78,648 $76,908
Tax Equivalent Adjustment 1,377 1,428 1.239 1.338 1,409
Tax Equivalent Interest Income $85,929 $82,941 $81,610 $79,986 $78,317
Interest Expense 39,003 37,349 36,237 35,963 35,309
Tax Equivalent Net Interest Income $46,926 $42,736 $45,373 $44,023 $43,008
- --------------------------------------------------------------------------------
Average earning assets grew $334 million from the second quarter of 1996, with
$69 million of this increase attributable to Centra, and approximately $34
million attributable to the Mid-America acquisition in the third quarter of
1996. Total loans grew $319 million, with $36 million attributable to Centra and
$6 million attributable to Mid-America. Excluding the impact of Centra and
Mid-America, average earning assets and loans grew at an internal rate of 6.0%
and 9.3%, respectively. The average loans to average deposits ratio increased to
94.4%, up from 91.2% in the second quarter of 1996.
The average loan growth, excluding the impact of Centra, of $283 million, was
funded by increased wholesale borrowings (funds purchased, repurchase
agreements, FHLB borrowings, and long-term borrowings) of $62 million, increased
time deposits (personal CDs and Brokered CDs) of $116 million ($70 million
increase in personal CDs and a $46 million increase in Brokered CDs), higher
balances of Savings, NOW and MMA of $55 million, higher net free funds of $31
million and lower balances of investments and short-term investments of $19
million. The average balance of brokered CDs for the second quarter of 1997 was
$127 million with a period end balance of $165 million (up $75 million from
December 31, 1996).
Net Interest Margin
Quarterly Trends
(Quarterly Info Only)
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Yield on Earning Assets 8.28% 8.25% 8.21% 8.19% 8.23%
Cost of Interest-Bearing
Liabilities 4.55% 4.49% 4.45% 4.48% 4.50%
Interest Rate Spread 3.73% 3.76% 3.76% 3.71% 3.73%
Net Free Funds Contribution .79% .77% .80% .80% .79%
Net Interest Margin 4.52% 4.54% 4.56% 4.51% 4.52%
Average Earning Assets
to Average Assets 93.28% 92.97% 92.60% 92.73% 92.93%
Free Funds Ratio (% of
Earning Assets 17.32% 17.16% 18.03% 17.79% 17.62%
- --------------------------------------------------------------------------------
Second Quarter 1997 compared to First Quarter 1997:
FTE net interest income in the second quarter of 1997 was $46.9 million, an
increase of $1.3 million over the first quarter 1997 FTE net interest income of
$45.6 million.
FTE net interest income was positively impacted by one additional day in the
second quarter of 1997 when compared to the first quarter of 1997. This
additional day increased FTE net interest income by $507,000 in the second
quarter of 1997. The second quarter of 1997 also benefited from a positive
volume variance (change in interest income from incremental earning assets less
the change in interest expense from incremental volumes of interest expense) of
$1.2 million offset by a negative rate variance (change in interest income from
incremental yields on earning assets less the change in interest expense from
incremental rates on interest-bearing liabilities) of $362,000. The negative
rate variance was caused by lower levels of interest collected on nonaccrual
loans in the second quarter of 1997.
The net interest margin for the second quarter of 1997 was 4.52%, compared with
4.54% in the first quarter of 1997. The largest factor contributing to the
decrease in net interest margin was the lower net interest spread of 3 basis
points. A yield increase of 3 basis points on earning assets was offset by an
increase of 6 basis points on interest-bearing liabilities. The decline in yield
on earning assets in the second quarter is attributable to the lower levels of
interest collected on nonaccrual loans. The impact of the lower interest rate
spread on net interest margin was tempered by a larger contribution from net
free funds.
Average earning assets and loans increased $85 million and $111 million,
respectively, in the second quarter. Average earning assets and loans grew at an
annualized rate of 8.4% and 13.9%, respectively.
The average loan growth of $111 million, was funded by increased wholesale
borrowings (funds purchased, repurchase agreements, FHLB borrowings, and
long-term borrowings) of $14 million, increased time deposits (personal CDs and
Brokered CDs) of $47 million ($18 million increase in personal CDs and a $29
million increase in Brokered CDs), higher net free funds of $22 million, higher
balances of Savings, NOW and MMA of $3 million and lower balances of investments
and short-term investments of $25 million.
Earning Asset and Interest-Bearing Liability Volumes
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Average Loans $3,309,286 $3,198,576 $3,111.614 $3,049,21 $2,989,910
Average Earning Assets 4,160,223 4,074,879 3,955,571 3,885,71 3,826,544
Average Noninterest-
Bearing
Deposits 551,006 550,230 583,697 564,90 545,992
Average Interest-
Bearing Deposits 2,956,310 2,906,460 2,835,861 2,792,78 2,732,106
Average Deposits 3,507,316 3,456,690 3,419,558 3,357,68 3,278,098
Average Interest-
Bearing Liabilities 3,439,502 3,375,380 3,242,422 3,194,67 3,152,447
- --------------------------------------------------------------------------------
YTD Second Quarter 1997 compared to YTD Second Quarter 1996:
FTE net interest income in the first six months of 1997 was $92.5 million, an
increase of $7.3 million over the first six months of 1996 FTE net interest
income of $85.2 million. The acquisition of Centra accounts for $1.6 million of
this increase.
The consolidated increase in FTE net interest income was primarily attributable
to a large positive impact from a volume variance (change in interest income
from incremental earning assets less the change in interest expense from
incremental volumes of interest-bearing liabilities) of $7.5 million.
The net interest margin for the first six months of 1997 was 4.53%, compared
with 4.52% in the first six months of 1996. The largest factor contributing to
the increase in net interest margin was a higher yield (up 3 basis points) on
earning assets. The cost of funds for the first six months of 1997 remained
unchanged from the first six months of 1996 at 4.52%. The contribution from net
free funds in the first six months of 1997 decreased slightly by 2 basis points.
Average earning assets increased $324 million in the first six months of 1997
compared to the first six months of 1996, with $68 million of this increase
attributable to Centra. Total loans grew $308 million, with $36 million
attributable to Centra. Excluding the impact of Centra, average earning assets
and loans grew at an annualized rate of 6.7% and 9.2%, respectively.
The average loan growth, excluding the impact of Centra, of $272 million, was
funded by increased wholesale borrowings (funds purchased, repurchase
agreements, FHLB borrowings, and long-term borrowings) of $73 million, increased
time deposits (personal CDs and Brokered CDs) of $107 million ($66 million
increase in personal CDs and a $41 million increase in Brokered CDs), higher net
free funds of $28 million, higher balances of Savings, NOW and MMA of $49
million and lower balances of investments and short- term investments of $15
million.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The loan loss provision for the second quarter of 1997 was $1.1 million, a
decrease of $37,000 from the first quarter of 1997 and an increase of $214,000
from the second quarter of 1996. As of June 30, 1997, the allowance for possible
loan losses of $49.9 million represented 1.47% of total outstanding loans, down
from the 1.50% reported at December 31, 1996, and down from 1.52% reported at
June 30, 1996. The combination of second quarter provision expense exceeding net
charge-offs by $545,000 and annualized loan growth of 13.9%, caused the
allowance for possible loan losses to loans ratio to decline by 5 basis points
in the second quarter. The second quarter of 1997 net charge-offs as a percent
of average loans of 0.07% compares favorably to net charge-offs to average loans
of 0.12% in the second quarter of 1996.
Provision for Possible Loan Losses
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Provision - Quarter $ 1,086 $ 1,123 $ 1,610 $ 1,011 $ 872
Provision - Year $ 2,209 1,123 4,665 3,055 2,044
Net Charge-offs
(Recoveries)
- Quarter 541 (125) 948 456 915
Net Charge-offs
(Recoveries)
- Year 416 (125) 2,368 1,420 964
Allowance at Period
End $ 49,943 $ 49,398 $ 47,422 $ 46,760 $46,049
Allowance to Period
End Loans 1.47% 1.52% 1.50% 1.51% 1.52%
Net Charge-offs
(Recoveries)
to Average Loans
(Annualized)
- Quarter .07% (.02)% .12% .06% .12%
Net Charge-offs
(Recoveries)
to Average Loans
(Annualized) - Year .03% (.02)% .08% .06% .07%
- --------------------------------------------------------------------------------
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 collectibility of principal or interest on loans, it is management's
practice to place such loans on nonaccrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously accrued
and uncollected interest on such loans is reversed and income is recorded only
to the extent that interest payments are subsequently received in cash and a
determination has been made that the principal balance of the loan is
collectible. If collectability of the principal is in doubt, payments received
are applied to loan principal.
Loans past due 90 days or more but still accruing interest 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.
Total nonperforming loans at June 30, 1997, were $28.1 million, an increase of
$8.5 million from December 31, 1996. The ratio of nonperforming loans to total
loans at June 30, 1997, was .83% compared to .62% at December 31, 1996, and .66%
at June 30, 1996. Other real estate owned increased to $1.5 million at June 30,
1997, up from $1.2 million at December 31, 1996.
The increase in nonperforming loans is primarily attributable to three
commercial credits. Management expects several of these credits to be resolved
and does not anticipate any significant losses as a result.
Nonperforming Loans and Other Real Estate
(In Thousands)
- --------------------------------------------------------------------------------
6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
- --------------------------------------------------------------------------------
Nonaccrual Loans $20,589 $16,492 $17,225 $17,939 $15,156
Accruing Loans Past Due
90 Days or More 7,040 2,052 1,801 1,646 3,442
Restructured Loans 471 499 534 576 1,325
------ ------ ------ ------ ------
Total Nonperforming
Loans $28,100 $19,043 $19,560 $20,161 $19,923
====== ====== ====== ====== ======
Nonperforming Loans as
a Percent of Loans .83% .59% .62% .65% .66%
Other Real Estate Owned $ 1,455 $ 1,272 $ 1,173 $ 1,727 $ 1,833
- --------------------------------------------------------------------------------
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 June 30, 1997, the recorded investment in impaired loans totaled $19.9
million. Included in this amount is $17.3 million of impaired loans that do not
require a related allowance for possible loan losses and $2.6 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 June 30, 1997, was approximately $16.1 million. Interest
income recognized on a cash basis on impaired loans during the first six months
of 1997 totaled $309,000.
The following table shows, for those loans accounted for on a nonaccrual basis
and restructured loans for the six months ended June 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 Six Months
Ended June 30, 1997
(In Thousands)
- --------------------------------------------------------------------------------
Interest income in accordance with original terms $952
Interest income recognized 333
---
Reduction in interest income $619
- --------------------------------------------------------------------------------
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 June 30, 1997, potential problem loans totaled $55.3 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 June 30,
1997, no concentrations existed in the Corporation's loan portfolio in excess of
10% of total loans.
Real estate construction loans at June 30, 1997, totaled $243.8 million, or 7.2%
of loans while agricultural loans were 1.0% of total loans.
As of June 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
Second Quarter 1997 compared to Second Quarter 1996
Noninterest income increased $2.0 million, or 12.7% over the second quarter of
1996. Excluding the impact of Centra, the increase was $1.7 million, or 10.7%.
All categories, with the exception of mortgage banking activity, increased when
compared to the second quarter of 1996.
Trust service fees increased $784,000, or 12.6% compared to the same quarter
last year. This increase is primarily due to increased trust business.
Retail investment income increased $157,000, or 20.5% over the second quarter of
1996. This increase is attributable to higher levels of revenue from offices
opened during 1996.
Service charges on deposit accounts increased $370,000, or 12.3% over the same
period last year. Excluding the impact of Centra, the increase was $303,000, or
10.0%. The majority of the increase is attributable to higher fees on business,
interest checking and correspondent accounts, and lower waived service charges.
Mortgage banking income decreased $114,000, or 3.7% from the second quarter of
1996. Lower origination fees (down $310,000), and underwriting fees (down
$28,000), were offset by higher gain on sale of loans (up $58,000) and higher
loan servicing revenues (up $165,000). The production related revenue
(origination, underwriting and escrow waiver fees) was lower due to lower
production volumes in the second quarter of 1997 ($171 million) compared to the
same period last year ($183 million).
Other miscellaneous income, from a variety of sources, increased $628,000, or
25.1% in the second 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 which were previously recorded net of
expenses.
Investment security gains of $188,000 increased $152,000 over the same period
last year. This variance is attributable to investment security gains from the
sale of Sallie Mae stock.
Second Quarter 1997 compared to First Quarter 1997
Noninterest income increased $496,000, or 2.9% in the second quarter of 1997
compared to first quarter of 1997. All categories, with the exception of
investment security gains, increased when compared to the first quarter of 1997.
Trust service fees increased $35,000, or 0.5% during the quarter. This change is
primarily the result of increased trust business.
Retail investment income increased $34,000, or 3.8% in the second quarter of
1997. This increase reflects higher volumes of trades made in the second quarter
of 1997.
Service charges on deposit accounts increased $161,000, or 5.0% in the second
quarter. The increase consists mainly of increases in service charges on
correspondent accounts (up $101,000) and interest checking accounts (up
$48,000).
Mortgage banking income increased $166,000, or 5.9% from the first quarter of
1997. Higher gain on sale of loans (up $133,000) and increased underwriting fees
(up $69,000), were partially offset by lower origination fees (down $15,000) and
lower loan servicing revenues (down $21,000). Total loan production (originated
volumes) increased to $171 million, up from $126 million in the first quarter of
1997.
Noninterest Income
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Trust Servicing Fees $ 6,983 $ 6,948 $ 6,651 $ 6,175 $ 6,199
Service Charges on Deposit
Accounts 3,386 3,225 3,384 3,218 3,016
Mortgage Banking Activity 2,964 2,798 2,867 2,913 3,078
Retail Investment Income 922 888 796 628 765
Other 3,128 2,743 3,427 2,605 2,500
------ ------ ------ ------ ------
Noninterest Income Excluding
Securities Gains 17,383 16,602 17,125 15,539 15,558
Investment Security Gains,
Net 188 473 485 52 36
------ ------ ------ ------ ------
Total $17,571 $17,075 $17,610 $15,591 $15,594
- --------------------------------------------------------------------------------
Other miscellaneous income, from a variety of sources, increased $385,000, or
14.0% in the second quarter of 1997 compared to the first quarter of 1997.
Increases in commercial loan commitment fees, electronic funds transfer fees and
increased revenue from the reinsurance subsidiary contributed the majority of
the increase.
YTD Second Quarter 1997 compared to YTD Second Quarter 1996
Noninterest income increased $2.8 million, or 8.7% in the first six months of
1997 compared to first six months of 1996. Excluding the impact of Centra, the
increase was $2.5 million, or 7.8%. All categories of noninterest income, with
the exception of income from mortgage banking activity, increased when compared
to the first six months of 1996.
Trust service fees increased $1.6 million, or 12.7%, compared to the same period
last year. The change was primarily due to increased trust business.
Retail investment income increased $413,000, or 29.6% in the first six months of
1997. This increase is attributable to higher levels of revenue from offices
opened during 1996.
Service charges on deposit accounts increased $607,000, or 10.1% in the first
six months of 1997. Excluding the impact of Centra, the increase was $476,000,
or 7.9%. The increase is attributable to an increase in service fees on business
accounts (up $347,000), increased service charges on interest checking accounts
(up $135,000) and a decrease in waived service charges (down $122,000).
Mortgage banking income decreased $1.1 million, or 15.5% in the first six months
of 1997. Decreases in loan origination fees (down $780,000), gain on sale of
loans (down $458,000) and underwriting fees (down $223,000) were partially
offset by higher loan servicing revenues (up $428,000). Revenue tied to
production is lower in the first six months of 1997 when compared to the first
six months of last year as total loan production (originated volumes) declined
to $297 million, from $383 million.
Other miscellaneous income, from a variety of sources, increased $940,000, or
19.1% in the first six months of 1997. This increase is primarily attributable
to a change in the accounting for the gross revenues of the reinsurance
subsidiary which were previously recorded net of expenses.
Investment security gains of $661,000 increased $285,000 over the same period
last year. The gains for both periods are primarily attributable to sales of
Sallie Mae Stock.
NONINTEREST EXPENSE
Second Quarter 1997 compared to Second Quarter 1996
Total noninterest expense increased $3.9 million, or 11.4% in the second quarter
of 1997 compared to the same period last year. Excluding the impact of Centra,
the increase was $3.4 million, or 9.9%. All categories of noninterest expense
except stationery and supplies increased when compared to the second quarter of
last year.
Salaries and employee benefit expenses increased $1.4 million, or 7.5% when
compared to the second quarter of 1996. Excluding the impact of Centra, this
increase was $1.2 million, or 6.3%. Total salary related expenses increased
$850,000, or 5.6%, compared to the second quarter of 1996 while fringe benefit
related expenses increased $330,000, or 9.0%. The 5.6% increase in salary
expense is attributable to base merit increases (approximately 4.5%),
transitional overlapping positions as certain functions are being centralized,
and new positions added. The fringe benefit increase was primarily due to higher
401(k) expense (up $93,000), pension expense (up $92,000), profit sharing
expense (up $89,000) and social security tax expense (up $71,000). The increases
are linked to the higher levels of salary expense incurred and changes to
benefit plans and plan assumptions.
Net occupancy expense increased $106,000, or 3.7% compared to the second quarter
of 1996. Excluding the impact of Centra, this increase was $45,000, or 1.6%. 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 $296,000, or 16.3%
compared to the second quarter of 1996. Excluding the impact of Centra, this
increase was $262,000, or 14.4%. This increase is a result of higher levels of
depreciation on computer equipment (up $274,000) and higher rental expense of
equipment (up $15,000). The increase in depreciation and equipment rental is
attributable to the expenditures incurred during 1996 as part of the investment
in technology, equipment and facilities.
Data processing increased $339,000, or 16.8%, compared to the second quarter of
1996. This increase is primarily due to the cost of higher processing volumes.
Noninterest Expense
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Salaries and Employee
Benefits $20,125 $20,179 $19,395 $18,563 $18,713
Net Occupancy 2,937 3,204 2,443 2,697 2,831
Equipment Rentals,
Depreciation and
Maintenance 2,117 2,184 2,005 2,037 1,821
Data Processing 2,357 2,291 2,130 2,076 2,018
Stationery and Supplies 836 906 935 755 862
Business Development and
Advertising 890 828 994 876 872
FDIC 116 96 (47) 14 24
Other 9,013 7,930 8,383 7,345 7,319
Total $38,391 $37,618 $36,238 $34,462 $34,460
- --------------------------------------------------------------------------------
Other miscellaneous expense, from various sources, increased $1.7 million
compared to the second quarter of 1996. Excluding the impact of Centra, this
increase was $1.2 million, or 16.1%. Contributing to the increase were: higher
consulting expenses (up $623,000), a change in the accounting for the gross
expenses of the reinsurance subsidiary which were previously netted against
revenue (up $334,000), increased telephone and communication expenses (up
$182,000), higher amortization of mortgage servicing rights (up $146,000) and an
increase in courier service costs (up $143,000).
Second Quarter 1997 compared to First Quarter 1997
Total noninterest expense increased $773,000, or 2.1% in the second quarter of
1997. Increases in data processing, business development and advertising, FDIC
insurance and other expenses were partially offset by decreases in salaries and
employee benefits, net occupancy, equipment rental, depreciation and maintenance
and stationery and supplies expenses.
Salaries and employee benefit expenses decreased $54,000, or 0.3% when compared
to the first quarter of 1997. Total salary related expenses increased $245,000
in the second quarter while fringe benefit related expenses decreased $299,000.
Salary expense is up as a result of increased full-time equivalent employees.
Fringe benefit expenses decreased in part due to reduced unemployment tax
expense (down $108,000) and social security expense (down $201,000); these taxes
decreased from first quarter due to taxes incurred on incentives paid in the
first quarter, as well as less tax being incurred in the second quarter as
individual maximums are met.
Other miscellaneous expense, from various sources, increased by $1.1 million
compared to the first quarter of 1997. This increase was primarily the result of
consulting expenses, non-recurring charges at affiliates and increased meals and
entertainment expenses.
YTD Second Quarter 1997 compared to YTD Second Quarter 1996
Total noninterest expense increased $6.3 million, or 9.1% for the first six
months of 1997 compared to the first six months of 1996. Excluding the impact of
Centra, the increase would have been $5.3 million, or 7.6%. All categories, with
the exception of business development and advertising expense, increased when
compared to the same period for last year.
Salaries and employee benefit expenses increased $2.9 million, or 7.7% for the
first six months of 1997 when compared to the first six months of 1996.
Excluding the impact of Centra, the increase would have been $2.4 million, or
6.3%. The adjusted increase (excluding Centra) is comprised of both higher
salary expenses (up $1.9 million, or 6.3%) and higher fringe benefit expenses
(up $508,000, or 6.6%). The 6.3% increase in salary expense is attributable to
base merit increases (approximately 4.5%), transitional overlapping positions as
certain functions are being centralized, and new positions added. The major
contributions to the increase in fringe benefit expense were: social security
expense (up $193,000), 401k expense (up $192,000) and pension expense (up
$149,000). The increases are linked to the higher levels of salary expense
incurred and changes to benefit plans and plan assumptions.
Net occupancy expense increased $562,000, or 10.1% for the first six months of
1997 when compared to the first six months of 1996. Excluding the impact of
Centra, the increase would have been $437,000, or 7.8%. Increases were realized
due to additional leased space from Mid-America, incremental costs of remodeled
workspace, and increased occupancy expenses resulting from technology and
customer service enhancements.
Equipment rentals, depreciation and maintenance increased $598,000, or 16.1% for
the first six months of 1997 when compared to the first six months of 1996.
Excluding the impact of Centra, the increase would have been $536,000, or 14.5%.
The primary contribution to the increase is a result of higher levels of
depreciation on computer equipment (up $513,000) attributable to the
expenditures incurred during 1996 as the investment in technology, equipment and
facilities.
Data processing increased $526,000, or 12.8% over the same period for 1996. This
increase is primarily due to the cost of higher processing volumes.
Other miscellaneous expense, from various sources, increased $1.5 million
compared to the first six months of 1996. Excluding the impact of Centra, the
increase would have been $1.3 million, or 8.3%. The increase consists mainly of:
increased consulting, legal and professional expenses (up $678,000), a change in
the accounting for the gross expenses of the reinsurance subsidiary which were
previously netted out of revenue (up $665,000) and increased telephone and
communication expense (up $422,000).
Expense Control
Quarterly Trends
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Efficiency Ratio - Quarter 59.70% 60.48% 57.98% 57.86% 58.84%
Efficiency Ratio - Year 60.08% 60.48% 58.80% 59.08% 59.71%
Expense Ratio - Quarter 2.03% 2.09% 1.92% 1.94% 1.99%
Expense Ratio - Year 2.05% 2.09% 1.98% 1.99% 2.02%
- --------------------------------------------------------------------------------
INCOME TAXES
Income tax expense increased 5.3% over the second quarter of 1996. The effective
tax rate at 34.44% decreased from 35.37% for the second quarter of 1996.
Income Tax Expense
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Income Before Taxes $23,643 $22,498 $23,896 $22,803 $21,861
State Tax Expense $ 1,294 $ 1,227 $ 1,441 $ 1,354 $ 1,289
Federal Tax Expense 6,849 6,522 7,402 6,789 6,444
------ ------ ------ ------ ------
Total Income Tax Expense $ 8,143 $ 7,749 $ 8,834 $ 8,143 $ 7,733
====== ====== ====== ====== ======
Effective Tax Rate 34.44% 34.44% 36.97% 35.71% 35.37%
- --------------------------------------------------------------------------------
BALANCE SHEET
June 30, 1997 compared to March 31, 1997
During the second quarter of 1997, total assets increased $137 million, or 12.3%
on an annualized basis. Loans increased $150 million, or 18.5% on an annualized
basis. The loan growth was in commercial (up $92 million, or 20.2% on an
annualized basis), residential real estate loans (up $47 million, or 18.5% on an
annualized basis) and consumer (up $11 million, or 10.7% on an annualized
basis). The loan growth was funded with $23 million of wholesale funding, $94
million of interest-bearing deposits and $26 million from a reduction of
investments and short-term investments and a $7 million increase in net free
funds. The $94 million increase in interest-bearing deposits reflects a $58
million increase in outstanding brokered CDs, a $23 million increase in retail
time deposits and an increase of $13 million in NOW, savings and MMA balances.
June 30, 1997 compared to June 30, 1996
During the past twelve months, total assets increased $431 million, or 10.3%.
Excluding the impact of Centra and Mid-America, total assets would have
increased by $312 million, or 7.5%. Loans increased $379 million, or 12.5% ($338
million or 11.2%, excluding Centra and Mid-America). The internal loan growth
was in commercial (up $235 million, or 14.2%), real estate ( up $87 million, or
8.9%) and consumer (up $16 million, or 4.1%). The internal loan growth was
funded with $108 million of wholesale funding, $151 million of interest-bearing
deposits, a $33 million reduction of investments and short-term investments and
a $46 million increase in net free funds. The $151 million increase in
interest-bearing deposits reflects a $61 million increase in outstanding
brokered CDs and an increase of $90 million in retail interest-bearing deposits.
June 30, 1997 compared to December 31, 1996
During the first six months of 1997, total assets increased $176 million, or
8.1% on an annualized basis. Excluding the impact of Centra, total assets would
have increased by $100 million, or 4.6%. Loans increased $243 million, ($207
million, or 13.2% on an annualized basis, excluding Centra). The internal loan
growth was in commercial (up $160 million, or 18.6% on an annualized basis),
real estate (up $42 million, or 8.3% on an annualized basis) and consumer (up $5
million, or 2.6% on an annualized basis). The internal loan growth was funded
with $61 million of wholesale funding, $98 million of interest-bearing deposits
and $58 million from a reduction of investments and short-term investments
offset by a $10 million decrease in net free funds. The $98 million increase in
interest-bearing deposits reflects a $74 million increase in outstanding
brokered CDs and an increase of $24 million in retail interest-bearing deposits.
LIQUIDITY
Liquidity refers to the ability of the Corporation to generate adequate amounts
of cash to meet the Corporation's needs for cash. The subsidiary banks and the
parent company of the Corporation have different liquidity considerations.
Banking subsidiaries meet their cash flow requirements by having funds available
to satisfy customer credit needs as well as having available funds to satisfy
deposit withdrawal requests. Liquidity at banking subsidiaries is derived from
deposit growth, money market assets, maturing loans, the maturity of securities,
access to other funding sources and markets, and a strong capital position.
Deposit growth is the primary source of liquidity at the banking subsidiaries.
Interest-bearing deposits increased $152 million, while noninterest-bearing
deposits fell $78 million from the seasonally high year-end balance.
As of June 30, 1997, the securities portfolio contained $373.7 million at
amortized cost of U.S. Treasury and federal agency securities available for
sale, representing 45.3% of the total securities portfolio. These government
securities are highly marketable and had a market value equal to 100.0% 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 $17.6 million in the second quarter of 1997 compared to
$16.3 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 June 30, 1997, the Corporation had $19.3
million outstanding in short-term money market investments, serving as an
essential source of liquidity. The amount at quarter end represents .4% of total
assets compared to .6% at December 31, 1996.
Short-term borrowings totaled $488.8 million at June 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 $25.0 million in the
first six months of 1997 and will continue to be the parent's main source of
long-term liquidity.
At June 30, 1997, the parent company had $115 million of established lines of
credit with nonaffiliated banks, of which $64 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 June 30, 1997, totaled
$2.2 million.
The Corporation's long-term debt to equity ratio at June 30, 1997, was 9.0%,
compared to 5.4% at December 31, 1996. This increase is primarily attributable
to an increase in outstanding long-term FHLB advances.
Management believes that, in the current economic environment, the Corporation's
subsidiary and parent company liquidity positions are adequate. There are no
known trends nor any known demands, commitments, events or uncertainties that
will result or are reasonably likely to result in a material increase or
decrease in the Corporation's liquidity.
CAPITAL
Stockholders' equity at June 30, 1997, increased $26.8 million, or 6.8% since
December 31, 1996. This increase was composed of $8.1 million as a result of the
Centra acquisition, $18.4 million of retained earnings, $0.7 million from option
exercises, $1.1 million increase in the unrealized gain on available for sale
securities, reduced by $1.5 million from treasury stock purchases. Equity to
assets at June 30, 1997, remained at 9.14%, with the Tier 1 leverage ratio
climbing to 8.66%.
Cash dividends of $.29 per share were paid in the second quarter of 1997,
representing a payout ratio of 42.03%. Compared to the same period last year, a
cash dividend of $.24 per share was paid, representing a payout ratio of 37.50%.
Capital
Quarterly Trends
(In Thousands)
- --------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------
Stockholders' Equity $419,929 $407,590 $393,145 $381,428 $371,392
Average Equity to Average
Assets 9.23% 9.19% 9.06% 8.94% 8.90%
Equity to Assets -
Period End 9.14% 9.14% 8.90% 8.91% 8.92%
Tier 1 Capital to Risk
Weighted Assets -
Period End 10.80% 1.03% 10.73% 10.75% 10.66%
Total Capital to Risk
Weighted Assets -
Period End 12.05% 12.28% 11.98% 12.00% 11.91%
Tier 1 Leverage Ratio -
Period End 8.66% 8.58% 8.41% 8.34% 8.24%
Market Value Per Share -
Period End $39.50 $ 36.75 $ 35.42 $ 33.64 $ 32.29
Book Value Per Share -
Period End $18.70 $ 18.16 $ 17.84 $ 20.77 $ 20.21
Market Value Per Share to
Book Value Per Share 211.2% 202.4% 198.5% 194.4% 191.7%
Dividends Per Share -
This Quarter $ .29 $ .24 $ .24 $ .24 $ .24
Dividends Per Share -
Year to Date $ .53 $ .24 $ .95 $ .71 $ .47
Earnings Per Share -
This Quarter $ .69 $ .66 $ .68 $ .67 $ .64
Earnings Per Share -
Year to Date $ 1.35 $ .66 $ 2.60 $ 1.92 $ 1.25
Dividend Payout Ratio -
This Quarter 42.03% 36.36% 35.29% 35.82% 37.50%
Dividend Payout Ratio -
Year to Date 39.26% 36.36% 36.54% 36.98% 37.60%
- --------------------------------------------------------------------------------
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 June 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 June 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.
RECENT DEVELOPMENTS
On May 14, 1997, Associated Banc-Corp and First Financial Corporation,
headquartered in Stevens Point, Wisconsin, announced the signing of a definitive
agreement to merge the two companies in a "Merger of Equals". The new company
will be called Associated Banc-Corp and its headquarters will be in Green Bay,
Wisconsin.
When the merger is completed later this year, the new Associated Banc-Corp will
have approximately $10.5 billion in assets and over 220 full-service banking
locations throughout Wisconsin and Illinois.
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.
ASSOCIATED BANC-CORP
PART II - OTHER INFORMATION
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The corporation held its Annual Meeting of Shareholders on April
23, 1997. Proxies were solicited by corporation management
pursuant to Regulation 14A under the Securities Exchange Act of
1934.
(b) Directors elected at the Annual Meeting were Harry B. Conlon,
Jr., Ronald R. Harder, and J. Douglas Quick. Directors continuing
in office after the meeting were Robert Feitler, Robert C.
Gallagher, John S. Holbrook, Jr., William R. Hutchinson, James F.
Janz and John C. Meng.
(c) The matters voted upon and the results of the voting were as
follows:
(i) Election of the below-named nominees to the Board of
Directors of the corporation:
For Withheld
All Nominees 14,495,087 277,346
By Nominee:
Conlon 14,495,087 277,346
Harder 14,495,134 277,299
Quick 14,495,676 276,758
(ii) Amendment of the Associated Banc-Corp Restated Long-Term
Incentive Stock Option Plan to increase the number of shares
available for issuance thereunder.
For Against Abstain
13,471,473 994,686 306,274
(iii) Ratification of the selection of KPMG Peat Marwick as
independent certified public accountants for the corporation
for the year ending December 31, 1997.
For Against Abstain
14,679,558 20,956 71,919
(d) Not applicable.
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:
There were no reports on Form 8-K filed for the six months ended
June 30, 1997.
ASSOCIATED BANC-CORP
EXHIBIT (11)
Statement Re Computation of Per Share Earnings
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
As Reported:
Net income $30,248,654 $27,522,960
Weighted average common shares
outstanding 22,447,557 22,035,046
Net income per share $1.35 $1.25
Primary:
Net income $30,248,654 $27,522,960
Weighted average common shares outstanding 22,447,557 22,035,046
Common stock equivalents 350,817 306,623
Adjusted weighted average common shares
outstanding 22,798,374 22,341,669
Net income per share $1.33 $1.23
Fully Diluted:
Net income $30,248,654 $27,522,960
Weighted average common shares outstanding 22,447,557 22,035,046
Common stock equivalents 384,991 318,443
Adjusted weighted average common shares
outstanding 22,832,548 22,353,489
Net income per share $1.32 $1.23
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.
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)
/s/ Harry B. Conlon
Date: August 14, 1997 -----------------------------------------
Harry B. Conlon
Chairman & Chief Executive Officer
/s/ Joseph B. Selner
Date: August 14, 1997 -----------------------------------------
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
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000007789
<NAME> ASSOCIATED BANC-CORP
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 189,694
<INT-BEARING-DEPOSITS> 2,459
<FED-FUNDS-SOLD> 16,879
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 423,227
<INVESTMENTS-CARRYING> 415,898
<INVESTMENTS-MARKET> 416,454
<LOANS> 3,402,937
<ALLOWANCE> 49,943
<TOTAL-ASSETS> 4,595,386
<DEPOSITS> 3,582,170
<SHORT-TERM> 488,760
<LIABILITIES-OTHER> 66,672
<LONG-TERM> 37,855
0
0
<COMMON> 419,929
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 4,595,386
<INTEREST-LOAN> 140,278
<INTEREST-INVEST> 25,212
<INTEREST-OTHER> 575
<INTEREST-TOTAL> 166,065
<INTEREST-DEPOSIT> 63,587
<INTEREST-EXPENSE> 76,352
<INTEREST-INCOME-NET> 89,713
<LOAN-LOSSES> 2,209
<SECURITIES-GAINS> 661
<EXPENSE-OTHER> 76,009
<INCOME-PRETAX> 46,141
<INCOME-PRE-EXTRAORDINARY> 30,249
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,249
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 8.27
<LOANS-NON> 20,589
<LOANS-PAST> 7,040
<LOANS-TROUBLED> 471
<LOANS-PROBLEM> 55,259
<ALLOWANCE-OPEN> 47,422
<CHARGE-OFFS> 1,907
<RECOVERIES> 1,491
<ALLOWANCE-CLOSE> 49,943
<ALLOWANCE-DOMESTIC> 49,943
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
