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