SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
----------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the transition period from to
------------------ -------------------
Commission file number 0-5519
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Associated Banc-Corp
- --------------------------------------------------------------------------------
(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)
1200 Hansen Road, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip code)
(920) 491-7000
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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 April 30, 1999, was 63,373,548 shares.
<PAGE>
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets -
March 31, 1999, March 31, 1998
and December 31, 1998 3
Consolidated Statements of Income -
Three Months Ended March 31, 1999
and 1998 4
Consolidated Statement of Changes in Stockholders'
Equity - Three Months Ended March 31, 1999 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K See Footnote (5)
in Part I Item I
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
March 31, March 31, December 31,
1999 1998 1998
---- ---- ----
(In thousands, except share data)
ASSETS
Cash and due from banks $ 253,330 $ 297,600 $ 331,532
Interest-bearing deposits in other
financial institutions 5,600 89,627 200,467
Federal funds sold and securities
purchased under agreements to resell 33,225 33,301 4,485
Investment securities:
Held to maturity-at amortized cost
(fair value of $520,819, $745,401,
and $562,940, respectively 512,340 734,928 550,775
Available for sale-at fair value
(amortized cost of $2,492,237,
$1,978,559, and $2,320,240,
respectively) 2,516,992 2,024,805 2,356,960
Loans held for sale 127,893 101,833 165,170
Loans 7,463,922 7,167,327 7,272,697
Allowance for possible loan losses (103,064) (93,415) (99,677)
--------- --------- ---------
Loans, net 7,360,858 7,073,912 7,173,020
Premises and equipment 140,455 125,822 140,142
Other assets 351,501 210,440 328,116
--------- --------- ---------
Total assets $11,302,194 $10,692,268 $11,250,667
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 948,173 $ 841,968 $ 998,379
Interest-bearing deposits 7,488,487 7,651,453 7,559,440
--------- --------- ---------
Total deposits 8,436,660 8,493,421 8,557,819
Short-term borrowings 1,815,020 1,181,363 1,671,093
Long-term debt 27,848 30,150 26,004
Accrued expenses and other liabilities 119,135 150,508 117,030
--------- --------- ---------
Total liabilities 10,398,663 9,855,442 10,371,946
Stockholders' equity
Preferred stock -- -- --
Common stock (par value $0.01
per share, authorized
100,000,000 shares, issued
63,389,734, 63,389,734 and
63,389,734 shares, respectively) 634 507 634
Surplus 225,757 221,850 225,757
Retained earnings 663,328 592,169 646,071
Accumulated other comprehensive income 15,716 29,287 23,369
Treasury stock at cost (58,826, 163,070
and 503,158 shares, respectively) (1,904) (6,987) (17,110)
--------- --------- ---------
Total stockholders' equity 903,531 836,826 878,721
Total liabilities and stockholders'
equity $11,302,194 $10,692,268 $11,250,667
========== ========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
1999 1998
---- ----
(In thousands except
per share data)
INTEREST INCOME
Interest and fees on loans $ 150,372 $ 151,057
Interest and dividends on investment securities:
Taxable 40,177 44,296
Tax exempt 4,728 2,439
Interest on deposits in other
financial institutions 161 577
Interest on federal funds sold
and securities purchased under
agreements to resell 539 255
------- -------
Total interest income 195,977 198,624
INTEREST EXPENSE
Interest on deposits 77,398 86,297
Interest on short-term borrowings 21,340 17,370
Interest on long-term borrowings 442 441
------- -------
Total interest expense 99,180 104,108
------- -------
NET INTEREST INCOME 96,797 94,516
Provision for possible loan losses 4,451 3,758
------- -------
Net interest income after provision for
possible loan losses 92,346 90,758
NONINTEREST INCOME
Trust service fees 9,581 7,915
Service charges on deposit accounts 6,915 6,370
Mortgage banking 11,813 10,896
Credit card and other nondeposit fees 4,548 3,986
Retail commission income 3,886 3,390
Asset sale gains, net 282 185
Investment securities gains, net 3,589 5,311
Other 4,003 3,523
------- -------
Total noninterest income 44,617 41,576
NONINTEREST EXPENSE
Salaries and employee benefits 38,221 36,263
Occupancy 5,926 5,168
Equipment 3,693 3,409
Data processing 5,322 4,654
Business development and advertising 3,058 3,266
Stationery and supplies 1,877 1,396
FDIC expense 862 830
Other 20,034 16,589
------- -------
Total noninterest expense 78,993 71,575
------- -------
Income before income taxes 57,970 60,759
Income tax expense 19,019 20,899
------- -------
NET INCOME $ 38,951 $ 39,860
======= =======
Earnings per share:
Basic $ 0.62 $ 0.63
Diluted $ 0.61 $ 0.62
See accompanying notes to consolidated financial statements
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
Accumulated
Common Other
Stock Retained Comprehensive Treasury
Amount Surplus Earnings Income Stock Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 634 $ 225,757 $ 646,071 $ 23,369 $ (17,110) $ 878,721
Comprehensive income:
Net income -- -- 38,951 -- -- 38,951
Net unrealized holding losses
arising during the period -- -- -- (8,376) -- (8,376)
Add back: reclassification
adjustment for net
gains realized in net income -- -- -- (3,589) -- (3,589)
Income tax effect -- -- -- 4,262 -- 4,262
Comprehensive income 31,248
Cash dividends, $0.29 per share -- -- (18,477) -- -- (18,477)
Common stock issued:
Business combinations 3 10,664 (1,469) 50 15,351 24,599
Incentive stock options -- -- (1,662) -- 2,749 1,087
Retirement of treasury stock in (3) (10,664) (86) -- 10,753 --
connection with business combination
Purchase of treasury stock -- -- -- -- (13,647) (13,647)
---------------------------------------------------------------------------
Balance, March 31, 1999 $ 634 $ 225,757 $ 663,328 $ 15,716 $ (1,904) $ 903,531
===========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements Of Cash Flows
(Unaudited)
March 31,
1999 1998
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 38,951 $ 39,860
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for possible loan losses 4,451 3,758
Depreciation and amortization 4,399 3,884
Amortization (accretion) of:
Mortgage servicing rights 2,258 1,748
Intangibles 1,703 1,460
Investment premiums and discounts 350 248
Deferred loan fees and costs 378 82
Gain on sales of securities, net (3,589) (5,311)
Gain on other asset sales, net (282) (185)
Gain on sales of loans held for sale, net (5,847) (5,865)
Decrease in loans held for sale, net 43,124 18,033
Decrease in interest receivable and other assets 6,551 12,563
Increase (decrease) in interest payable and
other liabilities (75) 21,316
------ ------
Net cash provided by operating activities 92,372 91,591
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold and securities
purchased under agreements to resell (17,340) (21,790)
Net (increase) decrease in interest-bearing
deposits in other financial institutions 194,883 (84,607)
Net increase in loans (86,817) (100,970)
Mortgage servicing rights additions (4,731) (4,915)
Purchases of:
Securities held to maturity -- (10,019)
Securities available for sale (373,775) (84,737)
Premises and equipment, net of disposals (4,393) (1,899)
Proceeds from:
Sales of securities available for sale 35,054 57,090
Maturities of securities available for sale 220,841 180,821
Maturities of securities held to maturity 38,225 47,380
Sales of other real estate owned and other assets 1,853 1,961
Net cash received in acquisition of subsidiary 3,956 --
------- -------
Net cash provided (used) by investing activities 7,756 (21,685)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (273,271) 98,144
Net increase (decrease) in short-term borrowings 126,213 (156,265)
Repayment of long-term debt (234) --
Proceeds from issuance of long-term debt -- 15,500
Cash dividends (18,477) (14,695)
Proceeds from exercise of stock options 1,087 4,768
Purchase of treasury stock (13,648) (9,942)
------- -------
Net cash provided by financing activities (178,330) (62,490)
------- -------
Net increase (decrease) in cash and cash equivalents (78,202) 7,416
Cash and due from banks at beginning of period 331,532 290,184
------- -------
Cash and due from banks at end of period $253,330 $297,600
======= =======
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $102,651 $102,596
Income taxes 2,168 2,146
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate 5,503 3,035
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements
NOTE 1: Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Associated
Banc-Corp's ("Corporation") financial position, results of its operations and
cash flows for the periods presented, and all such adjustments are of a normal
recurring nature. The consolidated financial statements include the accounts of
all subsidiaries. All material intercompany transactions and balances are
eliminated. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
These interim consolidated financial statements have been prepared according to
the rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally presented in
accordance with generally accepted accounting principles have been omitted or
abbreviated. The information contained in the consolidated financial statements
and footnotes in the Corporation's 1998 annual report on Form 10-K, should be
referred to in connection with the reading of these unaudited interim financial
statements.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the allowance for possible loan losses and the valuation of
investments and mortgage servicing rights.
NOTE 2: Reclassifications
Certain items in the prior period consolidated financial statements have been
reclassified to conform with the March 31, 1999 presentation.
NOTE 3: Business Combinations
The following table summarizes completed transactions during 1998 and through
March 31, 1999:
<TABLE>
Consideration Paid
---------------------------------
Date Method of Cash Shares of Total Assets Intangibles
Name of Acquired Acquired Accounting (In Millions) Common Stock (In Millions) (In Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Windsor Bancshares, Inc.
("Windsor") 2/99 Purchase $ --- 799,961 $ 182 $17.4
Minneapolis, Minnesota
Citizens Bankshares, Inc.
("Citizens")
Shawano, Wisconsin 12/98 Purchase 16.2 448,571 161 11.9
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
On March 10, 1999 the Corporation announced the signing of a definitive
agreement with Riverside Acquisition Corp. to acquire Riverside Acquisition
Corp. of Minneapolis, Minnesota ("Riverside"). Riverside has approximately $336
million in total assets, and operates in five locations in the Minneapolis
metropolitan area. The stock-for-stock merger transaction is contingent upon
approval of regulatory authorities and the shareholders of Riverside. The
transaction, expected to be completed in the third quarter of 1999, will be
accounted for using the pooling-of-interests method. Since the transaction is
not expected to be material to prior periods' reported operating results,
previously reported results are not anticipated to be restated following
consummation.
NOTE 4: Adoption of Statements of Financial Accounting Standards ("SFAS")
On January 1, 1999, the Corporation, as required, adopted SFAS No. 134,
"Accounting for Mortgage-Backed Securities after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise: an amendment of FASB
Statement No. 65." This statement requires that after the securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. This
statement conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking entity with the required
accounting for securities retained after the securitization of other types of
assets by a nonmortgage banking enterprise. There was no material impact on the
Corporation's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998. SFAS No. 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows, or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
SFAS No. 133 is effective for all quarters of fiscal years beginning after June
15, 1999. Earlier application is encouraged, but is permitted only as of the
beginning of any fiscal quarter that begins after the issuance of the statement.
This statement should not be applied retroactively to financial statements of
prior periods. The adoption of SFAS No. 133 is not expected to have a material
impact on the Corporation's financial statements.
<PAGE>
NOTE 5: Earnings Per Share
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the weighted
average number of shares adjusted for the dilutive effect of outstanding stock
options.
Presented below are the calculations for basic and diluted earnings per share:
For the three months ended March 31,
------------------------------------
1999 1998
---- ----
(in thousands, except per share data)
Net income available to common
stockholders $38,951 $39,860
======= ======
Weighted average shares outstanding 63,214 63,281
Effect of dilutive stock options
outstanding 538 782
--- ---
Diluted weighted average shares
outstanding 63,752 64,063
====== ======
Basic earnings per common share $0.62 $0.63
===== =====
Diluted earnings per common share $0.61 $0.62
===== =====
NOTE 6: Segment Reporting
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," was issued, requiring selected financial and descriptive
information about reportable operating segments. The statement replaces the
"industry segment" concept of SFAS no. 14 with a "management approach" concept
as the basis for identifying reportable segments. The management approach is
based on the way that management organizes the segments within the enterprise
for making operating decisions, allocating resources, and assessing performance.
Consequently, the segments are evident from the structure of the enterprise's
internal organization, focusing on financial information that an enterprise's
chief operating decision -makers use to make decisions about the enterprise's
operating matters.
The Corporation's reportable segment is banking, conducted through its bank,
leasing, mortgage, insurance and brokerage subsidiaries. For purposes of segment
disclosure under this statement, these entities have similar economic
characteristics and the nature of their products, services, processes,
customers, delivery channels and regulatory environment are similar.
The "other" segment is comprised of smaller nonreportable segments, including
asset management, consumer finance, treasury, holding company investments, as
well as inter-segment eliminations and residual revenues and expenses,
representing the difference between actual amounts incurred and the amounts
allocated to operating segments.
<PAGE>
Selected segment information is presented below.
Consolidated
Banking Other Eliminations Total
-----------------------------------------------
As of and for the three (In thousands)
months ended March 31, 1999
Total assets $11,784,724 $1,259,667 $(1,742,197) $11,302,194
========== ========= ========== ==========
Interest income $ 198,209 $ 4,872 $ (7,104) $ 195,977
Interest expense 102,272 4,012 (7,104) 99,180
Net interest income 95,937 860 -- 96,797
Provision for loan losses 4,460 116 (125) 4,451
Noninterest income 40,832 29,156 (25,371) 44,617
Depreciation and
amortization 6,428 1,921 -- 8,346
Other noninterest expense 71,952 24,066 (25,371) 70,647
Income taxes 17,889 1,523 (393) 19,019
---------- --------- ------- ------
Net income $ 36,043 $ 2,390 $ 518 $ 38,951
========== ======== ========== ==========
As of and for the three
months ended March 31, 1998
Total assets $11,139,861 $1,472,447 $(1,920,040) $10,692,268
========== ========= ========== ==========
Interest income $ 205,065 $ 2,582 $ (9,023) $ 198,624
Interest expense 111,399 1,732 (9,023) 104,108
Net interest income 93,666 850 -- 94,516
Provision for loan losses 3,883 -- (125) 3,758
Noninterest income 34,412 16,794 (9,630) 41,576
Depreciation and amortization 7,163 701 -- 7,864
Other noninterest expense 59,838 12,990 (9,117) 63,711
Income taxes 19,665 2,129 (895) 20,899
---------- --------- ---------- ----------
Net income $ 37,529 $ 1,824 $ (507) $ 39,860
========== ========= ========== ==========
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and the
Results of Operations
Forward-Looking Statements
Forward-looking statements have been made in this document that are subject to
risks and uncertainties. These forward-looking statements describe future plans
or strategies and include Associated Banc-Corp's expectations of future results
of operations. The words "believes," "expects," "anticipates," or similar
expressions identify forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document and in the documents that are incorporated by
reference, could affect the future financial results of Associated Banc-Corp
(the "Corporation") and could cause those results to differ materially from
those expressed in the forward-looking statements contained or incorporated by
reference in this document. These factors include the following:
- operating, legal, and regulatory risks;
- economic, political, and competitive forces affecting the Corporation's
banking, securities, asset management, and credit services businesses;
and
- the risk that the Corporation's analyses of these risks and forces could
be incorrect and/or that the strategies developed to address them could
be unsuccessful.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
Overview
The following discussion and analysis is presented to assist in the
understanding and evaluation of the Corporation's financial condition and
results of operations. It is intended to complement the unaudited financial
statements, footnotes, and supplemental financial data appearing elsewhere in
this Form 10-Q and should be read in conjunction therewith.
The following discussion refers to the impact of the Corporation's business
combination activity (see Note 3 of the notes to consolidated financial
statements). On November 12, 1998, the Corporation completed the conversion of
First Financial Bank ("FFB") systems and the distribution of FFB assets into its
various affiliates.
Results Of Operations - Summary
Net income for the three months ended March 31, 1999 totaled $39.0 million, or
$.62 and $.61 for basic and diluted earnings per share, respectively.
Comparatively, net income for the first quarter of 1998 ("1Q98") was $39.9
million, or $.63 and $.62 for basic and diluted earnings per share,
respectively. Operating results for the first quarter of 1999 ("1Q99") generated
an annualized return on average assets ("ROA") of 1.42% and an annualized return
on average equity ("ROE") of 17.44%, compared to 1.53% and 19.51%, respectively,
for the comparable period in 1998. The net interest margin for 1Q99 was 3.78%
compared to 3.79% for the comparable quarter in 1998.
Financial results on a sequential quarter basis showed improvement, following
the FFB conversion in late 1998. Net income for 1Q99 was up $1.2 million over
the fourth quarter of 1998 ("4Q98"). Diluted EPS was $.61 compared to the $.60
for 4Q98. In addition, ROA and ROE were improved by 4 basis points and 36 basis
points, respectively, over the ratios for 4Q98, with the net interest margin
increasing 6 basis points over the 3.72% for 4Q98. <PAGE>
- --------------------------------------------------------------------------------
TABLE 1
Summary Results of Operations: Trends
(Dollars in thousands, except per share)
1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------
Net income (Qtr) $38,951 $ 37,756 $ 38,400 $41,004 $39,860
Net income (YTD) $38,951 $157,020 $119,264 $80,864 $39,860
Earnings per share
- basic (Qtr) $0.62 $0.60 $0.61 $0.65 $0.63
Earnings per share
- basic (YTD) $0.62 $2.49 $1.89 $1.28 $0.63
Earnings per share
- diluted (Qtr) $0.61 $0.60 $0.60 $0.64 $0.62
Earnings per share
- diluted (YTD) $0.61 $2.46 $1.86 $1.26 $0.62
ROA (Qtr) 1.42% 1.38% 1.44% 1.56% 1.53%
ROA (YTD) 1.42% 1.48% 1.51% 1.54% 1.53%
ROE (Qtr) 17.44% 17.08% 17.51% 19.36% 19.51%
ROE (YTD) 17.44% 18.33% 18.77% 19.43% 19.51%
Efficiency ratio (Qtr) 56.18% 57.59% 53.64% 52.17% 54.10%
Efficiency ratio (YTD) 56.18% 54.37% 53.29% 53.11% 54.10%
Net interest margin (Qtr) 3.78% 3.72% 3.77% 3.77% 3.79%
Net interest margin (YTD) 3.78% 3.79% 3.77% 3.78% 3.79%
Net Interest Income and Net Interest Margin
Net interest income ("NII") for the three months ended March 31, 1999 was $96.8
million, up $2.3 million over the comparable quarter last year. Fully taxable
equivalent ("FTE") net interest income for 1Q99 increased by $3.6 million to
$99.6 million, compared to 1Q98. As indicated in Tables 2 and 3, changes in the
volume and mix of earning assets ("EAs") and interest-bearing liabilities
("IBLs") (principally due to acquisitions) contributed $5.8 million to FTE NII,
while changes in the rate environment impacted FTE NII unfavorably by $2.2
million.
Given the timing of completed acquisitions, average EAs and IBLs of 1Q98 do not
include Citizens or Windsor. EAs, excluding the acquisitions, increased $106
million over 1Q98, or 1.1%. Loans, representing 71.6% of average EAs for 1Q99,
accounted for essentially the entire earning asset growth. Loans, excluding the
acquisitions, grew $79 million, or 1.1% from 1Q98.
The net interest margin for 1Q99 was 3.78%, down from 3.79% in the comparable
first quarter of last year. The interest rate spread (the difference between the
average earning asset yield and the average rate paid on interest-bearing
liabilities) increased 6 basis points, attributable to a 42 bp reduction on IBLs
offsetting a 36 bp decrease on EAs. Net free funds contribution decreased by 7
bp in 1Q99, which was caused by both lower average balances of net free funds
and lower value (rate on total IBLs) of these funds.
The $100 million investment in bank owned life insurance ("BOLI") made in 4Q98
also impacts the comparison between first quarter periods. The funding of BOLI
increased interest expense by approximately $1.3 million between quarters. Thus,
adjusted for the NII impact of BOLI, the 1Q99 net interest margin would have
been 3.83%, or 4 basis points higher than 1Q98.
<PAGE>
- --------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis
(Dollars in thousands)
- --------------------------------------------------------------------------------
Three months ended Three months ended
March 31, 1999 March 31, 1998
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------
Loans $ 7,499,055 $150,588 8.06% $7,201,930 $151,307 8.44%
Investments and
other 2,979,190 48,170 6.47% 2,873,236 48,826 6.81%
--------- ------- --------- ------
Total earning
assets 10,478,245 198,758 7.61% 10,075,166 200,133 7.97%
Other assets, net 675,974 507,243
------- -------
Total assets $11,154,219 $10,582,409
========== ==========
Interest-bearing
deposits $ 7,467,572 77,399 4.20% $ 7,550,146 86,297 4.64%
Wholesale funding 1,746,911 21,782 4.99% 1,285,347 17,811 5.54%
--------- ------ --------- ------
Total interest-
bearing
liabilities 9,214,483 99,181 4.35% 8,835,493 104,108 4.77%
------ -------
Demand, non-interest
bearing 906,204 778,885
Other liabilities 127,509 139,494
Stockholders' equity 906,023 828,537
------- -------
Total liabilities
and equity $11,154,219 $10,582,409
========== ==========
Interest rate
spread 3.26% 3.20%
Net interest income
and net interest
margin $99,577 3.78% $96,025 3.79%
====== ======
Tax equivalent
adjustment $2,780 $1,509
- --------------------------------------------------------------------------------
<PAGE>
TABLE 3
Volume / Rate Variance
(Dollars in thousands)
- --------------------------------------------------------------------------------
Comparison of
Three months ended March 31, 1999 versus 1998
---------------------------------------------
Income/ Variance Attributable to
Expense ------------------------
Variance Volume Rate
- --------------------------------------------------------------------------------
INTEREST INCOME
Loans $ ( 719) $ 6,109 $(6,828)
Investments and Other ( 656) 1,907 (2,563)
----- ----- ------
Total interest income 1,375) 8,016 (9,391)
INTEREST EXPENSE
Interest-bearing deposits $(8,898) $(3,598) $(5,300)
Wholesale funding 3,971 5,835 (1,864)
------ ------ ------
Total interest expense (4,927) 2,237 (7,164)
----------------------------------------------
Net interest income $ 3,552 $ 5,779 $(2,227)
==============================================
The change in interest due to both rate and volume has been allocated
proportionately to volume variance and rate variance based on the relationship
of the absolute dollar change in each.
Provision For Possible Loan Loss
The provision for loan loss (PFLL) for the first quarter of 1999 was $4.5
million, up slightly from 4Q98 of $4.2 million and up from 1Q98 of $3.8 million.
The PFLL recorded in the first quarter of 1999 exceeded net charge-offs recorded
in the same quarter by $1.4 million.
The PFLL is a function of the methodology used to determine the adequacy of the
allowance for loan losses. See additional discussion under the "Allowance for
Loan Losses" section.
Noninterest Income
Noninterest income increased $3.0 million or 7.3% over the comparable first
quarter of 1998. Noninterest income, excluding net investment securities gains,
increased $4.8 million, or 13.1%. Most other categories of noninterest income
increased compared to 1Q98.
Trust service fees increased $1.7 million or 21.0% compared to the same quarter
last year, as a result of higher trust assets under management and general
market conditions.
Income from BOLI, purchased in October 1998, accounts for $1.3 million of the
increase between first quarter periods. BOLI income is included in other
noninterest income.
Mortgage banking income consists of servicing fees, gains on sales of loans, and
production related revenue (origination, underwriting and escrow waiver fees).
Mortgage banking income increased $917,000, or 8.4% versus 1Q98. The increase
was principally a result of increased servicing fees. The mortgage portfolio
serviced for others increased to $5.4 billion compared to $5.0 billion at March
31, 1998. Mortgage production between the two first quarter periods was similar
at $484 million for 1Q99 and $495 million for 1Q98.
Net investment securities gains were $3.6 million for 1Q99, down $1.7 million
from 1Q98.
- --------------------------------------------------------------------------------
TABLE 4
Noninterest Income
(In thousands)
- --------------------------------------------------------------------------------
1st Qtr. 1st Qtr. Dollar Percent
1999 1998 Change Change
- --------------------------------------------------------------------------------
Trust service fees $ 9,581 $ 7,915 $ 1,666 21.0%
Service charges on
deposit accounts 6,915 6,370 545 8.6
Mortgage banking 11,813 10,896 917 8.4
Credit card and other
nondeposit fees 4,548 3,986 562 14.1
Retail commissions 3,886 3,390 496 14.6
Asset sale gains, net 282 185 97 52.4
BOLI income 1,278 --- 1,278 100.0
Other 2,725 3,523 (798) (22.7)
------ ------ ----- -----
Total, excluding
securities gains $41,028 $36,265 $ 4,763 13.1%
Investment securities
gains, net 3,589 5,311 (1,722) (32.4)
------ ------ ----- ----
Total noninterest income $44,617 $41,576 $ 3,041 7.3%
- --------------------------------------------------------------------------------
Noninterest Expense
Total noninterest expense ("NIE") increased $7.4 million, or 10.4% over 1Q98.
All categories of NIE, with the exception of business development/advertising,
increased when compared to the first quarter of last year. The timing of the
Citizens and Windsor purchase acquisitions added approximately $2.7 million to
total NIE for 1Q99 compared to 1Q98. Without the acquisitions, NIE would have
increased over 1Q98 by $4.8 million, or 6.7%
Personnel expenses increased $2.0 million, or 5.4% when compared to 1Q98.
Approximately $1.4 million of the increase is due to the additional staff of
acquired entities, with the remainder attributable to base merit increases.
Occupancy and equipment increased to $9.6 million, or $1.0 million over 1Q98,
primarily due to increases in various rental expenses, contract maintenance, and
depreciation on furniture, fixtures and equipment.
Data processing for 1Q99 was $5.3 million, or $668,000 over 1Q98. Higher volumes
to process, software costs, and the timing of the acquisitions account for the
majority of the increase.
Professional and legal fees, included in other expense, were up $1.5 million
between the comparable first quarters, principally due to Y2K efforts and
acquisitions. The remaining increase in other NIE is due to intangibles
amortization (additional goodwill recorded with the acquisitions, and increased
capitalized mortgage servicing rights), and various volume-related costs (e.g.
credit bureau, recording and filing fees).
<PAGE>
- --------------------------------------------------------------------------------
TABLE 5
Noninterest Expense
(In thousands)
- --------------------------------------------------------------------------------
1st Qtr. 1st Qtr. Dollar Percent
1999 1998 Change Change
- --------------------------------------------------------------------------------
Salaries and employee benefits $38,221 $36,263 $ 1,958 5.4%
Occupancy 5,926 5,168 758 14.7
Equipment 3,693 3,409 284 8.3
Data processing 5,322 4,654 668 14.4
Stationery and supplies 1,877 1,396 481 34.5
Business development and advertising 3,058 3,266 (208) (6.4)
FDIC expense 862 830 32 3.9
Other 20,034 16,589 3,445 20.8
------- ------ ----- ----
Total noninterest expense $78,993 $71,575 $7,418 10.4%
- --------------------------------------------------------------------------------
Balance Sheet
At March 31, 1999, total assets were $11.3 billion, an increase of $610 million,
or 5.7%, over March 31, 1998, while assets grew $52 million over December 31,
1998. The growth is in part due to the timing of the purchase acquisitions.
Citizens and Windsor accounted for $354 million of the increase between
comparable first quarter periods, while Windsor accounted for $182 million of
the increase since year end 1998. Citizens was acquired in December 1998 (total
assets of $161 million; loans of $105 million; deposits of $117 million).
Windsor was acquired in February 1999 (total assets of $182 million; loans of
$113 million; deposits of $152 million). Goodwill intangibles increased by $17.4
million in 1Q99 for Windsor and by $11.9 million at year end 1998 for Citizens.
On average, total assets for 1Q99 increased to $11.2 billion, or $572 million
(5.4%) over 1Q98. Excluding the acquisitions, total assets were up 2.1% on
average. Average earning assets for 1Q99 were $10.5 billion which, excluding the
acquisitions, increased $106 million over 1Q98, and increased $227 million over
4Q98. Loan growth in the first quarter accounted for essentially all the earning
asset growth.
On average, loans were $7.5 billion for 1Q99, growing $297 million over 1Q98
(4.1%) and $260 million over 4Q98 (14.6% annualized). Without the acquisitions,
average loans grew 1.1% over 1Q98 and at a 4.5% annualized pace over 4Q98. Loan
growth has come primarily from commercial loans.
Historical trends support a seasonal first quarter dip in average deposit
balances compared to fourth quarter. On average, deposits were $8.4 billion for
1Q99, decreasing $130 million versus 4Q98 (down 6.2% annualized) and increasing
$45 million since 1Q98 (0.5%). Without the acquisitions, average deposits were
down 16.5% on an annualized basis for the sequential quarters and down 2.7% for
the comparable first quarters. For the periods under comparison, average
balances of NOW accounts were up while time deposits were down in part in
response to the Corporation's disciplined pricing philosophy in 1999.
<PAGE>
- --------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
(Dollars in millions)
- --------------------------------------------------------------------------------
March 31, % of March 31, % of Dec. 31, % of
1999 Total 1999 Total 1999 Total
- --------------------------------------------------------------------------------
Commercial, financial
& agricultural
("CF&A" loans) $1,122 15% $1,061 15% $ 962 13%
Real estate-construction 472 6 332 4 461 6
Real estate-mortgage 5,214 69 5,072 70 5,245 71
Installment 759 10 785 11 751 10
Leases 25 -- 19 -- 19 --
----- -- ----- -- ----- --
Total loans (including
loans held for sale) $ 7,592 100% $7,269 100% $7,438 100%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
(Dollars in millions)
- --------------------------------------------------------------------------------
March 31, % of March 31, % of Dec. 31, % of
1999 Total 1999 Total 1999 Total
- --------------------------------------------------------------------------------
Demand $ 948 11% $ 842 10% $ 998 12%
Savings 930 11 994 12 937 11
NOW 773 9 428 5 835 10
Money Market 1,322 16 1,415 16 1,165 13
Time 4,464 53 4,814 57 4,623 54
----- -- ----- -- ----- --
Total deposits $ 8,437 100% $ 8,493 100% $ 8,558 100%
- --------------------------------------------------------------------------------
Allowance For Loan Losses
The loan portfolio is the Corporation's primary asset subject to credit risk.
Credit risk is controlled and monitored through the use of lending standards,
thorough review of potential borrowers, and on-going review of loan payment
performance. Active asset quality administration, including early problem loan
identification and timely resolution of problems, further ensures appropriate
management of credit risk and minimization of loan losses.
As of March 31, 1999, the allowance for possible loan losses ("AFLL") was $103.1
million, representing 1.38% of loans outstanding, compared to $93.4 million, or
1.30% of loans at March 31, 1998, and $99.7 million, or 1.37% at year end 1998.
At March 31, 1999, the AFLL was 225% of nonperforming loans compared to 275% and
185%, at March 31 and December 31, 1998, respectively. The AFLL was increased in
part by balances acquired of $2.0 million related to Windsor (included as of
March 31, 1999), and $3.6 million related to Citizens included as of December
31, 1998). Table 8 provides additional information regarding activity in the
AFLL.
The AFLL represents management's estimate of an amount adequate to provide for
potential losses inherent in the loan portfolio. Management's evaluation of the
adequacy of the AFLL is based on management's ongoing review and grading of the
loan portfolio, consideration of past loan loss experience, trends in past due
and nonperforming loans, risk characteristics of the various classifications of
loans, current economic conditions, the fair value of underlying collateral, and
other factors affecting borrowers which could result in potential credit losses.
In general, the increase in the AFLL is a function of a number of factors.
First, total loan growth was moderate (4.1% increase between comparable first
quarters, or 1.1% increase excluding the acquisitions; and 10.7% annualized
growth since year-end 1998, or 4.3% excluding the acquisitions). Loan growth has
been predominantly in commercial-oriented loans (CF&A loans, commercial real
estate and real estate construction loans) which by their nature carry greater
inherent credit risk. Also, nonperforming loans increased by $11.9 million
between March 31, 1999 and 1998, while declining since year end 1998 (further
discussed under section "Nonperforming Loans and Other Real Estate Owned"). Net
charge-offs have remained unchanged ($3.1 million for March 31, 1999 and 1998).
Finally, the AFLL was impacted by balances acquired in the acquisitions as
described above.
- --------------------------------------------------------------------------------
TABLE 8
Allowance for Loan Losses and Nonperforming Assets
(Dollars in thousands)
- --------------------------------------------------------------------------------
At and for the At and for the
three months ended Year ended
March 31, December 31,
- -------------- -----------------------------------------------------------------
1999 1998 1998
---- ---- ----
Allowance for Loan
Losses (AFLL) (In Thousands)
- --------------------------------------------------------------------------------
Balance at beginning of period $ 99,677 $ 92,731 $ 92,731
Balance related to acquisitions 2,037 -- 3,636
Provision for possible loan losses 4,451 3,758 14,740
Charge-offs (3,679) (4,030 (17,039)
Recoveries 578 956 5,609
------- ------ ------
Net loan charge-offs (NCOs) (3,101) (3,074) (11,430)
------- ------ ------
Balance at end of period $103,064 $ 93,415 $ 99,677
Nonperforming Assets
- --------------------------------------------------------------------------------
Nonaccrual loans $ 39,749 $ 30,072 $ 48,150
Accruing loans past due 90
days or more 5,358 3,414 5,252
Restructured loans 776 455 485
------ ------ ------
Total nonperforming loans (NPLs) 45,883 33,941 53,887
Other real estate owned (OREO) 10,568 4,265 6,025
------ ------ ------
Total nonperforming assets (NPAs) $ 56,451 $ 38,206 $ 59,912
Ratio of AFLL to NCOs (annualized) 8.20 7.49 8.72
Ratio of NCOs to average loans
(annualized) 0.17% 0.17% 0.16%
Ratio of AFLL to total loans 1.38% 1.30% 1.37%
Ratio of NPLs to total loans 0.61% 0.47% 0.74%
Ratio of NPAs to total assets 0.50% 0.36% 0.53%
Ratio of AFLL to NPLs 225% 275% 185%
- --------------------------------------------------------------------------------
<PAGE>
Nonperforming Loans And Other Real Estate Owned
Management's identification of nonaccrual and problem loan identification
philosophy, which is embodied through the ongoing monitoring and reviewing of
all pools of risk in the loan portfolio to ensure that problem loans are
identified quickly and the risk of loss is minimized.
Nonperforming loans ("NPLs") are considered an indicator of future loan losses.
NPLs are defined as nonaccrual loans, loans 90 days or more past due but still
accruing and restructured loans. The Corporation specifically excludes student
loan balances that are 90 days or more past due and still accruing and that have
contractual government guarantees as to collection of principal and interest,
from its definition of NPLs. The Corporation had $11 million, $13 million and $8
million of these loans at March 31, 1999, December 31, 1998, and March 31, 1998,
respectively.
Table 8 provides detailed information regarding nonperforming assets. Total NPLs
at March 31, 1999 were down from year end 1998. Half of this decrease is due to
one large commercial property that was transferred into OREO in 1Q99 from the
nonaccrual category in 4Q98. The increase in NPLs between the first quarter
periods is in part due to the $3.3 million of NPLs acquired at year end 1998
from Citizens as well as from increases in real estate nonaccrual loans
(particularly residential real estate).
OREO was up from 1Q98 to 4Q98 primarily due to the 4Q98 classification of
certain bank properties carried as real estate. OREO increased additionally in
1Q99 due to one large commercial property described above.
Potential problem loans are loans where there are doubts as to the ability of
the borrower to comply with present repayment terms. The decision of management
to place loans in this category does not necessarily mean that the Corporation
expects losses to occur but that management recognizes that a higher degree of
risk is associated with these performing loans. At March 31, 1999, potential
problem loans totaled $71 million. The loans that have been reported as
potential problem loans are not concentrated in a particular industry.
Management does not presently expect significant losses from credits in this
category.
Liquidity
Liquidity refers to the ability of the Corporation to generate adequate amounts
of cash to meet the Corporation's needs for cash. The Corporation must meet
maturing debt obligations, provide a reliable source of funding to borrowers,
and fund operations on a cost effective basis. Management believes that
sufficient resources are available to meet the Corporation's liquidity
objectives. Management is not aware of any events or uncertainties that are
reasonably likely to have a material impact on the Corporation's liquidity,
capital resources or operations. Special consideration is also being given to
Year 2000 liquidity issues (see "Year 2000").
Liquidity, particularly at the banking subsidiaries, is predominantly derived
from deposit growth. Deposits as a percentage of total funding sources (which
includes deposits, short-term borrowings and long-term debt) was 81% on average
for 1Q99.
Another substantial source of liquidity is the investment securities portfolio,
totalling $3.0 billion in 1Q99. These securities could be sold for liquidity or
pledged to provide additional funding. Management may continue to reposition the
investment portfolio in order to enhance future results of operations with no
expected material impact on liquidity.
The Corporation and its affiliates also have multiple funding sources that could
be used to increase liquidity and provide additional financing flexibility.
These sources consist primarily of established federal fund lines with major
banks, advances from the Federal Home Loan Bank ("FHLB"), federal funds
purchased from a sizable network of correspondent banks, and securities sold
under agreements to repurchase obtained from a base of individual, business and
public entity customers.
Liquidity is also necessary at the parent company level. The parent company's
primary sources of funds are dividends and service fees from subsidiaries,
borrowings and proceeds from the issuance of equity. The parent company manages
its liquidity position to provide the funds necessary to pay dividends to
shareholders, service debt, invest in subsidiaries and satisfy other operating
requirements.
At March 31, 1999, the parent company had $225 million of established lines of
credit with non-affiliated banks, of which $143 million was in use for nonbank
affiliates.
Capital
Stockholders' equity at March 31, 1999 increased to $903.5 million, compared to
$836.8 million at March 31, 1998. The change in equity between the two periods
was primarily composed of the retention of earnings, the issuance of common
stock in connection with acquisitions, the exercise of stock options, along with
the payment of dividends and the repurchase of common stock. Stockholders'
equity also included unrealized gains, net of tax, on securities available for
sale (included in accumulated comprehensive income) of $15.7 million at March
31, 1999, compared to $29.3 million for the comparable prior year period. The
ratio of period-end equity to assets at March 31,1999, was 7.99%, compared to
7.83% at March 31, 1998.
Cash dividends of $0.29 per share were paid in 1Q99, representing a pay-out
ratio of 46.77% for the quarter.
The adequacy of the Corporation's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends on a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management. The capital ratios of the Corporation
and its banking affiliates are greater than minimums required by regulatory
guidelines. The Corporation's capital ratios are summarized in Table 9.
<PAGE>
- --------------------------------------------------------------------------------
TABLE 9
Capital Ratios
- --------------------------------------------------------------------------------
Tier I Capital Total Capital Tier I Leverage
- --------------------------------------------------------------------------------
March 31, 1999 10.79% 12.15% 7.49%
December 31, 1998 11.05% 12.28% 7.56%
March 31, 1998 10.89% 12.14% 7.34%
Regulatory minimum requirements 6.00% 10.00% 5.00%
- --------------------------------------------------------------------------------
Year 2000
The Corporation's Year 2000 Project is proceeding on schedule. The Year 2000
Project relates to systems designed to use two digits rather than four to define
the applicable year. The Corporation has adopted a centralized approach to
addressing the Year 2000 problem. The Corporation's Director of Systems and
Operations has overall responsibility for the Year 2000 compliance efforts and
is assisted by a project management office that is staffed with both internal
and external resources. Overseeing the project is a steering committee composed
of senior management officials. Monthly status reports are provided to each of
the Corporation's affiliates and the Corporation's Board of Directors monitors
progress on a quarterly basis. The Corporation has dedicated significant
internal and external resources to assess, plan and execute a strategy for
achieving Year 2000 readiness.
Using the Federal Financial Institution's Examination Council (FFIEC) Year 2000
directives that have been published since 1996, the Corporation has established
policy guidelines and time frames that are used to manage the work effort and
guide Year 2000 compliance decision making. All project management activities
and plans have incorporated the FFIEC guidelines published to date.
The Corporation's Year 2000 compliance efforts have included completing an
inventory of all products and services that may be affected by Year 2000 date
related issues. Each product or service inventoried has been categorized as:
mission critical, significant, ancillary or other, depending on its significance
to the successful continuance of a business activity. Concurrent with and
immediately following the completion of the inventory of products and services,
the Corporation undertook and completed an awareness project involving all
employees, management, boards of directors, and customers of the Corporation.
The Corporation is adhering to FFIEC guidelines for completing Year 2000
remediation, testing and implementation for all Mission Critical products and
services by June 30, 1999, and for Significant Products and services by December
31, 1999. The Corporation is currently on schedule to complete Year 2000
compliance activities within these designated timeframes.
The Corporation uses national third party service providers and software vendors
almost exclusively. The products and services provided by these organizations
have been integrated to provide an overall technology infrastructure for the
Corporation. As a result, a large part of the Corporation's Mission Critical
product Year 2000 testing effort is for products processed by service bureaus.
The Corporation must conduct Year 2000 testing with these service bureaus and/or
verify that the service bureau's systems that the Corporation utilizes have
successfully completed Year 2000 tests. The Corporation must determine not only
that the service bureau's systems will function properly in the Year 2000 and
beyond, but also test that the specific functions utilized by the Corporation
will properly perform.
The Corporation has no custom developed system code. Therefore, the remediation
phase of the Corporation's Year 2000 compliance effort does not include code
renovation. Product and service upgrades provided by the Corporation's service
bureaus and other vendors are the primary remediation strategy. This also
impacts the testing phase of the overall project plan and requires that it will
be proportionally larger than a plan which has significant code renovation as
its focus.
The Corporation has been careful to consider non-information technology as well
as information technology systems in its approach to Year 2000 compliance.
Non-information technology systems include equipment in use in the business
areas, which is not defined as computer hardware or peripheral devices.
Equipment includes: calculators, time clocks,
heating/ventilating/air-conditioning, elevators, telephones, facsimiles,
satellite dishes, and security devices. The Corporation has contacted vendors of
noninformation technology systems to determine Year 2000 compliance of these
systems and products and anticipates the completion of testing of these systems
and products during 1999. The Corporation has also identified third parties with
which it has a material relationship, such as telecommunications, power and
other utility vendors. The impact and status of these services is being reviewed
and appropriate steps are being taken to ensure continued operation for all
areas.
The Corporation's customers who are not preparing for the Year 2000 may
experience a disruption in business that could potentially result in significant
financial difficulties. Through the use of personal contacts and questionnaires,
the Corporation has taken an active role in heightening customer awareness of
the Year 2000 issues, assessing and monitoring material customers' Year 2000
compliance efforts, and taking steps to minimize the Corporation's exposure.
Material customers include fund takers, fund providers, and capital market and
asset management counterparties. The Year 2000 readiness of material customers
is being monitored by the Corporation on a quarterly basis and prospective
credit customers are also assessed for Year 2000 compliance as part of the
underwriting process. Additionally, consideration of Year 2000 credit risk has
been incorporated into the Corporation's loan reserve methodology.
The estimated costs for Year 2000 compliance are not expected to have a
significant impact on the Corporation's results of operations, liquidity or
capital resources. The Corporation estimates the total cost of addressing Year
2000 issues will be approximately $12 million, of which approximately $8 million
has been expended as of December 31, 1998. Additional expenditures will continue
through 1999. Year 2000 compliance costs have been influenced by a heavy
reliance on external resources that have been contracted to assist the
Corporation in the project management, vendor management, and testing phases of
its Year 2000 compliance effort. Scheduled systems upgrades and enhancements
which would have taken place, notwithstanding the Year 2000 compliance process,
have not been included in the estimated Year 2000 costs, even though certain of
these expenses may result in Year 2000 solutions.
Management of the Corporation believes that the potential effects on the
Corporation's internal operations of the Year 2000 compliance effort can and
will be addressed prior to the Year 2000. However, if required product or
service upgrades are not made or are not completed on a timely basis prior to
the Year 2000, the Year 2000 issue could disrupt normal business operations.
Normal business operations could also be disrupted if third party servicers,
upon which the Corporation depends for services, including service bureaus,
payment systems, utilities, etc., encounter difficulties relating to the Year
2000 issue.
The most reasonable likely worst case Year 2000 scenarios foreseeable at this
time would include the Corporation temporarily not being able to process, in
some combination, various types of customer transactions. This could affect the
ability of the Corporation to, among other things, originate new loans, post
loan payments, accept deposits or allow immediate withdrawals, and, depending on
the amount of time such scenario lasted, could have a material adverse effect on
the Corporation. Because of the serious implications of these scenarios,
contingency plans have been established and are being monitored for all mission
critical products to mitigate the risks associated with any failure to
successfully complete Year 2000 compliance renovation, validation, or
implementation efforts. Additionally, a business resumption contingency plan is
being developed to mitigate risks associated with the failure at critical dates
of systems that support core business processes. A liquidity contingency plan is
being written and will be tested, including working with the Federal Reserve to
ensure that adequate currency will be available to meet anticipated customer
needs, as well as ensuring adequate access to funding as needed by the
Corporation. The Year 2000 business resumption contingency plan is designed to
ensure that Mission Critical core business processes will continue if one or
more supporting systems fail and would allow for limited transactions, including
the ability to make certain deposit withdrawals, until the Year 2000 problems
are fixed.
The costs of the Year 2000 project and the date on which the Corporation plans
to complete Year 2000 compliance are based on management's best estimates, which
were derived using numerous assumptions of future events such as service
bureaus' and other vendors' plans, the availability of certain resources
(including internal and external resources), and other factors. However, there
can be no guarantee that these estimates will be achieved at the cost disclosed
or within the timeframe indicated, and actual results could differ materially
from these plans. Factors that might affect the timely and efficient completion
of the Corporation's Year 2000 project include, but are not limited to, vendors'
and service bureaus' abilities to adequately correct or convert software and the
effect on the Corporation's ability to test these systems, the availability and
cost of personnel trained in the Year 2000 area, the ability to identify and
correct all relevant computer programs, and similar uncertainties.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation has not experienced any material changes to its market risk
position since December 31, 1998, from that disclosed in the Corporation's 1998
Form 10-K Annual Report.
<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, 1999.
<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, 1999 /s/ H. B. Conlon
----------------------------------------
H. B. Conlon
Chairman and Chief Executive Officer
Date: May 14, 1999 /s/ Joseph B. Selner
-----------------------------------------
Joseph B. Selner
Principal Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000007789
<NAME> ASSOCIATED BANC-CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 253,330
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<FED-FUNDS-SOLD> 33,225
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<ALLOWANCE> (103,064)
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0
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