SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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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 (IRS employer identification no.)
of 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)
- --------------------------------------------------------------------------------
(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 July 31, 1999, was 63,247,163 shares.
<PAGE>
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets - June 30, 1999,
June 30, 1998 and December 31, 1998 3
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1999 and 1998
Consolidated Statement of Changes in
Stockholders' Equity - Six Months Ended June 30, 1999
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998
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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
<TABLE>
June 30, June 30, December 31,
1999 1998 1998
---- ---- ---
(In thousands, except share data)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 248,019 $ 274,318 $ 331,532
Interest-bearing deposits in other financial institutions 5,333 5,828 200,467
Federal funds sold and securities purchased under agreements
to resell 35,500 18,500 4,485
Investment securities:
Held to maturity-at amortized cost (fair value of
$483,922, $685,495, and $562,940, respectively) 479,142 674,691 550,775
Available for sale-at fair value (amortized cost of
$2,626,334, $1,994,348, and $2,320,240, respectively) 2,611,650 2,044,507 2,356,960
Loans held for sale 83,800 86,851 165,170
Loans 7,634,576 7,210,496 7,272,697
Allowance for possible loan losses (103,735) (91,708) (99,677)
------- ------ ------
Loans, net 7,530,841 7,118,788 7,173,020
Premises and equipment 137,513 128,573 140,142
Other assets 490,986 209,287 328,116
-------- -------
Total assets $11,622,784 $10,561,343 $11,250,667
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 973,854 $ 841,997 $ 998,379
Interest-bearing deposits 7,515,832 7,625,071 7,559,440
--------- --------- ---------
Total deposits 8,489,686 8,467,068 8,557,819
Short-term borrowings 2,105,821 1,066,288 1,671,093
Long-term borrowings 25,661 27,758 26,004
Accrued expenses and other liabilities 104,410 132,943 117,030
------- ------- -------
Total liabilities 10,725,578 9,694,057 10,371,946
Stockholders' equity
Preferred stock --- --- ---
Common stock (par value $0.01 per share, authorized
100,000,000 shares, issued 63,389,734 shares) 634 634 634
Surplus 225,757 224,982 225,757
Retained earnings 684,020 613,314 646,071
Accumulated other comprehensive income (loss) (9,609) 31,810 23,369
Treasury stock at cost (104,235, 81,148 and 503,158 (3,596) (3,454) (17,110)
shares, respectively) ----- ----- ------
Total stockholders' equity 897,206 867,286 878,721
------- ------- -------
Total liabilities and stockholders' equity $11,622,784 $10,561,343 $11,250,667
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
<TABLE>
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $151,576 $151,406 $301,972 $302,463
Interest and dividends on investment securities:
Taxable 40,181 41,588 80,358 85,884
Tax exempt 5,270 2,579 9,998 5,018
Interest on deposits in other financial institutions 119 608 280 1,185
Interest on federal funds sold and securities
purchased under agreements to resell 231 232 469 487
--- --- --- ---
Total interest income 197,377 196,413 393,077 395,037
INTEREST EXPENSE
Interest on deposits 75,543 86,774 152,942 173,071
Interest on short-term borrowings 23,858 15,280 44,919 32,650
Interest on long-term borrowings 425 544 867 985
------ ------ ------- -------
Total interest expense 99,826 102,598 198,728 206,706
------ ------- ------- -------
NET INTEREST INCOME 97,551 93,815 194,349 188,331
Provision for possible loan losses 4,547 3,375 8,998 7,133
----- ----- ----- -----
Net interest income after provision for possible loan losses 93,004 90,440 185,351 181,198
NONINTEREST INCOME
Trust service fees 9,608 8,066 19,189 15,981
Service charges on deposit accounts 6,773 6,816 13,690 13,186
Mortgage banking 8,420 11,183 20,221 22,079
Credit card and other nondeposit fees 5,094 4,711 9,652 8,697
Retail commission income 4,897 3,987 8,783 7,377
Asset sale gains, net 321 6,191 603 6,376
Investment securities gains, net 1,023 643 4,612 5,954
Other 5,129 3,340 9,131 6,863
------ ----- ------ ------
Total noninterest income 41,265 44,937 85,881 86,513
NONINTEREST EXPENSE
Salaries and employee benefits 39,153 37,322 77,383 73,585
Occupancy 5,581 5,054 11,507 10,222
Equipment 3,725 3,458 7,417 6,867
Data processing 5,167 4,789 10,462 9,443
Business development and advertising 3,270 4,069 6,329 7,335
Stationery and supplies 2,021 1,486 3,892 2,882
FDIC expense 716 817 1,578 1,647
Other 17,265 15,863 37,323 32,452
------ ------ ------ ------
Total noninterest expense 76,898 72,858 155,891 144,433
------ ------ ------- -------
Income before income taxes 57,371 62,519 115,341 123,278
Income tax expense 17,495 21,515 36,514 42,414
------ ------ ------ ------
NET INCOME $39,876 $41,004 $78,827 $80,864
======= ======= ======= =======
Earnings per share:
Basic $0.63 $0.65 $1.25 $1.28
Diluted $0.62 $0.64 $1.23 $1.26
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
<TABLE>
ASSOCIATED BANC-CORP
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Common Other
Stock Retained Comprehensive Treasury
Amount Surplus Earnings Income Stock Total
---------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ $ 225,757 $ 646,071 $ 23,369 $ (17,110) $ 878,721
634
Comprehensive income:
Net income --- --- 78,827 --- --- 78,827
Net unrealized holding --- --- --- (46,792) --- (46,792)
losses arising during the period
Add back: reclassification
adjustment for net gains
realized in net income --- --- --- (4,612) --- (4,612)
Income tax effect --- --- --- 18,376 --- 18,376
------
Comprehensive income 45,799
Cash dividends, $0.58 per share --- --- (36,861) --- --- (36,861)
Common stock issued:
Business combinations 3 10,664 (1,469) 50 15,351 24,599
Incentive stock options --- --- (2,462) --- 4,317 1,855
Retirement of treasury stock in
connection with business
combination (3) (10,664) (86) --- 10,753 ---
Purchase of treasury stock --- --- --- --- (16,907) (16,907)
----------------------------------------------------------------------------
Balance, June 30, 1999 $ 634 $ 225,757 $ 684,020 $ (9,609) $ (3,596) $ 897,206
============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements Of Cash Flows
(Unaudited)
<TABLE>
For the Six Months Ended June
30,
---------------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $78,827 $80,864
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses 8,998 7,133
Depreciation and amortization 9,002 7,915
Amortization (accretion) of:
Mortgage servicing rights 2,420 3,183
Intangibles 3,478 2,920
Investment premiums and discounts 970 882
Deferred loan fees and costs (751) 31
Gain on sales of securities, net (4,612) (5,954)
Gain on other asset sales, net (603) (6,376)
Gain on sales of loans held for sale, net (9,029) (12,128)
Decrease in loans held for sale, net 90,399 39,278
(Increase) decrease in interest receivable and other assets (26,352) 12,335
Increase (decrease) in interest payable and other liabilities (14,799) 3,750
--------------------------------
Net cash provided by operating activities 137,948 133,833
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold and securities purchased under agreements to (19,615) (6,989)
resell
Net (increase) decrease in interest-bearing deposits in other financial 195,151 (809)
institutions
Net increase in loans (296,914) (178,043)
Mortgage servicing rights additions (6,606) (10,345)
Purchases of:
Securities held to maturity --- (10,019)
Securities available for sale (775,344) (216,432)
Premises and equipment, net of disposals (6,027) (10,610)
Bank-owned life insurance (100,000) ---
Proceeds from:
Sales of securities available for sale 36,178 60,366
Maturities of securities available for sale 528,809 296,619
Maturities of securities held to maturity 71,405 107,601
Sales of other real estate owned and other assets 3,112 41,599
Net cash received in acquisition of subsidiary 3,956 ---
--------------------------------
Net cash provided (used) by investing activities (365,895) 72,938
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (220,247) 71,791
Net increase (decrease) in short-term borrowings 417,014 (271,732)
Repayment of long-term debt (420) ---
Proceeds from issuance of long-term debt --- 13,500
Cash dividends (36,861) (29,368)
Proceeds from exercise of stock options 1,855 6,177
Purchase of treasury stock (16,907) (13,005)
--------------------------------
Net cash provided (used) by financing activities 144,434 (222,637)
--------------------------------
Net decrease in cash and cash equivalents (83,513) (15,866)
Cash and due from banks at beginning of period 331,532 290,184
================================
Cash and due from banks at end of period $248,019 $274,318
================================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $203,858 $202,821
Income taxes 38,501 3,839
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate 6,528 4,160
Mortgage loans securitized and transferred to securities available for sale 41,201 0
</TABLE>
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 June 30, 1999 presentation.
NOTE 3: Business Combinations
The following table summarizes completed transactions during 1998 and through
June 30, 1999:
<TABLE>
Consideration Paid
---------------------------
Shares of
Date Method of Cash Common Total Assets Intangibles
Name of Acquired Acquired Accounting (In millions) 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. 12/98 Purchase $16.2 448,571 $161 $11.9
("Citizens") Shawano, Wisconsin
- -----------------------------------------------------------------------------------------------------------------------
</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 transaction will be accounted for under the purchase
method. The Corporation plans to repurchase up to 2.8 million shares of common
stock expected to be issued in conjunction with the combination. The merger
transaction is expected to be completed in the third quarter of 1999.
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.
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:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income available to common stockholders $39,876 $41,004 $78,827 $80,864
======= ======= ======= =======
Weighted average shares outstanding 63,337 63,261 63,276 63,271
Effect of dilutive stock options outstanding 585 768 568 790
--- --- --- ---
Diluted weighted average shares outstanding 63,922 64,029 63,844 64,061
====== ====== ====== ======
Basic earnings per common share $0.63 $0.65 $1.25 $1.28
===== ===== ===== =====
Diluted earnings per common share $0.62 $0.64 $1.23 $1.26
===== ===== ===== =====
</TABLE>
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.
<PAGE>
The Corporation's reportable segment is banking, conducted through its bank,
leasing , mortgage, insurance and brokerage subsidiaries. For purposes of
segment disclosure under this statement, these entities have similar economic
characteristics and the nature of their products, services, processes,
customers, delivery channels and regulatory environment are similar.
The "other" segment is comprised of smaller nonreportable segments, including
asset management, consumer finance, treasury, holding company investments, as
well as inter-segment eliminations and residual revenues and expenses,
representing the difference between actual amounts incurred and the amounts
allocated to operating segments.
Selected segment information is presented below.
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
Consolidated
Banking Other Eliminations Total
As of and for the three months ended (In thousands)
June 30, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $12,314,879 $1,103,425 $(1,795,520) $11,622,784
=========== ========== ============ ===========
Interest income $204,679 $ 3,950 $(11,252) $197,377
Interest expense 107,829 3,249 (11,252) 99,826
Net interest income 96,850 701 0 97,551
Provision for loan losses 4,522 150 (125) 4,547
Noninterest income 38,587 29,753 (27,075) 41,265
Depreciation and amortization 3,281 2,172 0 5,453
Other noninterest expense 76,634 21,887 (27,076) 71,445
Income taxes 14,827 2,187 481 17,495
------- ----- --- ------
Net income $ 36,173 $ 4,058 $ (355) $ 39,876
======== ======= ========= ========
As of and for the three months ended
June 30, 1998
Total assets $11,037,165 $1,514,076 $(1,989,898) $10,561,343
=========== ========== ============ ===========
Interest income $204,544 $ 2,358 $(10,489) $196,413
Interest expense 111,369 1,718 (10,489) 102,598
Net interest income 93,175 640 0 93,815
Provision for loan losses 3,500 0 (125) 3,375
Noninterest income 38,262 21,058 (14,383) 44,937
Depreciation and amortization 7,897 732 0 8,629
Other noninterest expense 62,343 13,783 (11,897) 64,229
Income taxes 19,343 1,190 982 21,515
------ ----- --- ------
Net income $ 38,354 $ 5,993 $ (3,343) $ 41,004
======== ======= ========= ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
Consolidated
Banking Other Eliminations Total
As of and for the three months ended (In thousands)
June 30, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $12,314,879 $1,103,425 $(1,795,520) $11,622,784
=========== ========== ============ ===========
Interest income $402,611 $ 8,822 $(18,356) $393,077
Interest expense 209,823 7,261 (18,356) 198,728
Net interest income 192,788 1,561 0 194,349
Provision for loan losses 8,982 266 (250) 8,998
Noninterest income 79,418 58,909 (52,446) 85,881
Depreciation and amortization 9,706 4,093 0 13,799
Other noninterest expense 148,586 45,953 (52,447) 142,092
Income taxes 32,716 3,710 88 36,514
------ ----- -- ------
Net income $ 72,216 $ 6,448 $ 163 $ 78,827
======== ======= ======== ========
As of and for the six months ended June 30, 1998
Total assets $11,037,165 $1,514,076 $(1,989,898) $10,561,343
=========== ========== ============ ===========
Interest income $409,609 $ 4,940 $(19,512) $395,037
Interest expense 222,768 3,450 (19,512) 206,706
Net interest income 186,841 1,490 0 188,331
Provision for loan losses 7,383 0 (250) 7,133
Noninterest income 72,673 37,852 (24,012) 86,513
Depreciation and amortization 15,060 1,433 0 16,493
Other noninterest expense 122,181 26,772 (21,013) 127,940
Income taxes 39,008 3,319 87 42,414
------ ----- -- ------
Net income $ 75,882 $ 7,818 $ (2,836) $80,864
======== ======= ========= =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<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 other similar
expressions identify forward-looking statements.
Shareholders should note that many factors, some of which may be discussed
elsewhere in this document could affect the future financial results of
Associated Banc-Corp (the "Corporation") and could cause those results to differ
materially from those expressed in forward-looking statements contained 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).
Management continually evaluates strategic acquisition opportunities and other
various strategic alternatives that could involve the sale or acquisition of
branches or other assets.
Results of Operations - Summary
Net income for the first six months of 1999 totaled $78.8 million, or $1.25 and
$1.23 of basic and diluted earnings per share, respectively. Comparatively, net
income for the first six months of 1998 was $80.9 million, or $1.28 and $1.26 of
basic and diluted earnings per share, respectively. Operating results for the
first six months of 1999 generated an annualized return on average assets
("ROA") of 1.41% and an annualized return on average equity ("ROE") of 17.54%,
compared to 1.54% and 19.43%, respectively, for the same period in 1998. The net
interest margin for the first six months of 1999 was 3.76% compared to 3.78% for
the comparable period in 1998.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
TABLE 1
Summary Results of Operations: Trends
(in thousands, except per share data)
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1999 1999 1998 1998 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income (Qtr) $39,876 $38,951 $ 37,756 $ 38,400 $41,004
Net income (YTD) $78,827 $38,951 $157,020 $119,264 $80,864
Earnings per share - basic (Qtr) $0.63 $0.62 $0.60 $0.61 $0.65
Earnings per share - basic (YTD) $1.25 $0.62 $2.49 $1.89 $1.28
Earnings per share - diluted (Qtr) $0.62 $0.61 $0.60 $0.60 $0.64
Earnings per share - diluted (YTD) $1.23 $0.61 $2.46 $1.86 $1.26
ROA (Qtr) 1.40% 1.42% 1.38% 1.44% 1.56%
ROA (YTD) 1.41% 1.42% 1.48% 1.51% 1.54%
ROE (Qtr) 17.64% 17.44% 17.08% 17.51% 19.36%
ROE (YTD) 17.54% 17.44% 18.33% 18.77% 19.43%
Efficiency ratio (Qtr) 54.57% 56.18% 57.59% 53.65% 52.17%
Efficiency ratio (YTD) 55.37% 56.18% 54.37% 53.29% 53.11%
Net interest margin (Qtr) 3.74% 3.78% 3.72% 3.78% 3.78%
Net interest margin (YTD) 3.76% 3.78% 3.79% 3.77% 3.78%
</TABLE>
Net Interest Income and Net Interest Margin
Net interest income on a fully taxable equivalent basis ("FTE NII") was $200.3
million for the first half of 1999, up $8.9 million over the comparable period
of 1998. As indicated in Tables 2 and 3, changes in the volume and mix of
earning assets ("EAs"), interest-bearing liabilities ("IBLs"), and net free
funds ("NFFs") contributed $12.7 million to FTE NII, while the changes in the
value of NFFs and in the rate environment impacted FTE NII unfavorably by $3.8
million. The majority of the change in FTE NII between periods is attributable
to the acquisitions of Citizens and Windsor, the funding of the BOLI purchases,
and the reduced cost of interest-bearing liabilities as a result of lower
interest-bearing deposit balances and higher wholesale funding balances.
Average EAs for the first six months of 1999 increased $538 million (5.4%).
Loans accounted for over 61% of the EA growth (up $330 million). This growth was
funded with increased IBLs, up $551 million or 6.3% (the net of an increase in
wholesale funds of $659 million and a decline in interest-bearing deposits of
$108 million). Average NFFs declined $13 million between the comparable six
month periods. Given the timing of completed acquisitions, Citizens and Windsor
are not in average EAs and IBLs for the first half of 1998. Thus, excluding the
acquisitions, average EAs increased $236 million, or 2.3% and IBLs increased
$310 million, or 3.5%.
The net interest margin for the first half of 1999 was 3.76%, down from 3.78% in
the comparable first half 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 45 bp
reduction on IBLs offset by a 39 bp decrease on EAs. Net free funds contribution
decreased by 8 bp in the first half of 1999, which was caused by both lower
average balances of net free funds and lower value (rate on total IBLs) of these
funds. Investments and other short term investments as a percent of average EAs
increased to represent 28.5% of average EAs for the first half of 1999, compared
to 28.0% last year, negatively impacting the yield on EAs, as investment yields
are lower than loan yields. The cost of interest-bearing deposits declined 48
basis points to 4.13% for the first half of 1999 due primarily to changes in
pricing strategies in deposit products. With interest-bearing deposits declining
to represent 80.0% of average IBLs for the first half of 1999, compared to 86.2%
last year, the rate of IBLs was down 45 basis points on average to 4.28%,
compared to the first half of 1998.
The $200 million investment in bank owned life insurance ("BOLI") carried in
1999 (none at June 30, 1998) also impacts the comparison of FTE NII. The funding
of BOLI increased interest expense by approximately $3.3 million and decreased
NIM by 6 basis points between the six month periods. Thus, adjusted for the
impact of BOLI, the net interest margin for the six months ended June 30, 1999
would have been 3.82% , or 4 basis points higher than for the comparable period
last year.
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis-Taxable Equivalent Basis
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
Three Months ended June 30, 1999 Three Months ended June 30, 1998
-------------------------------- --------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ---------------------------------------- --------------- ----------- ---------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Loans $7,641,973 $151,790 7.91% $ 7,285,812 $151,650 8.30%
Investments and other 3,066,820 48,712 6.35 2,756,113 46,309 6.72
--------- ------ --------- ------
Total earning assets 10,708,793 200,502 7.47 10,041,925 197,959 7.86
Other assets, net 734,640 492,995
------- -------
Total assets $11,443,433 $10,534,920
=========== ===========
Interest-bearing deposits $7,470,730 75,544 4.06 $ 7,605,270 86,774 4.58
Wholesale funding 1,991,406 24,282 4.82 1,143,330 15,824 5.48
--------- ------ --------- ------
Total interest-bearing liabilities 9,462,136 99,826 4.22 8,748,600 102,598 4.69
------ -------
Demand, non-interest bearing 959,566 796,361
Other liabilities 115,228 140,296
Stockholders' equity 906,503 849,663
------- -------
Total liabilities and equity $11,443,433 $10,534,920
=========== ===========
Interest rate spread 3.25 3.17
Net interest income and net interest
margin $100,676 3.74% $ 95,360 3.78%
======== ========
Tax equivalent adjustment $ 3,125 $ 1,545
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
TABLE 2 (Continued)
Net Interest Income Analysis-Taxable Equivalent Basis
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
Six Months ended June 30, 1999 Six Months ended June 30, 1998
------------------------------ ------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 7,573,929 $302,402 7.98% $ 7,244,104 $ 302,957 8.37%
Investments and other 3,022,769 96,581 6.39 2,814,350 95,135 6.76
--------- ------ --------- ------
Total earning assets 10,596,698 398,983 7.53 10,058,454 398,092 7.92
Other assets, net 703,925 500,079
------- -------
Total assets $11,300,623 $10,558,533
=========== ===========
Interest-bearing deposits $ 7,470,359 152,944 4.13 $ 7,577,860 173,071 4.61
Wholesale funding 1,872,553 45,785 4.86 1,213,946 33,635 5.51
--------- ------ --------- ------
Total interest-bearing liabilities 9,342,912 198,729 4.28 8,791,806 206,706 4.73
------- -------
Demand, non-interest bearing 931,906 787,671
Other liabilities 119,541 139,898
Stockholders' equity 906,264 839,158
------- -------
Total liabilities and equity $11,300,623 $10,558,533
=========== ===========
Interest rate spread 3.25 3.19
Net interest income and net interest $200,254 3.76% $ 191,386 3.78%
margin
======== ============
Tax equivalent adjustment $ 5,905 $ 3,055
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
TABLE 3
Volume / Rate Variance
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Comparison of
Three Months ended June 1999 versus Six Months ended June 1999 versus
Three Months ended June 1998 Six Months ended June 1998
Income/ Variance Attributable to Income/ Variance Attributable to
Expense Volume Rate Expense Volume Rate
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 140 $ 7,238 $ (7,098) $ (555) $13,480 $(14,035)
Investments and Other 2,403 5,403 (3,000) 1,446 7,470 (6,024)
----- ----- ------ ----- ------ ------
Total interest income 2,543 12,641 (10,098) 891 20,950 (20,059)
INTEREST EXPENSE
Interest-bearing deposits $(11,231) $(4,500) $ (6,731) $(20,128) $(8,095) $(12,033)
Wholesale funding 8,458 10,460 (2,002) 12,151 16,345 (4,194)
------ ------ ------ ------ ------ -------
Total interest expense (2,773) 5,960 (8,733) (7,977) 8,250 (16,227)
--------------------------------------------------------------------------------------
Net interest income $ 5,316 $ 6,681 $(1,365) $ 8,868 $12,700 $ (3,832)
======================================================================================
</TABLE>
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.
<PAGE>
Provision For Possible Loan Loss
The provision for possible loan losses ("PFLL") for the first six months of 1999
was $9.0 million, up $1.9 million from the comparable period last year. The PFLL
recorded for the first six months of 1999 exceeded net charge-offs recorded in
the same period by $2.0 million. Net charge-offs as a percent of average loans
(on an annualized basis) decreased to 0.19% compared to the same period last
year of 0.23%. See Table 8.
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 excluding net investment security gains and other asset sales
gains was $80.7 million, or $6.5 million higher than the comparable 1998 period
(See Table 4). Noninterest income was $85.9 million for the first half of 1999,
down $632,000, or 0.7%, in the first six months of 1999 compared to the same
period last year. The acquisitions accounted for approximately $1.0 million of
noninterest income in the six months of 1999.
Trust service fees increased $3.2 million, or 20.1% compared to the same six
month period last year, as a result of higher trust assets under management and
general market conditions.
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 decreased $1.9 million, or 8.4% from the first six
months of 1998, with a $3.1 million decrease in gains on sales of loans and
volume related fees (impacted by approximately 16% lower mortgage production),
partially offset by an increase of $1.3 million in servicing fees (given a 7%
increase in mortgages serviced for others to $5.5 billion).
Retail commission income (brokerage and insurance commissions) increased $1.4
million, or 19.1% compared to the same period last year. The majority of the
increase is brokerage related, particularly variable and fixed annuities.
Income from BOLI (with $100 million purchased in each October 1998 and May 1999)
accounts for $3.5 million of the increase between the first six month periods.
BOLI income is included in other noninterest income in the consolidated income
statements.
Asset sale gains decreased $5.8 million, compared to the first six months of
1998. The first half of 1998 included non-recurring gains of $2.9 million on
sales of office buildings and a gain of $3.0 million on the sale of an affinity
credit card portfolio.
Net investment securities gains were $4.6 million for the first six months of
1999, down $1.3 million when compared to the same period last year.
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
TABLE 4
Noninterest Income
(in thousands)
- -------------------------------------------------------------------------------------------------------------------------
2nd Qtr. 2nd Qtr. Dollar Percent YTD YTD Dollar Percent
1999 1998 Change Change 1999 1998 Change Change
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trust service fees $ 9,608 $ 8,066 $ 1,542 19.1% $19,189 $15,981 $3,208 20.1%
Service charges on deposit accounts 6,773 6,816 (43) (0.6) 13,690 13,186 504 3.8
Mortgage banking 8,420 11,183 (2,763) (24.7) 20,221 22,079 (1,858) (8.4)
Credit card & other nondeposit fees 5,094 4,711 383 8.1 9,652 8,697 955 11.0
Retail commission income 4,897 3,987 910 22.8 8,783 7,377 1,406 19.1
BOLI income 2,270 --- 2,270 --- 3,548 --- 3,548 ---
Asset sale gains, net 321 6,191 (5,870) (94.8) 603 6,376 (5,773) (90.5)
Investment securities gains, net 1,023 643 380 59.1 4,612 5,954 (1,342) (22.5)
Other 2,859 3,340 (481) (14.4) 5,583 6,863 (1,280) (18.7)
------ ----- ----- ----- ----- ----- ------- ------
Total noninterest income $41,265 $44,937 $(3,672) (8.2)% $85,881 $86,513 $ (632) (0.7)%
======= ======= ======== ====== ======= ======= ======= ======
Total, net of securities gains $40,242 $44,294 $(4,052) (9.1)% $81,269 $80,559 $ 710 0.9%
Total, net of securities and asset
sale gains $39,921 $38,103 $ 1,818 4.7% $80,666 $74,183 $6,483 8.7%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest Expense
Noninterest expense ("NIE") was $155.9 million for the first half of 1999, up
$11.5 million, or 7.9%, compared to the same six month period last year (See
Table 5). The timing of the Citizen's and Windsor purchase acquisitions added
approximately $5.8 million to NIE for the first half of 1999 compared to last
year.
Salary and employee benefit expenses increased to $77.4 million, up $3.8 million
to the same period last year. Approximately $3.1 million of the change between
comparable periods is due to the additional staff of acquired entities, with the
remainder due to base merit increases.
Occupancy and equipment increased to $18.9 million, up $1.8 million over the
comparable period last year. The increase is primarily due to higher rental
expenses and contract maintenance.
Data processing increased to $10.5 million, up $1.0 million to the same period
last year. Higher processing volumes, software costs, and the timing of the
acquisitions account for the majority of the increase.
Stationery and supplies increased to $3.9 million, up $1.0 million over the
comparable period last year due in part to a larger asset base and workforce.
Other expenses were up $4.9 million over the comparable six month period,
principally in professional fees (up $1.8 million, primarily a function of Y2K
costs), and in office expense which includes costs such as telephone, postage,
and courier (up $2.0 million). <PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
TABLE 5
Noninterest Expense
(In thousands)
- -------------------------------------------------------------------------------------------------------------------------
2nd Qtr. 2nd Qtr. Dollar Percent YTD YTD Dollar Percent
1999 1998 Change Change 1999 1998 Change Change
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $39,153 $37,322 $1,831 4.9% $ 77,383 $73,585 $3,798 5.2%
Occupancy 5,581 5,054 527 10.4 11,507 10,222 1,285 12.6
Equipment 3,725 3,458 267 7.7 7,417 6,867 550 8.0
Data processing 5,167 4,789 378 7.9 10,462 9,443 1,019 10.8
Business development and advertising 3,270 4,069 (799) (19.6) 6,329 7,335 (1,006) (13.7)
Stationery and supplies 2,021 1,486 535 36.0 3,892 2,882 1,010 35.0
FDIC expense 716 817 (101) (12.4) 1,578 1,647 (69) (4.2)
Other 17,265 15,863 1,402 8.8 37,323 32,452 4,871 15.0
------- ------- ----- --- ------- ------ ----- -----
Total noninterest expense $76,898 $72,858 $4,040 5.6% $155,891 $144,433 $11,458 7.9%
======= ======= ====== ==== ======== ======== ======= =====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Balance Sheet
At June 30, 1999, total assets were $11.6 billion, an increase of $1.1 billion,
or 10.1%, over June 30, 1998, while assets grew $372 million over December 31,
1998. Citizens and Windsor accounted for $372 million of the increase between
comparable second 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).
On average, total assets for the first six months of 1999 increased to $11.3
billion, or $742 million (7.0%) over the same period last year. Excluding the
acquisitions, total assets were up 2.1% on average. Average earning assets for
the first half of 1999 were $10.6 billion which, excluding the acquisitions,
increased $236 million over the first half of 1998.
Loan growth accounted for essentially all the earning asset growth for the first
six months of 1999. On average, loans were $7.6 billion in the first half of
1999, growing $330 million over the same period in 1998. Without the
acquisitions, average loans grew 1.8% over the comparable six-month period in
1998.
On average, deposits were $8.4 billion in the first half of 1999, increasing $37
million over the same period last year. Without the acquisitions, average
deposits were down 2.5% for the comparable periods.
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
(Dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------
June 30, % of June 30, % of Dec. 31, % of
1999 Total 1998 Total 1998 Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial $1,189 15% $1,102 15% $ 962 13%
& agricultural ("CF&A loans")
Real estate-construction 481 6 328 5 461 6
Real estate-mortgage 5,276 69 5,047 69 5,245 71
Installment 748 10 802 11 751 10
Leases 24 -- 18 -- 19 --
---- --- ----- --- ----- ---
Total loans (including loans held
for sale) $7,718 100% $7,297 100% $7,438 100%
====== === ====== === ====== ===
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
(Dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------
June 30, % of June 30, % of Dec. 31, % of
1999 Total 1998 Total 1998 Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 974 11% $ 842 10% $ 998 12%
Savings 934 11 999 12 937 11
NOW 743 9 412 5 835 10
Money Market 1,366 16 1,422 17 1,165 13
Time 4,473 53 4,792 56 4,623 54
----- --- ----- --- ----- ---
Total deposits $8,490 100% $8,467 100% $8,558 100%
====== === ====== === ====== ===
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 June 30, 1999, the allowance for possible loan losses ("AFLL") was $103.7
million, representing 1.36% of loans outstanding, compared to $91.7 million, or
1.27% of loans at June 30, 1998, and $99.7 million, or 1.37% at year end 1998.
At June 30, 1999, the AFLL was 247% of nonperforming loans compared to 198% and
185% at June 30 and December 31, 1998, respectively. The AFLL was increased in
part by balances acquired of $2.0 million related to Windsor (included in first
quarter 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 June 30, 1999 AFLL increased $4.1 million since December 31, 1998, of which
$2.0 million was acquired with the Windsor transaction. Additionally, period end
loans grew $362 million (10.0% annualized) since year end (or 6.9% annualized
excluding the Windsor acquisition). 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.
These commercial-oriented loans increased as a percent of total loans to 37% at
June 30, 1999 compared to 32% at December 31, 1998.
The June 30, 1999 AFLL increased $12.0 million since June 30, 1998, of which
$5.6 million was acquired with the Windsor and Citizens transactions. Period end
loans grew $424 million (5.9%) since June 30, 1998 (or 2.9% excluding the
acquisitions), again mostly in commercial-oriented loans. In particular, the mix
of commercial real estate loans (included in Table 6 under real estate-mortgage)
increased to 21% of total loans at June 30, 1999 compared to 19% and 17% for
December 31 and June 30, 1998, respectively.
Charge-offs were $8.0 million for the period ending June 30, 1999, $7.2 million
at year end 1998, and $9.8 million for the period ending June 30, 1998, while
recoveries for the corresponding periods were $1.0 million, $4.0 million and
$1.7 million, respectively. There was a large commercial credit of which
approximately $2.0 million was charged off in the first half of 1998 and
recovered in the second half of 1998.
The AFLL represents management's estimate of an amount adequate to provide for
potential losses inherent in the loan portfolio as of each balance sheet date.
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 existing factors
affecting borrowers which could result in potential credit losses, such as Year
2000 issues relating to borrowers.
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
TABLE 8
Allowance for Loan Losses and Nonperforming Assets
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
At and for the At and for the
six months ended year ended
June 30, December 31,
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1998
---- ---- ----
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for Loan Losses (AFLL):
Balance at beginning of period $ 99,677 $ 92,731 $ 92,731
Balance related to acquisitions 2,037 --- 3,636
Provision for possible loan losses 8,998 7,133 14,740
Charge-offs (7,969) (9,814) (17,039)
Recoveries 992 1,658 5,609
------- ------ -------
Net charge-offs (NCOs) (6,977) (8,156) (11,430)
------- ------ -------
Balance at end of period $103,735 $ 91,708 $ 99,677
======== ======== ========
Nonperforming Assets:
Nonaccrual loans $ 37,431 $ 39,512 $ 48,150
Accruing loans past due 90 days or more 4,243 6,404 5,252
Restructured loans 283 287 485
------- ------ ------
Total nonperforming loans (NPLs) 41,957 46,203 53,887
Other real estate owned (OREO) 9,759 4,012 6,025
------- ------ ------
Total nonperforming assets (NPAs) $ 51,716 $ 50,215 $ 59,912
======== ======== ========
Ratios:
AFLL to NCOs (annualized) 7.37 5.58 8.72
NCOs to average loans (annualized) 0.19% 0.23% 0.16%
AFLL to total loans 1.36% 1.27% 1.37%
NPLs to total loans 0.55% 0.64% 0.74%
NPAs to total assets 0.44% 0.48% 0.53%
AFLL to NPLs 247% 198% 185%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming Loans And Other Real Estate Owned
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 $12 million, $13 million and $7
million of these loans at June 30, 1999, December 31, 1998, and June 30, 1998,
respectively.
Table 8 provides detailed information regarding nonperforming assets. NPLs
decreased to $42 million at June 30, 1999, down $11.9 million when compared to
year end 1998, and down $4.2 million from the same period in 1998. Approximately
$4.0 million of the change since year end 1998 was due to a loan secured by
commercial property which was transferred from the nonaccrual category at
December 31, 1998 into OREO in 1999, with the remaining decline seen primarily
in residential real estate nonaccruals. The decrease in NPLs between the June 30
periods is in part due to a $5.7 million decline in nonaccrual commercial and
industrial loans offset by a $2.6 million increase in loans secured by real
estate, mostly residential properties.
OREO was $9.8 million at June 30, 1999, up from $3.7 million and up $5.7 million
from December 31, and June 30, 1998, respectively. The increase since year-end
was primarily due to the $4.0 million commercial property transferred into OREO
as described above (which was subsequently sold during the third quarter of
1999). The increase between June periods was due principally to the $4.0 million
commercial property and the classification of certain bank properties as OREO in
fourth quarter 1998.
Potential problem loans are loans where there are doubts as to the ability of
the borrower to comply with present repayment terms. The decision of management
to place loans in this category does not necessarily mean that the Corporation
expects losses to occur but that management recognizes that a higher degree of
risk is associated with these performing loans. At June 30, 1999, potential
problem loans totaled $62 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 82% on average
for the first half of 1999.
Another substantial source of liquidity is the investment securities portfolio,
totaling $3.1 billion at June 30, 1999. 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 June 30, 1999, the parent company had $225 million of established lines of
credit with non-affiliated banks, of which $59 million was in use.
Capital
Stockholders' equity at June 30, 1999 increased to $897.2 million, compared to
$867.3 million at June 30, 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 losses, net of tax, on securities available for
sale (included in accumulated comprehensive income) of $9.6 million at June 30,
1999, compared to the unrealized gains, net of tax, on securities available for
sale (included in accumulated comprehensive income) of $31.8 million for the
comparable prior year period. The ratio of period-end equity to assets at June
30,1999, was 7.72%, compared to 8.21% at June 30, 1998. The decline in the
period-end equity to assets ratio was primarily attributable to the accumulated
other comprehensive loss of $9.7 million at June 30, 1999, down $41.5 million
when compared to the accumulated other comprehensive gain of $31.8 million at
June 30, 1998.
Cash dividends of $0.29 per share were paid in 1Q99 and 2Q99, representing
pay-out ratios of 46.77% and 46.03%, for the respective periods.
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>
TABLE 9
Capital Ratios
- --------------------------------------------------------------------------------------------------------------------------
Tier I Capital Total Capital Tier I Leverage
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1999 10.48% 11.83% 7.49%
December 31, 1998 11.05% 12.28% 7.56%
June 30, 1998 12.14% 13.37% 7.63%
Regulatory minimum requirements for well capitalized 6.00% 10.00% 5.00%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Second Quarter Results
Net income for the second quarter of 1999 ("2Q99") was $39.9 million, down $1.1
million compared to the same period last year. Diluted EPS was $.62 down from
$.64 for the same period in 1998. The quarterly ROE and ROA were 17.64% and
1.40%, respectively for 2Q99, compared to 19.36% and 1.56% for 2Q98,
respectively.
FTE NII for 2Q99 increased by $5.3 million compared to 2Q98. FTE NII was
impacted positively compared to 2Q98 by $667 million growth in EAs (adding $5.3
million to FTE NII), and an 8 bp increase in rate spread (adding $2.0 million to
FTE NII), offset by higher NFF cost of $2.0 million. The NIM was 4 bp lower than
NIM of 2Q98. The decrease in NIM was attributable to a 39 bp decline in earning
asset yield (impacted in part by holding a lower mix of loans to earning
assets), offset with a 47 bp decrease in the cost of interest-bearing
liabilities (due to greater reliance on wholesale funding). Additionally,
average NFF was negatively impacted by an average $166 million of BOLI
purchases, reducing FTE NII by $2.0 million and NIM by 8 bp. Thus, NIM adjusted
for BOLI would have increased 4 bp over the comparable quarter. The $5.3 million
increases in FTE NII includes approximately $4.5 million of FTE NII attributable
to the acquisitions.
The PFLL for 2Q99 was $4.5 million, up slightly ($96,000) from 1Q99 of $4.5
million and up $1.2 million from 2Q98 of $3.4 million. The PFLL recorded in the
second quarter of 1999 exceeded net charge-offs recorded in the same quarter by
$671,000. Net charge-offs as a percent of average loans (on an annualized basis)
increased to 0.20% compared to 1Q99 of 0.17%, and decreased when compared to
2Q98 of 0.28%.
Noninterest income for 2Q99 was $41.3 million, down $3.7 million (8.2%) versus
2Q98. However, excluding securities and asset sale gains, noninterest income
increased $1.8 million (4.8%). The increase was primarily attributable to an
increase of $1.5 million in trust service fees, $2.3 million of BOLI income,
$909,000 of retail commissions, offset by a decrease of $2.8 million in mortgage
banking income (principally in gains on sale, which are a function of the
interest rate environment and approximately 29% lower mortgage production
between quarters).
Noninterest expense for 2Q99 was $76.9 million, up $4.0 million (5.5%) over
2Q98. The $4.0 million increase was primarily a result of an increase of $1.8
million in personnel, $1.1 million in losses other than loans, particularly
overdraft losses, $1.2 million in office expense, $1.1 million in mortgage
servicing rights amortization, and $1.5 million increase in various other
expenses due to the timing of the acquisitions. Primarily offsetting the
increases was a $5.1 million swing in mortgage servicing right valuation
reserve.
Current Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133--an amendment of FASB Statement No. 133", was issued in
June 1999. 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, as amended by SFAS No. 137, is effective for all quarters of
fiscal years beginning after June 15, 2000. 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, as amended, is not expected to have a material impact on the Corporation's
financial statements.
<PAGE>
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 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 is adhering to FFIEC guidelines for substantially 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. As of July 31, 1999, the Corporation has
completed remediation, testing and implementation for all of its Mission
Critical products. Additionally, as of July 31, 1999, the corporation has
completed remediation, testing and implementation for all but four of its
Significant products. The remaining Significant products are expected to be
completed by September 30, 1999.
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
non-information 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 has been reviewed
and appropriate steps have been taken, as considered appropriate in the
circumstances, to provide for 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
material 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. Major
fund providers have been identified and their Year 2000 readiness has been
assessed and is being monitored.
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 $10.5 million, of which approximately $10
million has been expended as of June 30, 1999. 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.
Additionally, subsequent uncontrolled changes to Mission Critical and
Significant products could impact their Year 2000 compliance. 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 the scenarios mentioned above, a number
of actions are being taken to address and/or mitigate these risks. 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.
Management has also instituted procedures to ensure that those Mission Critical
and Significant products tested to be Year 2000 ready remain so through the turn
of the century. This clean management procedure provides for controlling changes
to products deemed Year 2000 ready and a process for revalidating those products
as changes occur prior to the turn of the century. Additionally, a business
resumption contingency plan has been developed to mitigate risks associated with
the failure at critical dates of systems that support core business processes.
This 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. A
liquidity contingency plan is also 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 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
Item 4: Submission of matters to a vote of security holders
(a) The corporation held its Annual Meeting of Shareholders on April
28, 1999. Proxies were solicited by corporation management
pursuant to Regulation 14A under the Securities Exchange Act of
1934.
(b) Directors elected at the Annual Meeting were John S. Holbrook,
Jr., William R. Hutchinson, George R. Leach, and John C. Seramur.
(c) The matters voted upon and the results of the voting were as
follows:
(i) Election of the below-named nominees to the Board of
Directors of the Corporation:
FOR WITHHELD
All Nominees: 51,493,138 741,382
By Nominee:
John S. Holbrook, Jr. 51,715,274 519,246
William R. Hutchinson 51,719,555 514,965
George R. Leach 51,493,138 741,382
John C. Seramur 51,734,696 499,824
(ii) Ratification of the selection of KPMG LLP as independent
auditors of Associated for the year ending December 31,
1999.
FOR AGAINST ABSTAIN
51,609,200 231,164 394,156
(d) Not applicable
<PAGE>
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11, Statement regarding computation of per-share
earnings. See Note 5 of the notes to consolidated financial
statements in Part I Item I.
Exhibit 27, Financial data schedule. Included in the
electronically filed document as required.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the six months ended June
30, 1999. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ASSOCIATED BANC-CORP
(Registrant)
Date: August 13, 1999 /s/ H. B. Conlon
----------------------------------------
H. B. Conlon
Chairman and Chief Executive Officer
Date: August 13, 1999 /s/ Joseph B. Selner
----------------------------------------
Joseph B. Selner
Principal Financial Officer
<PAGE>
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