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 September 30, 1999
-----------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5519
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Associated Banc-Corp
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
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(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
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 October 31, 1999, was 63,976,740 shares.
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
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PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets -
September 30, 1999, September 30, 1998
and December 31, 1998
Consolidated Statements of Income -
Three and Nine Months Ended
September 30, 1999 and 1998
Consolidated Statement of Changes in
Stockholders' Equity -
Nine Months Ended September 30, 1999
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
September 30, September 30, December 31,
1999 1998 1998
---- ---- ----
(In thousands, except share data)
ASSETS
Cash and due from banks $ 305,626 $ 241,447 $ 331,532
Interest-bearing deposits in other financial institutions 5,539 10,348 200,467
Federal funds sold and securities purchased under agreements
to resell 45,230 68,695 4,485
Investment securities:
Held to maturity-at amortized cost (fair value of
$443,297, $634,353 and $562,940, respectively) 440,804 621,522 550,775
Available for sale-at fair value (amortized cost of
$2,842,931, $2,070,851, and $2,320,240, respectively) 2,805,061 2,118,320 2,356,960
Loans held for sale 19,967 90,700 165,170
Loans 8,121,683 7,180,810 7,272,697
Allowance for possible loan losses (110,241) (92,715) (99,677)
--------- --------- ---------
Loans, net 8,011,442 7,088,095 7,173,020
Premises and equipment 138,890 134,612 140,142
Other assets 552,027 201,936 328,116
--------- --------- ---------
Total assets $12,324,586 $10,575,675 $11,250,667
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,098,339 $ 888,896 $ 998,379
Interest-bearing deposits 7,880,193 7,610,772 7,559,440
--------- --------- ---------
Total deposits 8,978,532 8,499,668 8,557,819
Short-term borrowings 2,248,189 1,040,095 1,671,093
Long-term borrowings 24,473 26,889 26,004
Accrued expenses and other liabilities 142,269 125,459 117,030
------- ------- ---------
Total liabilities 11,393,463 9,692,111 10,371,946
Stockholders' equity
Preferred stock --- --- ---
Common stock (par value $0.01 per share, authorized
100,000,000 shares, issued 64,156,539, 63,389,734 ,
63,389,734 shares respectively ) 641 634 634
Surplus 254,602 224,982 225,757
Retained earnings 704,787 631,052 646,071
Accumulated other comprehensive income (loss) (24,450) 30,512 23,369
Treasury stock at cost (121,564, 95,034 and 503,158
shares, respectively) (4,457) (3,616) (17,110)
------- ------- ---------
Total stockholders' equity 931,123 883,564 878,721
------- ------- ---------
Total liabilities and stockholders' equity $12,324,586 $10,575,675 $11,250,667
=========== =========== ===========
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except share data)
INTEREST INCOME
Interest and fees on loans $ 157,312 $ 151,786 $ 459,284 $ 454,249
Interest and dividends on investment securities:
Taxable 41,302 40,770 121,638 126,607
Tax exempt 6,092 2,815 16,112 7,880
Interest on deposits in other financial institutions 93 257 373 1,442
Interest on federal funds sold and securities
purchased under agreements to resell 386 778 855 1,265
------- ------- ------- -------
Total interest income 205,185 196,406 598,262 591,443
INTEREST EXPENSE
Interest on deposits 78,734 87,640 231,676 260,711
Interest on short-term borrowings 26,486 14,638 71,405 47,288
Interest on long-term borrowings 395 446 1,262 1,431
------- ------- ------- -------
Total interest expense 105,615 102,724 304,343 309,430
------- ------- ------- -------
NET INTEREST INCOME 99,570 93,682 293,919 282,013
Provision for loan losses 4,541 3,378 13,539 10,511
------ ------ ------- -------
Net interest income after provision for loan losses 95,029 90,304 280,380 271,502
NONINTEREST INCOME
Trust service fees 9,307 8,496 28,496 24,477
Service charges on deposit accounts 7,780 7,093 21,470 20,279
Mortgage banking 5,933 10,566 25,368 32,635
Credit card and other nondeposit fees 5,335 4,877 14,987 13,574
Retail commission income 5,077 3,872 13,860 11,249
Asset sale gains, net 74 543 677 6,919
Investment securities gains (losses), net (50) 35 4,562 5,989
Other 5,932 3,536 15,063 10,399
------ ------ ------- -------
Total noninterest income 39,388 39,018 124,483 125,521
NONINTEREST EXPENSE
Salaries and employee benefits 36,862 36,624 114,245 110,209
Occupancy 5,776 5,081 17,283 15,303
Equipment 4,047 3,499 11,464 10,366
Data processing 5,385 3,989 15,847 13,432
Business development and advertising 3,023 3,234 9,352 10,569
Stationery and supplies 1,889 1,572 5,781 4,454
FDIC expense 714 826 2,292 2,473
Other 16,620 17,223 53,157 49,665
------ ------ ------- -------
Total noninterest expense 74,316 72,048 229,421 216,471
------ ------ ------- -------
Income before income taxes 60,101 57,274 175,442 180,552
Income tax expense 18,319 18,874 54,833 61,288
------ ------ ------ ------
NET INCOME $ 41,782 $ 38,400 $ 120,609 $ 119,264
========= ========= ========= =========
Earnings per share:
Basic $0.65 $0.61 $1.90 $1.88
Diluted $0.65 $0.60 $1.88 $1.86
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Common Other
Stock Retained Comprehensive Treasury
Amount Surplus Earnings Income (Loss) Stock Total
-------------------------------------------------------------------------
(In thousands)
Balance, December 31, 1998 $ 634 $ 225,757 $ 646,071 $ 23,369 $ (17,110) $ 878,721
Comprehensive income:
Net income --- --- 120,609 --- --- 120,609
Net unrealized holding
losses arising during the period --- --- --- (70,028) --- (70,028)
Add back: reclassification
adjustment for net gains
realized in net income --- --- --- (4,562) --- (4,562)
Income tax effect --- --- --- 26,925 --- 26,925
---------
Comprehensive income 72,944
Cash dividends, $0.87 per share --- --- (55,195) --- --- (55,195)
Common stock issued:
Business combinations 25 90,063 (2,211) (154) 25,976 113,699
Incentive stock options --- --- (4,401) --- 8,856 4,455
Retirement of treasury stock in
connection with business
combination (18) ( 61,921) (86) --- --- (62,025)
Tax benefits of restricted shares
and options --- 703 --- --- --- 703
Purchase of treasury stock --- --- --- --- (22,179) (22,179)
--------------------------------------------------------------------------
Balance, September 30, 1999 $ 641 $ 254,602 $ 704,787 $ (24,450) $ (4,457) $ 931,123
==========================================================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
---------------------------------
1999 1998
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 120,609 $ 119,264
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 13,539 10,511
Depreciation and amortization 13,966 11,853
Amortization (accretion) of:
Mortgage servicing rights 7,211 4,822
Intangibles 5,555 4,380
Investment premiums and discounts 1,534 4,857
Deferred loan fees and costs 1,289 62
Gain on sales of securities, net (4,562) (5,989)
Gain on other asset sales, net (441) (6,919)
Gain on sales of loans held for sale, net (10,411) (17,623)
Decrease in loans held for sale, net 63,599 40,924
(Increase) decrease in interest receivable and other assets (8,639) 22,091
Increase (decrease) in interest payable and other liabilities 20,761 (3,734)
-------------------------------
Net cash provided by operating activities 224,010 184,499
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold and securities purchased under agreements to resell (16,745) (57,184)
Net (increase) decrease in interest-bearing deposits in other financial institutions 195,040 (5,329)
Net increase in loans (488,449) (118,849)
Mortgage servicing rights additions (11,177) (15,321)
Purchases of:
Securities held to maturity --- (10,019)
Securities available for sale (962,005) (468,136)
Premises and equipment, net of disposals (10,373) (17,620)
Bank-owned life insurance (100,000) ---
Proceeds from:
Sales of securities available for sale 38,279 60,366
Maturities of securities available for sale 606,655 464,316
Maturities of securities held to maturity 109,597 161,190
Sales of other real estate owned and other assets 10,561 11,273
Net cash received in purchase acquisitions 33,497 ---
-------------------------------
Net cash provided (used) by investing activities (595,120) 4,687
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (68,698) 104,390
Net increase (decrease) in short-term borrowings 549,309 (297,578)
Repayment of long-term debt (516) (1,216)
Proceeds from issuance of long-term debt 53 13,500
Cash dividends (55,195) (47,744)
Proceeds from exercise of stock options 4,455 7,140
Purchase and retirement of treasury stock (84,204) (16,415)
-------------------------------
Net cash provided (used) by financing activities 345,204 (237,923)
-------------------------------
Net decrease in cash and cash equivalents (25,906) (48,737)
Cash and due from banks at beginning of period 331,532 290,184
===============================
Cash and due from banks at end of period $305,626 $241,447
===============================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $308,965 $279,850
Income taxes 39,984 52,129
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate 7,318 5,074
Mortgage loans securitized and transferred to securities available for sale 92,015 ---
See accompanying notes to consolidated financial statements.
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 September 30, 1999 presentation.
NOTE 3: Business Combinations
The following table summarizes completed business combination transactions
during 1998 and through September 30, 1999:
Consideration Paid (In millions)
------------------------
Shares of
Date Method of Common Cash Total
Name of Acquired Acquired Accounting Stock (In millions) Assets Loans Deposits Intangibles
- ---------------------------------------------------------------------------------------------------------------------------------
Riverside Acquisition Corp. 8/31/99 Purchase 2,434,005 $ --- $ 374 $ 266 $ 337 $ 67
("Riverside")
Minneapolis, Minnesota
Windsor Bancshares, Inc. 2/3/99 Purchase 799,961 $ --- $ 182 $ 113 $ 152 $ 17
("Windsor")
Minneapolis, Minnesota
Citizens Bankshares, Inc. 12/19/98 Purchase 448,571 $ 16.2 $ 161 $ 105 $ 117 $ 12
("Citizens") Shawano, Wisconsin
- ---------------------------------------------------------------------------------------------------------------------------------
The consolidated financial statements include the results of operations for the
acquisitions accounted for under the purchase method since the date of
acquisition.
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:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share data)
Net income available to common stockholders $41,782 $38,400 $120,609 $119,264
======= ======= ======== ========
Weighted average shares outstanding 63,803 63,306 63,453 63,283
Effect of dilutive stock options outstanding 591 635 564 716
--- --- --- ---
Diluted weighted average shares outstanding 64,394 63,941 64,017 63,999
====== ====== ====== ======
Basic earnings per common share $0.65 $0.61 $1.90 $1.88
===== ===== ===== =====
Diluted earnings per common share $0.65 $0.60 $1.88 $1.86
===== ===== ===== =====
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.
Selected segment information is presented below.
- ---------------------------------------------------------------------------------------------------------------------
Consolidated
Banking Other Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------
As of and for the three months ended (In thousands)
September 30, 1999
Total assets $13,153,849 $1,187,212 $(2,016,475) $12,324,586
=========== ========== =========== ===========
Interest income $212,768 $3,243 $ (10,826) $205,185
Interest expense 114,605 1,836 (10,826) 105,615
Net interest income 98,163 1,407 0 99,570
Provision for loan losses 4,490 176 (125) 4,541
Noninterest income 40,199 31,330 (32,141) 39,388
Depreciation and amortization 2,483 2,390 2,345 7,218
Other noninterest expense 72,537 26,705 (32,144) 67,098
Income taxes 17,791 1,404 (876) 18,319
------- ----- ----- ------
Net income $41,061 $ 2,062 $ (1,341) $ 41,782
======= ======= ========== ========
As of and for the three months ended
September 30, 1998
Total assets $11,003,631 1,553,658 $(1,981,614) $10,575,675
=========== ========= =========== ===========
Interest income $204,208 $2,282 $(10,084) $196,406
Interest expense 111,107 1,701 (10,084) 102,724
Net interest income 93,101 581 0 93,682
Provision for loan losses 3,503 0 (125) 3,378
Noninterest income 32,298 15,567 (8,847) 39,018
Depreciation and amortization 9,014 769 (6) 9,777
Other noninterest expense 61,366 12,748 (11,843) 62,271
Income taxes 21,102 (2,270) 42 18,874
------ ------ -- ------
Net income $ 30,414 $ 4,901 $3,085 $38,400
========= ======= ====== =======
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Consolidated
Banking Other Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------
As of and for the nine months ended (In thousands)
September 30, 1999
Total assets $13,153,849 $1,187,212 $(2,016,475) $12,324,586
=========== ========== ============ ===========
Interest income $615,379 $12,065 $ (29,182) $598,262
Interest expense 324,428 9,097 (29,182) 304,343
Net interest income 290,951 2,968 0 293,919
Provision for loan losses 13,472 442 (375) 13,539
Noninterest income 118,654 90,239 (84,410) 124,483
Depreciation and amortization 12,189 6,483 2,345 21,017
Other noninterest expense 220,158 72,658 (84,412) 208,404
Income taxes 50,507 5,114 (788) 54,833
------ ----- ----- ------
Net income $113,279 $ 8,510 $ (1,180) $120,609
========= ======== ========= ========
As of and for the nine months ended
September 30, 1998
Total assets $11,003,631 $1,553,658 $(1,981,614) $10,575,675
=========== ========== =========== ===========
Interest income $613,817 $ 7,222 $(29,596) $591,443
Interest expense 333,875 5,151 (29,596) 309,430
Net interest income 279,942 2,071 0 282,013
Provision for loan losses 10,886 0 (375) 10,511
Noninterest income 104,614 53,419 (32,512) 125,521
Depreciation and amortization 24,074 2,202 (6) 26,270
Other noninterest expense 183,188 39,520 (32,507) 190,201
Income taxes 60,110 1,049 129 61,288
------ ----- --- ------
Net income $ 106,298 $12,719 $247 $119,264
=========== ======== ==== ========
- ---------------------------------------------------------------------------------------------------------------------
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 nine months of 1999 totaled $120.6 million, or $1.90
and $1.88 of basic and diluted earnings per share, respectively. Comparatively,
net income for the first nine months of 1998 was $119.3 million, or $1.88 and
$1.86 of basic and diluted earnings per share, respectively. Operating results
for the first nine months of 1999 generated an annualized return on average
assets ("ROA") of 1.40% and an annualized return on average equity ("ROE") of
17.70%, compared to 1.51% and 18.77%, respectively, for the same period in 1998.
The net interest margin for the first nine months of 1999 was 3.74% compared to
3.78% for the comparable period in 1998.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 1
Summary Results of Operations: Trends
(in thousands, except per share data)
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
1999 1999 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------
Net income (Qtr) $ 41,782 $39,876 $38,951 $ 37,756 $ 38,400
Net income (YTD) $120,609 $78,827 $38,951 $157,020 $119,264
Earnings per share - basic (Qtr) $0.65 $0.63 $0.62 $0.60 $0.61
Earnings per share - basic (YTD) $1.90 $1.25 $0.62 $2.49 $1.88
Earnings per share - diluted (Qtr) $0.65 $0.62 $0.61 $0.60 $0.60
Earnings per share - diluted (YTD) $1.88 $1.23 $0.61 $2.46 $1.86
ROA (Qtr) 1.40% 1.40% 1.42% 1.38% 1.44%
ROA (YTD) 1.40% 1.41% 1.42% 1.48% 1.51%
ROE (Qtr) 18.01% 17.64% 17.44% 17.08% 17.51%
ROE (YTD) 17.70% 17.54% 17.44% 18.33% 18.77%
Efficiency ratio (Qtr) 52.12% 54.45% 56.05% 57.59% 53.64%
Efficiency ratio (YTD) 54.20% 55.25% 56.05% 54.37% 53.29%
Net interest margin (Qtr) 3.70% 3.74% 3.78% 3.72% 3.78%
Net interest margin (YTD) 3.74% 3.76% 3.78% 3.79% 3.78%
Net Interest Income and Net Interest Margin
- -------------------------------------------
Net interest income on a fully taxable equivalent basis ("FTE NII") was $303.4
million for the first nine months of 1999, up $16.7 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 $21.3 million to FTE NII, while the changes in the
value of NFFs and the rate environment impacted FTE NII unfavorably by $4.6
million. The majority of the change in FTE NII between periods is attributable
to the purchase acquisitions, 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 nine months of 1999 increased $703 million (7.0%).
Loans accounted for over 57% of the EA growth (up $404 million). This growth was
funded with increased IBLs, up $725 million or 8.3% (the net of an increase in
wholesale funds of $769 million and a decline in interest-bearing deposits of
$44 million). Average NFFs declined $22 million between the comparable nine
month periods. Given the timing of completed acquisitions, Citizens, Windsor and
Riverside are not in average EAs and IBLs for the first nine months of 1998.
Therefore, excluding the acquisitions, average EAs increased $354 million, or
3.5% and IBLs increased $417 million, or 4.8%.
The net interest margin for the first nine months of 1999 was 3.74%, down from
3.78% in the comparable period 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 44 bp
reduction on IBLs offset by a 38 bp decrease on EAs. Net free funds contribution
decreased by 10 bp in the first nine months 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 28.7% of average EAs for the first nine
months of 1999, compared to 27.8% last year, negatively impacting the yield on
EAs, as investment yields generally are lower than loan yields. The cost of
interest-bearing deposits declined 49 basis points to 4.10% for the first nine
months of 1999 due primarily to changes in pricing strategies in deposit
products. With interest-bearing deposits declining to represent 79.6% of average
IBLs for the first nine months of 1999, compared to 86.7% last year, the rate of
IBLs was down 44 basis points on average to 4.27%, compared to the first nine
months of 1998.
The $200 million investment in bank owned life insurance ("BOLI") carried in
1999 (none at September 30, 1998) also impacts the comparison of FTE NII. The
funding of BOLI increased interest expense by approximately $5.9 million and
decreased NIM by 8 basis points between the nine month periods. Thus, adjusted
for the impact of BOLI, the net interest margin for the nine months ended
September 30, 1999 would have been 3.82%, or 4 basis points higher than for the
comparable period last year.
- -----------------------------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis-Taxable Equivalent Basis
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Three Months ended September 30, 1999 Three Months ended September 30, 1998
------------------------------------- -------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------
Loans (1) (2) (3) $ 7,848,876 $157,536 7.94% $ 7,294,041 $152,025 8.25%
Investments and other (1) 3,222,019 51,221 6.35 2,742,579 46,025 6.71
--------- ------ ---- --------- ------ ----
Total earning assets 11,070,895 208,757 7.48 10,036,620 198,050 7.83
------- ---- ------- ----
Other assets, net 760,063 525,540
------- -------
Total assets $11,830,958 $10,562,160
=========== ===========
Interest-bearing deposits $ 7,721,084 78,734 4.05 $ 7,638,934 87,640 4.55
Wholesale funding 2,065,644 26,881 5.09 1,074,333 15,084 5.50
--------- ------ ---- --------- ------ ----
Total interest-bearing liabilities 9,786,728 105,615 4.27 8,713,267 102,724 4.67
--------- ------- ---- ------- ----
Demand, non-interest bearing 1,009,464 845,158
Other liabilities 114,439 133,763
Stockholders' equity 920,327 869,972
------- -------
Total liabilities and equity $11,830,958 $10,562,160
=========== ===========
Interest rate spread (1) 3.21 3.16
Net free funds 0.49 0.62
---- ----
Net interest income and net interest
margin (1) $103,142 3.70% $95,326 3.78%
=================== =================
Tax equivalent adjustment $3,572 $1,644
- ---------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TABLE 2 (Continued)
Net Interest Income Analysis-Taxable Equivalent Basis
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 1999 Nine Months ended September 30, 1998
------------------------------------ ------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------
Loans (1) (2) (3) $ 7,664,783 $459,937 7.97% $ 7,260,932 $454,981 8.33%
Investments and other (1) 3,089,556 147,802 6.38 2,790,164 141,160 6.75
--------- ------- ---- --------- ------- ----
Total earning assets 10,754,339 607,739 7.51 10,051,096 596,141 7.89
------- ---- ------- ----
Other assets, net 723,795 508,660
------- -------
Total assets $11,478,134 $10,559,756
=========== ===========
Interest-bearing deposits $7,554,493 231,676 4.10 $ 7,598,442 260,711 4.59
Wholesale funding 1,935,821 72,667 4.95 1,166,897 48,719 5.51
--------- ------ --------- ------
Total interest-bearing liabilities 9,490,314 304,343 4.27 8,765,339 309,430 4.71
------- -------
Demand, non-interest bearing 958,037 807,044
Other liabilities 118,780 137,830
Stockholders' equity 911,003 849,543
------- -------
Total liabilities and equity $11,478,134 $10,559,756
=========== ===========
Interest rate spread (1) 3.24 3.18
Net free funds 0.50 0.60
---- ----
Net interest income and net interest
margin (1) $303,396 3.74% $286,711 3.78%
================== ==================
Tax equivalent adjustment $9,477 $4,698
- ----------------------------------------------------------------------------------------------------------------------
(1) The yield on tax exempt loans and securities is computed on a
tax-equivalent basis using a tax rate of 35% for all periods presented and
is net of the effects of certain disallowed interest deductions.
(2) Nonaccrual loans have been included in the average balances.
(3) Interest income includes net loan fees.
- -----------------------------------------------------------------------------------------------------------------------
TABLE 3
Volume / Rate Variance
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Comparison of
Three Months ended September 1999 versus Nine Months ended September 1999 versus
Three Months ended September 1998 Nine Months ended September 1998
Income/ Variance Attributable to Income/ Variance Attributable to
Expense Volume Rate Expense Volume Rate
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 5,511 $ 11,276 $ (5,765) $ 4,956 $ 24,697 $(19,741)
Investments and other 5,196 8,240 (3,044) 6,642 15,813 (9,171)
----- ----- ------ ------ ------ ------
Total interest income 10,707 19,516 (8,809) 11,598 40,510 (28,912)
INTEREST EXPENSE
Interest-bearing deposits $ (8,905) $ (1,825) $ (7,080) $(29,035) $ (9,918) $(19,117)
Wholesale funding 11,797 12,931 (1,134) 23,948 29,103 (5,155)
------ ------ ------ ------ ------ ------
Total interest expense 2,892 11,106 (8,214) (5,087) 19,185 (24,272)
-----------------------------------------------------------------------------------------
Net interest income $ 7,815 $ 8,410 $ (595) $ 16,685 $ 21,325 $ (4,640)
=========================================================================================
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 Loan Losses
- -------------------------
The provision for loan losses ("PFLL") for the first nine months of 1999 was
$13.5 million, up $3.0 million from the comparable period last year. Net
charge-offs as a percent of average loans (on an annualized basis) decreased to
0.18% compared to the same period last year of 0.19%. 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 was $124.5 million, down $1.0 million or 0.8%, for the first
nine months of 1999 compared to the same period last year (See Table 4).
Influencing this result was lower security and other asset sale gains (down $7.7
million between comparable nine month periods), and mortgage banking (down $7.3
million), offset in part by noninterest income from the purchase acquisitions
(which accounted for $1.9 million of the increase) and BOLI income (up $6.4
million).
Trust service fees were $28.5 million, an increase $4.0 million or 16.4%,
compared to the same nine month period last year, as a result of higher trust
assets under management.
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 was $25.4 million, a decrease of $7.3 million or 22.3%,
from the first nine months of 1998, with a $7.7 million decrease in gains on
sales of loans and volume related fees (impacted by approximately 29.1% lower
mortgage production, $1.1 billion for the first nine months of 1999), partially
offset by an increase of $442,000 or 4.1% in servicing fees (given a 4.6%
increase in mortgages serviced for others to $5.6 billion).
Retail commission income (brokerage and insurance commissions) increased $2.6
million, or 23.2% compared to the same period last year. The majority of the
increase was due to the sale of annuity products.
Income from BOLI (with $100 million purchased in both October 1998 and May 1999)
accounts for $6.4 million of the increase between the first nine month periods.
BOLI income is included in other noninterest income in the consolidated income
statements.
Asset sale gains decreased $6.2 million, compared to the first nine months of
1998. The first nine months 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.
- --------------------------------------------------------------------------------------------------------------------------
TABLE 4
Noninterest Income
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
3rd Qtr. 3rd Qtr. Dollar Percent YTD YTD Dollar Percent
1999 1998 Change Change 1999 1998 Change Change
- ---------------------------------------------------------------------------------------------------------------------------
Trust service fees $ 9,307 $ 8,496 $ 811 9.5% $ 28,496 $24,477 $ 4,019 16.4%
Service charges on deposit accounts 7,780 7,093 687 9.7 21,470 20,279 1,191 5.9
Mortgage banking 5,933 10,566 (4,633) (43.8) 25,368 32,635 (7,267) (22.3)
Credit card & other nondeposit fees 5,335 4,877 458 9.4 14,987 13,574 1,413 10.4
Retail commission income 5,077 3,872 1,205 31.1 13,860 11,249 2,611 23.2
BOLI income 2,895 --- 2,895 --- 6,442 --- 6,442 ---
Asset sale gains, net 74 543 (469) (86.4) 677 6,919 (6,242) (90.2)
Investment securities gains, net (50) 35 (85) (242.9) 4,562 5,989 (1,427) (23.8)
Other 3,037 3,536 (499) (14.1) 8,621 10,399 (1,778) (17.1)
----- ----- ----- ----- ------ ------- ------- ----
Total noninterest income $39,388 $39,018 $ 370 0.9% $124,483 $125,521 $(1,038) (0.8)%
======= ======= ====== ===== ======== ======== ======= ====
Total, net of securities gains $39,438 $38,983 $ 455 1.2% $119,921 $119,532 $ 389 0.3%
Total, net of securities and asset
sale gains 39,364 38,440 924 2.4 119,244 112,613 6,631 5.9
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest Expense
- -------------------
Noninterest expense ("NIE") was $229.4 million for the first nine months of
1999, up $13.0 million or 6.0%, compared to the same nine month period last year
(See Table 5). The purchase acquisitions added approximately $10.0 million to
NIE between comparable nine month periods.
Salary and employee benefit expenses increased to $114.2 million, up $4.0
million from the same period last year. The majority of the change between
comparable periods is due to the additional personnel expense of acquired
entities ($5.2 million), base merit increases, and lower fringe benefit costs
(down $1.8 million), primarily due to reduced profit sharing expense.
Occupancy and equipment increased to $28.7 million, up $3.1 million over the
comparable period last year. The increase is due to increased depreciation (up
$1.3 million), with the remainder primarily from higher rental expenses and
contract maintenance.
Data processing increased to $15.8 million, up $2.4 million to the same period
last year. Higher processing volumes, and software costs account for the
majority of the increase.
Stationery and supplies increased to $5.8 million, up $1.3 million over the
comparable period last year, due in part to a larger asset base and workforce.
Other expenses were up $3.5 million over the comparable nine month period. The
increase is a result of higher intangible amortization due to recent
acquisitions, increased office expense which includes courier, data
communications and software amortization, and various other expenses, offset by
a reduction in mortgage servicing rights amortization.
- --------------------------------------------------------------------------------------------------------------------------
TABLE 5
Noninterest Income
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
3rd Qtr. 3rd Qtr. Dollar Percent YTD YTD Dollar Percent
1999 1998 Change Change 1999 1998 Change Change
- ---------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $36,862 $36,624 $ 238 0.6% $114,245 $110,209 $ 4,036 3.7%
Occupancy 5,776 5,081 695 13.7 17,283 15,303 1,980 12.9
Equipment 4,047 3,499 548 15.7 11,464 10,366 1,098 10.6
Data processing 5,385 3,989 1,396 35.0 15,847 13,432 2,415 18.0
Business development and advertising 3,023 3,234 (211) (6.5) 9,352 10,569 (1,217) (11.5)
Stationery and supplies 1,889 1,572 317 20.2 5,781 4,454 1,327 29.8
FDIC expense 714 826 (112) (13.6) 2,292 2,473 (181) (7.3)
Other 16,620 17,223 (603) (3.5) 53,157 49,665 3,492 7.0
------ ------ ----- ---- ------ ------ ----- ---
Total noninterest expense $74,316 $72,048 $2,268 3.1% $229,421 $216,471 $12,950 6.0%
======= ======= ====== ==== ======== ======== ======= ===
- ---------------------------------------------------------------------------------------------------------------------------
Income Taxes
- ------------
The effective tax rate for the first nine months of 1999 was 31.25%, down from
33.94% for the same period last year, due to an increase in tax-exempt
securities, the tax benefit of BOLI and the utilization of tax loss carry
forwards.
Balance Sheet
- -------------
At September 30, 1999, total assets were $12.3 billion, an increase of $1.7
billion, or 16.5%, over September 30, 1998, while assets grew $1.1 billion over
December 31, 1998. Excluding intangibles, Citizens, Windsor and Riverside
accounted for $813 million of the increase between comparable September periods,
while Windsor and Riverside accounted for $640 million of the increase since
year end 1998. See Note 3 of notes to consolidated financial statements.
Total average assets for the first nine months of 1999 increased to $11.5
billion, or $918 million (8.7%) over the same period last year. Excluding the
acquisitions, total average assets were up 5.1%. Average earning assets for the
first nine months of 1999 were $10.8 billion which, excluding the acquisitions,
increased $354 million over the first nine months of 1998.
Loan growth accounted for essentially all the earning asset growth for the first
nine months of 1999. On average, loans were $7.7 billion in the first nine
months of 1999, growing $404 million over the same period in 1998. Without the
acquisitions, average loans grew 2.3% over the comparable period in 1998.
On average, deposits were $8.5 billion in the first nine months of 1999,
increasing $107 million over the same period last year. Without the
acquisitions, average deposits were down 2.2% for the comparable periods.
- ----------------------------------------------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
(Dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------
September 30, % of September 30, % of December 31, % of
1999 Total 1998 Total 1998 Total
- ----------------------------------------------------------------------------------------------------------------------
Commercial, financial
& agricultural ("CF&A loans") $ 1,348 17% $ 1,019 14% $ 962 13%
Real estate-construction 520 7 352 5 461 6
Real estate-mortgage 5,493 67 5,077 70 5,245 71
Installment 757 9 807 11 751 10
Leases 24 -- 17 -- 19 --
-- -- -- -- -- --
Total loans (including loans held
for sale) $ 8,142 100% $ 7,272 100% $ 7,438 100%
====== === ======= === ======= ===
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
(Dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------
September 30, % of September 30, % of December 31, % of
1999 Total 1998 Total 1998 Total
- ----------------------------------------------------------------------------------------------------------------------
Demand $ 1,098 12% $ 889 10% $ 998 12%
Savings 905 10 981 12 937 11
NOW 797 9 436 5 835 10
Money Market 1,481 17 1,424 17 1,165 13
Time (excluding brokered CDs) 4,218 47 4,655 55 4,551 53
Brokered CDs 480 5 115 1 72 1
--- -- --- -- --- --
Total deposits $ 8,979 100% $ 8,500 100% $ 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 September 30, 1999, the allowance for possible loan losses ("AFLL") was
$110.2 million, representing 1.36% of loans outstanding, compared to $92.7
million, or 1.29% of loans, at September 30, 1998, and $99.7 million, or 1.37%
at year end 1998. At September 30, 1999, the AFLL was 231% of nonperforming
loans compared to 216% and 185% at September 30 and December 31, 1998,
respectively. The AFLL was increased in part by balances acquired from the
purchase acquisitions. Table 8 provides additional information regarding
activity in the AFLL.
The September 30, 1999 AFLL increased $10.6 million since December 31, 1998, of
which $7.4 million was acquired with the aforementioned purchase transactions.
Additionally, period end loans grew $849 million since year end. 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 39% at September 30, 1999 compared to 32% at December 31, 1998.
The September 30, 1999 AFLL increased $17.5 million since September 30, 1998, of
which $11.0 million was acquired with the three purchase transactions. Period
end loans grew $941 million since September 30, 1998, again mostly in
commercial-oriented loans. The mix of commercial-oriented loans (CF&A loans and
commercial real estate included in Table 6) increased to 39% of total loans at
September 30, 1999 compared to 33% for September 30 and 32% for December 31,
1998.
Charge-offs were $12.3 million for the nine months ending September 30, 1999,
$13.2 million for the comparable period ending September 30, 1998, and $17.0
million for the year ended 1998, while recoveries for the corresponding periods
were $1.9 million, $2.7 million and $5.6 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 fourth quarter of 1998.
The AFLL represents management's estimate of an amount adequate to provide for
probable losses 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 8
Allowance for Loan Losses and Nonperforming Assets
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
At and for the At and for the
nine months ended year ended
September 30, December 31,
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1998
---- ---- ----
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses (AFLL):
Balance at beginning of period $ 99,677 $ 92,731 $ 92,731
Balance related to acquisitions 7,447 --- 3,636
Provision for loan losses 13,539 10,511 14,740
Charge-offs (12,292) (13,184) (17,039)
Recoveries 1,870 2,657 5,609
------ ------ ------
Net charge-offs (NCOs) (10,422) (10,527) (11,430)
------- ------ ------
Balance at end of period $110,241 $ 92,715 $ 99,677
======== ======== ========
Nonperforming Assets:
Nonaccrual loans $ 40,330 $ 36,566 $ 48,150
Accruing loans past due 90 days or more 6,539 6,161 5,252
Restructured loans 840 287 485
------ ------ ------
Total nonperforming loans (NPLs) 47,709 43,014 53,887
Other real estate owned (OREO) 4,105 4,085 6,025
------ ------- ------
Total nonperforming assets (NPAs) $ 51,814 $ 47,099 $59,912
======== ======== =======
Ratios:
AFLL to NCOs (annualized) 7.91 6.59 8.72
NCOs to average loans (annualized) 0.18% 0.19% 0.16%
AFLL to total loans 1.36% 1.29% 1.37%
NPLs to total loans 0.59% 0.60% 0.74%
NPAs to total assets 0.42% 0.45% 0.53%
AFLL to NPLs 231% 216% 185%
- --------------------------------------------------------------------------------------------------------------------------
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 $15 million, $8 million and $13
million of these loans at September 30, 1999, September 30, 1998, and December
31, 1998, respectively.
Table 8 provides detailed information regarding nonperforming assets. NPLs were
$47.7 million at September 30, 1999, up $4.7 million from the same period in
1998 in part due to a $3.4 million increase in NPLs secured by real estate,
mostly residential properties. NPLs were down $6.2 million when compared to year
end 1998, with approximately $4.0 million of the change due to a loan secured by
commercial property which was subsequently foreclosed and sold by September
30,1999. The three acquisitions contributed approximately $5.3 million of the
increase in NPLs between comparable nine month periods and $1.8 million of the
increase since year end 1998.
OREO was $4.1 million at September 30, 1999, relatively unchanged from September
30, 1998 and down $1.9 million from December 31. The decrease since year-end was
primarily due to a commercial property sale of approximately $1.0 million.
Potential problem loans are loans where there are doubts as to the ability of
the borrower to comply with present repayment terms. The decision of management
to place loans in this category does not necessarily mean that the Corporation
expects losses to occur but that management recognizes that a higher degree of
risk is associated with these performing loans. At September 30, 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 deposits. Deposits as a percentage of total funding sources (which includes
deposits, short-term borrowings and long-term debt) was 81% on average for the
first nine months of 1999. Wholesale funding represents the balance of the
Corporation's total funding needs. Currently, the banking subsidiaries have in
aggregate approximately $1.8 billion in available federal fund lines. Purchases
of funds on a daily basis are done through New York money market brokers, as
well as through a substantial network of direct relationships, as well as
through New York money market brokers. The banks also utilize brokered CDs,
repurchase agreements, treasury tax & loans, public funds and, to a lesser
extent FHLB advances. The parent company currently funds with loan commitments.
At September 30, 1999, total commitments are $150 million and current
utilization is $87 million.
Both the parent company ("PCO") and its four largest banking subsidiaries have
recently been rated (see below) by Moody's and Standard & Poor's. These ratings,
along with the Corporation's existing Thomson BankWatch, rating open new
channels of distribution and potential liquidity.
Bank Ratings: Long term Issuer Short term
- ------------ --------- ------ ----------
Moody's A2 Prime-1
Thomson BankWatch B TBW-1
S&P A- A-2
PCO Ratings: CP Issuer Short term
- ----------- -- ------ ----------
Moody's TBA N/A Prime-2
S&P N/A BBB+ A-2
The Corporation has full access to the Federal Reserve Bank's discount window.
In aggregate the Corporation has over $4 billion in collateral pledged for
discount borrowing purposes. The Corporation also has unutilized borrowing
capacity at the FHLB of Chicago of over $1 billion. Finally, its investment
portfolio has over $1.5 billion in available securities which can be funded via
repurchase agreements.
Capital
- -------
Stockholders' equity at September 30, 1999 increased to $931.1 million, compared
to $883.6 million at September 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 loss) of $24.5 million
at September 30, 1999, compared to unrealized gains, net of tax, on securities
available for sale (included in accumulated comprehensive income) of $30.5
million for the comparable prior year period. The ratio of period-end equity to
assets at September 30,1999, was 7.56%, compared to 8.35% at September 30, 1998.
The decline in the period-end equity to assets ratio was primarily attributable
to the accumulated other comprehensive loss of $24.5 million at September 30,
1999, down $55.0 million when compared to the accumulated other comprehensive
gain of $30.5 million at September 30, 1998.
Cash dividends of $0.29 per share were paid in each of the first three quarters,
representing pay-out ratios of 46.77%, 46.03% and 44.62%, for the respective
quarterly periods, bringing cash dividends to $0.87 per share for the nine month
period in 1999.
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 various 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 have declined since year end 1998
primarily as a function of stock repurchase activity, increased intangibles from
purchase acquisitions and increased commercial loan growth. The Corporation's
capital ratios are summarized in Table 9.
TABLE 9
Capital Ratios
- --------------------------------------------------------------------------------
Tier I Capital Total Capital Tier I Leverage
- --------------------------------------------------------------------------------
September 30, 1999 10.03% 11.36% 7.15%
September 30, 1998 12.30% 13.54% 7.82%
December 31, 1998 11.05% 12.28% 7.56%
Regulatory minimum
requirements for
well capitalized 6.00% 10.00% 5.00%
- --------------------------------------------------------------------------------
Third Quarter Results
- ---------------------
As detailed in Table 1, income for the third quarter of 1999 ("3Q99") was $41.8
million, up $3.4 million compared to the third quarter of 1998 ("3Q98"). Diluted
EPS was $0.65 up from $0.60 for the same period in 1998. The quarterly ROE and
ROA were 18.01% and 1.40%, respectively for 3Q99, compared to 17.51% and 1.44%
for 3Q98, respectively.
As shown in Tables 2 and 3, FTE NII for 3Q99 increased by $7.8 million compared
to 3Q98. FTE NII was impacted positively compared to 3Q98 by $1.0 billion growth
in EAs (adding $8.4 million to FTE NII), and a 5 bp increase in rate spread
(reducing FTE NII by $8.8 million), offset by a 13 bp reduction in the
contribution from NFFs (reducing FTE NII by $1.8 million). The NIM was 8 bp
lower than NIM of 3Q98. The decrease in NIM was attributable to a 35 bp decline
in earning asset yield (impacted in part by holding a lower mix of loans to
earning assets), offset with a 40 bp decrease in the cost of interest-bearing
liabilities (due to greater reliance on higher wholesale funding costs).
Additionally, average NFFs was negatively impacted by an average $206 million of
BOLI purchases, reducing FTE NII by $2.5 million and NIM by 9 bp. Thus, NIM
adjusted for BOLI would have increased 1 bp over the comparable third quarter of
last year. The $7.8 million increase in FTE NII includes approximately $5.2
million of FTE NII attributable to the acquisitions.
The PFLL for 3Q99 was $4.5 million, relatively unchanged from 2Q99 and up $1.2
million from 3Q98 of $3.4 million. The PFLL recorded in the third quarter of
1999 exceeded net charge-offs recorded in the same quarter by $1.1 million. Net
charge-offs as a percent of average loans (on an annualized basis) decreased to
0.17% compared to 2Q99 of 0.20%, and increased when compared to 3Q98 of 0.13%.
Noninterest income for 3Q99 was $39.4 million, down slightly (less than 1.0%)
versus 3Q98. However, excluding securities and asset sale gains, noninterest
income increased $924,000 (2.4%). The primary contributors of the $924,000
increase were BOLI income of $2.9 million (compared to none for 3Q98), retail
commission income up $1.2 million (primarily annuity production income), trust
service fees up $811,000 and service charges on deposit accounts up $687,000,
offset by lower mortgage banking income down $4.6 million (principally in gains
on sales, a result of lower mortgage production down 57% between comparable
periods).
Noninterest expense for 3Q99 was $74.3 million, up $2.3 million (3.1%) over
3Q98. The $2.3 million increase was primarily a result of an increases of: $1.8
million in personnel costs; $1.1 million in losses other than loans (primarily
paid overdraft losses), $1.2 million in office expense, $1.1 million in MSR
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 the MSR valuation reserve.
Current Accounting Pronouncements
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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.
Year 2000
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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 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 October 31, 1999, the Corporation has
completed remediation, testing and implementation for all Mission Critical and
Significant products and services.
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 has conducted Year 2000 testing with these service bureaus
and/or verified that the service bureau's systems that the Corporation utilizes
have successfully completed Year 2000 tests. The Corporation has determined not
only that the service bureau's systems will function properly in the Year 2000
and beyond, but also tested 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 did not include code
renovation. Product and service upgrades provided by the Corporation's service
bureaus and other vendors were the primary remediation strategy. This also
impacts the testing phase of the overall project plan and required that it would
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
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 substantially all has
been expended as of September 30, 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 have or
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 had been established and were 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 has also been written, which includes 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.
ASSOCIATED BANC-CORP
PART II - OTHER INFORMATION
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 three months
ended September 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: November 12, 1999 /s/ H. B. Conlon
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H. B. Conlon
Chairman and Chief Executive Officer
Date: November 12, 1999 /s/ Joseph B. Selner
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Joseph B. Selner
Principal Financial Officer