-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CqoZEPTlA68C1ULLySwesnLxT1dXO8pF2hS3tytqQBTJ07yTVKi3Ut/jCD5zO+46 UnJIHTKx/9GgF2t6QIWSkw== 0000007789-98-000013.txt : 19980817 0000007789-98-000013.hdr.sgml : 19980817 ACCESSION NUMBER: 0000007789-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASSOCIATED BANC-CORP CENTRAL INDEX KEY: 0000007789 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 391098068 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-05519 FILM NUMBER: 98688693 BUSINESS ADDRESS: STREET 1: 112 NORTH ADAMS ST STREET 2: P O BOX 13307 CITY: GREEN BAY STATE: WI ZIP: 54301 BUSINESS PHONE: 4144333166 MAIL ADDRESS: STREET 1: 112 NORTH ADAMS STREET STREET 2: P O BOX 13307 CITY: GREEN BAY STATE: WI ZIP: 54307-3307 FORMER COMPANY: FORMER CONFORMED NAME: ASSOCIATED BANK SERVICES INC DATE OF NAME CHANGE: 19770626 10-Q 1 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, 1998 ------------------------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- -------------------- Commission file number 0-5519 --------------------------------------------------- Associated Banc-Corp - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Wisconsin 39-1098068 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS employer identification no.) incorporation or organization) 112 North Adams Street, Green Bay, Wisconsin 54301 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (920) 433-3166 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of registrant's common stock, par value $0.01 per share, at June 30, 1998, was 63,308,586 shares. ASSOCIATED BANC-CORP TABLE OF CONTENTS Page No. --------- PART I. Financial Information Item 1. Financial Statements: Consolidated Statements of Financial Condition - June 30, 1998 and December 31, 1997 Consolidated Statements of Income - Three and Six Months Ended June 30, 1998 and 1997 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 30 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 See Footnote (8) in Part I Item I Signatures Special Note Regarding Forward-Looking Statements Forward-looking statements have been made in this document, and in documents that are incorporated by reference, that are subject to risks and uncertainties. These forward-looking statements, which are included in Management's Discussion and Analysis, describe future plans or strategies and include the Corporation's expectations of future results of operations. The words "believes," "expects," "anticipates" or similar expressions identify forward-looking statements. Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, could affect the future financial results of the Corporation and could cause those results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document. These factors include the following: - operating, legal and regulatory risks; - economic, political and competitive forces affecting the Corporation's banking, securities, asset management and credit services businesses; and - the risk that the Corporation's analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: ASSOCIATED BANC-CORP Consolidated Statements of Financial Condition (Unaudited) June 30, December 31, 1998 1997 ---- ---- (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 275,844 $ 288,021 Interest-bearing deposits in other financial institutions 4,619 4,154 Federal funds sold and securities purchased under agreements to resell 18,500 11,511 Investment securities: Held to maturity at amortized cost (Fair value of approximately $685,495 and $782,240 at June 30, 1998 and December 31, 1997, respectively) 674,691 772,524 Available for sale-stated at fair value 2,044,507 2,167,694 Loans, held for sale 86,851 114,001 Loans, net of unearned income 7,210,503 7,076,576 Less: Allowance for possible loan losses (91,708) (92,731) ------ ------ Loans, net 7,118,795 6,983,845 Premises and equipment 128,573 127,823 Other assets 209,287 221,866 -------- ------- Total assets $10,561,667 $10,691,439 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing deposits $ 842,077 $ 904,710 Interest-bearing deposits 7,625,071 7,459,427 --------- --------- Total deposits 8,467,148 8,364,137 Short-term borrowings 1,066,287 1,337,008 Accrued expenses and other liabilities 133,188 161,331 Long-term borrowings 27,758 15,270 --------- --------- Total liabilities 9,694,381 9,877,746 Commitments and contingent liabilities --- --- Stockholders' equity Preferred stock --- --- Common stock (par value $0.01 per share, authorized 100,000,000 shares issued; 63,389,734 and 62,993,309 shares, respectively) 634 504 Surplus 224,982 218,072 Retained earnings 613,314 569,996 Accumulated other comprehensive income 31,810 26,144 Less: Treasury stock (81,148 and 23,618 shares, respectively at cost) (3,454) (1,023) ------ ----- Total stockholders' equity 867,286 813,693 --------- --------- Total liabilities and stockholders' equity $10,561,667 $10,691,439 ========== ========== (See accompanying notes to Consolidated Financial Statements.) ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements of Income (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands) INTEREST INCOME Interest and fees on loans $151,247 $146,162 $302,131 $288,417 Interest and dividends on investment securities: Taxable 41,564 46,127 85,837 90,692 Tax exempt 2,603 2,300 5,065 4,650 Interest on deposits in other financial institutions 609 256 1,185 533 Interest on federal funds sold and securities purchased under agreements to resell 232 211 487 506 ------- ------- ------- ------- Total interest income 196,255 195,056 394,705 384,798 INTEREST EXPENSE Interest on deposits 86,775 82,821 173,071 163,856 Interest on short-term borrowings 15,280 18,052 32,650 34,472 Interest on long-term borrowings 543 546 985 1,034 ------- ------- ------- ------- Total interest expense 102,598 101,419 206,706 199,362 ------- ------- ------- ------- NET INTEREST INCOME 93,657 93,637 187,999 185,436 Provision for possible loan losses 3,375 3,186 7,133 6,559 ------- ------- ------- ------- Net interest income after provision for possible loan losses 90,282 90,451 180,866 178,877 NONINTEREST INCOME Trust service fees 8,066 6,983 15,981 13,931 Service charges on deposit accounts 6,816 7,023 13,186 13,522 Investment securities gains, net 642 188 5,953 1,383 Mortgage banking activity 11,183 5,438 22,079 10,554 Retail commission income 3,987 3,992 7,377 7,862 Loan fees 4,870 4,074 9,030 7,758 Asset sale gains, net 6,191 165 6,376 363 Other 3,341 3,249 6,863 6,377 ------- ------- ------- ------- Total noninterest income 45,096 31,112 86,845 61,750 NONINTEREST EXPENSE Salaries and employee benefits 37,103 33,518 73,046 66,839 Net occupancy expense 5,053 5,193 10,222 10,855 Equipment rentals, depreciation and maintenance 3,458 3,026 6,867 6,205 Data processing expense 4,789 4,270 9,443 8,399 Stationery and supplies 1,486 1,249 2,882 2,577 Business development and advertising 4,069 3,787 7,335 7,691 FDIC expense 817 840 1,646 1,642 Other 16,084 14,909 32,992 29,449 ------- ------- ------- ------- Total noninterest expense 72,859 66,792 144,433 133,657 ------- ------- ------- ------- Income before income taxes 62,519 54,771 123,278 106,970 Income tax expense 21,515 19,291 42,414 37,631 ------- ------- ------- ------- NET INCOME $ 41,004 $ 35,480 $ 80,864 $ 69,339 ======= ======= ======= ======= Earnings per share: Basic $ 0.65 $ 0.57 $ 1.28 $ 1.10 Diluted $ 0.64 $ 0.56 $ 1.26 $ 1.08 (See accompanying notes to Consolidated Financial Statements) ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, -------- 1998 1997 ---- ---- (In Thousands) OPERATING ACTIVITIES Net income $ 80,864 $ 69,339 Adjustments to reconcile net income to net cash used by operating activities: Provision for possible loan losses 7,133 6,559 Depreciation and amortization 7,915 7,084 Amortization of mortgage servicing rights 3,183 2,492 Amortization of intangibles 2,920 3,116 Net amortization (accretion) of premiums and discounts 882 (4,372) Loss on sales of investment securities, net (5,953) (1,383) Increase (decrease) in interest receivable and other assets 12,334 (2,546) Decrease in interest payable and other liabilities (28,143) (3,941) Amortization of loan fees and costs 31 26 Net increase in mortgage loans acquired for sale 34,848 1,269 Loss on sales of mortgage loans held for sale (7,698) (1,246) Loss on other asset sales (6,376) (363) ------- ------- Net cash provided by operating activities 101,940 76,034 INVESTING ACTIVITIES Net decrease (increase) in federal funds sold and securities purchased under agreements to resell (6,989) 15,523 Net increase in interest-bearing deposits in other financial institutions (465) (1,892) Purchases of held to maturity securities (10,019) (97,286) Purchases of available for sale securities (216,432) (498,843) Proceeds from sales of available for sale securities 60,366 33,612 Maturities of held to maturity securities 107,601 144,742 Maturities of available for sale securities 296,619 249,760 Net increase in loans (174,024) (268,397) Proceeds from sales of other real estate 3,513 3,872 Purchases of premises and equipment, net of disposals (10,611) (8,016) Purchase of mortgage servicing rights (10,345) (3,588) Net cash received in purchase of subsidiary -- 5,051 Proceeds from sale of other assets 38,086 544 ------- ------- Net cash used in investing activities 77,300 (424,918) FINANCING ACTIVITIES Net increase (decrease) in deposits 103,011 103,233 Net increase (decrease) in short-term borrowings (271,732) 199,565 Cash dividends (29,368) (22,764) Proceeds from issuance of long-term borrowings 13,500 425 Proceeds from exercise of stock options 6,177 2,308 Stock purchases by pooled company --- (21,048) Purchase of treasury stock (13,005) (1,524) ------- ------- Net cash provided by (used in) financing activities (191,417) (260,195) Net decrease in cash and cash equivalents (12,177) (88,689) Cash and due from banks at beginning of period 288,021 369,842 ------- ------- Cash and due from banks at end of period $ 275,844 $ 281,153 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 202,821 $ 193,348 Income taxes 3,839 37,092 Supplemental schedule of noncash investing activities: Loans transferred to other real estate 4,160 13,465 Loans made in connection with the disposition of other real estate 237 3,807 (See accompanying notes to Consolidated Financial Statements.) ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Notes to Consolidated Financial Statements NOTE 1: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Associated Banc-Corp's ("Corporation") financial position, results of its operations and cash flows for the periods presented. All adjustments necessary to the fair presentation of the financial statements are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. NOTE 2: The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The Corporation has not changed its accounting and reporting policies from those stated in the Corporation's 1997 Form 10-K Annual Report. NOTE 3: Business Combinations The following table summarizes completed transactions during 1997 and 1998 (through June 30):
Consideration Paid --------------------------- Shares of Date Method of Cash Common Total Assets Intangibles Name of Acquired Acquired Accounting (In Millions) Stock (In Millions) (In Millions) - ---------------------------------------------------------------------------------------------------------------- Centra Financial, Inc. [A] 2/97 Pooling of West Allis, Wisconsin Interests $--- 517,956 $ 76 $--- First Financial Corporation [B] 10/97 Pooling of Stevens Point, Wisconsin Interests 0.1 34,794,911 6,005 --- - ----------------------------------------------------------------------------------------------------------------
[A] The transaction, accounted for using the pooling-of-interests method, was not material to operating results for years prior to the acquisition and, accordingly, results for years prior to the acquisition were not restated. [B] Allconsolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest period presented. NOTE 4: Investment Securities The amortized cost and fair values of investment securities held to maturity and securities available for sale for the periods indicated were as follows: Investment Securities Held to Maturity - -------------------------------------------------------------------------------- (In thousands) June 30, 1998 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- Federal agency securities $ 107,815 $ 108,447 Mortgage-related securities 314,062 319,875 Obligations of state and political subdivisions 178,795 181,632 Other securities (debt) 74,019 75,541 ------- ------- Total $ 674,691 $ 685,495 ================================================================================ (In thousands) December 31, 1997 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury securities $ 498 $ 500 Federal agency securities 146,259 146,818 Mortgage-related securities 361,298 365,952 Obligations of state and political subdivisions 183,286 186,300 Other securities (debt) 81,183 82,670 - -------------------------------------------------------------------------------- Total $ 772,524 $ 782,240 ================================================================================ Investment Securities Available for Sale - -------------------------------------------------------------------------------- (In thousands) June 30, 1998 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury securities $ 94,559 $ 95,248 Federal agency securities 276,715 277,726 Mortgage-related securities 1,394,195 1,426,950 Obligations of state and political subdivisions 51,219 51,383 Other securities (debt and equity) 177,660 193,200 - -------------------------------------------------------------------------------- Total $1,994,348 $2,044,507 ================================================================================ (In thousands) December 31, 1997 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury securities $ 109,200 $ 109,841 Federal agency securities 324,708 330,542 Mortgage-related securities 1,536,134 1,557,603 Obligations of state and political subdivisions 14,312 14,136 Other securities (debt and equity) 142,081 155,572 - -------------------------------------------------------------------------------- Total $2,126,435 $2,167,694 ================================================================================ NOTE 5: Allowance for Possible Loan Losses A summary of the changes in the allowance for possible loan losses for the periods indicated is as follows: For the Six For the Year Months Ended Ended June 30, December 31, 1998 1997 ---- ---- (In Thousands) - -------------------------------------------------------------------------------- Balance at beginning of period $ 92,731 $ 71,767 Balance related to acquisition -- 728 Provisions charged to operating expense 7,133 31,668 Net loan charge-offs (8,156) (11,432) ----- ------ Balance at end of period $ 91,708 $ 92,731 - -------------------------------------------------------------------------------- NOTE 6: Mortgage Servicing Rights The Corporation recognizes as separate assets (capitalized) the rights to service mortgage loans for others whether the servicing rights are acquired through purchases or loan origination. The fair value of capitalized mortgage servicing rights is based upon the present value of estimated expected future cash flows. Based upon current fair values, capitalized mortgage servicing rights are assessed periodically for impairment, which is recognized in the statement of income during the period in which impairment occurs by establishing a corresponding valuation allowance. For purposes of performing its impairment evaluation, the Corporation stratifies its portfolio of capitalized mortgage servicing rights on the basis of certain risk characteristics. A summary of the changes in the balance of mortgage servicing rights is as follows: For the Six For the Year Months Ended Ended June 30, December 31, 1998 1997 ---- ---- (In Thousands) - -------------------------------------------------------------------------------- Balance at beginning of period $ 22,535 $ 20,238 Additions 10,345 9,801 Amortization (3,183) (6,472) Sales of servicing rights --- --- Change in valuation allowance (3,055) (1,032) ----- ----- Balance at end of period $ 26,642 $ 22,535 - -------------------------------------------------------------------------------- NOTE 7: Per Share Computations The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which became effective at year end 1997 for all periods presented. Under the provisions of SFAS No. 128, primary and fully diluted earnings per share were replaced with basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options. The Corporation issued 500,995 shares of common stock to a wholly-owned subsidiary as part of the 1996 acquisition of F&M Bankshares of Reedsburg, Inc. These shares are not reflected on the Consolidated Statements of Financial Condition as issued or outstanding. NOTE 8: Earnings Per Share Presented below are the calculations for basic and diluted earnings per share: Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands, Except Per Share Data) Basic: Net income available to common stockholders $41,004 $35,480 $80,864 $69,339 Weighted average shares outstanding 63,261 62,696 63,271 62,938 Basic earnings per share $ 0.65 $ 0.57 $ 1.28 $ 1.10 ==== ==== ==== ==== Diluted: Net income available to common stockholders $41,004 $35,480 $80,864 $69,339 Weighted average shares outstanding 63,261 62,696 63,271 62,938 Effect of dilutive stock options outstanding 769 863 790 1,049 ------ ------ ------ ------ Diluted weighted average shares outstanding 64,030 63,559 64,061 63,987 Diluted earnings per common share $ 0.64 $ 0.56 $ 1.26 $ 1.08 ==== ==== ==== ==== NOTE 9: Comprehensive Income The Financial Accounting Standards Board (FASB) has issued SFAS No. 130, "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Corporation adopted SFAS No. 130 on January 1, 1998, and all annual required disclosures will be included beginning with the Corporation's 1998 Form 10-K Annual Report. The Corporation's comprehensive income for the three and six month periods ended June 30, 1998 and 1997, is as follows: Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net income $ 41,004 $ 35,480 $ 80,864 $ 69,339 Other comprehensive income, net of tax-unrealized gain on securities: Unrealized holding gains arising during the period 2,940 11,962 9,535 5,587 Less: reclassification adjustmentfor net gains realized in net income (417) (122) (3,869) (899) ------ ------ ------ ------ Subtotals 2,523 11,840 5,666 4,688 ------ ------ ------ ------ Comprehensive income $ 43,527 $ 47,320 $ 86,530 $ 74,027 ====== ====== ====== ====== ITEM 2. Management's Discussion and Analysis of Financial Condition and the Results of Operations The purpose of this discussion is to focus on information about the Corporation's financial condition and results of operations that are not otherwise apparent from the consolidated financial statements included in this report. Reference should be made to those statements presented elsewhere in this report for an understanding of the following discussion and analysis. EARNINGS The following discussion will focus upon "operating earnings", with respect to the fourth quarter of 1997, for Associated. Operating earnings for the fourth quarter of 1997 exclude the impact of the merger, integration and other one-time charges recorded by Associated (an $89.8 million reduction to net income). All references to pre-tax operating income, noninterest income, noninterest expense, tax expense, net income and net income per share are based upon operating earnings. In October 1997, Associated completed the acquisition of the $6.0 billion First Financial Corporation (FFC) in Stevens Point, WI. This acquisition was accounted for using the pooling-of-interests method. All consolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest reporting period. All prior period per share results, period end shares and weighted average shares have been restated to reflect the five-for-four stock split effected in the form of a 25 percent stock dividend paid to shareholders on June 12, 1998. Net income for the second quarter of 1998 was $41.0 million, up 15.6% over 1997 second quarter net income of $35.5 million, and up from the $39.9 million reported in the first quarter of 1998. Earnings per basic share were $0.65 in the second quarter of 1998, up 14.0% over the $0.57 reported in the second quarter of 1997, and up from the $0.63 net income per share reported in the first quarter of 1998. Earnings per diluted share were $0.64 in the second quarter of 1998, up 14.3% over the $0.56 reported in the second quarter of 1997, and up from the $0.62 net income per share reported in the first quarter of 1998. Diluted earnings take into account shares that could be issued through stock option plans, convertible securities or other contracts. Net income for the first six months of 1998 was $80.9 million, up 20.1% over the net income in the same period of 1997 of $69.3 million. Earnings per basic share were $1.28 in the first six months of 1998, up 16.4% over the $1.10 reported in the first six months of 1997. Earnings per diluted share were $1.26 in the first six months of 1998, up 16.7% over the $1.08 reported in the first six months of 1997. Return on average assets (ROA) for the second quarter of 1998 was 1.56%, up from 1.38% during the same period last year. Second quarter 1998 ROA increased from 1.53% in the first quarter of 1998. Return on average equity (ROE) for the first quarter of 1998 was 19.36%, up from 17.41% during the same period last year. Second quarter 1998 ROE decreased from the 19.51% reported in the first quarter of 1998. Return on average assets (ROA) for the first six months of 1998 was 1.54%, up from 1.37% during the same period last year. Return on average equity (ROE) for the first six months of 1998 was 19.43%, up from 17.10% during the same period last year. The change in second quarter 1998 net income (increase of $5.5 million, or 15.6%), when compared to the same period last year, was a result of higher noninterest income (up $14.0 million, or 44.9%), offset by higher provision for loan losses (up $189,000, or 5.9%), higher noninterest expense (up $6.1 million, or 9.1%) and higher tax expense (up $2.2 million, or 11.5%). The change in second quarter 1998 net income (increase of $1.1 million, or 2.9%), when compared to the first quarter of 1998, was a result of lower provisions for loan losses (down $384,000, or 10.2%), higher noninterest income (up $3.3 million, or 8.0%), offset by lower net interest income (down $686,000, or 0.7%), higher noninterest expense (up $1.3 million, or 1.8%), and higher income tax expense (up $616,000, or 2.9%). The change in the first six months of 1998 net income (increase of $11.5 million, .or 16.6%), when compared to the same period last year, was a result of higher net interest income (up $2.6 million, or 1.4%) and higher noninterest income (up $25.1 million, or 40.6%), offset by higher provision for loan losses (up $574,000, or 8.8%), higher noninterest expense (up $10.8 million, or 8.1%), and higher income tax expense (up $4.8 million, or 12.7%). Net Income Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Operating Net Income (Qtr) $41,004 $39,860 $ 36,018 $ 36,822 $ 35,480 Operating Net Income (YTD) $80,864 $39,860 $142,178 $106,161 $ 69,339 Consolidated Net Income (Loss)(Qtr) $41,004 $39,860 $(53,802) $ 36,822 $ 35,480 Consolidated Net Income (YTD) $80,864 $39,860 $ 52,359 $106,161 $ 69,339 Operating EPS - Basic (Qtr) $ .65 $ .63 $ .57 $ .59 $ .57 Operating EPS - Diluted (Qtr) $ .64 $ .62 $ .57 $ .58 $ .56 Operating EPS - Basic (YTD) $ 1.28 $ .63 $ 2.26 $ 1.69 $ 1.10 Operating EPS - Diluted (YTD) $ 1.26 $ .62 $ 2.22 $ 1.66 $ 1.08 Consolidated EPS - Basic (Qtr) $ .65 $ .63 $ (1.86) $ .59 $ .57 Consolidated EPS - Diluted (Qtr) $ .64 $ .62 $ (.85) $ .58 $ .56 Consolidated EPS - Basic (YTD) $ 1.28 $ .63 $ .83 $ 1.69 $ 1.10 Consolidated EPS - Diluted (YTD) $ 1.26 $ .62 $ .82 $ 1.66 $ 1.08 Operating ROE - Quarter 19.36% 19.51% 16.46% 17.33% 17.41% Operating ROE - YTD 19.43% 19.51% 16.93% 17.09% 17.10% Operating ROA - Quarter 1.56% 1.53% 1.34% 1.40% 1.38% Operating ROA - YTD 1.54% 1.53% 1.37% 1.38% 1.37% - -------------------------------------------------------------------------------- NET INTEREST INCOME Second Quarter 1998 Compared to Second Quarter 1997: Fully taxable equivalent (FTE) net interest income in the second quarter of 1998 was $95.2 million, an increase of $208,246 over the second quarter of 1997 FTE net interest income of $95.0 million. The increase in FTE net interest income was attributable to larger volumes of earning assets (up $246 million) when compared to the second quarter of 1997. The increase in net interest income due to the volume variance (change in interest income from incremental earning assets less the change in interest expense from incremental volumes of interest-bearing liabilities) was $5.2 million. This large increase was offset by a negative rate variance (change in interest income from incremental yields on earning assets less the change in interest expense from incremental rates on interest-bearing liabilities) of $5.0 million. The contribution from the growth in earning assets was essentially offset by a 9 basis point decrease in the net interest margin. The growth in earning assets was concentrated in loans, with loans increasing $416 million offset by a $197 million decrease in investment securities, when compared to the second quarter of 1997. The net interest margin for the second quarter of 1998 was 3.77%, compared with 3.86% in the second quarter of 1997. The contribution from net free funds in the second quarter of 1998 increased to 0.60% from 0.54% for the same period in 1997. The rate spread decreased to 3.17% from 3.32% reported a year ago. Average earning assets grew $246 million from the second quarter of 1997. The average loans to average deposits ratio increased to 86.7%, up from 85.6% in the second quarter of 1997. The growth in average loans of $416 million was funded by increased time deposits (personal CDs and Brokered CDs) of $115 million ($123 million increase in personal CDs and an $8 million decrease in Brokered CDs), higher balances of Savings, NOW and MMA of $166 million and higher net free funds of $142 million, a decrease in the balances of investments and short-term investments of $170, offset by a $177 million decrease in wholesale borrowings ( funds purchased, repurchase agreements, FHLB borrowings, and long-term borrowings). Net Interest Income Tax Equivalent Basis (In Thousands) - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Interest Income $196,255 $198,451 $201,798 $200,647 $195,056 Tax Equivalent Adjustment 1,543 1,509 1,464 1,406 1,355 ------- ------- ------- ------- ------- Tax Equivalent Interest Income $197,798 $199,960 $203,262 $202,053 $196,411 Interest Expense 102,598 104,108 106,418 105,857 101,419 ------- ------- ------- ------- ------- Tax Equivalent Net Interest Income $ 95,200 $ 95,852 $ 96,844 $ 96,196 $ 94,992 - -------------------------------------------------------------------------------- Second Quarter 1998 Compared to First Quarter 1998: Fully taxable equivalent (FTE) net interest income in the second quarter of 1998 was $95.2 million, a decrease of $652,000 compared to the first quarter of 1998 FTE net interest income of $95.9 million. The decrease in FTE net interest income was attributable to lower volumes of earning assets (down $38 million) when compared to the first quarter of 1998. The increase in net interest income due to the volume variance (change in interest income from incremental earning assets less the change in interest expense from incremental volumes of interest-bearing liabilities) was $938,000. This variance is primarily attributable to a shift in earning assets to higher yielding loans from lower yielding investments. This increase was more than offset by a negative rate variance (change in interest income from incremental yields on earning assets less the change in interest expense from incremental rates on interest-bearing liabilities) of $1.7 million. Additionally, the extra day in the second quarter compared to the first quarter contributed $116,000 to net interest income. The contribution from the change in mix of earning assets was more than offset by the 2 basis point decrease in the net interest margin. The change in earning assets resulted as loans increased $84 million offset by a $122 million decrease in investment securities, when compared to the first quarter of 1998. The net interest margin for the second quarter of 1998 was 3.77%, compared with 3.79% in the first quarter of 1998. The contribution from net free funds in the second quarter of 1998 increased to 0.60% from 0.59% compared to the first quarter of 1998. The rate spread decreased to 3.17% from 3.20% reported last quarter. Average earning assets decreased $38 million from the first quarter of 1998. Total loans grew $84 million. Included in the change in the average loan balance for the quarter is a $24 million reduction from the sale of an affinity credit card portfolio which resulted in a gain of $3.0 million. The average loans to average deposits ratio increased to 86.7%, up from 86.5 % in the first quarter of 1998. The ratio of average loans to average earning assets increased to 72.6% for the second quarter of 1998 compared to 71.5% in the first quarter of 1998. The growth in average loans of $84 million was funded by time deposits (personal CDs and Brokered CDs) of $0 million ($8 million increase in personal CDs and an $8 million decrease in Brokered CDs), higher balances of Savings, NOW and MMA of $55 million and higher net free funds of $49 million, a decrease in the balances of investments and short-term investments of $122, offset by a $142 million decrease in wholesale borrowings (funds purchased, repurchase agreements, FHLB borrowings, and long-term borrowings). Net Interest Margin Quarterly Trends (Quarterly Info Only) - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Yield on Earning Assets 7.86% 7.97% 7.95% 8.07% 8.01% Cost of Interest-Bearing Liabilities 4.69% 4.77% 4.78% 4.79% 4.69% ---- ---- ---- ---- ---- Interest Rate Spread 3.17% 3.20% 3.17% 3.28% 3.32% Net Free Funds Contribution 0.60% 0.59% 0.63% 0.57% 0.54% ---- ---- ---- ---- ---- Net Interest Margin 3.77% 3.79% 3.80% 3.85% 3.86% ==== ==== ==== ==== ==== Average Earning Assets to Average Assets 95.30% 95.24% 95.34% 95.23% 95.27% Free Funds Ratio (% of Earning Assets) 12.86% 12.33% 13.12% 11.96% 11.73% - -------------------------------------------------------------------------------- YTD Second Quarter 1998 Compared to YTD Second Quarter 1997: FTE net interest income in the first six months of 1998 was $191.1 million, an increase of $2.8 million over the same period in 1997 FTE net interest income of $188.2 million. The increase for this period was primarily attributable to a volume variance (change in interest income from incremental earning assets less the change in interest expense from incremental volumes of interest-bearing liabilities) of $11.2 million, offset by a negative rate variance (change in interest income from incremental yields on earning assets less the change in interest expense from incremental rates on interest-bearing liabilities) of $8.4 million. The net interest margin for the first six months of 1998 was 3.78%, compared with 3.87% in the first six months of 1997. The largest factor contributing to the decrease in net interest margin was the 14 basis point reduction in interest rate spread. Contributing to this decline in spread was a 10 basis point reduction in the yield on total earning assets (loans down 14 basis points, investments down 7 basis points) and a higher rate on total interest-bearing liabilities of 4 basis points (retail deposits up 6 basis points and wholesale funds up 2 basis points). This 14 basis point reduction in interest rate spread was offset by a 5 basis point increase in contribution from net free funds. Average earning assets increased $372 million in the first six months of 1998 compared to the same period last year. Total average loans grew $444 million in the first six months of 1998 compared to the first six months of 1997. The average loan growth of $444 million was a result of increased time deposits (personal CDs and Brokered CDs) of $153 million ($141 million increase in personal CDs and a $12 million increase in Brokered CDs), higher balances of Savings, Now and MMA of $157 million, increased net free funds of $134 million, decreased balances of investments and short-term investments of $73 million offset by increased wholesale borrowings (funds purchased, repurchase agreements, FHLB borrowings and long-term borrowings) of $73 million. Earning Asset and Interest-Bearing Liability Volumes Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Average Loans $ 7,285,819 $ 7,201,937 $ 7,161,090 $ 6,990,922 $ 6,869,948 Average Earning Assets 10,039,967 10,078,411 10,150,486 9,940,700 9,794,201 Average Noninterest- Bearing Deposits 769,465 778,957 824,393 726,945 704,798 Average Interest- Bearing Deposits 7,605,270 7,550,146 7,511,209 7,403,326 7,323,884 Average Deposits 8,401,735 8,329,103 8,355,602 8,130,271 8,028,682 Average Interest- Bearing Liabilities $ 8,748,600 $ 8,835,493 $ 8,818,256 $ 8,751,596 $ 8,644,990 - -------------------------------------------------------------------------------- LOAN LOSS The loan loss provision for the second quarter of 1998 was $3.4 million, a decrease of $384,000 from the first quarter of 1998 provision of $3.8 million and an increase of $186,000 from the second quarter of 1997. As of June 30, 1998, the allowance for possible loan losses of $91.7 million represented 1.27% of total outstanding loans, down from the 1.31% reported at December 31, 1997, and up from 1.06% reported at June 30, 1997. The increase in allowance for possible loan losses to loans from the second quarter of 1997 to the first quarter of 1998 is attributable to the $16.8 million one-time charge recorded at year end 1997 in conjunction with the acquisition of First Financial. The decrease in the ratio of allowance for possible loan losses to period end loans in the second quarter of 1998 compared to the first quarter of 1998 is attributable to net charge-offs exceeding the provision for loan losses by $1.7 million and period end loans increasing by $43 million. Combined, these two factors caused the allowance to decrease to 1.27% of loans as of June 30, 1998. During the second quarter of 1998, net charge-offs of $5.1 million were recorded. The majority of net charge-offs were related to the charge-offs of a single commercial creditor totaling $2.0 million and the credit card portfolio net charge-offs totaling $2.2 million. The second quarter of 1998 net charge-offs as a percent of average loans (on an annualized basis) of 0.28% increased when compared to net charge-offs to average loans (on an annualized basis) of 0.16% in the second quarter of 1997 and net charge-offs as a percent of average loans (on an annualized basis) of 0.17% in the first quarter of 1998. Allowance for Possible Loan Losses Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Provision Expense - Qtr $ 3,375 $ 3,759 $ 4,571 $ 3,739 $ 3,186 Merger Adjustment - Qtr --- --- 16,800 --- --- Provision Expense - YTD 7,134 3,759 14,868 10,297 6,559 Merger Adjustment - YTD --- --- 16,800 --- --- Net Charge-Offs - Qtr 5,081 3,075 3,113 2,947 2,752 Net Charge-Offs - YTD 8,156 3,075 11,432 8,319 5,372 Allowance at Period End $91,708 $93,415 $92,731 $74,454 $73,682 Allowance to Loans 1.27% 1.30% 1.31% 1.05% 1.06% Net Charge-Offs to Average Loans (Annualized) - Qtr .28% .17% .17% .16% .16% Net Charge-Offs to Average Loans (Annualized) - YTD .23% .17% .16% .16% .16% - -------------------------------------------------------------------------------- NONPERFORMING LOANS Management is committed to a nonaccrual and problem loan identification philosophy. This philosophy is embodied through the monitoring and reviewing of credit policies and procedures to ensure that all problem loans are identified quickly and the risk of loss is minimized. Nonperforming loans are considered a leading indicator of future loan losses. Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past due but still accruing and restructured loans. The Corporation specifically excludes student loan balances that are 90 days or more past due and still accruing and that have contractual government guarantees as to collection of principal and interest, from its definition of nonperforming loans. Loans are normally placed in nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact on the collectibility of principal or interest on loans, it is management's practice to place such loans on nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectibility of the principal is in doubt, payments received are applied to loan principal. Loans past due 90 days or more but still accruing interest, with the exception of guaranteed student loans, are also included in nonperforming loans. Student loans past due 90 days or more but still accruing interest were $7.4 million at June 30, 1998, compared to $8.0 million at March 31, 1998, and $8.0 million at December 31, 1997. Loans past due 90 days or more but still accruing interest are classified as such where the underlying loans are both well-secured (the collateral value is sufficient to cover principal and accrued interest) and in the process of collection. Also included in nonperforming loans are "restructured" loans. Restructured loans involve the granting of some concession to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate. Total nonperforming loans at June 30, 1998 were $46.2 million, an increase of $12.3 million from March 31, 1998 and an $11.9 million increase from December 31, 1997. The ratio of nonperforming loans to total loans at June 30, 1998 was .64% compared to .47% at March 31, 1998 and .61% at June 30, 1997. Other real estate owned decreased in the second quarter to $4.0 million at June 30, 1998, down from $4.3 million at March 31, 1998. The increase in nonaccrual loans is primarily attributable to a single large commercial credit totaling $6.3 million. Nonperforming Loans and Other Real Estate (In Thousands) - -------------------------------------------------------------------------------- 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 ------- ------- -------- ------- ------- Nonaccrual Loans $39,512 $30,072 $32,415 $36,202 $34,877 Accruing Loans Past Due 90 Days or More 6,404 3,414 1,324 1,648 7,040 Restructured Loans 287 455 558 186 471 ------ ------ ------ ------ ------ Total Nonperforming Loans $46,203 $33,941 $34,297 $38,036 $42,388 ====== ====== ====== ====== ====== Nonperforming Loans as a Percent of Loans 0.64% 0.47% 0.48% 0.54% 0.61% Other Real Estate Owned $ 4,012 $ 4,265 $ 2,067 $ 2,447 $ 2,510 - -------------------------------------------------------------------------------- Impaired loans are defined as those loans where it is probable that all amounts due according to contractual terms, including principal and interest, will not be collected. The Corporation has determined that commercial loans and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet the definition. Impaired loans are measured at the fair value of the collateral, if the loan is collateral dependent, or alternatively at the present value of expected future cash flows. Interest income on impaired loans is recognized only at the time that cash is received, unless applied to reduce principal. At June 30, 1998, the recorded investment in impaired loans totaled $20.1 million. Included in this amount is $18.6 million of impaired loans that do not require a related allowance for possible loan losses and $1.5 million of impaired loans for which the related allowance for possible loan losses totaled $776,000. The average recorded investment in impaired loans during the twelve months ended June 30, 1998, was approximately $14.5 million. Interest income recognized on a cash basis on impaired loans during the first six months of 1998 totaled $960,000. The following table shows, for those loans accounted for on a nonaccrual basis and restructured loans for the six months ended June 30, 1998, the gross interest that would have been recorded if the loans had been current in accordance with their original terms and the amount of interest income that was included in net income for the period. For the Six Months Ended June 30, 1998 ------------------- (In Thousands) Interest income in accordance with original terms $ 2,391 Interest income recognized (1,293) ----- Reduction in interest income $ 1,098 ===== 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, 1998, potential problem loans totaled $63.0 million compared to $74.0 million at the end of 1997. The loans that have been reported as potential problem loans are not concentrated in a particular industry, but rather cover a diverse range of businesses, e.g. communications, wholesale trade, manufacturing, finance/insurance/real estate, and services. Management does not presently expect significant losses from credits in this category. LOAN CONCENTRATIONS Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. The Corporation's loans are widely diversified by borrower, industry group and area. At June 30, 1998, no concentrations existed in the Corporation's loan portfolio in excess of 10% of total loans. Real estate construction loans at June 30, 1998, totaled $329 million, or 4.5% of loans while agricultural loans were 0.8% of total loans. As of June 30, 1998, the Corporation did not have any cross-border outstandings to borrowers in any foreign country where such outstandings exceeded 1% of total assets. NONINTEREST INCOME Second Quarter 1998 Compared to Second Quarter 1997 Noninterest income increased $14.0 million, or 44.9% over the second quarter of 1997. Noninterest income, excluding net investment securities gains, increased $13.5 million, or 43.8%. Income from service charges on deposit accounts and retail commission income decreased from the second quarter of 1997. All other categories of noninterest income increased from the second quarter of 1997. Trust service fees increased $1.1 million, or 15.5% compared to the same quarter last year. The increase is a result of higher trust assets under management and general market conditions. Net investment securities gains increased $454,000, or 241.5% over the second quarter of 1997. The $642,000 in net investment securities gains recognized in the second quarter of 1998 consisted primarily of gains from the sale of equity securities held as available for sale. Mortgage banking income increased $5.7 million, or 105.6% from the second quarter of 1997. Increases were recognized in higher origination fees (up $314,000), underwriting fees (up $382,000), servicing fees (up $91,000), escrow waiver fees (up $136,000) and gains on sales of loans (up $4.8 million). The production related revenue, (origination, underwriting and escrow waiver fees) was higher due to higher production volumes in the second quarter of 1998 ($539 million) compared to the same period last year ($190 million). The increased gains on sales of loans is the result of this increased production in a more favorable mortgage banking rate environment. Retail commission income decreased $5,000, or 0.1% compared to the same period last year. Decreases in income from annuities (down $204,000) and stocks (down $400,000) were offset, in part, by an increase in income from mutual funds (up $449,000). Income from loan fees increased $796,000, or 19.5% compared to the second quarter of 1997. The increase is a result of increased fees on credit cards (up $666,000) and real estate loans (up $174,000). Asset sale gains increased $6.0 million over the second quarter of 1997. Gains recognized in the second quarter of 1998 include gains of $2.9 million on sales of office buildings, a gain of $3.0 million on the sale of an affinity credit card portfolio, a gain of $138,000 on sale of land trusts, and a gain of $92,000 on the sale of leased equipment. Other miscellaneous income, from a variety of sources, increased $92,000, or 2.8% over the second quarter of 1997. The increase is primarily attributable to higher income from TYME/electronic funds transfer and automatic teller machine fees (up $339,000) and increased international income of $53,000 offset by lower income from real estate held for investments (down $381,000). The reduced income from real estate held for investments was a result of the sale of an office building in early April. Rental income from tenants leasing the facility ceased at that time. Noninterest Income Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Trust Servicing Fees $ 8,066 $ 7,915 $ 7,744 $ 7,089 $ 6,983 Service Charges on Deposit Accounts 6,816 6,370 7,177 7,211 7,023 Mortgage Banking Activity 11,183 10,896 8,410 6,745 5,438 Loan Fees 4,870 4,160 4,379 4,270 4,074 Retail Commission Income 3,987 3,390 3,614 3,969 3,992 Asset Sale Gains (Losses), net 6,191 185 (23) 511 165 Other 3,341 3,522 3,780 3,509 3,249 ------ ------ ------ ------ ------ Total, excluding Securities Gains $ 44,454 $ 36,438 $ 35,081 $ 33,304 $ 30,924 Investment Security Gains, net 642 5,311 280 851 188 Merger, Integration and Other One-Time Charges -- -- (35,290) -- -- ------ ------ ------ ------ ------ Total Noninterest Income $ 45,096 $ 41,749 $ 71 $ 34,155 $ 31,112 - -------------------------------------------------------------------------------- Second Quarter 1998 Compared to First Quarter 1998 Noninterest income increased $3.3 million, or 8.0% in the second quarter of 1998 compared to the first quarter of 1998. Noninterest income, excluding net investment securities gains, increased $8.0 million, or 22.0%. All categories of noninterest income, with the exception of investment securities gains and other, increased in the second quarter of 1998 when compared to the first quarter of 1998. Service charges on deposit accounts increased $446,000, or 7.0% during the quarter. The increases were primarily due to increased service charges on business accounts (up $235,000) and overdraft/NSF fees (up $265,000). Net investment security gains decreased $4.7 million. In the fourth quarter of 1997, the Corporation hedged certain agency issued zero coupon bonds by executing various interest rate futures contracts. In the first quarter of 1998, these contracts were closed and the zero coupon bonds were sold. As a result, a net gain of $5.1 million was recognized. The $642,000 in net investment securities gains recognized in the second quarter of 1998 consisted primarily of gains from the sale of equity securities. Mortgage banking income increased $287,000, or 2.6% from the first quarter of 1998. Increases were recognized in higher origination fees (up $40,000), escrow waiver fees (up $53,000) and gains on sales of loans (up $396,000), offset by lower underwriting fees and servicing fees. The production related revenue (origination and escrow waiver fees) was higher due to higher production volumes in the second quarter of 1998 ($539 million) compared to the first quarter of 1998 ($495 million). The increased gains on sales of loans is the result of increased production and a more favorable mortgage banking rate environment. Retail commission income increased $597,000, or 17.6% compared to the same period last year. Increases in income from annuities (up $419,000), mutual funds (up $83,000) and insurance (up $80,000) accounted for the increase in the second quarter. Income from loan fees increased $710,000, or 17.1% from the first quarter of 1998 to the second quarter of 1998. The increase is a result of increased fees on credit cards (up $846,000) and real estate loans (up $132,000) offset by decreases in commercial loan fees (down $221,000) and letter of credit/SBA fees (down $61,000). Asset sale gains increased $6.0 million over the first quarter of 1998. Gains recognized in the second quarter of 1998 were gains of $2.9 million on sales of office buildings, a gain of $3.0 million on the sale of an affinity credit card portfolio, a gain of $138,000 on sale of land trusts, and a gain of $92,000 on sale of leased equipment. Other miscellaneous income, from a variety of sources, decreased $181,000, or 5.1% compared to the first quarter of 1998. The decrease is primarily attributable to reduced income from real estate held for investments as a result of the sale of an office building in early April. Rental income from tenants leasing the facility ceased at that time. YTD Second Quarter 1998 Compared to YTD Second Quarter 1997 Noninterest income increased $25.1 million, or 40.6% in the first six months of 1998 compared to the same period last year. Noninterest income, excluding net investment securities gains, increased $20.5 million, or 34.0%. Decreases in service charges on deposit accounts and retail commission income were more than offset by increases in trust service fees, net investment security gains, mortgage banking activity, loan fees and net asset sale gains compared to the first six months of 1997. Trust service fees increased $2.1 million, or 14.7% compared to the same period last year. The increase is a result of higher trust assets under management and general market conditions. Service charges on deposit accounts decreased $336,000, or 2.5% during the first six months of 1998. Lower levels of service charges on personal deposit accounts and overdraft/NSF fees (approximately $500,000 lower) were somewhat offset by higher fees collected on business accounts. Net investment security gains increased $4.6 million. In the fourth quarter of 1997, the Corporation hedged certain agency issued zero-coupon bonds by executing various interest rate futures contracts. In the first quarter of 1998, these contracts were closed and the zero-coupon bonds were sold. As a result, a net gain of $5.1 million was recognized. The first six months of 1998 also includes gains of $642,000 recognized in the second quarter of 1998. These gains consisted primarily of gains from the sale of equity securities. The first six months of 1997 included gains on sales of mortgage-related securities ($721,000) and gains on sales of Sallie Mae stock. Mortgage banking income increased $11.5 million, or 109.2% from the first six months of 1997. Increases were recognized in higher origination fees (up $573,000), underwriting fees (up $857,000), servicing fees (up $288,000), escrow waiver fees (up $221,000) and gains on sales of loans (up $9.6 million). The production related revenue (origination, underwriting and escrow fees) was higher due to higher production volumes in the first six months of 1998 ($1.034 billion) compared to the first six months of 1997 ($385 million). The increased gains on sales of loans is the result of increased production and a more favorable mortgage banking rate environment. Retail commission income decreased $485,000, or 6.2% compared to the same period last year. Increases in income from mutual funds (up $823,000), was offset by lower fees on stocks (down $798,000) and annuities (down $622,000). Income from loan fees increased $1.3 million, or 16.4% from the first six months of 1997 to the first six months of 1998. The increase is a result of increased fees on credit cards (up $673,000), real estate loans (up $296,000) and commercial loan fees (up $306,000). Asset sale gains increased $6.0 million over the first six months of 1997. Gains recognized in the first six months of 1998 included gains of $2.9 million on sales of office buildings, a gain of $3.0 million on the sale of an affinity credit card portfolio, a gain of $138,000 on sale of land trusts, a gain of $117,000 on the sale of leased equipment, and a gain of $85,000 on the sale of an operations building. NONINTEREST EXPENSE Second Quarter 1998 Compared to Second Quarter 1997 Total noninterest expense increased $6.1 million, or 9.1% in the second quarter of 1998 compared to the same period last year. All categories of noninterest expense, with the exception of net occupancy expense and deposit insurance premiums, increased when compared to the second quarter of last year. Salaries and employee benefit expenses increased $3.6 million, or 10.7% when compared to the second quarter of 1997. Total salary related expenses increased $2.9 million, or 9.9%, compared to the second quarter of 1997, while fringe benefit related expenses increased $673,000, or 9.7%. The 9.9% increase in salary expense is attributable to base merit increases, transitional overlapping positions as support functions are centralized, and new positions added. The fringe benefit increase was primarily due to higher social security tax expense (up $275,000), pension expense ($195,000), health insurance premiums ($177,000) and profit sharing expense ($177,000). All except the health insurance premium increase are linked to the higher levels of salary expense. Equipment rentals, depreciation and maintenance increased $432,000, or 14.3% over the second quarter of 1997. This increase was primarily attributable to higher levels of depreciation on computer equipment ($501,000). Data processing increased $519,000, or 12.2%, compared to the second quarter of 1997. This increase is primarily due to the cost of processing volumes in excess of the volumes covered in the base contract. Business development and advertising increased $282,000, or 7.4%, compared to the second quarter of 1997. The increased costs are attributable to higher levels of newspaper directory and other advertising costs offset, in part, by lower direct mail costs resulting, in part, from the merger with First Financial Corporation. Other miscellaneous expense, from various sources, increased $1.2 million compared to the second quarter of 1997. The increase was the result of higher amortization of mortgage servicing rights, partially offset by lower miscellaneous expense accruals. Noninterest Expense Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Salaries and Employee Benefits $ 37,103 $ 35,943 $ 32,933 $ 33,883 $ 33,518 Net Occupancy Expense 5,053 5,168 4,432 5,010 5,193 Equipment Rentals, Depreciation and Maintenance 3,458 3,409 3,230 3,165 3,026 Data Processing Expense 4,789 4,654 4,347 4,155 4,270 Stationery and Supplies 1,486 1,396 1,505 1,450 1,249 Business Development and Advertising 4,069 3,266 4,283 3,962 3,787 FDIC Expense 817 830 831 810 840 Other 16,084 16,908 18,459 15,913 14,909 ------ ------ ------ ------ ------ Noninterest Expense, Excluding Merger, Integration and Other One-Time Charges 72,859 71,574 70,020 68,348 66,792 Merger, Integration and Other One-Time Charges --- --- 51,622 --- --- ------ ------ ------- ------ ------ Total Noninterest Expense $ 72,859 $ 71,574 $121,642 $ 68,348 $ 66,792 - -------------------------------------------------------------------------------- Second Quarter 1998 Compared to First Quarter 1998 Total noninterest expense increased $1.6 million, or 2.2% in the second quarter of 1998 compared to the first quarter of 1998. Increases in salaries and employee benefits, net occupancy expense, equipment rentals, depreciation and maintenance and data processing expense were partially offset by decreases in stationery and supplies, business development and advertising, FDIC expense and other expenses. Salaries and employee benefit expenses increased $1.2 million, or 1.9% when compared to the first quarter of 1998. Salary expense accounted for the entire increase. Increases are attributable to overtime, temporary help, an extra day of pay in the quarter, contractual earn-outs, incremental commissions paid to sales driven positions, and the reflection of continued centralization of support staff. Business development and advertising increased $803,000, or 24.6% in the second quarter of 1998 compared to the first quarter. The increase was primarily a result of reduced marketing initiatives in the first quarter. Other miscellaneous expense, from various sources, decreased by $824,000, or 4.9% compared to the first quarter of 1998. The decrease was a result of lower consulting costs and lower miscellaneous expense accruals offset by higher mortgage servicing rights amortization and higher legal and professional fees. YTD Second Quarter 1998 Compared to YTD Second Quarter 1997 Total noninterest expense increased $10.8 million, or 8.1% in the first six months of 1998 compared to the same period last year. Increases in salaries and employee benefits, equipment rentals, depreciation and maintenance, data processing expense and others were partially offset by decreases in net occupancy and business development and advertising. Salaries and employee benefit expenses increased $6.2 million, or 9.3% when compared to the first six months of 1997. Total salary related expenses increased $5.2 million, or 9.9% in the first six months while fringe benefit related expenses increased $1.0 million, or 7.1%. Salary expense is up primarily as a result of base merit increases (approximately $3.0 million), variable pay (commissions/incentives up $1.8 million), transitional overlapping positions as support functions are centralized, and new positions added at the parent and other affiliates. Fringe benefit expenses increased due to higher health insurance expense (up $293,000), profit sharing expense (up $407,000), social security expense (up $409,000) and pension expense (up $270,000). Net occupancy expense decreased $633,000, or 5.8% in the first six months of 1998 compared to the first six months of 1997. All categories of occupancy expense have contributed to the decline. Equipment rentals, depreciation and maintenance increased $662,000 or 10.7% over the first six months of 1997. This increase was primarily attributable to higher levels of depreciation on computer equipment (up $948,000) offset by lower levels of depreciation on furniture and other equipment (down $329,000). Data processing increased $1.0 million, or 12.4%, compared to the first six months of 1997. This increase is primarily due to increases in the base contract processing costs and additional systems engineer hours. Business development and advertising decreased $356,000, or 4.6% in the first six months of 1998 compared to the same period last year. The favorable variance was primarily due to the savings from reduced direct mail costs resulting, in part, from the merger with First Financial Corporation. Other miscellaneous expense, from various sources, increased by $3.5 million, or 12.0% compared to the first six months of 1997. This increase was primarily due to increased mortgage servicing rights amortization, increased placement/relocation/moving expenses, and increased consultant fees. Expense Control Quarterly Trends - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Efficiency Ratio - Quarter 52.17% 54.10% 53.08% 52.78% 53.05% Efficiency Ratio - Year 53.11% 54.10% 53.33% 53.43% 53.76% Expense Ratio - Quarter 1.13% 1.41% 1.37% 1.40% 1.47% Expense Ratio - Year 1.27% 1.41% 1.45% 1.48% 1.53% - -------------------------------------------------------------------------------- INCOME TAXES The effective tax rate for the second quarter of 1998 remained stable at 34.41%, down from both the 35.22% in the second quarter of 1997 and the 35.86% in the fourth quarter of 1997. Income Tax Expense Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Operating Income Before Taxes $ 62,519 $ 60,759 $ 56,151 $ 56,859 $ 54,771 ------ ------ ------ ------ ------ Merger, Integration and Other One-Time Charges Before Taxes --- --- (103,713) --- --- ------ ------ ------- ------ ------ State Tax Expense - Operating $ 1,401 $ 1,747 $ 1,478 $ 1,836 $ 1,676 Federal Tax Expense - Operating 20,114 19,152 18,655 18,201 17,615 ------ ------ ------ ------ ------ Total Income Tax Expense - $ 21,515 $ 20,899 $ 20,133 $ 20,037 $ 19,291 Operating Federal Tax - Merger, Integration and Other One-Time Charges --- --- (13,893) --- --- ------ ------ ------ ------ ------ Total Income Tax Expense $ 21,515 $ 20,899 $ 6,240 $ 20,037 $ 19,291 ====== ====== ===== ====== ====== Effective Tax Rate 34.41% 34.40% 35.86% 35.24% 35.22% ===== ===== ===== ===== ===== - -------------------------------------------------------------------------------- BALANCE SHEET June 30, 1998 Compared to June 30, 1997 During the past twelve months, total assets increased $30 million, or 0.3%. Loans (including loans held for sale) increased $300 million, or 4.3%. The loan growth was all in commercial and other loans (up $404 million or 17.7%) and loans held for sale (up $44 million, or 104.5%). Real estate and consumer loans decreased from June 30, 1997 ($100 million or 2.7% and $48 million or 5.2%, respectively). A sale of an affinity credit card portfolio, $24 million of outstanding balances, in the second quarter of 1998 contributed to the decline in consumer loans. The loan growth was funded with an increase in interest-bearing deposits of $233 million, a decrease in investments of $243 and $165 million increase in net free funds offset by a $341 million decrease in wholesale funding. The $233 million increase in interest-bearing deposits reflects a $40 million decrease in outstanding brokered CDs offset by an increase of $273 million in retail interest-bearing deposits. June 30, 1998 Compared to December 31, 1997 During the first six months of 1998, total assets decreased by $130 million, or 2.4% on an annualized basis. Loans (including loans held for sale) increased $107 million, or 3.0% on an annualized basis. The loan growth was all in commercial (up $232 million, or 19.0% on an annualized basis). Real estate and consumer loans decreased from December 31, 1997 ($46 million, or 2.5% and $53 million, or 11.3% on an annualized basis, respectively). A sale of an affinity credit card portfolio, $24 million of outstanding balances, in the second quarter of 1998 contributed to the decline in consumer loans. Loans held for resale also declined by $27 million, or 48.0% on an annualized basis. The loan growth was funded with a $214 million reduction of investments and short-term investments and a $166 million increase of interest-bearing deposits offset by a $15 million decrease in net free funds and a $258 million decrease in wholesale funding. The $166 million increase in interest-bearing deposits reflects a $7 million increase in outstanding brokered CDs and an increase of $159 million in retail interest-bearing deposits. June 30, 1998 Compared to March 31, 1998 During the second quarter of 1998, total assets decreased by $131 million, or 4.9% on an annualized basis. Loans, including loans held for sale, increased $28 million, or 1.6% on an annualized basis. The loan growth was all in commercial and other loans (up $75 million, or 11.6% on an annualized basis). Loans held for sale and consumer loans decreased from March 31, 1998 ($15 million, or 59.0% and $35 million, or 15.1% on an annualized basis, respectively). The loan growth was funded with a $152 million reduction of investments and short-term investments and a $34 million increase in net free funds offset by a $41 million decrease in interest-bearing deposits and a $117 million decrease in wholesale funding. The $41 million decrease in interest-bearing deposits reflects a $5 million decrease in outstanding brokered CDs and a decrease of $36 million in retail interest-bearing deposits. LIQUIDITY Liquidity refers to the ability of the Corporation to generate adequate amounts of cash to meet the Corporation's needs for cash. The subsidiary banks and the parent company of the Corporation have different liquidity considerations. Banking subsidiaries meet their cash flow requirements by having funds available to satisfy customer credit needs as well as having available funds to satisfy deposit withdrawal requests. Liquidity at banking subsidiaries is derived from deposit growth, money market assets, maturing loans, the maturity of securities, access to other funding sources and markets, and a strong capital position. Deposit growth is the primary source of liquidity at the banking subsidiaries. Interest-bearing deposits increased $165.6 million, while noninterest-bearing deposits fell $62.6 million from the seasonally high year-end balance. As of June 30, 1998, the securities portfolio contained $371.2 million at amortized cost of U.S. Treasury and federal agency securities available for sale, representing 13.9% of the total securities portfolio. These government securities are highly marketable and had a market value equal to 100.5% of amortized cost at quarter end. Money market investments, consisting of federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits in other financial institutions, averaged $63.6 million in the second quarter of 1998 compared to $37.0 million during the same period in 1997. Being short-term and liquid by nature, money market investments generally provide a lower yield than other earning assets. The Corporation has a strategy of maintaining a sufficient level of liquidity to accommodate fluctuations in funding sources and will periodically take advantage of specific opportunities to temporarily invest excess funds at narrower than normal rate spreads while still generating additional net interest income. At June 30, 1998, the Corporation had $23.1 million outstanding in short-term money market investments, serving as an essential source of liquidity. The amount at quarter end represents .2% of total assets compared to .1% at December 31, 1997. Short-term borrowings totaled $1.1 billion at June 30, 1998, compared with $1.3 billion at the end of 1997. Within the classification of short-term borrowings are federal funds purchased, securities sold under agreements to repurchase and FHLB advances with a remaining maturity of less than one year. Federal funds are purchased from a sizable network of correspondent banks while securities sold under agreements to repurchase are obtained from a base of individual, business and public entity customers. FHLB advances with a remaining maturity of greater than one year are included in long-term borrowings. Deposit growth will continue to be the primary source of bank subsidiary liquidity on a long-term basis, along with stable earnings, the resulting cash generated by operating activities and strong capital positions. Shorter-term liquidity needs will mainly be derived from growth in short-term borrowings, maturing securities and money market assets, loan maturities and access to other funding sources. Liquidity is also necessary at the parent company level. The parent company's primary sources of funds are dividends and service fees from subsidiaries, borrowings and proceeds from the issuance of equity. The parent company manages its liquidity position to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries and satisfy other operating requirements. Dividends received from subsidiaries totaled $38.6 million in the first six months of 1998 and will continue to be the parent's main source of long-term liquidity. At June 30, 1998, the parent company had $150 million of established lines of credit with non-affiliated banks, of which $78 million was in use for nonbank affiliates. The Corporation's long-term debt to equity ratio at June 30, 1998, was 3.2%, compared to 1.9% at December 31, 1997. This increase is primarily attributable to an increase in outstanding long-term FHLB advances. Management believes that, in the current economic environment, the Corporation's subsidiaries and parent company liquidity positions are adequate. There are no known trends nor any known demands, commitments, events or uncertainties that will result or are reasonably likely to result in a material increase or decrease in the Corporation's liquidity. CAPITAL Stockholders' equity at June 30, 1998, increased $53.6 million, or 6.6% since December 31, 1997. This increase was composed of $51.5 million of retained earnings, $9.4 million from option exercises and a $5.7 million increase in the unrealized gain on available for sale securities, reduced by $13.0 million from treasury stock purchases. Equity to assets at June 30, 1998 increased to 8.21%, with the Tier 1 leverage ratio climbing to 7.62%. Cash dividends of $0.232 were paid in the second quarter of 1998, representing a payout ratio of 35.69% for the quarter. Capital Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------- Stockholders' Equity $867,286 $836,826 $813,693 $874,027 $842,561 Average Equity to Average Assets 8.06% 7.83% 8.15% 8.08% 7.95% Equity to Assets - Period End 8.21% 7.83% 7.61% 8.16% 8.00% Tier 1 Capital to Risk Weighted Assets - Period End 12.14% 10.89% 10.61% 12.45% 12.21% Total Capital to Risk Weighted Assets - Period End 13.37% 12.14% 11.86% 13.49% 13.26% Tier 1 Leverage Ratio - Period End 7.63% 7.34% 7.10% 7.77% 7.72% Market Value Per Share - Period End $37.63 $43.16 $44.09 $36.05 $31.59 Book Value Per Share - Period End $13.70 $13.24 $12.92 $13.91 $13.44 Market Value Per Share to Book Value Per Share 275% 326% 341% 259% 235% Dividends Per Share - This Quarter $0.232 $0.232 $0.232 $0.232 $0.232 Dividends Per Share - Year to Date $0.464 $0.232 $0.889 $0.657 $0.425 Basic Operating Earnings Per Share - This Quarter $0.65 $0.63 $0.57 $0.59 $0.57 Basic Operating Earnings Per Share- Year to Date $1.28 $0.63 $2.26 $1.69 $1.12 Dividend Payout Ratio - This Quarter 35.69% 36.83% 40.70% 39.32% 40.70% Dividend Payout Ratio - Year to Date 36.25% 36.83% 39.34% 38.88% 37.95% - -------------------------------------------------------------------------------- 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. As of June 30, 1998, the Corporation's tier 1 risk-based capital ratio, total risk-based capital (tier 1 and tier 2) ratio and tier 1 leverage ratio were well in excess of regulatory minimums. Management of the Corporation expects to continue to exceed the minimum standards in the future. Similar capital guidelines are also required of the individual banking subsidiaries of the Corporation. As of June 30, 1998, each banking subsidiary exceeded the minimum ratios for tier 1 capital, total capital and the tier 1 leverage ratio. Management actively reviews capital strategies for the Corporation and each of its subsidiaries to ensure that capital levels are appropriate based on the perceived business risks, future growth opportunities, industry standards and regulatory requirements. YEAR 2000 The Year 2000 issue relates to systems designed to use two digits rather than four to define the applicable year. The Corporation uses third party service providers and software vendors almost exclusively. As such, product and service upgrades are the primary remediation strategy which, along with testing, are the major parts of the Corporation's Year 2000 project plan. The Corporation previously completed an initial assessment of the Year 2000 issue, which was performed by an independent third party. Based upon experience to date and recently issued guidance from banking industry regulators and the SEC, management continues to revisit and revise its Year 2000 project plans and related cost estimates. Delivery commitments of Year 2000 ready products from vendors and service providers have been integrated with the Corporation's Year 2000 project plan to ensure that all Mission Critical systems are tested and implemented by the second quarter of 1999. While the Year 2000 related costs have increased from initial estimates, management believes that the costs for Year 2000 compliance are not material and, thus, will not have a significant impact on the Corporation's results of operations, liquidity or capital resources. RECENT DEVELOPMENTS On April 22, 1998, the Corporation announced the awarding of a 5-for-4 stock split to be effected as a 25 percent stock dividend. The 5-for-4 stock split effected in the form of a 25 percent stock dividend was paid on June 12, 1998, to shareholders of record at the close of business on June 1, 1998. All share data has been adjusted retroactively to reflect the stock split effected in the form of a stock dividend. Any fractional shares resulting from the dividend were paid in cash. PENDING COMBINATION On February 17, 1998 the Corporation announced the signing of a definitive agreement to acquire Citizens Bankshares, Inc. ("Citizens"), parent company of the $164 million Citizens Bank, N.A., with four banking locations in Northeast Wisconsin. The stock-for-stock merger transaction is contingent upon approval of regulatory authorities and the shareholders of Citizens. The transaction, expected to be completed in the fourth quarter of 1998, will be accounted for using the pooling-of-interests method. However, the transaction is not expected to be material to prior years' reported operating results and, accordingly, previously reported results will not be restated. ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Corporation adopted SFAS No. 131 on January 1, 1998, and required disclosures will be included beginning with the Corporation's 1998 Form 10-K Annual Report. The FASB has issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-Retirement Benefits," which is effective for fiscal years beginning after December 15, 1997. This statement revises employers' disclosures about pension and other post-retirement benefit plans. It does not change the measurement of recognition of those plans. It standardizes the disclosure requirements for pensions and other post-retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful. The Corporation adopted SFAS No. 132 on January 1, 1998, and required disclosures will be included beginning with the Corporation's 1998 Form 10-K Annual Report. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued by FASB 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. The Corporation anticipates that the adoption of SFAS No. 133 will not have a material impact in the Corporation's financial statements. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Corporation has not experienced any material changes to its market risk position from that disclosed in the Corporation's 1997 Form 10-K Annual Report. 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 22, 1998. 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 Robert S. Gaiswinkler, Robert C. Gallagher, Robert P. Konopacky, George R. Leach, John C. Meng, John C. Seramur, John H. Sproule, Ralph R. Staven, and Norman L. Wanta. (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: 42,844,982.475 440,902.419 By Nominee: Robert S. Gaiswinkler 42,907,158.648 378,726.246 Robert C. Gallagher 42,924,980.897 360,903.997 Robert P. Konopacky 42,849,769.766 436,115.128 George R. Leach 42,860,780.213 425,104.681 John C. Meng 42,931,814.237 354,070.657 John C. Seramur 42,923,432.984 362,451.910 John H. Sproule 42,898,577.247 387,307.647 Ralph R. Staven 42,889,121.690 396,763.204 Norman L. Wanta 42,844,982.475 440,902.419 (ii) Approval of the Associated Banc-Corp Amended and Restated Long-Term Incentive Stock Plan. FOR AGAINST ABSTAIN --- ------- ------- 39,172,674.625 3,079,019.278 1,034,190.991 (iii)Ratification of the selection of KPMG Peat Marwick LLP as independent auditors of Associated for the year ending December 31, 1998. FOR AGAINST ABSTAIN --- ------- ------- 42,852,648.508 242,067.894 191,168.492 (d) Not applicable ASSOCIATED BANC-CORP PART II - OTHER INFORMATION Page No. -------- ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the six months ended June 30, 1998. 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 14, 1998 /s/ H. B. Conlon ----------------------------------------- H. B. Conlon Chairman and Chief Executive Officer Date: August 14, 1998 /s/ Joseph B. Selner ----------------------------------------- Joseph B. Selner Principal Financial Officer EX-27 2
9 6-MOS DEC-31-1998 JUN-30-1998 275,844 4,619 18,500 0 2,044,507 674,691 685,495 7,210,503 (91,708) 10,561,667 8,467,148 1,066,287 133,188 27,758 0 0 634 866,652 10,561,667 302,131 90,902 1,672 394,705 173,071 206,706 187,999 7,133 5,953 6,863 123,278 123,278 0 0 80,864 1.28 1.26 7.86 39,512 6,404 287 63,041 92,731 9,814 1,658 91,708 91,708 0 0
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