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, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5519
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Associated Banc-Corp
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
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(State or other jurisdiction of (IRS employer identification no.)
of incorporation or organization)
1200 Hansen Road, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip code)
(920) 491-7000
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(Registrant's telephone number, including area code)
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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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of registrant's common stock, par value $0.01
per share, at October 28, 2004, was 110,418,966 shares.
1
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, 2004, September 30, 2003
and December 31, 2003 3
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2004
and 2003 4
Consolidated Statement of Changes in
Stockholders' Equity - Nine Months Ended
September 30, 2004 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 42
Item 4. Controls and Procedures 42
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 43
Item 6. Exhibits 43
Signatures 44
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
September 30, September 30, December 31,
2004 2003 2003
---------------------------------------------
(In Thousands, except share data)
ASSETS
Cash and due from banks $ 286,799 $ 340,042 $ 389,140
Interest-bearing deposits in other financial institutions 10,381 6,180 7,434
Federal funds sold and securities purchased under
agreements to resell 63,105 19,950 3,290
Investment securities available for sale, at fair value 4,166,760 3,415,574 3,773,784
Loans held for sale 72,266 390,332 104,336
Loans 10,830,627 10,289,242 10,291,810
Allowance for loan losses (175,007) (176,223) (177,622)
--------------------------------------------
Loans, net 10,655,620 10,113,019 10,114,188
Premises and equipment 131,288 131,873 131,315
Goodwill 232,564 224,388 224,388
Other intangible assets 69,863 58,565 63,509
Other assets 447,115 414,246 436,510
--------------------------------------------
Total assets $ 16,135,761 $ 15,114,169 $ 15,247,894
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 1,867,905 $ 1,804,596 $ 1,814,446
Interest-bearing deposits, excluding brokered
certificates of deposit 7,623,042 7,673,766 7,813,267
Brokered certificates of deposit 186,326 156,994 165,130
--------------------------------------------
Total deposits 9,677,273 9,635,356 9,792,843
Short-term borrowings 2,956,626 2,049,833 1,928,876
Long-term funding 1,911,797 1,993,104 2,034,160
Accrued expenses and other liabilities 136,600 134,928 143,588
--------------------------------------------
Total liabilities 14,682,296 13,813,221 13,899,467
Stockholders' equity
Preferred stock -- -- --
Common stock (par value $0.01 per share,
authorized 250,000,000 shares, issued 110,458,038,
110,375,547 and 110,163,832 shares, respectively) 1,105 736 734
Surplus 585,274 580,823 575,975
Retained earnings 824,909 695,076 724,356
Accumulated other comprehensive income 49,265 36,310 52,089
Deferred compensation (1,981) (1,744) (1,981)
Treasury stock, at cost (177,312, 460,206 and
122,863 shares, respectively) (5,107) (10,253) (2,746)
--------------------------------------------
Total stockholders' equity 1,453,465 1,300,948 1,348,427
--------------------------------------------
Total liabilities and stockholders' equity $ 16,135,761 $ 15,114,169 $ 15,247,894
============================================
See accompanying notes to consolidated financial statements.
3
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-----------------------------------------------
(In Thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $ 142,389 $ 145,246 $ 415,090 $ 441,527
Interest and dividends on investment securities and
deposits with other financial institutions:
Taxable 31,590 26,710 93,389 79,430
Tax exempt 10,255 9,825 30,757 29,822
Interest on federal funds sold and securities
purchased under agreements to resell 241 38 336 127
----------------------------------------------
Total interest income 184,475 181,819 539,572 550,906
INTEREST EXPENSE
Interest on deposits 27,191 30,327 81,401 93,875
Interest on short-term borrowings 10,262 6,757 24,042 23,766
Interest on long-term funding 13,806 15,759 39,959 49,640
----------------------------------------------
Total interest expense 51,259 52,843 145,402 167,281
----------------------------------------------
NET INTEREST INCOME 133,216 128,976 394,170 383,625
Provision for loan losses -- 12,118 11,065 37,210
----------------------------------------------
Net interest income after provision
for loan losses 133,216 116,858 383,105 346,415
NONINTEREST INCOME
Trust service fees 7,773 7,001 23,684 21,427
Service charges on deposit accounts 13,672 13,338 39,210 37,611
Mortgage banking 6,593 21,671 24,664 73,284
Credit card and other nondeposit fees 6,253 5,435 17,998 18,023
Retail commission income 11,925 6,830 34,444 17,540
Bank owned life insurance income 3,580 3,532 10,576 10,373
Asset sale gains, net 309 871 749 203
Investment securities gains (losses), net (6) 1 1,356 702
Other 3,034 3,245 8,908 14,795
----------------------------------------------
Total noninterest income 53,133 61,924 161,589 193,958
NONINTEREST EXPENSE
Personnel expense 53,467 53,080 159,355 153,649
Occupancy 6,939 7,101 21,275 21,367
Equipment 3,022 3,178 8,899 9,612
Data processing 5,865 6,322 17,666 17,542
Business development and advertising 3,990 4,113 10,704 11,029
Stationery and supplies 1,214 1,651 3,869 4,964
Mortgage servicing rights expense 5,975 4,199 10,379 28,818
Intangible amortization expense 935 871 2,651 2,091
Loan expense 1,152 1,806 4,208 6,104
Other 12,447 13,486 39,275 39,372
----------------------------------------------
Total noninterest expense 95,006 95,807 278,281 294,548
----------------------------------------------
Income before income taxes 91,343 82,975 266,413 245,825
Income tax expense 27,977 24,589 78,982 72,777
----------------------------------------------
NET INCOME $ 63,366 $ 58,386 $ 187,431 $ 173,048
==============================================
Earnings per share:
Basic $ 0.58 $ 0.53 $ 1.70 $ 1.56
Diluted $ 0.57 $ 0.52 $ 1.68 $ 1.55
Average shares outstanding:
Basic 110,137 110,209 110,182 110,837
Diluted 111,699 111,485 111,614 111,894
See accompanying notes to consolidated financial statements.
4
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Other
Common Retained Comprehensive Deferred Treasury
Stock Surplus Earnings Income Compensation Stock Total
----------------------------------------------------------------------------------------
(In Thousands, except per share data)
Balance, December 31, 2003 $ 734 $ 575,975 $ 724,356 $ 52,089 $ (1,981) $ (2,746) $ 1,348,427
Comprehensive income:
Net income -- -- 187,431 -- -- -- 187,431
Net unrealized losses on derivative
instruments arising during the
period, net of taxes of $1.3 million -- -- -- (1,467) -- -- (1,467)
Add: reclassification adjustment to
interest expense for interest
differential, net of taxes of
$2.3 million -- -- -- 2,891 -- -- 2,891
Net unrealized losses on available
for sale securities arising during the
period, net of taxes of $2.4 million -- -- -- (3,380) -- -- (3,380)
Less: reclassification adjustment for
net gains on available for sale
securities realized in net income,
net of taxes of $0.5 million -- -- -- (868) -- -- (868)
-------
Comprehensive income 184,607
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Cash dividends, $0.7267 per share -- -- (80,066) -- -- -- (80,066)
Common stock issued:
Incentive stock options 2 5,474 (6,812) -- -- 18,473 17,137
3-for-2 stock split effected in the
form of a stock dividend 369 (369) -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- (20,834) (20,834)
Tax benefit of stock options -- 4,194 -- -- -- -- 4,194
----------------------------------------------------------------------------------------
Balance, September 30, 2004 $1,105 $585,274 $824,909 $49,265 $(1,981) $(5,107) $1,453,465
========================================================================================
See accompanying notes to consolidated financial statements.
5
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements Of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
2004 2003
---------------------------
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 187,431 $ 173,048
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 11,065 37,210
Depreciation and amortization 11,697 12,397
Provision for (recovery of) valuation allowance on mortgage
servicing rights, net (2,204) 15,832
Amortization (accretion) of:
Mortgage servicing rights 12,583 12,986
Intangible assets 2,651 2,091
Investment premiums and discounts 17,916 15,546
Deferred loan fees and costs (13) (659)
Gain on sales of securities, net (1,356) (702)
Gain on sales of assets, net (749) (203)
Gain on sales of loans held for sale, net (9,698) (52,843)
Mortgage loans originated and acquired for sale (1,192,729) (3,749,288)
Proceeds from sales of mortgage loans held for sale 1,234,497 3,717,635
Increase in interest receivable and other assets (5,152) (15,590)
Increase (decrease) in interest payable and other liabilities 3,893 (20,996)
--------------------------
Net cash provided by operating activities 269,832 146,464
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (564,471) (19,168)
Capitalization of mortgage servicing rights (13,457) (33,158)
Purchases of:
Securities available for sale (973,226) (1,180,342)
Premises and equipment, net of disposals (8,330) (10,256)
Proceeds from:
Sales of securities available for sale 31,021 1,264
Maturities and paydowns of securities available for sale 530,979 1,073,622
Sales of other real estate owned and other assets 8,424 14,491
Net cash paid in business combinations (17,457) (18,025)
--------------------------
Net cash used in investing activities (1,006,517) (171,572)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (108,694) 510,503
Net cash paid in sale of branch deposits (6,575) --
Net increase (decrease) in short-term borrowings 1,027,750 (339,773)
Repayment of long-term funding (881,692) (507,876)
Proceeds from issuance of long-term funding 750,080 407,364
Cash dividends (80,066) (73,232)
Proceeds from exercise of incentive stock options 17,137 18,580
Purchase and retirement of treasury stock -- (68,567)
Purchase of treasury stock (20,834) (732)
--------------------------
Net cash provided by (used in) financing activities 697,106 (53,733)
--------------------------
Net decrease in cash and cash equivalents (39,579) (78,841)
Cash and cash equivalents at beginning of period 399,864 445,013
--------------------------
Cash and cash equivalents at end of period $ 360,285 $ 366,172
==========================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 145,463 $ 173,100
Income taxes 61,237 83,553
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate 7,744 10,100
See accompanying notes to consolidated financial statements.
6
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements
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 U.S. generally accepted accounting principles have been omitted
or abbreviated. The information contained in the consolidated financial
statements and footnotes in Associated Banc-Corp's 2003 annual report on Form
10-K, should be referred to in connection with the reading of these unaudited
interim 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 the financial
position, results of operations, changes in stockholders' equity, and cash flows
of Associated Banc-Corp (individually referred to herein as the "Parent
Company," and together with all of its subsidiaries and affiliates, collectively
referred to herein as the "Corporation") 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 have been eliminated. 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 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 loan losses, mortgage servicing rights,
derivative financial instruments and hedging activities, and income taxes.
On April 28, 2004, the Board of Directors declared a 3-for-2 stock split,
effected in the form of a stock dividend, payable on May 12, 2004, to
shareholders of record at the close of business on May 7, 2004. Any fractional
shares resulting from the stock split were paid in cash. All share and per share
information has been restated to reflect the effect of this stock split (see
Note 4).
NOTE 2: Reclassifications
Certain items in the prior period consolidated financial statements have been
reclassified to conform with the September 30, 2004 presentation.
NOTE 3: New Accounting Pronouncements
In December 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 132 (revised December 2003), "Employers' Disclosures about Pensions
and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88,
and 106," ("SFAS 132"). SFAS 132 revises employers' disclosures about pension
plans and other postretirement benefit plans. This Statement does not change the
measurement or recognition of pension plans and other postretirement benefit
plans required by FASB Statements No. 87, "Employers' Accounting for Pensions,"
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The revised SFAS
132 retains the disclosure requirements contained in the original SFAS 132 and
requires additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. In general, the annual provisions of SFAS 132 are
effective for fiscal years ending after December 15, 2003, and the
interim-period disclosures are effective for interim periods
7
beginning after December 15, 2003. See Note 11 for further discussion of the
Corporation's retirement plans. The adoption had no material impact on the
Corporation's results of operations, financial position, or liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation provides guidance on
how to identify a variable interest entity and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a variable
interest entity are to be included in an entity's consolidated financial
statements. A variable interest entity exists when either the total equity
investment at risk is not sufficient to permit the entity to finance its
activities by itself, or the equity investors lack one of three characteristics
associated with owning a controlling financial interest. Those characteristics
include the direct or indirect ability to make decisions about an entity's
activities through voting rights or similar rights, the obligation to absorb the
expected losses of an entity if they occur, or the right to receive the expected
residual returns of the entity if they occur. The adoption had no material
impact on the Corporation's results of operations, financial position, or
liquidity.
In December 2003, the FASB reissued FIN 46 ("FIN 46R") with certain
modifications and clarifications. Application of FIN 46R was effective for
interests in certain variable interest entities as of December 31, 2003, and for
all other types of variable interest entities for periods ending after March 15,
2004, unless FIN 46 was previously applied. Under the application of FIN 46R a
previously consolidated subsidiary relating to the issuance of trust preferred
securities was deconsolidated in the first quarter of 2004. See Note 7 for
further discussion of this trust and the Corporation's related obligations. The
adoption had no material impact on the Corporation's results of operations,
financial position, or liquidity.
In March 2004, the SEC issued Staff Accounting Bulletin ("SAB") No. 105,
"Application of Accounting Principles to Loan Commitments," ("SAB 105"). SAB 105
provides guidance regarding loan commitments accounted for as derivative
instruments. Specifically, SAB 105 requires servicing assets to be recognized
only once the servicing asset has been contractually separated from the
underlying loan by sale or securitization of the loan with servicing retained.
As such, consideration for the expected future cash flows related to the
associated servicing of the loan may not be recognized in valuing the loan
commitment. This will result in a lower fair value mark of loan commitments, and
recognition of the value of the servicing asset later upon sale or
securitization of the underlying loan. The provisions of SAB 105 were effective
for loan commitments accounted for as derivatives entered into after March 31,
2004. The adoption of SAB 105 had no material impact on the Corporation's
results of operations, financial position, or liquidity. See Note 8 for further
discussion of the Corporation's loan commitments accounted for as derivative
instruments.
In March 2004, the FASB ratified the consensus reached by the Emerging Issues
Task Force in Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments," ("EITF 03-1"). EITF 03-1 provides
guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an impairment loss. An
investment is considered impaired if the fair value of the investment is less
than its cost. Generally, an impairment is considered other-than-temporary
unless the investor has the ability and intent to hold an investment for a
reasonable period of time sufficient for a forecasted recovery of fair value up
to (or beyond) the cost of the investment, and evidence indicating that the cost
of the investment is recoverable within a reasonable period of time outweighs
evidence to the contrary. If impairment is determined to be
other-than-temporary, then an impairment loss should be recognized through
earnings equal to the difference between the investment's cost and its fair
value. In September 2004, the FASB delayed the accounting requirements of EITF
03-1 until additional implementation guidance is issued and goes into effect.
The Corporation does not expect the requirements of EITF 03-1 will have a
material impact on the Corporation's results of operations, financial position,
or liquidity.
In December 2003, the AICPA's Accounting Standards Executive Committee issued
Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer," ("SOP 03-3"). SOP 03-3 addresses accounting
for differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. The provisions of this SOP are effective for
8
loans acquired in fiscal years beginning after December 15, 2004. The
Corporation does not expect the requirements of SOP 03-3 to have a material
impact on the results of operations, financial position, or liquidity.
NOTE 4: Earnings Per Share
Basic earnings per share is calculated by dividing net income 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,
2004 2003 2004 2003
------------------------------------------------
(In Thousands, except per share data)
Net income $ 63,366 $ 58,386 $ 187,431 $ 173,048
================================================
Weighted average shares outstanding 110,137 110,209 110,182 110,837
Effect of dilutive stock options outstanding 1,562 1,276 1,432 1,057
------------------------------------------------
Diluted weighted average shares outstanding 111,699 111,485 111,614 111,894
================================================
Basic earnings per share $ 0.58 $ 0.53 $ 1.70 $ 1.56
================================================
Diluted earnings per share $ 0.57 $ 0.52 $ 1.68 $ 1.55
================================================
NOTE 5: Business Combinations
Completed Business Combinations:
- -------------------------------
On April 1, 2004, the Corporation (through its subsidiary Associated Financial
Group, LLC) consummated its cash acquisition of 100% of the outstanding shares
of Jabas Group, Inc. ("Jabas"). Jabas is an insurance agency specializing in
employee benefit products headquartered in Kimberly, Wisconsin, and was acquired
to enhance the Corporation's existing insurance business. Jabas operates as part
of Associated Financial Group, LLC. The acquisition was accounted for under the
purchase method of accounting. Goodwill of approximately $8 million and other
intangibles of approximately $6 million recognized in the transaction at
acquisition were assigned to the wealth management segment. In addition,
goodwill may increase in the future as contingent payments may be made to the
former Jabas shareholders through December 31, 2007, if Jabas exceeds certain
performance targets.
On April 1, 2003, the Corporation consummated its cash acquisition of 100% of
the outstanding shares of CFG Insurance Services, Inc. ("CFG"), a closely-held
insurance agency headquartered in Minnetonka, Minnesota. Effective in June 2003,
CFG operated as Associated Financial Group, LLC. CFG, an independent, full-line
insurance agency, was acquired to enhance the growth of the Corporation's
existing insurance business. The acquisition was accounted for under the
purchase method of accounting; thus, the results of operations of CFG prior to
the consummation date were not included in the accompanying consolidated
financial statements. The acquisition was individually immaterial to the
consolidated financial results. Goodwill of approximately $12 million and other
intangibles of approximately $15 million recognized in the transaction at
acquisition were assigned to the wealth management segment.
Business Combination Completed Subsequent to September 30, 2004:
- ---------------------------------------------------------------
On October 29, 2004, the Corporation consummated its acquisition of 100% of the
outstanding shares of First Federal Capital Corp ("First Federal"), based in La
Crosse, Wisconsin. The acquisition will be accounted for under the purchase
method and was, therefore, appropriately not included in the consolidated
financial statements herewith, but will be included in the Corporation's
financial results effective upon the date of acquisition and thereafter. The
Corporation is in the process of recording the transaction and assigning fair
values of the assets acquired and liabilities assumed. The excess cost of the
acquisition over the fair value of the net assets acquired will be allocated to
the identifiable intangible assets with the remainder then
9
allocated to goodwill. Thus, at the time of this filing it is not practicable to
provide detailed updated financial information on the transaction. Any specific
transaction results disclosed in the paragraphs below should be considered to be
best estimates available at the time of this filing and subject to change upon
the completion of the recording of the transaction.
As of September 30, 2004, First Federal operated a $3.7 billion savings bank
with over 90 banking locations serving more than 40 communities in Wisconsin,
northern Illinois, and southern Minnesota, building upon and complimenting the
Corporation's footprint. As a result of the acquisition, the Corporation will
enhance its current branch distribution (including supermarket locations which
are new to the Corporation's distribution model), improve its operational and
managerial efficiencies, increase revenue streams, and strengthen its community
banking model.
Per the definitive agreement signed on April 28, 2004 (the "Merger Agreement"),
First Federal shareholders receive 0.9525 shares (restated for the Corporation's
3-for-2 stock split in May 2004) of the Corporation's common stock for each
share of First Federal common stock held, an equivalent amount of cash, or a
combination thereof. The Merger Agreement provides that the aggregate
consideration paid by the Corporation for the First Federal outstanding common
stock must be equal to 90% stock and 10% cash (including cash paid for
fractional shares), with the cash consideration based upon the Corporation's
closing stock price on the effective date of the merger. The Corporation's
closing stock price on October 29, 2004 was $34.69 per share. The value of the
common stock consideration is based upon the Corporation's average market price
surrounding the date of signing and announcing the definitive agreement. Based
upon the aforementioned values for the 90% stock/10% cash, the consummation of
the transaction included the issuance of approximately 19.4 million shares of
common stock (valued at approximately $535 million) and $75 million in cash. The
preliminary amount of goodwill is estimated to range from $450 million to $470
million.
NOTE 6: Goodwill and Other Intangible Assets
Goodwill:
- --------
Goodwill is not amortized, but is subject to impairment tests on at least an
annual basis. No impairment loss was incurred in 2003 or through September 30,
2004. At September 30, 2004, goodwill of $212 million is assigned to the banking
segment and goodwill of $21 million is assigned to the wealth management
segment. The change in the carrying amount of goodwill was as follows.
As of and for the
As of and for the nine months ended year ended
September 30, 2004 September 30, 2003 December 31, 2003
---------------------------------------------------------------------
Goodwill: ($ in Thousands)
- ---------
Balance at beginning of period $ 224,388 $ 212,112 $ 212,112
Goodwill acquired 8,176 12,276 12,276
---------------------------------------------------------------------
Balance at end of period $ 232,564 $ 224,388 $ 224,388
=====================================================================
Other Intangible Assets:
- -----------------------
The Corporation has other intangible assets that are amortized, consisting of
core deposit intangibles, other intangibles (primarily related to customer
relationships acquired in connection with the CFG and Jabas acquisitions), and
mortgage servicing rights. The core deposit intangibles and mortgage servicing
rights are assigned to the banking segment, while the other intangibles are
assigned to the wealth management segment.
10
For core deposit intangibles and other intangibles, changes in the gross
carrying amount, accumulated amortization, and net book value were as follows:
As of and for the
As of and for the nine months ended year ended
September 30, 2004 September 30, 2003 December 31, 2003
----------------------------------------------------------------------
($ in Thousands)
Core deposit intangibles: (1)
- ------------------------
Gross carrying amount $ 16,783 $ 28,165 $ 28,165
Accumulated amortization (10,497) (20,212) (20,682)
----------------------------------------------------------------------
Net book value $ 6,286 $ 7,953 $ 7,483
======================================================================
Amortization during the period $ (1,197) $ (1,289) $ (1,759)
Other intangibles:
Gross carrying amount $ 20,678 $ 14,751 $ 14,751
Accumulated amortization (2,656) (802) (1,202)
----------------------------------------------------------------------
Net book value $ 18,022 $ 13,949 $ 13,549
======================================================================
Additions during the period $ 5,927 $ 14,751 $ 14,751
Amortization during the period (1,454) (802) (1,202)
(1) Core deposit intangibles of $11.4 million were fully amortized during 2003
and were removed from both the gross carrying amount and the accumulated
amortization effective January 1, 2004.
Mortgage servicing rights are amortized in proportion to and over the period of
estimated servicing income. Mortgage servicing rights are carried on the balance
sheet at the lower of cost or estimated market value. A valuation allowance is
established to the extent the carrying value of the mortgage servicing rights
exceeds the estimated fair value by stratification. The Corporation periodically
evaluates its mortgage servicing rights asset for impairment and resulting
additions to or reversals from the valuation allowance are recognized. An
other-than-temporary impairment is recognized as a write-down of the mortgage
servicing rights asset and the related valuation allowance (to the extent
valuation allowance is available) and then against earnings. Given changes in
interest rates, especially the extended period of historically low interest
rates experienced during 2003, and the impact on mortgage banking volumes,
refinances, prepayment speeds, and secondary markets, the Corporation evaluated
its mortgage servicing rights asset for possible other-than-temporary
impairment. As a result, $5.5 million and $15.6 million was determined to be
other-than-temporarily impaired for the nine months ended September 30, 2004 and
2003, respectively, and $18.1 million for the year ended December 31, 2003. A
summary of changes in the balance of the mortgage servicing rights asset and the
mortgage servicing rights valuation allowance was as follows.
As of and for the
As of and for the nine months ended year ended
September 30, 2004 September 30, 2003 December 31, 2003
----------------------------------------------------------------------
Mortgage servicing rights: ($ in Thousands)
- --------------------------
Mortgage servicing rights at
beginning of period $ 65,062 $ 60,685 $ 60,685
Additions 13,457 33,158 39,707
Amortization (12,583) (12,986) (17,212)
Other-than-temporary
impairment (5,518) (15,583) (18,118)
-----------------------------------------------------------------------
Mortgage servicing rights at
end of period 60,418 65,274 65,062
-----------------------------------------------------------------------
Valuation allowance at
beginning of period (22,585) (28,362) (28,362)
Additions (4,450) (15,832) (15,832)
Reversals 6,654 -- 3,491
Other-than-temporary
impairment 5,518 15,583 18,118
-----------------------------------------------------------------------
Valuation allowance at end
of period (14,863) (28,611) (22,585)
-----------------------------------------------------------------------
Mortgage servicing rights, net $ 45,555 $ 36,663 $ 42,477
=======================================================================
11
At September 30, 2004, the Corporation was servicing one- to four- family
residential mortgage loans owned by other investors with balances totaling $6.01
billion, compared to $5.59 billion and $5.93 billion at September 30 and
December 31, 2003, respectively. The fair value of servicing was approximately
$45.6 million (representing 76 basis points ("bp") of loans serviced) at
September 30, 2004, compared to $36.7 million (or 66 bp of loans serviced) at
September 30, 2003 and $42.5 million (or 72 bp of loans serviced) at December
31, 2003.
Mortgage servicing rights expense, which includes the amortization of mortgage
servicing rights and increases or decreases to the valuation allowance
associated with the mortgage servicing rights, was $10.4 million and $28.8
million for the nine months ended September 30, 2004 and 2003, respectively, and
$29.6 million for the year ended December 31, 2003.
The following table shows the estimated future amortization expense for
amortizing intangible assets. The projections of amortization expense for the
next five years are based on existing asset balances, the current interest rate
environment, and prepayment speeds as of September 30, 2004. The actual
amortization expense the Corporation recognizes in any given period may be
significantly different depending upon changes in interest rates, market
conditions, regulatory requirements, and events or circumstances that indicate
the carrying amount of an asset may not be recoverable.
Estimated amortization expense:
Core Deposit Mortgage
Intangibles Other Intangibles Servicing Rights
-----------------------------------------------------
($ in Thousands)
Three months ending December 31, 2004 $ 300 $ 500 $ 4,000
Year ending December 31, 2005 1,000 1,800 14,200
Year ending December 31, 2006 1,000 1,400 11,700
Year ending December 31, 2007 1,000 1,300 9,500
Year ending December 31, 2008 1,000 1,200 7,500
=====================================================
NOTE 7: Long-term Funding
Long-term funding was as follows:
September 30, September 30, December 31,
2004 2003 2003
------------------------------------------
($ in Thousands)
Federal Home Loan Bank advances $ 712,048 $ 912,386 $ 912,138
Bank notes 300,000 350,000 300,000
Repurchase agreements 500,000 329,175 429,175
Subordinated debt, net 205,664 208,171 204,351
Junior subordinated debentures, net 187,493 -- --
Other borrowed funds 6,592 6,584 6,555
-----------------------------------------
Total long-term debt $ 1,911,797 $ 1,806,316 $ 1,852,219
Company-obligated mandatorily
redeemable preferred securities, net -- 186,788 181,941
-----------------------------------------
Total long-term funding $ 1,911,797 $ 1,993,104 $ 2,034,160
==========================================
Federal Home Loan Bank advances:
- -------------------------------
Long-term advances from the Federal Home Loan Bank had maturities through 2017
and had weighted-average interest rates of 2.78% at September 30, 2004, and
2.96% at both September 30 and December 31, 2003. These advances had a
combination of fixed and variable rates, of which 65% was fixed rate at
September 30, 2004 and 95% was fixed rate at both September 30 and December 31,
2003.
12
Bank notes:
- ----------
The long-term bank notes had maturities through 2007 and had weighted-average
interest rates of 2.43% at September 30, 2004, 2.07% at September 30, 2003, and
2.20% at December 31, 2003. These notes had a combination of fixed and variable
rates.
Repurchase agreements:
- ---------------------
The long-term repurchase agreements had maturities through 2007 and had
weighted-average interest rates of 1.76% and 1.97% at September 30, 2004 and
2003, respectively, and 1.67% at December 31, 2003. These repurchase agreements
had a combination of fixed and variable rates, predominantly fixed.
Subordinated debt:
- -----------------
In August 2001, the Corporation issued $200 million of 10-year subordinated
debt. This debt was issued at a discount and has a fixed coupon interest rate of
6.75%. The Corporation also entered into a fair value hedge to hedge the
interest rate risk on the subordinated debt. As of September 30, 2004, September
30, 2003, and December 31, 2003, the fair value of the derivative was a $6.7
million gain, a $9.3 million gain, and a $5.5 million gain, respectively. Given
the fair value hedge, subordinated debt is carried on the consolidated balance
sheet at fair value. The subordinated debt qualifies under the risk-based
capital guidelines as Tier 2 supplementary capital for regulatory purposes.
Junior subordinated debentures and Company-obligated Mandatorily Redeemable
Preferred Securities:
- ---------------------
On May 30, 2002, ASBC Capital I (the "ASBC Trust"), a Delaware business trust
whose common stock was wholly owned by the Corporation, completed the sale of
$175 million of 7.625% preferred securities (the "Preferred Securities"). The
Preferred Securities are traded on the New York Stock Exchange under the symbol
"ABW PRA." The ASBC Trust used the proceeds from the offering to purchase a like
amount of 7.625% Junior Subordinated Debentures (the "Debentures") of the
Corporation. The Debentures are the sole assets of the ASBC Trust and were
eliminated, along with the related income statement effects, in the consolidated
financial statements for 2003 and prior years.
Effective in the first quarter of 2004, in accordance with guidance provided on
the application of FIN 46R, the Corporation was required to deconsolidate the
ASBC Trust from its consolidated financial statements. Accordingly, the
Debentures issued by the Corporation to ASBC Trust (as opposed to the trust
preferred securities issued by the ASBC Trust) are reflected in the
Corporation's consolidated balance sheet as long-term funding. The
deconsolidation of the net assets and results of operations of this trust did
not have a material impact on the Corporation's financial statements since the
Corporation continues to be obligated to repay the Debentures held by the ASBC
Trust and guarantees repayment of the Preferred Securities issued by the ASBC
Trust. The consolidated long-term funding obligation related to the ASBC Trust
increased from $175 million to $180 million upon deconsolidation, with the
difference representing the Corporation's common ownership interest in the ASBC
Trust recorded in investment securities available for sale.
The Preferred Securities accrue and pay dividends quarterly at an annual rate of
7.625% of the stated liquidation amount of $25 per Preferred Security. The
Corporation has fully and unconditionally guaranteed all of the obligations of
the ASBC Trust. The guarantee covers the quarterly distributions and payments on
liquidation or redemption of the Preferred Securities, but only to the extent of
funds held by the ASBC Trust. The Preferred Securities are mandatorily
redeemable upon the maturity of the Debentures on June 15, 2032, or upon earlier
redemption as provided in the Indenture. The Corporation has the right to redeem
the Debentures on or after May 30, 2007.
The Preferred Securities qualify under the risk-based capital guidelines as Tier
1 capital for regulatory purposes within certain limitations. The Federal
Reserve Board could re-evaluate the qualification of the preferred securities as
Tier 1 capital at anytime. If it is determined that the preferred securities no
longer qualify as Tier 1 capital, the effect of such a change is not expected to
affect the Corporation's well-capitalized status.
During 2002, the Corporation entered into a fair value hedge to hedge the
interest rate risk on the Debentures. The fair value of the derivative was a
$7.1 million gain at September 30, 2004, a $11.8 million gain at
13
September 30, 2003, and a $6.9 million gain at December 31, 2003. Given the fair
value hedge, the Debentures are carried on the consolidated balance sheet at
fair value.
NOTE 8: Derivatives and Hedging Activities
The Corporation uses derivative instruments primarily to hedge the variability
in interest payments or protect the value of certain assets and liabilities
recorded in its consolidated balance sheet from changes in interest rates. The
predominant derivative and hedging activities include interest rate swaps,
interest rate caps, and certain mortgage banking activities. Interest rate swaps
are entered into primarily as an asset/liability management strategy to modify
interest rate risk, while interest rate caps are entered into as interest rate
protection instruments.
The Corporation measures the effectiveness of its hedges on a periodic basis.
Any difference between the fair value change of the hedge versus the fair value
change of the hedged item is considered to be the "ineffective" portion of a
fair value hedge. The ineffective portion of a fair value hedge is recorded as
an increase or decrease in the related income statement classification of the
item being hedged. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings. For the mortgage derivatives, which are
not accounted for as hedges, changes in the fair value are recorded as
adjustments to mortgage banking income.
Estimated Fair
Notional Market Value Weighted Average
Amount Gain/(Loss) Receive Rate Pay Rate Maturity
----------------------------------------------------------------------
September 30, 2004 ($ in Thousands)
- ------------------
Interest Rate Risk Management hedges:
Swaps-receive variable / pay fixed (1), (3) $ 200,000 $ (17,742) 1.59% 5.03% 80 months
Swaps-receive fixed / pay variable (2), (4) 375,000 13,771 7.21% 3.51% 202 months
Swaps-receive variable / pay fixed (2), (5) 297,436 (5,633) 3.90% 6.34% 47 months
Caps-written (1), (3) 200,000 210 Strike 4.72% -- 23 months
======================================================================
September 30, 2003
Interest Rate Risk Management hedges:
Swaps-receive variable / pay fixed (1), (3) $ 200,000 $ (25,890) 1.11% 5.03% 92 months
Swaps-receive fixed / pay variable (2), (4) 375,000 21,136 7.21% 2.77% 214 months
Swaps-receive variable / pay fixed (2), (5) 365,063 (14,624) 3.29% 6.29% 53 months
Caps-written (1), (3) 200,000 1,298 Strike 4.72% -- 35 months
======================================================================
(1) Cash flow hedges (2) Fair value hedges
(3) Hedges variable rate long-term debt (4) Hedges fixed rate long-term debt
(5) Hedges specific longer-term fixed rate commercial loans
Not included in the above table were customer swaps and caps with a notional
amount of $110.1 million and $31.1 million as of September 30, 2004 and 2003,
respectively, for which the Corporation has mirror swaps and caps. The change in
fair value of the customer swaps and caps, and the mirror swaps and caps is
recorded in earnings. The net impact of these swaps and caps for 2004 and 2003
was immaterial.
Commitments to originate residential mortgage loans held for sale and forward
commitments to sell residential mortgage loans represent the Corporation's
mortgage derivatives, the fair value of which are included in other liabilities
on the consolidated balance sheets. The net fair value of the mortgage
derivatives at September 30, 2004, was a $1.0 million loss, compared to a $1.3
million loss at September 30, 2003. The net fair value change is recorded in
mortgage banking income in the consolidated statements of income. The $1.0
million net fair value loss on mortgage derivatives at September 30, 2004, is
composed of the net loss on commitments to fund approximately $146 million of
loans to individual borrowers and the net loss on commitments to sell
approximately $152 million of loans to various investors. The $1.3 million net
fair value loss on mortgage derivatives at September 30, 2003, is comprised of
the net gain on commitments to fund approximately $226 million of loans to
individual borrowers and the net loss on commitments to sell
14
approximately $432 million of loans to various investors. As previously
discussed in Note 3, the Corporation adopted SAB 105 effective April 1, 2004.
NOTE 9: Contractual Obligations, Commitments, Off-Balance Sheet Risk, and
Contingent Liabilities
Commitments and Off-Balance Sheet Risk
- --------------------------------------
The Corporation utilizes a variety of financial instruments in the normal course
of business to meet the financial needs of its customers and to manage its own
exposure to fluctuations in interest rate. These financial instruments include
lending-related commitments.
Lending-related Commitments
- ---------------------------
Through the normal course of operations, the Corporation has entered into
certain contractual obligations and other commitments. As a financial services
provider the Corporation routinely enters into commitments to extend credit.
While contractual obligations represent future cash requirements of the
Corporation, a significant portion of commitments to extend credit may expire
without being drawn upon. Such commitments are subject to the same credit
policies and approval process accorded to loans made by the Corporation.
Lending-related commitments include commitments to extend credit, commitments to
originate residential mortgage loans held for sale, commercial letters of
credit, and standby letters of credit. Commitments to extend credit are
agreements to lend to customers at predetermined interest rates as long as there
is no violation of any condition established in the contracts. Commercial and
standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Commercial letters of credit are
issued specifically to facilitate commerce and typically result in the
commitment being drawn on when the underlying transaction is consummated between
the customer and the third party, while standby letters of credit generally are
contingent upon the failure of the customer to perform according to the terms of
the underlying contract with the third party.
Under SFAS 133, commitments to originate residential mortgage loans held for
sale and forward commitments to sell residential mortgage loans are defined as
derivatives and are therefore required to be recorded on the consolidated
balance sheet at fair value. The Corporation's derivative and hedging activities
are further summarized in Note 8. The following is a summary of lending-related
commitments.
September 30,
----------------------------
2004 2003
----------------------------
($ in Thousands)
Commitments to extend credit, excluding
commitments to originate mortgage loans (1) $ 3,934,750 $ 3,597,438
Commercial letters of credit (1) 16,632 44,241
Standby letters of credit (2) 396,907 306,610
(1) These off-balance sheet financial instruments are exercisable at the market
rate prevailing at the date the underlying transaction will be completed
and thus are deemed to have no current fair value, or the fair value is
based on fees currently charged to enter into similar agreements and is not
material at September 30, 2004 or 2003.
(2) As required by FASB Interpretation No. 45, an interpretation of FASB
Statements No. 5, 57, and 107, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others," the Corporation has established a liability in other
liabilities on the consolidated balance sheet of $3.7 million and $1.7
million at September 30, 2004 and 2003, respectively, as an estimate of the
fair value of these financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to these financial instruments is represented by the contractual
amount of those instruments. The commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for extending loans to customers. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation upon extension of
credit, is based on management's credit evaluation of the customer. Since many
of the commitments are expected to expire
15
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Contingent Liabilities
- ----------------------
In the ordinary course of business, the Corporation may be named as defendant in
or be a party to various pending and threatened legal proceedings. In view of
the intrinsic difficulty in ascertaining the outcome of such matters, the
Corporation cannot state what the eventual outcome of any such proceeding will
be. Management believes, based upon discussions with legal counsel and current
knowledge, that liabilities arising out of any such proceedings (if any) will
not have a material adverse effect on the consolidated financial position,
results of operations, or liquidity of the Corporation.
A contingent liability is required to be established if it is probable that the
Corporation will incur a loss on the performance of a letter of credit. During
the second quarter of 2003, given the deterioration of the financial condition
of a borrower, the Corporation established a $2.5 million liability for standby
letters of credit, of which $0.9 million remained at September 30, 2004.
NOTE 10: Stock-Based Compensation
As allowed under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Corporation accounts for stock-based compensation cost under the
intrinsic value method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations, under which no compensation cost has been recognized for any
periods presented, except with respect to restricted stock awards. Compensation
expense for employee stock options is generally not recognized if the exercise
price of the option equals or exceeds the fair value of the stock on the date of
grant, as such options would have no intrinsic value at the date of grant.
The Corporation may issue common stock with restrictions to certain key
employees. The shares are restricted as to transfer, but are not restricted as
to dividend payment or voting rights. Transfer restrictions lapse over three or
five years, depending upon whether the award is fixed or performance-based, are
contingent upon continued employment, and for performance awards are based on
earnings per share performance goals. The Corporation amortizes the expense over
the vesting period. During the second quarter of 2003, 75,000 restricted stock
shares were awarded. Expense on the restricted stock of approximately $564,000
and $259,000 was recorded for the nine months ended September 30, 2004 and 2003,
respectively, and expense of approximately $211,000 and $158,000 was recorded
for the three months ended September 30, 2004 and 2003, respectively.
For purposes of providing the pro forma disclosures required under SFAS 123, the
fair value of stock options granted in the comparable three and nine month
periods ended September 30, 2004 and 2003 was estimated at the date of grant
using a Black-Scholes option pricing model which was originally developed for
use in estimating the fair value of traded options which have different
characteristics from the Corporation's employee stock options. The model is also
sensitive to changes in the subjective assumptions that can materially affect
the fair value estimate. As a result, management believes the Black-Scholes
model may not necessarily provide a reliable single measure of the fair value of
employee stock options. The following table illustrates the effect on net income
and earnings per share if the Corporation had applied the fair value recognition
provisions of SFAS 123.
16
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------------------------
2004 2003 2004 2003
------------------------------------------------
($ in Thousands, except per share amounts)
Net income, as reported $ 63,366 $ 58,386 $ 187,431 $ 173,048
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 127 95 338 155
Less: Total stock-based compensation expense determined
under fair value based method for all awards, net of
related tax effects ( 1,026) (710) (3,006) (2,137)
----------------------------------------------
Net income, as adjusted $ 62,467 $ 57,771 $ 184,763 $ 171,066
==============================================
Basic earnings per share, as reported $ 0.58 $ 0.53 $ 1.70 $ 1.56
Less: Total stock-based compensation expense determined
under fair value based method for all awards, net of
related tax effects (0.01) (0.01) (0.03) (0.02)
----------------------------------------------
Basic earnings per share, as adjusted $ 0.57 $ 0.52 $ 1.67 $ 1.54
==============================================
Diluted earnings per share, as reported $ 0.57 $ 0.52 $ 1.68 $ 1.55
Less: Total stock-based compensation expense determined
under fair value based method for all awards, net of
related tax effects (0.01) (0.01) (0.03) (0.02)
----------------------------------------------
Diluted earnings per share, as adjusted $ 0.56 $ 0.51 $ 1.65 $ 1.53
===============================================
The following assumptions were used in estimating the fair value for options
granted in 2004 and 2003:
2004 2003
------------------------------
Dividend yield 3.12% 3.59%
Risk-free interest rate 3.59% 3.27%
Weighted average expected life 7 yrs 7 yrs
Expected volatility 27.98% 28.30%
The weighted average per share fair values of options granted in the comparable
nine-month periods of 2004 and 2003 were $6.97 and $5.06, respectively. The
annual expense allocation methodology prescribed by SFAS 123 attributes a higher
percentage of the reported expense to earlier years than to later years,
resulting in accelerated expense recognition for proforma disclosure purposes.
NOTE 11: Retirement Plans
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
2004 2003 2004 2003
----------------------------------------------
Components of Net Periodic Benefit Cost ($ in Thousands)
- ----------------------------------------
Service cost $ 1,673 $ 1,464 $ 5,020 $ 4,393
Interest cost 964 901 2,891 2,702
Expected return on plan assets (1,572) (1,325) (4,715) (3,976)
Amortization of:
Transition asset (81) (81) (243) (243)
Prior service cost 19 19 56 56
Actuarial loss 93 18 278 55
---------------------------------------------
Total net periodic benefit cost $ 1,096 $ 996 $ 3,287 $ 2,987
As previously disclosed in its notes to consolidated financial statements for
the year ended December 31, 2003, the Corporation does not expect to make a
contribution to its pension plan in 2004. The Corporation regularly reviews the
funding of its pension plans. Therefore, it is possible that after that review,
the Corporation may decide to make a contribution to the pension plan at that
time.
17
NOTE 12: Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires selected financial and descriptive information about
reportable operating segments. The statement uses 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 primary segment is banking, conducted through its bank and
lending subsidiaries. For purposes of segment disclosure under this statement,
these have been combined as one segment, as these segments have similar economic
characteristics and the nature of their products, services, processes,
customers, delivery channels, and regulatory environment are similar. Banking
includes: lending and deposit gathering to businesses (including commercial and
specialized lending, lease financing, and other banking services to larger
businesses and metro or niche markets, as well as business-related services such
as cash management and international banking services) and to consumers
(including mortgages, home equity lending, and card products) and the support to
deliver such banking services.
The Corporation's other segment is wealth management (including insurance,
brokerage, and trust/asset management). The wealth management segment is
included in "Other," along with intersegment eliminations and residual revenues
and expenses, representing the difference between actual amounts incurred and
the amounts allocated to operating segments.
18
Selected segment information is presented below.
Consolidated
Banking Other Total
- -----------------------------------------------------------------------------------------
As of and for the nine months ended ($ in Thousands)
September 30, 2004
Total assets $ 16,063,542 $ 72,219 $ 16,135,761
=============================================
Net interest income $ 393,912 $ 258 $ 394,170
Provision for loan losses 11,065 -- 11,065
Noninterest income 103,691 57,898 161,589
Depreciation and amortization 25,101 1,830 26,931
Other noninterest expense 212,524 38,826 251,350
Income taxes 75,911 3,071 78,982
---------------------------------------------
Net income $ 173,002 $ 14,429 $ 187,431
=============================================
As of and for the nine months ended
September 30, 2003
Total assets $ 15,058,447 $ 55,722 $ 15,114,169
=============================================
Net interest income $ 383,177 $ 448 $ 383,625
Provision for loan losses 37,210 -- 37,210
Noninterest income 155,953 38,005 193,958
Depreciation and amortization 26,308 1,166 27,474
Other noninterest expense 236,501 30,573 267,074
Income taxes 72,872 (95) 72,777
---------------------------------------------
Net income $ 166,239 $ 6,809 $ 173,048
=============================================
- -----------------------------------------------------------------------------------------
Consolidated
Banking Other Total
- -----------------------------------------------------------------------------------------
As of and for the three months ended ($ in Thousands)
September 30, 2004
Total assets $ 16,063,542 $ 72,219 $ 16,135,761
=============================================
Net interest income $ 133,175 $ 41 $ 133,216
Provision for loan losses -- -- --
Noninterest income 33,261 19,872 53,133
Depreciation and amortization 8,177 679 8,856
Other noninterest expense 72,292 13,858 86,150
Income taxes 27,095 882 27,977
---------------------------------------------
Net income $ 58,872 $ 4,494 $ 63,366
=============================================
As of and for the three months ended
September 30, 2003
Total assets $ 15,058,447 $ 55,722 $ 15,114,169
=============================================
Net interest income $ 128,826 $ 150 $ 128,976
Provision for loan losses 12,118 -- 12,118
Noninterest income 48,766 13,158 61,924
Depreciation and amortization 8,674 526 9,200
Other noninterest expense 74,948 11,659 86,607
Income taxes 24,903 (314) 24,589
---------------------------------------------
Net income $ 56,949 $ 1,437 $ 58,386
=============================================
- -----------------------------------------------------------------------------------------
19
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
Statements made in this document and in documents that are incorporated by
reference which are not purely historical are forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, including any
statements regarding descriptions of management's plans, objectives, or goals
for future operations, products or services, and forecasts of its revenues,
earnings, or other measures of performance. Forward-looking statements are based
on current management expectations and, by their nature, are subject to risks
and uncertainties. These statements may be identified by the use of words such
as "believe," "expect," "anticipate," "plan," "estimate," "should," "will,"
"intend," or similar expressions.
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 in this document or incorporated by
reference in this document. These factors, many of which are beyond the
Corporation's control, include the following:
o operating, legal, and regulatory risks;
o economic, political, and competitive forces affecting the Corporation's
banking, securities, asset management, and credit services businesses; and
o 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. Forward-looking
statements speak only as of the date they are made. The Corporation undertakes
no obligation to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.
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 consolidated
financial statements, footnotes, and supplemental financial data appearing
elsewhere in this Form 10-Q and should be read in conjunction therewith. The
detailed discussion focuses on the nine months ended September 30, 2004 and the
comparable period in 2003. Discussion of third quarter 2004 results compared to
third quarter 2003 is predominantly in section, "Comparable Third Quarter
Results."
The following discussion refers to the Corporation's business combination
activity that may impact the comparability of certain financial data (see Note
5, "Business Combinations," of the notes to consolidated financial statements).
In particular, consolidated financial results for the nine-months of 2004
reflect nine month's contribution from its April 1, 2003 acquisition of CFG and
six month's contribution from its April 1, 2004 acquisition of Jabas, while
consolidated financial results for 2003 reflect six month's contribution of CFG
and no contribution from Jabas.
On April 28, 2004, the Board of Directors declared a 3-for-2 stock split,
effected in the form of a stock dividend, payable on May 12, 2004, to
shareholders of record at the close of business on May 7, 2004. All share and
per share information in the accompanying consolidated financial statements was
restated to reflect the effect of this stock split.
20
Critical Accounting Policies
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 loan losses, mortgage servicing rights
valuation, derivative financial instruments and hedging activities, and income
taxes.
The consolidated financial statements of the Corporation are prepared in
conformity with U.S. generally accepted accounting principles and follow general
practices within the industries in which it operates. This preparation requires
management to make estimates, assumptions, and judgments that affect the amounts
reported in the financial statements and accompanying notes. These estimates,
assumptions, and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, actual
results could differ from the estimates, assumptions, and judgments reflected in
the financial statements. Certain policies inherently have a greater reliance on
the use of estimates, assumptions, and judgments and, as such, have a greater
possibility of producing results that could be materially different than
originally reported. Management believes the following policies are both
important to the portrayal of the Corporation's financial condition and results
and require subjective or complex judgments and, therefore, management considers
the following to be critical accounting policies. The critical accounting
policies are discussed directly with the Audit Committee of the Corporation.
Allowance for Loan Losses:
- -------------------------
Management's evaluation process used to determine the
adequacy of the allowance for loan losses is subject to the use of estimates,
assumptions, and judgments. The evaluation process combines several factors:
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, existing economic
conditions, the fair value of underlying collateral, and other qualitative and
quantitative factors which could affect probable credit losses. Because current
economic conditions can change and future events are inherently difficult to
predict, the anticipated amount of estimated loan losses, and therefore the
adequacy of the allowance, could change significantly. As an integral part of
their examination process, various regulatory agencies also review the allowance
for loan losses. Such agencies may require that certain loan balances be charged
off when their credit evaluations differ from those of management, based on
their judgments about information available to them at the time of their
examination. The Corporation believes the allowance for loan losses is adequate
and properly recorded in the consolidated financial statements. See section
"Allowance for Loan Losses."
Mortgage Servicing Rights Valuation:
- -----------------------------------
The fair value of the Corporation's mortgage servicing rights asset is important
to the presentation of the consolidated financial statements since the mortgage
servicing rights are carried on the consolidated balance sheet at the lower of
amortized cost or fair value. Mortgage servicing rights do not trade in an
active open market with readily observable prices. As such, like other
participants in the mortgage banking business, the Corporation relies on an
internal discounted cash flow model to estimate the fair value of its mortgage
servicing rights and consults periodically with third parties as to the
assumptions used and that the resultant valuation is within the context of the
market. In addition, the Corporation periodically reviews the assumptions
underlying the valuation of mortgage servicing rights. As part of this review,
beginning with the third quarter 2004 valuation of the mortgage servicing
rights, the Corporation changed the external service provider of prepayment
speeds to a source that management believed to provide a better representation
of market value. The impact of this change was an increase in fair value of
mortgage servicing rights of $0.8 million. While the Corporation believes that
the values produced by its internal model are indicative of the fair value of
its mortgage servicing rights portfolio, these values can change significantly
depending upon the then current interest rate environment, estimated prepayment
speeds of the underlying mortgages serviced, and other economic conditions. The
proceeds that might be received should the Corporation actually consider a sale
of the mortgage servicing rights portfolio could differ from the amounts
reported at any point in time. The Corporation believes the mortgage servicing
rights asset is
21
properly recorded in the consolidated financial statements. See Note 6,
"Goodwill and Other Intangible Assets," of the notes to consolidated financial
statements and section "Noninterest Expense."
Derivative Financial Instruments and Hedge Accounting:
- -----------------------------------------------------
In various aspects of its business, the Corporation uses derivative financial
instruments to modify exposures to changes in interest rates and market prices
for other financial instruments. Substantially all of these derivative financial
instruments are designated as hedges for financial reporting purposes. The
application of the hedge accounting policy requires judgment in the assessment
of hedge effectiveness, identification of similar hedged item groupings, and
measurement of changes in the fair value of hedged items. However, if in the
future the derivative financial instruments used by the Corporation no longer
qualify for hedge accounting treatment and, consequently, the change in the fair
value of hedged items could be recognized in earnings, the impact on the
consolidated results of operations and reported earnings could be significant.
The Corporation believes hedge effectiveness is evaluated properly in the
consolidated financial statements. See Note 8, "Derivatives and Hedging
Activities," of the notes to consolidated financial statements.
Income Tax Accounting:
- ---------------------
The assessment of tax assets and liabilities involves the use of estimates,
assumptions, interpretations, and judgments concerning certain accounting
pronouncements and federal and state tax codes. There can be no assurance that
future events, such as court decisions or positions of federal and state taxing
authorities, will not differ from management's current assessment, the impact of
which could be significant to the consolidated results of operations and
reported earnings. The Corporation believes the tax assets and liabilities are
adequate and properly recorded in the consolidated financial statements. See
section "Income Taxes."
Segment Review
As described in Note 12, "Segment Reporting," of the notes to consolidated
financial statements, the Corporation's primary reportable segment is banking,
conducted through its bank and lending subsidiaries. Banking includes: lending
and deposit gathering to businesses (including commercial and specialized
lending, lease financing, and other banking services to larger businesses and
metro or niche markets, as well as business-related services such as cash
management and international banking services) and to consumers (including
mortgages, home equity lending, and card products) and the support to deliver
such banking services.
The Corporation's profitability is primarily dependent on net interest income,
noninterest income, the level of the provision for loan losses, noninterest
expense, and taxes of its banking segment. The consolidated discussion is
therefore predominantly describing the banking segment results. The critical
accounting policies primarily affect the banking segment, with the exception of
income tax accounting, which affects both the banking and wealth management
segments (see section "Critical Accounting Policies").
Results of Operations - Summary
Net income for the nine months ended September 30, 2004 totaled $187.4 million,
or $1.70 and $1.68 for basic and diluted earnings per share, respectively.
Comparatively, net income for the nine months ended September 30, 2003 was
$173.0 million, or $1.56 and $1.55 for basic and diluted earnings per share,
respectively. Year-to-date 2004 results generated an annualized return on
average assets of 1.62% and an annualized return on average equity of 18.00%,
compared to 1.54% and 17.82%, respectively, for the comparable period in 2003.
The net interest margin for the first nine months of 2004 was 3.79% compared to
3.82% for the first nine months of 2003.
22
- ------------------------------------------------------------------------------------------------------------
TABLE 1 (1)
Summary Results of Operations: Trends
($ in Thousands, except per share data)
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
2004 2004 2004 2003 2003
- ------------------------------------------------------------------------------------------------------------
Net income (Quarter) $ 63,366 $ 64,505 $ 59,560 $ 55,609 $ 58,386
Net income (Year-to-date) 187,431 124,065 59,560 228,657 173,048
Earnings per share - basic (Quarter) $ 0.58 $ 0.59 $ 0.54 $ 0.51 $ 0.53
Earnings per share - basic (Year-to-date) 1.70 1.13 0.54 2.07 1.56
Earnings per share - diluted (Quarter) $ 0.57 $ 0.58 $ 0.53 $ 0.50 $ 0.52
Earnings per share - diluted (Year-to-date) 1.68 1.11 0.53 2.05 1.55
Return on average assets (Quarter) 1.60% 1.67% 1.57% 1.49% 1.53%
Return on average assets (Year-to-date) 1.62 1.62 1.57 1.53 1.54
Return on average equity (Quarter) 17.76% 18.87% 17.37% 16.85% 17.75%
Return on average equity (Year-to-date) 18.00 18.12 17.37 17.58 17.82
Efficiency ratio (Quarter) (2) 49.37% 46.17% 50.28% 51.02% 48.83%
Efficiency ratio (Year-to-date) (2) 48.58 48.18 50.28 49.84 49.47
Net interest margin (Quarter) 3.76% 3.80% 3.80% 3.81% 3.78%
Net interest margin (Year-to-date) 3.79 3.80 3.80 3.84 3.82
(1) All per share financial information has been restated to reflect the effect
of the 3-for-2 stock split.
(2) Noninterest expense divided by sum of taxable equivalent net interest
income plus noninterest income, excluding investment securities gains
(losses), net, and asset sales gains (losses), net.
Net Interest Income and Net Interest Margin
Net interest income on a taxable equivalent basis for the nine months ended
September 30, 2004, was $413.4 million, an increase of $11.1 million or 2.7%
over the comparable period last year. As indicated in Tables 2 and 3, the $11.1
million increase in taxable equivalent net interest income was attributable to
favorable volume changes (with balance sheet growth and differences in the mix
of average earning assets and average interest-bearing liabilities adding $19.1
million to taxable equivalent net interest income), offset partly by unfavorable
rate variances (as the impact of changes in the interest rate environment
reduced taxable equivalent net interest income by $8.0 million).
The net interest margin for the first nine months of 2004 was 3.79%, down 3
basis points ("bp") from 3.82% for the comparable period in 2003. The decrease
was attributable to a 3 bp lower contribution from net free funds (particularly
reflecting the impact of the lower cost of funds in 2004 on the value of net
free funds) as the interest rate spread was unchanged (the net of a 29 bp
decrease in both the yield on earning assets and the cost of interest-bearing
liabilities).
Interest rates were relatively stable and historically low during 2003 and the
first half of 2004, with one interest rate decrease of 25 bp during June 2003
compared to three interest rate increases of 25 bp each occurring in the second
and third quarters of 2004. The average Federal funds rate of 1.14% for
year-to-date 2004 was almost level with the 1.16% average for year-to-date 2003
(2 bp lower), however the Federal funds rate at September 30, 2004 was 1.75%, up
75 bp from 1.00% at September 30, 2003.
The yield on earning assets was 5.12% for year-to-date 2004, down 29 bp from the
comparable nine-month period last year. The average loan yield was down 29 bp to
5.18%, as competitive pricing on new and refinanced loans and the repricing of
variable rate loans in the lower interest rate environment from June 2003
through June 2004 put downward pressure on loan yields. The average yield on
investments and other earning assets decreased 22 bp to 4.96%, impacted by
faster prepayments (particularly on mortgage-related securities) and increased
investments in the lower rate environment.
23
The cost of interest-bearing liabilities was 1.58% for year-to-date 2004, down
29 bp compared to the first nine months of 2003, aided by the lower average rate
environment during the first half of the year and a larger mix of lower costing
short-term borrowings in wholesale funding. The average cost of interest-bearing
deposits was 1.38%, down 29 bp from year-to-date 2003, benefiting from lower
rates on interest-bearing deposit products in general, as well as from a larger
mix of lower-costing transaction accounts. The cost of wholesale funding
(comprised of short-term borrowings and long-term funding) was 1.94%, down 26 bp
from year-to-date 2003, largely a function of mix, as higher-priced long-term
advances matured and new, lower-costing funding was added. Average short-term
borrowings grew to 57% of wholesale funding, at an average cost 1.27% for
year-to-date 2004, compared to 51% and an average cost of 1.38% for the
comparable 2003 period. Average long-term funding fell to 43% (average cost
2.83%) of wholesale funding in 2004, from 49% (average cost 3.07%) in 2003.
Average earning assets increased by $466 million (3.3%) over the comparable
nine-month period last year. Average investments and other earning assets were
up $569 million (notably mortgage-related securities), while average loans
decreased $103 million (representing 73.4% of average earning assets for
year-to-date 2004 compared to 76.6% for year-to-date 2003). Decreases in average
residential real estate, which includes mortgage loans held for sale, (down $282
million) and consumer loans (down $34 million) were partially offset by
increases in commercial loans (up $213 million). Commercial loans grew to
represent 62.9% of average loans for the first nine months of 2004 compared to
60.3% for the comparable period in 2003.
Average interest-bearing liabilities increased $304 million (2.5%) over the
comparable period of 2003, and net free funds increased $162 million, both
supporting the growth in earning assets. Average noninterest-bearing demand
deposits (a component of net free funds) increased by $106 million, or 6.4%. The
growth in average interest-bearing liabilities was comprised primarily of growth
in interest-bearing deposits (up $359 million, or 4.8%), which reduced the need
for wholesale funding. Wholesale funding was down $55 million (representing
35.5% of average interest-bearing liabilities for year-to-date 2004 compared to
36.9% for year-to-date 2003), notably in long-term funding, which decreased $275
million to represent 15.2% of average interest-bearing liabilities for
year-to-date 2004 versus 17.9% for year-to-date 2003.
24
- --------------------------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)
- --------------------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2004 Nine Months ended September 30, 2003
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------
Earning assets:
Loans: (1) (2) (3)
Commercial $ 6,668,508 $ 246,765 4.86% $ 6,455,171 $ 249,509 5.10%
Residential real estate 3,265,419 133,842 5.46 3,547,875 154,138 5.79
Consumer 675,654 35,216 6.96 709,692 38,660 7.28
------------------------ ------------------------
Total loans 10,609,581 415,823 5.18 10,712,738 442,307 5.47
Investments and other (1) 3,843,013 142,935 4.96 3,273,806 127,272 5.18
------------------------ ------------------------
Total earning assets 14,452,594 558,758 5.12 13,986,544 569,579 5.41
Other assets, net 1,043,304 1,026,672
------------ ------------
Total assets $ 15,495,898 $ 15,013,216
============ ============
Interest-bearing liabilities:
Interest-bearing deposits:
Savings deposits $ 927,876 $ 2,528 0.36% $ 930,105 $ 3,997 0.57%
Interest-bearing demand deposits 2,366,312 14,186 0.80 1,708,600 10,995 0.86
Money market deposits 1,530,856 9,247 0.81 1,640,707 11,694 0.95
Time deposits, excluding Brokered CDs 2,844,147 53,227 2.50 3,062,576 64,825 2.83
------------------------ ------------------------
Total interest-bearing
deposits,excluding Brokered CDs 7,669,191 79,188 1.38 7,341,988 91,511 1.67
Brokered CDs 216,371 2,213 1.37 184,494 2,364 1.71
------------------------ ------------------------
Total interest-bearing deposits 7,885,562 81,401 1.38 7,526,482 93,875 1.67
Wholesale funding 4,347,031 64,001 1.94 4,402,081 73,406 2.20
------------------------ ------------------------
Total interest-bearing liabilities 12,232,593 145,402 1.58 11,928,563 167,281 1.87
------- -------
Noninterest-bearing demand deposits 1,750,576 1,644,871
Other liabilities 121,613 141,548
Stockholders' equity 1,391,116 1,298,234
------------ ----------
Total liabilities and equity $ 15,495,898 $ 15,013,216
============ ============
Interest rate spread 3.54% 3.54%
Net free funds 0.25 0.28
---- ----
Taxable equivalent net interest
income and net interest margin $ 413,356 3.79% $ 402,298 3.82%
================= ==================
Taxable equivalent adjustment 19,186 18,673
--------- ---------
Net interest income $ 394,170 $ 383,625
========= =========
(1) The yield on tax exempt loans and securities is computed on a taxable
equivalent basis using a tax rate of 35% for all periods presented.
(2) Nonaccrual loans and loans held for sale are included in the average
balances.
(3) Interest income includes net loan fees.
- -------------------------------------------------------------------------------------------------------------------
25
- -------------------------------------------------------------------------------------------------------------------
TABLE 2 (continued)
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)
- -------------------------------------------------------------------------------------------------------------------
Three Months ended September 30, 2004 Three Months ended September 30, 2003
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------------
Earning assets:
Loans: (1) (2) (3)
Commercial $ 6,787,476 $ 85,971 4.96% $ 6,565,202 $ 83,321 4.97%
Residential real estate 3,251,564 44,886 5.49 3,541,464 49,538 5.55
Consumer 669,661 11,775 6.99 707,103 12,657 7.10
------------------------ ------------------------
Total loans 10,708,701 142,632 5.25 10,813,769 145,516 5.30
Investments and other (1) 3,980,213 48,238 4.85 3,314,933 42,468 5.12
------------------------ ------------------------
Total earning assets 14,688,914 $ 190,870 5.14 14,128,702 187,984 5.26
Other assets, net 1,041,537 1,023,974
------------ ------------
Total assets $ 15,730,451 $ 15,152,676
============ ============
Interest-bearing liabilities:
Interest-bearing deposits:
Savings deposits $ 945,881 $ 844 0.35% $ 935,402 $ 1,113 0.47%
Interest-bearing demand deposits 2,338,492 4,615 0.79 1,938,111 4,070 0.83
Money market deposits 1,516,812 3,294 0.86 1,586,092 3,430 0.86
Time deposits, excluding Brokered
CDs 2,771,249 17,488 2.51 3,120,919 21,213 2.70
------------------------ ------------------------
Total interest-bearing
deposits, excluding Brokered CDs 7,572,434 26,241 1.38 7,580,524 29,826 1.56
Brokered CDs 235,844 950 1.60 146,670 501 1.36
------------------------ ------------------------
Total interest-bearing deposits 7,808,278 27,191 1.39 7,727,194 30,327 1.56
Wholesale funding 4,573,129 24,068 2.07 4,228,226 22,516 2.09
------------------------ ------------------------
Total interest-bearing
liabilities 12,381,407 51,259 1.64 11,955,420 52,843 1.75
------ ------
Noninterest-bearing demand deposits 1,813,279 1,757,806
Other liabilities 116,165 134,467
Stockholders' equity 1,419,600 1,304,983
------------ ------------
Total liabilities and equity $ 15,730,451 $ 15,152,676
============ ============
Interest rate spread 3.50% 3.51%
Net free funds 0.26 0.27
---- ----
Taxable equivalent net interest
income and net interest margin $ 139,611 3.76% $ 135,141 3.78%
================= =================
Taxable equivalent adjustment 6,395 6,165
--------- ---------
Net interest income $ 133,216 $ 128,976
========= =========
- -------------------------------------------------------------------------------------------------------------------
26
- -------------------------------------------------------------------------------------------------------
TABLE 3
Volume / Rate Variance - Taxable Equivalent Basis
($ in Thousands)
- -------------------------------------------------------------------------------------------------------
Comparison of
Nine Months ended September 30, 2004 versus 2003
Variance Attributable to
Income/Expense ------------------------
Variance (1) Volume Rate
- -------------------------------------------------------------------------------------------------------
INTEREST INCOME: (2)
Loans:
Commercial $ (2,744) $ 8,391 $ (11,135)
Residential real estate (20,296) (10,700) (9,596)
Consumer (3,444) (1,635) (1,809)
----------------------------------------
Total loans (26,484) (3,944) (22,540)
Investments and other 15,663 21,341 (5,678)
----------------------------------------
Total interest income $ (10,821) $ 17,397 $ (28,218)
INTEREST EXPENSE:
Interest-bearing deposits:
Savings deposits $ (1,469) $ (10) $ (1,459)
Interest-bearing demand deposits 3,191 3,995 (804)
Money market deposits (2,447) (743) (1,704)
Time deposits, excluding brokered CDs (11,598) (4,400) (7,198)
----------------------------------------
Interest-bearing deposits, excluding brokered CDs (12,323) (1,158) (11,165)
Brokered CDs (151) 371 (522)
----------------------------------------
Total interest-bearing deposits (12,474) (787) (11,687)
Wholesale funding (9,405) (895) (8,510)