Associated of Wisconsin Under Pressure to Cut Costs

Back in 1997, Associated Banc-Corp of Green Bay, Wis., told investors that its acquisition of First Financial Corp. in Stevens Point would not be a slash-and-burn deal.

The combined company would be very cautious in cutting expenses, said Associated's chairman and chief executive, H.B. Conlon.

True to its word, the $11.3 billion-asset company said last month that merger and technology expenses continued to eat into earnings in 1998. What's more, the company did not make up for the higher expenses with additional revenue growth.

Associated earned $38 million in the fourth quarter on an operating basis, up 5% from the previous year. It lost $54 million in the 1997 quarter after merger and other one-time charges.

The company said while it met its own earnings estimates in 1998, it expects earnings to rise only modestly this year, because of slow revenue growth and high expenses. It said it expects revenues to improve and expenses to moderate in the second half of the year, though.

"The pressure is clearly on them," said Joseph Roberto, an analyst with Keefe, Bruyette & Woods Inc. "They have some time, but clearly the clock is ticking."

"There's kind of a double whammy where there's been a delay in revenue growth and a delay in expense savings," said Gerry Cronin, an analyst with McDonald Investments Inc.

Associated's go-slow approach to integrating its large merger is an anomaly. It is the same approach Norwest Corp. is using in its merger with Wells Fargo & Co., and opinions are split as to whether it is better. In the case of Associated, the deal has disappointed.

"The deal isn't on track. That's pretty obvious," said Bradley Vander Ploeg of Everen Securities Inc., Chicago. Mr. Vander Ploeg reduced his earnings estimates for the company this week and downgraded its stock. "It's been a difficult cultural integration."

"The First Financial deal is a microcosm of what's going to happen with the bigger mergers done last year," Mr. Cronin said. "You've got a retail bank and a commercial bank, and you're trying to bring them together. The problem is you have tremendous cultural differences."

The First Financial deal was unusual. Associated, a bank holding company, bought a larger savings and loan and billed it as a merger of equals. And despite their overlapping operations, the company cut only 10% of costs.

Though the merger closed in October 1997, First Financial's computer systems were not converted to Associated's until this past November.

With its large mortgage operation, Associated says it expects to be hurt by people who pay off their mortgages early in 1999.

Mr. Cronin said he believes the biggest problem has been adding Associated's commercial lending expertise at former First Financial offices. That is one of the company's goals for 1999. Mr. Cronin said he believes the company can still get itself on track.

Associated may not be in any immediate threat of being taken over. Companies that might be interested, including Wells Fargo & Co. or Firstar Corp., are preoccupied with their own mergers. And U.S. Bancorp, which would like to be bigger in Wisconsin, may be less interested because of Associated's large presence in rural areas and small towns. U.S. Bancorp's strategy is to target bigger cities.

Mr. Conlon has favored staying independent and he has a board to back him. "Never underestimate the power Nick Conlon has over his board," said one observer.

But Mr. Conlon is expected to retire in 2000, and no one has been tapped to succeed him.

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