SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ---------- EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-5519 Associated Banc-Corp (Exact name of registrant as specified in its charter) Wisconsin 39-1098068 (State or other jurisdiction of (IRS employer identification no.) incorporation or organization) 112 North Adams Street, Green Bay, Wisconsin 54301 (Address of principal executive offices) (Zip code) (414) 433-3166 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of registrant's common stock, par value $0.01 per share, at September 30, 1996, was 18,362,669 shares. ASSOCIATED BANC-CORP TABLE OF CONTENTS Page No. PART I. Financial Information Item 1. Financial Statements: Consolidated Statements of Financial Condition - September 30, 1996 and December 31, 1995 Consolidated Statements of Income - Three and Nine Months Ended September 30, 1996 and 1995 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1996 and 1995 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: ASSOCIATED BANC-CORP Consolidated Statements of Financial Condition (Unaudited) September 30 December 31 1996 1995 ---- ---- (In Thousands) ASSETS Cash and due from banks $ 209,174 $ 214,411 Interest-bearing deposits in other financial institutions 665 652 Federal funds sold and securities purchased under agreements to resell 17,115 45,100 Trading account securities --- --- Investment securities: Held to maturity (Fair value of approximately $396,265 and $399,697 at September 30, 1996, and December 31, 1995, respectively) 397,734 398,233 Available for sale-stated at fair value 425,749 397,476 Loans, net of unearned income 3,090,358 2,747,936 Less: Allowance for possible loan losses (46,760) (41,614) --------- --------- Loans, net 3,043,598 2,706,322 Premises and equipment 73,763 59,300 Other assets 114,497 101,007 --------- --------- Total assets $4,282,295 $3,906,969 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing deposits $ 609,752 $ 619,294 Interest-bearing deposits 2,792,718 2,526,382 --------- --------- Total deposits 3,402,470 3,145,676 Short-term borrowings 422,125 363,726 Long-term borrowings 21,863 22,064 Accrued expenses and other liabilities 54,409 50,741 --------- --------- Total liabilities $3,900,867 $3,566,675 Commitments and contingent liabilities --- --- Stockholders' equity: Preferred stock --- --- PART I. Financial Information September 30 December 31 1996 1995 ---- ---- (In Thousands) Common stock (Par value $0.01 per share, authorized 48,000,000 shares, issued 18,375,985 and 17,695,695 shares, respectively) 184 177 Surplus 164,544 158,642 Retained earnings 212,648 179,153 Net unrealized gains (losses) on securities available for sale 4,565 6,109 Less: Treasury stock (13,316 and 212,673 shares at cost, respectively) (513) (3,787) ------- ------- Total stockholders' equity 381,428 340,294 ------- ------- Total liabilities and stockholders' equity $4,282,295 $3,906,969 ========= ========= (See accompanying notes to Consolidated Financial Statements.) ITEM 1. Financial Statements continued: ASSOCIATED BANC-CORP Consolidated Statements of Income (Unaudited) For the Three Months For the Nine Months Ended September 30 Ended September 30 1996 1995 1996 1995 ---- ---- ---- ---- (In Thousands) (In Thousands) INTEREST INCOME Interest and fees on loans $66,207 $59,083 $193,987 $170,291 Interest and dividends on investment securities: Taxable 10,082 9,618 29,716 29,059 Tax-exempt 2,120 1,912 6,708 5,664 Interest on deposits in other financial institutions 16 21 45 37 Interest on federal funds sold and securities purchased under agreements to resell 223 740 905 1,581 ------ ------ ------ ------- Total interest income 78,648 71,374 231,361 206,632 ------ ------ ------- ------- INTEREST EXPENSE Interest on deposits 30,629 27,833 90,322 77,591 Interest on short-term borrowings 4,949 4,296 14,499 13,939 Interest on long-term borrowings 385 354 1,419 697 ------ ------ ------ ------ Total interest expense 35,963 32,483 106,240 92,227 ------ ------ ------- ------- NET INTEREST INCOME 42,685 38,891 125,121 114,405 Provision for possible loan losses 1,011 677 3,055 2,403 ------ ------ ------- ------ Net interest income after provision for possible loan losses 41,674 38,214 122,066 112,002 ------ ------ ------- ------ NONINTEREST INCOME Trust service fees 6,175 5,460 18,534 16,346 Service charges on deposit accounts 3,218 3,022 9,222 8,874 Investment securities gains, net 52 92 428 226 Mortgage banking activity 2,913 2,451 9,728 5,212 Retail investment income 628 525 2,025 1,537 Other 2,605 2,888 7,536 8,692 ------ ------ ------ ------ Total noninterest income 15,591 14,438 47,473 40,887 ------ ------ ------ ------ ITEM 1. Financial Statements continued: For the Three Months For the Nine Months Ended September 30 Ended September 30 1996 1995 1996 1995 ---- ---- ---- ---- (In Thousands) (In Thousands) NONINTEREST EXPENSE Salaries and employee benefits 18,563 17,422 55,972 50,784 Net occupancy expense 2,796 2,652 8,375 7,966 Equipment rentals, depreciation and maintenance 2,037 1,635 5,740 4,943 Data processing expense 2,076 2,091 6,198 6,000 Stationery and supplies 755 742 2,442 2,368 Business development and advertising 876 721 2,626 2,465 FDIC expense 14 35 50 3,299 Other 7,345 7,105 22,744 19,316 ------ ------ ------- ------ Total noninterest expense 34,462 32,403 104,147 97,141 ------ ------ ------- ------ Income before income taxes 22,803 20,249 65,392 55,748 Income tax expense 8,143 7,429 23,210 19,941 ------ ------ ------ ------ NET INCOME $14,660 $12,820 $42,182 $35,807 ====== ====== ====== ====== Per share Net income .80 .73 2.30 2.05 Dividends .29 .27 .85 .70 Weighted average shares outstanding 18,359 17,469 18,361 17,471 (See accompanying notes to Consolidated Financial Statements.) ITEM 1. Financial Statements continued: ASSOCIATED BANC-CORP Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 1996 1995 ---- ---- (In Thousands) OPERATING ACTIVITIES Net income $42,182 $35,807 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 3,055 2,403 Depreciation and amortization 6,246 5,504 Amortization of purchased mortgage servicing rights 1,721 769 Amortization of goodwill 2,304 2,191 Net amortization and accretion of premiums and discounts 332 881 Gain on sales of investment securities, net (428) (226) Increase in interest receivable and other assets (3,117) (10,910) Increase in interest payable and other liabilities 2,473 9,820 Amortization of loan fees and costs (1,097) (1,264) Purchases of trading account securities (5) (171) Proceeds from sales of trading account securities 33 214 Net (increase) decrease in mortgage loans acquired for resale 12,116 (12,027) Gain on sales of mortgage loans held for resale, net (2,434) (353) Other, net (186) (436) ------ ------ Net cash provided by operating activities $63,195 $32,202 INVESTING ACTIVITIES Net decrease in federal funds sold and securities purchased under agreements to resell $42,560 $39,885 Net increase in interest-bearing deposits in other financial institutions (13) (350) Purchases of held to maturity securities (87,295) (83,080) Purchases of available for sale securities (172,108) (61,290) Proceeds from sales of available for sale securities 2,776 2,080 Maturities of held to maturity securities 99,984 82,395 Maturities of available for sale securities 190,714 85,660 Net increase in loans (198,125) (203,529) Proceeds from sales of other real estate 1,138 1,981 Purchases of premises and equipment, net of disposals (17,576) (3,701) Purchase of mortgage servicing rights (4,912) (5,978) Net cash from acquisitions 461 (747) Payments for other real estate additions --- (9) ------- ------ Net cash used by investing activities $(142,396) $(146,683) ITEM 1. Financial Statements continued: Nine Months Ended September 30, 1996 1995 ---- ---- (In Thousands) FINANCING ACTIVITIES Net increase in deposits $42,526 $98,697 Net increase (decrease) in short-term borrowings 43.816 (23,658) Proceeds from issuance of long-term borrowings 3,500 --- Cash dividends (15,253) (12,469) Proceeds from exercise of stock options 704 1,342 Purchase of treasury stock (1,329) (2,085) ------ ------ Net cash provided by financing activities $73,964 $61,827 ------ ------ Net decrease in cash and cash equivalents $(5,237) $(52,654) Cash and cash equivalents beginning of period 214,411 210,497 ------ ------ Cash and cash equivalents at end of period $209,174 $157,843 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $105,608 $85,532 Income taxes 25,042 23,603 Supplemental schedule of noncash investing activities: Loans transferred to other real estate $1,229 $1,152 Loans made in connection with the disposition of other real estate 162 167 (See accompanying notes to Consolidated Financial Statements.) ITEM 1. Financial Statements continued: ASSOCIATED BANC-CORP Notes to Consolidated Financial Statements NOTE 1: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Associated Banc-Corp s ( Corporation ) financial position, results of its operations and cash flows for the periods presented. All adjustments necessary to the fair presentation of the financial statements are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. NOTE 2: The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The Corporation has not changed its accounting and reporting policies from those stated in the Corporation's 1995 Annual Report on Form 10- K. NOTE 3: BUSINESS COMBINATIONS The following table summarizes completed transactions during 1995 and 1996 (through September 30): <TABLE> Consideration Paid -------------------- <CAPTION> Cash Shares of Total Date Method of (In Common Assets (In Intangibles Name of Acquired Acquired Accounting Millions) Stock Millions) (In Millions) - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Great Northern 7/95 Purchase $1.2 --- (A) $1.5 Mortgage Company Rolling Meadows, IL (D) GN Bancorp, Inc. 8/95 Pooling of --- 747,626 130 --- Chicago, IL (B) interests SBL Capital Bank 3/96 Pooling of --- 332,957 68 --- Shares, Inc. interests Lodi, WI (C) Greater Columbia 4/96 Pooling of --- 967,634 211 --- Bancshares, Inc. interests Portage, WI (B) F&M Bankshares of 7/96 Pooling of --- 534,990 139 --- Reedsburg, Inc. interests Reedsburg, WI (C) (E) Mid-America 7/96 Purchase $7.8 --- 39 $1.7 National Bancorp, Inc. Chicago, IL (D) - --------------------------------------------------------------------------------------------- </TABLE> (A) The Corporation acquired approximately $535 million in mortgage servicing as part of this acquisition. The consolidated financial statements include the results of operations since the date of acquisition. (B) The transaction was accounted for as a pooling of interests. All consolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest period presented. (C) The transaction, accounted for using the pooling-of-interests method, was not material to prior years' reported prior years operating results and, accordingly, previously reported prior years results were not restated. (D) The consolidated financial statements include the results of operations since the date of acquisition. (E) See Note 7. NOTE 4: INVESTMENT SECURITIES The amortized cost and fair values of investment securities held to maturity and securities available for sale for the periods indicated were as follows: Investment Securities Held to Maturity - ------------------------------------------------------------------------------- (In thousands) September 30, 1996 - ------------------------------------------------------------------------------- Amortized Cost Fair Value - ------------------------------------------------------------------------------- U.S. treasury and federal agency securities $ 160,069 $ 159,030 Obligations of states and political subdivisions 170,588 170,139 Other securities 67,077 67,096 - ------------------------------------------------------------------------------- Total $ 397,734 $ 396,265 ============================================================================== Investment Securities Held to Maturity - ------------------------------------------------------------------------------- (In thousands) December 31, 1995 - ------------------------------------------------------------------------------- Amortized Cost Fair Value - ------------------------------------------------------------------------------- U.S. treasury and federal agency securities $ 172,548 $ 172,484 Obligations of states and political subdivisions 169,923 170,614 Other securities 55,762 56,599 - ------------------------------------------------------------------------------- Total $ 398,233 $ 399,697 =============================================================================== Investment Securities Available for Sale - ------------------------------------------------------------------------------- (In thousands) September 30, 1996 - ------------------------------------------------------------------------------- Amortized Cost Fair Value - ------------------------------------------------------------------------------- U.S. treasury and federal agency securities $ 396,710 $ 395,307 Other securities 21,871 30,442 - ------------------------------------------------------------------------------- Total $ 418,581 $ 425,749 =============================================================================== (In thousands) December 31, 1995 - ------------------------------------------------------------------------------- Amortized Cost Fair Value - ------------------------------------------------------------------------------- U.S. treasury and federal agency securities $ 368,217 $ 371,414 Other securities 19,507 26,062 - ------------------------------------------------------------------------------- Total $ 387,724 $ 397,476 =============================================================================== NOTE 5: ALLOWANCE FOR POSSIBLE LOAN LOSSES A summary of the changes in the allowance for possible loan losses for the periods indicated is as follows: For the Nine For the Year Months Ended Ended September 30, December 31, 1996 1995 ---- ---- ($ in Thousands) Balance at beginning of period $ 41,614 $ 39,380 Balance related to acquisition 3,511 --- Provisions charged to operating expense 3,055 4,291 Loan losses net of recoveries (1,420) (2,057) ----- ----- Balance at end of period $ 46,760 $ 41,614 NOTE 6: MORTGAGE SERVICING RIGHTS Effective January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65 . Accordingly, the Corporation recognizes as separate assets (capitalized) the rights to service mortgage loans for others whether the servicing rights are acquired through purchases or loan origination. The fair value of capitalized mortgage servicing rights is based upon the present value of estimated expected future cash flows. Based upon current fair values, capitalized mortgage servicing rights are assessed periodically for impairment, which is recognized in the statement of income during the period in which impairment occurs by establishing a corresponding valuation allowance. For purposes of performing its impairment evaluation, the Corporation stratifies its portfolio of capitalized mortgage servicing rights on the basis of certain risk characteristics. Changes in capitalized mortgage servicing rights for the nine months ended September 30, 1996, were: ($ in Thousands) Balance at 12/31/95 $ 7,239 Capitalized mortgage servicing rights 4,912 Amortization (1,721) Sales of servicing rights --- Allowance for impairment (1) ------ Balance at 9/30/96 $ 10,429 ====== NOTE 7: PER SHARE COMPUTATIONS Per share computations are computed based on the weighted average number of common shares outstanding for the three and nine months ended September 30, 1996, and 1995. The Corporation issued 500,995 shares of common stock to a wholly-owned subsidiary as part of the acquisition of F&M Bankshares of Reedsburg, Inc. These shares are not reflected on the Consolidated Statements of Financial Condition as issued or outstanding. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on information about the corporation's financial condition and results of operations that are not otherwise apparent from the consolidated financial statements included in this report. Reference should be made to those statements presented elsewhere in this report for an understanding of the following discussion and analysis. EARNINGS The acquisitions of F&M Bankshares of Reedsburg, Inc. (primary subsidiary was Farmers & Merchants Bank, now known as Associated Bank Reedsburg) and Mid- America National Bancorp Inc. (primary subsidiary was Mid-America National Bank of Chicago, merged into Associated Bank Chicago on August 23) were completed on July 19 and July 31, 1996, respectively. The Reedsburg acquisition was accounted for using the pooling-of-interests method. However, this transaction was not material to prior years' reported operating results and, accordingly, previously reported prior years results were not restated. The operating results of Associated Banc-Corp include Associated Bank Reedsburg since January 1, 1996. The Mid-America acquisition was accounted for using the purchase method. The consolidated financial statements include the results of operations of Mid-America since the date of acquisition. The acquisition of Greater Columbia Bancshares, Inc. (primary subsidiary was The First National Bank of Portage, now known as Associated Bank Portage) was completed on April 5, 1996. This acquisition was accounted for using the pooling-of-interests method. Therefore, all consolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest reporting period. On March 1, 1996 SBL Capital Bankshares was acquired (primary subsidiary was The State Bank of Lodi, now known as Associated Bank Lodi). This acquisition was accounted for using the pooling-of-interests method. This transaction was not material to prior years' reported operating results and, accordingly, previously reported prior years results were not restated. The operating results of Associated Banc-Corp include Associated Bank Lodi since January 1, 1996. Net Income Quarterly Trends ($ in Thousands) - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Net Income $14,660 $14,128 $13,394 $12,221 $12,820 E.P.S. 0.80 0.77 0.73 0.70 0.73 Return on Average Equity - Quarter 15.56% 15.51% 14.99% 14.43% 15.68% Return on Average Equity - Year to Date 15.36% 15.25% 14.99% 15.03% 15.25% Return on Average Assets - Quarter 1.39% 1.38% 1.33% 1.28% 1.37% Return on Average Assets - Year to Date 1.37% 1.36% 1.33% 1.31% 1.32% - ------------------------------------------------------------------------------- Net Income for the third quarter of 1996 increased to $14.7 million, up 14.4% over 1995 third quarter net income of $12.8 million. Earnings per share increased to $.80 for the third quarter of 1996, an increase of 9.6% over earnings per share of $.73 in the third quarter of 1995. Net Income for the first nine months of 1996 increased to $42.2 million, up 17.8% over the first nine months of 1995 net income of $35.8 million. Earnings per share for the first nine months of 1996 increased to $2.30, up 12.2% over 1995 earnings per share of $2.05. Return on average assets (ROA) for the third quarter of 1996 was 1.39%, up from 1.37% during the same period last year. The 2 basis point increase in ROA was achieved as net income grew 14.4%, outpacing average asset growth of 12.9%, as compared to the third quarter last year. ROA for the first nine months of 1996 improved to 1.37% compared to 1.32% for the first nine months of 1995. ROA also improved when comparing the third quarter of 1996 to the second quarter of 1996 (ROA of 1.38%), as net income increased by 3.8% while average assets increased 1.8%. Return on average equity (ROE) for the third quarter of 1996 was 15.56%, down slightly from the 15.68% reported during the same period last year. ROE for the first nine months of 1996 improved slightly to 15.36%, up from 15.25% in the same period last year. ROE also improved when comparing the third quarter of 1996 (15.56%) to the second quarter of 1996 (15.51%). NET INTEREST INCOME Third Quarter 1996 compared to Second Quarter 1996: Taxable equivalent net interest income in the third quarter of 1996 was $44.0 million, an increase of $1.0 million over the second quarter net interest income of $43.0 million. The increase in net interest income was attributable to larger volumes of earning assets. The net change (change in interest income from incremental volumes of earning assets less the change in interest expense from incremental volumes of interest-bearing liabilities) contributed $1.0 million of net interest income in the third quarter of 1996 compared to the second quarter of 1996. A negative rate variance of $460,000 (change in interest income from incremental yields on earning assets less the change in interest expense from incremental rates on interest-bearing liabilities) occurred in the third quarter. The majority of this variance was attributable to a 4 basis point decline on the yield for total earning assets. Offsetting the negative rate variance was a positive contribution of $473,000, attributable to the extra day in the third quarter (92 days) compared to the second quarter (91 days). Net Interest Income Tax Equivalent Basis ($ in Thousands) - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Interest Income $78,648 $76,908 $75,805 $72,746 $71,374 Tax Equivalent Adjustment 1,338 1,409 1,352 1,092 1,164 ----- --- --- --- --- Tax Equivalent Interest Income 79,986 78,317 77,157 73,838 72,538 Interest Expense 35,963 35,308 34,968 32,872 32,483 ------ ------ ------ ------ ------ Tax Equivalent Net Interest Income $44,023 $43,009 $42,189 $40,966 $40,055 - ------------------------------------------------------------------------------ The net interest margin for the third quarter of 1996 was 4.51% compared with 4.52% in the second quarter of 1996. The slight decrease in the net interest margin for the third quarter of 1996 compared to the second quarter of 1996 is primarily attributable to a larger decrease in the earning asset yield when compared to the interest-bearing liability cost decrease. The interest rate spread (difference between yield on earning assets and rate on interest-bearing liabilities) decreased slightly by 1 basis point from the second quarter to 3.71%. The yield on earning assets declined 4 basis points while the rate on interest-bearing liabilities decreased by 3 basis points in the third quarter. Net Interest Margin Quarterly Trends Quarterly Info Only) - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Yield on Earning Assets 8.19% 8.23% 8.25% 8.33% 8.33% Cost of Interest Bearing Liabilities 4.48 4.51 4.54 4.56 4.55 ---- ---- ---- ---- ---- Interest Rate Spread 3.71 3.72 3.71 3.77 3.78 Net Free Funds Contribution .80 .80 .80 .85 .82 --- --- --- --- --- Net Interest Margin 4.51 4.52 4.51 4.62 4.60 ==== ==== ==== ==== ==== Average Earning Assets to Average Assets 92.73 92.92 92.99 93.22 93.14 Free Funds Ratio 17.79 17.62 17.56 18.69 18.04 - ------------------------------------------------------------------------------- Average earning assets increased $59 million in the third quarter. Average loans to average deposits ratio declined slightly to 90.83% in the third quarter of 1996, down from 91.23% in the second quarter of 1996. The slight decrease is attributable to the Mid-America acquisition (loan to deposit ratio of 17.9% at acquisition date). Total average loans grew $59 million, or 7.9%, on an annualized basis, in the third quarter. The third quarter growth in average loans of $59 million was funded by increased time deposits (personal CDs and brokered CDs) of $15 million ($12 million from brokered CDs), increased balances of Savings, NOW and MMA of $46 million and increased net free funds of $17 million, offset by lower wholesale borrowings (funds purchased, repurchase agreements, FHLB borrowings and long- term borrowings) of $19 million. Third Quarter 1996 compared to Third Quarter 1995: Taxable equivalent net interest income in the third quarter of 1996 was $44.0 million, a significant increase of $4.0 million over the third quarter 1995 net interest income of $40.0 million. Excluding Lodi (net interest income in the third quarter of 1996 of $719,000) and Reedsburg (net interest income in the third quarter of 1996 of $1.2 million), net interest income would have increased by $2.1 million when compared to the third quarter of 1995. The increase in net interest income was attributable to larger volumes of earning assets, with the net change (change in interest income from incremental volumes of earning assets less the change in interest expense from incremental volumes of interest-bearing liabilities) contributing $5.1 million of net interest income in the third quarter of 1996 compared to the third quarter of 1995. This positive volume variance was reduced by a negative rate variance (change in interest income from incremental yields on earning assets less the change in interest expense from incremental rates on interest-bearing liabilities) of $1.0 million. The rate variance was comprised of a negative rate variance on loans of $2.0 million, offset by positive rate variances on investments ($111,000), interest-bearing deposits ($603,000) and other borrowings ($256,000). This indicates that the pricing pressure on loans has been partially offset by the pricing of retail deposits. The net interest margin for the third quarter of 1996 was 4.51% compared with 4.60% in the third quarter of 1995. Excluding Lodi and Reedsburg, the net interest margin would have been 4.55% for the third quarter of 1996, down only 5 basis points when compared to the third quarter of 1995. The interest rate spread (difference between yield on earning assets and rate on interest-bearing liabilities) decreased 7 basis points to 3.71% from the third quarter of 1995 at 3.78%. The yield on earning assets decreased by 14 basis points while the rate on interest-bearing liabilities decreased by 7 basis points compared to the third quarter of 1995. The contribution from net free funds decreased by 2 basis points from the third quarter of 1995. Combined, these factors lowered net interest margin by 9 basis points. Earning Asset and Interest Bearing Liability Volume Period Ending September 30 ($ in Thousands) - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Average Loans $3,049,213 $2,989,910 $2,903,438 $2,687,593 $2,624,199 Average Earnings Assets 3,885,182 3,825,789 3,760,453 3,517,687 3,455,798 Average Noninterest- Bearing Deposits 564,904 545,992 532,882 539,005 516,466 Average Interest- Bearing Deposits 2,792,245 2,731,350 2,714,068 2,513,125 2,500,191 Average Deposits 3,357,149 3,277,342 3,246,950 3,052,130 3,016,657 Average Interest- Bearing Liabilities 3,194,137 3,151,693 3,100,249 2,860,107 2,832,312 - ------------------------------------------------------------------------------- Average earning assets increased $429 million in the third quarter of 1996 over the third quarter of 1995. Earning asset growth was concentrated in loans as the average loans to average deposits ratio climbed to 90.83% in the third quarter of 1996, up from 86.99% in the third quarter of 1995. Average loans grew $425 million, or 16.2% in the third quarter of 1996 compared to the third quarter of 1995 (excluding $51 million of average loans at Lodi and $101 million at Reedsburg, loans grew internally 10.4% over the past 12 months). The growth in average loans since the third quarter of 1995 of $425 million was funded by increased time deposits (personal CDs and brokered CDs) of $186 million, increased Savings/NOW/MMA balances of $106 million, increased wholesale borrowings (funds purchased, repurchase agreements and FHLB borrowings and long-term borrowings) of $70 million and increased net free funds of $68 million offset by higher volumes of investments and short-term investments of $5 million. The average balance of brokered CDs declined $6 million in the third quarter of 1996 when compared to the third quarter of 1995. YTD Third Quarter 1996 compared to YTD Third Quarter 1995: Taxable equivalent net interest income in the first nine months of 1996 was $129.2 million, a significant increase of $11.5 million over the first nine months of 1995 net interest income of $117.7 million. Excluding Lodi (net interest income in the first nine months of 1996 of $2.1 million) and Reedsburg (net interest income in the first nine months of 1996 of $3.5 million), net interest income would have increased by $5.8 million when compared to the first nine months of 1995. The increase in net interest income was attributable to larger volumes of earning assets. The net change (change in interest income from incremental volumes of earning assets less the change in interest expense from incremental volumes of interest-bearing liabilities) contributed $14.2 million of net interest income in the first nine months of 1996 compared to the first nine months of 1995. This positive volume variance was reduced by a negative rate variance (change in interest income from incremental yields on earning assets less the change in interest expense from incremental rates on interest-bearing liabilities) of $2.8 million. The rate variance was comprised of a negative rate variance on loans of $4.1 million and interest-bearing deposits of $599,000, offset by positive rate variances on investments of $575,000 and other borrowings of $1.3 million. The net interest margin for the first nine months of 1996 was 4.51% compared with 4.65% in the first nine months of 1995. Excluding Lodi and Reedsburg, the net interest margin would have been 4.55% for the first nine months of 1996, or an 11 basis point decrease compared to the same period in 1995. The interest rate spread (difference between yield on earning assets and rate on interest-bearing liabilities) decreased 13 basis points to 3.71% from 3.84% compared to the first nine months of 1995. The yield on earning assets decreased by 8 basis points while the rate on interest-bearing liabilities increased by 5 basis points. The contribution from net free funds also decreased, by 1 basis point. Combined, these factors decreased net interest margin by 14 basis points. Average earning assets increased $440 million in the first nine months of 1996 over the first nine months of 1995. Average loans grew $422 million, in the first nine months of 1996 compared to the first nine months of 1995. The growth in average loans in the first nine months of 1996 of $422 million was funded by increased time deposits (personal CDs and brokered CDs) of $231 million ($19 million from brokered CDs), increased Savings/NOW/MMA balances of $92 million, increased wholesale borrowings (funds purchased, repurchase agreements and FHLB borrowings and long-term borrowings) of $58 million and increased net free funds of $58 million offset by higher volumes of investments and short-term investments of $17 million. ALLOWANCE FOR LOAN LOSSES The loan loss provision for the third quarter of 1996 was $1.0 million, an increase of $139,000 from the second quarter of 1996 and an increase of $334,000 over the third quarter of 1995. The provision for the first nine months of 1996 was $3.1 million, compared to $2.4 million in the first nine months of 1995. The increase in loan loss provision is attributable to the growth in total loans outstanding as the allowance is maintained above 1.50% of outstanding loans. Provision for Possible Loan Losses Quarterly Trends ($ in Thousands) - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Provision - Quarter $1,011 $872 $1,172 $1,888 $677 Provision - Year to Date 3,055 2,044 1,172 4,291 2,403 Net Charge-offs - Quarter 456 915 49 925 740 Net Charge-offs - Year 1,420 964 49 2,057 1,132 Allowance at Period End 46,760 46,049 46,092 41,614 40,651 Allowance at Period End Loans 1.51% 1.52% 1.57% 1.51% 1.52% Net Charge-offs to Average Loans (Annualized)-Quarter .06% .12% .01% .14% .11% Net Charge-offs to Average Loans (Annualized)-Year .06% .07% .01% .08% .06% - ------------------------------------------------------------------------------- As of September 30, 1996, the allowance for possible loan losses of $46.7 million represented 1.51% of total outstanding loans, the same as the 1.51% reported at December 31, 1995, and down slightly from 1.52% at September 30, 1995. Charge-offs for the quarter ending September 30, 1996 of $798,000 were reduced by recoveries of $342,000 creating net charge-offs of $456,000. This compares to net charge-offs of $740,000 in the third quarter of 1995 and net charge-offs of $915,000 in the second quarter of 1996. Net charge-offs to average loans of .06% (annualized) in the third quarter of 1996 compares to net charge-offs .12% (annualized) in the second quarter of 1996 and .11% (annualized) in the third quarter of 1995. Net charge-offs to average loans for the first nine months of 1996 of .06% compares to .06% for the first nine months of 1995. NONPERFORMING LOANS Management is committed to an aggressive non-accrual and problem loan identification philosophy. This philosophy is embodied through the monitoring and reviewing of credit policies and procedures to ensure that all problem loans are identified quickly and the risk of loss is minimized. Nonperforming loans are considered a leading indicator of future loan losses. Nonperforming loans are defined as non-accrual loans, loans 90 days or more past due but still accruing and restructured loans. Loans are normally placed in non-accrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact on the collectibility of principal or interest on loans, it is management's practice to place such loans on non-accrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectibility of the principal is in doubt, payments received are applied to loan principal. Loans past due 90 days or more but still accruing interest are also included in Nonperforming loans. Loans past due 90 days or more but still accruing are classified as such where the underlying loans are both well-secured (the collateral value is sufficient to cover principal and accrued interest) and in the process of collection. Also included in nonperforming loans are "restructured" loans. Restructured loans involve the granting of some concession to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate. Total nonperforming loans at September 30, 1996 were $20.2 million, an increase of $2.0 million from December 31, 1995 ($291,000 of the increase is attributable to Lodi and Reedsburg). The ratio of nonperforming loans to total loans at September 30, 1996 was .65% compared to .66% at December 31, 1995 and .70% at September 30, 1995. Other real estate owned totaled $1.7 million at September 30, 1996 compared with $1.6 million at December 31, 1995 and $1.9 million at September 30, 1995. Nonperforming Loans and Other Real Estate ($ in Thousands) - ------------------------------------------------------------------------------- 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 ------- ------- ------- -------- ------- Nonaccrual Loans $17,939 $15,156 $14,797 $15,105 $15,744 Accruing Loans Past Due 90 Days or More 1,646 3,442 2,172 1,320 1,751 Restructured Loans 576 1,325 1,180 1,704 1,228 ----- ----- ----- ----- ----- Total Nonperforming Loans $20,161 $19,923 $18,149 $18,129 $18,723 Nonperforming Loans as a Percent of Loans .65% .66% .62% .66% .70% Other Real Estate Owned $1,727 $1,833 $1,083 $1,600 $1,899 - ------------------------------------------------------------------------------- Impaired loans are defined as those loans where it is probable that all amounts due according to contractual terms, including principal and interest, will not be collected. The Corporation has determined that nonaccrual and restructured loans meet the definition. Impaired loans are measured at the fair value of the collateral, if the loan is collateral dependant, or alternatively at the present value of expected future cash flows. Interest income on impaired loans is recognized only at the time that cash is received, unless applied to reduce principal. At September 30, 1996, the recorded investment in impaired loans totaled $17.1 million. Included in this amount is $14.2 million of impaired loans that do not require a related allowance for possible loan losses and $1.0 million of impaired loans for which the related allowance for possible loan losses totaled $2.9 million. The average recorded investment in impaired loans during the nine months ended September 30, 1996, was approximately $13.4 million. Interest income recognized on a cash basis on impaired loans during the first nine months of 1996 totaled $553,000. The following table shows, for those loans accounted for on a non-accrual basis and restructured loans for the nine months ended September 30, 1996, the gross interest that would have been recorded if the loans had been current in accordance with their original terms and the amount of interest income that was included in net income for the period. For the Nine Months Ended September 30, 1996 - ------------------------------------------------------------------------------- ($ in Thousands) - ------------------------------------------------------------------------------- Interest income in accordance with original terms $ 1,508 Interest income recognized 614 ----- Reduction in interest income $ 894 === - ------------------------------------------------------------------------------- Potential problem loans are loans where there are doubts as to the ability of the borrower to comply with present repayment terms. The decision of management to place loans in this category does not necessarily mean that the corporation expects losses to occur, but that management recognizes that a higher degree of risk is associated with these performing loans. At September 30, 1996, potential problem loans totaled $55.2. The loans that have been reported as potential problem loans are not concentrated in a particular industry, but rather cover a diverse range of businesses, e.g. communications, wholesale trade, manufacturing, finance/insurance/real estate, and services. Management does not presently expect significant losses from credits in this category. LOAN CONCENTRATIONS Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. The Corporation's loans are widely diversified by borrower, industry group and area. At September 30, 1996, no concentrations existed in the Corporation's loan portfolio in excess of 10% of total loans. Real estate construction loans at September 30, 1996, totaled $200.3 million or only 6.5% of loans while agricultural loans were 1.1% of total loans. As of September 30, 1996, the Corporation did not have any cross-border outstandings to borrowers in any foreign country where such outstandings exceeded 1% of total assets. NONINTEREST INCOME Third Quarter 1996 compared to Second Quarter 1996: Noninterest income decreased $3,000 in the third quarter of 1996 when compared to the second quarter of 1996. Excluding investment security gains, noninterest income decreased $19,000, or 0.1% during the same time period. Income from mortgage banking activities decreased $165,000 and retail investment income decreased $137,000 in the third quarter while service charges on deposit accounts and miscellaneous other income increased $202,000 and $105,000, respectively. Noninterest Income Quarterly Trends ($ in Thousands) - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Trust Servicing Fees $6,175 $6,199 $6,160 $5,897 $5,460 Service Charges on Deposit Accounts 3,218 3,016 2,988 2,940 3,022 Mortgage Banking Activity 2,913 3,078 3,737 2,590 2,451 Retail Investment Income 628 765 632 563 525 Other 2,605 2,500 2,431 2,369 2,888 ----- ----- ----- ----- ----- Noninterest income excluding securities gains 15,539 15,558 15,948 14,359 14,346 Investment Security Gains, Net 52 36 340 104 92 ----- ----- ----- ----- ----- Total $15,591 $15,594 $16,288 $14,463 $14,438 - ---------------------------------------------------------------------------- Mortgage banking activity includes loan servicing fees, origination fees, underwriting fees and escrow waiver fees as well as the net gain or loss on the sale of mortgage loans to the secondary market. Income from these activities decreased $165,000 in the third quarter of 1996 compared to the second quarter of 1996. Increased revenues from servicing (up $61,000) were offset by lower origination fees ($112,000), underwriting fees ($82,000), escrow waiver fees ($20,000) and gain on sale of loans ($12,000). Service charges on deposit accounts increased 6.7%, or $202,000 in the third quarter. Increased OD/NSF fees (up $78,000) and service charges on business accounts (up $86,000) account for the majority of the increase. Retail investment income decreased 17.9%, or $137,000 in the third quarter. The decrease is attributable to lower levels of market activity in the third quarter compared to the second quarter. Other miscellaneous income, from a variety of sources, increased 4.2%, or $105,000 in the quarter. Areas showing increases were miscellaneous income (insurance recovery of $75,000), EFTS fees ($71,000), installment loan life/health/accident insurance fees ($28,000) and international income ($21,000). These increases were offset by lower nonaffiliate data processing income ($55,000) and miscellaneous commissions and fees ($47,000). Third Quarter 1996 compared to Third Quarter 1995: Noninterest income increased $1.2 million, or 8.0%, in the third quarter of 1996 when compared to the third quarter of 1995 (an increase of $938,000, or 6.5%, excluding Lodi and Reedsburg). Excluding investment security gains, noninterest income increased $1.2 million, or 8.3%, during the same time period. The largest contributors to this increase were trust service fees ($715,000), mortgage banking activity ($461,000), service charges on deposit accounts ($196,000) and retail investment income ($103,000) offset by a decrease in other miscellaneous income of $282,000. Trust fees grew 13.1%. This increase is reflective of the general market conditions prevalent during the past two years. Income from mortgage banking activity increased 18.8%, or $461,000, in the third quarter of 1996 compared to the same period last year. This increase was attributable to increased fees from larger servicing and origination volumes, as well as the adoption of SFAS 122 on January 1, 1996. The increase in servicing and origination volumes reflect strong residential lending markets during the last 15 months as well as the added volumes from the acquisition of Great Northern Mortgage in July of 1995. As a result of adopting SFAS 122, internally originated rights to service mortgage loans for others are now capitalized and amortized over the expected life of the loan servicing arrangement. The increase in income from mortgage banking activities was from servicing fees ($216,000), underwriting fees ($4,000) and gain on sale of loans to the secondary market ($492,000) offset by lower origination fee income ($244,000) and escrow waiver fees ($7,000). The impact of the adoption of SFAS 122 is a component of the increase from the gain on sale of loans. Service charges on deposit accounts increased 6.5%, or $196,000, over the third quarter of 1995. The increase is attributable to higher OD/NSF fees (up $118,000), service charges on personal accounts (up $49,000) and service charges on business accounts (up $30,000). Retail investment income increased by 19.6%, or $103,000, over the third quarter of 1995. The addition of new offices and staff helped account for this large increase. Other miscellaneous income decreased by $282,000, or 9.8%, when compared to the third quarter of 1995. Items contributing to this decrease were lower non- affiliate data processing income (down $208,000), real estate loan commitment fees (down $121,000), miscellaneous check charge income (down $75,000) and miscellaneous operating lease income (down $50,000). Offsetting these decreases were higher levels of international banking income (up $44,000) and EFTS fees (up $38,000). YTD Third Quarter 1996 compared to YTD Third Quarter 1995: Noninterest income increased $6.6 million, or 16.1%, in the first nine months of 1996 when compared to the same period last year (increased $4.8 million, or 11.7%, excluding Lodi, Reedsburg and Great Northern Mortgage). Excluding investment security gains, noninterest income increased $6.4 million, or 15.7%, during the same time period. The largest contributors to this increase were mortgage banking activity ($4.5 million), trust fees ($2.2 million), retail investment income ($488,000) and service charges on deposit accounts ($348,000) offset by a decrease in other miscellaneous income of $1.2 million. Income from mortgage banking activity increased 86.6%, or $4.5 million, in the first nine months of 1996 compared to the same period last year. This large increase was attributable to increased fees from larger servicing and origination volumes, as well as the adoption of SFAS 122 on January 1, 1996. The increase in servicing and origination volumes reflect the general market conditions during the last 15 months as well as the added volumes from the acquisition of Great Northern Mortgage in July of 1995. As a result of adopting SFAS 122, internally originated rights to service mortgage loans for others are now capitalized and amortized over the expected life of the loan servicing arrangement. The substantial increase in income from mortgage banking activities was from servicing fees ($1.1 million), origination fees ($526,000), underwriting fees ($533,000), escrow waiver fees ($121,000) and gain on sale of loans to the secondary market ($2.2 million). The impact of the adoption of SFAS 122 is a component of the increase from the gain on sale of loans. Trust fees grew 13.4%. This increase is reflective of the general market conditions prevalent during the past two years. Retail investment income increased by 31.8%, or $488,000, over the first nine months of 1995. The addition of new offices and staff helped account for this large increase. Service charges on deposit accounts increased 3.9%, or $348,000, over the first nine months of 1995. The increase is attributable to higher OD/NSF fees (up $188,000) and business overdrafts (up $200,000). Other miscellaneous income decreased by $1.2 million, or 13.3%, when compared to the first nine months of 1995. A $1.0 million insurance recovery was booked in the first nine months of 1995. Additionally, non-affiliate data processing income decreased by $393,000. This decrease was offset by international income (up $68,000), miscellaneous commissions and fees (up $151,000) and real estate loan late fees (up $127,000). NONINTEREST EXPENSE Third Quarter 1996 compared to Second Quarter 1996: Total noninterest expense decreased $2,000 in the third quarter of 1996 when compared to the second quarter of 1996. Equipment rentals, depreciation and maintenance expense increased $216,000 while salaries and employee benefits expense decreased $150,000 and stationery and supplies decreased $107,000. Noninterest Expense Quarterly Trends ($ in Thousands) - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Salaries and Employee Benefits $18,563 $18,713 $18,696 $17,391 $17,422 Net Occupancy Expense 2,796 2,831 2,748 2,500 2,652 Equipment Rentals, Depreciation and Maintenance 2,037 1,821 1,882 1,658 1,635 Data Processing Expense 2,076 2,018 2,104 1,909 2,091 Stationery and Supplies 755 862 825 808 742 Business Development and Advertising 876 872 878 806 721 FDIC Expense 14 24 12 331 35 Other 7,345 7,319 8,080 7,489 7,105 ------ ----- ----- ----- ----- Total $34,462 $34,460 $35,225 $32,892 $32,403 - ---------------------------------------------------------------------------- Equipment rentals, depreciation and maintenance expense increased 11.9%, or $216,000, in the third quarter. The increase is attributable to the increased depreciation on computer equipment purchased related to Project Associated (as described below) (up $143,000) and increased equipment repair expense (up $61,000). Full-time salaries and commissions/incentives decreased, in total, $226,000 in the third quarter. This accounted for the 0.8% decrease, or $150,000, in total salaries and employee benefits expense. Expense Control Quarterly Trends - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Efficiency Ratio - Quarter 57.86% 58.84% 60.59% 59.45% 59.56% Efficiency Ratio - Year 59.08% 59.71% 60.59% 60.84% 61.32% Expense Ratio - Quarter 1.94% 1.99% 2.06% 2.09% 2.07% Expense Ratio - Year 1.99% 2.02% 2.06% 2.19% 2.23% - ------------------------------------------------------------------------------ The efficiency ratio improved to 57.86% for the third quarter of 1996 compared to 58.84% for the second quarter of 1996. The improvement from the second quarter of 1996 was due to noninterest expenses remaining stable while net tax- equivalent income grew by 1.7%. The expense ratio improved to 1.94% for the third quarter of 1996 compared to 1.99% for the second quarter of 1996. Third Quarter 1996 compared to Third Quarter 1995: Total noninterest expense increased $1.2 million, or 8.0%, in the third quarter of 1996 when compared to the third quarter of 1995 (increased $1.1 million, or 3.3%, excluding Lodi and Reedsburg). Categories showing the largest increases were salaries and employee benefits ($1.1 million), equipment rentals, depreciation and maintenance expense ($402,000), other expense ($240,000), occupancy expense ($144,000) and business development and advertising expense ($155,000). In previous reports, we have commented on the Corporation's continued focus on improving service to its customers as well as achieving internal productivity gains. As an outgrowth of this strategy, the Corporation is in the midst of a project consolidating procedures and processes internally known as "Project Associated", which involves the transition to an organization-wide service bureau processing model. This effort is an integral part of a six-year contract signed in 1995 with our strategic technology partner, EDS Corporation. Project Associated will result in a new $7 million processing facility and the installation of equipment and software network- wide. The $17.6 million investment in premises and equipment through the first nine months of 1996 as reflected in the Consolidated Statement of Cash Flows is primarily related to Project Associated. It is anticipated that the majority of the consolidation and conversion effort will be completed in mid-1997. Project Associated is currently proceeding according to our plans. However, in the event that implementation takes longer than planned, requires additional resources, or projected cost reductions are not achieved as scheduled, noninterest expense may increase during the succeeding quarters. The following discussion refers to items affected by Project Associated. Salaries and Benefits increased 6.5%, or $1.1 million, over the third quarter of 1995 (3.4%, or $585,000, excluding the impact of Lodi and Reedsburg). The increase was in base salary expense ($841,000), overtime/contract help and severance ($137,000), and profit sharing expense as a result of higher levels of earnings ($140,000). Net occupancy expense increased $144,000, or 5.4%, over the third quarter of 1995. This increase is attributable to higher costs associated with additional building maintenance and depreciation (up $106,000). Equipment rentals, depreciation and maintenance increased from the third quarter of 1995 by $402,000, or 24.6%. The increase is attributable to higher depreciation and maintenance costs associated with the equipment purchased as part of Project Associated (depreciation on computers and equipment up $395,000). Other noninterest expense increased $240,000 in the third quarter of 1996 when compared to the third quarter of 1995. The increase is attributable to increased mortgage servicing rights amortization of $109,000, consultant fees of $430,000, clerical services of $116,000, postage of $87,000, association dues of $67,000 and legal/professional of $61,000. The efficiency ratio improved to 57.86% for the third quarter of 1996 compared to 59.56% for the same period last year. The expense ratio improved to 1.94% for the third quarter of 1996 compared to 2.07% for the third quarter of 1995. YTD Third Quarter 1996 compared to YTD Third Quarter 1995: Total noninterest expense increased $7.0 million, or 7.2%, in the first nine months of 1996 when compared to the same period in 1995 (increased $3.1 million, or 3.2%, excluding Lodi, Reedsburg and Great Northern Mortgage). Categories showing the largest increases were salaries and employee benefits ($5.2 million), other miscellaneous expense ($3.4 million), occupancy expense ($409,000) and equipment rentals, depreciation and maintenance ($797,000). Offsetting these increases were significantly lower FDIC insurance premiums ($3.2 million). Salaries and Benefits increased 10.2% over the first nine months of 1995 (5.4% excluding the impact of Lodi, Reedsburg and Great Northern Mortgage). The increase was in base salary expense ($3.5 million), commissions paid to individuals with sales based salaries ($572,000), profit sharing expense as a result of higher levels of earnings ($485,000), 401k expense ($98,000) and FICA taxes ($245,000). Net occupancy expense increased $409,000, or 4.2%, over the first nine months of 1995 (increased 2.0%, or $156,000, excluding the impact of Lodi, Reedsburg and Great Northern Mortgage). This increase is primarily attributable to increased building maintenance and depreciation (up $200,000). Equipment rentals, depreciation and maintenance increased from the first nine months of 1995 by $797,000, or 16.1% (increased 12.1%, or $599,000, excluding Lodi, Reedsburg and Great Northern Mortgage). The increase is attributable to higher depreciation and maintenance costs associated with the equipment purchased as part of Project Associated (depreciation on computers and equipment up $893,000), higher equipment repair expense ($134,000) offset by lower depreciation expense on furniture and fixtures (down $229,000). Other noninterest expense increased $3.4 million in the first nine months of 1996 when compared to the same period in 1995. The increase is attributable to increased MSR amortization of $983,000, consultant fees of $541,000, donations ($183,000), clerical services ($208,000), legal and professional ($131,000), telephone and communication ($175,000) and higher expenses relating to loan recording/unreimbursed fees of $153,000. The significant decrease in FDIC expense from the first nine months of 1995 reflects the reduced FDIC premium charted to banks in 1996. The YTD efficiency ratio for 1996 improved to 59.08% compared to 61.32% for the same period last year. The YTD expense ratio for 1996 improved to 1.99% compared to 2.23% for the same period last year. INCOME TAXES Income tax expense increased 16.4% over the first nine months of 1995, slightly lower than the increase of 17.3 % in income before taxes. The effective tax rate remained fairly consistent with previous quarters at 35.7%. Income Tax Expense Quarterly Trends ($ in Thousands) - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Income Before Taxes 22,803 21,862 20,728 19,557 20,249 State Tax Expense 1,354 1,289 1,212 1,301 1,236 Federal Tax Expense 6,789 6,444 6,122 6,035 6,193 Total Income Tax Expense 8,143 7,733 7,334 7,336 7,429 Effective Tax Rate 35.71% 35.4% 35.4% 37.5% 36.7% - ------------------------------------------------------------------------------ BALANCE SHEET September 30, 1996 compared to June 30, 1996 During the third quarter of 1996, total assets increased $119 million (approximately $80 million excluding the impact of Mid-America). Loans increased $65 million (8.7% annualized growth). The loan growth was in commercial and other ($30 million), real estate mortgage ($27 million) and consumer ($10 million). This loan growth was funded through increased interest-bearing deposits of $18 million, increased short-term and long-term borrowings of $34 million, and higher net free funds of $28 million offset by higher balances of investment and short-term investment balances of $15 million September 30, 1996 compared to December 31, 1995 During the first nine months of 1996, total assets increased $375 million ($125 million, or 4.3% annualized growth, excluding the impact of Lodi, Reedsburg and Mid-America) to $4.282 billion. Loans increased $342 million ($185 million excluding the impact of Lodi and Reedsburg, or 9.1% growth on an annualized basis). The loan growth was in commercial and other ($191 million), real estate mortgage ($114 million) and consumer ($37 million). This loan growth was funded through increased interest-bearing deposits of $266 million, increased short-term and long-term borrowings of $58 million and higher net free funds of $18 million. September 30, 1996 compared to September 30, 1995 Over the past twelve months total assets increased $531 million ($281 million, or 7.5%, excluding the impact of Lodi, Reedsburg and Mid-America) to $4.282 billion. Loans increased $413 million ($255 million excluding the impact of Lodi, Reedsburg and Mid-America, or 9.7% growth). The $413 million of loan growth was in commercial and other ($242 million), real estate mortgage ($123 million) and consumer ($48 million). The loan growth was funded through increased interest-bearing deposits of $272 million, increased short-term and long-term borrowings of $114 million and higher net free funds of $64 million, offset by higher balances of investments and short-term investments of $37 million. LIQUIDITY Liquidity refers to the ability of the Corporation to generate adequate amounts of cash to meet the Corporation's needs for cash. The subsidiary banks and the parent company of the Corporation have different liquidity considerations. Banking subsidiaries meet their cash flow requirements by having funds available to satisfy customer credit needs as well as having available funds to satisfy deposit withdrawal requests. Liquidity at banking subsidiaries is derived from deposit growth, money market assets, maturing loans, the maturity of securities, access to other funding sources and markets, and a strong capital position. Deposit growth is the primary source of liquidity at the banking subsidiaries. Interest-bearing deposits increased $266 million from December 31, 1995 to September 30, 1996, while noninterest-bearing deposits fell $10 million from the seasonally high year-end balance. As of September 30, 1996, the securities portfolio contained $396.7 million at amortized cost of U.S. Treasury and federal agency securities available for sale, representing 48.6% of the total securities portfolio. These government securities are highly marketable and had a market value equal to 99.7% of amortized cost at quarter end. Money market investments, consisting of federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits in other financial institutions, averaged $18.2 million in the third quarter of 1996 compared to $51.8 million during the same period in 1995. Being short-term and liquid by nature, money market investments generally provide a lower yield than other earning assets. The Corporation has a strategy of maintaining a sufficient level of liquidity to accommodate fluctuations in funding sources and will periodically take advantage of specific opportunities to temporarily invest excess funds at narrower than normal rate spreads while still generating additional net interest income. At September 30, 1996, the Corporation had $17.8 million outstanding in short-term money market investments, serving as an essential source of liquidity. The amount at quarter end represents .4% of total assets compared to 1.2% at December 31, 1995. Short-term borrowings totaled $422.1 million at September 30, 1996, compared with $363.7 million at the end of 1995. Within the classification of short- term borrowings are federal funds purchased and securities sold under agreements to repurchase. Federal funds are purchased from a sizeable network of correspondent banks while securities sold under agreements to repurchase are obtained from a base of individual, business and public entity customers. Deposit growth will continue to be the primary source of bank subsidiary liquidity on a long-term basis, along with stable earnings, the resulting cash generated by operating activities and strong capital positions. Shorter-term liquidity needs will mainly be derived from growth in short-term borrowings, maturing securities and money market assets, loan maturities and access to other funding sources. Liquidity is also necessary at the parent company level. The parent company's primary sources of funds are dividends and service fees from subsidiaries, borrowings and proceeds from the issuance of equity. The parent company manages its liquidity position to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries and satisfy other operating requirements. Dividends received from subsidiaries totaled $29.9 million in the first nine months of 1996 and will continue to be the parent's main source of long-term liquidity. At September 30, 1996, the parent company had $110 million of established lines of credit with non-affiliated banks, of which $64 million was in use. The parent company also has access to funds from the issuance of the Corporation's commercial paper, although such funds are also downstreamed to the nonbank subsidiaries. Commercial paper outstanding at September 30, 1996, totaled $2.4 million. The Corporation s long-term debt to equity ratio at September 30, 1996, was 5.7%, compared to 6.5% at December 31, 1995. This decrease is mainly attributable to FHLB advances which were reclassed from long-term to short-term borrowings due to remaining maturities of less than one year. Management believes that, in the current economic environment, the Corporation's subsidiary and parent company liquidity positions are adequate. There are no known trends nor any known demands, commitments, events or uncertainties that will result or are reasonably likely to result in a material increase or decrease in the Corporation's liquidity. CAPITAL Stockholders' equity at September 30, 1996 increased 11.1% , or $41.1 million, to $381.4 million or $20.77 per share, compared with $340.3 million, or $19.46 per share, at December 31, 1995. Equity to assets at September 30, 1996 remains strong at 8.91%, with the Tier 1 leverage ratio climbing to 8.28%. The increase in equity of $41.1 million since December 31, 1995 is attributable to $7.6 million from the Lodi acquisition, $8.8 million from the Reedsburg acquisition, $26.9 million of retained earnings, $704,000 from the exercise of stock options reduced by $1.5 million for the change in the equity portion of the SFAS 115 adjustment and $1.3 million for Treasury stock purchases. Cash dividends of $.29 per share were paid in the third quarter of 1996, representing a payout ratio of 36.25%. Compared to the same period last year, a cash dividend of $.27 per share was paid, representing a payout ratio of 36.99%. On a YTD basis, the cash dividend paid in 1996 was $.85 compared to $.70 per share paid in the same period last year, a 21.4% increase. Capital Quarterly Trends ($ in Thousands) - ------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------- Stockholders' Equity $381,428 $371,392 $364,046 $340,294 $329,989 Average Equity to Average Assets 8.94% 8.90% 8.89% 8.91% 8.75% Equity to Assets - Period End 8.91% 8.92% 8.91% 8.71% 8.80% Tier 1 Capital to Risk Weighted Assets - Period End 10.75% 10.66% 10.55% 10.57% 10.55% Total Capital to Risk Weighted Assets - Period End 12.00% 11.91% 11.81% 11.82% 11.81% Tier 1 Leverage Ratio - Period End 8.34% 8.24% 8.15% 8.05% 7.93% Market Value Per Share - Period End $40.38 $38.75 $37.75 $40.94 $36.75 Book Value Per Share - Period End $20.77 $20.21 $19.82 $19.46 $18.89 Market Value Per Share to Book Value Per Share 194.4% 191.7% 190.5% 210.4% 194.5% Dividends Per Share - This Quarter $.29 $.29 $.27 $.27 $.27 Dividends Per Share - Year to Date $.85 $.56 $.27 $.97 $.70 Earnings Per Share - This Quarter $.80 $.77 $.73 $.70 $.73 Earnings Per Share - Year to Date $2.30 $1.50 $.73 $2.75 $2.05 Dividend Payout Ratio - This Quarter 36.25% 37.66% 36.99% 38.57% 36.99% Dividend Payout Ratio - Year to Date 36.96% 37.33% 36.99% 35.27% 34.15% - ------------------------------------------------------------------------------- As of September 30, 1996, the Corporation's tier 1 risk-based capital ratio, total risk-based capital (tier 1 and tier 2) ratio and tier 1 leverage ratio were well in excess of regulatory minimums. Management of the Corporation expects to continue to exceed the minimum standards in the future. Similar capital guidelines are also required of the individual banking subsidiaries of the Corporation. As of September 30, 1996, each banking subsidiary exceeded the minimum ratios for tier 1 capital, total capital and the tier 1 leverage ratio. Management actively reviews capital strategies for the Corporation and each of its subsidiaries to ensure that capital levels are appropriate based on the perceived business risks, future growth opportunities, industry standards and regulatory requirements. RECENT DEVELOPMENTS On November 7, 1996, the Corporation announced the signing of a definitive agreement under which the Corporation would acquire the $79 million-asset Centra Financial, Inc., and its subsidiary, Central Bank of West Allis, in a stock-for-stock merger transaction. The transaction, which is contingent upon approval by regulatory authorities and the shareholders of Centra Financial, Inc., is expected to be completed in the first quarter of 1997. ACCOUNTING DEVELOPMENTS In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Statement prescribes the accounting for the impairment of long-lived assets and goodwill related to those assets. The new rules specify when assets should be reviewed for impairment, how to determine whether an asset or group of assets is impaired, how to measure an impairment loss, and what financial statement disclosures are necessary. Also prescribed is the accounting for long-lived assets and identifiable intangibles that a company plans to dispose of, other than those that are a part of a discontinued operation. Any impairment of a long-lived asset resulting from management's review is to be recognized as a component of noninterest expense. The Corporation adopted SFAS 121 on January 1, 1996. The impact of adoption did not have a material effect on the consolidated financial statements of the Corporation. In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective in 1996. The statement requires that a fair value-based method be used to value employee compensation plans that include stock-based awards. The statement permits a company to recognize compensation expense under SFAS 123, or continue to use the prior accounting rules which did not consider the market value of stock in certain award plans. If adoption of the statement's fair value procedures are not used in the computation of compensation expense in the income statement, the company must disclose in a footnote to the financial statements the pro forma impact of adoption. The Corporation will be adopting the disclosure method of the statement. ASSOCIATED BANC-CORP PART II - OTHER INFORMATION ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits: (11) Statements re Computation of Per Share Earnings (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the nine months ended September 30, 1996. ASSOCIATED BANC-CORP EXHIBIT (11) Statement Re Computation of Per Share Earnings September 30, 1996 September 30, 1995 ------------------ ------------------ As Reported: Net income $ 42,181,892 $ 35,807,634 Weighted average common shares outstanding 18,361,457 17,470,691 Net income per share $2.30 $2.05 Primary: Net income $ 42,181,892 $ 35,807,634 Weighted average common shares outstanding 18,361,457 17,470,691 Common stock equivalents 240,092 176,363 Adjusted weighted average common shares outstanding 18,601,549 17,647,054 Net income per share $2.27 $2.03 Fully Diluted: Net income $ 42,181,892 $ 35,807,634 Weighted average common shares outstanding 18,361,457 17,470,691 Common stock equivalents 266,487 275,115 Adjusted weighted average common shares outstanding 18,627,944 17,745,806 Net income per share $2.26 $2.02 Note: The primary and fully diluted numbers are not disclosed in the reported financials because any dilution that is less than 3% of earnings per common shares outstanding is not considered to be material. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ASSOCIATED BANC-CORP ------------------------------------- (Registrant) /s/ Harry B. Conlon Date: November 14, 1996 -------------------------------------- Harry B. Conlon Chairman & Chief Executive Officer /s/ Joseph B. Selner Date: November 14, 1996 -------------------------------------- Joseph B. Selner Principal Financial Officer INDEX TO EXHIBITS Exhibit No. Page No. ----------- -------- (11) Computations of Earnings Per Share and Average Number of Common Shares Outstanding