1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 ----- For the quarterly period ended March 31, 1997 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 March 31, 1997, was 22,439,000 shares.
2 ASSOCIATED BANC-CORP TABLE OF CONTENTS Page No. PART I. Financial Information Item 1. Financial Statements: Consolidated Statements of Financial Condition - March 31, 1997 and December 31, 1996 Consolidated Statements of Income - Three Months Ended March 31, 1997 and 1996 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1997 and 1996 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. Other Information Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures
3 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: ASSOCIATED BANC-CORP Consolidated Statements of Financial Condition (Unaudited) March 31, December 31, 1997 1996 ---- ---- (In Thousands) ASSETS Cash and due from banks $ 176,739 $ 236,314 Interest-bearing deposits in other financial institutions 2,279 670 Federal funds sold and securities purchased under agreements to resell 22,056 27,977 Investment securities: Held to maturity (Fair value of approximately $424,349 and $417,541 at March 31, 1997 and December 31, 1996, respectively) 426,324 417,195 Available for sale-stated at fair value 433,530 437,440 Loans, net of unearned income 3,253,026 3,159,853 Less: Allowance for possible loan losses (49,398) (47,422) --------- --------- Loans, net 3,203,628 3,112,431 Premises and equipment 79,748 75,987 Other assets 114,531 111,065 --------- --------- Total assets $ 4,458,835 $4,419,079 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing deposits $ 580,215 $ 655,358 Interest-bearing deposits 2,910,696 2,852,683 --------- --------- Total deposits 3,490,911 3,508,041 Short-term borrowings 471,990 444,066 Accrued expenses and other liabilities 56,780 52,697 Long-term borrowings 31,564 21,130 --------- --------- Total liabilities 4,051,245 4,025,934 Commitments and contingent liabilities --- --- Stockholders' equity Preferred stock --- --- Common stock (par value $0.01 per share, authorized 48,000,000 shares issued 22,473,556 and 22,059,191 shares, respectively) 225 221 Surplus 168,255 164,514 Retained earnings 235,383 222,348 Net unrealized gains on securities available for sale 4,962 6,980 Less: Treasury stock (34,556 and 26,226 shares at cost) (1,235) (918) --------- -------- Total stockholders' equity 407,590 393,145 --------- --------- Total liabilities and stockholders' equity $ 4,458,835 $4,419,079 ========= ========= (See accompanying notes to Consolidated Financial Statements.)
4 ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 1997 1996 ---- ---- (In Thousands) INTEREST INCOME Interest and fees on loans $ 68,530 $ 63,312 Interest and dividends on investment securities: Taxable 10,336 9,810 Tax exempt 2,338 2,308 Interest on deposits in other financial institution 72 9 Interest on federal funds sold and securities purchased under agreements to resell 295 366 ------ ------ Total interest income 81,571 75,805 ------ ------ INTEREST EXPENSE Interest on deposits 31,271 29,963 Interest on short-term borrowings 5,823 4,489 Interest on long-term borrowings 313 516 ------ ------ Total interest expense 37,407 34,968 ------ ------ NET INTEREST INCOME 44,164 40,837 Provision for possible loan losses 1,123 1,172 ------ ------ Net interest income after provision for possible loan losses 43,041 39,665 ------ ------ NONINTEREST INCOME Trust service fees 6,948 6,160 Service charges on deposit accounts 3,225 2,988 Investment securities gains, net 473 340 Mortgage banking activity 2,798 3,737 Retail investment income 888 632 Other 2,743 2,431 ------ ------ Total noninterest income 17,075 16,288 ------ ------ NONINTEREST EXPENSE Salaries and employee benefits 20,179 18,696 Net occupancy expense 3,204 2,748 Equipment rentals, depreciation and maintenance 2,184 1,882 Data processing expense 2,291 2,104 Stationery and supplies 906 825 Business development and advertising 828 878 FDIC expense 96 12 Other 7,930 8,080 ------ ------ Total noninterest expense 37,618 35,225 ------ ------ Income before income taxes 22,498 20,728 Income tax expense 7,749 7,334 ------ ------ NET INCOME $ 14,749 $ 13,394 ====== ====== Per share Net income $ .66 $ .61 Dividends $ .24 $ .23 Weighted average shares outstanding 22,240 22,026 (See accompanying notes to consolidated Financial Statements)
5 ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 1997 1996 ---- ---- (In Thousands) OPERATING ACTIVITIES Net income $ 14,749 $ 13,394 Adjustments to reconcile net income to net cash used by operating activities: Provision for possible loan losses 1,123 1,172 Depreciation and amortization 2,458 2,003 Amortization of mortgage servicing rights 682 540 Amortization of intangibles 686 761 Net amortization (accretion) of premiums and discounts (68) 98 Gain on sales of investment securities, net (473) (340) Increase in interest receivable and other assets (728) (10,096) Increase in interest payable and other liabilities 2,150 1,766 Amortization of loan fees and costs (383) (376) Net increase in mortgage loans acquired for resale 7,100 21,346 Gain on sales of mortgage loans held for resale (594) (1,109) ------ ------ Net cash provided by operating activities $ 26,702 $ 29,159 ------ ------ INVESTING ACTIVITIES Net decrease in federal funds sold and securities purchased under agreements to resell $ 10,346 $ 32,260 Net increase in interest-bearing deposits in other financial institutions (1,609) (3) Purchases of held to maturity securities (35,220) (27,292) Purchases of available for sale securities (89,624) (61,666) Proceeds from sales of available for sale securities 1,585 620 Maturities of held to maturity securities 53,966 28,965 Maturities of available for sale securities 89,394 62,655 Net increase in loans (62,969) (57,601) Proceeds from sales of other real estate 368 614 Purchases of premises and equipment, net of disposals (3,610) (3,379) Purchase of mortgage servicing rights (1,248) (1,866) Net cash received in purchase of subsidiary 5,051 5,232 ------ ------ Net cash used in investing activities $ (33,570) $ (21,461) ------ ------ FINANCING ACTIVITIES Net decrease in deposits $ (84,779) $ (54,027) Net increase (decrease) in short-term borrowings 6,858 (5,251) Cash dividends (5,325) (4,750) Proceeds from issuance of long-term borrowings 31,500 3,500 Proceeds from exercise of stock options 384 201 Purchase of treasury stock (1,345) --- ------ ------ Net cash used in financing activities $ (52,707) $ (60,327) ------ ------ Net decrease in cash and cash equivalents $ (59,575) $ (52,629) Cash and due from banks at beginning of period 236,314 214,411 ------- ------- Cash and due from banks at end of period $ 176,739 $ 161,782 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 37,487 $ 34,870 Income taxes 1,802 2,866 Supplemental schedule of noncash investing activities: Loans transferred to other real estate $ 437 $ 114 Loans made in connection with the disposition of other real estate 35 --- (See accompanying notes to Consolidated Financial Statements.)
6 ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Notes to Consolidated Financial Statements NOTE 1: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Associated Banc-Corp's ("Corporation") financial position, results of its operations and cash flows for the periods presented. All adjustments necessary to the fair presentation of the financial statements are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change relate to the determination of the allowance for possible loan losses. 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 1996 Form 10-K Annual Report. NOTE 3: Business Combinations The following table summarizes completed transactions during 1996 and 1997 (through March 31): <TABLE> Consideration Paid ------------------------------ Total Assets Date Method of Cash Shares of (In Intangibles Name of Acquired Acquired Accounting (In Millions) Common Stock [C] Millions) (In Millions) - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> SBL Capital Bank Shares, Inc. [A] 3/96 Pooling of Lodi, Wisconsin interests --- 399,548 68 --- Greater Columbia Bank Shares, Inc. [B] 4/96 Pooling of Portage, Wisconsin interests --- 1,161,161 211 --- F&M Bankshares of Reedsburg, Inc. [A] 7/96 Pooling of Reedsburg, Wisconsin interests --- 641,988 139 --- Mid-America National Bancorp, Inc. 7/96 Purchase 7.8 --- 39 1.9 Chicago, Illinois Centra Financial, Inc. [A] 2/97 Pooling of West Allis, Wisconsin interests --- 414,365 76 --- </TABLE> [A] The transaction, accounted for using the pooling-of-interests method, was not material to operating results for years prior to the acquisition and, accordingly, results for years prior to the acquisition were not restated. [B] All consolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest period presented. [C] Share amounts have been restated to reflect the 6-for-5 stock split effected as a 20% stock dividend paid on March 17, 1997.
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) March 31, 1997 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury and federal agency securities $ 170,390 $ 169,236 Obligations of states and political subdivision 195,524 194,605 Other securities 60,410 60,508 ------- ------- Total $ 426,324 $ 424,349 ======= ======= - -------------------------------------------------------------------------------- (In thousands) December 31, 1996 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury and federal agency securities $ 161,199 $ 161,255 Obligations of states and political subdivisions 194,810 194,511 Other securities 61,186 61,775 ------- ------- Total $ 417,195 $ 417,541 ======= ======= - -------------------------------------------------------------------------------- Investment Securities Available for Sale - -------------------------------------------------------------------------------- (In thousands) March 31, 1997 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury and federal agency securities $ 391,428 $ 389,532 Obligations of states and political subdivisions 4,944 5,155 Marketable equity securities 29,320 38,843 - -------------------------------------------------------------------------------- Total $ 425,692 $ 433,530 ================================================================================ (In thousands) December 31, 1996 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury and federal agency securities $ $393,934 $ 394,492 Obligations of states and political subdivisions --- --- Marketable equity securities 32,502 42,948 - -------------------------------------------------------------------------------- Total $ 426,436 $ 437,440 ================================================================================
8 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 Three For the Year Months Ended Ended March 31, December 31, 1997 1996 ---- ---- (In Thousands) - -------------------------------------------------------------------------------- Balance at beginning of period $ 47,422 $ 41,614 Balance related to acquisition 728 3,511 Provisions charged to operating expense 1,123 4,665 Net loan recoveries (losses) 125 (2,368) ------ ------ Balance at end of period $ 49,398 $ 47,422 ====== ====== - -------------------------------------------------------------------------------- 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. A summary of the changes in capitalized mortgage servicing rights for the periods indicated is as follows: For the Three For the Year Months Ended Ended March 31, December 31, 1997 1996 ---- ---- (In Thousands) - -------------------------------------------------------------------------------- Balance at beginning of period $ 10,995 $ 7,239 Additions 1,248 6,144 Amortization (682) (2,362) Sales of servicing rights --- --- Change in valuation allowance 4 (26) ------ ------ Balance at end of period $ 11,565 $ 10,995 ====== ====== - --------------------------------------------------------------------------------
9 NOTE 7: Per Share Computations Per share computations are computed based on the weighted average number of common shares outstanding for the three months ended March 31, 1997 and 1996. 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 the Results of Operations The purpose of this discussion is to focus on information about the Corporation's financial condition and results of operations that are not otherwise apparent from the consolidated financial statements included in this report. Reference should be made to those statements presented elsewhere in this report for an understanding of the following discussion and analysis. EARNINGS On February 21, 1997, Associated completed the acquisition of the $76-million Centra Financial, Inc. (Centra) headquartered in West Allis, WI. The transaction was accounted for using the pooling-of-interests method. However, the transaction was not material to prior years' reported operating results and, accordingly, previously reported prior years' results have not been restated. In April 1996, Associated completed the acquisition of the $211-million Greater Columbia Bancshares, Inc. in Portage, WI. This acquisition was accounted for using the pooling-of-interests method. All consolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest reporting period. Associated also completed two other acquisitions in 1996 that were accounted for using the pooling-of-interests method - the $139-million F&M Bankshares of Reedsburg in July 1996 and the $68-million SBL Capital Bankshares in Lodi, WI in March 1996. However, the transactions were not material to operating results for years prior to the acquisitions and, accordingly, results of operations for years prior to the acquisitions have not been restated. On July 31, 1996, Associated completed the acquisition of the $39-million asset Mid-America National Bancorp Inc. (Mid-America), Chicago. This transaction was accounted for using the purchase method. Accordingly, the consolidated financial statements include the results of operations of Mid-America since the date of acquisition. All per share financial information has been adjusted to reflect the 6-for-5 stock split effected in the form of a 20 percent stock dividend paid to shareholders on March 17, 1997. Net income for the first quarter of 1997 was $14.7 million, up 10.1% over 1996 first quarter net income of $13.4 million. Earnings per share were $0.66 in the first quarter of 1997, up 8.2% over the $0.61 reported in the first quarter of 1996. Return on average assets (ROA) for the first quarter of 1997 was 1.36%, up from 1.33% during the same period last year. Return on average equity (ROE) for the first quarter of 1997 was 14.84%, down slightly from 14.99% during the same period last year. The change (increase of $1.4 million, or 10.1%) in first quarter 1997 net income, when compared to the same period last year, was a result of higher net interest income (up $3.3 million, or 8.1%), higher
10 noninterest income (up $787,000, or 4.8%), slightly lower provision for loan losses (down $49,000, or 4.2%), offset by higher noninterest expense (up $2.4 million, or 6.8%) and higher tax expense (up $415,000, or 5.7%). Net Income Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Net Income ...... $14,749 $15,062 $14,660 $14,128 $13,394 E.P.S ........... $ 0.66 $ 0.68 $ 0.67 $ 0.64 $ 0.61 Return on Average Equity - Quarter 14.84% 15.48% 15.56% 15.51% 14.99% Return on Average Equity - Year to Date 14.84% 15.39% 15.36% 15.25% 14.99% Return on Average Assets - Quarter 1.36% 1.40% 1.39% 1.38% 1.33% Return on Average Assets - Year to Date 1.36% 1.38% 1.37% 1.36% 1.33% - -------------------------------------------------------------------------------- NET INTEREST INCOME Fully taxable equivalent (FTE) net interest income in the first quarter of 1997 was $45.6 million, an increase of $3.4 million over the first quarter of 1996 FTE net interest income of $42.2 million. Adjusting the first quarter of 1997 for the impact of Centra (net interest income of $827,000 in the first quarter of 1997) and an increase in collected nonaccrual loan interest income (up $447,000 over the first quarter of 1996) reduces the increase to $2.1 million. The net interest margin for the first quarter of 1997 was 4.54%, compared with 4.51% in the first quarter of 1996. The largest factor contributing to the decrease to net interest margin was the lower contribution from net free funds, down 3 basis points. Interest-bearing liabilities comprised a larger portion of total funding (82.8% in first quarter of 1997 compared to 82.4% in first quarter of 1996). Net Interest Income Tax Equivalent Basis (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Interest Income $81,571 $80,371 $78,648 $76,908 $75,805 Tax Equivalent Adjustment 1,428 1,239 1,338 1,409 1,352 ------ ------ ------ ------ ------ Tax Equivalent Interest $82,999 $81,610 $79,986 $78,317 $77,157 Interest Expense 37,407 36,237 35,963 35,309 34,968 ------ ------ ------ ------ ------ Tax Equivalent Net Interest Income $45,592 $45,373 $44,023 $43,008 $42,189 - -------------------------------------------------------------------------------- Average earning assets grew $316 million from the first quarter of 1996, with $68 million of this increase attributable to Centra, and approximately $30 million attributable to the Mid-America acquisition in the third quarter of 1996 (primarily investment securities). All subsidiary banks reported growth in average earning assets when compared to the first quarter of 1996. Total loans grew $295 million, with $36 million attributable to Centra and $7 million attributable to Mid-America. Excluding the impact of Centra and Mid-America, average earning assets and loans grew at an internal rate of 5.8% and 8.7%, respectively in the first quarter of 1997. The addition of Centra, with a loan to deposit ratio of 103.6%, combined with loan growth funded only partially by deposit growth caused the average loans to average deposits ratio to increase to 92.4%, up from 89.4% in the first quarter of 1996.
11 The average loan growth, excluding the impact of Centra, of $259 million, was funded by increased wholesale borrowings (funds purchased, repurchase agreements, FHLB borrowings, and long-term borrowings) of $81 million, increased time deposits (personal CDs and Brokered CDs) of $100 million ($67 million increase in personal CDs and a $33 million increase in Brokered CDs), higher balances of Savings, NOW and MMA of $43 million, higher net free funds of $24 million and lower balances of investments and short-term investments of $11 million. Over the past twelve months, loan growth has been funded by approximately 44% wholesale funds (including brokered CDs) and 46% retail interest-bearing deposits, with the remainder from net free funds and the change in the investment portfolios. The average balance of brokered CDs for the first quarter of 1997 was $97 million with a period end balance of $106 million (up $16 million from December 31, 1996). Net Interest Margin Quarterly Trends (Quarterly Info Only) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Yield on Earning Assets 8.26% 8.21% 8.19% 8.23% 8.25% Cost of Interest-Bearing Liabilities 4.49% 4.45% 4.48% 4.50% 4.54% ---- ---- ---- ---- ---- Interest Rate Spread 3.77% 3.76% 3.71% 3.73% 3.71% Net Free Funds Contribution .77% .80% .80% .79% .80% ---- ---- ---- ---- ---- Net Interest Margin 4.54% 4.56% 4.51% 4.52% 4.51% ==== ==== ==== ==== ==== Average Earning Assets to Average Assets 92.97% 92.60% 92.73% 92.92% 92.99% Free Funds Ratio (% of Earning Assets) 17.16% 18.03% 17.79% 17.62% 17.56% - -------------------------------------------------------------------------------- Earning Asset and Interest-Bearing Liability Volumes Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Average Loans $3,198,576 $3,111,614 $3,049,213 $2,989,910 $2,903,438 Average Earning Assets 4,076,729 3,955,571 3,885,182 3,825,789 3,760,453 Average Noninterest- Bearing Deposits 550,230 583,697 564,904 545,992 532,882 Average Interest- Bearing Deposits 2,910,015 2,835,861 2,792,245 2,731,350 2,714,068 Average Deposits 3,460,245 3,419,558 3,357,149 3,277,342 3,246,950 Average Interest- Bearing Liabilities 3,377,230 3,242,422 3,194,137 3,151,693 3,100,249 - -------------------------------------------------------------------------------- LOAN LOSS The loan loss provision for the first quarter of 1997 was $1.1 million, a decrease of $49,000 from the same period in 1996. As of March 31, 1997, the allowance for possible loan losses of $49.4 million represented 1.52% of total outstanding loans, up slightly from the 1.50% reported at December 31, 1996, and down from 1.57% reported at March 31, 1996. The combination of first quarter provision expense, net recoveries of $125,000 and slower loan growth than previous quarters account for the increase in the allowance for possible loan losses to loans from the fourth quarter of 1996.
12 Provision for Possible Loan Losses Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Provision - Quarter $ 1,123 $ 1,610 $ 1,011 $ 872 $ 1,172 Provision - Year 1,123 4,665 3,055 2,044 1,172 Net Charge-offs (Recoveries) - Quarter (125) 948 456 915 49 Net Charge-offs (Recoveries) - Year (125) 2,368 1,420 964 49 Allowance at Period End $49,398 $47,422 $46,760 $46,049 $46,092 Allowance to Period End Loans 1.52% 1.50% 1.51% 1.52% 1.57% Net Charge-offs (Recoveries) to Average Loans (Annualized) - Quarter (.02)% .12% .06% .12% .01% Net Charge-offs (Recoveries) to Average Loans (Annualized) - Year (.02)% .08% .06% .07% .01% - -------------------------------------------------------------------------------- During the first quarter of 1997, net recoveries of $125,000 were recorded. This net recovery position was the result of three larger recoveries collected in the first quarter. The first quarter 1997 net recovery position compares favorably to the $948,000 of net chargeoffs in the fourth quarter of 1996 and $49,000 of net chargeoffs in the first quarter of 1996. The first quarter of 1997 net recoveries as a percent of average loans of (0.02%) compares favorably to net chargeoffs to average loans of 0.12% in the fourth quarter of 1996 and 0.01% in the first quarter of 1996. 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
13 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 March 31, 1997, were $19.0 million, a decrease of $517,000 from December 31, 1996. The ratio of nonperforming loans to total loans at March 31, 1997, was .59% compared to .62% at December 31, 1996, and March 31, 1996. Other real estate owned increased slightly to $1.3 million at March 31, 1997, up from $1.2 million at December 31, 1996. Nonperforming Loans and Other Real Estate (In Thousands) - -------------------------------------------------------------------------------- 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96 ------- -------- ------- ------- ------- Nonaccrual Loans $16,492 $17,225 $17,939 $15,156 $14,797 Accruing Loans Past Due 90 Days or More 2,052 1,801 1,646 3,442 2,172 Restructured Loans 499 534 576 1,325 1,180 ------ ------ ------ ------ ------ Total Nonperforming Loans $19,043 $19,560 $20,161 $19,923 $18,149 ====== ====== ====== ====== ====== Nonperforming Loans as a Percent of Loans .59% .62% .65% .66% .62% Other Real Estate Owned $ 1,272 $ 1,173 $ 1,727 $ 1,833 $ 1,083 - -------------------------------------------------------------------------------- Impaired loans are defined as those loans where it is probable that all amounts due according to contractual terms, including principal and interest, will not be collected. The Corporation has determined that commercial loans and residential real estate loans that have a nonaccrual status or have had their terms restructured meet the definition. Impaired loans are measured at the fair value of the collateral, if the loan is collateral dependent, or alternatively at the present value of expected future cash flows. Interest income on impaired loans is recognized only at the time that cash is received, unless applied to reduce principal. At March 31, 1997, the recorded investment in impaired loans totaled $15.8 million. Included in this amount is $13.3 million of impaired loans that do not require a related allowance for possible loan losses and $2.5 million of impaired loans for which the related allowance for possible loan losses totaled $1.0 million. The average recorded investment in impaired loans during the twelve months ended March 31, 1997, was approximately $14.7 million. Interest income recognized on a cash basis on impaired loans during the first three months of 1997 totaled $113,000. The following table shows, for those loans accounted for on a non-accrual basis and restructured loans for the three months ended March 31, 1997, 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 Three Months Ended March 31, 1997 (In Thousands) - -------------------------------------------------------------------------------- Interest income in accordance with original terms $383 Interest income recognized 126 --- Reduction in interest income $257 === - -------------------------------------------------------------------------------- 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
14 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 March 31, 1997, potential problem loans totaled $58.4 million ($55.9 million, excluding the impact of Centra) compared to $54.0 million at the end of 1996. 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 March 31, 1997, no concentrations existed in the Corporation's loan portfolio in excess of 10% of total loans. Real estate construction loans at March 31, 1997, totaled $241.1 million, or 7.4% of loans while agricultural loans were 1.0% of total loans. As of March 31, 1997, 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 Noninterest income increased $787,000, or 4.8% in the first quarter of 1997 compared to the first quarter of 1996. Excluding the impact of Centra, the increase would have been $692,000 or 4.3%. All categories, with the exception of mortgage banking activity, increased when compared to the first quarter of 1996. Noninterest Income Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Trust Servicing Fees $ 6,948 $ 6,651 $ 6,175 $ 6,199 $ 6,160 Service Charges on Deposit Accounts 3,225 3,384 3,218 3,016 2,988 Mortgage Banking Activity 2,798 2,867 2,913 3,078 3,737 Retail Investment Income 888 796 628 765 632 Other 2,743 3,427 2,605 2,500 2,431 ----- ----- ----- ----- ----- Noninterest Income Excluding Securities Gains 16,602 17,125 15,539 15,558 15,948 Investment Security Gains, Net 473 485 52 36 340 ------ ------ ------ ------ ------ Total $17,075 $17,610 $15,591 $15,594 $16,288 ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------- Trust service fees increased $788,000, or 12.8% compared to the same quarter last year. The increase was mainly the result of continued improvement in trust business volume and growth in assets under management.
15 Retail investment income increased $256,000, or 40.5% over the first quarter of 1996. This increase is attributable to higher levels of revenue from offices opened during 1996. Service charges on deposit accounts increased $237,000, or 7.9% over the same period last year. Excluding the impact of Centra, the increase would have been $173,000, or 5.8%. All banks recorded higher total service charges on deposit account revenue, with the majority of the increase attributable to higher fees on business accounts, business overdraft fees and lower waived service charges. Mortgage banking income decreased $939,000, or 25.1% from the first quarter of 1996. Lower origination fees (down $471,000), underwriting fees (down $195,000), escrow waiver fees (down $21,000) and lower gain on sale of loans (down $515,000) were partially offset by higher loan servicing revenues (up $263,000). The production related revenues (origination, underwriting and escrow waiver fees) were lower due to lower production volumes in the first quarter of 1997 ($108.2 million) compared to the same period last year ($160.0 million). The decrease in gain on sale of loans is attributable to the variability of market interest rates experienced in the secondary market during the first quarter of 1997. Investment security gains of $473,000 increased $133,000 over the same period last year. Both periods' gains were primarily from the sale of Sallie Mae Stock. NONINTEREST EXPENSE Total noninterest expense increased $2.4 million, or 3.8% in the first quarter of 1997 compared to the same period last year. Excluding the impact of Centra, the increase would have been $1.9 million, or 5.3%. All categories of noninterest expense except business development and other increased when compared to the first quarter of last year. Noninterest Expense Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Salaries and Employee Benefits $ 20,179 $ 19,395 $ 18,563 $ 18,713 $ 18,696 Net Occupancy Expense 3,204 2,443 2,796 2,831 2,748 Equipment Rentals, Depreciation and Maintenance 2,184 2,005 2,037 1,821 1,882 Data Processing Expense 2,291 2,130 2,076 2,018 2,104 Stationery and Supplies 906 935 755 862 825 Business Development and Advertising 828 994 876 872 878 FDIC Expense 96 (47) 14 24 12 Other 7,930 8,383 7,345 7,319 8,080 Total $ 37,618 $ 36,238 $ 34,462 $ 34,460 $ 35,225 ====== ====== ====== ====== ====== - -------------------------------------------------------------------------------- Salaries and employee benefit expenses increased $1.5 million, or 7.9% when compared to the fourth quarter of 1996. Excluding the impact of Centra, this increase was $1.2 million, or 6.3%. The adjusted increase (excluding Centra) was primarily salary expense. Total salary related expenses increased $966,000, or 6.6%, compared to the first quarter of 1996 while fringe benefit related expenses increased $223,000, or 5.5%. The 6.6% increase in salary expense is attributable to base merit increases (approximately 4.5%), transitional overlapping positions as certain functions are being centralized, and new positions added. The fringe benefit increase was primarily due to higher pension expense (up $56,000), 401k expense (up $99,000), and higher social security tax expense (up $121,000) offset by
16 lower profit sharing expense (down $151,000). The increases are linked to the higher levels of salary expense incurred (pension, 401k and social security) and changes to benefit plans or plan assumptions (401k and pension). Net occupancy expense increased $456,000, or 16.6% compared to the first quarter of 1996. Excluding the impact of Centra, this increase was $392,000, or 14.3%. This increase is primarily due to the Chicago region (incremental cost of additional and remodeled workspace from Mid-America), and increased occupancy expenses resulting from technology and customer service enhancements. Equipment rentals, depreciation and maintenance increased $302,000, or 16.0% compared to the first quarter of 1996. Excluding the impact of Centra, this increase was $273,000, or 14.5%. This increase is a result of higher levels of depreciation on computer equipment (up $239,000) and higher equipment repair expense (up $48,000). The increase in depreciation and equipment repair expense are attributable to the expenditures incurred during 1996 as part of the investment in technology and customer service enhancements. Data processing increased $187,000, or 8.9%, compared to the first quarter of 1996. This increase is primarily due to higher processing volumes. The efficiency ratio improved to 60.48% for the first quarter of 1997 compared to 60.59% for the same period last year. Expense Control Quarterly Trends - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Efficiency Ratio - Quarter 60.48% 57.98% 57.86% 58.84% 60.59% Efficiency Ratio - Year 60.48% 59.80% 59.08% 59.71% 60.59% Expense Ratio - Quarter 2.05% 1.92% 1.94% 1.99% 2.06% Expense Ratio - Year 2.05% 1.98% 1.99% 2.02% 2.06% - -------------------------------------------------------------------------------- The expense ratio improved to 2.05% for the first quarter of 1997 compared to 2.06% for the first quarter of 1996. INCOME TAXES Income tax expense increased 5.7% over the first quarter of 1996. The effective tax rate at 34.44% decreased from 35.38% for the first quarter of 1996. Income Tax Expense Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Income Before Taxes $22,498 $23,896 $22,803 $21,861 $20,728 State Tax Expense $ 1,227 $ 1,441 $ 1,354 $ 1,289 $ 1,212 Federal Tax Expense 6,522 7,402 6,789 6,444 6,122 ----- ----- ----- ----- ----- Total Income Tax Expense $ 7,749 $ 8,834 $ 8,143 $ 7,733 $ 7,334 ===== ===== ===== ===== ===== Effective Tax Rate 34.44% 36.97% 35.71% 35.37% 35.38% - --------------------------------------------------------------------------------
17 BALANCE SHEET During the past twelve months, total assets increased $375 million, or 9.2%. Excluding the impact of Centra and Mid-America, total assets would have increased by $256 million, or 6.3%. Loans increased $316 million, or 10.8% ($280 million, or 9.6%, excluding Centra). The internal loan growth was in commercial (up $198 million or 12.3%), real estate (up $62 million or 6.5%) and consumer (up $16 million or 4.2%). The internal loan growth (excluding Centra) was funded with $108 million of wholesale funding, $142 million of interest-bearing deposits and $3 million from a reduction of investments and short-term investments and a $27 million increase in net free funds. The $142 million increase in interest-bearing deposits reflects a $38 million increase in outstanding brokered CDs and an increase of $104 million in retail interest-bearing deposits. Excluding the impact of Centra, 36% of incremental loan growth was funded by increasing retail deposits. During the first quarter of 1997, total assets increased $39.8 million, or 0.9%. Excluding the impact of Centra, total assets would have decreased by $36.4 million, or 0.8%. Loans increased $91.2 million ($57.3 million, or 7.4% on an annualized basis, excluding Centra). The loan growth was essentially all commercial related. The internal loan growth (excluding Centra) was funded with $38 million of wholesale funding, $4 million of interest-bearing deposits and $33 million from a reduction of investments and short-term investments offset by an $18 million decrease in net free funds. The $4 million increase in interest-bearing deposits reflects a $16 million increase in outstanding brokered CDs and a decrease of $12 million in retail interest-bearing deposits. LIQUIDITY Liquidity refers to the ability of the Corporation to generate adequate amounts of cash to meet the Corporation's needs for cash. The subsidiary banks and the parent company of the Corporation have different liquidity considerations. Banking subsidiaries meet their cash flow requirements by having funds available to satisfy customer credit needs as well as having available funds to satisfy deposit withdrawal requests. Liquidity at banking subsidiaries is derived from deposit growth, money market assets, maturing loans, the maturity of securities, access to other funding sources and markets, and a strong capital position. Deposit growth is the primary source of liquidity at the banking subsidiaries. Interest-bearing deposits increased $58 million, while noninterest-bearing deposits fell $75 million from the seasonally high year-end balance. As of March 31, 1997, the securities portfolio contained $391.4 million at amortized cost of U.S. Treasury and federal agency securities available for sale, representing 45.5% of the total securities portfolio. These government securities are highly marketable and had a market value equal to 99.5% of amortized cost at quarter end. Money market investments, consisting of federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits in other financial institutions, averaged $24.5 million in the first quarter of 1997 compared to $29.2 million during the same period in 1996. 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.
18 At March 31, 1997, the Corporation had $24.3 million outstanding in short-term money market investments, serving as an essential source of liquidity. The amount at quarter end represents .5% of total assets compared to .6% at December 31, 1996. Short-term borrowings totaled $472.0 million at March 31, 1997, compared with $444.1 million at the end of 1996. Within the classification of short-term borrowings are federal funds purchased, securities sold under agreements to repurchase and FHLB advances with a remaining maturity of less than one year. Federal funds are purchased from a sizable network of correspondent banks while securities sold under agreements to repurchase are obtained from a base of individual, business and public entity customers. FHLB advances with a remaining maturity of greater than one year are included in long-term borrowings. Deposit growth will continue to be the primary source of bank subsidiary liquidity on a long-term basis, along with stable earnings, the resulting cash generated by operating activities and strong capital positions. Shorter-term liquidity needs will mainly be derived from growth in short-term borrowings, maturing securities and money market assets, loan maturities and access to other funding sources. Liquidity is also necessary at the parent company level. The parent company's primary sources of funds are dividends and service fees from subsidiaries, borrowings and proceeds from the issuance of equity. The parent company manages its liquidity position to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries and satisfy other operating requirements. Dividends received from subsidiaries totaled $8.7 million in the first three months of 1997 and will continue to be the parent's main source of long-term liquidity. At March 31, 1997, the parent company had $115 million of established lines of credit with non-affiliated banks, of which $64 million was in use for nonbank affiliates. 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 March 31, 1997, totaled $2.1 million. The Corporation's long-term debt to equity ratio at March 31, 1997, was 7.7%, compared to 5.4% at December 31, 1996. This increase is primarily attributable to an increase in outstanding long-term FHLB advances. Management believes that, in the current economic environment, the Corporation's 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 March 31, 1997, increased $14.4 million, or 3.7% since December 31, 1996. This increase was composed of $8.1 million as a result of the Centra acquisition, $9.4 million of retained earnings, $0.4 million from option exercises, reduced by $1.3 million from treasury stock purchases and $2.1 million reduction in the net unrealized gain on available for sale securities. Equity to assets at March 31, 1997, climbed to 9.14%, with the Tier 1 leverage ratio climbing to 8.58%. Cash dividends of $.24 per share were paid in the first quarter of 1997, representing a payout ratio of 36.36%. Compared to the same period last year, a cash dividend of $.23 per share was paid, representing a payout ratio of 37.70%.
19 Capital Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------- Stockholders' Equity $407,590 $393,145 $381,428 $371,392 $364,046 Average Equity to Average Assets 9.19% 9.06% 8.94% 8.90% 8.89% Equity to Assets - Period End 9.14% 8.90% 8.91% 8.92% 8.84% Tier 1 Capital to Risk Weighted Assets - Period End 11.03% 10.73% 10.75% 10.66% 10.55% Total Capital to Risk Weighted Assets - Period End 12.28% 11.98% 12.00% 11.91% 11.81% Tier 1 Leverage Ratio - Period End 8.58% 8.41% 8.28% 8.24% 8.15% Market Value Per Share - Period End $ 36.75 $ 35.42 $ 40.38 $ 38.75 $ 37.75 Book Value Per Share - Period End $ 18.16 $ 17.84 $ 20.77 $ 20.21 $ 19.82 Market Value Per Share to Book Value Per Share 202.4% 198.5% 194.4% 191.7% 190.5% Dividends Per Share - This Quarter $ .24 $ .24 $ .24 $ .24 $ .23 Dividends Per Share - Year to Date $ .24 $ .95 $ .71 $ .47 $ .23 Earnings Per Share - This Quarter $ .66 $ .68 $ .67 $ .64 $ .61 Earnings Per Share - Year to Date $ .66 $ 2.60 $ 1.92 $ 1.25 $ .61 Dividend Payout Ratio - This Quarter 36.36% 35.29% 35.82% 37.50% 37.70% Dividend Payout Ratio - Year to Date 36.36% 36.54% 36.98% 37.60% 37.70% - -------------------------------------------------------------------------------- The adequacy of the Corporation's capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic conditions in markets served and strength of management. As of March 31, 1997, 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 March 31, 1997, 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 April 23, 1997, the Corporation announced a $.29 (twenty-nine cents) per share quarterly cash dividend. This will result in a 20% increase in the quarterly cash dividend paid. The dividends anticipated to be paid in 1997 represent an increase of 16.8% over those paid in 1996. ACCOUNTING DEVELOPMENTS In February 1997, Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share," which is effective for financial statements issued for periods ending after December 15, 1997. This statement simplifies the standards for computing earnings per share previously found in APB No. 15. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual
20 presentation of basic and diluted EPS on the face the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Earlier application of this statement is not permitted. The Corporation has determined that the impact of adoption will not have a material effect on the consolidated statements of the Corporation.
21 ASSOCIATED BANC-CORP PART II - OTHER INFORMATION Page No. ------- ITEM 5: Other Information On May 14, 1997, the Corporation entered into an Agreement and Plan of Merger, dated as of May 14, 1997, by and among the Corporation, Badger Merger Corp., a Wisconsin corporation and wholly owned subsidiary of the Corporation (the "Merger Sub") and First Financial Corporation, a Wisconsin corporation ("FFC") (the "Merger Agreement"). The Merger Agreement provides for a combination of the respective businesses through a stock-for-stock merger of equals. The resulting institution, which will retain the Associated Banc-Corp name, will have combined assets of $10.5 billion, equity capital of approximately $900 million, and a network of over 200 full-service banking locations throughout Wisconsin and Illinois. Headquarters of the merged company will be in Green Bay, with significant operations remaining in both Stevens Point and Green Bay. The Merger Agreement provides that, at the effective time of the Merger, each share of common stock, par value $1.00 per share, of FFC (the "FFC Common Stock"), will be exchanged for .765 shares of common stock, par value $.01 per share, of the Corporation ("Associated Common Stock"). The Merger is intended to qualify as a tax-free reorganization for federal income tax purposes and will be accounted for as a "pooling of interests" for financial reporting purposes. Consummation of the transactions contemplated by the Merger Agreement is subject to certain conditions, including approval by the shareholders of FFC of the Merger, approval by the shareholders of the Corporation of the authorization of additional shares of Associated Common Stock and the issuance of additional shares of Associated Common Stock in connection with the Merger, receipt of legal opinions to the effect that the Merger qualifies as a tax-free reorganization for federal income tax purposes, confirmation from the parties' accountants that the Merger will be accounted for as a "pooling of interests" for financial reporting purposes, absence of any injunction or certain other legal matters restraining or prohibiting the transaction, the truth and accuracy of certain representations and warranties, compliance with certain covenants contained in the Merger Agreement and other usual and customary closing conditions. The Corporation's Chief Executive Officer H.B. Conlon will be Chairman and CEO of the combined companies. John C. Seramur, FFC's Chief Executive Officer, will be named Vice Chairman, and will remain President of FFC during the integration. Robert C. Gallagher will remain as Vice Chairman of Associated. The board of directors of the combined institutions will consist of seven of the existing directors from each company. The foregoing description is qualified in its entirety by reference to the Merger Agreement, which is attached hereto as Exhibit 2 and is incorporated herein by reference. As a condition to the Corporation entering into the Merger Agreement, FFC and the Corporation entered into a stock option agreement, dated as of May 14, 1997 (the "FFC Stock Option Agreement"), pursuant to which FFC granted to the Corporation an irrevocable option to purchase up to 19.9% of the outstanding shares of FFC Common Stock at an exercise price of $23.25 per share (the "FFC Stock Option"). As a condition to FFC entering into the Merger Agreement, FFC and the Corporation entered into a stock option agreement, dated as of May 14, 1997 (the "Associated Stock Option Agreement"), pursuant to which the Corporation granted to FFC an irrevocable option to purchase up to 19.9% of the outstanding shares of Associated Common Stock at an exercise price of $32.50 per share (the "Associated Stock Option"). Each of the FFC Stock Option and the Associated Stock Option will become exercisable upon certain conditions specified in the FFC Stock Option Agreement and the Associated Stock Option Agreement, respectively. The foregoing description is qualified in its entirety by reference to the Associated Stock Option Agreement and the FFC Stock Option Agreement, which are attached hereto as Exhibits 10.1 and 10.2, respectively, and each of which is incorporated herein by reference. The merger is expected to be earnings accretive during fiscal year 1998, the first full year of consolidation. In connection with the transaction, the merged company anticipates taking a one-time charge and one-time conforming accounting adjustments of at least $40 million, net of taxes, the exact amount of which has not yet been determined. It is further anticipated that transactional economies will result in pre-tax savings totaling approximately $10 million in the first full year of consolidation and is expected to increase in future years. This Form 10-Q, including this Item 5, contains forward-looking statements, including estimates of future operating results and other forward-looking financial information for the Corporation, FFC, and the combined company. These estimates constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Actual results and other financial information may differ materially from the results and financial information discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) expected cost savings from the merger cannot be fully realized or realized within the expected time frame; (2) revenues following the merger are lower than expected; (3) competitive pressures among financial institutions increase significantly; (4) costs or difficulties related to the integration of the businesses of the Corporation and FFC are greater than expected; (5) general economic conditions are less favorable than expected; and (6) legislation or regulatory changes adversely affect the business in which the combined company will be engaged. ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits: (2) Agreement and Plan of Merger, dated as of May 14, 1997 among the Corporation, Badger Merger Corp. and First Financial Corporation (10.1) Stock Option Agreement, dated as of May 14, 1997 between the Corporation and First Financial Corporation (10.2) Stock Option Agreement, dated as of May 14, 1997 between First Financial Corporation and the Corporation (11) Statements re Computation of Per Share Earnings (27) Financial Data Schedule (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended March 31, 1997.
22 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: May 15, 1997 --------------------------------- Harry B. Conlon Chairman & Chief Executive Officer /s/ JOSEPH B. SELNER Date: May 15, 1997 -------------------------------- Joseph B. Selner Principal Financial Officer
23 INDEX TO EXHIBITS Exhibit No. Page No. - ---------- -------- (2) Agreement and Plan of Merger, dated as of May 14, 1997 among the Corporation, Badger Merger Corp. and First Financial Corporation (10.1) Stock Option Agreement, dated as of May 14, 1997 between the Corporation and First Financial Corporation (10.2) Stock Option Agreement, dated as of May 14, 1997 between First Financial Corporation and the Corporation (11) Computations of Earnings Per Share and Average Number of Common Shares Outstanding (27) Financial Data Schedule