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
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