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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period 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 (I.R.S. employer
incorporation or organization)
identification no.)
112 NORTH ADAMS STREET, 54301
GREEN BAY, WISCONSIN (Zip code)
Registrant's telephone number, including area code: (414) 433-3166
(Address of principal executive
offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
COMMON STOCK, PAR VALUE--$0.01 PER SHARE
(TITLE OF CLASS)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of March 10, 1997, 22,436,829 shares of Common Stock were outstanding and
the aggregate market value of the voting stock held by non-affiliates of the
Registrant was $864,070,940. Excludes $39,011,427 of market value representing
the outstanding shares of the Registrant owned by all directors and officers
who individually, in certain cases, or collectively, may be deemed affiliates.
Includes $94,617,575 of market value representing 10.48% of the outstanding
shares of the Registrant held in a fiduciary capacity by the trust departments
of four wholly-owned subsidiaries of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
Proxy Statement for Annual Meeting of Part III
Shareholders on April 23, 1997
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ASSOCIATED BANC-CORP
1996 FORM 10-K TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations 9
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 61
PART III
Item 10. Directors and Executive Officers of the Registrant 61
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management 61
Item 13. Certain Relationships and Related Transactions 61
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 62
Signatures 64
2
PART I
ITEM 1 BUSINESS
GENERAL
Associated Banc-Corp (the "Corporation") is a bank holding company registered
pursuant to the Bank Holding Company Act of 1956, as amended (the "Act"). It
was incorporated in Wisconsin in 1964 and was inactive until 1969 when
permission was received from the Board of Governors of the Federal Reserve
System to acquire three banks. The Corporation currently owns eleven
commercial banks located in Wisconsin and Illinois (the "affiliates") serving
their local communities and, measured by total assets held at December 31,
1996, was the third largest commercial bank holding company headquartered in
Wisconsin. As of December 31, 1996, the Corporation owned 28 non-banking
subsidiaries located in Arizona, Georgia, Illinois, Nevada, and Wisconsin.
There was no material change in the nature of the business done by the
Corporation or its affiliates and subsidiaries during 1996.
The Corporation, through an affiliate, Associated Banc-Shares, Inc., acquired
SBL Capital Bank Shares, Inc. and its wholly owned subsidiary, State Bank of
Lodi, and its wholly owned subsidiaries, SBL Management Corp. and Lodi
Insurance Agency, Inc., on March 1, 1996. The Corporation, through Associated
Banc-Shares, Inc., acquired Greater Columbia Bancshares, Inc. and its wholly
owned subsidiary, First National Bank of Portage, and its wholly owned
subsidiary, Portage Investments, Inc., on April 5, 1996. Further, on July 19,
1996, the Corporation acquired F&M Bankshares of Reedsburg, Inc. and its
wholly owned subsidiary, Farmers and Merchants Bank, and its wholly owned
subsidiary, Fusch Corporation. The Corporation, through its subsidiary,
Associated Illinois Banc Corp, acquired Mid-America National Bancorp, Inc. and
its wholly owned subsidiary, Mid-America National Bank of Chicago, on July 31,
1996, which was merged that same date with Associated Bank Chicago, a
subsidiary of the Corporation. On September 27, 1996, the Corporation
dissolved Associated Acquisitions Corporation, a corporation operated as a
holding company for a captive insurance company, and the insurance company
became a direct subsidiary of the Corporation. The Corporation acquired Centra
Financial, Inc., and its wholly owned subsidiary, Central Bank of West Allis,
and its wholly owned subsidiary, Central Investments, Inc., on February 21,
1997.
SERVICES
The Corporation provides advice and specialized services to the affiliates in
various areas of banking policy and operations, including auditing, data
processing, marketing/advertising, investments, legal/compliance, personnel
services, trust services, risk management, and other financial services
functionally related to banking.
Responsibility for the management of the affiliates remains with their
respective Boards of Directors and officers. Services rendered to the
affiliates by the Corporation are intended to assist the local management of
these banks to expand the scope of the banking services offered by them. At
December 31, 1996 the affiliated banks operated a total of 96 banking
locations in 65 communities.
The Corporation, through its affiliates, provides a complete range of retail
banking services to individuals and small- to medium-size businesses. These
services include checking, savings, NOW, Super NOW, and money market deposit
accounts, business, personal, educational, residential, and commercial
mortgage loans, MasterCard, VISA and other consumer-oriented financial
services, including IRA and Keogh accounts, safe deposit and night depository
facilities. Automated Teller Machines (ATMs), which provide 24-hour banking
services to customers of the affiliates, are installed in many locations in
the affiliates' service areas. The affiliates are members of an interstate
shared ATM network, which allows their customers to perform banking
transactions from their checking, savings or credit card accounts at ATMs in a
multi-state environment. Among the services designed specifically to meet the
needs of small- and medium-size businesses are various types of specialized
financing, cash management services and transfer/collection facilities.
The affiliates provide lending, depository, and related financial services to
commercial, industrial, financial, and governmental customers. In the lending
area these include term loans, revolving credit
3
arrangements, letters of credit, inventory and accounts receivable financing,
real estate construction lending, and international banking services.
Additional emphasis is given to non-credit services for commercial customers,
such as advice and assistance in the placement of securities, corporate cash
management, and financial planning. The affiliates make available check
clearing, safekeeping, loan participations, lines of credit, portfolio
analyses, data processing, and other services to approximately 150
correspondent financial institutions.
Four of the affiliates and a trust company subsidiary offer a wide variety of
fiduciary, investment management, advisory, and corporate agency services to
individuals, corporations, charitable trusts, foundations, and institutional
investors. They also administer (as trustee and in other fiduciary and
representative capacities) pension, profit sharing and other employee benefit
plans, and personal trusts and estates.
The mortgage banking subsidiaries are involved in the origination and
warehousing of mortgage loans and the sale of such loans to investors. The
primary focus is on one- to four-family residential and multi-family
properties, all of which are generally saleable into the secondary mortgage
market.
Investment subsidiaries provide discount and full-service brokerage services,
including the sale of fixed and variable annuities, mutual funds, and
securities, to the affiliates' customers and the general public. Several
investment subsidiaries located in Nevada hold, manage, and trade cash,
stocks, and securities transferred from the affiliates and reinvest investment
income. Insurance subsidiaries provide insurance products, including credit
life and disability insurance, to the affiliates' customers. A leasing
subsidiary provides lease financing for a variety of capital equipment for
commerce and industry.
The Corporation and affiliates are not dependent upon a single or a few
customers, the loss of which would have a material adverse effect on the
Corporation. No material portion of the Corporation's or the affiliates'
business is seasonal.
FOREIGN OPERATIONS
The Corporation and its affiliates do not engage in any operations in foreign
countries.
EMPLOYEES
At December 31, 1996, the Corporation and its affiliates, as a group, had
2,012 full-time equivalent employees.
COMPETITION
Competition exists in all of the Corporation's principal markets. Competition
involves efforts to obtain new deposits, the scope and type of services
offered, interest rates paid on deposits and charged on loans, as well as
other aspects of banking. Substantial competition exists from other financial
institutions engaged in the business of making loans and accepting deposits.
All of the affiliates also face direct competition from members of bank
holding company systems that have greater assets and resources than those of
the Corporation.
SUPERVISION AND REGULATIONS
Financial institutions are highly regulated both at the federal and state
level. Numerous statutes and regulations affect the business of the
Corporation and the affiliates.
The activities of the Corporation are regulated by the Act. The Act requires
prior approval of the Federal Reserve Board (the "Board") before acquiring
direct or indirect ownership or control of more than five percent of the
voting shares of any bank or bank holding company. The Riegel-Neal Interstate
Banking and Branching Efficiency Act of 1994 contains provisions which amended
the Act to allow an adequately-capitalized and adequately-managed bank holding
company to acquire a bank located in another state as of September 29, 1995.
Effective June 1, 1997, interstate branching will be permitted.
The Act also prohibits, with certain exceptions, acquisitions of more than
five percent of the voting shares of any company which is not a bank and the
conduct by a holding company (directly or through its
4
subsidiaries) of any business other than banking or performing services for
its subsidiaries without prior approval of the Board.
All of the affiliate banks are insured by the Federal Deposit Insurance
Corporation and are subject to the provisions of the Federal Deposit Insurance
Act. Areas subject to regulation by federal and state authorities include
capital adequacy, reserves, investments, loans, mergers, issuance of
securities, payments of dividends by the banking affiliates, establishment of
branches, and other aspects of banking operations.
The FDIC Board of Directors voted December 11, 1996 to finalize a rule
lowering the rates on assessments paid to the Savings Association Insurance
Fund ("SAIF"), effective as of October 1, 1996. As a result of the special
assessment required by the Deposit Insurance Funds Act of 1996 ("Funds Act"),
the SAIF was capitalized at the target Designated Reserve Ratio ("DRR") of
1.25% of estimated insured deposits on October 1, 1996. The Funds Act required
the FDIC to set assessments in order to maintain the target DRR. The Board
has, therefore, lowered the rates on assessments paid to the SAIF, while
simultaneously widening the spread between the lowest and highest rates to
improve the effectiveness of the FDIC's risk-based premium system. The Board
has also established a process, similar to that which was applied to the Bank
Insurance Fund ("BIF"), for adjusting the rate schedules for both the SAIF and
the BIF within a limited range, without notice and comment to maintain each of
the fund balances at the target DRR.
The Funds Act also separates, effective January 1, 1997, the Financing
Corporation ("FICO") assessment to service the interest on its bond
obligations from the SAIF assessment. The amount assessed on individual
institutions by the FICO will be in addition to the amount paid for deposit
insurance according to the FDIC's risk-related assessment rate schedules.
GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings and growth of the banking industry and the banking affiliates of
the Corporation are affected by the credit policies of monetary authorities,
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit in order to
combat recession and curb inflationary pressures. Among the instruments of
monetary policy used by the Federal Reserve to implement these objectives are
open market operations in U.S. government securities, changes in reserve
requirements against member bank deposits and changes in the Federal Reserve
discount rate. These means are used in varying combinations to influence
overall growth of bank loans, investments and deposits, and may also affect
interest rates charged on loans or paid for deposits. The monetary policies of
the Federal Reserve authorities have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to have
such an effect in the future.
In view of changing conditions in the national economy and in the money
markets, as well as the effect of credit policies by monetary and fiscal
authorities, including the Federal Reserve System, no prediction can be made
as to possible future changes in interest rates, deposit levels and loan
demand, or their effect on the business and earnings of the Corporation and
its affiliates.
ITEM 2 PROPERTIES
The Corporation's corporate headquarters are located in the City of Green Bay,
Wisconsin, in a leased facility with approximately 6,500 square feet of office
space owned by an affiliated company. The space is currently leased on a
month-to-month basis.
In April 1996, the Corporation acquired and fully renovated an 85,000 square
foot facility in Ashwaubenon, Wisconsin, which is occupied by an affiliate
which provides customer service and data processing services to all banking
subsidiaries of the Corporation and certain correspondent customers.
The affiliates, as of December 31, 1996, occupied 96 offices in 65 different
communities within Wisconsin and northern Illinois. All key facilities, except
Associated Bank Milwaukee and Associated Bank Chicago, are owned by the
affiliates. Except for the affiliate offices in downtown Milwaukee and
Chicago, which are located in the lobbies of multi-story office buildings, all
of the banking facilities are free-standing buildings that provide adequate
customer parking facilities, including drive-in facilities of various numbers
and types for customer convenience. Some banks also have offices in various
supermarket locations as
5
well as offices located within retirement community facilities. In addition,
the Corporation owns other real property that, when considered in the
aggregate, is not material to its financial position.
ITEM 3 LEGAL PROCEEDINGS
Information in response to this item is incorporated by reference to Note 14
"Commitments and Contingent Liabilities--Legal" of the Notes to Consolidated
Financial Statements included under Item 8 of this document.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
EXECUTIVE OFFICERS OF THE CORPORATION
Pursuant to General Instruction G of Form 10-K, the following list is included
as an unnumbered item in Part I of this report in lieu of being included in
the Proxy Statement for the Annual Meeting of Stockholders to be held April
23, 1997.
The following is a list of names and ages of executive officers of the
Corporation and affiliates indicating all positions and offices held by each
such person and each such person's principal occupation(s) or employment
during the past five years. The Date of Election refers to the date the person
was first elected an officer of the Corporation or its affiliates. Officers
are appointed annually by the Board of Directors at the meeting of directors
immediately following the Annual Meeting of Shareholders. There are no family
relationships among these officers nor any arrangement or understanding
between any officer and any other person pursuant to which the officer was
selected. No person other than those listed below has been chosen to become an
Executive Officer of the Corporation.
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Harry B. Conlon Chairman, President, Chief Executive March 1, 1975
Age: 61 Officer and Director of Associated
Banc-Corp
Robert C. Gallagher Vice Chairman and Director of April 28, 1982
Age: 58 Associated Banc-Corp; Chairman and
Chief Executive Officer of Associated
Bank Green Bay (affiliate)
Prior to April 1996, Executive Vice
President and Director of Associated
Banc-Corp; Chairman, President and
Chief Executive Officer of Associated
Bank Green Bay (affiliate)
Brian R. Bodager Senior Vice President, General July 22, 1992
Age: 41 Counsel and Corporate Secretary of
Associated Banc-Corp
Prior to June 1992, Senior Officer of
an Ohio-based bank holding company
Joseph B. Selner Senior Vice President and Chief January 25, 1978
Age: 50 Financial Officer of Associated Banc-
Corp
Arthur E. Olsen, III Vice President--General Auditor of July 28, 1993
Age: 45 Associated Banc-Corp
Prior to July 1993, Senior manager of
a national public
accounting firm
Mary Ann Bamber Senior Vice President-Director of January 22, 1997
Age: 46 Retail Banking of Associated Banc-
Corp
From January 1996 to January 1997,
Independent consultant
From January 1996 to January 1997,
Senior Officer of an Iowa-based bank
Prior to January 1996, Senior Officer
of a Minnesota-based holding company
Robert J. Johnson Vice President-Director of Human January 22, 1997
Age: 51 Resources of Associated Banc-Corp
Prior to January 1997, Senior Officer
of a Wisconsin manufacturing company
6
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
John P. Evans President and Director of Associated August 16, 1993
Age: 47 Bank North (affiliate)
Prior to July 1993, Officer of a
Wisconsin bank
David J. Handy President, Chief Executive Officer May 31, 1991
Age: 57 and Director of Associated Bank,
National Association (affiliate)
Michael B. Mahlik Executive Vice President, Managing January 1, 1991
Age: 44 Trust Officer, and Director of
Associated Bank, National Association
(affiliate); President, Chief
Executive Officer, and Director of
Associated Trust Company (subsidiary)
George J. McCarthy President and Chief Executive Officer November 11, 1983
Age: 46 of Associated Bank Chicago
(affiliate)
Mark J. McMullen Executive Vice President and Director June 2, 1981
Age: 48 of Associated Bank Green Bay
(affiliate)
Randall J. Peterson President and Director of Associated August 2, 1982
Age: 51 Bank Green Bay (affiliate)
Prior to July 1996, Executive Vice
President and Director of Associated
Bank Green Bay (affiliate)
Gary L. Schaefer President of Associated Bank Madison March 1, 1995
Age: 47 (affiliate)
Prior to March 1995, Senior Officer
of a Wisconsin bank
Thomas R. Walsh President and Chief Executive Officer January 1, 1994
Age: 39 of Associated Bank Lakeshore
(affiliate)
From September 1992 to January 1994,
Senior Officer of Associated Bank
Lakeshore (affiliate)
Prior to September 1992, Senior
Officer of an Illinois bank
Gordon J. Weber President, Chief Executive Officer December 15, 1993
Age: 49 and Director of Associated Bank
Milwaukee (affiliate); Director of
Associated Bank Madison (affiliate)
Prior to December 15, 1993,
President, Chief Executive Officer
and Director of Associated Bank
Lakeshore (affiliate)
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information in response to this item is incorporated by reference to the table
"Market Information" on Page 61 and the discussion of dividend restrictions in
Note 11 "Stockholders' Equity" of the Notes to Consolidated Financial
Statements included under Item 8 of this document. The Corporation's common
stock is currently being traded on the Nasdaq National Market under the symbol
ASBC.
The approximate number of equity security holders of record of common stock,
$.01 par value, as of March 1, 1997, was 5,000. Certain of the Corporation's
shares are held in "nominee" or "street" name and, accordingly, the number of
beneficial owners of such shares is not known nor included in the foregoing
number.
Payment of future dividends is within the discretion of the Corporation's
Board of Directors and will depend, among other factors, on earnings, capital
requirements, and the operating and financial condition of the Corporation. At
the present time, the Corporation expects that dividends will continue to be
paid in the future.
7
ITEM 6 SELECTED FINANCIAL DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA(1)
%
CHANGE 5-YEAR
1995 COMPOUND
TO GROWTH
YEARS ENDED DECEMBER 31, 1996 1996 1995 1994 1993 1992 1991 RATE
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(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
Interest income $ 311,732 11.6 $ 279,378 $ 231,861 $ 219,856 $ 237,828 $ 257,769 3.9%
Interest expense 142,477 13.9 125,099 88,513 85,094 108,477 141,996 0.1
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Net interest income 169,255 9.7 154,279 143,348 134,762 129,351 115,773 7.9
Less: Provision for
possible loan losses 4,665 8.7 4,291 2,211 5,871 10,707 21,771 (26.5)
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Net interest income
after provision for
possible loan losses 164,590 9.7 149,988 141,137 128,891 118,644 94,002 11.9
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Plus: Noninterest income 65,083 17.6 55,350 50,861 50,955 49,073 42,221 9.0
Less: Noninterest
expense 140,385 8.0 130,033 124,943 121,354 120,913 113,700 4.3
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Net noninterest expense 75,302 0.8 74,683 74,082 70,399 71,840 71,479 1.0
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Income before income
taxes and extraordinary
item 89,288 18.6 75,305 67,055 58,492 46,804 22,523 31.7
Income tax expense 32,044 17.5 27,277 23,487 19,620 14,692 8,471 30.5
Extraordinary item -- -- -- -- -- 1,006 -- --
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NET INCOME $ 57,244 19.2 $ 48,028 $ 43,568 $ 38,872 $ 33,118 $ 14,052 32.4
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Earnings per share(2)
Income before
extraordinary item $ 2.60 13.5 $ 2.29 $ 2.08 $ 1.89 $ 1.61 $ .72 29.4
Net income $ 2.60 13.5 $ 2.29 $ 2.08 $ 1.89 $ 1.67 $ .72 29.4
Cash dividends per
share(2) $ .95 17.3 $ .81 $ .71 $ .62 $ .51 $ .48 14.9
Weighted average shares
outstanding 22,035 5.1 20,967 20,939 20,394 19,916 19,536
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SELECTED FINANCIAL DATA
Year-End Balance:
Loans, net of unearned
income $3,159,853 15.0 $2,747,936 $2,461,595 $2,177,583 $2,122,460 $2,065,149 8.9%
Allowance for possible
loan losses 47,422 14.0 41,614 39,380 36,296 35,257 31,820 8.3
Investment securities 854,635 7.4 795,709 798,629 748,611 704,227 631,200 6.2
Assets 4,419,079 12.7 3,922,501 3,628,698 3,266,696 3,246,022 3,177,037 6.8
Deposits 3,508,041 11.5 3,145,676 2,952,785 2,675,359 2,708,592 2,619,480 6.0
Long-term borrowings 21,130 (4.2) 22,064 8,819 12,848 19,706 39,841 (11.9)
Stockholders' equity 393,145 15.5 340,294 299,286 280,079 235,567 208,114 13.6
Stockholders' equity per
share (2) 17.84 10.0 16.22 14.28 13.65 11.75 10.50 11.2
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Average for the Year:
Loans, net of unearned
income $3,013,909 16.3 $2,591,218 $2,304,230 $2,159,998 $2,109,214 $1,986,018 8.7%
Investment securities 821,655 4.4 786,807 766,484 725,870 648,754 614,671 6.0
Assets 4,156,440 13.5 3,662,269 3,355,147 3,256,733 3,148,606 2,720,377 8.8
Deposits 3,325,995 12.2 2,964,126 2,737,712 2,667,097 2,622,983 2,442,647 6.4
Long-term borrowings 27,159 73.5 15,657 11,464 18,352 27,010 39,882 (7.4)
Stockholders' equity 371,911 16.4 319,451 288,284 252,001 220,696 207,121 12.4
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Financial Ratios:
Return on average equity 15.39% 15.03% 15.11% 15.43% 15.01% 6.78%
Return on average assets 1.38 1.31 1.30 1.21 1.05 .52
Net interest margin
(tax-equivalent) 4.53 4.64 4.72 4.69 4.63 4.49
Average equity to
average assets 8.95 8.72 8.59 7.86 7.01 7.61
Dividend payout ratio 36.54 35.27 34.00 32.31 30.50 66.28
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(1) All financial data adjusted retroactively for certain acquisitions
accounted for using the pooling-of-interests method.
(2) Per share data adjusted retroactively for stock splits and stock dividends
(including the 6-for-5 stock split to be effected as a 20% stock dividend
declared on January 22, 1997).
8
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is management's analysis of the consolidated
financial condition and results of operations of the Corporation, which may
not otherwise be apparent from the consolidated financial statements included
in this report. Reference should be made to those statements and the selected
financial data presented elsewhere in this report for an understanding of the
following discussion and analysis.
BUSINESS COMBINATIONS
In July 1995, the Corporation completed the cash acquisition of Great Northern
Mortgage Company, a privately owned mortgage company in suburban Chicago. The
mortgage company acquisition provided approximately $535 million in mortgage
servicing as well as expanding the Corporation's mortgage loan origination
capabilities in Chicago and northeast Illinois. The acquisition was accounted
for as a purchase, and accordingly, the consolidated financial statements
include the results of operations since the date of acquisition.
In August 1995, the Corporation acquired GN Bancorp, Inc., parent company of
the $130 million Gladstone-Norwood Trust & Savings Bank in northwest Chicago
in a stock for stock merger transaction. The GN Bancorp acquisition was
accounted for as a pooling of interests. All consolidated financial
information was restated as if the transaction had been effected as of the
beginning of the earliest reporting period. The bank was subsequently renamed
Associated Bank Gladstone-Norwood. Additionally in the Chicago market, on July
31, 1996, the Corporation completed the cash acquisition of Mid-America
National Bancorp Inc., parent company of the $39 million Mid-America National
Bank of Chicago, with one office in downtown Chicago. Mid-America National
Bank of Chicago was subsequently merged into Associated Bank Chicago. This
transaction was accounted for as a purchase, and accordingly, the consolidated
financial statements include the results of operations since the date of
acquisition. At year-end 1996 total assets in the Chicago market exceeded $442
million.
In April 1996, the Corporation completed the acquisition of Greater Columbia
Bancshares, Inc., parent company of $211 million The First National Bank of
Portage. This acquisition was accounted for using the pooling-of-interests
method. All consolidated financial information was restated as if the
transaction had been effected as of the beginning of the earliest reporting
period. The bank was subsequently renamed Associated Bank Portage.
The Corporation also completed two other acquisitions that were accounted for
using the pooling-of-interests method. However, neither transaction was
material to prior years' reported operating results and, accordingly,
previously reported prior years' results were not restated. In March 1996, the
Corporation completed the acquisition of SBL Capital Bankshares, Inc., parent
company of the $68 million The State Bank of Lodi. In July 1996, the
Corporation completed the acquisition of the $139 million F&M Bankshares of
Reedsburg, Inc., parent company of Farmers & Merchants Bank. The banks were
renamed Associated Bank Lodi and Associated Bank Reedsburg, respectively.
On February 21, 1997, the Corporation completed its merger with Centra
Financial, Inc., whose principal subsidiary is the $76 million asset Central
Bank of West Allis. The total number of shares issued totalled 414,365. The
transaction, to be accounted for using the pooling-of-interests method, was
not material to prior years' reported operating results and, accordingly,
previously reported results will not be restated. The bank was subsequently
renamed Associated Bank West Allis.
All per share information has been adjusted to reflect the 5-for-4 stock
split, effected in the form of a 25% stock dividend, paid to shareholders on
June 15, 1995 and the 6-for-5 stock split declared January 22, 1997, effected
in the form of a 20% stock dividend, payable on March 17, 1997 to shareholders
of record March 5, 1997.
PERFORMANCE SUMMARY
The Corporation achieved record earnings in 1996. Net income grew to $57.2
million, a 19.2% increase over the $48.0 million earned in 1995. The increase
in 1996 net income, excluding the impact of the
9
acquisitions of Lodi, Reedsburg, and Great Northern Mortgage, was $6.3
million, or 13.2%. This followed a 10.2% improvement in 1995 earnings over
1994.
On a per share basis, net income was $2.60 in 1996 compared with $2.29 in
1995, an increase of 13.5%. This followed a 10.0% increase in 1995 per share
earnings over 1994.
The improvement in the Corporation's 1996 net income was led by a $15.9
million or 10.0% increase in fully taxable equivalent net interest income.
Changes in the volumes of earning assets and interest-bearing liabilities were
the major factors for the improvement as average earning assets grew 12.9%
combined with 13.7% growth in average interest-bearing liabilities compared
with 1995. Fully taxable equivalent interest income in 1996 rose $33.3 million
or 11.7% compared with 1995, while interest expense increased $17.4 million or
13.9% between the same periods, resulting in the improvement in 1996 net
interest income.
The provision for loan losses was $4.7 million in 1996 compared to $4.3
million in 1995. The increase in provision was related to slightly higher net
charge-offs in 1996 compared to 1995 and strong loan growth of 15.0%,
requiring a higher provision in 1996 to maintain an adequate allowance for
possible loan losses to loans ratio, which was 1.50% at December 31, 1996.
Noninterest income rose 17.6% over 1995 as trust revenues continued to show
strong growth, up 13.2% over 1995, and mortgage banking activities up 61.5%
over 1995, as a result of larger servicing and origination volumes related to
the first full year of operations of Great Northern Mortgage acquired in July
1995, as well as the adoption of SFAS 122 on January 1, 1996. Retail
investment income continued to increase, up 34.3% over 1995, as new sales
offices were added.
Noninterest expense increased 8.0% over 1995. Excluding the impact of the
acquisitions of Lodi, Reedsburg, and Great Northern Mortgage, total
noninterest expense increased $5.5 million, or 4.3%. Offsetting a $3.6 million
decrease in FDIC premium expense were higher levels of salaries and benefits,
mortgage servicing rights amortization, and consulting expenses.
For the year, return on average assets improved to 1.38% compared with 1.31%
in 1995. This improvement resulted from an earnings increase of 19.2% that
outpaced average asset growth of 13.5%.
Return on average equity (ROE) in 1996 increased to 15.39% compared to 15.03%
in 1995. The 1996 ROE was achieved on a larger capital base as a result of the
Corporation's strong earnings performance.
Cash dividends paid in 1996 increased 17.3% to $.95 per share compared to $.81
per share in 1995. This followed a 14.1% increase in 1995 dividends over the
$.71 per share paid in 1994.
INVESTING IN THE FUTURE
Since 1995 the Corporation has been involved in a study to determine how it
could enhance its technology and systems to meet anticipated customer service
expectations and improve both the ease of access and quality of its financial
services. One of the study recommendations was to consolidate its seven
regional processing operations into one center and standardize its processes
and procedures.
The Corporation acquired and fully renovated an 85,000 square-foot building in
1996 to house the operational functions. Deposit processing functions were
transferred to the new center in the 1996 fourth quarter. Loan and other
processes will be consolidated at the center in 1997, and the Corporation will
be converting to new technology, in many of its major systems, with its long-
term technology partner, EDS Corporation. In the last half of 1997, the
Corporation will begin consolidating and converting the banks it acquired over
the past 18 months into these new systems.
The Corporation has already invested $20 million in new facilities and
equipment of the expected $25 million investment in this project. The expenses
related to the project are expected to temper 1997 earnings growth to the 6-8
percent range, however, the Corporation anticipates achieving or exceeding its
5-year published financial goals.
The Corporation believes that this project will enable it to continue to be
competitive in the market place. While it believes that it has always been an
efficient company, the new processes, when fully
10
implemented, should increase its efficiency and eliminate expenses related to
operating separate processing functions in each of its banking regions.
NET INTEREST INCOME
Net interest income is the largest component of the Corporation's operating
income (net interest income plus other noninterest income), accounting for
72.2% of 1996 total operating income, compared to 73.6% and 73.8% in 1995 and
1994, respectively. Net interest income represents the difference between
interest earned on loans, securities and other earning assets, and the
interest expense associated with the deposits and borrowings that fund them.
Interest rate fluctuations together with changes in the volume and types of
earning assets and interest-bearing liabilities combine to affect total net
interest income. The remainder of this analysis discusses net interest income
on a fully tax-equivalent ("FTE") basis in order to provide comparability
among the types of interest earned.
Net interest income on a FTE basis reached $174.6 million in 1996, an increase
of 10.0% over the 1995 level of $158.7 million. The increase in 1996 net
interest income, excluding the impact of the acquisitions of Lodi, Reedsburg,
and Great Northern Mortgage, was $8.4 million, or 5.3%. Net interest margin,
or FTE net interest income as a percent of total average earning assets,
decreased to 4.53% in 1996 from the 4.64% recorded for 1995. The strong growth
in earning assets more than offset the 11 basis point decline in net interest
margin, creating the $15.9 million increase in net interest income. The $11.2
million increase in 1995 FTE net interest income over 1994 was volume related
as average earning assets grew by 9.5% and average interest-bearing
liabilities increased by 10.9%.
Average loans outstanding grew from $2.59 billion in 1995 to $3.01 billion in
1996, an increase of 16.3%. The increase in 1996 average loans, excluding the
impact of the acquisitions of Lodi, Reedsburg, and Great Northern Mortgage,
was $271.6 million, or 10.5%. This followed the 12.5% growth from 1994 to
1995. The ratio of average loans to average total assets grew from 70.8% in
1995 to 72.5% in 1996. This followed a similar change from 68.7% in 1994.
These changes in asset mix to greater loan composition have provided a source
of higher yielding assets, which aided in the overall improvement in net
interest income in 1995 and 1996.
11
TABLE 2: AVERAGE BALANCES AND INTEREST RATES (INCOME AND RATES ON A TAX-
EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS
Earning assets:
Loans, net of unearned
income(1)(2)(3) $3,013,909 $262,625 8.71% $2,591,218 $231,591 8.94% $2,304,230 $188,037 8.16%
Investment securities:
Taxable 644,467 39,986 6.20 639,105 38,857 6.08 636,798 36,223 5.69
Tax-exempt(1) 177,188 13,174 7.44 147,702 11,046 7.48 129,686 9,571 7.38
Interest-bearing
deposits in other
financial institutions 1,085 65 5.99 691 50 7.09 1,051 46 4.38
Federal funds sold and
securities purchased
under agreements to
resell 20,848 1,220 5.85 39,070 2,263 5.79 50,745 2,138 4.21
--------------------------------------------------------------------------------------------
Total earning assets 3,857,497 $317,070 8.22% 3,417,786 $283,807 8.30% 3,122,510 $236,015 7.56%
--------------------------------------------------------------------------------------------
Allowance for possible
loan losses (46,416) (40,638) (38,070)
Cash and due from banks 162,677 143,907 155,411
Other assets 182,682 141,214 115,296
--------------------------------------------------------------------------------------------
Total assets $4,156,440 $3,662,269 $3,355,147
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits $ 409,365 $ 9,151 2.24% $ 415,919 $ 9,706 2.33% $ 439,709 $ 10,145 2.31%
NOW deposits 356,877 7,100 1.99 317,072 6,203 1.96 300,407 5,311 1.77
Money market deposits 452,962 17,047 3.76 385,649 14,174 3.68 382,658 10,235 2.67
Time deposits 1,549,827 87,834 5.67 1,326,929 75,447 5.69 1,094,295 49,912 4.56
Federal funds purchased
and securities sold
under agreements to
repurchase 271,426 13,301 4.90 262,740 13,893 5.29 238,022 9,156 3.85
Other short-term
borrowings 105,162 6,299 5.99 66,632 4,607 6.91 49,604 2,932 5.91
Long-term borrowings 27,159 1,745 6.42 15,657 1,069 6.83 11,464 822 7.17
--------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 3,172,778 $142,477 4.49% 2,790,598 $125,099 4.48% 2,516,159 $ 88,513 3.52%
--------------------------------------------------------------------------------------------
Demand deposits 556,964 518,557 520,643
Accrued expenses and
other liabilities 54,787 33,663 30,061
Stockholders' equity 371,911 319,451 288,284
--------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $4,156,440 $3,662,269 $3,355,147
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Net interest income and
rate spread(1) $174,593 3.73% $158,708 3.82% $147,502 4.04%
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Net yield on earning
assets(1) 4.53% 4.64% 4.72%
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
(1) The yield on tax-exempt loans and securities is computed on a tax-
equivalent basis using a tax rate of 35% for all periods presented and is
net of the effects of certain disallowed interest deductions.
(2) Non-accrual loans have been included in the average balances.
(3) Interest income includes net loan fees.
12
The net interest margin decreased to 4.53% in 1996 compared to 4.64% in 1995.
The interest rate spread, or difference between the yield on earning assets
and the rate on interest-bearing liabilities, decreased 9 basis points in
1996. The yield on earning assets decreased by 8 basis points while the rate
on interest-bearing liabilities increased by 1 basis point. The contribution
from net free funds also decreased by 2 basis points. Combined, these factors
decreased net interest margin by 11 basis points.
TABLE 3: RATE/VOLUME ANALYSIS(1)
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO TO
----------------------------------------
VOLUME RATE NET VOLUME RATE NET
----------------------------------------
(IN THOUSANDS)
Interest income:
Loans, net of unearned
income(2) $36,958 $(5,924) $31,034 $24,683 $18,871 $43,554
Investment securities:
Taxable 328 801 1,129 132 2,502 2,634
Tax-exempt(2) 2,193 (65) 2,128 1,346 129 1,475
Interest-bearing
deposits in other
financial institutions 25 (10) 15 (19) 23 4
Federal funds sold and
securities purchased
under agreements to
resell (1,066) 23 (1,043) (562) 687 125
----------------------------------------
Total earning assets(2) $38,438 $(5,175) $33,263 $25,580 $22,212 $47,792
----------------------------------------
Interest expense:
Savings deposits $ (151) $ (404) $ (555) $ (554) $ 115 $ (439)
NOW deposits 790 107 897 305 587 892
Money market deposits 2,526 347 2,873 81 3,858 3,939
Time deposits 12,633 (246) 12,387 11,822 13,713 25,535
Federal funds purchased
and securities sold
under agreements to
repurchase 449 (1,041) (592) 1,028 3,709 4,737
Other short-term
borrowings 2,375 (683) 1,692 1,121 554 1,675
Long-term borrowings 742 (66) 676 288 (41) 247
----------------------------------------
Total interest-bearing
liabilities $19,364 $(1,986) $17,378 $14,091 $22,495 $36,586
----------------------------------------
Net interest income(2) $19,074 $(3,189) $15,885 $11,489 $ (283) $11,206
----------------------------------------
(1) The change in interest due to both rate and volume has been allocated in
proportion to the relationship to the dollar amounts of the change in each.
(2) The yield on tax-exempt loans and securities is computed on an FTE basis
using a tax rate of 35% for all periods presented and is net of the effects
of certain disallowed interest deductions.
The Corporation's cost of funds and mix of funding remained stable in 1996.
Interest-bearing deposits accounted for 87.3% of total interest-bearing
funding in 1996, compared to 87.6% in 1995. This slightly higher dependence on
wholesale funding caused the rate on total interest-bearing liabilities to
increase by 1 basis point in 1996.
13
TABLE 4: INTEREST RATE SPREAD AND INTEREST MARGIN (ON A TAX-EQUIVALENT BASIS)
1996 AVERAGE 1995 AVERAGE 1994 AVERAGE
-------------------------------------------------------------------------------------
% OF % OF % OF
EARNING EARNING EARNING
BALANCE ASSETS RATE BALANCE ASSETS RATE BALANCE ASSETS RATE
-------------------------------------------------------------------------------------
(IN THOUSANDS)
Earning assets $3,857,497 100.0% 8.22% $3,417,786 100.0% 8.30% $3,122,510 100.0% 7.56%
-------------------------------------------------------------------------------------
Financed by:
Interest-bearing funds $3,172,778 82.2% 4.49% $2,790,598 81.6% 4.48% $2,516,159 80.6% 3.52%
Noninterest-bearing
funds 684,719 17.8% 627,188 18.4% 606,351 19.4%
-------------------------------------------------------------------------------------
Total funds sources $3,857,497 100.0% 3.69% $3,417,786 100.0% 3.66% $3,122,510 100.0% 2.84%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Interest rate spread 3.73% 3.82% 4.04%
Contribution from net
free funds .80% .82% .68%
Net interest margin 4.53% 4.64% 4.72%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Average prime rate* 8.27% 8.83% 7.14%
Average fed funds rate* 5.30% 5.84% 4.18%
Average spread 297bp 299bp 296bp
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
*Source: Federal Reserve Statistics
The Corporation continued to experience a tightening of loan spreads. The
yield on total loans decreased by 23 basis points in 1996. This was offset by
slightly higher yields on the investment portfolio. Additionally, the
contribution from net free funds decreased by 2 basis points in 1996. (Net
free funds represent the difference between earning assets and interest-
bearing liabilities, or the amount of funding that does not have a specific
interest cost associated with them.) The decreased contribution was a result
of lower relative volumes of net free funds in 1996 compared to 1995. The net
interest margin for 1995 was 4.64%, slightly lower than the 4.72% recorded in
1994.
TABLE 5: SELECTED AVERAGE BALANCES
% OF % OF
TOTAL TOTAL % OF $
1996 ASSETS 1995 ASSETS CHANGE
----------------------------------------
(IN THOUSANDS)
ASSETS
Loans, net of unearned income $3,013,909 72.5% $2,591,218 70.8% 16.3%
Investment securities:
Taxable 644,467 15.5 639,105 17.4 .8
Tax-exempt 177,188 4.3 147,702 4.0 20.0
Interest-bearing deposits in
other financial institutions 1,085 -- 691 -- 57.0
Federal funds sold and securities
purchased under agreements to
resell 20,848 .5 39,070 1.1 (46.6)
----------------------------------------
Total earning assets 3,857,497 92.8 3,417,786 93.3 12.9
Other assets 298,943 7.2 244,483 6.7 22.3
----------------------------------------
Total assets $4,156,440 100.0% $3,662,269 100.0% 13.5%
----------------------------------------
LIABILITIES & STOCKHOLDERS'
EQUITY
Interest-bearing deposits $2,769,031 66.6% $2,445,569 66.8% 13.2%
Short-term borrowings 376,588 9.1 329,372 9.0 14.3
Long-term borrowings 27,159 .6 15,657 .4 73.5
----------------------------------------
Total interest-bearing
liabilities 3,172,778 76.3 2,790,598 76.2 13.7
Demand deposits 556,964 13.4 518,557 14.2 7.4
Accrued expenses and other
liabilities 54,787 1.3 33,663 .9 62.8
Stockholders' equity 371,911 9.0 319,451 8.7 16.4
----------------------------------------
Total liabilities and
stockholders' equity $4,156,440 100.0% $3,662,269 100.0% 13.5%
----------------------------------------
----------------------------------------
14
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets to produce interest income. This
ratio was 92.8% in 1996 compared with 93.3% in 1995 and 93.1% in 1994,
indicating a consistent ability to effectively use assets in a direct earning
capacity. However, the slight decrease in 1996 reflects the Corporation's
increased expenditures for fixed assets in 1996 as a part of the
implementation of technology and customer service enhancements currently in
progress.
As the largest component of operating income, improvements in the growth of
net interest income are important to the Corporation's earnings performance.
Growth in the Corporation's net interest income during the past several years
has primarily been a result of growth in the level of earning asset volumes
and changes in asset mix toward higher yielding assets. The Corporation uses
certain modeling and analysis techniques to manage net interest income and the
related interest rate risk position (see Interest Rate Sensitivity). The
Corporation seeks to meet the needs of its customers, yet provide for
stability in net interest income in the event of significant interest rate
changes.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses was $4.7 million in 1996 compared to
$4.3 million in 1995 and $2.2 million in 1994. The increase in provision was
related to slightly higher net charge-offs in 1996 compared to 1995 and strong
loan growth of 15.0%, requiring a higher provision in 1996 to maintain an
adequate allowance for possible loan losses to loans ratio of 1.50% at
December 31, 1996. (See Allowance for Possible Loan Losses discussion.)
NONINTEREST INCOME
Total noninterest income, excluding gains from security transactions,
increased $9.2 million or 16.6% in 1996 compared to an increase of $4.4
million, or 8.6% in 1995 compared to 1994. The increase in 1996 noninterest
income, excluding gains from security transactions and the impact of the
acquisitions of Lodi, Reedsburg, and Great Northern Mortgage, was $7.1
million, or 13.0%. Trust service fees and service charges on deposits
continued to be the primary components of noninterest income, comprising
58.9%, 61.9%, and 64.4% of total noninterest income excluding gains on
security transactions in 1996, 1995, and 1994, respectively. The Corporation
continues to develop additional sources of noninterest income through enhanced
product offerings in residential mortgage lending and retail investment
services. The increase in mortgage banking income is evidence of this effort.
TABLE 6: NONINTEREST INCOME
% CHANGE
FROM PRIOR
YEARS ENDED DECEMBER 31, YEAR
-----------------------------
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
Trust service fees $ 25,185 $ 22,243 $ 20,282 13.2 9.7
Service charges on deposit accounts 12,606 11,814 12,314 6.7 (4.1)
Mortgage banking income 12,595 7,801 5,633 61.5 38.5
Retail investment income 2,821 2,100 1,759 34.3 19.4
Other 10,963 11,062 10,659 (0.9) 3.8
-----------------------------
Total, excluding securities gains $ 64,170 $ 55,020 $ 50,647 16.6 8.6
Investment securities gains, net 913 330 214 176.7 54.2
-----------------------------
Total non-interest income $ 65,083 $ 55,350 $ 50,861 17.6 8.8
-----------------------------
-----------------------------
Trust fees, comprising 39.3% of noninterest income, excluding gains on
security transactions, increased $2.9 million or 13.2% in 1996. This followed
a $2.0 million or 9.7% increase in 1995 compared with 1994. The increase was
mainly the result of continued improvement in trust business volume and growth
in assets under management. Trust assets under management totaled $3.5 billion
at December 31, 1996, compared with $3.1 billion at the end of 1995.
Income from mortgage banking activity increased 61.5%, or $4.8 million in 1996
compared to 1995. The largest component of this increase was the impact of
SFAS 122 adopted on January 1, 1996. As a result of
15
adopting SFAS 122, the Corporation recognizes as separate assets the rights to
service mortgage loans for others, however those rights are acquired. It
requires that when a definitive plan exists to sell the loan and retain
servicing rights, the cost of the mortgage will be allocated between the loan
and the related mortgage servicing right based on their relative fair values
at the date of origination or purchase; otherwise, the date of sale will be
used. SFAS No. 122 also requires assessing the capitalized mortgage servicing
rights for impairment based on the fair value of those rights. The impact in
1996 was an additional $2.6 million of income. Mortgage banking income was
also positively impacted by a larger servicing portfolio, as serviced loans
grew to $2.4 billion at year-end 1996 from $2.1 billion at year-end 1995. This
created an additional $1.4 million in servicing revenue in 1996. The remainder
of the increase in mortgage banking income is attributable to residential loan
originations as origination fees, underwriting fees and escrow waiver fees
increased approximately $1.0 million. These higher levels of fees were a
result of origination volumes increasing to $548 million in 1996 from $385
million in 1995.
Retail investment income relates to commissions and fees associated with
brokerage, insurance, and individual investment activities. Retail investment
income totaled $2.8 million in 1996 compared with $2.1 million and $1.8
million in 1995 and 1994, respectively. 1996's increase reflects the strong
market conditions experienced throughout the year which increased the volume
of individual brokerage transactions. The increase also reflects the continued
expansion of retail investment services throughout the Corporation's banking
office locations.
Net security gains totaled $913,000, $330,000, and $214,000 in 1996, 1995, and
1994, respectively. During 1996 and 1995, gains of $32,000 and $175,000,
respectively, were recognized on previously written off municipal bonds.
Payments received from the bond trustee allowed the Corporation to recover
previous amounts written down on these bonds. The payments received are
included in securities gains. During 1996, gross gains of $942,000 were
recognized on the sale of available for sale investments, primarily from the
sale of Sallie Mae stock by two affiliate banks.
NONINTEREST EXPENSE
Noninterest expense in 1996 increased $10.4 million or 8.0% compared to 1995.
This followed a $5.1 million or 4.1% rise in 1995. Salaries and employee
benefits expense is the largest component of noninterest expense and totaled
$75.4 million in 1996, an increase of 10.5% over 1995. This followed a 4.8%
increase in 1995. The increase in 1996, excluding the impact of the
acquisitions of Lodi, Reedsburg and Great Northern Mortgage, was $4.3 million,
or 6.3%.
TABLE 7: NONINTEREST EXPENSE
% CHANGE
FROM PRIOR
YEARS ENDED DECEMBER 31, YEAR
---------------------------------
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
Salaries and employee benefits $ 75,367 $ 68,175 $ 65,028 10.5 4.8
Net occupancy expense 10,818 10,466 9,634 3.4 8.6
Equipment rentals, depreciation, and
maintenance 7,745 6,601 6,582 17.3 .3
Data processing expense 8,328 7,909 7,992 5.3 (1.0)
Stationery and supplies 3,377 3,176 3,065 6.3 3.6
Business development and advertising 3,620 3,271 2,962 10.7 10.4
FDIC expense 3 3,630 6,011 (99.9) (39.6)
Other 31,127 26,805 23,669 16.1 13.2
---------------------------------
Total $140,385 $130,033 $124,943 8.0 4.1
---------------------------------
---------------------------------
Full-time equivalent (FTE) employees at December 31, 1996, totaled 2,012
compared to 1,857 at the end of 1995. Lodi, Reedsburg and Mid-America
combined, contributed 82 FTEs. As the Corporation expands to take advantage of
business opportunities and the related revenues, management will continue to
review its significant investment in salaries and employee benefits expense.
16
Equipment rentals, depreciation, and maintenance increased by $1.1 million, or
17.3% in 1996. The increase is attributable to higher levels of depreciation
and maintenance costs associated with the equipment purchased as part of
technology and customer service enhancements currently in progress.
FDIC expense historically has been a large non-controllable noninterest
expense. FDIC expense decreased in 1996 to $3,000, down from $3.6 million in
1995 and $6.0 million in 1994. The decrease reflects the virtual elimination
of FDIC insurance premiums in 1996. However, in 1997, the Corporation expects
to incur $485,000 of FDIC expense as a result of regulations passed in late
1996.
Other noninterest expense increased $4.3 million or 16.1% in 1996. The
increase in other noninterest expense is primarily attributable to higher
amortization of mortgage servicing rights in 1996 of $1.1 million. Mortgage
servicing rights amortization in 1996 totaled $2.4 million compared to $1.3
million in 1995 and $344,000 in 1994. In conjunction with the technology and
customer service enhancements currently in progress, consulting fees increased
by $1.1 million, telephone and communications costs increased $459,000, and
clerical services increased $397,000.
Amortization of branch purchase premium totaled $1.4 million in 1996 and $1.4
million in 1995, and $175,000 in 1994. Aggregate branch purchase premiums, at
the time of the branch acquisitions in 1994, totaled $18 million. The core
deposit portion will be amortized over 10 years, while the goodwill portion
will be amortized over 15 years.
INCOME TAXES
Income tax expense for the year 1996 was $32.0 million compared with $27.3
million in 1995 and $23.5 million in 1994. The Corporation's effective tax
rate (income tax expense divided by income before taxes) was 35.9% in 1996
compared with 36.2% in 1995 and 35.0% in 1994.
BALANCE SHEET ANALYSIS
LOANS
Total loans outstanding grew to $3.16 billion at December 31, 1996, a 15.0% or
a $412 million increase from the end of 1995. The increase in 1996 loans
outstanding, excluding the impact of the acquisitions of Lodi, Reedsburg, and
Great Northern Mortgage, was $253.0 million, or 9.3%.
TABLE 8: LOAN COMPOSITION
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------------------------------------------------------------------------------------
(IN THOUSANDS)
Commercial, financial
and agricultural $ 837,352 26% $ 783,806 29% $ 691,262 28% $ 758,814 35% $ 827,778 39%
Real estate--
construction 219,422 7 145,199 5 126,162 5 96,640 4 92,551 4
Real estate--mortgage 1,806,616 57 1,517,885 55 1,346,440 55 1,057,724 49 951,639 45
Installment loans to
individuals 286,014 9 291,303 11 291,555 12 259,261 12 244,078 12
Lease financing 10,449 1 9,743 -- 6,176 -- 5,144 -- 6,414 --
-------------------------------------------------------------------------------------
Total loans $3,159,853 100% $2,747,936 100% $2,461,595 100% $2,177,583 100% $2,122,460 100%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Real estate mortgage loans totaled $1.8 billion at the end of 1996 and $1.5
billion in 1995. Loans in this classification increased $288.7 million or
19.0% during 1996, with loans secured by one- to four-family residential
properties totaling $1.0 billion at December 31, 1996. Residential real estate
loans consist of conventional home mortgages, home equity lines, and second
mortgages. Loans of this type are primarily made to borrowers in Wisconsin and
northern Illinois. Residential real estate loans generally limit the maximum
loan to 75% to 80% of collateral value.
Also included in the real estate-mortgage classification are loans secured by
non-farm, non-residential real estate properties. Loans in these groups
totaled $712.1 million at December 31, 1996. Real estate loans secured by non-
residential real estate properties involve borrower characteristics similar to
those discussed for commercial loans and real estate construction projects.
Loans of this type are mainly for business and
17
industrial properties, multi-family properties, community purpose properties
and similar properties. Loans are primarily made to borrowers in Wisconsin and
northern Illinois. Credit risk is managed in a manner similar to commercial
loans and real estate construction by employing sound underwriting guidelines,
lending to borrowers in known markets and businesses, and formally reviewing
the borrower's financial soundness and relationship on an ongoing basis.
Commercial, financial, and agricultural loans totaled $837.4 million at the
end of 1996 and comprised 26% of the loan portfolio, compared with 29% of the
portfolio at the end of 1995. The commercial, financial, and agricultural loan
classification primarily consists of commercial loans to middle market
companies and small businesses. Loans of this type are in a broad range of
industries. Borrowers are primarily concentrated in Wisconsin and northern
Illinois. The credit risk related to commercial loans is largely influenced by
general economic conditions and the resulting impact on a borrower's
operations.
Within the commercial, financial, and agricultural classification at December
31, 1996, loans to finance agricultural production totaled $33.6 million or
1.1% of total loans. This level is essentially unchanged from the $32.2
million balance at the end of 1995.
An active credit risk management process is used for commercial loans to
ensure that sound and consistent credit decisions are made. Credit risk is
controlled by detailed underwriting procedures, comprehensive loan
administration, and periodic review of borrowers' outstanding loans and
commitments. Borrower relationships are formally reviewed on an ongoing basis.
Further analyses by customer, industry and geographic location are performed
to monitor trends, financial performance and concentrations.
The loan portfolio is widely diversified by types of borrowers, industry
groups and market areas. Significant loan concentrations are considered to
exist for a financial institution 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. At December 31, 1996, no
concentrations existed in the Corporation's loan portfolio in excess of 10% of
total loans or $316.0 million.
Real estate construction loans totaled $219.4 million or 7% of the total loan
portfolio at the end of 1996 compared to $145.2 million or 5% at December 31,
1995. Loans in this classification are primarily short-term interim loans that
provide financing for the acquisition or development of commercial real
estate, such as multi-family or other commercial development projects. These
interim loans are generally made with the intent that the borrower will
refinance the loan with an outside third party or sell the project upon
completion.
Real estate construction loans are made to developers and project managers who
are well known to the Corporation, have prior successful project experience
and are well capitalized. Projects undertaken by these developers are
carefully reviewed by the Corporation to ensure that they are economically
viable. Loans of this type are primarily made in markets in Wisconsin and
northern Illinois in which the Corporation has a thorough knowledge of the
local market economy.
The credit risk associated with real estate construction loans is generally
confined to specific geographic areas. The Corporation controls the credit
risk on these types of loans by making loans in familiar markets to
developers, underwriting the loans to meet the requirements of institutional
investors in the secondary market, reviewing the merits of individual
projects, controlling loan structure, and monitoring project progress and
construction advances.
18
TABLE 9: LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY(1)
DECEMBER 31, 1996 MATURITY(2)
- - ----------------- ---------------------------------------
WITHIN 1 1-5 AFTER 5
YEAR YEARS YEARS TOTAL
--------------------------
(IN THOUSANDS)
Commercial, financial, and
agricultural $541,909 $262,288 $33,155 $ 837,352
Real estate-construction 148,431 65,308 5,683 219,422
--------------------------
Total $690,340 $327,596 $38,838 $1,056,774
--------------------------
--------------------------
Fixed rate $217,548 $248,296 $19,364 $ 485,208
Floating or adjustable rate 472,792 79,300 19,474 571,566
--------------------------
Total $690,340 $327,596 $38,838 $1,056,774
--------------------------
--------------------------
Percent 65% 31% 4% 100%
- - ---------------------
(1) Based upon scheduled principal repayments.
(2) Demand loans, past due loans, and overdrafts are reported in the "Within 1
Year" category.
Installment loans to individuals totaled $286.0 million or 9% of the total
loan portfolio at the end of 1996 compared to $291.3 million or 11% at
December 31, 1995. Installment loans include short-term installment loans,
direct and indirect automobile loans, recreational vehicle loans, credit card
loans, student loans and other personal loans. Individual borrowers may be
required to provide related collateral or a satisfactory endorsement or
guaranty from another person, depending on the specific type of loan and the
creditworthiness of the borrower. Loans are made to individual borrowers
located primarily in Wisconsin and northern Illinois. Credit risk for these
types of loans is generally influenced by general economic conditions, the
characteristics of individual borrowers and the nature of the loan collateral.
Credit risk is primarily controlled by reviewing the creditworthiness of the
borrowers as well as taking appropriate collateral and guaranty positions on
such loans.
Factors that are critical to managing overall credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, an adequate allowance
for possible loan losses, and sound non-accrual and charge-off policies.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
As of December 31, 1996, the allowance for possible loan losses of $47.4
million represented 1.50% of total loans, compared to 1.51% at December 31,
1995. The year-end allowance increased 14.0% from the end of 1995 as period-
end loans increased 15.0% over the same period.
19
TABLE 10: LOAN LOSS EXPERIENCE
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Average loans
outstanding $3,013,909 $2,591,218 $2,304,230 $2,159,998 $2,109,214
Balance of allowance for
possible loan losses at
beginning of period $ 41,614 $ 39,380 $ 36,296 $ 35,257 $ 31,820
-----------------------------------------------------
-----------------------------------------------------
Loans charged-off:
Commercial, financial,
and agricultural 2,644 3,075 2,379 4,520 7,417
Real estate--
construction 193 191 89 131 3
Real estate--mortgage 505 588 1,595 1,999 790
Installment loans to
individuals 1,534 1,423 2,009 1,535 1,950
Lease financing 1 5 18 50 107
-----------------------------------------------------
Total loans charged-off 4,877 5,282 6,090 8,235 10,267
-----------------------------------------------------
Recoveries of loans
previously charged-off:
Commercial, financial,
and agricultural 1,255 1,847 3,084 2,193 2,400
Real estate--
construction 3 70 -- 173 --
Real estate--mortgage 542 500 366 378 127
Installment loans to
individuals 701 800 956 639 362
Lease financing 8 8 7 20 26
-----------------------------------------------------
Total recoveries 2,509 3,225 4,413 3,403 2,915
-----------------------------------------------------
Net loans charged-off 2,368 2,057 1,677 4,832 7,352
Balance related to
acquisitions 3,511 -- 2,550 -- 82
Additions to the
allowance charged to
operating expense 4,665 4,291 2,211 5,871 10,707
-----------------------------------------------------
Balance at end of period $ 47,422 $ 41,614 $ 39,380 $ 36,296 $ 35,257
-----------------------------------------------------
-----------------------------------------------------
Ratio of net charge-offs
to average loans
outstanding .08% .08% .07% .22% .35%
Ratio of allowance for
possible loan losses to
total loans at end of
period 1.50% 1.51% 1.60% 1.67% 1.66%
-----------------------------------------------------
-----------------------------------------------------
The provision for possible loan losses in 1996 was $4.7 million compared with
$4.3 million in 1995 and $2.2 million in 1994.
Total gross charge-offs in 1996 were $4.9 million compared with $5.3 million
in 1995 and $6.1 million in 1994. The ratio of 1996 net charge-offs to average
loans was .08%, unchanged from 1995.
Loans charged-off are subject to continuous review and specific efforts are
taken to achieve maximum recovery of principal, accrued interest, and related
expenses.
Management regularly reviews the adequacy of the allowance for possible loan
losses to ensure that the allowance is sufficient to absorb potential losses
arising from the credit granting process. Factors considered include the
levels of non-performing loans, other real estate, past due trends, growth in
the loan portfolio, changes in the composition of the loan portfolio,
historical net charge-offs, the present and potential financial condition of
borrowers, general economic conditions, specific industry conditions and other
regulatory or legal issues that could affect the Corporation's loss potential.
The Corporation believes that the allowance for possible loan losses as of
December 31, 1996, is adequate to absorb potential loan losses as evidenced by
its charge-off experience and allowance coverage of non-
20
performing loans (discussed below). Active asset quality administration
ensures appropriate management of credit risk and minimization of loan losses.
TABLE 11: ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
AS OF DECEMBER 31,
---------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS)
Commercial, financial and agricultural $27,600 $22,168 $20,702 $19,194 $21,704
Real estate--construction 1,047 929 1,133 1,440 1,195
Real estate--mortgage 7,071 7,748 8,365 8,491 6,687
Installment loans to individuals 4,282 3,070 4,058 3,836 3,675
Lease financing 530 460 331 136 155
Unallocated 6,892 7,239 4,791 3,199 1,841
--------------------------------------------
Total $47,422 $41,614 $39,380 $36,296 $35,257
--------------------------------------------
--------------------------------------------
NON-PERFORMING LOANS, POTENTIAL PROBLEM LOANS, AND OTHER REAL ESTATE
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.
Non-performing loans are considered a leading indicator of future loan losses.
Non-performing loans are defined as non-accrual loans, loans 90 days or more
past due but still accruing, and restructured loans.
Loans are normally placed on 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, amortization of
related loan fees is suspended, 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 non-performing 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 non-performing 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.
21
TABLE 12: NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED
DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS)
Non-accrual loans $17,225 $15,105 $14,958 $22,089 $29,555
Accruing loans past due 90 days
or more 1,801 1,320 1,484 2,469 1,325
Restructured loans 534 1,704 1,888 1,992 1,932
-------------------------------------------
Total non-performing loans $19,560 $18,129 $18,330 $26,550 $32,812
-------------------------------------------
-------------------------------------------
Ratio of non-performing loans to
total loans at period end .62% .66% .74% 1.22% 1.55%
Ratio of the allowance for
possible loans losses to non-
performing loans at period end 242.44% 229.54% 214.84% 136.71% 107.45%
-------------------------------------------
Other real estate owned $ 1,204 $ 1,600 $ 2,370 $ 3,973 $ 4,132
-------------------------------------------
-------------------------------------------
Non-performing loans at December 31, 1996, were $19.6 million, an increase of
$1.4 million from the level at December 31, 1995. The ratio of non-performing
loans to total loans at the end of 1996 was .62% compared to .66% at December
31, 1995, and .74% at the end of 1994. The Corporation's allowance for
possible loan losses balance was more than twice the amount of total non-
performing loans at December 31, 1996, 1995 and 1994.
The following table shows, for those loans accounted for on a non-accrual
basis and restructured loans for the years ended as indicated, 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.
TABLE 13: FOREGONE LOAN INTEREST
YEARS ENDED DECEMBER
31,
-----------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Interest income in accordance with original terms $1,931 $2,010 $2,096
Interest income recognized (905) (934) (1,009)
-----------------
Reduction in interest income $1,026 $1,076 $1,087
-----------------
-----------------
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 December 31, 1996, potential problem loans totaled $54.0 million. 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 the potential problem loan category.
Other real estate owned declined to $1.2 million at December 31, 1996,
compared to $1.6 million at the end of 1995. Management actively seeks to
ensure properties held are administered to minimize the Corporation's risk of
loss.
INVESTMENT SECURITIES PORTFOLIO
The investment securities portfolio is intended to provide the Corporation
with adequate liquidity, flexibility in asset/liability management and a
source of stable income. Investment securities, both those
22
held to maturity and those available for sale totaled $854.6 million at
December 31, 1996, compared with $795.7 million one year ago.
TABLE 14: INVESTMENT SECURITIES PORTFOLIO
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Investment Securities Held to Maturity:
U.S. Treasury and federal agency securities $161,199 $172,548 $206,072
Obligations of states and political subdivisions 194,810 169,923 152,543
Other securities 61,186 55,762 58,228
------------------------
Total Amortized Cost $417,195 $398,233 $416,843
------------------------
------------------------
Total Fair Market Value $417,541 $399,697 $401,086
------------------------
------------------------
Investment Securities Available for Sale:
U.S. Treasury and federal agency securities $393,934 $368,217 $377,830
Marketable equity securities 32,502 19,507 9,625
------------------------
Total Amortized Cost $426,436 $387,724 $387,455
------------------------
------------------------
Total Fair Market Value $437,440 $397,476 $380,938
------------------------
------------------------
Total securities averaged $821.7 million in 1996 compared with $786.8 million
in 1995. In 1996, average taxable securities were 78.4% of total average
securities compared with 81.2% in 1995.
At December 31, 1996, the securities portfolio had an aggregate fair value of
approximately $855.0 million compared with a total amortized cost of $843.6
million.
At December 31, 1996, the Corporation's securities portfolio did not contain
securities, other than U.S. Treasury and federal agencies, of any single
issuer that were payable from and secured by the same source of revenue or
taxing authority where the aggregate book value of such securities exceeded
10% of stockholders' equity or $39.3 million.
TABLE 15: INVESTMENT SECURITIES PORTFOLIO MATURITY DISTRIBUTION(1)
DECEMBER 31, 1996
INVESTMENT SECURITIES HELD TO MATURITY--MATURITY DISTRIBUTION AND WEIGHTED AVERAGE
YIELD
----------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE
WITHIN FIVE BUT WITHIN AFTER TEN
WITHIN ONE YEAR YEARS TEN YEARS YEARS TOTAL TOTAL
----------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD FAIR VALUE
----------------------------------------------------------------------------------------------
(IN THOUSANDS)
U.S. Treasury and
federal agency
securities $ 34,835 5.57% $103,935 6.08% $22,227 7.07% $ 202 7.50% $161,199 6.11% $161,255
Obligations of states
and political
subdivisions 53,269 7.02 95,135 7.61 45,380 7.38 1,026 7.35 194,810 7.40 194,511
Other securities 13,150 6.78 35,578 6.72 10,736 6.85 1,722 7.88 61,186 6.79 61,775
---------------------------------------------------------------------------------------------
Total Amortized Cost $ 101,254 6.49% $234,648 6.80% $78,343 7.22% $2,950 7.67% $417,195 6.81% $417,541
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Total Fair Value $ 100,831 $235,227 $77,857 $3,626 $417,541
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE--MATURITY DISTRIBUTION AND WEIGHTED AVERAGE
YIELD
----------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE
WITHIN FIVE BUT WITHIN AFTER TEN
WITHIN ONE YEAR YEARS TEN YEARS YEARS TOTAL TOTAL
----------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD FAIR VALUE
----------------------------------------------------------------------------------------------
U.S. Treasury and
federal agency
securities $ 131,129 6.04% $252,792 6.28% $ 9,013 6.51% $1,000 6.89% $393,934 6.21% $394,492
Marketable equity
securities 32,502 5.62% -- -- -- -- -- -- 32,502 5.62 42,948
---------------------------------------------------------------------------------------------
Total Amortized Cost $ 163,631 5.96% $252,792 6.28% $ 9,013 6.51% $1,000 6.89% $426,436 6.16% $437,440
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Total Fair Value $ 174,156 $253,222 $ 9,061 $1,001 $437,440
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
(1) Expected maturities will differ from contractual maturities, as borrowers
may have the right to call or repay obligations with or without call or
prepayment penalties.
(2) Yields on tax-exempt securities are computed on a tax-equivalent basis
using a tax rate of 35% and have not been adjusted for certain disallowed
interest deductions.
23
DEPOSITS
Average total deposits in 1996 were $3.3 billion, an increase of 12.2% or
$361.9 million over 1995. Included in this growth is approximately $191
million from the acquisitions of Reedsburg, Lodi and Mid-America as well as
approximately $17.2 million of the growth in average total deposits from the
purchase of brokered CDs by the Corporation in 1996. At December 31, 1996, the
outstanding balance of brokered CDs was $90.6 million, which are included in
time deposits in the table shown below. Adjusted for acquisitions and brokered
CDs, internal deposit growth in 1996 was approximately 3.7%.
TABLE 16: AVERAGE DEPOSITS DISTRIBUTION
YEARS ENDED DECEMBER 31,
---------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Noninterest-bearing demand deposits $ 556,964 $ 518,557 $ 520,643
Interest-bearing demand deposits 356,877 317,072 300,407
Savings deposits 409,365 415,919 439,709
Money market deposits 452,962 385,649 382,658
Time deposits 1,549,827 1,326,929 1,094,295
---------------------
Total deposits $3,325,995 $2,964,126 $2,737,712
---------------------
---------------------
Year-end 1996 noninterest-bearing demand deposits were $655.4 million compared
with $619.3 million at the end of 1995. These amounts are substantially above
the respective yearly average balance amounts. Demand deposits normally show a
sizeable increase as businesses, public entities and correspondent banks
adjust their cash positions at year-end. Average noninterest-bearing demand
deposits as a percentage of total average deposits declined to 16.7% in 1996
from 17.5% in 1995.
TABLE 17: AVERAGE RATES PAID ON DEPOSITS
YEARS ENDED DECEMBER 31,
-
1996 1995 1994
---- ---- ----
Interest-bearing demand deposits 1.99% 1.96% 1.77%
Savings deposits 2.24 2.33 2.31
Money market deposits 3.76 3.68 2.67
Time deposits 5.67 5.69 4.56
Total interest-bearing deposits 4.37 4.32 3.41
The total of average interest-bearing demand, savings, and money market
deposits increased to $1.22 billion for 1996 from $1.12 billion in 1995.
Approximately one-half of this growth is attributable to the acquisitions of
Reedsburg, Lodi and Mid-America. However, these deposits as a percentage of
total average deposits continued to decline to 36.7% in 1996 from 37.7% in
1995, and 41.0% in 1994. This change in the mix of the Corporation's retail
deposit base reflects the shift in customers' investment preferences, as they
opted for the higher yields available through certificates of deposit.
TABLE 18: MATURITY DISTRIBUTION--CERTIFICATES OF DEPOSIT AND OTHER TIME
DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 1996
----------------------------
CERTIFICATES OF DEPOSIT OTHER TIME DEPOSITS
----------------------------
(IN THOUSANDS)
Three months or less $317,676 $58,556
Over three months through six
months 63,710 --
Over six months through twelve
months 54,593 --
Over twelve months 36,933 --
------------------------
Total $472,912 $58,556
------------------------
------------------------
The Corporation continues to experience strong competition for deposits in its
markets. This is true for both the business and retail segments of the market.
During 1996, the Corporation's banks offered a
24
number of different products with specific features and competitive pricing.
The deposit products are designed to retain core deposit accounts, attract new
customers, and create opportunities for providing other bank services or
relationships.
SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased, commercial paper,
short-term notes payable, current maturities of long-term debt, treasury tax
and loan notes, securities sold under agreements to repurchase, and Federal
Home Loan Bank notes. Average 1996 short-term borrowings were $376.6 million
compared with $329.4 million during 1995.
TABLE 19: SHORT-TERM BORROWINGS
DECEMBER 31,
-------------------------
1996 1995 1994
-------------------------
(IN THOUSANDS)
Federal funds purchased and securities sold under
agreements to repurchase $308,839 $270,824 $288,893
Notes payable to banks 68,937 66,647 30,415
Commercial paper 2,172 2,326 10,603
Current maturities of long-term borrowings 3,067 800 800
Federal Home Loan Bank 51,349 15,277 --
Other borrowed funds 9,702 7,852 9,126
-------------------------
Total $444,066 $363,726 $339,837
-------------------------
-------------------------
The increase in short-term borrowings is attributable to larger amounts
outstanding for overnight federal funds purchased and Federal Home Loan Bank
notes with a remaining maturity less than 1 year as subsidiary banks fund a
greater portion of asset growth with wholesale funding. The notes payable to
banks and commercial paper are primarily used to fund residential, commercial,
and leasing lending activities at the Corporation's residential mortgage,
commercial mortgage, and leasing subsidiaries.
TABLE 20: FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Average amounts outstanding during year $271,426 $262,740 $238,022
Average interest rates on amounts outstanding
during year 4.90% 5.29% 3.85%
Maximum month-end amounts outstanding $362,580 $339,431 $304,712
Average interest rates on amounts outstanding at
end of year 5.64% 5.15% 5.33%
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 investments, maturing loans, the
maturity of investment securities held to maturity, the maturity or sale of
investment securities available for sale, access to other funding sources and
markets, and a strong capital position.
Deposit growth is the primary source of liquidity at the banking subsidiaries.
Total period-end deposits increased $362.4 million from 1995 to 1996. The
Corporation's overall deposit base grew an average of $361.9 million or 12.2%
during 1996. Deposit growth, especially in the core deposit base, is the most
stable source of liquidity of a bank.
Another substantial source of liquidity is the Corporation's maturing
investment securities portfolio, particularly securities maturing within one
year. At December 31, 1996, the amortized cost of securities,
25
both securities held to maturity and securities available for sale, maturing
within one year amounted to $264.3 million or 31.3% of the total securities
portfolio. At the end of 1996, the securities portfolio contained $393.9
million at amortized cost of U.S. Treasury and federal agency securities
available for sale, representing 46.7% of the total securities portfolio at
amortized cost. These government securities are highly marketable and had a
market value of $394.5 million or 100.1% of amortized cost at year-end.
Money market investments, consisting of federal funds sold, securities
purchased under agreements to resell, and interest-bearing deposits in other
financial institutions, averaged $21.9 million in 1996 compared to $39.8
million in 1995. The funds provided from the maturity of these assets were
used as a funding source for the growth in loans and securities, which
generally have higher yields. Being short-term and liquid by nature, money
market assets 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 December 31, 1996, the Corporation had $28.6 million
outstanding in short-term money market investments, serving as an essential
source of liquidity. The year-end 1996 amount represents 0.6% of total assets
compared to 1.25% at December 31, 1995.
The loan portfolio is also a source of additional liquidity. The Corporation
has $690.3 million of commercial loans and real estate construction loans
maturing within one year and a steady flow of repayments in the mortgage and
installment loan portfolios. Additionally, the Corporation has $1.0 billion of
loans secured by one-to-four-family residential property that could possibly
be securitized.
Within the classification of short-term borrowings at year-end 1996, federal
funds purchased and securities sold under agreements to repurchase totaled
$308.8 million compared with $270.8 million at the end of 1995. 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.
The aggregate subsidiary liquidity resources were sufficient in 1996 to fund
the growth in loans and the investment securities portfolio, and to meet other
needs for cash when necessary. As of December 31, 1996, there were no material
commitments for capital expenditures, i.e. to purchase fixed assets. However,
the Corporation is making investments in equipment and facilities to support
its technology upgrades.
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 money market and investment portfolio securities, 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 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 $51.3 million in
1996 and will continue to be the parent's main source of long-term liquidity.
The dividends from subsidiaries, along with a $6.9 million increase in net
short-term borrowed funds, were sufficient to pay cash dividends to the
Corporation's common shareholders of $20.3 million in 1996, and fund increased
lending activities of nonbanking subsidiaries of $12.4 million.
At December 31, 1996, $57.5 million in dividends could be paid to the parent
by subsidiary banks without obtaining prior regulatory approval, subject to
the capital needs of the banks. Additionally, the parent company had $115
million of established lines of credit with nonaffiliated banks, of which
$68.9 million was in use. Of the amount in use, the parent company
downstreamed the majority to the Corporation's residential and commercial
mortgage banking subsidiaries and leasing company for their use in funding
loans and leases. 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 non-bank subsidiaries. Commercial paper outstanding at
December 31, 1996, totaled $2.2 million.
26
The Corporation's long-term debt to equity ratio at December 31, 1996, was
5.4% compared to 6.5% at December 31, 1995. The decrease is attributable to
the change in current maturities of long-term borrowings between years.
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.
INTEREST RATE SENSITIVITY
Interest rate risk is the exposure to a bank's earnings and capital arising
from changes in future interest rates. All banks assume interest rate risk as
an integral part of normal banking operations. The management of interest rate
risk includes four components: policy statements, risk limits, risk
measurement and reporting procedures.
An important responsibility of the Asset/Liability Committee (ALCO) of each
subsidiary bank is the management of risks associated with changing interest
rates, changing asset and liability mixes, and their impact on earnings. These
ALCOs, in turn, operate under the advisory policy guidelines on interest rate
sensitivity set by the Corporation's ALCO. The sensitivity of net interest
income to market rate changes is evaluated regularly by the Corporation to
determine the effectiveness of interest rate risk management.
Interest rate sensitivity analysis can be performed in several different ways.
The traditional method of measuring interest sensitivity is called "gap"
analysis. Gap analysis is used to identify mismatches in the repricing of
assets and liabilities within specified periods of time or interest
sensitivity gaps.
For all assets and liabilities repriced within one year, the ratio of rate
sensitive assets to rate sensitive liabilities was 72.1% at December 31, 1996.
As presented, this traditional gap analysis does not accurately reflect the
Corporation's true rate sensitivity position. The categories of savings, NOW,
and money market accounts have been included in the 0-90 days category for
this gap analysis. While these accounts are contractually short-term in
nature, it is management's experience that repricing occurs over a longer
period of time. The year-end 1996 liability sensitive position would tend to
provide favorable short-term effects on earnings during periods of declining
rates while rising rates would tend to affect net interest income unfavorably
over the short run.
The Corporation uses simulation modeling results that incorporate the dynamics
of balance sheet and interest rate changes and reflect the related impact on
net interest income over a specified time horizon. The Corporation is
continually reviewing its interest rate risk position and modifying its
strategies based upon simulation projections under various interest rate
levels. Additionally, the Corporation may enter into interest-rate swap
agreements to assist in managing interest rate risk. Management's philosophy
is to maintain an appropriate rate sensitive asset and liability position to
provide for stability in earnings in the event of significant interest rate
changes. The Corporation believes that it has an effective process for
managing interest rate risk.
27
TABLE 21: INTEREST RATE SENSITIVITY ANALYSIS
DECEMBER 31, 1996
-------------------------------------
INTEREST SENSITIVITY PERIOD
-------------------------------------
TOTAL
0-90 91-180 181-365 WITHIN OVER 1
DAYS DAYS DAYS 1 YEAR YEAR TOTAL
-------------------------------------
(IN MILLIONS)
Earning assets:
Investment securities(1) $ 114 $ 67 $ 84 $ 265 $ 579 $ 844
Loans, net of unearned income 1,328 223 340 1,891 1,269 3,160
Other earning assets 29 -- -- 29 -- 29
-------------------------------------
Total $1,471 $ 290 $ 424 $2,185 $1,848 $4,033
-------------------------------------
-------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits(2) $1,975 $ 273 $ 337 $2,585 $ 268 $2,853
Other interest-bearing
liabilities 408 12 24 444 21 465
-------------------------------------
Total interest-bearing
liabilities $2,383 $ 285 $ 361 $3,029 $ 289 $3,318
-------------------------------------
-------------------------------------
Interest sensitivity gap $ (912) $ 5 $ 63 $ (844) $1,559 $ 715
-------------------------------------
Cumulative interest sensitivity
gap $ (912) $(908) $(845)
Cumulative ratio of rate
sensitive assets to rate
sensitive liabilities at
December 31, 1996 61.7% 66.0% 72.1%
-------------------------------------
-------------------------------------
(1) Securities balances exclude $11.0 million of unrealized gains relating to
available for sale securities.
(2) Savings, NOW, and money market account balances totaling $1.26 billion are
included in the 0-90 days category. While these accounts are contractually
short-term in nature, it is management's experience that repricing occurs
over a longer period of time.
CAPITAL
Stockholders' equity at December 31, 1996, increased 15.5% to $393.1 million
or $17.84 per share compared with $340.3 million or $16.22 per share in 1995.
Period-end equity has increased at a 13.6% compounded growth rate during the
past five years and represents 8.90% of total assets as of December 31, 1996.
Year-end capital includes a $7.0 million equity component compared to a $6.1
million component at December 31, 1995, related to unrealized gains on
securities available for sale, net of tax effect. Without the equity
adjustment, the ratio of December 31, 1996, equity to assets would be 8.74%
compared with adjusted equity of 8.52% at year-end 1995.
Cash dividends paid in 1996 were $0.95 per share compared with $0.81 per share
in 1995, an increase of 17.3%. Cash dividends have increased at a 14.9%
compounded rate during the past five years.
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 condition in
markets served and strength of management.
As of December 31, 1996 and 1995, the Corporation's Tier 1 risk-based capital
ratios, total risk-based capital (Tier 1 and Tier 2) ratios and Tier 1
leverage ratios were well in excess of regulatory requirements. Management of
the Corporation expects to continue to exceed the minimum standards in the
future. Capital ratios are included in Note 18, Regulatory Matters, of the
notes to consolidated financial statements.
In 1991, the Corporation's Board of Directors authorized management to
repurchase up to 480,000 shares of the Corporation's common stock in the
market from time to time. The shares repurchased would be available in
connection with the Corporation's employee incentive plans and for other
corporate purposes. Shares repurchased are held as treasury stock and,
accordingly, are accounted for as a reduction of stockholders' equity. The
Corporation purchased 92,684 of its common shares in 1996 and 76,200 in 1995.
28
Management believes that a strong capital position is necessary to take
advantage of opportunities for profitable geographic and product expansion,
and to provide depositor and investor confidence. The Corporation's capital
level remains strong, but must also be maintained at an appropriate level that
provides the opportunity for a superior return on the capital employed.
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.
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and is to be applied prospectively. In December 1996, the FASB
issued SFAS No. 127 which deferred the effective date of certain components of
SFAS No. 125 until January 1, 1998. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Management of the Corporation does not expect that adoption of SFAS No. 125
will have a material impact on the Corporation's financial position, results
of operations, or liquidity.
29
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS
EXCEPT SHARE DATA)
ASSETS
Cash and due from banks $ 236,314 $ 214,411
Interest-bearing deposits in other financial
institutions 670 652
Federal funds sold and securities purchased under
agreements to resell 27,977 45,100
Investment securities:
Held to maturity--at amortized cost
(Fair value of approximately $417,541 and $399,697 at
December 31, 1996 and 1995, respectively) 417,195 398,233
Available for sale--at fair value 437,440 397,476
Loans 3,159,853 2,747,936
Allowance for possible loan losses (47,422) (41,614)
- - -------------------------------------------------------------------------------
Loans, net 3,112,431 2,706,322
Premises and equipment 75,987 59,300
Other assets 111,065 101,007
- - -------------------------------------------------------------------------------
Total assets $4,419,079 $3,922,501
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 655,358 $ 619,294
Interest-bearing deposits 2,852,683 2,526,382
- - -------------------------------------------------------------------------------
Total deposits 3,508,041 3,145,676
Short-term borrowings 444,066 363,726
Long-term borrowings 21,130 22,064
Accrued expenses and other liabilities 52,697 50,741
- - -------------------------------------------------------------------------------
Total liabilities 4,025,934 3,582,207
- - -------------------------------------------------------------------------------
Commitments and contingent liabilities -- --
- - -------------------------------------------------------------------------------
Stockholders' equity
Preferred stock (Par value $1.00 per share, authorized
750,000 shares, no shares issued) -- --
Common stock (Par value $0.01 per share, authorized
48,000,000 shares, issued 22,059,191 and 21,234,834
shares at December 31, 1996 and 1995, respectively) 221 177
Surplus 164,514 158,642
Retained earnings 222,348 179,153
Net unrealized gain on securities available for sale,
net of taxes 6,980 6,109
Less: Treasury stock at cost (26,226 shares in 1996
and 255,208 shares in 1995) (918) (3,787)
- - -------------------------------------------------------------------------------
Total stockholders' equity 393,145 340,294
- - -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $4,419,079 $3,922,501
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
30
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
INTEREST INCOME
Interest and fees on loans $261,702 $230,692 $186,925
Interest and dividends on investment securities:
Taxable 39,986 38,857 36,223
Tax-exempt 8,759 7,516 6,529
Interest on deposits in other financial
institutions 65 50 46
Interest on federal funds sold and securities
purchased under agreements to resell 1,220 2,263 2,138
- - ----------------------------------------------------------------------------
Total interest income 311,732 279,378 231,861
- - ----------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 121,132 105,530 75,603
Interest on short-term borrowings 19,600 18,500 12,088
Interest on long-term borrowings 1,745 1,069 822
- - ----------------------------------------------------------------------------
Total interest expense 142,477 125,099 88,513
- - ----------------------------------------------------------------------------
NET INTEREST INCOME 169,255 154,279 143,348
Provision for possible loan losses 4,665 4,291 2,211
- - ----------------------------------------------------------------------------
Net interest income after provision for possible
loan losses 164,590 149,988 141,137
- - ----------------------------------------------------------------------------
NONINTEREST INCOME
Trust service fees 25,185 22,243 20,282
Service charges on deposit accounts 12,606 11,814 12,314
Investment securities gains, net 913 330 214
Mortgage banking income 12,595 7,801 5,633
Retail investment income 2,821 2,100 1,759
Other 10,963 11,062 10,659
- - ----------------------------------------------------------------------------
Total noninterest income 65,083 55,350 50,861
- - ----------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 75,367 68,175 65,028
Net occupancy expense 10,818 10,466 9,634
Equipment rentals, depreciation and maintenance 7,745 6,601 6,582
Data processing expense 8,328 7,909 7,992
Stationery and supplies 3,377 3,176 3,065
Business development and advertising 3,620 3,271 2,962
FDIC expense 3 3,630 6,011
Other 31,127 26,805 23,669
- - ----------------------------------------------------------------------------
Total noninterest expense 140,385 130,033 124,943
- - ----------------------------------------------------------------------------
Income before income taxes 89,288 75,305 67,055
Income tax expense 32,044 27,277 23,487
- - ----------------------------------------------------------------------------
NET INCOME $ 57,244 $ 48,028 $ 43,568
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
Net income per share $ 2.60 $ 2.29 $ 2.08
Weighted average shares outstanding 22,035 20,967 20,939
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
31
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NET UNREALIZED
GAIN (LOSS) ON
COMMON STOCK SECURITIES
-------------- RETAINED AVAILABLE FOR TREASURY
SHARES AMOUNT SURPLUS EARNINGS SALE STOCK TOTAL
------ ------ -------- -------- -------------- -------- --------
(IN THOUSANDS)
Balance, December 31,
1993, as previously
reported 13,478 $135 $151,346 $111,892 $6,726 $(3,762) $266,337
Adjustment to
retroactively restate a
1996 business
combination accounted
for as a pooling of
interests 968 10 6,600 7,132 -- -- 13,742
- - -----------------------------------------------------------------------------------------------
Balance December 31,
1993, as restated 14,446 145 157,946 119,024 6,726 (3,762) 280,079
- - -----------------------------------------------------------------------------------------------
Net income -- -- -- 43,568 -- -- 43,568
Cash dividends, $0.71
per share -- -- -- (14,511) -- -- (14,511)
Exercise of incentive
stock options 85 -- 1,038 -- -- 57 1,095
Tax benefits of
restricted shares and
options -- -- 102 -- -- -- 102
Change in unrealized
gain (loss) on
securities available for
sale, net of related
income taxes -- -- -- -- (10,712) -- (10,712)
Purchase of treasury
stock -- -- -- -- (338) (338)
- - -----------------------------------------------------------------------------------------------
Balance, December 31,
1994 14,531 145 159,086 148,081 (3,986) (4,043) 299,283
- - -----------------------------------------------------------------------------------------------
Net income -- -- -- 48,028 -- -- 48,028
Cash dividends, $0.81
per share -- -- -- (16,924) -- -- (16,924)
5-for-4 stock split
effected in the form of
a stock dividend 3,153 32 -- (32) -- -- --
Exercise of incentive
stock options 27 -- (409) -- -- 1,863 1,454
Tax benefits of
restricted shares and
options -- -- 443 -- -- -- 443
Change in unrealized
gain (loss) on
securities available for
sale, net of related
income taxes -- -- -- -- 10,095 -- 10,095
Reissuance of treasury
stock in a business
combination (15) -- (478) -- -- 478 --
Purchase of treasury
stock -- -- -- -- -- (2,085) (2,085)
- - -----------------------------------------------------------------------------------------------
Balance, December 31,
1995 17,696 177 158,642 179,153 6,109 (3,787) 340,294
- - -----------------------------------------------------------------------------------------------
Net income -- -- -- 57,244 -- -- 57,244
Cash dividends, $0.95
per share -- -- -- (20,278) -- -- (20,278)
Cash dividends of pooled
affiliates -- -- -- (300) -- -- (300)
Issuance of stock in
connection with business
combinations 868 9 9,800 6,566 8 -- 16,383
Exercise of incentive
stock options 31 -- (732) -- -- 2,208 1,476
Tax benefits of
restricted shares and
options -- -- 564 -- -- -- 564
Retirement of stock
previously issued in
connection with a
business combination (212) (2) (3,760) -- -- 3,762 --
Change in unrealized
gain (loss) on
securities available for
sale, net of related
income taxes -- -- -- -- 863 -- 863
Purchase of treasury
stock -- -- -- -- -- (3,101) (3,101)
- - -----------------------------------------------------------------------------------------------
Balance prior to
subsequent event,
December 31, 1996 18,383 184 164,514 222,385 6,980 (918) 393,145
- - -----------------------------------------------------------------------------------------------
Subsequent event (Note
19) 3,676 37 ---- (37) ---- ---- ----
- - -----------------------------------------------------------------------------------------------
Balance, December 31,
1996 22,059 $221 $164,514 $222,348 $ 6,980 $ (918) $393,145
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
32
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net Income $ 57,244 $ 48,028 $ 43,568
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 4,665 4,291 2,211
Provision for losses on other real estate
owned -- -- 95
Depreciation and amortization 8,340 7,329 7,434
Amortization of mortgage servicing rights 2,362 1,340 344
Amortization of intangibles 3,028 3,061 1,470
Deferred income taxes (3,853) (5,635) (2,514)
Net accretion of premiums and discounts on
investment securities 425 959 1,123
Gain on sales of securities, net (913) (330) (214)
Increase in interest receivable and other
assets (5,040) (5,875) (4,827)
Increase in interest payable and other
liabilities 8,376 7,103 9,935
Amortization of loan fees and costs (1,552) (1,661) (1,657)
Purchases of trading account securities (5) (1,294) (1,426)
Proceeds from sales of trading account
securities 37 1,332 1,472
Net (increase) decrease in mortgage loans
acquired for resale 5,079 (18,620) 40,383
(Gain) loss on sales of mortgage loans held
for resale, net (3,124) (687) 96
Other, net (879) (139) (149)
- - ------------------------------------------------------------------------------
Net cash provided by operating activities $ 74,190 $ 39,202 $ 97,344
- - ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net decrease in federal funds sold and
securities purchased under agreements to
resell $ 31,698 $ 12,535 $ 85,126
Net decrease (increase) in interest-bearing
deposits in other financial institutions (18) (352) 375
Purchases of held to maturity securities (162,895) (142,319) (260,585)
Purchases of available for sale securities (266,523) (104,193) (195,552)
Proceeds from sales of available for sale
securities 14,521 2,187 40,676
Maturities of held to maturity securities 156,055 146,302 259,824
Maturities of available for sale securities 266,017 116,583 116,529
Payments for ORE additions -- (11) (26)
Net increase in loans (260,616) (263,742) (189,694)
Proceeds from sales of other real estate 1,854 1,403 3,247
Purchases of premises and equipment, net of
disposals (23,137) (4,100) (7,031)
Mortgage servicing rights additions (6,144) (6,568) (1,336)
Net cash received (paid) in acquisition of
subsidiary 461 (480) (639)
Proceeds from sale of other assets 2,022 -- 502
- - ------------------------------------------------------------------------------
Net cash used by investing activities $(246,705) $(242,755) $(148,584)
- - ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits $ 148,097 $ 192,891 $ 36,028
Net increase in short-term borrowings 62,524 17,134 67,420
Cash dividends (20,578) (16,924) (14,511)
Repayment of long-term borrowings -- -- (2,680)
Proceeds from issuance of long-term
borrowings 6,000 15,000 --
Proceeds from exercise of stock options 1,476 1,454 1,095
Purchase of treasury stock (3,101) (2,085) (338)
- - ------------------------------------------------------------------------------
Net cash provided for financing activities $ 194,418 $ 207,470 $ 87,014
- - ------------------------------------------------------------------------------
Net increase in cash and cash equivalents 21,903 3,917 35,774
Cash and due from banks at beginning of year 214,411 210,494 174,720
- - ------------------------------------------------------------------------------
Cash and due from banks at end of year $ 236,314 $ 214,411 $ 210,494
- - ------------------------------------------------------------------------------
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 143,043 $ 119,398 $ 85,845
Income taxes 32,664 32,603 23,568
Supplemental schedule of non-cash investing
activities:
Loans transferred to other real estate $ 1,459 $ 1,251 $ 2,688
Loans made in connection with the
disposition of other real estate 223 177 398
Acquisitions:
Fair value of assets acquired, including
cash and cash equivalents 40,715 3,670 234,359
Value ascribed to intangibles 1,900 1,462 18,633
Liabilities assumed 34,772 5,132 241,512
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
33
ASSOCIATED BANC-CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Associated Banc-Corp and its
subsidiaries (Corporation) conform to generally accepted accounting principles
and to general practice within the banking and mortgage banking industries.
The following is a description of the more significant of those policies.
BUSINESS
The Corporation provides a full range of banking and related financial
services to individual and corporate customers through its network of bank and
mortgage affiliates in Wisconsin, Illinois, and Georgia. The Corporation is
subject to competition from other financial institutions and is regulated by
federal and state banking agencies and undergoes periodic examinations by
those agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and subsidiaries, all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated in consolidation. Results of
operations of companies purchased are included from the date of acquisition.
Financial statements have been restated to include companies acquired under
pooling of interests when material. Certain amounts in the 1994 and 1995
consolidated financial statements have been reclassified to conform with the
1996 presentation.
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.
INVESTMENT SECURITIES
Securities are classified as held to maturity, available for sale, or trading.
Investment securities classified as held to maturity, which management has the
intent and ability to hold to maturity, are reported at amortized cost,
adjusted for amortization of premiums and accretion of discounts using a
method that approximates level yield. Available for sale and trading
securities are reported at fair value with unrealized gains and losses, net of
related deferred income taxes, included in stockholders' equity or income,
respectively. Realized securities gains or losses are reported in the
consolidated statements of income. The cost of securities sold is based on the
specific identification method. Any security held to maturity for which there
has been a permanent impairment of value is written down to its estimated
market value.
LOANS
Loans and leases are carried at the principal amount outstanding, net of any
unearned income. Unearned income, primarily from direct leases, is recognized
on a basis that generally approximates a level yield on the outstanding
balances receivable. Interest on all other loans is based upon the principal
amount outstanding.
Loans are normally placed on 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, amortization of
related loan fees is suspended, 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.
34
Loan origination fees and certain direct loan origination costs on real estate
and commercial loans are deferred and recognized as an adjustment of yield
using the interest method. Non-refundable fees and direct origination costs
associated with installment loans are, in the opinion of management,
insignificant and are not accounted for as an adjustment of yield of the
related loan categories. Loan origination fees and direct origination costs on
residential real estate loans held for resale are also not accounted for as an
adjustment of yield. All other loan fees are included in other income.
Loans held for resale are recorded at the lower of cost or market as
determined on an aggregate basis. Holding costs are treated as period costs.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is a reserve for estimated credit
losses. Credit losses arise primarily from the loan portfolio, but may also be
derived from other sources, including commitments to extend credit, guarantees
and standby letters of credit. Actual credit losses, net of recoveries, are
deducted from the allowance for possible loan losses. A provision for possible
loan losses, which is a charge against earnings, is added to bring the
allowance to a level that, in management's judgment, is adequate to absorb
losses inherent in the loan portfolio. Management performs an ongoing
assessment of the loan portfolio to determine the appropriate level of the
allowance. The factors considered in the evaluation include, but are not
necessarily limited to, estimated losses from loan and off-balance sheet
arrangements; general economic conditions; deterioration in credit
concentration or pledged collateral; historical loss experience; and trends in
portfolio volume, maturity, composition, delinquencies and non-accruals.
The Corporation adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosure," on January 1, 1995. Management,
considering current information and events regarding the borrower's ability to
repay their obligations, considers a loan to be impaired when it is probable
that the Corporation will be unable to collect all amounts due according to
the contractual terms of the note agreement, including principal and interest.
Management has determined that commercial loans and residential real estate
loans that have a nonaccrual status or have had their terms restructured meet
this definition. The amount of impairment is measured based on the fair value
of the collateral, if the loan is collateral dependent, or alternatively, at
the present value of expected future cash flows discounted at the loan's
effective interest rate. Interest income on impaired loans is recorded when
cash is received and only if principal is considered to be fully collectible.
Management believes that the allowance for possible loan losses is adequate.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Corporation's
allowance for possible loan losses. Such agencies may require the Corporation
to recognize additions to the allowance based on their judgments about
information available to them at the time of their examinations.
REAL ESTATE ACQUIRED IN FORECLOSURE
Real estate acquired in foreclosure includes properties acquired in partial or
total satisfaction of loans and is included in other assets in the
accompanying consolidated statements of financial condition. Properties are
recorded at the lower of recorded investment in the loans at the time of
acquisition or the fair value of the properties, less estimated selling costs.
Any write-down in the carrying value of a property at the time of acquisition
is charged to the allowance for possible loan losses. Any subsequent write-
downs to reflect current fair market value, as well as gains and losses on
disposition and revenues and expenses incurred in maintaining such properties,
are included in current operations.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the related assets or the lease
term. Maintenance and repairs are charged to expense as incurred while
additions or
35
major improvements are capitalized and depreciated over their estimated useful
lives. Estimated useful lives for premises include periods up to 50 years and
for equipment include periods up to 10 years.
INTANGIBLES
The excess of the purchase price over the fair value of net assets of
subsidiaries acquired consists primarily of goodwill and core deposit
intangibles that are being amortized on a straight-line basis. Goodwill is
amortized to operating expense over periods up to 40 years for acquisitions
made before 1983, for periods up to 25 years for acquisitions made after 1982
but before 1988 and for periods of 15 years for acquisitions made after 1987.
Core deposit intangibles are amortized to expense over a period of 10 years.
Other intangibles are amortized on an accelerated basis over shorter periods.
The Corporation reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
MORTGAGE SERVICING RIGHTS
The Corporation adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights," on January 1, 1996. SFAS No. 122 requires recognizing as separate
assets the rights to service mortgage loans for others, however those rights
are acquired. It requires that when a definitive plan exists to sell the loan
and retain servicing rights, the cost of the mortgage will be allocated
between the loan and the related mortgage servicing right based on their
relative fair values at the date of origination or purchase; otherwise, the
date of sale is used. SFAS No. 122 also requires assessing the capitalized
mortgage servicing rights for impairment based on the fair value of those
rights.
The fair value of mortgage servicing rights is determined based on quoted
market prices for comparable transactions or a present value model of expected
future cash flows. Mortgage servicing rights are amortized proportionately in
relation to the associated servicing revenues over the estimated lives of the
serviced loans. In accordance with SFAS No. 122, the Corporation evaluates and
measures impairment of its servicing rights using stratifications based on the
risk characteristics of the underlying loans. Management has determined those
risk characteristics to include method of acquisition (bulk versus loan-by-
loan). Bulk acquisitions are further stratified by loan type, while loan-by-
loan acquisitions are further stratified by loan type and interest rate.
Impairment is recognized through a valuation allowance.
Deferred servicing rights are recorded when mortgage loans are sold with
servicing retained and the actual service fee rate is in excess of the normal
service fee rate. The present value of the deferred servicing rights is
amortized on an accelerated basis over the estimated life of the remaining
loan portfolio. The effects of prepayments are recognized based upon both
historical and current prepayment conditions.
INCOME TAXES
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts
currently payable under tax laws. Deferred income taxes, which arise
principally from temporary differences between the period in which certain
income and expenses are recognized for financial accounting purposes and the
period in which they affect taxable income, are included in the amounts
provided for income taxes.
The Corporation files a consolidated federal income tax return and individual
subsidiary state income tax returns. Accordingly, amounts equal to tax
benefits of those subsidiaries having taxable federal losses or credits are
reimbursed by other subsidiaries that incur federal tax liabilities.
INTEREST RATE SWAP AGREEMENTS
The Corporation enters into interest rate swap agreements to manage interest
rate exposure in its loan portfolio from changes in market interest rates.
These agreements involve the receipt of fixed or floating
36
rate amounts in exchange for floating or fixed rate interest payments over the
life of the agreement without an exchange of the underlying principal amount.
The differential to be paid or received is accrued monthly and recognized as
an adjustment to interest income or expense. The related amount payable to or
receivable from counterparties is included in other liabilities or assets. The
fair values of the swap agreements are not recognized in the consolidated
financial statements. Gains or losses from terminated agreements are deferred
and accreted or amortized to noninterest income or expense over the remaining
life of the asset related to the terminated agreement.
STOCK OPTION PLAN
Prior to January 1, 1996, the Corporation accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Corporation adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Corporation has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
PER SHARE COMPUTATIONS
Earnings per share are based upon the weighted average number of common shares
outstanding during each year. All per share financial information, except for
the share information in the consolidated statements of changes in
stockholders' equity, has been adjusted to reflect the 5-for-4 stock split,
effected as a 25% stock dividend, paid to shareholders on June 15, 1995, and
the 6-for-5 stock split declared January 22, 1997, to be effected as a 20%
stock dividend payable on March 17, 1997, to shareholders of record at the
close of business on March 5, 1997. The calculation of net income per share
excludes shares issuable upon exercise of stock options because inclusion of
such shares does not result in material dilution of income per share. 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 nor will they be adjusted for the 6-for-5 stock split.
37
NOTE 2 BUSINESS COMBINATIONS:
The following table summarizes completed transactions during the three years
ended December 31, 1996:
CONSIDERATION PAID
-----------------------
SHARES OF
DATE METHOD OF CASH COMMON TOTAL ASSETS INTANGIBLES
NAME OF ACQUIRED ACQUIRED ACCOUNTING (IN MILLIONS) STOCK(F) (IN MILLIONS) (IN MILLIONS)
- - ----------------------------------------------------------------------------------------------------------
Branch office acquisitions in 9/94 to Purchase (A) -- (A) 18.0
Madison, Rhinelander, Oshkosh, 11/94
Oconto, and Oconto Falls,
Wisconsin
Great Northern Mortgage Company 7/95 Purchase 1.2 -- (B) 1.5
Rolling Meadows, Illinois
GN Bancorp, Inc. 8/95 Pooling of -- 897,151 130 --
Chicago, Illinois (C) interests
SBL Capital Bank Shares, Inc. (D) 3/96 Pooling of -- 399,548 68 --
Lodi, Wisconsin interests
Greater Columbia Bank Shares, 4/96 Pooling of -- 1,161,161 211 --
Inc. (C) interests
Portage, Wisconsin
F&M Bankshares of Reedsburg, Inc. 7/96 Pooling of -- 641,988 139 --
Reedsburg, Wisconsin (D)(E) interests
Mid-America National Bancorp Inc. 7/96 Purchase 7.8 -- 39 1.9
Chicago, Illinois
(A) The Corporation acquired approximately $190 million in deposits and $114
million in loans in these branch office acquisitions.
(B) The Corporation acquired approximately $535 million in mortgage servicing
as part of this acquisition.
(C) All consolidated financial information has been restated as if the
transaction had been effected as of the beginning of the earliest period
presented.
(D) The transaction was not material to prior years' reported operating
results and, accordingly, previously reported results were not restated.
(E) See "Per Share Computations" in Note 1.
(F) Share amounts have been restated to reflect the 6-for-5 stock split to be
effected as a 20% stock dividend payable on March 17, 1997, to
shareholders of record at the close of business on March 5, 1997.
NOTE 3 RESTRICTIONS ON CASH AND DUE FROM BANKS:
The Corporation's bank subsidiaries are required to maintain certain vault
cash and reserve balances with the Federal Reserve Bank to meet specific
reserve requirements. These requirements approximated $55.2 million at
December 31, 1996.
38
NOTE 4 INVESTMENT SECURITIES:
The amortized cost and fair values of securities held to maturity at December
31, 1996 and 1995 were as follows:
1996
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------
(IN THOUSANDS)
U.S. Treasury and federal agency
securities $161,199 $ 919 $ (863) $161,255
Obligations of states and political
subdivisions 194,810 1,322 (1,621) 194,511
Other securities 61,186 674 (85) 61,775
--------------------------------
Total $417,195 $2,915 $(2,569) $417,541
--------------------------------
--------------------------------
1995
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------
(IN THOUSANDS)
U.S. Treasury and federal agency
securities $172,548 $1,007 $(1,071) $172,484
Obligations of states and political
subdivisions 169,923 1,536 (845) 170,614
Other securities 55,762 910 (73) 56,599
--------------------------------
Total $398,233 $3,453 $(1,989) $399,697
--------------------------------
--------------------------------
The amortized cost and fair values of securities available for sale at
December 31, 1996 and 1995 were as follows:
1996
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------
(IN THOUSANDS)
U.S. Treasury and federal agency
securities $393,934 $ 1,474 $ (916) $394,492
Marketable equity securities 32,502 10,446 -- 42,948
--------------------------------
Total $426,436 $11,920 $ (916) $437,440
--------------------------------
--------------------------------
1995
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------
(IN THOUSANDS)
U.S. Treasury and federal agency
securities $368,217 $ 3,671 $ (474) $371,414
Marketable equity securities 19,507 6,610 (55) 26,062
--------------------------------
Total $387,724 $10,281 $ (529) $397,476
--------------------------------
--------------------------------
39
The amortized cost and fair values of securities held to maturity and
securities available for sale at December 31, 1996, by contractual maturity
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or repay obligations with or
without call or prepayment penalties.
SECURITIES HELD TO MATURITY
AMORTIZED FAIR
COST VALUE
(IN THOUSANDS)
Due in one year or less $101,254 $100,831
Due after one year through five years 234,648 235,227
Due after five years through ten years 78,343 77,857
Due after ten years 2,950 3,626
Total $417,195 $417,541
SECURITIES AVAILABLE FOR SALE
AMORTIZED FAIR
COST VALUE
(IN THOUSANDS)
Due in one year or less $131,129 $131,208
Due after one year through five years 252,792 253,221
Due after five years through ten years 9,013 9,061
Due after ten years 1,000 1,002
Subtotal $393,934 $394,492
Marketable equity securities 32,502 42,948
Total $426,436 $437,440
Total proceeds and gross realized gains and losses from the sale of securities
available for sale for each of the three years ended December 31 were:
1996 1995 1994
------- ------ -------
(IN THOUSANDS)
Proceeds $14,521 $2,187 $40,676
Gross gains 942 129 6
Gross losses 63 5 142
On November 15, 1995, the FASB issued a Special Report entitled: "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." As permitted, the Corporation made a one-time
reclassification on December 31, 1995, of securities with an amortized cost of
$5.5 million, with no unrealized gain or loss, from investment securities held
to maturity to investment securities available for sale.
Securities with an amortized cost of approximately $386 million at December
31, 1996, and $376 million at December 31, 1995, were pledged to secure
certain deposits or for other purposes as required or permitted by law.
On November 25, 1996, the company sold securities classified as held to
maturity prior to their maturity dates. These securities were sold for $1.3
million which approximated amortized cost. These sales were made due to a
significant deterioration in the issuer's creditworthiness and, therefore,
were not considered to be inconsistent with their original classification.
40
NOTE 5 LOANS:
Loans at December 31 are summarized below:
1996 1995
---------- ----------
(IN THOUSANDS)
Commercial and financial $ 803,710 $ 751,587
Agricultural 33,642 32,219
Real estate--construction 219,422 145,199
Real estate--mortgage 1,783,245 1,492,559
Residential real estate--mortgage loans held for sale 23,371 25,326
Installment loans to individuals 286,014 291,303
Lease financing 10,449 9,743
--------------
Total $3,159,853 $2,747,936
--------------
--------------
A summary of the changes in the allowance for possible loan losses for the
years indicated is as follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year $41,614 $39,380 $36,296
Balance related to acquisitions 3,511 -- 2,550
Charge-offs (4,877) (5,282) (6,090)
Recoveries 2,509 3,225 4,413
-
Net charge-offs (2,368) (2,057) (1,677)
Provision charged to expense 4,665 4,291 2,211
-
Balance at end of year $47,422 $41,614 $39,380
-
-
Non-performing loan components at December 31 are summarized as follows:
1996 1995
------- -------
(IN THOUSANDS)
Non-accrual loans $17,225 $15,105
Accruing loans past due 90 days or more 1,801 1,320
Restructured loans 534 1,704
Total $19,560 $18,129
The effect of nonperforming loans on interest revenue was as follows for the
years ended December 31:
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Interest income in accordance with original terms $1,931 $2,010 $2,096
Interest income recognized (905) (934) (1,009)
-----------------
Reduction in interest income $1,026 $1,076 $1,087
-----------------
-----------------
41
Management has determined that commercial loans and residential real estate
loans that have a nonaccrual status or have had their terms restructured are
defined as impaired loans for the provisions of SFAS No. 114. The amount of
impairment is measured based on the fair value of the collateral, if the loan
is collateral dependent, or alternatively, at the present value of expected
future cash flows discounted at the loan's effective interest rate. Interest
income on impaired loans is recorded when cash is received and only if
principal is considered to be fully collectible.
The following table presents data on impaired loans at December 31:
1996 1995
---- ----
(IN THOUSANDS)
Impaired loans for which an allowance has been provided $ 2,152 $ 2,400
Impaired loans for which no allowance has been provided 14,287 12,705
--------
Total loans determined to be impaired $16,439 $15,105
--------
Required allowance $ 1,102 $ 1,316
--------
--------
1996 1995
---- ----
(IN THOUSANDS)
For the years ended December 31:
Average recorded investment in impaired loans $14,020 $13,390
--------
--------
Cash basis interest income recognized from impaired loans $ 840 $ 783
--------
--------
A summary of loans made by the Corporation's subsidiaries to or for the
benefit of directors and executive officers or their affiliated companies of
the Corporation or its subsidiaries during 1996 is as follows:
1996
----
(IN THOUSANDS)
Balance at beginning of year $ 63,188
New loans 88,125
Repayments (85,663)
Other changes 8,319
Balance at end of year $ 73,969
The other changes primarily consisted of: loans to companies where an
individual director had a related interest, but as of December 31, 1996, that
individual was no longer a director; loans to directors, or their affiliated
companies, newly elected in 1996; and the beginning of year balance of loans
to directors, or their affiliated companies, from acquisitions accounted for
as pooling-of-interests, but not restated (Lodi and Reedsburg).
These loans were made on substantially the same terms, including rates and
collateral, if any, as those prevailing at the time for comparable
transactions with other customers, and did not involve more than a normal risk
of collectibility or present other unfavorable features.
The Corporation serves the credit needs of its customers by offering a wide
variety of loan programs to customers in Wisconsin and northern Illinois. The
loan portfolio is widely diversified by types of borrowers, industry groups
and market areas. Significant loan concentrations are considered to exist for
a financial institution 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. At December 31, 1996, no
concentrations existed in the Corporation's loan portfolio in excess of 10% of
total loans, or $316 million.
Other real estate owned, which is included in other assets, totaled $1.2
million and $1.6 million at December 31, 1996 and 1995, respectively.
42
NOTE 6 LOAN SERVICING RIGHTS:
A summary of changes in the balance of mortgage servicing rights is as
follows:
1996 1995
------- ------
(IN THOUSANDS)
Balance at beginning of year $ 7,239 $2,011
Additions 6,144 6,568
Amortization (2,362) (1,340)
Sales of servicing rights -- --
Valuation allowance (26) --
Balance at end of year $10,995 $7,239
At December 31, 1996, the Corporation was servicing 1-to-4-family residential
mortgage loans owned by other investors with balances totaling $2.40 billion
compared with $2.07 billion and $1.20 billion at December 31, 1995 and 1994,
respectively.
NOTE 7 PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31 is as follows:
1996 1995
-------- --------
(IN THOUSANDS)
Premises $ 60,557 $ 52,626
Land and land improvements 13,151 11,944
Furniture and equipment 62,606 51,826
Leasehold improvements 8,818 5,164
---
145,132 121,560
Less: Accumulated depreciation and amortization (69,145) (62,260)
---
Total $ 75,987 $ 59,300
---
---
Depreciation and amortization of premises and equipment totaled $7.3 million
in 1996, $7.0 million in 1995, and $6.7 million in 1994.
A third party provides data processing and management information system
services to the Corporation pursuant to an agreement for information
technology services dated August 1, 1995. As of December 31, 1996, this
agreement is in effect through August 1, 2001. The Agreement provides for the
delivery of certain information technology services over the life of the
Agreement. The Agreement calls for monthly fixed and variable fees, covering
the cost of systems operations and the migration to new systems. System
migration fees are amortized over the life of the Agreement, while operational
costs are expensed as incurred. Operational costs are subject to annual
adjustment, indexed to changes in the Consumer Price Index (CPI). The
facilities housing the data processing operation are leased until September
15, 1997. Certain data processing and other related equipment is leased on a
month-to-month basis. The costs associated with this contract are included in
the minimum annual rental and commitment table shown below.
The Corporation and certain subsidiaries are obligated under a number of non-
cancelable operating leases for other facilities, equipment, and services,
certain of which provide for increased rentals based upon increases in volume,
cost of living adjustments, and other operating costs.
43
The approximate minimum annual rentals and commitments under these agreements
are as follows:
(IN
THOUSANDS)
- - -------------------
1997 $ 7,164
1998 7,046
1999 6,770
2000 6,657
2001 4,516
Thereafter 13,057
- - -------------------
Total $45,210
- - -------------------
- - -------------------
Consolidated rental and service expense under leases and other agreements, net
of sublease income, totaled $11.8 million in 1996, $11.3 million in 1995, and
$10.9 million in 1994.
NOTE 8 DEPOSITS:
The distribution of deposits at December 31 is as follows:
1996 1995
---------- ----------
(IN THOUSANDS)
Noninterest-bearing demand deposits $ 655,358 $ 619,294
Interest-bearing demand deposits 391,547 330,020
Savings deposits 390,623 390,641
Money market deposits 478,731 429,358
Time deposits 1,591,782 1,376,363
Total deposits $3,508,041 $3,145,676
Time deposits of $100,000 or more were $531.5 million and $399.6 million at
December 31, 1996 and 1995, respectively. Interest expense on time deposits of
$100,000 or more was $42.9 million, $27.9 million, and $9.2 million for the
years ended December 31, 1996, 1995, and 1994, respectively.
NOTE 9 SHORT-TERM BORROWINGS:
Short-term borrowings at December 31 are as follows:
1996 1995
-------- --------
(IN THOUSANDS)
Federal funds purchased and securities sold under agreements
to repurchase $308,839 $270,824
Commercial paper 2,172 2,326
Notes payable to banks 68,937 66,647
Federal Home Loan Bank advances 51,349 15,277
Other borrowed funds 9,702 7,852
Current maturities of long-term borrowings 3,067 800
----------------
Total $444,066 $363,726
----------------
----------------
Commercial paper is issued in maturities not to exceed nine months at the
prevailing market rate at date of issuance. Notes payable to banks are
unsecured borrowings under existing lines of credit. At December 31, 1996, the
Corporation's parent company had $115 million of established lines of credit
with various non-affiliated banks, of which $68.9 million was outstanding.
Borrowings under these lines accrue interest at short-term market rates and
are payable upon demand or in maturities up to 90 days.
Subsidiary banks have collateral pledge agreements whereby they have agreed to
keep on hand at all times, free of all other pledges, liens, and encumbrances,
whole first mortgages on improved residential property with unpaid principal
balances aggregating no less than 167% of all outstanding borrowings from the
Federal Home Loan Bank. Loans totaling approximately $120.8 million and $57.1
million were maintained as collateral to secure Federal Home Loan Bank
advances at December 31, 1996, and December 31, 1995, respectively.
44
NOTE 10 LONG-TERM BORROWINGS:
Long-term borrowings at December 31 are as follows:
1996 1995
------- -------
(IN THOUSANDS)
Parent company:
8.6% senior unsecured notes $ 400 $ 1,200
9.35% subordinated capital note 2,667 2,667
----------------
$ 3,067 $ 3,867
Subsidiaries:
Federal Home Loan Bank, 4.84% to 7.63% maturing in 1998
through 2004 $21,130 $18,997
----------------
Less: Current maturities of long-term borrowings $(3,067) $ (800)
----------------
Total $21,130 $22,064
================
The table below summarizes the maturities of the Corporation's long-term
borrowings:
YEAR $ (IN THOUSANDS)
- - ---- ----------------
1997 $ 3,067
1998 14,817
1999 1,221
2000 2,320
2001 668
Thereafter 2,104
-------
Total $24,197
Current maturities of long-term borrowings (3,067)
-------
Total long-term borrowings $21,130
=======
The 8.6% senior unsecured notes are due April 30, 1997. The Corporation has
the option to prepay these senior notes, in whole or in part. This option
began on April 30, 1994, subject to a variable redemption premium representing
the present value of aggregate unpaid scheduled interest payments discounted
at the U.S. Treasury rate at time of prepayment.
The 9.35% $2,667,000 subordinated capital note is due October 31, 1997, and
may be redeemed, in whole or in part, at the option of the Corporation. This
option began on April 30, 1994, on the same basis as the 8.6% senior unsecured
notes.
In the various loan agreements, there are covenants in effect as long as the
debt remains unpaid, the most significant of which places limitations on
additional funded indebtedness and the payment of cash dividends. At December
31, 1996, the most restrictive of such covenants limited the maximum amount of
additional funded indebtedness that could be incurred to approximately $400
million and the maximum amount of restricted payments that could be made to
approximately $265 million. The Corporation and subsidiaries were in
compliance with the existing covenants at December 31, 1996.
NOTE 11 STOCKHOLDERS' EQUITY:
On June 15, 1995, the Corporation distributed 3.15 million shares of common
stock in connection with a 5-for-4 stock split, effected in the form of a 25%
stock dividend. On January 22, 1997, the Board of Directors declared a 6-for-5
stock split to be effected as a 20% stock dividend payable on March 17, 1997,
to shareholders of record at the close of business on March 5, 1997 (See Note
19).
At December 31, 1996, subsidiary net assets equaled $350.5 million, of which
approximately $57.5 million could be transferred to the Corporation in the
form of cash dividends without prior regulatory approval, subject to the
capital needs of the subsidiary banks.
The Corporation's Articles of Incorporation authorize the issuance of 750,000
shares of preferred stock at a par value of $1.00 per share. No shares have
been issued.
45
The Corporation has an Incentive Stock Option Plan. The plan provides for the
granting of options to key employees to purchase common stock at a price at
least equal to the fair market value of the stock on the date of grant. The
options granted are for a ten-year term and may be exercised at any time
during this period. No options have been granted since 1985.
Activity in the Incentive Stock Option Plan is summarized as follows:
INCENTIVE STOCK OPTIONS
--------------------------------------
AVAILABLE FOR GRANTED AND OPTION
GRANT EXERCISABLE PRICE RANGE*
------------------------------
Balance, December 31, 1993 11,017 13,048 $6.84-$8.74
Options exercised (12,616) $6.84-$8.74
------------------------------
Balance, December 31, 1994 11,017 432 $ 8.74
Options exercised (432) $ 8.74
------------------------------
Balance, December 31, 1995 11,017 -- --
Options exercised
------------------------------
Balance, December 31, 1996 11,017 -- --
------------------------------
------------------------------
* Option price ranges have not been restated for the stock split in 1995 or
the stock split to be paid in 1997. The number of shares reserved under the
plan were not increased for the stock dividends paid.
In 1987, the Corporation adopted a Long-Term Incentive Stock Plan ("Stock
Plan") for certain key employees. The Stock Plan is administered by the
Corporation's Administrative Committee of the Board of Directors
("Committee"). Initially, 600,000 shares were authorized for grant over the
ten-year period of the Stock Plan. As a result of stock dividends declared and
paid by the Corporation, the number of shares authorized for grant at December
31, 1993, totaled 750,200. As of December 31, 1993, a total of 733,132 grants
for shares had been issued under the Stock Plan, with 17,068 available to be
issued.
In 1994, the Board of Directors, with subsequent approval of the Corporation's
shareholders, adopted amendments to the Stock Plan. The amendments to the
Stock Plan were incorporated in a Restated Long-Term Incentive Stock Option
Plan ("Restated Stock Plan"). As part of the amendments, the Board agreed to
increase the number of shares available for issuance under the Restated Stock
Plan by an additional 600,000 shares, bringing the total authorized shares to
a total of 1,350,200 shares. The Board also extended the original 10-year
termination date of the Stock Plan from 1996 to the year 2006.
The following is a summary of various additional changes reflected in the
Restated Stock Plan: provides for the grant of incentive stock options, which
were not provided for in the Stock Plan; eliminates a requirement that options
vest not later than five years from the date of grant in order to permit
greater flexibility to the Committee in providing longer term incentives to
participants; amends the provisions for the exercise and vesting of options in
the event of death, permanent disability, or retirement such that the
Committee is authorized to exercise discretion to determine whether unvested
options should vest as though employment had not terminated and to permit
vested unexercised options to be exercised after termination of employment
according to the terms of the original grant.
46
Activity in the Restated Stock Plan is summarized as follows:
GRANTED AND EXERCISABLE OPTIONS
-----------------------------------------------------------
AVAILABLE FOR RESTRICTED WITHOUT OPTION
GRANT STOCK AWARDS SARS WITH SARS PRICE RANGE*
------------------------------------------------------
Balance, December 31,
1993 17,068 -- 374,489 125,663 $ 9.09-$24.00
Additional authorized
plan shares 600,000 -- -- -- --
Granted (129,000) -- 129,000 -- 21.83
Exercised -- -- (11,377) (5,389) 9.37- 10.45
Forfeitures 4,950 -- (4,950) -- --
------------------------------------------------------
Balance, December 31,
1994 493,018 -- 487,162 120,274 $ 9.09-$24.00
------------------------------------------------------
Granted (126,000) -- 126,000 -- $24.00-$24.17
Adjustment to shares for
5-for-4 stock split 94,599 -- 143,368 26,890 --
Exercised -- -- (60,016) (22,131) 9.09- 24.17
Forfeitures 13,533 -- (13,533) -- --
------------------------------------------------------
Balance at December 31,
1995 475,150 -- 682,981 125,033 $ 9.09-$24.17
------------------------------------------------------
Granted (171,500) -- 171,500 -- 30.73
Exercised -- -- (49,526) (32,531) 9.09- 24.17
Forfeitures 15,916 -- (14,541) (1,375) --
------------------------------------------------------
Balance at December 31,
1996 prior to stock
split declared in
January 1997 319,566 -- 790,414 91,127 $ 9.09-$30.73
------------------------------------------------------
------------------------------------------------------
Stock split declared in
January 1997 (Note 19) 63,913 -- 158,083 18,225
------------------------------------------------------
Balance, December 31,
1996 383,479 -- 948,497 109,352 $ 9.09-$30.73
------------------------------------------------------
------------------------------------------------------
* Option price ranges have been restated for the June 15, 1995, 5-for-4 stock
split, effected as a 25% stock dividend, and for the 6-for-5 stock split to
be effected as a 20% stock dividend declared on January 22, 1997.
Total expense related to the above plans was $0, $0, and $.1 million in 1996,
1995, and 1994, respectively.
Upon completion of the merger of F&M Financial Services Corporation ("F&M")
with and into the Corporation as of May 8, 1992, the Corporation assumed the
obligations, which were previously those of F&M under the outstanding options
granted under F&M's Non-Qualified Stock Option Plan (the "F&M Plan"). The
number of option shares granted was converted to the Corporation's option
shares at a rate of .8 options for each option granted and were all considered
fully exercisable upon completion of the merger for a total of 61,650 shares
of the Corporation's stock.
47
Activity in the F&M Plan assumed by the Corporation, is summarized as follows:
AVAILABLE GRANTED AND OPTION
FOR GRANT EXERCISABLE PRICE RANGE*
----------------------------
Balance, December 31, 1993 -- 19,800 $10.04-$11.29
----------------------------
Balance, December 31, 1994 -- 19,800 $10.04-$11.29
----------------------------
Adjustment to shares granted for 5-for-4
stock split -- 4,950 $ --
Balance, December 31, 1995 -- 24,750 10.04- 11.29
----------------------------
Exercised -- (16,500) $10.04-$11.29
Balance at December 31, 1996 prior to
stock split declared in January 1997 -- 8,250 11.29
----------------------------
Stock split declared in January 1997 (Note
19) -- 1,650 --
----------------------------
Balance, December 31, 1996 -- 9,900 $ 11.29
----------------------------
----------------------------
* Option price ranges subsequent to assumption of the F&M Plan have been
restated for the June 15, 1995, 5-for-4 stock split, effected in the form of
a 25% stock dividend, and the 6-for-5 stock split to be effected as a 20%
stock dividend declared on January 22, 1997.
Upon completion of the merger of GN Bancorp, Inc. with and into the
Corporation as of August 3, 1995, the Corporation assumed the obligations,
which were previously those of GN Bancorp, Inc. under the outstanding options
granted under GN Bancorp, Inc.'s Stock Option Plan ("GN Plan"). The number of
option shares granted was converted to the Corporation's option shares at a
rate of 8.234 options for each option granted and were all considered fully
exercisable upon completion of the merger for a total of 20,997 shares of the
Corporation's stock.
Activity in the GN Plan assumed by the Corporation, is summarized as follows:
AVAILABLE FOR GRANTED AND OPTION
GRANT EXERCISABLE PRICE RANGE*
------------------------------
Balance, December 31, 1993 57,638 24,702 $ 10.12
Granted (57,638) 57,638 10.12- 11.13
Exercised -- (61,343) 10.12- 11.13
------------------------------
Balance, December 31, 1994 -- 20,997 $ 11.13
Exercised -- (15,908) 11.13
------------------------------
Balance, December 31, 1995 -- 5,089 $ 11.13
------------------------------
Balance at December 31, 1996 prior to
stock split declared in January 1997 -- 5,089 $ 11.13
------------------------------
Stock split declared in January 1997
(Note 19) -- 1,018 --
------------------------------
Balance, December 31, 1996 -- 6,107 $ 11.13
------------------------------
------------------------------
* Option price ranges have been restated for the June 15, 1995 5-for-4 stock
split, effected as a 25% stock dividend, and for the 6-for-5 stock split to
be effected as a 20% stock dividend declared on January 22, 1997.
48
The Corporation applies APB Opinion No. 25 in accounting for the Restated
Stock Plan and, accordingly, compensation cost based on the fair value at
grant date has not been recognized for its stock options in the consolidated
financial statements during the years ended December 31, 1996 and 1995. Had
the Corporation determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, "Accounting for Stock-
Based Compensation", the Corporation's net income would have been reduced to
the pro forma amounts indicated below:
1996 1995
------- -------
(IN THOUSANDS)
Net income As reported $57,244 $48,028
Pro forma $56,548 $47,879
1996 1995
------- -------
Net income per share As reported $ 2.60 $ 2.29
Pro forma $ 2.56 $ 2.27
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
graded vesting period of 3 years and compensation cost for options granted
prior to January 1, 1995, is not considered. However, the annual expense
allocation methodology prescribed by SFAS No. 123 attributes a higher
percentage of the reported expense to earlier years than to later years,
resulting in an accelerated expense recognition.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes option-pricing model. The following assumptions were used in
estimated the fair value for options granted in 1995 and 1996:
1996 1995
------ ------
Dividend yield 3.00% 2.70%
Risk-free interest rate 5.44% 7.76%
Weighted average expected life 7 yrs. 7 yrs.
Expected volatility 20.49% 21.54%
The weighted average per share fair values of options granted during 1996 and
1995 were $6.98 and $7.29, respectively.
49
NOTE 12 RETIREMENT PLAN:
The Corporation has a non-contributory defined benefit retirement plan
covering substantially all full-time employees. The benefits are based
primarily on years of service and the employee's compensation paid while a
participant in the plan. The Corporation's funding policy is consistent with
the funding requirements of federal law and regulations. Plan assets are
actively managed by investment professionals.
The following table sets forth the plan's funded status at December 31:
1996 1995 1994
-----------------------
(IN THOUSANDS)
Actuarial present value of accumulated benefit
obligations:
Vested $(20,103) $(19,471) $(18,495)
Non-vested (1,829) (1,888) (1,082)
-----------------------
Total $(21,932) $(21,359) $(19,577)
-----------------------
-----------------------
Projected benefit obligation $(22,823) $(22,362) $(20,005)
Plan assets at fair value, primarily marketable
securities 24,783 21,778 17,908
-----------------------
Plan assets in excess of (less than) projected
benefit obligation 1,960 (584) (2,097)
Unrecognized net asset (1,955) (2,150) (2,345)
Unrecognized prior service cost 314 334 77
Unrecognized (gain) loss (3,615) (1,639) 448
-----------------------
Accrued pension liability $ (3,296) $ (4,039) $ (3,917)
-----------------------
-----------------------
Net periodic pension costs include the following
components:
Service cost-benefits earned during the period $ 1,465 $ 1,308 $ 1,406
Interest cost on projected benefit obligation 1,593 1,622 1,325
Actual (return) loss on assets (2,824) (4,515) 215
Net amortization and deferral 1,048 2,856 (1,847)
-----------------------
Net periodic pension expense $ 1,282 $ 1,271 $ 1,099
-----------------------
-----------------------
Assumptions used in expense calculations were:
Discount rates 7.0% 8.0% 7.0%
Rates of increase in compensation levels 5.0% 5.0% 5.0%
Expected long-term rate of return on assets 9.0% 9.0% 8.0%
-----------------------
Assumptions used for the December 31, 1996 liability included a discount rate
of 7% and a 5% increase in compensation levels.
The Corporation and its subsidiaries also have a Profit Sharing/Retirement
Savings Plan. Total expense related to contributions to the plan was $4.4
million, $3.7 million, and $3.4 million in 1996, 1995, and 1994, respectively.
The profit sharing contribution is determined annually by the Administrative
Committee of the Board of Directors. The formula is based on the return on
average equity of each affiliate and the Corporation.
50
NOTE 13 INCOME TAX EXPENSE:
The current and deferred amounts of income tax expense (benefit) are as
follows:
YEARS ENDED DECEMBER
31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Current:
Federal $30,188 $27,501 $21,844
State 5,709 5,411 4,157
Total current $35,897 $32,912 $26,001
Deferred:
Federal $(3,527) $(4,885) $(2,237)
State (326) (750) (277)
Total deferred $(3,853) $(5,635) $(2,514)
Total income tax expense $32,044 $27,277 $23,487
Temporary differences between the amounts reported in the financial statements
and the tax bases of assets and liabilities resulted in deferred taxes.
Deferred tax assets and liabilities at December 31 are as follows:
1996 1995
------- -------
(IN THOUSANDS)
Gross deferred tax assets:
Allowance for possible loan losses $17,503 $15,115
Accrued pension expense 1,674 1,834
Deferred compensation 2,192 2,228
Securities valuation adjustment 3,528 2,187
Loan fee income 248 454
Other real estate 235 410
Benefit of tax loss carryforwards 1,639 --
Other 3,854 3,546
-------------
Total gross deferred tax assets $30,873 $25,774
-------------
Gross deferred tax liabilities:
Premises and equipment $ 1,229 $ 1,786
Lease financing 206 --
Prepaid expenses 398 267
Accretion 380 692
State income taxes 893 787
Other 58 25
-------------
Total gross deferred tax liabilities $ 3,164 $ 3,557
-------------
Net deferred tax assets $27,709 $22,217
Tax effect of unrealized gain related to available for sale
securities (4,024) (3,643)
-------------
Net deferred tax assets including unrealized gain related to
available for sale securities $23,685 $18,574
-------------
-------------
Management believes it is more likely than not that the deferred tax assets
will be fully realized. Therefore, no valuation allowance has been recorded as
of December 31, 1996 or 1995.
As of December 31, 1996 the Corporation had approximately $4,683,000 of
purchased net operating loss carryforwards available to reduce federal tax
liability through the year 2009. Utilization of the net operating loss
carryforwards is reflected as a charge in lieu of current tax expense and
recorded in the consolidated statements of financial condition as a reduction
to goodwill.
51
The effective income tax rate differs from the statutory federal tax rate. The
major reasons for this difference are as follows:
1996 1995 1994
---- ---- ----
Federal income tax rate at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) resulting from:
Tax-exempt interest and dividends (3.7) (3.4) (3.8)
State income taxes net of federal income tax benefit 3.9 3.9 3.9
Other .7 .7 (.1)
-----
Effective income tax rate 35.9% 36.2% 35.0%
-----
-----
NOTE 14 COMMITMENTS AND CONTINGENT LIABILITIES:
COMMITMENTS AND LETTERS OF CREDIT
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to interest rate risk. These
financial instruments include commitments to extend credit, commercial letters
of credit, standby letters of credit and financial guarantees, and interest
rate swaps.
The Corporation's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit,
commercial letters of credit, and standby letters of credit and financial
guarantees written is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The following is a summary of financial instruments with off-balance sheet
risk at December 31:
1996 1995
---------- --------
(IN THOUSANDS)
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit $1,080,705 $868,357
Commercial letters of credit 3,489 2,517
Standby letters of credit and financial guarantees written 45,287 63,904
Financial instruments whose notional or contract amount
exceeds the amount of credit risk:
Interest rate swap agreements 3,400 3,500
Commitments to extend credit are agreements to lend funds to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the customer. Collateral held
varies but may include accounts receivable, inventory, property, plant,
equipment, securities, certificates of deposit and income producing commercial
properties.
A letter of credit is a document issued by the Corporation on behalf of its
customer (the account party) authorizing a third party (the beneficiary), or
in special cases the account party, to draw drafts on the Corporation up to a
stipulated amount and with specified terms and conditions. The letter of
credit is a conditional commitment (except when prepaid by the account party)
on the part of the Corporation to provide payment on drafts drawn in
accordance with the terms of the document.
A commercial letter of credit is issued specifically to facilitate trade or
commerce. Under the terms of a commercial letter of credit, as a general rule,
drafts will be drawn when the underlying transaction is consummated as
intended.
52
A standby letter of credit is a letter of credit or similar arrangement that
represents an obligation on the part of the Corporation to a designated third
party (the beneficiary) contingent upon the failure of the Corporation's
customer (the account party) to perform under the terms of the underlying
contract with the beneficiary, or obligates the Corporation to guarantee or
stand as surety for the benefit of a third party to the extent permitted by
law or regulation.
The underlying contract may entail either financial or non-financial
undertakings of the account party with the beneficiary. The underlying
contract may involve such things as the customer's payment of commercial
paper, delivery of merchandise, completion of a construction contract or
repayment of the account party's obligations to the beneficiary. Under the
terms of a standby letter, as a general rule, drafts will be drawn only when
the underlying event fails to occur as intended.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers.
The Corporation enters into various interest-rate swaps in managing its
interest-rate risk. In these swaps, the Corporation agrees to exchange, at
specified intervals, the difference between fixed- and floating-interest
amounts calculated on an agreed-upon notional principal amount. A portion of
the Corporation's loan portfolio consists of prime-related commercial loans,
which reprice based upon movements in the prime interest rate. Interest rate
swaps may be used to reduce the impact of changes in interest rates on the
Corporation's net interest income. The net amount payable or receivable from
interest-rate swap agreements is accrued as an adjustment to interest income
or expense. At December 31, 1996 and 1995, $3.4 million and $3.5 million,
respectively of "pay-fixed" swaps were in effect converting a fixed rate
commercial loan to a variable rate.
The Corporation's current credit exposure on swaps is limited to the value of
interest-rate swaps that have become favorable to the Corporation. At December
31, 1996, the market value of interest-rate swaps was a positive $36,000.
If an interest rate swap that is used to manage interest-rate risk is
terminated early, any resulting gain or loss is deferred and accreted or
amortized to noninterest income or expense over the remaining life of the
asset related to the terminated agreement.
Deferred gains totaling $211,000 at December 31, 1996, resulting from interest
rate swaps terminated during 1994 with notional amounts of $19.8 million, are
included in other liabilities and will be recognized as part of noninterest
income in the following periods: $104,000 in 1997, $97,000 in 1998, and
$10,000 in 1999.
LEGAL
There are legal proceedings pending against certain subsidiaries of the
Corporation in the ordinary course of their business. Although litigation is
subject to many uncertainties and the ultimate exposure with respect to these
matters cannot be ascertained, management believes, based upon discussions
with counsel, that the Corporation has meritorious defenses, and any ultimate
liability would not have a material adverse affect on the consolidated
financial position of the Corporation.
53
NOTE 15 PARENT COMPANY FINANCIAL INFORMATION:
Presented below are condensed statements of financial condition, income and
cash flows for the Parent Company:
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
1996 1995
-------- --------
(IN THOUSANDS)
ASSETS
Cash and due from banks $ 309 $ 1,628
Notes receivable from non-bank subsidiaries 74,780 62,428
Notes receivable from bank subsidiaries 24,600 24,600
Notes receivable from subsidiary bank holding companies 11,612 --
Investment in bank subsidiaries 261,369 246,911
Investment in non-bank subsidiaries 23,423 12,723
Investment in subsidiary bank holding companies 57,084 49,058
Other assets 26,904 21,607
----------
Total assets $480,081 $418,955
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 74,176 $ 67,273
Accrued expenses and other liabilities 12,760 8,321
Long-term borrowings -- 3,067
----------
Total liabilities 86,936 78,661
Stockholders' equity 393,145 340,294
----------
Total liabilities and stockholders' equity $480,081 $418,955
----------
----------
STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
INCOME
Dividends from subsidiaries $51,283 $30,467 $30,968
Management and service fees from subsidiaries 4,267 3,963 3,651
Interest income on notes receivable 6,088 4,562 2,758
Other income 234 267 1,157
-----------------------
Total income 61,872 39,259 38,534
-----------------------
EXPENSE
Interest expense on borrowed funds 4,449 3,593 2,580
Salaries and employee benefits 3,287 3,331 3,668
Other expense 5,030 4,931 4,307
-----------------------
Total expense 12,766 11,855 10,555
-----------------------
Income before income tax benefit and equity in
undistributed income 49,106 27,404 27,979
Income tax benefit (547) (663) (1,059)
-----------------------
Income before equity in undistributed net income of
subsidiaries 49,653 28,067 29,038
Equity in undistributed net income of subsidiaries 7,591 19,961 14,530
-----------------------
Net income $57,244 $48,028 $43,568
-----------------------
-----------------------
54
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 57,244 $ 48,028 $ 43,568
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries (7,591) (19,961) (14,530)
Depreciation and other amortization 135 199 159
Amortization of intangibles 805 871 871
Loss (gain) on sales of assets, net -- 2 (14)
(Increase) decrease in interest receivable and
other assets 599 (7,488) (3,747)
Increase (decrease) in interest payable and
other liabilities (252) 1,290 86
Other, net (154) (30) (3,092)
-----------------------
Net cash provided by operating activities $ 50,786 $ 22,911 $ 23,301
-----------------------
INVESTING ACTIVITIES
Purchases of investment securities $ -- (780) --
Net (increase) decrease in notes receivable (12,374) (32,547) 19,910
Purchase of premises and equipment, net of
disposals (82) (81) (176)
Capital contribution to subsidiaries (9,200) (500) (14,500)
-----------------------
Net cash provided (used) by investing activities $(21,656) $(33,908) $ 5,234
-----------------------
FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings $ (8,546) $ 30,169 $(15,036)
Cash dividends (20,278) (16,924) (14,511)
Proceeds from exercise of stock options 1,476 1,454 1,095
Purchase of treasury stock (3,101) (2,085) (338)
-----------------------
Net cash provided (used) by financing activities $(30,449) $ 12,610 $(28,790)
-----------------------
Net increase (decrease) in cash and cash
equivalents $ (1,319) $ 1,613 $ (255)
Cash and due from banks at beginning of year 1,628 15 270
-----------------------
Cash and due from banks at end of year $ 309 $ 1,628 $ 15
-----------------------
-----------------------
NOTE 16 FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Corporation disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth
below for the Corporation's financial instruments.
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL
INSTITUTIONS, AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS
TO RESELL:
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
INVESTMENT SECURITIES HELD TO MATURITY, INVESTMENT SECURITIES AVAILABLE FOR
SALE, AND TRADING ACCOUNT SECURITIES:
The fair value of investment securities held to maturity, investment
securities available for sale, and trading account securities, except certain
state and municipal securities, is estimated based on bid prices published in
financial newspapers or bid quotations received from securities dealers. The
fair value of certain state and municipal securities is not readily available
through market sources other than dealer quotations, so fair value estimates
are based on quoted market prices of similar instruments, adjusted for
differences between the quoted instruments and the instruments being valued.
55
LOANS:
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, credit card and other consumer. For
residential mortgage loans for resale, fair value is estimated using the
prices of the Corporation's existing commitments to sell such loans and/or the
quoted market prices for commitments to sell similar loans.
The fair value of other types of loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for similar maturities. Future cash
flows are also adjusted for estimated reductions or delays due to
delinquencies, non-accruals or potential charge-offs.
EXCESS SERVICING RIGHTS:
The fair value of excess servicing rights is estimated based upon a pricing
model that considers factors such as normal servicing fees, loan prepayment
speeds and an appropriate discount rate.
MORTGAGE SERVICING RIGHTS:
The fair value is estimated by discounting the expected future cash flows
considering estimated service fees, ancillary income, interest on tax and
insurance, and principal and interest float, servicing costs, other costs, and
future prepayment speeds.
DEPOSITS:
Under SFAS No. 107, the fair value of deposits with no stated maturity such as
noninterest-bearing demand deposits, savings, NOW accounts and money market
accounts, is equal to the amount payable on demand as of December 31. The fair
value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS:
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
LONG-TERM BORROWINGS:
Rates currently available to the Corporation for debt with similar terms and
remaining maturities are used to estimate fair value of existing borrowings.
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows:
1996 1995
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- --------------
(IN THOUSANDS)
Financial assets:
Cash and due from banks $ 236,314 $ 236,314 $ 214,411 $ 214,411
Interest-bearing deposits in
other financial institutions 670 670 652 652
Federal funds sold and
securities purchased under
agreements to resell 27,977 27,977 45,100 45,100
Investment securities:
Held to maturity 417,195 417,541 398,233 399,697
Available for sale 437,440 437,440 397,476 397,476
Loans 3,159,853 3,145,627 2,747,936 2,728,480
Mortgage servicing rights 10,995 14,177 7,239 9,348
Financial liabilities:
Deposits 3,508,041 3,509,091 3,145,676 3,152,893
Short-term borrowings 444,066 444,066 363,726 363,726
Long-term borrowings 21,130 20,833 22,064 22,291
---------- ---------- ---------- ----------
56
COMMITMENTS TO EXTEND CREDIT, COMMERCIAL LETTERS OF CREDIT, STANDBY LETTERS OF
CREDIT AND FINANCIAL GUARANTEES WRITTEN:
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counter-parties. The fair value of financial guarantees written and letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counter-parties.
INTEREST RATE SWAP AGREEMENTS:
The fair value of interest rate swap agreements are obtained from dealer
quotes. These values represent the estimated amount the Corporation would
receive or pay to terminate the contracts or agreements, taking into account
current interest rates and, when appropriate, the current creditworthiness of
the counter-parties.
The contract or notional amount, carrying amount and estimated fair value for
commitments to extend credit, commercial letters of credit, standby letters of
credit and financial guarantees written, and interest rate swap agreements at
December 31 is as follows:
1996
------------------------------
CONTRACT
OR ESTIMATED
NOTIONAL CARRYING FAIR
AMOUNT AMOUNT(1) VALUE
----------------
(IN THOUSANDS)
Commitments to extend credit $1,080,705 $297 $2,676
Commercial letters of credit 3,489 -- 9
Standby letters of credit and financial
guarantees written 45,287 -- 453
Interest rate swap agreements 3,400 2 36
1995
------------------------------
CONTRACT
OR ESTIMATED
NOTIONAL CARRYING FAIR
AMOUNT AMOUNT(1) VALUE
----------------
(IN THOUSANDS)
Commitments to extend credit $ 856,179 $381 $1,750
Commercial letters of credit 2,517 -- 6
Standby letters of credit and financial
guarantees written 63,904 -- 639
Interest rate swap agreements 3,500 3 28
(1) The amounts shown under "carrying amount" represent accruals or deferred
income arising from these unrecognized financial instruments.
LIMITATIONS:
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Corporation's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Corporation has a substantial trust
department that contributes net fee income annually. The trust department is
not considered a financial instrument and its value has not been incorporated
into the fair value estimates. Other significant assets and liabilities
57
that are not considered financial assets or liabilities include the mortgage
banking operation, brokerage network, deferred tax liabilities, the benefit of
low cost core deposits, property, equipment, and goodwill. In addition, the
tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in many of the estimates.
NOTE 17 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is selected financial data summarizing the results of operations
for each quarter in the years ended December 31, 1996 and 1995:
1996 QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income $75,805 $76,908 $78,648 $80,371
Interest expense 34,968 35,309 35,963 36,237
Provision for possible loan losses 1,172 872 1,011 1,610
Investment securities gains, net 340 36 52 485
Income before income tax expense 20,728 21,861 22,803 23,896
Net income 13,394 14,128 14,660 15,062
Net income per share $ .61 $ .64 $ .67 $ .68
Weighted average shares outstanding 22,026 22,044 22,031 22,040
1995 QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income $66,112 $69,146 $71,374 $72,746
Interest expense 28,465 31,279 32,483 32,872
Provision for possible loan losses 946 780 677 1,888
Investment securities gains, net 21 113 92 104
Income before income tax expense 17,375 18,124 20,249 19,557
Net income 11,272 11,715 12,820 12,221
Net income per share $ .54 $ .56 $ .61 $ .58
Weighted average shares outstanding 20,962 20,972 20,963 20,975
NOTE 18 REGULATORY MATTERS:
The Corporation and the subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Corporation's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Corporation and the subsidiary banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation
categorized the Corporation and its two largest subsidiary banks, Associated
Bank Green Bay and Associated Bank Milwaukee as adequately capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Corporation must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set
58
forth in the table. There are no conditions or events since that notification
that management believes have changed the institution's category.
The actual capital amounts and ratios of the Corporation, Associated Bank
Green Bay, and Associated Bank Milwaukee are also presented in the table. No
deductions from capital were made for interest-rate risk in 1996.
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
($ IN ADEQUACY ACTION
THOUSANDS) ACTUAL PURPOSES PROVISIONS:
- - ----------------------------------------------------------------
AS OF DECEMBER
31, 1996: AMOUNT RATIO* AMOUNT RATIO* AMOUNT RATIO*
- - ----------------------------------------------------------------
ASSOCIATED
BANC-CORP
- - ----------
Total Capital $398,193 11.98% $265,800 ^8.00% $332,249 ^10.00%
Tier I Capital $356,589 10.73% $132,900 ^4.00% $199,350 ^6.00%
Leverage $356,589 8.41% $169,678 ^4.00% $212,098 ^5.00%
ASSOCIATED
BANK GREEN BAY
- - --------------
Total Capital $100,777 10.52% $ 76,651 ^8.00% $ 95,814 ^10.00%
Tier I Capital $ 76,782 8.01% $ 38,326 ^4.00% $ 57,488 ^6.00%
Leverage $ 76,782 6.46% $ 47,536 ^4.00% $ 59,420 ^5.00%
ASSOCIATED
BANK MILWAUKEE
- - --------------
Total Capital $ 60,628 10.26% $ 47,202 ^8.00% $ 59,002 ^10.00%
Tier I Capital $ 51,744 8.77% $ 23,601 ^4.00% $ 35,401 ^6.00%
Leverage $ 51,744 7.45% $ 27,775 ^4.00% $ 34,718 ^5.00%
*Total Capital ratio is defined as Tier 1 Capital plus Tier 2 Capital divided
by total risk weighted assets. The Tier 1 Capital ratio is defined as Tier 1
capital divided by total risk weighted assets. The leverage ratio is defined
as Tier 1 capital divided by the most recent quarter's average total assets.
Under the framework, the Corporation's capital levels do not allow the
Corporation to accept brokered deposits without prior approval from
regulators.
NOTE 19 SUBSEQUENT EVENT:
On January 22, 1997, the Board of Directors declared a 6-for-5 stock split to
be effected as a 20% stock dividend payable on March 17, 1997, to shareholders
of record at the close of business on March 5, 1997. Any fractional shares
resulting from the dividend will be paid in cash. All share and per share data
amounts contained in the consolidated financial statements have been restated
to reflect the effect of this stock split.
59
INDEPENDENT AUDITORS' REPORT
ASSOCIATED BANC-CORP
The Board of Directors
Associated Banc-Corp:
We have audited the accompanying consolidated statements of financial
condition of Associated Banc-Corp and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are
the responsibility of Associated Banc-Corp's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Associated
Banc-Corp and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
LOGO
KPMG Peat Marwick LLP
Chicago, Illinois
January 24, 1997
60
MARKET INFORMATION
MARKET PRICE
RANGE
SALES PRICES
-------------
DIVIDENDS PAID BOOK VALUE HIGH LOW
-------------- ---------- ------ ------
1996
4th Quarter $.24 $17.84 $36.46 $32.92
3rd Quarter .24 17.31 33.65 31.88
2nd Quarter .24 16.84 32.92 31.25
1st Quarter .23 16.52 32.92 29.38
1995
4th Quarter $.23 $16.22 $34.12 $30.21
3rd Quarter .23 15.74 31.04 25.31
2nd Quarter .18 15.40 25.83 23.67
1st Quarter .18 14.79 25.08 22.83
Indicated Annual Dividend Rate: $.96
Market information has been restated for the June 15, 1995 5-for-4 stock split
effected as a 25% stock dividend and for the 6-for-5 stock split effected as a
20% stock dividend declared on January 22, 1997, and payable March 17, 1997.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the Corporation's definitive Proxy Statement, prepared for
the 1997 Annual Meeting of Shareholders, which contains information concerning
directors of the Corporation, under the caption "Election of Directors," is
incorporated herein by reference. The information concerning "Executive
Officers of the Registrant," as a separate item, appears in Part I of this
document.
ITEM 11 EXECUTIVE COMPENSATION
The information in the Corporation's definitive Proxy Statement, prepared for
the 1997 Annual Meeting of Shareholders, which contains information concerning
this item, under the caption "Executive Compensation," is incorporated herein
by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the Corporation's definitive Proxy Statement, prepared for
the 1997 Annual Meeting of Shareholders, which contains information concerning
this item, under the captions "Principal Holders of Common Stock" and
"Security Ownership of Management," is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Corporation's definitive Proxy Statement, prepared for
the 1997 Annual Meeting of Shareholders, which contains information concerning
this item under the caption "Certain Transactions," is incorporated herein by
reference.
61
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2 Financial Statements and Financial Statement Schedules
The following financial statements and financial statement
schedules are included under a separate caption "Financial
Statements and Supplementary Data" in Part II, Item 8 hereof
and are incorporated herein by reference.
Consolidated Statements of Financial Condition--December 31,
1996 and 1995
Consolidated Statements of Income--For the Years Ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Changes in Stockholders' Equity--
For the Years Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows--For the Years Ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a) 3 Exhibits Required by Item 601 of Regulation S-K
EXHIBIT SEQUENTIAL PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- - ----------------------------------------------------------------------
(3)(a) Articles of Incorporation Exhibit (3) to Report on Form
10-Q for the quarter ended June
30, 1993
(3)(b) Bylaws Exhibit (3) to Report on Form
10-Q for the quarter ended
September 30, 1991
(4) Instruments Defining the
Rights of Security Holders,
Including Indentures
The Registrant, by signing
this report, agrees to
furnish the Securities and
Exchange Commission, upon its
request, a copy of any
instrument that defines the
rights of holders of long-
term debt of the Registrant
and all of its subsidiaries
for which consolidated or
unconsolidated financial
statements are required to be
filed and that authorizes a
total amount of securities
not in excess of 10% of the
total assets of the
Registrant and its
subsidiaries on a
consolidated basis.
62
EXHIBIT SEQUENTIAL PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- - ----------------------------------------------------------------------
*(10)(a) The 1982 Incentive Stock Exhibit (10) to Report on
Option Plan of the Registrant Form 10-K for fiscal year
ended December 31, 1987
*(10)(b) The Restated Long-Term Exhibits filed with
Incentive Stock Option Plan Associated's registration
of the Registrant statement (33-86790) on Form
S-8 filed under the
Securities Act of 1933
*(10)(c) Deferred Compensation Exhibit (10)(c) to Report on
Agreement dated November 1, Form 10-K for fiscal year
1986 between Associated Bank ended December 31, 1992
Green Bay, National
Association and Robert C.
Gallagher
*(10)(d) Change of Control Plan of the Exhibit (10)(d) to Report on
Registrant effective April Form 10-K for fiscal year
25, 1994 ended December 31, 1994
*(10)(e) Deferred Compensation Plan Exhibit (10(e) to Report on
and Deferred Compensation Form 10-K for fiscal year
Trust effective as of ended December 31, 1994
December 16, 1993, and
Deferred Compensation
Agreement of the Registrant
dated December 31, 1994
(11) Statement Re Computation of Filed herewith
Per Share Earnings
(21) Subsidiaries of the Filed herewith
Corporation
(23) Consent of Independent Filed herewith
Auditors
(24) Power of Attorney Filed herewith
- - ---------------------
* Management contracts and arrangements.
Schedules and exhibits other than those listed are omitted for the reasons
that they are not required, are not applicable or that equivalent
information has been included in the financial statements, and notes
thereto, or elsewhere herein.
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the fourth quarter of the fiscal year ended December 31,
1996.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ASSOCIATED BANC-CORP
Date: March 24, 1997
/s/ Harry B. Conlon
By: _________________________________
Harry B. Conlon
Chairman, President & Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Harry B. Conlon
By: ________________________________ *
By: ________________________________
Harry B. Conlon John S. Holbrook, Jr.
Chairman, President, Chief Director
Executive Officer and Director
/s/ Joseph B. Selner
By: ________________________________ *
By: ________________________________
Joseph B. Selner William R. Hutchinson
Senior Vice President-CFO Director
Principal Financial Officer and
Principal
Accounting Officer
/s/ Robert C. Gallagher
By: ________________________________ *
By: ________________________________
Robert C. Gallagher James F. Janz
Vice Chairman and Director
Director
*
By: ________________________________ *
By: ________________________________
Robert Feitler John C. Meng
Director
Director
*
By: ________________________________ *
By: ________________________________
Ronald R. Harder J. Douglas Quick
Director
Director
/s/ Brian R. Bodager
*By: ________________________________
Brian R. Bodager
Attorney-in-Fact
Date: March 24, 1997
64