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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