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
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
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

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
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

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

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.
PART II
ITEM 5

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.
ITEM 6

ITEM 6 SELECTED FINANCIAL DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA(1)
(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).
ITEM 7

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
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
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.
TABLE 2: AVERAGE BALANCES AND INTEREST RATES (INCOME AND RATES ON A TAX- EQUIVALENT BASIS)
(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.
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)
(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.
TABLE 4: INTEREST RATE SPREAD AND INTEREST MARGIN (ON A TAX-EQUIVALENT BASIS)
*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
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
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
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
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.
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
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
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.
TABLE 9: LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY(1)
- - --------------------- (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.
TABLE 10: LOAN LOSS EXPERIENCE
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-
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
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.
TABLE 12: NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED
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
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
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
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
(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.
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
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
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
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
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
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
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,
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.
The Corporation's long-term debt to equity ratio at December 31, 1996, was 5.4% compared to 6.5% at December 31, 1995. The decrease is attributable to the change in current maturities of long-term borrowings between years.
Management believes that, in the current economic environment, the Corporation's subsidiary and parent company liquidity positions are adequate. There are no known trends nor any known demands, commitments, events or uncertainties that will result or are reasonably likely to result in a material increase or decrease in the Corporation's liquidity.
INTEREST RATE SENSITIVITY
Interest rate risk is the exposure to a bank's earnings and capital arising from changes in future interest rates. All banks assume interest rate risk as an integral part of normal banking operations. The management of interest rate risk includes four components: policy statements, risk limits, risk measurement and reporting procedures.
An important responsibility of the Asset/Liability Committee (ALCO) of each subsidiary bank is the management of risks associated with changing interest rates, changing asset and liability mixes, and their impact on earnings. These ALCOs, in turn, operate under the advisory policy guidelines on interest rate sensitivity set by the Corporation's ALCO. The sensitivity of net interest income to market rate changes is evaluated regularly by the Corporation to determine the effectiveness of interest rate risk management.
Interest rate sensitivity analysis can be performed in several different ways. The traditional method of measuring interest sensitivity is called "gap" analysis. Gap analysis is used to identify mismatches in the repricing of assets and liabilities within specified periods of time or interest sensitivity gaps.
For all assets and liabilities repriced within one year, the ratio of rate sensitive assets to rate sensitive liabilities was 72.1% at December 31, 1996. As presented, this traditional gap analysis does not accurately reflect the Corporation's true rate sensitivity position. The categories of savings, NOW, and money market accounts have been included in the 0-90 days category for this gap analysis. While these accounts are contractually short-term in nature, it is management's experience that repricing occurs over a longer period of time. The year-end 1996 liability sensitive position would tend to provide favorable short-term effects on earnings during periods of declining rates while rising rates would tend to affect net interest income unfavorably over the short run.
The Corporation uses simulation modeling results that incorporate the dynamics of balance sheet and interest rate changes and reflect the related impact on net interest income over a specified time horizon. The Corporation is continually reviewing its interest rate risk position and modifying its strategies based upon simulation projections under various interest rate levels. Additionally, the Corporation may enter into interest-rate swap agreements to assist in managing interest rate risk. Management's philosophy is to maintain an appropriate rate sensitive asset and liability position to provide for stability in earnings in the event of significant interest rate changes. The Corporation believes that it has an effective process for managing interest rate risk.
TABLE 21: INTEREST RATE SENSITIVITY ANALYSIS
(1) Securities balances exclude $11.0 million of unrealized gains relating to available for sale securities.
(2) Savings, NOW, and money market account balances totaling $1.26 billion are included in the 0-90 days category. While these accounts are contractually short-term in nature, it is management's experience that repricing occurs over a longer period of time.
CAPITAL
Stockholders' equity at December 31, 1996, increased 15.5% to $393.1 million or $17.84 per share compared with $340.3 million or $16.22 per share in 1995. Period-end equity has increased at a 13.6% compounded growth rate during the past five years and represents 8.90% of total assets as of December 31, 1996. Year-end capital includes a $7.0 million equity component compared to a $6.1 million component at December 31, 1995, related to unrealized gains on securities available for sale, net of tax effect. Without the equity adjustment, the ratio of December 31, 1996, equity to assets would be 8.74% compared with adjusted equity of 8.52% at year-end 1995.
Cash dividends paid in 1996 were $0.95 per share compared with $0.81 per share in 1995, an increase of 17.3%. Cash dividends have increased at a 14.9% compounded rate during the past five years.
The adequacy of the Corporation's capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic condition in markets served and strength of management.
As of December 31, 1996 and 1995, the Corporation's Tier 1 risk-based capital ratios, total risk-based capital (Tier 1 and Tier 2) ratios and Tier 1 leverage ratios were well in excess of regulatory requirements. Management of the Corporation expects to continue to exceed the minimum standards in the future. Capital ratios are included in Note 18, Regulatory Matters, of the notes to consolidated financial statements.
In 1991, the Corporation's Board of Directors authorized management to repurchase up to 480,000 shares of the Corporation's common stock in the market from time to time. The shares repurchased would be available in connection with the Corporation's employee incentive plans and for other corporate purposes. Shares repurchased are held as treasury stock and, accordingly, are accounted for as a reduction of stockholders' equity. The Corporation purchased 92,684 of its common shares in 1996 and 76,200 in 1995.
Management believes that a strong capital position is necessary to take advantage of opportunities for profitable geographic and product expansion, and to provide depositor and investor confidence. The Corporation's capital level remains strong, but must also be maintained at an appropriate level that provides the opportunity for a superior return on the capital employed. Management actively reviews capital strategies for the Corporation and each of its subsidiaries to ensure that capital levels are appropriate based on the perceived business risks, future growth opportunities, industry standards, and regulatory requirements.
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. In December 1996, the FASB issued SFAS No. 127 which deferred the effective date of certain components of SFAS No. 125 until January 1, 1998. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial- components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Management of the Corporation does not expect that adoption of SFAS No. 125 will have a material impact on the Corporation's financial position, results of operations, or liquidity.
ITEM 8

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ASSOCIATED BANC-CORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
See accompanying notes to Consolidated Financial Statements.
ASSOCIATED BANC-CORP CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to Consolidated Financial Statements.
ASSOCIATED BANC-CORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying notes to Consolidated Financial Statements.
ASSOCIATED BANC-CORP CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to Consolidated Financial Statements.
ASSOCIATED BANC-CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995, AND 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Associated Banc-Corp and its subsidiaries (Corporation) conform to generally accepted accounting principles and to general practice within the banking and mortgage banking industries. The following is a description of the more significant of those policies.
BUSINESS
The Corporation provides a full range of banking and related financial services to individual and corporate customers through its network of bank and mortgage affiliates in Wisconsin, Illinois, and Georgia. The Corporation is subject to competition from other financial institutions and is regulated by federal and state banking agencies and undergoes periodic examinations by those agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Corporation and subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation. Results of operations of companies purchased are included from the date of acquisition. Financial statements have been restated to include companies acquired under pooling of interests when material. Certain amounts in the 1994 and 1995 consolidated financial statements have been reclassified to conform with the 1996 presentation.
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change relate to the determination of the allowance for possible loan losses.
INVESTMENT SECURITIES
Securities are classified as held to maturity, available for sale, or trading. Investment securities classified as held to maturity, which management has the intent and ability to hold to maturity, are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts using a method that approximates level yield. Available for sale and trading securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in stockholders' equity or income, respectively. Realized securities gains or losses are reported in the consolidated statements of income. The cost of securities sold is based on the specific identification method. Any security held to maturity for which there has been a permanent impairment of value is written down to its estimated market value.
LOANS
Loans and leases are carried at the principal amount outstanding, net of any unearned income. Unearned income, primarily from direct leases, is recognized on a basis that generally approximates a level yield on the outstanding balances receivable. Interest on all other loans is based upon the principal amount outstanding.
Loans are normally placed on non-accrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact on the collectibility of principal or interest on loans, it is management's practice to place such loans on non-accrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed, amortization of related loan fees is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectibility of the principal is in doubt, payments received are applied to loan principal.
Loan origination fees and certain direct loan origination costs on real estate and commercial loans are deferred and recognized as an adjustment of yield using the interest method. Non-refundable fees and direct origination costs associated with installment loans are, in the opinion of management, insignificant and are not accounted for as an adjustment of yield of the related loan categories. Loan origination fees and direct origination costs on residential real estate loans held for resale are also not accounted for as an adjustment of yield. All other loan fees are included in other income.
Loans held for resale are recorded at the lower of cost or market as determined on an aggregate basis. Holding costs are treated as period costs.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is a reserve for estimated credit losses. Credit losses arise primarily from the loan portfolio, but may also be derived from other sources, including commitments to extend credit, guarantees and standby letters of credit. Actual credit losses, net of recoveries, are deducted from the allowance for possible loan losses. A provision for possible loan losses, which is a charge against earnings, is added to bring the allowance to a level that, in management's judgment, is adequate to absorb losses inherent in the loan portfolio. Management performs an ongoing assessment of the loan portfolio to determine the appropriate level of the allowance. The factors considered in the evaluation include, but are not necessarily limited to, estimated losses from loan and off-balance sheet arrangements; general economic conditions; deterioration in credit concentration or pledged collateral; historical loss experience; and trends in portfolio volume, maturity, composition, delinquencies and non-accruals.
The Corporation adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure," on January 1, 1995. Management, considering current information and events regarding the borrower's ability to repay their obligations, considers a loan to be impaired when it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the note agreement, including principal and interest. Management has determined that commercial loans and residential real estate loans that have a nonaccrual status or have had their terms restructured meet this definition. The amount of impairment is measured based on the fair value of the collateral, if the loan is collateral dependent, or alternatively, at the present value of expected future cash flows discounted at the loan's effective interest rate. Interest income on impaired loans is recorded when cash is received and only if principal is considered to be fully collectible.
Management believes that the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for possible loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations.
REAL ESTATE ACQUIRED IN FORECLOSURE
Real estate acquired in foreclosure includes properties acquired in partial or total satisfaction of loans and is included in other assets in the accompanying consolidated statements of financial condition. Properties are recorded at the lower of recorded investment in the loans at the time of acquisition or the fair value of the properties, less estimated selling costs. Any write-down in the carrying value of a property at the time of acquisition is charged to the allowance for possible loan losses. Any subsequent write- downs to reflect current fair market value, as well as gains and losses on disposition and revenues and expenses incurred in maintaining such properties, are included in current operations.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the related assets or the lease term. Maintenance and repairs are charged to expense as incurred while additions or
major improvements are capitalized and depreciated over their estimated useful lives. Estimated useful lives for premises include periods up to 50 years and for equipment include periods up to 10 years.
INTANGIBLES
The excess of the purchase price over the fair value of net assets of subsidiaries acquired consists primarily of goodwill and core deposit intangibles that are being amortized on a straight-line basis. Goodwill is amortized to operating expense over periods up to 40 years for acquisitions made before 1983, for periods up to 25 years for acquisitions made after 1982 but before 1988 and for periods of 15 years for acquisitions made after 1987. Core deposit intangibles are amortized to expense over a period of 10 years. Other intangibles are amortized on an accelerated basis over shorter periods. The Corporation reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
MORTGAGE SERVICING RIGHTS
The Corporation adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," on January 1, 1996. SFAS No. 122 requires recognizing as separate assets the rights to service mortgage loans for others, however those rights are acquired. It requires that when a definitive plan exists to sell the loan and retain servicing rights, the cost of the mortgage will be allocated between the loan and the related mortgage servicing right based on their relative fair values at the date of origination or purchase; otherwise, the date of sale is used. SFAS No. 122 also requires assessing the capitalized mortgage servicing rights for impairment based on the fair value of those rights.
The fair value of mortgage servicing rights is determined based on quoted market prices for comparable transactions or a present value model of expected future cash flows. Mortgage servicing rights are amortized proportionately in relation to the associated servicing revenues over the estimated lives of the serviced loans. In accordance with SFAS No. 122, the Corporation evaluates and measures impairment of its servicing rights using stratifications based on the risk characteristics of the underlying loans. Management has determined those risk characteristics to include method of acquisition (bulk versus loan-by- loan). Bulk acquisitions are further stratified by loan type, while loan-by- loan acquisitions are further stratified by loan type and interest rate. Impairment is recognized through a valuation allowance.
Deferred servicing rights are recorded when mortgage loans are sold with servicing retained and the actual service fee rate is in excess of the normal service fee rate. The present value of the deferred servicing rights is amortized on an accelerated basis over the estimated life of the remaining loan portfolio. The effects of prepayments are recognized based upon both historical and current prepayment conditions.
INCOME TAXES
Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes.
The Corporation files a consolidated federal income tax return and individual subsidiary state income tax returns. Accordingly, amounts equal to tax benefits of those subsidiaries having taxable federal losses or credits are reimbursed by other subsidiaries that incur federal tax liabilities.
INTEREST RATE SWAP AGREEMENTS
The Corporation enters into interest rate swap agreements to manage interest rate exposure in its loan portfolio from changes in market interest rates. These agreements involve the receipt of fixed or floating
rate amounts in exchange for floating or fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued monthly and recognized as an adjustment to interest income or expense. The related amount payable to or receivable from counterparties is included in other liabilities or assets. The fair values of the swap agreements are not recognized in the consolidated financial statements. Gains or losses from terminated agreements are deferred and accreted or amortized to noninterest income or expense over the remaining life of the asset related to the terminated agreement.
STOCK OPTION PLAN
Prior to January 1, 1996, the Corporation accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Corporation has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
PER SHARE COMPUTATIONS
Earnings per share are based upon the weighted average number of common shares outstanding during each year. All per share financial information, except for the share information in the consolidated statements of changes in stockholders' equity, has been adjusted to reflect the 5-for-4 stock split, effected as a 25% stock dividend, paid to shareholders on June 15, 1995, and the 6-for-5 stock split declared January 22, 1997, to be effected as a 20% stock dividend payable on March 17, 1997, to shareholders of record at the close of business on March 5, 1997. The calculation of net income per share excludes shares issuable upon exercise of stock options because inclusion of such shares does not result in material dilution of income per share. The Corporation issued 500,995 shares of common stock to a wholly owned subsidiary as part of the acquisition of F&M Bankshares of Reedsburg, Inc. These shares are not reflected on the consolidated statements of financial condition as issued or outstanding nor will they be adjusted for the 6-for-5 stock split.
NOTE 2 BUSINESS COMBINATIONS:
The following table summarizes completed transactions during the three years ended December 31, 1996:
(A) The Corporation acquired approximately $190 million in deposits and $114 million in loans in these branch office acquisitions.
(B) The Corporation acquired approximately $535 million in mortgage servicing as part of this acquisition.
(C) All consolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest period presented.
(D) The transaction was not material to prior years' reported operating results and, accordingly, previously reported results were not restated.
(E) See "Per Share Computations" in Note 1.
(F) Share amounts have been restated to reflect the 6-for-5 stock split to be effected as a 20% stock dividend payable on March 17, 1997, to shareholders of record at the close of business on March 5, 1997.
NOTE 3 RESTRICTIONS ON CASH AND DUE FROM BANKS:
The Corporation's bank subsidiaries are required to maintain certain vault cash and reserve balances with the Federal Reserve Bank to meet specific reserve requirements. These requirements approximated $55.2 million at December 31, 1996.
NOTE 4 INVESTMENT SECURITIES:
The amortized cost and fair values of securities held to maturity at December 31, 1996 and 1995 were as follows:
The amortized cost and fair values of securities available for sale at December 31, 1996 and 1995 were as follows:
The amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 1996, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
SECURITIES HELD TO MATURITY
Total proceeds and gross realized gains and losses from the sale of securities available for sale for each of the three years ended December 31 were:
On November 15, 1995, the FASB issued a Special Report entitled: "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." As permitted, the Corporation made a one-time reclassification on December 31, 1995, of securities with an amortized cost of $5.5 million, with no unrealized gain or loss, from investment securities held to maturity to investment securities available for sale.
Securities with an amortized cost of approximately $386 million at December 31, 1996, and $376 million at December 31, 1995, were pledged to secure certain deposits or for other purposes as required or permitted by law.
On November 25, 1996, the company sold securities classified as held to maturity prior to their maturity dates. These securities were sold for $1.3 million which approximated amortized cost. These sales were made due to a significant deterioration in the issuer's creditworthiness and, therefore, were not considered to be inconsistent with their original classification.
NOTE 5 LOANS:
Loans at December 31 are summarized below:
A summary of the changes in the allowance for possible loan losses for the years indicated is as follows:
Non-performing loan components at December 31 are summarized as follows:
The effect of nonperforming loans on interest revenue was as follows for the years ended December 31:
Management has determined that commercial loans and residential real estate loans that have a nonaccrual status or have had their terms restructured are defined as impaired loans for the provisions of SFAS No. 114. The amount of impairment is measured based on the fair value of the collateral, if the loan is collateral dependent, or alternatively, at the present value of expected future cash flows discounted at the loan's effective interest rate. Interest income on impaired loans is recorded when cash is received and only if principal is considered to be fully collectible.
The following table presents data on impaired loans at December 31:
A summary of loans made by the Corporation's subsidiaries to or for the benefit of directors and executive officers or their affiliated companies of the Corporation or its subsidiaries during 1996 is as follows:
The other changes primarily consisted of: loans to companies where an individual director had a related interest, but as of December 31, 1996, that individual was no longer a director; loans to directors, or their affiliated companies, newly elected in 1996; and the beginning of year balance of loans to directors, or their affiliated companies, from acquisitions accounted for as pooling-of-interests, but not restated (Lodi and Reedsburg).
These loans were made on substantially the same terms, including rates and collateral, if any, as those prevailing at the time for comparable transactions with other customers, and did not involve more than a normal risk of collectibility or present other unfavorable features.
The Corporation serves the credit needs of its customers by offering a wide variety of loan programs to customers in Wisconsin and northern Illinois. The loan portfolio is widely diversified by types of borrowers, industry groups and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 1996, no concentrations existed in the Corporation's loan portfolio in excess of 10% of total loans, or $316 million.
Other real estate owned, which is included in other assets, totaled $1.2 million and $1.6 million at December 31, 1996 and 1995, respectively.
NOTE 6 LOAN SERVICING RIGHTS:
A summary of changes in the balance of mortgage servicing rights is as follows:
At December 31, 1996, the Corporation was servicing 1-to-4-family residential mortgage loans owned by other investors with balances totaling $2.40 billion compared with $2.07 billion and $1.20 billion at December 31, 1995 and 1994, respectively.
NOTE 7 PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31 is as follows:
Depreciation and amortization of premises and equipment totaled $7.3 million in 1996, $7.0 million in 1995, and $6.7 million in 1994.
A third party provides data processing and management information system services to the Corporation pursuant to an agreement for information technology services dated August 1, 1995. As of December 31, 1996, this agreement is in effect through August 1, 2001. The Agreement provides for the delivery of certain information technology services over the life of the Agreement. The Agreement calls for monthly fixed and variable fees, covering the cost of systems operations and the migration to new systems. System migration fees are amortized over the life of the Agreement, while operational costs are expensed as incurred. Operational costs are subject to annual adjustment, indexed to changes in the Consumer Price Index (CPI). The facilities housing the data processing operation are leased until September 15, 1997. Certain data processing and other related equipment is leased on a month-to-month basis. The costs associated with this contract are included in the minimum annual rental and commitment table shown below.
The Corporation and certain subsidiaries are obligated under a number of non- cancelable operating leases for other facilities, equipment, and services, certain of which provide for increased rentals based upon increases in volume, cost of living adjustments, and other operating costs.
The approximate minimum annual rentals and commitments under these agreements are as follows:
Consolidated rental and service expense under leases and other agreements, net of sublease income, totaled $11.8 million in 1996, $11.3 million in 1995, and $10.9 million in 1994.
NOTE 8 DEPOSITS:
The distribution of deposits at December 31 is as follows:
Time deposits of $100,000 or more were $531.5 million and $399.6 million at December 31, 1996 and 1995, respectively. Interest expense on time deposits of $100,000 or more was $42.9 million, $27.9 million, and $9.2 million for the years ended December 31, 1996, 1995, and 1994, respectively.
NOTE 9 SHORT-TERM BORROWINGS:
Short-term borrowings at December 31 are as follows:
Commercial paper is issued in maturities not to exceed nine months at the prevailing market rate at date of issuance. Notes payable to banks are unsecured borrowings under existing lines of credit. At December 31, 1996, the Corporation's parent company had $115 million of established lines of credit with various non-affiliated banks, of which $68.9 million was outstanding. Borrowings under these lines accrue interest at short-term market rates and are payable upon demand or in maturities up to 90 days.
Subsidiary banks have collateral pledge agreements whereby they have agreed to keep on hand at all times, free of all other pledges, liens, and encumbrances, whole first mortgages on improved residential property with unpaid principal balances aggregating no less than 167% of all outstanding borrowings from the Federal Home Loan Bank. Loans totaling approximately $120.8 million and $57.1 million were maintained as collateral to secure Federal Home Loan Bank advances at December 31, 1996, and December 31, 1995, respectively.
NOTE 10 LONG-TERM BORROWINGS:
Long-term borrowings at December 31 are as follows:
The table below summarizes the maturities of the Corporation's long-term borrowings:
The 8.6% senior unsecured notes are due April 30, 1997. The Corporation has the option to prepay these senior notes, in whole or in part. This option began on April 30, 1994, subject to a variable redemption premium representing the present value of aggregate unpaid scheduled interest payments discounted at the U.S. Treasury rate at time of prepayment.
The 9.35% $2,667,000 subordinated capital note is due October 31, 1997, and may be redeemed, in whole or in part, at the option of the Corporation. This option began on April 30, 1994, on the same basis as the 8.6% senior unsecured notes.
In the various loan agreements, there are covenants in effect as long as the debt remains unpaid, the most significant of which places limitations on additional funded indebtedness and the payment of cash dividends. At December 31, 1996, the most restrictive of such covenants limited the maximum amount of additional funded indebtedness that could be incurred to approximately $400 million and the maximum amount of restricted payments that could be made to approximately $265 million. The Corporation and subsidiaries were in compliance with the existing covenants at December 31, 1996.
NOTE 11 STOCKHOLDERS' EQUITY:
On June 15, 1995, the Corporation distributed 3.15 million shares of common stock in connection with a 5-for-4 stock split, effected in the form of a 25% stock dividend. On January 22, 1997, the Board of Directors declared a 6-for-5 stock split to be effected as a 20% stock dividend payable on March 17, 1997, to shareholders of record at the close of business on March 5, 1997 (See Note 19).
At December 31, 1996, subsidiary net assets equaled $350.5 million, of which approximately $57.5 million could be transferred to the Corporation in the form of cash dividends without prior regulatory approval, subject to the capital needs of the subsidiary banks.
The Corporation's Articles of Incorporation authorize the issuance of 750,000 shares of preferred stock at a par value of $1.00 per share. No shares have been issued.
The Corporation has an Incentive Stock Option Plan. The plan provides for the granting of options to key employees to purchase common stock at a price at least equal to the fair market value of the stock on the date of grant. The options granted are for a ten-year term and may be exercised at any time during this period. No options have been granted since 1985.
Activity in the Incentive Stock Option Plan is summarized as follows:
* Option price ranges have not been restated for the stock split in 1995 or the stock split to be paid in 1997. The number of shares reserved under the plan were not increased for the stock dividends paid.
In 1987, the Corporation adopted a Long-Term Incentive Stock Plan ("Stock Plan") for certain key employees. The Stock Plan is administered by the Corporation's Administrative Committee of the Board of Directors ("Committee"). Initially, 600,000 shares were authorized for grant over the ten-year period of the Stock Plan. As a result of stock dividends declared and paid by the Corporation, the number of shares authorized for grant at December 31, 1993, totaled 750,200. As of December 31, 1993, a total of 733,132 grants for shares had been issued under the Stock Plan, with 17,068 available to be issued.
In 1994, the Board of Directors, with subsequent approval of the Corporation's shareholders, adopted amendments to the Stock Plan. The amendments to the Stock Plan were incorporated in a Restated Long-Term Incentive Stock Option Plan ("Restated Stock Plan"). As part of the amendments, the Board agreed to increase the number of shares available for issuance under the Restated Stock Plan by an additional 600,000 shares, bringing the total authorized shares to a total of 1,350,200 shares. The Board also extended the original 10-year termination date of the Stock Plan from 1996 to the year 2006.
The following is a summary of various additional changes reflected in the Restated Stock Plan: provides for the grant of incentive stock options, which were not provided for in the Stock Plan; eliminates a requirement that options vest not later than five years from the date of grant in order to permit greater flexibility to the Committee in providing longer term incentives to participants; amends the provisions for the exercise and vesting of options in the event of death, permanent disability, or retirement such that the Committee is authorized to exercise discretion to determine whether unvested options should vest as though employment had not terminated and to permit vested unexercised options to be exercised after termination of employment according to the terms of the original grant.
Activity in the Restated Stock Plan is summarized as follows:
* Option price ranges have been restated for the June 15, 1995, 5-for-4 stock split, effected as a 25% stock dividend, and for the 6-for-5 stock split to be effected as a 20% stock dividend declared on January 22, 1997.
Total expense related to the above plans was $0, $0, and $.1 million in 1996, 1995, and 1994, respectively.
Upon completion of the merger of F&M Financial Services Corporation ("F&M") with and into the Corporation as of May 8, 1992, the Corporation assumed the obligations, which were previously those of F&M under the outstanding options granted under F&M's Non-Qualified Stock Option Plan (the "F&M Plan"). The number of option shares granted was converted to the Corporation's option shares at a rate of .8 options for each option granted and were all considered fully exercisable upon completion of the merger for a total of 61,650 shares of the Corporation's stock.
Activity in the F&M Plan assumed by the Corporation, is summarized as follows:
* Option price ranges subsequent to assumption of the F&M Plan have been restated for the June 15, 1995, 5-for-4 stock split, effected in the form of a 25% stock dividend, and the 6-for-5 stock split to be effected as a 20% stock dividend declared on January 22, 1997.
Upon completion of the merger of GN Bancorp, Inc. with and into the Corporation as of August 3, 1995, the Corporation assumed the obligations, which were previously those of GN Bancorp, Inc. under the outstanding options granted under GN Bancorp, Inc.'s Stock Option Plan ("GN Plan"). The number of option shares granted was converted to the Corporation's option shares at a rate of 8.234 options for each option granted and were all considered fully exercisable upon completion of the merger for a total of 20,997 shares of the Corporation's stock.
Activity in the GN Plan assumed by the Corporation, is summarized as follows:
* Option price ranges have been restated for the June 15, 1995 5-for-4 stock split, effected as a 25% stock dividend, and for the 6-for-5 stock split to be effected as a 20% stock dividend declared on January 22, 1997.
The Corporation applies APB Opinion No. 25 in accounting for the Restated Stock Plan and, accordingly, compensation cost based on the fair value at grant date has not been recognized for its stock options in the consolidated financial statements during the years ended December 31, 1996 and 1995. Had the Corporation determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, "Accounting for Stock- Based Compensation", the Corporation's net income would have been reduced to the pro forma amounts indicated below:
Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' graded vesting period of 3 years and compensation cost for options granted prior to January 1, 1995, is not considered. However, the annual expense allocation methodology prescribed by SFAS No. 123 attributes a higher percentage of the reported expense to earlier years than to later years, resulting in an accelerated expense recognition.
The fair value of each option granted is estimated on the grant date using the Black-Scholes option-pricing model. The following assumptions were used in estimated the fair value for options granted in 1995 and 1996:
The weighted average per share fair values of options granted during 1996 and 1995 were $6.98 and $7.29, respectively.
NOTE 12 RETIREMENT PLAN:
The Corporation has a non-contributory defined benefit retirement plan covering substantially all full-time employees. The benefits are based primarily on years of service and the employee's compensation paid while a participant in the plan. The Corporation's funding policy is consistent with the funding requirements of federal law and regulations. Plan assets are actively managed by investment professionals.
The following table sets forth the plan's funded status at December 31:
Assumptions used for the December 31, 1996 liability included a discount rate of 7% and a 5% increase in compensation levels.
The Corporation and its subsidiaries also have a Profit Sharing/Retirement Savings Plan. Total expense related to contributions to the plan was $4.4 million, $3.7 million, and $3.4 million in 1996, 1995, and 1994, respectively.
The profit sharing contribution is determined annually by the Administrative Committee of the Board of Directors. The formula is based on the return on average equity of each affiliate and the Corporation.
NOTE 13 INCOME TAX EXPENSE:
The current and deferred amounts of income tax expense (benefit) are as follows:
Temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities resulted in deferred taxes. Deferred tax assets and liabilities at December 31 are as follows:
Management believes it is more likely than not that the deferred tax assets will be fully realized. Therefore, no valuation allowance has been recorded as of December 31, 1996 or 1995.
As of December 31, 1996 the Corporation had approximately $4,683,000 of purchased net operating loss carryforwards available to reduce federal tax liability through the year 2009. Utilization of the net operating loss carryforwards is reflected as a charge in lieu of current tax expense and recorded in the consolidated statements of financial condition as a reduction to goodwill.
The effective income tax rate differs from the statutory federal tax rate. The major reasons for this difference are as follows:
NOTE 14 COMMITMENTS AND CONTINGENT LIABILITIES:
COMMITMENTS AND LETTERS OF CREDIT
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to interest rate risk. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit and financial guarantees, and interest rate swaps.
The Corporation's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, commercial letters of credit, and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The following is a summary of financial instruments with off-balance sheet risk at December 31:
Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment, securities, certificates of deposit and income producing commercial properties.
A letter of credit is a document issued by the Corporation on behalf of its customer (the account party) authorizing a third party (the beneficiary), or in special cases the account party, to draw drafts on the Corporation up to a stipulated amount and with specified terms and conditions. The letter of credit is a conditional commitment (except when prepaid by the account party) on the part of the Corporation to provide payment on drafts drawn in accordance with the terms of the document.
A commercial letter of credit is issued specifically to facilitate trade or commerce. Under the terms of a commercial letter of credit, as a general rule, drafts will be drawn when the underlying transaction is consummated as intended.
A standby letter of credit is a letter of credit or similar arrangement that represents an obligation on the part of the Corporation to a designated third party (the beneficiary) contingent upon the failure of the Corporation's customer (the account party) to perform under the terms of the underlying contract with the beneficiary, or obligates the Corporation to guarantee or stand as surety for the benefit of a third party to the extent permitted by law or regulation.
The underlying contract may entail either financial or non-financial undertakings of the account party with the beneficiary. The underlying contract may involve such things as the customer's payment of commercial paper, delivery of merchandise, completion of a construction contract or repayment of the account party's obligations to the beneficiary. Under the terms of a standby letter, as a general rule, drafts will be drawn only when the underlying event fails to occur as intended.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The Corporation enters into various interest-rate swaps in managing its interest-rate risk. In these swaps, the Corporation agrees to exchange, at specified intervals, the difference between fixed- and floating-interest amounts calculated on an agreed-upon notional principal amount. A portion of the Corporation's loan portfolio consists of prime-related commercial loans, which reprice based upon movements in the prime interest rate. Interest rate swaps may be used to reduce the impact of changes in interest rates on the Corporation's net interest income. The net amount payable or receivable from interest-rate swap agreements is accrued as an adjustment to interest income or expense. At December 31, 1996 and 1995, $3.4 million and $3.5 million, respectively of "pay-fixed" swaps were in effect converting a fixed rate commercial loan to a variable rate.
The Corporation's current credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. At December 31, 1996, the market value of interest-rate swaps was a positive $36,000.
If an interest rate swap that is used to manage interest-rate risk is terminated early, any resulting gain or loss is deferred and accreted or amortized to noninterest income or expense over the remaining life of the asset related to the terminated agreement.
Deferred gains totaling $211,000 at December 31, 1996, resulting from interest rate swaps terminated during 1994 with notional amounts of $19.8 million, are included in other liabilities and will be recognized as part of noninterest income in the following periods: $104,000 in 1997, $97,000 in 1998, and $10,000 in 1999.
LEGAL
There are legal proceedings pending against certain subsidiaries of the Corporation in the ordinary course of their business. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, management believes, based upon discussions with counsel, that the Corporation has meritorious defenses, and any ultimate liability would not have a material adverse affect on the consolidated financial position of the Corporation.
NOTE 15 PARENT COMPANY FINANCIAL INFORMATION:
Presented below are condensed statements of financial condition, income and cash flows for the Parent Company:
STATEMENTS OF FINANCIAL CONDITION
STATEMENTS OF INCOME
STATEMENTS OF CASH FLOWS
NOTE 16 FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Corporation disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments.
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS, AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES HELD TO MATURITY, INVESTMENT SECURITIES AVAILABLE FOR SALE, AND TRADING ACCOUNT SECURITIES:
The fair value of investment securities held to maturity, investment securities available for sale, and trading account securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.
LOANS:
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, credit card and other consumer. For residential mortgage loans for resale, fair value is estimated using the prices of the Corporation's existing commitments to sell such loans and/or the quoted market prices for commitments to sell similar loans.
The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. Future cash flows are also adjusted for estimated reductions or delays due to delinquencies, non-accruals or potential charge-offs.
EXCESS SERVICING RIGHTS:
The fair value of excess servicing rights is estimated based upon a pricing model that considers factors such as normal servicing fees, loan prepayment speeds and an appropriate discount rate.
MORTGAGE SERVICING RIGHTS:
The fair value is estimated by discounting the expected future cash flows considering estimated service fees, ancillary income, interest on tax and insurance, and principal and interest float, servicing costs, other costs, and future prepayment speeds.
DEPOSITS:
Under SFAS No. 107, the fair value of deposits with no stated maturity such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand as of December 31. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS:
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
LONG-TERM BORROWINGS:
Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate fair value of existing borrowings.
The estimated fair values of the Corporation's financial instruments at December 31 are as follows:
COMMITMENTS TO EXTEND CREDIT, COMMERCIAL LETTERS OF CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES WRITTEN:
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. The fair value of financial guarantees written and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter-parties.
INTEREST RATE SWAP AGREEMENTS:
The fair value of interest rate swap agreements are obtained from dealer quotes. These values represent the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counter-parties.
The contract or notional amount, carrying amount and estimated fair value for commitments to extend credit, commercial letters of credit, standby letters of credit and financial guarantees written, and interest rate swap agreements at December 31 is as follows:
(1) The amounts shown under "carrying amount" represent accruals or deferred income arising from these unrecognized financial instruments.
LIMITATIONS:
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Corporation has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities
that are not considered financial assets or liabilities include the mortgage banking operation, brokerage network, deferred tax liabilities, the benefit of low cost core deposits, property, equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.
NOTE 17 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is selected financial data summarizing the results of operations for each quarter in the years ended December 31, 1996 and 1995:
NOTE 18 REGULATORY MATTERS:
The Corporation and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Corporation and the subsidiary banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation categorized the Corporation and its two largest subsidiary banks, Associated Bank Green Bay and Associated Bank Milwaukee as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the Corporation must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
The actual capital amounts and ratios of the Corporation, Associated Bank Green Bay, and Associated Bank Milwaukee are also presented in the table. No deductions from capital were made for interest-rate risk in 1996.
*Total Capital ratio is defined as Tier 1 Capital plus Tier 2 Capital divided by total risk weighted assets. The Tier 1 Capital ratio is defined as Tier 1 capital divided by total risk weighted assets. The leverage ratio is defined as Tier 1 capital divided by the most recent quarter's average total assets.
Under the framework, the Corporation's capital levels do not allow the Corporation to accept brokered deposits without prior approval from regulators.
NOTE 19 SUBSEQUENT EVENT:
On January 22, 1997, the Board of Directors declared a 6-for-5 stock split to be effected as a 20% stock dividend payable on March 17, 1997, to shareholders of record at the close of business on March 5, 1997. Any fractional shares resulting from the dividend will be paid in cash. All share and per share data amounts contained in the consolidated financial statements have been restated to reflect the effect of this stock split.
INDEPENDENT AUDITORS' REPORT ASSOCIATED BANC-CORP
The Board of Directors Associated Banc-Corp:
We have audited the accompanying consolidated statements of financial condition of Associated Banc-Corp and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of Associated Banc-Corp's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Associated Banc-Corp and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1996 in conformity with generally accepted accounting principles.
LOGO
KPMG Peat Marwick LLP Chicago, Illinois January 24, 1997
MARKET INFORMATION
Indicated Annual Dividend Rate: $.96
Market information has been restated for the June 15, 1995 5-for-4 stock split effected as a 25% stock dividend and for the 6-for-5 stock split effected as a 20% stock dividend declared on January 22, 1997, and payable March 17, 1997.
ITEM 9

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the Corporation's definitive Proxy Statement, prepared for the 1997 Annual Meeting of Shareholders, which contains information concerning directors of the Corporation, under the caption "Election of Directors," is incorporated herein by reference. The information concerning "Executive Officers of the Registrant," as a separate item, appears in Part I of this document.
ITEM 11

ITEM 11 EXECUTIVE COMPENSATION
The information in the Corporation's definitive Proxy Statement, prepared for the 1997 Annual Meeting of Shareholders, which contains information concerning this item, under the caption "Executive Compensation," is incorporated herein by reference.
ITEM 12

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the Corporation's definitive Proxy Statement, prepared for the 1997 Annual Meeting of Shareholders, which contains information concerning this item, under the captions "Principal Holders of Common Stock" and "Security Ownership of Management," is incorporated herein by reference.
ITEM 13

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Corporation's definitive Proxy Statement, prepared for the 1997 Annual Meeting of Shareholders, which contains information concerning this item under the caption "Certain Transactions," is incorporated herein by reference.
PART IV
ITEM 14

ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- - --------------------- * Management contracts and arrangements.
Schedules and exhibits other than those listed are omitted for the reasons that they are not required, are not applicable or that equivalent information has been included in the financial statements, and notes thereto, or elsewhere herein.
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange Commission during the fourth quarter of the fiscal year ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ASSOCIATED BANC-CORP
Date: March 24, 1997 /s/ Harry B. Conlon By: _________________________________ Harry B. Conlon Chairman, President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Harry B. Conlon By: ________________________________ * By: ________________________________ Harry B. Conlon John S. Holbrook, Jr. Chairman, President, Chief Director Executive Officer and Director
/s/ Joseph B. Selner By: ________________________________ * By: ________________________________ Joseph B. Selner William R. Hutchinson Senior Vice President-CFO Director Principal Financial Officer and Principal Accounting Officer
/s/ Robert C. Gallagher By: ________________________________ * By: ________________________________ Robert C. Gallagher James F. Janz Vice Chairman and Director
Director
* By: ________________________________ * By: ________________________________ Robert Feitler John C. Meng Director
Director
* By: ________________________________ * By: ________________________________ Ronald R. Harder J. Douglas Quick Director
Director /s/ Brian R. Bodager *By: ________________________________ Brian R. Bodager Attorney-in-Fact
Date: March 24, 1997