<PAGE>
As filed with the Securities and Exchange Commission on October 30, 1998.
Registration Statement No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ASSOCIATED BANC-CORP
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 6711 39-1098068
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification Number)
Incorporation or Code Number)
Organization)
112 NORTH ADAMS STREET
P.O. BOX 13307
GREEN BAY, WI 54307-3307
(920) 433-3166
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
HARRY B. CONLON
ASSOCIATED BANC-CORP
112 NORTH ADAMS STREET
P.O. BOX 13307
GREEN BAY, WI 54307-3307
(920) 433-3166
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)
with copies to:
JAMES M. BEDORE, ESQ. RODNEY H. DOW, ESQ.
REINHART, BOERNER, VAN DEUREN, FOLEY & LARDNER
NORRIS & RIESELBACH, S.C. 777 EAST WISCONSIN AVENUE
1000 NORTH WATER STREET MILWAUKEE, WI 53202-5367
P.O. BOX 92900 (414) 271-2400
MILWAUKEE, WI 53202-0900
(414) 298-1000
Approximate date of commencement of proposed sale of the securities to the
public: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
================================================================================
(THE FACING SHEET CONTINUES, AND THE CALCULATION OF
THE REGISTRATION FEE APPEARS, ON THE FOLLOWING PAGE)
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Title of Each Class Proposed Maximum Proposed Maximum
Of Securities To Offering Aggregate Amount Of
Be Registered Amount To Price Per Unit Offering Price Registration Fee
Be Registered(1)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Common Stock, $0.01
par value per share
897,143 Not Applicable Not Applicable $4,759(2)
- ---------------------------------------------------------------------------------------------------
===================================================================================================
</TABLE>
(1) Represents an estimate of the number of shares of the Common Stock of the
Registrant that will be issued under the Agreement and Plan of Merger
assuming 26,582 shares of the Common Stock of Citizens Bankshares, Inc. are
outstanding on the effective date of the Merger. This number is subject to
adjustment in the event of a change in the number of outstanding shares of
the Common Stock of Citizens Bankshares, Inc. Accordingly, this
Registration Statement covers any additional shares of the Common Stock of
the Registrant which may be required to be issued by reason of such
adjustments. Subject to increase in accordance with Rule 416(a) and (b)
under the Securities Act of 1933, as amended, pursuant to stock splits or
stock dividends.
(2) Pursuant to Rule 457(f)(2), the registration fee was computed on the basis
of $17,118,114, the book value of the Common Stock of Citizens Bankshares,
Inc. to be exchanged in the Merger as of September 30, 1998, the latest
practicable date.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
2
<PAGE>
CITIZENS BANKSHARES, INC.
129 EAST DIVISION STREET
P.O. BOX 456
Shawano, Wisconsin 54166-0456
November 4, 1998
Dear Fellow Shareholder:
You are cordially invited to attend our special meeting of shareholders to
be held on November 24, 1998 at 7:00 p.m. (local time) at the offices of
Citizens Bank, National Association, 129 East Division Street, Shawano,
Wisconsin. At the special meeting, you will vote on a proposal to approve an
agreement for the merger of Associated Banc-Corp and Citizens Bankshares.
Subject to receipt of regulatory approval, approval by holders of a
majority of the shares of Citizens Bankshares common stock and satisfaction of
other conditions, the merger agreement provides that Citizens Bankshares will
combine its business and operations with those of Associated through a statutory
merger. In the merger, each share of Citizens Bankshares common stock will be
converted into the right to receive, at the election of the holder, either:
. 33.75 shares of Associated common stock (or cash for any fractional
shares); or
. a cash payment equal to 33.75 multiplied by the average closing prices
of the Associated common stock on the Nasdaq National Market over the
ten trading day period ending on November 23, 1998.
An election form will be sent to you promptly after the special meeting
permitting you to make a stock election and/or a cash election. You may make a
stock election for part of your shares and a cash election for the remainder of
your shares. You must return the election form by the deadline specified in the
election form (or a later notice) to be eligible to make a cash election.
Elections may be prorated in order to ensure that the total amount of cash
payments, including cash paid in lieu of fractional shares and pursuant to the
exercise of dissenters' rights, will not exceed 50% of the total merger
consideration. Associated common stock trades on the Nasdaq National Market.
The shares of Associated common stock to be issued in the merger will offer
greater liquidity than that of the shares of Citizens Bankshares common stock.
The Merger is intended to be tax free for federal income tax purposes to
Company shareholders to the extent they receive Associated common stock in
exchange for Company Common Stock. The accompanying Proxy Statement/Prospectus
describes the merger in greater detail. We encourage you to read it carefully.
The Board of Directors of Citizens Bankshares has determined that the
merger is in the best interests of Citizens Bankshares and its shareholders.
Accordingly, the Board has by unanimous vote approved the merger agreement and
the merger and recommends that shareholders vote in favor of the merger
agreement.
Your participation in the special meeting, in person or by proxy, is
especially important because the items to be voted on are very important to
Citizens Bankshares and its shareholders. Whether or not you plan to attend the
special meeting, we urge you to complete, date and sign the enclosed proxy card
promptly in the enclosed postage-paid envelope to ensure that your shares will
be represented at the special meeting. You may revoke your proxy at any time
before it is voted.
<PAGE>
Thank you, and I look forward to seeing you at the special meeting.
Very truly yours,
Mary B. Hayes
President and Chairwoman
of the Board of Directors
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE MERGER DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS
OR THE ASSOCIATED COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER, NOR
HAVE THEY DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Proxy Statement/Prospectus is dated November 4, 1998 and
is first being mailed to shareholders on or about November 4, 1998.
2
<PAGE>
CITIZENS BANKSHARES, INC.
129 EAST DIVISION STREET
P.O. BOX 456
Shawano, Wisconsin 54166-0456
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 24, 1998
TO THE SHAREHOLDERS OF CITIZENS BANKSHARES, INC.
A Special Meeting of Shareholders (the "Special Meeting") of Citizens
Bankshares, Inc., a Wisconsin corporation (the "Company") will be held at the
offices of Citizens Bank, National Association, 129 East Division Street,
Shawano, Wisconsin, on November 24, 1998 at 7:00 p.m. for the purpose of voting
on the following matters:
1. To approve the Agreement and Plan of Merger dated as of February 17,
1998, as amended, between Associated Banc-Corp ("Associated") and the
Company (the "Merger Agreement") providing for the merger of the
Company with and into Associated (the "Merger") (a copy of the Merger
Agreement and two amendments to the Merger Agreement are attached as
Exhibit A, Exhibit A-1 and Exhibit A-2 to the Proxy
Statement/Prospectus following this notice).
2. To transact such other business as may properly come before the
meeting.
THE DIRECTORS OF THE COMPANY HAVE UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND RECOMMEND THAT THE SHAREHOLDERS APPROVE THE MERGER AGREEMENT.
Any shareholder desiring to exercise dissenters' rights and be paid in cash
for the fair value of his or her shares of Common Stock, par value $20.00 per
share, of the Company ("Company Common Stock") in accordance with the provisions
of the Wisconsin Business Corporation Law (i) must file a written objection to
the Merger prior to the Special Meeting, (ii) must not vote in favor thereof,
and (iii) must otherwise comply with the procedures set forth in Subchapter XIII
of the Wisconsin Business Corporation Law, a copy of which is attached as
Exhibit C to the Proxy Statement/Prospectus. See "The Merger - Dissenters'
Rights" in the accompanying Proxy Statement/Prospectus.
The Board of Directors has fixed the close of business on November 2, 1998
as the record date for the determination of Company shareholders entitled to
notice of and to vote at the Special Meeting and any adjournment thereof.
Whether or not you plan to attend the Special Meeting, holders of the
Company Common Stock are asked to please complete, date and sign the enclosed
proxy card, which is solicited by the Board of Directors of the Company, and
return it promptly in the accompanying envelope. No postage is required if
mailed in the United States. The giving of such proxy does not affect your
right to vote in person in the event you attend the Special Meeting. You may
revoke the proxy at any time prior to its exercise in the manner described in
the Proxy Statement/Prospectus.
<PAGE>
The Special Meeting may be postponed or adjourned from time to time without
any notice other than by announcement at the Special Meeting of any
postponements or adjournments thereof, and any and all business for which notice
is hereby given may be transacted at such postponed or adjourned Special
Meeting.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE
OUTSTANDING SHARES OF THE COMPANY COMMON STOCK IS REQUIRED FOR APPROVAL OF THE
MERGER AGREEMENT. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU
OWN.
Shareholders are invited to attend the Special Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Mary B. Hayes
President and Chairwoman
of the Board of Directors
Shawano, Wisconsin
November 4, 1998
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME. AFTER THE SPECIAL
MEETING, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR STOCK
CERTIFICATES.
2
<PAGE>
CITIZENS BANKSHARES, INC.
AND
ASSOCIATED BANC-CORP
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... 1
SUMMARY................................................................... 4
RISK FACTORS.............................................................. 9
SELECTED FINANCIAL DATA OF ASSOCIATED BANC-CORP
AND CITIZENS BANKSHARES................................................... 11
RECENT RESULTS............................................................ 13
PROPOSED ACQUISITIONS..................................................... 13
COMPARATIVE STOCK PRICES AND DIVIDENDS.................................... 13
Associated Common Stock.............................................. 13
The Company Common Stock............................................. 14
COMPARATIVE UNAUDITED PER SHARE DATA...................................... 14
INTRODUCTION.............................................................. 15
ASSOCIATED BANC-CORP...................................................... 16
THE SPECIAL MEETING....................................................... 17
Matters to Be Considered at the Special Meeting...................... 17
Required Vote........................................................ 17
Voting of Proxies.................................................... 17
Revocability of Proxies.............................................. 17
Record Date; Stock Entitled to Vote; Quorum.......................... 17
Solicitation of Proxies.............................................. 18
THE MERGER................................................................ 18
Background of the Merger............................................. 18
Reasons for the Merger............................................... 22
Recommendation of the Board of Directors of the Company.............. 23
Opinion of Financial Advisor to the Company.......................... 23
Merger Consideration................................................. 27
Procedures for Election of the Form of Merger Consideration.......... 28
Limit on Cash Consideration Payable in the Merger.................... 29
Certain Election Considerations...................................... 29
Conversion of Shares; Procedures for Exchange of Certificates;
Fractional Shares.................................................... 30
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Regulatory Approvals Required........................................ 32
The Effective Time................................................... 33
Description of Associated Common Stock Issuable in the Merger........ 34
Comparison of Shareholder Rights..................................... 35
Authorized Capital Stock........................................ 35
Appraisal Rights and Dissenters' Rights......................... 35
Required Vote................................................... 36
Classified Board of Directors................................... 36
Removal of Directors............................................ 36
Newly Created Directorships and Vacancies.......................
on the Board of Directors....................................... 36
Certain Business Combinations................................... 37
Advance Notice of Proposals to Be Brought.......................
at the Annual Meeting........................................... 37
Advance Notice of Nominations of Directors...................... 37
Resale of Associated Common Stock Issued Pursuant to the Merger...... 38
Pre-Merger Dividend Policy........................................... 38
Post-Merger Dividend Policy.......................................... 38
Conduct of Business Pending the Merger............................... 39
Certain Material Federal Income Tax Consequences..................... 39
Anticipated Accounting Treatment..................................... 42
Dissenters' Rights................................................... 42
Interests of Certain Persons in the Merger........................... 44
Other Related Party Transactions..................................... 44
Management After the Merger.......................................... 44
Directors of Associated.............................................. 45
Executive Officers of Associated..................................... 47
CERTAIN PROVISIONS OF THE MERGER AGREEMENT................................ 49
The Merger........................................................... 49
Representations and Warranties....................................... 50
Certain Covenants.................................................... 50
No Solicitation of Transactions...................................... 52
Conditions to Consummation of the Merger............................. 52
Termination.......................................................... 53
Amendment and Waiver................................................. 54
Expenses............................................................. 54
CERTAIN INFORMATION CONCERNING ASSOCIATED................................. 55
Supervision and Regulation........................................... 56
Government Monetary Policies and Economic Controls................... 57
Properties........................................................... 57
Legal Proceedings.................................................... 58
Executive Compensation............................................... 58
Supplemental Executive Retirement Plan............................... 60
Certain Transactions................................................. 61
Principal Holders of Associated Common Stock......................... 62
Security Ownership of Management..................................... 62
CERTAIN INFORMATION CONCERNING THE COMPANY................................ 63
Ownership of the Company Common Stock................................ 64
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
EXPERTS.................................................................... 63
LEGAL OPINIONS............................................................. 64
FUTURE SHAREHOLDER PROPOSALS............................................... 64
WHERE CAN YOU FIND MORE INFORMATION........................................ 64
</TABLE>
Exhibit A: Agreement and Plan of Merger between Associated Banc-Corp
and Citizens Bankshares, Inc. dated as of February 17,
1998
Exhibit A-1: First Amendment to Agreement and Plan of Merger between
Associated Banc-Corp and Citizens Bankshares, Inc.
dated as of October 8, 1998
Exhibit A-2: Second Amendment to Agreement and Plan of Merger between
Associated Banc-Corp and Citizens Bankshares, Inc.
dated as of October __, 1998
Exhibit B: Opinion of Howe Barnes Investments Inc.
Exhibit C: Subchapter XIII of the Wisconsin Business Corporation Law
Exhibit D: Associated Banc-Corp and Subsidiaries Financial Statements
and Management's Discussion and Analysis of Financial
Condition and Results of Operations
Exhibit E: Citizens Bankshares, Inc. and Subsidiaries Financial
Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? HOW WILL I BENEFIT?
A: We believe you will benefit from the merger because the potential for the
combined company exceeds, in our opinion, what either company could
accomplish individually.
We believe the merger will increase the financial strength and resources of
Citizens Bankshares and enable Associated to increase its presence and
heighten its visibility in North Eastern Wisconsin. We believe that you
will benefit by having the opportunity to choose whether to receive cash
consideration or shares of Associated common stock or a combination of cash
and shares of Associated common stock in the Merger. To the extent you
choose to receive Associated common stock, we believe that you will benefit
as a result of the greater liquidity, marketability and dividend paying
capacity of the Associated common stock.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign, date and
return it as soon as possible. If you sign and send in your proxy and do
not indicate how you want to vote, your proxy will be voted in favor of the
merger. If you do not return your proxy or if you do not vote or you
abstain at the meeting, it will have the effect of a vote not to approve
the merger agreement.
You may attend the shareholders' meeting and vote your shares in person,
rather than completing and returning your proxy card. If you do complete
and return your proxy card, you may revoke it at any time up to and
including the day of the shareholders' meeting by following the directions
on page 17.
PLEASE REMEMBER THAT THE REQUIRED VOTE OF SHAREHOLDERS IS BASED ON THE
TOTAL NUMBER OF OUTSTANDING SHARES, AND NOT UPON THE NUMBER OF SHARES WHICH
ARE ACTUALLY VOTED.
<PAGE>
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. After the shareholder meeting, we will send you instructions on how to
receive the merger consideration in exchange for your shares of Citizens
Bankshares common stock.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You may elect to receive in exchange for each share of Citizens Bankshares
common stock either:
. 33.75 shares of Associated common stock (or cash for any fractional
shares); or
. a cash payment equal to 33.75 multiplied by the average closing prices
of the Associated common stock on the Nasdaq National Market over the
ten trading day period ending on November 23, 1998.
You may make a stock election for part of your shares and a cash election
for the remainder of your shares.
The total amount of cash payments, including the cash paid in lieu of
fractional shares and pursuant to the exercise of dissenters' rights, will
not exceed 50% of the total merger consideration. If the total amount of
cash payments exceeds this limit, Associated will substitute shares of
Associated common stock for cash payments among the shareholders electing
cash payments on a pro rata basis to the extent necessary to make the
amount of the cash payments not exceed 50% of the total merger
consideration.
Q: HOW WILL I BE ABLE TO ELECT THE FORM OF MERGER CONSIDERATION I RECEIVE?
A: If shareholders approve the merger, the exchange agent appointed by
Associated will send you an election form permitting you to make a stock
election and/or a cash election. You may make a stock election for part of
your shares and a cash election for the remainder of your shares. The
election form may specify a deadline for the return of your election form.
This deadline may be as few as thirteen business days after the date that
the election form is mailed. If the election form does not specify a
deadline, you will be sent a separate notice specifying the deadline at
least eight business days before the deadline. You may revoke or change
your election form by submitting an election bearing a later date that is
received by the exchange agent before the election deadline. It is possible
that the actual deadline may be later than the date specified in the
election form or the separate notice to you, due to unforeseen delays in
completing the merger. The actual deadline is two business days before the
date of completion of the merger. A proper cash election also requires that
you send your Citizens Bankshares stock certificates and a completed letter
of transmittal to the exchange agent before the election deadline. IF YOUR
ELECTION FORM IS NOT RECEIVED BY THE DEADLINE YOU WILL BE DEEMED TO HAVE
MADE A STOCK ELECTION FOR ALL OF YOUR SHARES OF CITIZENS BANKSHARES COMMON
STOCK.
Q: WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A. Citizens Bankshares may declare and pay a dividend not exceeding $2 per
share if the merger is not completed by December 20, 1998, but otherwise
may not declare or pay any dividends. After the merger, we presently
anticipate that Associated will pay dividends at the current quarterly rate
of $0.29 per share. However, the directors of Associated will use their
discretion to decide whether to declare dividends and the amount of any
dividends.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible. We
expect
2
<PAGE>
the merger to be completed approximately three weeks after the
shareholders' meeting.
Q: WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO ME?
A. The merger will be tax-free for federal income tax purposes for
shareholders who elect to receive the merger consideration in the form of
shares of Associated common stock. Shareholders who receive some or all of
the merger consideration in the form of a cash payment will have to pay
taxes based on the amount of the cash received. To review the tax
consequences to shareholders in greater detail, see pages 39 to 42.
Q: WHO CAN I CONTACT IF I HAVE MORE QUESTIONS ABOUT THE MERGER?
A: Citizens Bankshares, Inc.
129 East Division Street
P.O. Box 456
Shawano, Wisconsin 54166-0456
Attention: Secretary
Phone Number: (715) 526-6131
Q: WHO CAN I CONTACT IF I WOULD LIKE ADDITIONAL COPIES OF THE PROXY
STATEMENT/PROSPECTUS?
A: Associated Banc-Corp
112 North Adams Street
P.O. Box 13307
Green Bay, Wisconsin 54307-3307
Attention: Brian R. Bodager, Esq.
Phone Number: (920) 491-7001
3
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you. See "Where You Can Find More Information" (pages 65
and 66). We have included page references parenthetically to direct you to a
more complete description of the topics presented in this Summary.
THE COMPANIES
ASSOCIATED BANC-CORP (PAGES 55-63)
112 North Adams Street
P.O. Box 13307
Green Bay, WI 54307
(920) 491-7001
Associated Banc-Corp is a diversified multi-bank holding company headquartered
in Green Bay, Wisconsin. At September 30, 1998, Associated had $10.6 billion in
assets with more than 3,672 employees and over 225 banking locations in
Wisconsin and northern Illinois. Associated offers a variety of financial
products and services to complement its traditional line of banking products.
CITIZENS BANKSHARES, INC. (PAGES 63-64)
129 East Division Street
P.O. Box 456
Shawano, WI 54166
(715) 526-6131
Citizens Bankshares, Inc. is a one-bank holding company which owns 100% of the
stock of Citizens Bank, N.A and 100% of the stock of Wisconsin Finance
Corporation. At June 30, 1998, Citizens Bankshares had assets of $159.9
million. Citizens Bank is a full service bank serving the banking needs of the
North Eastern Wisconsin community of Shawano.
THE SHAREHOLDERS' MEETING (PAGES 17-18)
The shareholders' meeting will be held at the offices of Citizens Bank, National
Association, 129 East Division Street, Shawano, Wisconsin, at 7:00 p.m. on
November 24, 1998. At the shareholders' meeting, shareholders of Citizens
Bankshares will be asked to approve the merger agreement.
RECOMMENDATION TO SHAREHOLDERS
(PAGE 23)
The Board of Directors of Citizens Bankshares believes the merger is fair to you
and in your best interest and unanimously recommends that you vote "for"
approving the merger agreement.
RECORD DATE; VOTING POWER (PAGES 17-18)
You are entitled to vote at the shareholders' meeting if you owned shares on
November 2, 1998, the Record Date. Each shareholder is entitled to one vote for
each share of common stock.
On the Record Date, there were outstanding 26,582 shares of Citizens Bankshares
common stock.
VOTE REQUIRED (PAGE 17)
The affirmative vote by shareholders owning at least a majority of the
outstanding Citizens Bankshares common stock is required to approve the merger
agreement.
SHARE OWNERSHIP OF MANAGEMENT AND
CERTAIN SHAREHOLDERS (PAGE 64)
At the close of business on the Record Date, directors and executive officers of
Citizens Bankshares owned and were entitled to vote 802 shares of Citizens
Bankshares common stock which represented approximately 3% of the outstanding
shares, and the Estate of Clarence Bleser owned and was entitled to vote 13,508
shares of Citizens Bankshares common stock, which represented approximately
50.8% of the outstanding shares.
4
<PAGE>
THE MERGER (PAGE 18)
The merger will combine our businesses under a single holding company. As a
result of the merger, Associated will become the holding company for Citizens
Bankshares' banking subsidiary, Citizens Bank, and Citizens Bankshares' other
subsidiaries and will remain the holding company of Associated's current banks
and subsidiaries. In addition, after the merger, Citizens Bank will merge into
Associated Bank Green Bay, N.A., a wholly owned subsidiary of Associated.
The merger agreement is attached as Exhibit A to this document and two
amendments to the merger agreement are attached as Exhibit A-1 and Exhibit A-2
to this document. We encourage you to read the merger agreement and the
amendments. They are the legal documents governing the merger.
WHAT SHAREHOLDERS WILL RECEIVE IN THE
MERGER (PAGES 27-28)
As a result of the merger, shareholders of Citizens Bankshares may elect to
receive in exchange for each share of Citizens Bankshares common stock either:
. 33.75 shares of Associated common stock (or cash for any fractional
shares); or
. a cash payment equal to 33.75 multiplied by the average closing prices of
the Associated common stock on the Nasdaq National Market over the ten
trading days period ending on November 23, 1998.
You may elect to convert part of your shares of Citizens Bankshares common stock
into the right to receive shares of Associated common stock and the remainder of
your shares into the right to receive a cash payment.
If shareholders approve the merger, an exchange agent appointed by Associated
will send you an election form permitting you to elect to receive either shares
of Associated common stock or the cash payment. The election form may specify a
deadline for the return of your election form. This deadline may be as few as
thirteen business days after the date that the election form is mailed. If the
election form does not specify a deadline, you will be sent a separate notice
specifying the deadline at least eight business days before the deadline. You
may revoke or change your election form by submitting an election bearing a
later date before the election deadline. It is possible that the actual
deadline may be later than the date specified in the election form or the
separate notice to you, due to unforeseen delays in completing the merger. The
actual deadline is two business days before the date of completion of the
merger. A proper cash election also requires that you send your Citizens
Bankshares stock certificates and a completed letter of transmittal to the
exchange agent before the election deadline. IF YOUR ELECTION FORM IS NOT
RECEIVED BY THE DEADLINE YOU WILL RECEIVE SHARES OF ASSOCIATED COMMON STOCK IN
THE MERGER REGARDLESS OF YOUR ELECTION.
Associated will not pay more than 50% of the total merger consideration in the
form of cash payments, including cash to be paid in lieu of fractional shares
and pursuant to the exercise of dissenters' rights. If the amount of the cash
payments will exceed 50% of the total merger consideration, Associated will
reduce the number of shares receiving a cash payment by the amount necessary to
reach 50% and will pay the remainder of the merger consideration in the form of
shares of Associated common stock.
IF YOU MAKE A CASH ELECTION, AND IF THE AMOUNT OF CASH PAYMENTS WOULD EXCEED 50%
OF THE TOTAL MERGER CONSIDERATION, PART OF YOUR CASH ELECTION WILL BE CHANGED
INTO A STOCK ELECTION.
CERTAIN ELECTION CONSIDERATIONS (PAGES 29-30)
When making your election, you should consider the following:
. The cash payment amount will be fixed by the date of the shareholder
meeting, but the market value of Associated common stock may change between
5
<PAGE>
the shareholder meeting and the election deadline and afterwards.
. If you make a cash election, and receive cash, you will not have the risk
of declines in the market value of Associated common stock and you will not
have the opportunity to profit from increases in the market value of
Associated common stock.
. There may be materially different tax consequences involved if you elect to
receive any cash.
WE ENCOURAGE YOU TO OBTAIN CURRENT MARKET QUOTES FOR ASSOCIATED COMMON STOCK
PRIOR TO THE MEETING AND THROUGHOUT THE ELECTION PERIOD.
WE GIVE NO ASSURANCE THAT THE CASH PAYMENT PER SHARE OF YOUR CITIZENS BANKSHARES
COMMON STOCK WILL BE MORE OR LESS THAN THE MARKET VALUE OF ASSOCIATED COMMON
STOCK RECEIVED FOR YOUR CITIZENS BANKSHARES COMMON STOCK AT THE ELECTION
DEADLINE OR ON THE DATE THE MERGER IS COMPLETED.
NONE OF ASSOCIATED, CITIZENS BANKSHARES, ASSOCIATED'S BOARD OF DIRECTORS, OR
CITIZENS BANKSHARES' BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY
SHAREHOLDER AS TO WHETHER TO ELECT CASH OR STOCK.
DIVIDEND POLICY OF ASSOCIATED AFTER THE
MERGER (PAGE 38)
After the merger, it is presently expected that dividends will continue at
Associated's current quarterly dividend rate of $0.29 per share. Associated's
Board of Directors determines the level of dividends to be declared each quarter
based on various economic and financial factors.
FEDERAL INCOME TAX CONSIDERATIONS (PAGES 39-42)
We must receive an opinion from Associated's outside counsel stating that, as a
general matter, shareholders will not recognize gain or loss for federal income
tax purposes as a result of the merger, except if they receive cash for
fractional shares, exercise dissenters' rights or elect to receive some or all
of the merger consideration in the form of a cash payment.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES TO YOU OF THE MERGER
WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX
ADVISORS FOR A FULL EXPLANATION OF THE TAX CONSEQUENCES TO YOU OF THE MERGER.
FAIRNESS OPINION OF FINANCIAL ADVISOR (PAGES 23-27)
In deciding to approve the merger, the Board of Directors of Citizens Bankshares
considered the opinion of its financial advisor, Howe Barnes Investments Inc.,
as to the fairness of the merger to shareholders from a financial point of view.
The financial advisor performed several analyses in connection with delivering
its opinion, including the following:
. examining Associated's historical stock prices;
. comparing Associated to other publicly traded bank holding companies;
. comparing the merger to other transactions; and
. estimating the relative values and contributions to Associated and Citizens
Bankshares based on past and estimated future performance.
This opinion is attached as Exhibit B to this document. WE ENCOURAGE YOU TO
READ THE OPINION CAREFULLY.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 44)
The change of control arrangements for three officers of Citizens Bankshares or
its subsidiaries will be triggered upon completion of the merger. As a result,
the employment agreements of these officers will be automatically extended.
6
<PAGE>
LISTING OF ASSOCIATED COMMON STOCK
Associated will file an application to list the shares of Associated common
stock to be issued in the merger on the Nasdaq National Market under
Associated's current symbol "ASBC."
STATUS OF ASSOCIATED COMMON STOCK (PAGE 38)
Shares of Associated common stock received in the merger will be freely-
tradeable except for shares issued to affiliates of Citizens Bankshares.
Citizens Bankshares has concluded that its only affiliates are its directors and
executive officers and the Estate of Clarence Bleser.
CONDITIONS TO THE MERGER (PAGES 52-53)
We will complete the merger only if several conditions are satisfied, including
the following:
. Shareholders of Citizens Bankshares vote in favor of the merger agreement;
. no legal restraints or prohibitions exist which prevent the merger from
being completed;
. we receive all necessary regulatory approvals;
. Associated's counsel delivers an opinion concerning certain federal income
tax consequences of the merger;
. The number of shares of Associated common stock that is not issued in the
merger due to the exercise of dissenters' rights does not exceed 10% of the
maximum number of shares of Associated common stock which could have been
issued in the merger; and
. Associated receives a satisfactory report from its environmental consultant
regarding the environmental condition of Citizens Bankshares' real
property.
TERMINATION OF THE MERGER AGREEMENT (PAGES 53-54)
Our boards of directors can jointly agree to terminate the merger agreement at
any time without completing the merger. In addition, we can terminate the
merger agreement if:
. we do not complete the merger by January 31, 1999;
. the shareholders of Citizens Bankshares do not vote in favor of the merger
agreement;
. either party breaches or does not materially comply with the
representations or warranties it made or obligations it has under the
merger agreement, and, as a result, the conditions to completing the merger
cannot be satisfied; or
. The Federal Reserve Board or the Wisconsin Department of Financial
Institutions denies approval of the merger.
REGULATORY APPROVALS (PAGES 32-33)
The merger is subject to prior approval by certain regulatory authorities
including the Federal Reserve Board and the Wisconsin Department of Financial
Institutions. These approvals have been received.
DISSENTING SHAREHOLDERS' RIGHTS (PAGES 42-44)
Shareholders of Citizens Bankshares who follow certain procedural requirements
may be entitled to receive cash in the amount of the fair value of their shares
instead of the shares of Associated common stock or cash payment offered
pursuant to the merger. The fair value of the shares of Citizens Bankshares
common stock would be determined pursuant to Wisconsin law and may or may not be
the same as the cash payment offered in the merger.
ANY SHAREHOLDER WHO WISHES TO EXERCISE DISSENTERS' RIGHTS MUST NOT VOTE IN FAVOR
OF THE MERGER AGREEMENT AND MUST COMPLY WITH ALL OF THE PROCEDURAL REQUIREMENTS
PROVIDED BY WISCONSIN LAW. A COPY OF THE DISSENTERS'
7
<PAGE>
RIGHTS STATUTE IS ATTACHED AS EXHIBIT C TO THIS DOCUMENT. WE ENCOURAGE YOU TO
READ THE STATUTE CAREFULLY AND TO CONSULT WITH LEGAL COUNSEL IF YOU DESIRE TO
EXERCISE YOUR DISSENTERS' RIGHTS.
ACCOUNTING TREATMENT (PAGE 42)
The merger will be accounted for by Associated under the purchase method of
accounting.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
We have made forward-looking statements in this document, and in documents that
we incorporate by reference, that are subject to risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of Associated, Citizens Bankshares or the
combined company. When we use words such as "believes," "expects,"
"anticipates" or similar expressions, we are making forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document, could affect the future financial results of
Associated, Citizens Bankshares or the combined company and could cause those
results to differ materially from those expressed in our forward-looking
statements contained or incorporated by reference in this document. These
factors include the following:
. operating, legal and regulatory risks;
. economic, political and competitive forces affecting our banking,
securities, asset management and credit services businesses; and
. the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be unsuccessful.
8
<PAGE>
RISK FACTORS
In deciding whether to vote in favor of the Merger, shareholders of
Citizens Bankshares should consider the following factors, in addition to the
other matters set forth herein.
Omitted Industry Financial Information. Citizens Bankshares has excluded
certain financial disclosures required of bank holding companies under rules
promulgated by the Securities and Exchange Commission from the Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Citizens Bankshares which appears in Exhibit E. The omitted industry financial
information relates to, among other things, certain disclosures as to Citizens
Bank's investments and deposits. Associated and Citizens Bankshares have
determined that as Citizens Bankshares has not been required to make such
disclosures in the past to its shareholders, it has not compiled and would be
unable to create such financial information from existing financial records
without incurring considerable expense, effort and delay. Accordingly,
Associated and Citizens Bankshares have determined that the omission of certain
bank holding company financial disclosure is not material to the shareholders of
Citizens Bankshares.
Uncertain Legislative and Regulatory Environment. The banking and
financial services businesses in which Citizens Bankshares and Associated engage
are highly regulated. The laws and regulations affecting such businesses may be
changed dramatically in the near future. Such changes could affect the ability
of banks to engage in nationwide branch banking and the ability of bank holding
companies to engage in non-banking businesses, such as securities underwriting
and insurance, in which they have been allowed to engage only on a limited
basis. Such changes may also affect the capital that banks and bank holding
companies are required to maintain, the premiums paid for or the availability of
deposit insurance or other matters directly affecting earnings. Neither
Citizens Bankshares nor Associated can predict what changes will occur or the
effect that any such changes would have on the ability of the combined entity to
compete effectively or to take advantage of new opportunities after the merger.
Competition. Citizens Bankshares and Associated operate in highly
competitive markets. Competition in such markets is likely to increase in light
of the changing legislative and regulatory environment. In addition,
consolidation and mergers in the banking industry are expected to continue,
resulting in stronger and more effective competitors. Neither Citizens
Bankshares nor Associated can predict the degree to which competition in the
industry will increase in the future or the effect any such increased
competition will have on the combined entity.
Rapid Technological Changes. Evolving technology will play a major role in
the processing and delivery of financial services. The effective use of new
technology will enable banking and financial service businesses to improve
information concerning their customers and markets. It will also enable them to
reduce overhead expenses while improving the quality of service to customers.
Communications technology will substantially improve the ability of financial
institutions to exchange information with their customers and employees. Banks
and financial institutions that are unwilling or unable to access this evolving
new technology could experience lower earnings and a loss of competitiveness.
Uncertain Economic Environment. Until recently, banks and financial
service companies in the Midwest have experienced a relatively long period of
price stability and a growing economy. Price stability enables banks to better
protect themselves against interest rate risks. A strong economy enhances the
opportunity of the commercial sector of the economy to
9
<PAGE>
improve earnings and performance. It also provides an environment for financial
institutions to experience positive and profitable growth. Recent economic
changes present additional risks for all banks and financial service companies.
Nature of Business. The financial performance of Citizens Bankshares
results primarily from its retail banking activities located in the City of
Shawano, Wisconsin and surrounding markets in Northeastern Wisconsin and its
consumer finance activities based primarily in Northern Wisconsin. Shareholders
of Citizens Bankshares who receive shares of Associated common stock will own an
interest in a diversified multi-bank holding company with __ banking offices,
substantially all of which are located in various communities throughout
Wisconsin, which is engaged in several non-banking businesses including personal
property lease financing, commercial and residential mortgage banking, trust
services, full service brokerage and discount brokerage services, reinsurance
and general insurance agency activities. Financial performance of Associated is
accordingly dependent on its activities and the economic factors in such markets
and businesses.
Business Combinations. Associated seeks additional expansion opportunities
and accordingly may enter into business combinations with banking and non-
banking entities involving the issuance of its shares or payment of cash
consideration which may not require a vote of holders of Associated common
stock.
Share Price Fluctuation. The price of shares of Citizens Bankshares common
stock is based upon the financial condition of Citizens Bankshares and the
market value for similar non-publicly traded bank holding companies and other
factors. The share price of Associated common stock on the Nasdaq National
Market is by nature subject to the general price fluctuations in the market for
publicly-traded equity securities. Such fluctuations are not necessarily
related to a change in the financial performance or condition of Associated.
10
<PAGE>
SELECTED FINANCIAL DATA OF ASSOCIATED AND CITIZENS BANKSHARES
(In thousands, except per share amounts)
The following financial information is provided to aid in your analysis of
the financial aspects of the merger. The information regarding Associated Banc-
Corp ("Associated") has been derived from audited financial statements for 1993
through 1997 and unaudited financial statements for the six-month periods ended
June 30, 1998 and 1997. The information regarding Citizens Bankshares, Inc.
(the "Company" or "Citizens Bankshares") has been derived from audited financial
statements for 1993 through 1997 and unaudited financial statements for the six-
month periods ended June 30, 1998 and 1997. The information is only a summary
and you should read it in conjunction with the historical financial statements
(and related notes) of Associated contained in Exhibit D hereto and the
historical financial statements (and related notes) of Citizens Bankshares
contained in Exhibit E hereto. See "Where You Can Find More Information."
The per share data in the following information is adjusted retroactively
for stock splits and stock dividends. Earnings per share are calculated based
upon the weighted average shares outstanding.
The results of Associated and Citizens Bankshares for the six months ended
June 30, 1998 are not necessarily indicative of results expected for the entire
year.
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX-
MONTH PERIODS
ENDED JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1997 1996 1995
---------------------------- ----------- ----------- ----------
ASSOCIATED: (Unaudited) (In thousands, except per share data)
- ----------
<S> <C> <C> <C> <C> <C>
ASSOCIATED:
CONDENSED STATEMENTS OF INCOME:
- ------------------------------
Net interest income..................................... $ 187,999 $ 185,436 $ 375,607 $ 355,274 $ 336,359
Provision for possible loan losses...................... 7,133 6,559 31,668 13,695 14,029
Non-interest income..................................... 86,845 61,750 95,976 116,845 104,989
Non-interest expense.................................... 144,433 133,657 323,647 293,235 252,927
Income before income taxes and extraordinary item....... 123,278 106,970 116,268 165,189 174,392
Income tax expense...................................... 42,414 37,631 63,909 57,487 62,381
Extraordinary item...................................... - - - (686) -
Net income.............................................. 80,864 69,339 52,359 107,016 112,011
SHARE DATA:
- ----------
Basic earnings per share:
Income before extraordinary item..................... $ 1.28 $ 1.10 $ 0.83 $ 1.70 $ 1.82
Net income........................................... 1.28 1.10 0.83 1.69 1.82
Diluted earnings per share:
Income before extraordinary item:.................... $ 1.26 $ 1.08 $ 0.82 $ 1.67 $ 1.79
Net income........................................... 1.26 1.08 0.82 1.66 1.79
Cash dividends per share................................ 0.46 0.43 0.89 0.76 0.65
Weighted average shares outstanding:
Basic................................................ 63,271 62,938 62,884 63,205 61,386
Diluted.............................................. 64,061 63,987 63,935 64,380 62,473
SELECTED BALANCE SHEET DATA (PERIOD END):
- ----------------------------------------
Total Assets............................................ $10,561,667 $10,531,246 $10,691,439 $10,123,383 $9,393,609
Stockholders' equity.................................... 867,286 842,561 813,693 803,562 725,211
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1993
----------- ----------
<S> <C> <C>
ASSOCIATED:
- ----------
CONDENSED STATEMENTS OF INCOME:
- ------------------------------
Net interest income............................................... $ 320,990 $ 298,980
Provision for possible loan losses................................ 9,035 16,441
Non-interest income............................................... 84,155 95,713
Non-interest expense.............................................. 245,310 240,318
Income before income taxes and extraordinary item................. 150,800 137,934
Income tax expense................................................ 54,203 49,311
Extraordinary item................................................ - -
Net income........................................................ 96,597 88,623
SHARE DATA:
- ----------
Basic earnings per share:
Income before extraordinary item............................... $ 1.59 $ 1.50
Net income..................................................... 1.59 1.50
Diluted earnings per share:
Income before extraordinary item:.............................. $ 1.55 $ 1.44
Net income..................................................... 1.55 1.44
Cash dividends per share.......................................... 0.57 0.50
Weighted average shares outstanding:
Basic.......................................................... 60,748 59,005
Diluted........................................................ 62,144 61,518
SELECTED BALANCE SHEET DATA (PERIOD END):
- ----------------------------------------
Total Assets...................................................... $9,130,522 $8,448,468
Stockholders' equity.............................................. 626,591 560,722
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX-MONTH
PERIODS
ENDED JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CITIZENS BANKSHARES: (Unaudited)
- --------------------
CONDENSED STATEMENTS OF INCOME:
- ------------------------------
Net interest income............................... $ 4,751 $ 4,290 $ 8,809 $ 8,694 $ 7,977 $ 7,885 $ 5,567
Provision for possible loan losses................ 197 221 1,922 872 1,624 1,806 292
Non-interest income............................... 1,376 713 1,451 1,518 1,574 1,117 1,015
Non-interest expense.............................. 3,643 4,057 9,009 7,937 8,762 7,011 4,854
Income before income taxes........................ 2,287 725 (671) 1,403 (835) 185 1,436
Income tax expense (benefit)...................... 821 220 701 431 (523) (117) 418
Net income (loss)................................. 1,466 505 (1,372) 972 (312) 302 1,018
SHARE DATA:
- ----------
Basic net income (loss) per share................. $ 55.14 $ 18.98 $ (51.62) $ 36.58 $ (11.72) $ 11.34 $ 38.24
Cash dividends per share.......................... - - 2.00 2.00 - 4.00 4.00
Weighted average shares outstanding............... 27 27 27 27 27 27 27
SELECTED BALANCE SHEET DATA (PERIOD END):
- ----------------------------------------
Total Assets...................................... $159,905 $171,906 $169,599 $174,554 $190,159 $187,178 $128,130
Stockholders' equity.............................. 16,547 16,957 15,109 16,466 15,815 15,301 15,521
</TABLE>
12
<PAGE>
RECENT RESULTS
For the nine months ended September 30, 1998, Associated reported net income
of $119.3 million, up 12.3 percent compared to the same period in 1997.
Earnings were $1.88 per basic share, up 11.2 percent from earnings of $1.69 per
basic share in the first nine months of 1997. Diluted earnings per share were
$1.86 for the first nine months of 1998, up 12.0 percent from diluted earnings
per share of $1.66 for the year-earlier period.
For the nine months ended September 30, 1998, the Company reported net income
of $2.0 million, up 112 percent compared to the same period in 1997. Earnings
were $75.28 per share, up 112 percent from earnings of $35.47 per share in the
first nine months of 1997.
PROPOSED ACQUISITIONS
On October 1, 1998, Associated announced the signing of a definitive agreement
to acquire Windsor Bancshares, Inc. ("Windsor"), in a stock-for-stock merger
transaction. Windsor is a $190 million one-bank holding company with its main
office in Minneapolis, Minnesota. Subject to regulatory approval and approval
by the shareholders of Windsor, this transaction is expected to be completed in
the first quarter of 1999.
COMPARATIVE STOCK PRICES AND DIVIDENDS
ASSOCIATED COMMON STOCK
Shares of common stock, par value $0.01 per share, of Associated
("Associated Common Stock") trade on the Nasdaq National Market under the symbol
"ASBC." The following table sets forth, for the periods indicated, the high and
low sales prices per share as reported on the Nasdaq National Market and the
regular cash dividends declared for Associated Common Stock as adjusted to
reflect the 6-for-5 stock split declared on January 22, 1997, effected in the
form of a 20% stock dividend, paid on March 17, 1997, to shareholders of record
on March 5, 1997. Information is also adjusted to reflect the 5-for-4 stock
split, effected in the form of a 25% stock dividend, paid on June 12, 1998 to
shareholders of record of Associated on June 1, 1998.
<TABLE>
<CAPTION>
ASSOCIATED COMMON STOCK
--------------------------------------------------
1996 HIGH LOW DIVIDEND
- ---- --------------------------------------------------
<S> <C> <C> <C>
First Quarter................................... $26.34 $23.50 $0.1800
Second Quarter.................................. $26.34 $25.00 $0.1934
Third Quarter................................... $26.92 $25.50 $0.1934
Fourth Quarter.................................. $29.17 $26.34 $0.1934
1997
- ----
First Quarter................................... $32.40 $27.66 $0.1934
Second Quarter.................................. $31.60 $28.60 $0.2320
Third Quarter................................... $39.15 $31.20 $0.2320
Fourth Quarter.................................. $47.00 $37.00 $0.2320
1998
- ----
First Quarter................................... $43.80 $38.09 $0.2320
Second Quarter.................................. $43.70 $36.25 $0.2320
Third Quarter................................... $42.38 $31.44 $0.2900
</TABLE>
13
<PAGE>
On February 13, 1998, the last trading day before the announcement of the
proposed merger between Associated and Citizens Bankshares, the last sale price
of Associated Common Stock as reported on the Nasdaq National Market was $41.50
per share. On October 27, 1998, the last sale price of Associated Common Stock
as reported on the Nasdaq National Market was $36.50 per share. Holders of
shares of Common Stock, par value $20.00 per share, of the Company ("Company
Common Stock") are urged to obtain current market prices for Associated Common
Stock.
On October 27, 1998, there were approximately 10,544 holders of record of
Associated Common Stock.
THE COMPANY COMMON STOCK
The Company Common Stock is not listed on any exchange nor quoted in the
over-the-counter market, and no established "bid" or "ask" price is available.
In the opinion of the Company, due to the lack of an active market for shares of
the Company Common Stock, transactions in Company Common Stock of which the
Company is aware are not frequent enough to constitute representative prices.
The last sale of Company Common Stock of which the Company is aware was at
$636.66 per share on July 28, 1997.
The Board of Directors of the Company declared a $2.00 per share dividend
in December 1996, which was paid in January 1997. In January 1998, the Board of
Directors of the Company paid a dividend of $2.00 per share. Pursuant to the
merger agreement, the ability of the Company to pay dividends on the Company
Common Stock prior to the Effective Time has been restricted. See "The Merger -
Pre-Merger Dividend Policy."
On November 2, 1998, the Record Date for the Special Meeting, there were
137 holders of record of the Company Common Stock.
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth for Associated Common Stock and Company
Common Stock unaudited historical and pro forma per share financial information
as of and for six months ended June 30, 1998, and as of and for the year ended
December 31, 1997. The following data assumes that each outstanding share of
Company Common Stock will be converted into 33.75 shares of Associated Common
Stock.
The information presented herein should be read in conjunction with the
audited consolidated financial statements of Associated for the year ended
December 31, 1997, and the unaudited consolidated financial statements for the
six months ended June 30, 1998, attached hereto as Exhibit D, and the audited
consolidated financial statements of the Company, including the notes thereto,
attached hereto as Exhibit E. See "Where You Can Find More Information."
14
<PAGE>
<TABLE>
<CAPTION>
As of and for the Six As of and for the Year
Months Ended Ended
June 30, 1998 December 31, 1997
--------------------- ----------------------
<S> <C> <C>
ASSOCIATED
Basic Net Income Per Common Share:
Historical (2)............................. $ 1.28 $ 0.83
Pro forma (1).............................. 1.28 0.79
Diluted Net Income Per Common Share:
Historical (2)............................. $ 1.26 $ 0.82
Pro forma (1).............................. 1.26 0.78
Dividends Per Common Share:
Historical (2)............................. $ 0.46 $ 0.89
Pro forma (3).............................. 0.46 0.89
Book Value Per Common Share:
Historical (2)............................. $ 13.70 $ 12.92
Pro forma (1).............................. 13.88 13.12
CITIZENS BANKSHARES
Basic Net Income Per Common Share:
Historical................................. $ 55.14 $(51.62)
Pro forma (4).............................. 43.20 26.66
Diluted Net Income Per Common Share:
Historical................................. $ 55.14 $(51.62)
Pro forma (4).............................. 42.53 26.33
Dividends Per Common Share:
Historical................................. $ - $ 2.00
Pro forma(4)............................... 15.66 29.97
Book Value Per Common Share:
Historical................................. $622.51 $568.41
Pro forma (4).............................. 468.45 442.80
</TABLE>
(1) Associated pro forma per share amounts give effect to the Merger through the
issuance of 897,143 shares based upon an exchange ratio of 33.75 shares of
Associated common stock for each share of Company common stock. In
addition, the estimated goodwill of $7.5 million resulting from the
transaction is assumed to be amortized on a straight line basis over 15
years.
(2) Associated historical per share amounts have been adjusted for stock splits
and stock dividends.
(3) The Associated pro forma dividends per share amounts represent historical
dividends of Associated as adjusted retroactively for the stock splits and
stock dividends.
(4) The Company pro forma per share amounts are calculated by multiplying the
Associated pro forma per share amounts by 33.75.
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to holders of the
Company Common Stock in connection with the solicitation of proxies by the
Company's Board of Directors for use at the Special Meeting of Shareholders of
the Company (the "Special Meeting") and at any adjournment or postponement
thereof. The Special Meeting will be held at the offices of
15
<PAGE>
Citizens Bank, National Association, 129 East Division Street, Shawano,
Wisconsin on November 24, 1998. The Special Meeting will commence at 7:00 p.m.
At the Special Meeting, the shareholders of the Company will be asked to
approve the Agreement and Plan of Merger, dated as of February 17, 1998 (as
amended, the "Merger Agreement"), between Associated and Citizens Bankshares, as
more fully described herein. The Merger Agreement provides for the merger of
Associated and Citizens Bankshares (the "Merger"). See "The Special Meeting,"
"The Merger," and "Certain Provisions of the Merger Agreement." The approximate
date on which this Proxy Statement/Prospectus is first being mailed to
shareholders of the Company is on or about November 4, 1998.
ASSOCIATED BANC-CORP
Associated is a diversified multi-bank holding company registered with the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
pursuant to the Bank Holding Company Act of 1956, as amended (the "BHC Act").
Associated owns directly or indirectly all of the capital stock of 8 commercial
banks and a federally chartered thrift located in Wisconsin and Illinois, and
all of the capital stock of 30 nonbanking subsidiaries located in Arizona,
California, Delaware, Illinois, Missouri, Nevada and Wisconsin. As of September
30, 1998, Associated had total assets of $10.6 billion. The principal executive
offices of Associated are located at 112 North Adams Street, P.O. Box 13307,
Green Bay, Wisconsin 54307-3307 and its telephone number is (920) 433-3166. See
"Certain Information Concerning Associated."
16
<PAGE>
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, holders of the Company Common Stock will consider
and vote upon a proposal to approve the Merger Agreement and any other matters
that may properly come before the Special Meeting. For a detailed description
of the Merger and the Merger Agreement, see "The Merger" and "Certain Provisions
of the Merger Agreement."
REQUIRED VOTE
The affirmative vote of the holders of a majority of the outstanding shares
of the Company Common Stock entitled to vote at the Special Meeting is required
to approve the Merger Agreement. Each share of the Company Common Stock
outstanding on the Record Date (as defined herein) is entitled to one vote.
Shareholders of Associated are not required to approve the Merger Agreement and
no further corporate authorization by Associated is required to consummate the
Merger.
VOTING OF PROXIES
Shares represented by all properly executed proxies for the Company Common
Stock received in time for the Special Meeting will be voted at the Special
Meeting in the manner specified by the holders thereof. Proxies which do not
contain voting instructions will be voted FOR approval of the Merger Agreement.
It is not expected that any matter other than that referred to herein will
be brought before the Special Meeting. If, however, other matters are properly
presented, the persons named as proxies will vote in accordance with their
judgment with respect to such matters.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form of proxy does not preclude a
shareholder from voting in person. A shareholder may revoke a proxy at any time
prior to its exercise by delivering to the Secretary of the Company a duly
executed proxy or revocation of Proxy bearing a later date or by voting in
person at the Special Meeting. Attendance at the Special Meeting will not of
itself constitute revocation of a proxy.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of record of the Company Common Stock at the close of business
on November 2, 1998 (the "Record Date") will be entitled to receive notice of
and to vote at the Special Meeting.
At the Record Date, 26,582 shares of the Company Common Stock were
outstanding. Shares representing a majority of the outstanding shares of the
Company Common Stock entitled to vote must be represented in person or by proxy
at the Company Meeting in order for a quorum to be present. Abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of the Merger Agreement. If a broker or other holder of record
indicates on the proxy
17
<PAGE>
that it does not have discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as present and entitled
to vote with respect to that matter.
SOLICITATION OF PROXIES
The Company will bear the cost of the solicitation of proxies from its
shareholders, except that Associated and the Company will share equally the cost
of printing this Proxy Statement/Prospectus and all regulatory filing fees in
connection therewith. In addition to solicitation by mail, the directors,
officers and employees of the Company may solicit proxies from shareholders of
the Company by telephone or telegram, or in person, but will receive no
additional compensation for such services.
SHAREHOLDERS SHOULD NOT RETURN THEIR STOCK CERTIFICATES WITH THEIR PROXY
CARDS. AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVE TIME, THE COMPANY
SHAREHOLDERS WILL BE PROVIDED WITH MATERIALS RELATING TO THE EXCHANGE OF THEIR
STOCK CERTIFICATES AND THE ELECTION OF THE FORM OF MERGER CONSIDERATION. SEE
"THE MERGER - PROCEDURES FOR THE ELECTION OF THE FORM OF MERGER CONSIDERATION"
AND "THE MERGER - CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES;
FRACTIONAL SHARES."
THE MERGER
This section of the Proxy Statement/Prospectus describes certain aspects of
the proposed Merger. To the extent that it relates to the Merger Agreement, the
following description does not purport to be complete and is qualified in its
entirety by reference to the Merger Agreement which is attached hereto as
Exhibit A (including two amendments to the Merger Agreement which are attached
hereto as Exhibit A-1 and Exhibit A-2) and is incorporated herein by reference.
All shareholders are urged to read the Merger Agreement and the other exhibits
to this Proxy Statement/Prospectus in their entirety.
BACKGROUND OF THE MERGER
The Company experienced rapid growth from its formation in May 1987 as a
holding company for Citizens Bank, N.A. (the "Bank" or "Citizens Bank") through
1994. In late 1992, the Company organized Wisconsin Finance Corporation (the
"Finance Company") as a wholly-owned subsidiary to operate as a consumer
finance company. From 1992 and through 1994 the Finance Company established 17
new offices in Wisconsin and Illinois. During 1994, the Company acquired the
Farmers & Merchants Bank, Greenwood, Wisconsin, with assets of approximately
$25,000,000. Also in 1994, the Bank opened new branch offices in Appleton and
Ripon, Wisconsin.
In 1995, the Company experienced a series of difficulties attributable to
its rapid growth and management deficiencies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" attached hereto as
Exhibit E. As a result of such problems, the Company's directors raised the
subject of the advisability of a combination with a larger organization having
greater resources. However, the first priority of the Company's Board of
Directors was to address the specific problems at the Bank and to be responsive
to the regulatory agencies with supervisory authority over the Bank and the
Company.
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In late 1996, the Bank decided to pursue the sale of the Ripon and Appleton
branch offices. An outside consultant (the "Consultant") was retained in
January 1997 to evaluate the two branch offices and conduct a competitive
bidding process in order to dispose of those offices at an attractive price.
On February 28, 1997, the Company received an unsolicited letter of intent
from a larger organization to acquire the Company for cash, stock and notes at
an aggregate price of $21,222,000. The Company's Board of Directors rejected
that proposal. In connection with the sale of the Ripon and Appleton branches,
in June 1997 two larger organizations submitted preliminary proposals for the
acquisition of the entire Company in exchange for stock of the acquiror. One
proposal stated a price of $25,000,000 and the other contemplated an aggregate
transaction value of 150% of the Company's book value, which would have produced
a price of approximately $25,000,000 at that time.
On June 23, 1997, Clarence Bleser, the Company's majority shareholder and
Chairman of the Board, passed away. Following Mr. Bleser's death, Mary Bleser
Hayes became Chairwoman of the Board and Robert R. Behnke became President of
the Bank and a Director of the Company.
At the annual meeting of the shareholders on July 30, 1997, the Board of
Directors of the Company advised the shareholders that the Company was in the
process of retaining a professional advisor to help the Company's Board of
Directors understand and develop alternatives relating to the future of the
Company, the Bank and the Finance Company. Shortly thereafter, the Company
retained the Consultant to assist the Board of Directors of the Company in
evaluating a range of strategic options, including the possible sale of the
Company.
In October 1997, the Consultant presented to the Company a valuation
analysis and a series of considerations relevant to the formulation of
strategies regarding the future of the Company. Utilizing primarily a
discounted cash flow analysis, modified to a minor degree by reference to recent
comparable transactions, the Consultant computed a fair market value of the
Company on a controlling, liquid basis, as of June 30, 1997, of $31,828,000.
Such value was presented as the mid-point of a range of possible values within
approximately 15% of the mid-point. Furthermore, the Consultant concluded that
the value of the Company was highest when including all of its component parts,
as distinguished from evaluating each of the component parts (the Greenwood
branch of the Bank, the Bank without the Greenwood branch, and the Finance
Company) and adding those component parts together.
The Consultant further advised that, as a general matter, Bank stock prices
were at all time highs and acquisition pricing was exceptionally strong. Also,
the Consultant advised that the rate of consolidation in the banking industry is
expected to remain strong through the year 2000 as institutions seek
technological advantages and economies of scale. The Consultant further advised
that competitive pressures within the banking industry would likely increase in
the foreseeable future, following the passage of interstate banking and
branching legislation, increased product diversification and intensified
marketing by other banks and other financial service providers, and better
efficiency ratios historically maintained by non-bank competitors. As a general
matter, the Consultant believed that an internal growth strategy was unlikely to
enhance shareholder value as much as a sale or merger into another corporation.
At a meeting on October 29, 1997, the Board of Directors of the Company
discussed the Consultant's analysis and reached the consensus to pursue a sale
or merger of the entire Company as the best way to enhance shareholder value.
At the same meeting, the directors also
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discussed the manner of sale and in the course of that discussion considered the
possibility of pursuing negotiations with Associated alone.
Historically, Associated has been a significant lender and funding source
for the Finance Company. The Company's Board of Directors believed that
Associated would be a natural fit with the Company because of Associated's
strong presence in Northeastern Wisconsin and absence from the Shawano market
area. Also, the Company's Board of Directors considered Associated to be large
enough to provide needed expertise and liquidity for the Company and its
shareholders but not so large as to be uninterested in the Company. Over the
years, from time to time, Associated had informally expressed its interest in
pursuing a business combination with the Company. Associated's management had
also expressed a strong disinclination to becoming involved in a competitive
bidding auction process.
At the meeting on October 29, 1997, the Board of Directors of the Company
decided to contact Associated and invite it to make a proposal. Among the
reasons expressed by individual board members for pursing this course of action
were that Associated is a natural fit with the Company geographically and
culturally and has an interest in entering the consumer finance business;
Associated has a commendable tradition of service to community, customers and
employees; representatives of Associated have stated that Associated is not
interested in pursuing a competitive bidding process so that its participation
could be lost; a competitive bidding process takes longer and carries with it
greater risk of losing key employees and customer relationships; and Associated
and the Company are well known to each other. A meeting with Associated
representatives was subsequently held in November 1997.
On December 1, 1997, Associated proposed a merger of the Company directly
into Associated, with each share of Company Common Stock to be converted into 25
shares of Associated Common Stock (the equivalent of 31.25 shares of Associated
Common Stock after giving effect to Associated's June 1998 stock dividend).
On December 5, 1997, the Company's Board of Directors met to consider the
Associated proposal. Based on recent market prices of Associated Common Stock
in early December 1997, the initial Associated proposal exceeded the mid-point
valuation range determined by the Consultant, but did not reach the upper end of
the range of values provided by the Consultant. The Company's directors
concluded that the Associated proposal appeared to be reasonable but would not
justify a decision to not contact other potential acquirors. The Board decided
to respond to Associated with a counterproposal using an exchange ratio of 31
shares of Associated stock for each share of Company stock. This response was
communicated to Associated on December 6, 1997.
On December 12, 1997, representatives of Associated proposed an exchange
ratio of 27 shares of Associated Common Stock for each share of Company Common
Stock (the equivalent of 33.75 shares of Associated Common Stock after giving
effect to Associated's June 1998 stock dividend). The Board of Directors of the
Company met on the next business day, December 15, 1997, to consider the revised
Associated proposal. As of the date of the proposal, the closing price for
Associated Common Stock was $54.75 per share. Based upon the market price, the
Associated proposal had a nominal value of $39,295,000 which was 23% greater
than the Consultant's mid-range valuation and 220% of the Company's then
estimated consolidated book value as of December 31, 1997. The Board of
Directors unanimously approved an authorization to go forward on the basis of
Associated's revised proposal and to proceed with the negotiation of a
definitive merger agreement. This response was communicated to Associated on
December 15, 1997.
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During the ensuing two months, Associated and the Company proceeded with
mutual due diligence and the negotiation of a definitive merger agreement. On
February 10, 1998, a draft agreement and plan of merger was considered at a
meeting of the Board of Directors of the Company. As of the date of the
meeting, the closing price of Associated Common Stock was $52.50 per share.
Based on this price, the proposed merger consideration represented an aggregate
value of $37,680,000 for the Company, which was 18.4% above the mid-point of the
Consultant's valuation. The Company's Board of Directors considered the trading
range of Associated Common Stock during the period subsequent to the prior Board
meeting of December 15, 1997, which had ranged as low as approximately $47 per
share and as high as approximately $59 per share. At $47 per share, the
Associated proposal represented an aggregate value of $33,733,000. At $59 per
share, the Associated proposal represented an aggregate value of $42,345,000.
After extensive review of the proposed merger agreement and discussion of
various considerations, the Company's Board of Directors unanimously authorized
execution of the Merger Agreement on behalf of the Company. The Merger
Agreement was executed by Associated and the Company on February 17, 1998.
Subsequent to February 17, 1998, Associated and the Company experienced
delays as they moved forward with the necessary steps to close the transaction.
A major contributing factor to the delays was the application process with the
Federal Reserve Board and issues involving effects on competition in the
relevant geographic market. (See "The Merger - Regulatory Approvals Required.")
In addition, during this time period, market valuations declined for bank stocks
generally, including Associated Common Stock. These developments caused
Associated and the Company to reconsider some of the terms of the Merger
Agreement.
On October 8, 1998, Associated and the Company executed the First Amendment
to Agreement and Plan of Merger (the "First Amendment"). The First Amendment
changed the nature of the transaction from a stock-for-stock exchange to permit
an election by the Company's shareholders to receive limited amounts of cash
instead of Associated Common Stock. (See "The Merger - Merger Consideration".)
The First Amendment also established procedures for the exercise of stock or
cash elections and made other changes in recognition of a change in accounting
treatment from pooling-of-interest to purchase accounting.
On October 16, 1998, a Second Amendment to the Agreement (the "Second
Amendment") was considered at a meeting of the Board of Directors of the
Company. The primary purpose of the proposed Second Amendment was to change the
date after which either party had the right to unilaterally terminate the
Agreement from September 30, 1998 to December 31, 1998, or a later date
dependent upon the date of mailing of this Proxy Statement/Prospectus. Because
the effect of the proposed Second Amendment was to remove the Company's
unilateral right to terminate after September 30, 1998, a date which had already
passed, the Board of Directors of the Company considered the Second Amendment as
though it was a new agreement with Associated.
Prior to the meeting of the Board of Directors of the Company on October
16, 1998, Directors of the Company reviewed minutes of prior Board meetings
relating to the Merger Agreement, memoranda and correspondence prepared by its
counsel Foley & Lardner regarding fiduciary duties of the Directors, and certain
publicly available information regarding Associated, including recent filings
with the Securities and Exchange Commission, press releases, newspaper articles,
and securities analyst's reports. At the meeting, the Board of Directors of the
Company reviewed the historical background of the transaction and the terms of
the proposed Second Amendment. Foley & Lardner also reviewed with the Board of
Directors of
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the Company their duties and responsibilities in connection with approving the
Second Amendment. As of the close of business on the date immediately prior to
the October 16, 1998 meeting, the price for Associated Common Stock was $33.75
per share. Based upon such market price, the merger transaction with Associated
had a nominal aggregate value of $29,942,000 as of that date. The Board of
Directors of the Company also reviewed the range of market prices of Associated
Common Stock during the period of discussions with Associated, including the low
point of $25.00 per share (which produced a nominal aggregate value of
$22,429,000) on October 8, 1998, prior to the execution of the First Amendment
and the initiation by Associated of a stock buy-back program.
At the October 16 meeting, Howe Barnes Investments, Inc. ("HBI") delivered
its written opinion to the Board of Directors of the Company that, as of such
date and based upon and subject to the matters discussed, the Merger
Consideration was fair, from a financial point of view, to the holders of
Company Common Stock. The members of the Board of Directors of the Company
discussed the presentations they had received at this and other meetings of the
Board of Directors and, upon conclusion, unanimously approved the Second
Amendment and authorized its execution. The Second Amendment was executed by
Associated and the Company on October 27, 1998.
REASONS FOR THE MERGER
The Company. In considering the Merger, the directors of the Company
reviewed the terms and conditions of the proposed Merger Agreement, along with
certain business and financial information relating to Associated and the
Company. In reaching the conclusion to approve the Merger Agreement, the Board
of Directors of the Company considered a number of factors, including the
following:
1. The Merger will increase the financial strength and resources of the
Company enabling it to better serve its customers and to be more competitive
with other banks and finance companies doing business in the Company's
geographic markets.
2. The marketability and liquidity of Associated Common Stock and the
Associated dividend history and rate compare favorably to the illiquidity and
lack of marketability of the Company Common Stock and the dividend history of
the Company Common Stock.
3. The tax free nature of the Merger for federal income tax purposes
would permit the Company shareholders who elect to receive shares of Associated
Common Stock in the Merger to defer federal income taxation under certain
circumstances.
4. The potential for future appreciation of Associated Common Stock is
greater than the potential for appreciation of Company Common Stock due to
Associated's greater market capitalization and financial resources and the
possibility of future business combinations.
5. The financial terms of the Merger compare favorably to other recent
business combinations in the financial services industry and the range of values
provided to the Board of Directors of the Company by the Company's professional
advisors.
6. The Company and other financial institutions face uncertain current
and future economic and competitive environments, characterized by consolidation
and increasing competition and technological change.
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7. The Merger will have a favorable impact on the Company's employees and
customers.
8. The financial advice rendered by HBI that the consideration to be paid
in the Merger is fair to the holders of Company Common Stock from a financial
point of view. (See "The Merger - Opinion of Financial Advisor to the
Company".)
The Company's Board of Directors also discussed and recognized the fact
that the market price of Associated Common Stock would fluctuate between the
date of the Merger Agreement and the date of the closing of the Merger, as well
as thereafter.
While each member of the Company's Board of Directors evaluated each of the
foregoing as well as other factors, the Board of Directors collectively did not
assign any specific or relative weights to the factors considered and did not
make any determination with respect to any individual factor. The Company's
Board of Directors collectively made its determination with respect to the
Merger based on its unanimous conclusion that the Merger, in light of the
factors that each of them individually considered as appropriate, is fair and in
the best interests of the Company and its shareholders.
Associated. Prior to authorizing the Merger, Associated's Board of
Directors considered, among other things, the improving financial performance
and condition, business operations, capital levels, asset quality and future
growth prospects of the Company. The Board also considered the benefits to
Associated of expanding in Northeastern Wisconsin by acquisition of the Company
as opposed to the opening of a new branch bank, the positive impact of the
Merger on Associated by enhancing its visibility in the region and the terms of
the Merger Agreement.
Associated's Board of Directors believes the Merger will (i) result in
operational and managerial efficiencies which will better enable the Company to
contain costs and grow more rapidly than historic growth rates; (ii) result in
the Company having greater financial strength, increased competitiveness and
market diversification, thereby also benefiting Associated and its customers;
and (iii) result in an increase in long-term shareholder value for the
shareholders of Associated.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY
The Board of Directors of the Company has determined that the terms of the
Merger are fair to, and in the best interests of, the Company, and its
shareholders for the reasons stated immediately above.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
---
OPINION OF FINANCIAL ADVISOR TO THE COMPANY
At the meeting of the Board of Directors of Citizens Bankshares on October
16, 1998, at which the terms of the proposed Merger were discussed and
considered, HBI rendered a written opinion to the Company's Board of Directors
that, as of the date of such opinion and based upon the matters set forth in
such opinion, the Merger Consideration was fair, from a financial point of view,
to the holders of Company Common Stock. (HBI has confirmed its October 16,
1998,
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opinion by delivery of an updated written opinion to the Company's Board of
Directors dated the date of this Proxy Statement/Prospectus stating that, as of
the date hereof and based on the matters set forth in such opinion, the Merger
Consideration is fair, from a financial point of view, to the holders of Company
Common Stock).
THE FULL TEXT OF HBI'S OPINION DATED THE DATE HEREOF, WHICH SETS FORTH
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND LIMITS ON THE
REVIEW UNDERTAKEN BY HBI, IS ATTACHED AS EXHIBIT B AND IS INCORPORATED HEREIN BY
REFERENCE. THE DESCRIPTION OF THE HBI OPINION SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION HOLDERS OF COMPANY COMMON STOCK ARE URGED TO READ THE HBI
OPINION IN ITS ENTIRETY.
HBI's opinion as expressed herein is limited to the fairness, from a
financial point of view, of the Merger Consideration to the holders of Company
Common Stock and does not address the Company's underlying business decision to
proceed with the Merger, nor does it express an opinion as to the prices at
which shares of Associated Common Stock issued in the Merger may trade if and
when they are issued or at any future time. The opinion is directed only to the
Merger Consideration in the Merger and does not constitute a recommendation to
any holder of Company Common Stock as to how such holder should vote with
respect to the Merger Agreement at any meeting of holders of Citizens Common
Stock.
HBI, as part of its investment banking business, is regularly engaged in
the valuation of banks and bank holding companies, thrifts and thrift holding
companies, and various other financial services companies, in connection with
mergers and acquisitions, initial and secondary offerings of securities, and
valuations for other purposes. The Company's Board of Directors selected HBI on
the basis of its familiarity with the financial services industry, its
qualifications, ability, previous experience, and its reputation with respect to
such matters.
For purposes of its opinion dated the date hereof and in connection with
its review of the proposed transaction with Associated, HBI, among other things:
(i) participated in discussions with representatives of the Company concerning
the Company's financial condition, businesses, assets, earnings, prospects, and
such senior management's views as to its future financial performance; (ii)
reviewed the terms of the Merger Agreement, as amended; (iii) reviewed this
Proxy Statement/Prospectus; (iv) reviewed certain publicly available financial
statements, both audited (where available) and unaudited, and related financial
information of Citizens and Associated, including those included in Associated's
Annual Reports or Form 10-K for the years ended December 31, 1997, 1996 and 1995
and Associated's Quarterly Reports or Form 10-Q for the periods ended June 30,
1997, September 30, 1997, March 31, 1998 and June 30, 1998, as well as other
internally generated reports relating to asset/liability management, asset
quality, and so forth; (v) reviewed certain financial forecasts and projections
of Citizens Bankshares prepared by its management and reviewed publicly
available information, earnings estimates, and research reports available for
Associated; (vi) discussed and reviewed certain aspects of the past and current
business operations, financial condition, and future prospects of Citizens
Bankshares with certain members of management; (vii) reviewed reported market
prices and historical trading activity of Associated Common Stock; (viii)
reviewed certain aspects of the financial performance of Citizens Bankshares and
Associated and compared such financial performance of Citizens Bankshares and
Associated, together with stock market data relating to Associated Common Stock,
with similar data available for certain other financial institutions and certain
of their publicly traded securities; and (ix) reviewed certain of the financial
terms, to the extent publicly available, of certain recent business combinations
involving other financial institutions.
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In conducting its review and rendering its opinion dated the date hereof,
HBI assumed and relied, without independent verification, upon the accuracy and
completeness of all of the financial and other information that has been
provided to HBI by Citizens Bankshares, Associated, and their respective
representatives, and of the publicly available information that was reviewed by
HBI. HBI is not an expert in the evaluation of allowances for loan losses and
has not independently verified such allowances, and has relied on and assumed
that the aggregate allowances for loan losses set forth in the balance sheets of
each of Citizens Bankshares and Associated at December 31, 1997 and June 30,
1998, are adequate to cover such losses and complied fully with applicable law,
regulatory policy, and sound banking practice as of the date of such financial
statements. HBI was not retained to and did not conduct a physical inspection
of any of the properties or facilities of Citizens Bankshares or Associated, did
not make any independent evaluation or appraisal of the assets, liabilities or
prospects of Citizens Bankshares or Associated, and was not furnished with any
such evaluation or appraisal. HBI's opinion is necessarily based on economic,
market, and other conditions as in effect on, and the information made available
to us as of, the date hereof.
The following is a brief summary of the analyses presented by HBI to the
Company's Board of Directors in connection with HBI's written opinion.
Stock Trading History. HBI examined the history of trading prices and
volume for Associated Common Stock and the relationship between the movements of
such trading prices to movements of the Standard & Poor's 500 Index, other
financial indices, and of the trading prices of the common stocks of the
companies in the Associated Peer Group (consisting of Commerce Bancshares, Inc.,
BOK Financial Corporation, Community First Bankshares, Inc., First Merit
Corporation, Old National Bancorp, Provident Financial Group, Inc., TCF
Financial Corporation, UMB Financial Corporation, M&I Corporation and Old Kent
Financial Corporation). The 10 companies in the Associated Peer Group are
between $5.5 billion and $21.0 billion in assets and operate in an economic,
geographic, and demographic environment that HBI deemed to be similar to the
environment in which Associated operates. Comparative financial statistics were
reviewed and particular attention was given to the one-year period leading up to
the date of the fairness opinion.
The Company Common Stock is not quoted on an organized exchange and no
active trading market has developed for the Company Common Stock.
Comparable Company Analysis. HBI calculated, reviewed, and compared
selected publicly-available financial data and ratios (at or for the twelve
months ended June 30, 1998) and trading multiples (as of October 14, 1998) for
Associated to the corresponding ratios and multiples of the Associated Peer
Group. The trading multiples used in comparing Associated to the Associated
Peer Group were market price as a multiple of: (i) book value (which was 2.30x
for Associated as compared to a median of 2.24x for the Associated Peer Group);
(ii) tangible book value (which was 2.39x for Associated as compared to a median
of 2.75x for the Associated Peer Group); (iii) earnings per share ("EPS") for
the twelve months ended June 30, 1998 (which was 17.4x for Associated compared
to a median of 16.3x for the Associated Peer Group); (iv) 1998 estimated EPS
(which was 13.0x for Associated compared to a median of 15.5x for the Associated
Peer Group); and (v) 1999 estimated EPS (which was 12.0x for Associated compared
to a median of 14.1x for the Associated Peer Group). HBI used earnings
estimates as published by the Institutional Brokers Estimate System ("IBES"),
where available, for the companies comprising the Associated Peer Group. IBES
is a data service which monitors and publishes a compilation of earnings
estimates produced by selected research analysts on
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companies of interest to investors. Where IBES estimates were not available, HBI
used consensus earnings estimates from alternative publicly-recognized earnings
estimate services.
Since the Company Common Stock does not trade on any organized exchange and
an active market for the Company Common Stock has not developed, no relevant
data on which to compare the Company to peer groups exists.
Comparable Transaction Analysis. As part of its analyses, HBI reviewed 19
completed or pending comparable mergers and acquisitions of commercial banks,
thrifts, and bank and thrift holding companies ("National Comparative
Transactions"). Total assets of these Transactions were between $103.5 million
and $259.6 million, with a median of $161.3 million. Median capitalization was
8.34% and median nonperforming assets as a percentage of assets was 2.24%. The
National Comparative Transactions were selected based on similarity to certain
balance sheet characteristics of Citizens Bankshares. All were announced
between January 14, 1997 and September 16, 1998. For each transaction for which
data was available, HBI calculated the multiple of the offer value to the
acquired company's: (i) EPS for the twelve months preceding ("LTM"); (ii) book
value per share; and (iii) premium to core deposits.
National Comparative Transactions. The calculations for the National
Comparative Transactions yielded a range of multiples of offer value to LTM EPS
of 9.90 to 45.76x, with a median of 18.17x and a mean of 21.92x; a range of
multiples of offer value to book value of 1.28x to 3.00x, with a median of 1.79x
and a mean of 1.98x; a range of multiples of offer value to tangible book value
of 1.31x to 3.00x, with a median of 1.79x and a mean of 1.99x; and a range of
percentages of offer value premium to core deposits of 1.8% to 32.8%, with a
median of 8.8% and a mean of 11.1%.
HBI compared these multiples with the corresponding multiples for the
Merger, valuing the Merger Consideration at $1,063.13 per share, based upon a
market price for Associated Common Stock of $31.50 per share, which was the
closing price on October 14, 1998. In calculating the multiples for the Merger,
HBI used the Company's EPS for the twelve months ended June 30, 1998, and book
value per share and core deposits as of June 30, 1998. Since the Company
reported a loss for the 12 months ended June 30, 1998, pricing as a multiple of
reported earnings is not meaningful. However, on a core earnings basis, with
estimated core earnings of $1.6 million, HBI calculated that the Merger
Consideration represented multiples of 17.1x the Company's LTM core earnings,
1.71x its book value per share, 1.80x its tangible book value per share, and a
core deposit premium of 11.4%.
No company or transaction used in the above analyses as a comparison is
identical to Citizens Bankshares, Associated, or the Merger. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial operating characteristics, including, among other things, differences
in revenue composition and earnings performance among the companies, and other
facts that could affect the public trading value of the companies to which they
are being compared.
Discounted Cash Flow Analysis. Using discounted cash flow analysis, HBI
estimated the future dividend streams that Citizens Bankshares could produce
over the period from January 1, 1998, through December 31, 2002, assuming an
annual asset growth rate of 3.0%; and further assumed Citizens performed in
accordance with recent historical trends (after adjusting for one-time gains and
losses) and the future outlook of Citizens Bankshares management. HBI
calculated terminal values as a perpetuity with an asset growth rate of 2.0%.
The dividend
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streams and terminal value were discounted to present values, using a discount
rate of 12.0%, which reflects the required rates of return to holders and
prospective buyers of Company Common Stock. HBI estimated a range of terminal
values by applying multiples ranging from 15 times to 22 times estimated year-
end 2002 net income. The range of terminal multiples was chosen based on past
and current trading multiples of institutions similar to Citizens Bankshares and
past and current multiples of comparable merger and acquisition transactions.
The range of present values of Citizens Bankshares resulting from this analysis
was $24.7 million to $31.7 million.
In connection with its written opinion dated as of the date of this Proxy
Statement/Prospectus, HBI performed procedures to update certain of its analyses
and reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith. In updating its opinion, HBI did not
utilize any methods of analysis in addition to those described.
The foregoing is a summary of the material financial analyses performed by
HBI and presented to the Company's Board of Directors, but does not purport to
be a complete description of the analyses performed by HBI. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. Furthermore, in arriving at its
opinion, HBI did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Selecting portions of the analyses or
of the summary set forth above, without considering the analyses as a whole,
could create an incomplete view of the processes underlying HBI's opinion. The
ranges of valuations resulting from any particular analysis described above
should not be taken to be HBI's view of the actual value of Citizens Bankshares,
or the current or future trading price for Associated Common Stock.
In performing its analyses, HBI made numerous assumptions with respect to
industry performance, business and economic conditions and other matters, many
of which are beyond the control of Citizens Bankshares and Associated. The
analyses performed by HBI are not necessarily indicative of actual values of
future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of HBI's analysis
of the fairness of the Merger Consideration, from a financial point of view, to
the holders of Company Common Stock. The analyses do not purport to be
appraisals or to reflect the prices at which a company or its securities may
actually be bought or sold.
Pursuant to the terms of a letter agreement dated June 9, 1998 and amended
October 15, 1998, Citizens Bankshares agreed to pay HBI for its services in
connection with the Merger, including the rendering of its opinion. Citizens
Bankshares agreed to pay HBI a fee of $75,000. In addition, Citizens agreed to
indemnify HBI against certain liabilities arising out of its engagement,
including liabilities under the federal securities laws.
MERGER CONSIDERATION
Upon consummation of the Merger, each share of the Company Common Stock
outstanding at the Effective Time will be converted, at the election of each
holder of shares of Company Common Stock, into the right to receive either (the
"Merger Consideration"):
(1) 33.75 shares of Associated Common Stock (subject to the provisions
with respect to fractional shares described below); or
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(2) a cash payment equal to 33.75 multiplied by the average closing prices
of a share of Associated Common Stock as quoted on the Nasdaq National Market
during the ten-day trading period ending on the business day prior to the date
of the Special Meeting (the "Cash Consideration").
The allocations of Cash Consideration and/or shares of Associated Common
Stock that a holder of shares of Company Common Stock may receive will depend on
(a) the stated preference of the shareholder on the form of election which will
be delivered to the shareholder after the Special Meeting (the "Election Form"),
and (b) the proration procedures to be applied if the amount of the cash
payments to be made pursuant to elections to receive Cash Consideration, cash to
be paid in lieu of fractional shares and cash to be paid to shareholders who
exercise dissenters' rights under Wisconsin law ("Dissenting Shareholders")
would exceed 50% of the total amount of the Merger Consideration. See "The
Merger - Procedures for Election of the Form of Merger Consideration" and "The
Merger - Limit on Cash Consideration Payable in the Merger."
The Merger Agreement provides that if, subsequent to October 5, 1998 and
prior to the Effective Time, Associated pays a stock dividend or makes a
distribution on Associated Common Stock in shares of Associated Common Stock or
any security convertible into Associated Common Stock or combines or subdivides
the Associated Common Stock, then the Merger Consideration will be appropriately
adjusted to reflect such stock dividend, distribution, combination or
subdivision.
PROCEDURES FOR ELECTION OF THE FORM OF MERGER CONSIDERATION
As soon as reasonably practicable after the approval of the Merger by the
holders of Company Common Stock, a bank or trust company designated by
Associated (the "Exchange Agent") will mail an Election Form to each holder of
record of shares of Company Common Stock. Each Election Form will permit the
holder of shares of Company Common Stock, other than a holder of shares of
Company Common Stock who exercises dissenters' rights (a "Dissenting
Shareholder"), to (a) elect to receive Associated Common Stock with respect to
all or a portion of such holder's Company Common Stock (a "Stock Election")
and/or (b) elect to receive cash with respect to all or a portion of such
holder's Company Common Stock (a "Cash Election"). Any holder of shares of
Company Common Stock who does not submit an effective, properly completed
Election Form to the Exchange Agent on or before 5:00 P.M., Central Time, on the
business day that is two business days prior to the Effective Time (the
"Election Deadline") shall be deemed to have made a Stock Election. Any election
shall have been properly made only if the Exchange Agent shall have actually
received a properly completed Election Form by the Election Deadline. The
Exchange Agent will mail written notice of the scheduled Effective Time (and
assumed Election Deadline) to Company shareholders of record as soon as
practicable but in no event less than eight business days prior to the Effective
Time. An Election Form shall be deemed properly completed only if accompanied by
one or more certificates (or customary affidavits and indemnification regarding
the loss or destruction of such certificates or the guaranteed delivery of such
certificates) representing all shares of Company Common Stock covered by such
Election Form, together with duly executed transmittal materials. Any Election
Form may be revoked or changed by the person submitting such Election Form prior
to the Election Deadline.
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LIMIT ON CASH CONSIDERATION PAYABLE IN THE MERGER
Pursuant to the Merger Agreement, the aggregate amount of (a) Cash
Consideration, (b) cash paid to Dissenting Shareholders, and (c) cash paid in
lieu of fractional shares (collectively, the "Total Cash Payments") shall not be
more than 50% of the aggregate consideration to be received by holders of
Company Common Stock as of the Effective Time. For these purposes, the cash paid
to Dissenting Shareholders will be deemed to equal the product of the number of
shares of Company Common Stock held by Dissenting Shareholders multiplied by the
greater of (a) the Cash Consideration or (b) the product of 33.75 multiplied by
the average of the high and low trading prices of a share of Associated Common
Stock as quoted on the Nasdaq National Market on the Effective Time. Also for
these purposes, the total Merger Consideration will be deemed to be equal to the
sum of (a) the Total Cash Payments plus (b) the product of the number of whole
shares of Associated Common Stock issued in the Merger multiplied by the average
of the high and low trading prices of a share of Associated Common Stock as
quoted on the Nasdaq National Market on the Effective Time. If the number of
Cash Election Shares is such that the amount of Total Cash Payments exceeds 50%
of the aggregate Merger Consideration, Associated and the Company will reduce
the number of Cash Election Shares by the number necessary to cause the Total
Cash Payments to be 50% of the Merger Consideration and 50% of the Merger
Consideration to be Associated Common Stock. The number of Cash Election Shares
which may not be so converted into Cash Consideration will be converted into
Stock Election Shares and exchanged for Associated Common Stock. The reduction
in Cash Election Shares will be made pro rata among the shareholders of the
Company making Cash Elections based upon the number of shares of Company Common
Stock for which each such shareholder has made a Cash Election.
CERTAIN ELECTION CONSIDERATIONS
In making a Stock Election or a Cash Election, Company shareholders are
urged to consider that the Cash Consideration will be determined and fixed by
the date of the Special Meeting, but the market value of Associated Common Stock
may change between the date of the Special Meeting and the Election Deadline or
the Effective Time. The Effective Time cannot occur before fifteen business days
after the Election Forms are mailed to Company shareholders, and the Effective
Time may occur later. The Election Deadline is determined by reference to the
Effective Time and is two business days prior to the Effective Time. Company
shareholders should also consider that a shareholder making a Cash Election, to
the extent cash is received, will not be subject to the risk of declines in the
market value of Associated Common Stock but will not have the opportunity to
profit from increases in the market value of Associated Common Stock. Company
shareholders should also consider that there may be materially different tax
consequences involved in electing to receive Cash Consideration, as described
below under "The Merger - Certain Material Federal Income Tax Consequences".
Company shareholders should note that an Election Form may be revoked or changed
if notice of revocation or a replacement Election Form is received by the
Exchange Agent before the Election Deadline and that a proper Cash Election also
requires that Citizens Bankshares stock certificates and duly executed
transmittal materials be received by the Exchange Agent.
COMPANY SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTES FOR
ASSOCIATED COMMON STOCK PRIOR TO THE SPECIAL MEETING AND THE ELECTION DEADLINE.
NO ASSURANCE CAN BE GIVEN THAT THE CASH CONSIDERATION PER SHARE OF CITIZENS
BANKSHARES COMMON STOCK WILL BE MORE OR LESS THAN THE MARKET VALUE OF ASSOCIATED
COMMON STOCK RECEIVED IN EXCHANGE FOR A SHARE OF CITIZENS BANKSHARES COMMON
STOCK, AS OF THE ELECTION DEADLINE OR THE EFFECTIVE TIME OR THE DATE OF RECEIPT
OF ASSOCIATED COMMON STOCK BY A SHAREHOLDER MAKING
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A STOCK ELECTION. NONE OF ASSOCIATED, THE COMPANY, ASSOCIATED'S BOARD OF
DIRECTORS, OR THE COMPANY'S BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY
COMPANY SHAREHOLDER AS TO WHETHER TO MAKE A STOCK ELECTION OR A CASH ELECTION.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
At the Effective Time and without any action on the part of Associated, the
Company or the holders of the Company Common Stock, each share of the Company
Common Stock issued and outstanding immediately prior to the Effective Time
(other than shares held by Company shareholders exercising their dissenters'
rights under the Wisconsin Business Corporation Law (the "WBCL")) shall be
converted into the right to receive the Merger Consideration. See "The Merger
Dissenters' Rights." All such shares of the Company Common Stock shall no longer
be outstanding and shall automatically be canceled and retired and shall cease
to exist, and each stock certificate previously representing any such shares of
the Company Common Stock (other than shares held by dissenting shareholders as
described above) shall thereafter represent the right to receive the Merger
Consideration into which such Company Common Stock has been converted.
Certificates previously representing shares of the Company Common Stock shall be
exchanged for the Merger Consideration to which such shares are entitled upon
the surrender of such certificates as provided below. No fractional share of
Associated Common Stock shall be issued, and, in lieu thereof, a cash payment
shall be made as provided below.
As of the Effective Time, Associated shall deposit, or cause to be
deposited, with the Exchange Agent, for the benefit of the holders of shares of
the Company Common Stock and for exchange in accordance with the terms of the
Merger Agreement, certificates representing the shares of Associated Common
Stock, and an amount sufficient to pay the Cash Consideration and to make any
cash payments in lieu of fractional shares (such certificates for shares of
Associated Common Stock to be exchanged for the Company Common Stock, together
with such cash amount the "Company Exchange Fund") issuable pursuant to the
terms of the Merger Agreement in exchange for outstanding shares of the Company
Common Stock. It is anticipated that Harris Trust and Savings Bank will serve
as the Exchange Agent.
As soon as reasonably practicable after the approval of the Merger by the
shareholders of the Company, the Exchange Agent shall mail to each holder of
record of a certificate which immediately prior to the Effective Time
represented outstanding shares of the Company Common Stock whose shares were
converted into the right to receive the Merger Consideration, (i) a letter of
transmittal, (ii) instructions for use in effecting the surrender of the
certificates representing shares of the Company Common Stock in exchange for the
Merger Consideration and (iii) an Election Form. At the Effective Time and upon
surrender of a certificate previously representing shares of the Company Common
Stock to the Exchange Agent together with such duly executed letter of
transmittal and, for shareholders electing Cash Consideration, a duly executed
Election Form, the holder of such certificate shall receive in exchange therefor
(i) a certificate representing that number of whole shares of Associated Common
Stock to which such holder is entitled and cash in lieu of fractional shares, if
any, and/or (ii) a cash payment of the Cash Consideration to which such holder
is entitled, and the certificate so surrendered shall forthwith be canceled. In
the event of a transfer of ownership of shares which is not registered in the
transfer records of the Company, the Merger Consideration may be issued to a
transferee if the certificate representing such shares is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered, each certificate previously representing shares of the
Company Common Stock shall be deemed at any time after the Effective Time to
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represent only the right to receive upon such surrender the Merger Consideration
to which the holder of such certificate is entitled.
THE COMPANY SHAREHOLDERS SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO THE
EXCHANGE AGENT WITHOUT A LETTER OF TRANSMITTAL NOR RETURN THEIR STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
No dividends or other distributions declared or made after the Effective
Time with respect to Associated Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered certificate with
respect to the shares of Associated Common Stock represented thereby, and no
cash payment in lieu of fractional shares shall be paid to any such holder,
until such certificate is surrendered. Subject to the effect of applicable
laws, following surrender of any such certificate, after the Effective Time,
there shall be paid to the holder of said certificate, which represents whole
shares of Associated Common Stock issued in exchange therefor, without interest,
(i) promptly, the amount of cash payable with respect to a fractional share of
Associated Common Stock to which such holder is entitled and the amount of
dividends or other distributions with a record date after the Effective Time
paid with respect to such whole shares of Associated Common Stock, and (ii) at
the appropriate payment date, the amount of dividends or other distributions,
with a record date after the Effective Time, but prior to surrender and a
payment date occurring after surrender, payable with respect to such whole
shares of Associated Common Stock.
The Merger Consideration issued upon conversion of the shares of the
Company Common Stock shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of the Company Common Stock.
No certificates or scrip representing fractional shares of Associated
Common Stock shall be issued upon the surrender for exchange of the
certificates, and such fractional share interest will not entitle the owner
thereof to vote or to any rights as a shareholder of Associated. Each holder of
a fractional share interest shall be paid an amount in cash equal to the product
obtained by multiplying such fractional share interest to which such holder
would otherwise be entitled by the average of the daily closing prices of a
share of Associated Common Stock as quoted on the Nasdaq National Market during
the ten consecutive trading day period ending three business days prior to the
Effective Time. As soon as practicable after the determination of the amount of
cash, if any, to be paid to holders of fractional share interests, the Exchange
Agent shall notify Associated and Associated shall make available such amounts
to such holders of such fractional share interests subject to and in accordance
with the terms of the Merger Agreement, as relevant.
Any portion of the Exchange Fund which remains undistributed to the
shareholders of the Company for six months after the Effective Time shall be
delivered to Associated, upon demand, and any shareholders of the Company who
have not theretofore complied with the procedures described above shall
thereafter look only to Associated for payment of their claim for the Merger
Consideration and any dividends or distributions with respect to Associated
Common Stock.
Neither Associated nor the Company shall be liable to any holder of shares
of the Company Common Stock for any such shares of the Company Common Stock (or
dividends or distributions with respect thereto) or cash delivered to a public
official pursuant to any abandoned property, escheat or similar law.
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Associated shall be entitled to deduct and withhold from any cash
consideration payable pursuant to the Merger Agreement to any holder of shares
of the Company Common Stock such amounts as Associated is required to deduct and
withhold with respect to the making of such payment under the Internal Revenue
Code of 1986, as amended (the "Code"), or any provision of state, local or
foreign tax law.
At the Effective Time, the stock transfer books of the Company shall be
closed, and there shall be no further registration of transfers of shares of the
Company Common Stock thereafter on said record books. From and after the
Effective Time, the holders of certificates shall cease to have any rights with
respect to such shares of the Company Common Stock except as otherwise provided
in the Merger Agreement, or by law. On or after the Effective Time, any
certificates presented to the Exchange Agent or Associated for any reason shall
be converted into the Merger Consideration to which the holder of such
certificate is entitled in accordance with the terms of the Merger Agreement as
described above.
REGULATORY APPROVALS REQUIRED
Federal. The Merger is subject to prior approval by the Federal Reserve
Board under the BHC Act, which requires that the Federal Reserve Board take into
consideration, among other factors, the financial and managerial resources and
future prospects of the respective institutions and the convenience and needs of
the communities to be served. The BHC Act prohibits the Federal Reserve Board
from approving the Merger if it would result in a monopoly or be in furtherance
of any combination or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States, or if its effect in any
section of the country may be to substantially lessen competition or to tend to
create a monopoly, or if it would in any other manner be a restraint of trade,
unless the Federal Reserve Board finds that the anti-competitive effects of the
Merger are clearly outweighed in the public interest by the probable effect of
the transaction in meeting the convenience and needs of the communities to be
served. The Federal Reserve Board also has the authority to deny an application
if it concludes that the combined organization would have an inadequate capital
position. Furthermore, the Federal Reserve Board must also assess the records of
the bank subsidiaries of Associated and the Company under the Community
Reinvestment Act of 1977, as amended (the "CRA"). The CRA requires that the
Federal Reserve Board analyze, and take into account when evaluating an
application, each bank's record of meeting the credit needs of its local
communities, including low and moderate income neighborhoods, consistent with
safe and sound operation.
Under the BHC Act, the Merger may not be consummated until up to 30 days
following the date of Federal Reserve Board approval, during which time the
United States Department of Justice may challenge the Merger on antitrust
grounds. Although a challenge is improbable, there can be no assurance that the
Department of Justice will not challenge the Merger or, if such a challenge is
made, as to the result thereof. The commencement of an antitrust action would
stay the effectiveness of the Federal Reserve Board's approval unless a court
specifically orders otherwise. The BHC Act provides for the publication of
notice and public comment on the applications and authorizes the regulatory
agency to permit interested parties to intervene in the proceedings.
Associated filed an application with the Federal Reserve Bank of Chicago
(the "Federal Reserve Bank") that was accepted for filing by the Federal Reserve
Bank on September 17, 1998 and approved on October 23, 1998.
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Wisconsin. The Merger is also subject to prior approval by the Wisconsin
Department of Financial Institutions (the "Wisconsin Department") under Section
221.0901 of the Wisconsin Statutes which requires that the Wisconsin Department
take into consideration (i) the financial and managerial resources and future
prospects of the respective institutions and whether the transaction would be
contrary to the best interests of the shareholders or customers of the bank or
bank holding company to be acquired; (ii) whether the action would be
detrimental to the safety and soundness of the respective institutions or any
subsidiary or affiliate of the respective institutions; (iii) the record of
performance, management, financial responsibility and integrity, and the CRA
rating of the applicant; and (iv) whether, upon consummation of the transaction,
the applicant would control in excess of 30% of the total amount of deposits of
insured depository institutions in Wisconsin as specified under federal banking
law.
Associated filed an application with the Wisconsin Department on May 15,
1998 which was accepted for processing on the date filed and approved on August
31, 1998.
General. The Merger cannot proceed in the absence of all requisite
regulatory approvals. See "Certain Provisions of the Merger Agreement -
Conditions to Consummation of the Merger." In the Merger Agreement, Associated
and the Company have agreed to take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed with respect to the
Merger, including furnishing information to the Federal Reserve Board or in
connection with approvals or filings with other governmental entities.
Associated and the Company have also agreed to take all reasonable action
necessary to obtain approvals of the Federal Reserve Board, the Wisconsin
Department and other governmental entities. However, the obligation to take
reasonable actions is not to be construed as including an obligation to accept
any terms or conditions to an agreement or other approval of, or any exemption
by, any party that are not customarily contained in approvals of similar
transactions granted by such regulators or if Associated in good faith
determines that such terms or conditions would have a material adverse effect on
its business or financial condition or would materially detract from the value
of the Company to Associated. There can be no assurance that any regulatory
approvals will not contain a term or condition that causes such approvals to
fail to satisfy the conditions described above under "Certain Provisions of the
Merger Agreement - Conditions to Consummation of the Merger."
Associated and the Company are not aware of any other governmental
approvals or actions that are required for consummation of the Merger except as
described above. Should any other approval or action be required, it is
presently contemplated that such approval or action would be sought. There can
be no assurance that any such approval or action, if needed, could be obtained
and, if such approvals or actions are obtained, there can be no assurance as to
the timing thereof.
THE EFFECTIVE TIME
The Merger will be consummated and will become effective upon the filing of
Articles of Merger with the Department of Financial Institutions of the State of
Wisconsin (the "Effective Time"). The filing with respect to the Merger will
occur as promptly as practicable after the satisfaction or, if permissible,
waiver of the conditions to the Merger as set forth in the Merger Agreement,
provided that the Effective Time will not be less than 15 days after the date
the Election Forms are mailed to the holders of Company Common Stock . The
Merger Agreement may be terminated by either party if, among other reasons, the
Merger is not consummated on or before January 31, 1999. Upon consummation of
the Merger, the Company will be merged into Associated and will not continue its
separate existence or operations, to which Associated as the
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surviving corporation will succeed. See "Certain Provisions of the Merger
Agreement -Conditions to Consummation of the Merger" and "Certain Provisions of
the Merger Agreement - Termination."
DESCRIPTION OF ASSOCIATED COMMON STOCK ISSUABLE IN THE MERGER
The following description of Associated Common Stock issuable in the Merger
is a summary and is qualified in its entirety by reference to the terms of such
security, which is incorporated by reference herein and is set forth in full in
Article III of Associated's Articles of Incorporation. The description set forth
below is subject in all respects to the WBCL and Associated's Articles of
Incorporation.
Harris Trust and Savings Bank is the transfer agent and registrar for all
outstanding Associated Common Stock.
THE FOLLOWING DESCRIPTION OF ASSOCIATED COMMON STOCK SHOULD BE READ
CAREFULLY BY THE COMPANY SHAREHOLDERS SINCE, AT THE EFFECTIVE TIME, THE COMPANY
SHAREHOLDERS MAY RECEIVE PART OR ALL OF THE MERGER CONSIDERATION IN THE FORM OF
SHARES OF ASSOCIATED COMMON STOCK.
General. Associated has one class of common stock, the Associated Common
Stock. Of the 100,000,000 shares of Associated Common Stock authorized,
62,504,895 shares were outstanding as of October 27, 1998, exclusive of shares
held in its treasury. Of the 750,000 shares of Associated preferred stock with a
par value of $1.00 per share authorized, none were issued and outstanding as of
the Record Date.
Dividend Rights. Dividends on Associated Common Stock will be payable out
of the assets of Associated legally available therefor as, if and when declared
by the Associated Board of Directors. No share of Associated Common Stock is
entitled to any preferential treatment with respect to dividends.
Voting Rights. Each holder of Associated Common Stock will be entitled at
each shareholders' meeting of Associated, as to each matter to be voted upon, to
cast one vote, in person or by proxy, for each share of Associated Common Stock
registered in his or her name on the stock transfer books of Associated. Such
voting rights are not cumulative.
Rights Upon Liquidation. Subject to the rights of holders of any
Associated preferred stock which may be issued from time to time, in the event
of liquidation, dissolution or winding up of Associated, whether voluntary or
involuntary, the holders of Associated Common Stock will be entitled to receive
all assets of Associated remaining for distribution to its shareholders, on a
pro rata basis.
Miscellaneous. Shares of Associated Common Stock are not convertible into
shares of any other class of capital stock. Shares of Associated Common Stock
are not and will not be entitled to any preemptive or subscription rights. The
issued and outstanding shares of Associated Common Stock are fully paid and
nonassessable (except as otherwise provided under the WBCL).
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COMPARISON OF SHAREHOLDER RIGHTS
The following is a summary of material differences between the rights of
holders of Company Common Stock and Associated Common Stock. As the Company and
Associated are both incorporated under the laws of the State of Wisconsin,
rights of shareholders are substantially similar. Differences in the rights of
shareholders of the Company and Associated generally arise from differences
between the provisions of Associated's Articles of Incorporation and By-laws and
those of the Company. Shareholders of the Company, whose rights are governed by
the Company's Articles of Incorporation, By-laws and the WBCL will, on
consummation of the Merger, become shareholders of Associated to the extent that
they receive the Merger Consideration in the form of shares of Associated Common
Stock. Their rights as Associated shareholders will then be governed by
Associated's Articles of Incorporation and By-laws and by the WBCL. The
following is a summary of the material differences between the rights of
shareholders of the Company and the rights of shareholders of Associated.
AUTHORIZED CAPITAL STOCK
The Company. Under the Company's Articles of Incorporation, the aggregate
number of shares which it is authorized to issue is 100,000 shares of one class
of common stock, $20.00 par value. All shares of the Company Common Stock are
identical in rights and have one vote. The holders of the Company Common Stock
are entitled to such dividends as may be declared from time to time by the Board
of Directors of the Company from funds legally available therefor and upon
liquidation are entitled to receive pro rata all assets of the Company available
for distribution to such holders. The Company has no authorized shares of
preferred stock and, accordingly, the rights of holders of Company Common Stock
to receive dividends or payment in the event of voluntary or involuntary
dissolution, liquidation or winding up of the Company are not subject to the
prior satisfaction of the rights of any other shareholders.
Associated. Under Associated's Articles of Incorporation, Associated is
authorized to issue 100,000,000 shares of common stock, par value $0.01 per
share and 750,000 shares of preferred stock, $1.00 par value. All shares of
Associated Common Stock are identical in rights and have one vote. For a
description of Associated Common Stock, see "Description of Associated Common
Stock Issuable in the Merger." The preferred stock shall be cumulative and
dividends shall accrue thereon. The Board of Directors may divide the preferred
stock into series and establish the relative rights and preferences of preferred
stock issued in the future as specified in Associated's Articles of
Incorporation without shareholder action and issue such stock in series. As of
the date hereof, no shares of any series of Associated preferred stock are
issued and outstanding.
APPRAISAL RIGHTS AND DISSENTERS' RIGHTS
The Company. Under the WBCL, a shareholder of a corporation is generally
entitled to receive payment of the fair value of such shareholder's stock if
such shareholder dissents from a proposed merger or share exchange or a sale or
exchange of all or substantially all of the property and assets of the
corporation.
Associated. Dissenters' rights under the WBCL are not available to holders
of shares, such as shares of Associated Common Stock, which are registered on a
national securities exchange or quoted on Nasdaq on the record date filed to
determine shareholders entitled to notice of the meeting at which shareholders
are to vote on the proposed corporate action. Associated Common Stock is quoted
on the Nasdaq National Market.
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REQUIRED VOTE
The Company. Pursuant to the WBCL, the affirmative vote of a majority of
the shares of the Company Common Stock is required to adopt amendments to the
Company's Articles of Incorporation or approve mergers and certain other
extraordinary transactions.
Associated. Pursuant to 180.1706(1) of the WBCL, except as otherwise
provided in a corporation's articles of incorporation or bylaws, any amendment
to the articles of incorporation, merger or certain other extraordinary events
involving a corporation organized before January 1, 1973, which did not
expressly elect before January 1, 1991 to be governed by a majority or greater
voting requirement, must be approved by the affirmative vote of two-thirds of
the shares entitled to vote at a meeting called for that purpose. Associated's
Articles of Incorporation were amended in 1992 to reduce the vote required
pursuant to Section 180.1706(1) of the WBCL to a majority vote. Thus, the
affirmative vote of a majority of the shares of Associated is required to adopt
amendments to Associated's Articles of Incorporation which create dissenters'
rights or approve mergers and certain other extraordinary transactions other
than those described in "Comparison of Shareholder Rights - Certain Business
Combinations."
CLASSIFIED BOARD OF DIRECTORS
The Company. The Company's Board of Directors consists of a single class
of not less than three and not more than six directors, each of whom serves for
one year or until his or her successor is elected and qualified.
Associated. The Board of Directors of Associated is divided into three
classes as nearly equal in number as possible, with the directors in each class
serving for staggered three-year terms. However, Associated's By-laws require
that a director retire as of the first annual meeting of shareholders subsequent
to the director's 65th birthday unless such director's term is extended for a
one-year term by a two-thirds vote of Associated's Board of Directors. At each
annual meeting of Associated's shareholders, the successors to the class of
directors whose term expires at the time of such meeting are elected by a
majority of the votes cast, assuming a quorum is present. Associated's Board of
Directors consists of 14 directors.
REMOVAL OF DIRECTORS
The Company. The Company's By-laws provide that a director may be removed
from office "with or without cause" by a vote of shareholders where the votes
cast to remove the director exceed the number of votes cast not to remove the
director.
Associated. Shareholders of Associated may remove a director only for
"cause." "Cause" is defined as conviction of a felony, declaration of unsound
mind by an order of a court of competent jurisdiction, gross dereliction of duty
or commission of an action which constitutes intentional misconduct or a knowing
violation of law and that results in both an improper substantial personal
benefit and a material injury to Associated.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES ON THE BOARD OF DIRECTORS
The Company. Pursuant to 180.0810 of the WBCL, unless otherwise provided
in a corporation's articles of incorporation, shareholders may fill vacancies on
a corporation's board of directors. The Company's By-laws authorize the
shareholders or the Company's Board of Directors, by the affirmative vote of a
majority of the shareholders or the directors then in office,
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though less than a quorum, to fill vacancies on the Company's Board of Directors
until the next succeeding election of directors.
Associated. Associated's Articles of Incorporation provide that newly
created directorships and any vacancies on Associated's Board of Directors may
only be filled by the Board of Directors. Associated's By-laws provide that the
remaining members of Associated's Board of Directors shall appoint a director in
accordance with the WBCL.
CERTAIN BUSINESS COMBINATIONS
The Company. The Company's Articles of Incorporation and By-laws do not
contain any supermajority voting provisions relating to the approval by holders
of the Company Common Stock of mergers or other business combinations.
Associated. Article VII of Associated's Articles provides that an
affirmative vote of 80% of Associated's outstanding shares is required to
approve a merger or other business combination involving a beneficial owner of
10% or more of Associated's outstanding voting shares (an "interested
shareholder"). In addition, if the consideration offered in connection with
such transaction does not satisfy certain "fair price" requirements, the
affirmative vote of 80% of the "non-interested outstanding shares" (defined as
voting shares not beneficially owned by an interested shareholder) of Associated
will also be required to approve such a transaction. These requirements do not
apply if (a) the board of directors approves the transaction and a majority of
the directors voting to approve the transaction are "continuing directors"
(defined as a director who was either (i) a director at the time the interested
shareholder became "interested" and who is not otherwise affiliated with such
shareholder, or (ii) a director designated (prior to his or her initial election
as a director) as a continuing director by a majority of the then continuing
directors or (b) the transaction is between Associated and a subsidiary of
Associated and no interested shareholder (together with such shareholder's
affiliates and associates) owns any of the outstanding shares of the subsidiary.
The foregoing provision may only be amended, modified or repealed by the
affirmative vote of not less than 80% of the outstanding shares and the non-
interested outstanding shares of Associated.
ADVANCE NOTICE OF PROPOSALS TO BE BROUGHT AT THE ANNUAL MEETING
The Company. The Company's Articles of Incorporation and By-laws do not
contain any provisions relating to advance notice of proposals to be brought
before an annual meeting.
Associated. Pursuant to Article II, Section 5 of Associated's By-laws, any
shareholder who intends to bring business before an annual meeting of
shareholders (other than nominations for directors) must provide Associated with
notice of such intention, the nature of such proposal and certain other
information regarding the shareholder bringing the proposal, not less than 60
nor more than 75 days prior to the meeting, or within 10 days from the date
notice or public disclosure of the date of such meeting is given, if such
announcement date is less than 70 days before the meeting date.
ADVANCE NOTICE OF NOMINATIONS OF DIRECTORS
The Company. The Company's Articles of Incorporation and By-laws do not
contain any provisions relating to advance notice of nominations of directors.
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Associated. Pursuant to Article II, Section 6 of Associated's By-laws, any
shareholder who intends to nominate directors for election at a meeting called
for that purpose must provide Associated with notice of such intention, certain
information regarding the proposed nominee and certain information regarding the
nominating shareholder, not less than 60 days nor more than 75 days prior to the
meeting, or within 10 days from the date notice or public disclosure of the date
of such meeting is publicly announced, if such announcement date is less than 70
days before the meeting date.
RESALE OF ASSOCIATED COMMON STOCK ISSUED PURSUANT TO THE MERGER
The Associated Common Stock issued pursuant to the Merger will be
registered under the Securities Act of 1933, as amended (the "Securities Act")
and be freely tradable under the Securities Act except for shares issued to any
shareholder of the Company who may be deemed to be an "affiliate" of the Company
for purposes of Rule 145 under the Securities Act. Each affiliate identified by
the Company will enter into an agreement with Associated providing that such
affiliate will be subject to Rule 145(d) of the Securities Act, and shall not
transfer any Associated Common Stock received in the Merger except in compliance
with the Securities Act. This Proxy Statement/Prospectus does not cover resales
of Associated Common Stock received by any person who may be deemed to be an
affiliate of the Company. The Company has concluded that the only affiliates of
the Company are its directors and executive officers and the Estate of Clarence
Bleser.
PRE-MERGER DIVIDEND POLICY
The Company. Pursuant to the Merger Agreement, the Company is prohibited
from declaring or paying any dividend on, or making any other distribution in
respect of, its outstanding shares of capital stock without the prior written
consent of Associated, except that in the event the Effective Time occurs after
December 20, 1998, the Company may, prior to the Effective Time, declare and pay
a cash dividend to holders of Company Common Stock not to exceed $2.00 per
share.
Associated. Associated expects to continue to declare, until the Effective
Time, its regularly scheduled dividends.
POST-MERGER DIVIDEND POLICY
It is the current intention of the Board of Directors of Associated to
continue to declare cash dividends on the Associated Common Stock following the
Merger. The dividend is currently in the amount of $0.29 per quarter or $1.16
per year, in each case per share. Shareholders should note that no such
dividends payable following the date hereof have currently been declared and
that future dividends will be determined by the Associated Board of Directors in
light of the earnings and financial condition of Associated and its subsidiaries
and other factors, including applicable governmental regulations and policies.
In that regard, Associated is a legal entity separate and distinct from its
banking and non-banking subsidiaries, and the principal sources of Associated's
income are dividends and interest from such subsidiaries. The payment of
dividends by Associated's banking subsidiaries is subject to certain
restrictions under applicable governmental regulations. See also "The Merger -
Pre-Merger Dividend Policy."
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CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company has agreed to carry on its
business, and the business of its subsidiaries, in the usual, regular and
ordinary course in substantially the same manner as conducted prior to the
execution of the Merger Agreement, subject to certain covenants and other
agreements agreed to by the Company in the Merger Agreement. See "Certain
Provisions of the Merger Agreement - Certain Covenants."
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Associated and the Company have received an opinion of Reinhart, Boerner,
Van Deuren, Norris & Rieselbach, s.c. that the Merger will qualify as a tax-free
reorganization under Section 368(a)(1)(A) of the Code and that each of
Associated and the Company will be a party to such reorganization within the
meaning of Section 368(b) of the Code. Accordingly, the Company and Associated
will recognize no gain or loss for federal income tax purposes as a result of
the Merger and no gain or loss will be recognized by any holder of the Company
Common Stock upon receipt of Associated Common Stock pursuant to the Merger
(except upon the receipt of cash in lieu of fractional shares of Associated
Common Stock, consideration received as a result of the exercise of dissenters'
rights or Cash Consideration paid to such shareholder). The Internal Revenue
Service ("Service") has not been asked to rule upon the tax consequences of the
Merger and such request will not be made. The opinion of Reinhart, Boerner, Van
Deuren, Norris & Rieselbach, s.c. will be based entirely upon the Code,
regulations now in effect thereunder, current administrative rulings and
practice, and judicial authority, all of which are subject to change (possibly
with retroactive effect). Unlike a ruling from the Service, an opinion of an
advisor is not binding on the Service and there can be no assurance, and none is
hereby given, that the Service will not take a position contrary to one or more
positions reflected herein or that the opinion will be upheld by the courts if
challenged by the Service. The tax treatment of each holder of Company Common
Stock will depend in part upon such shareholder's particular situation. Special
tax consequences not described below may be applicable to particular classes of
taxpayers, including financial institutions, insurance companies, tax-exempt
organizations, broker-dealers, persons who are not citizens or residents of the
United States or who are legal entities formed under the laws of jurisdictions
outside the United States, and holders of Company Common Stock who acquired
their shares through the exercise of employee stock options or otherwise as
compensation. This discussion also assumes that the holders of Company Common
Stock hold their Common Stock as a capital asset.
THIS DISCUSSION IS INTENDED FOR GENERAL PURPOSES ONLY AND IS NOT INTENDED
TO BE LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF COMPANY COMMON STOCK.
EACH SHAREHOLDER OF THE COMPANY IS URGED TO CONSULT HIS OR HER OWN TAX AND
FINANCIAL ADVISORS AS TO THE EFFECT OF SUCH FEDERAL INCOME TAX CONSEQUENCES ON
HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES AND ALSO AS TO ANY STATE,
LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT OF THE MERGER.
Based upon the opinion of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c., which in turn is based upon various representations and
subject to various assumptions and qualifications, the following federal income
tax consequences to the shareholders of the Company will result from the Merger:
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(i) Provided that the Merger of the Company with and into
Associated qualifies as a statutory merger under applicable law, the Merger
will qualify as a reorganization within the meaning of Section 368(a)(1)(A)
of the Code, and the Company and Associated will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code for
purposes of this reorganization.
(ii) No gain or loss will be recognized by the holders of the
Company Common Stock upon the exchange of the Company Common Stock solely
for Associated Common Stock pursuant to the Merger.
(iii) Upon the exchange of Company Common Stock for a combination of
Associated Common Stock and cash (other than cash received in lieu of
fractional shares of Associated Common Stock), a holder of Company Common
Stock will generally realize gain equal to the excess of the amount of cash
plus the fair market value of the Associated Common Stock received by the
holder of Company Common Stock over the adjusted tax basis of his or her
Company Common Stock, but such gain will be recognized for federal income
tax purposes only to the extent of the cash received. In general, this
recognized gain will be taxable to the holders of Company Common Stock as
capital gain, although it is possible that such gain will be taxable as
dividend income to a particular holder of Company Common Stock if the cash
received by him or her does not result in a "meaningful reduction" in the
percentage ownership of Associated Common Stock that he or she otherwise
would have received (see paragraph (ix) below). The holder of Company
Common Stock who receives both Associated Common Stock and cash in the
Merger will not recognize any loss on the exchange.
(iv) A holder of Company Common Stock who receives solely cash in
exchange for his or her Company Common Stock will be treated as having
exchanged such stock for cash in a redemption of his or her Company Common
Stock subject to Section 302 of the Code, and the holder of Company Common
Stock generally will recognize capital gain or loss equal to the difference
between the amount of cash received and the holder's tax basis in his or
her Company Common Stock (unless such holder is treated as constructively
owning Associated Common Stock after the Merger under the circumstances
described in paragraph (ix) below).
(v) A holder of Company Common Stock who perfects his or her
dissenters' rights under Wisconsin law and who receives payment in cash for
the "fair value" of his or her Company Common Stock will be treated as
having exchanged such stock for cash in a redemption subject to Section 302
of the Code, and the holder of Company Common Stock generally will
recognize capital gain or loss in such exchange equal to the difference
between the cash received and the tax basis of such stock (unless such
holder is treated as constructively owning Associated Common Stock after
the Merger under the circumstances described in paragraph (ix) below).
(vi) In the case of a holder of Company Common Stock who receives
solely Associated Common Stock in the Merger, the tax basis of the
Associated Common Stock received will be the same as the stockholder's tax
basis in the Company Common Stock surrendered in exchange therefor. In the
case of a holder of Company Common Stock who receives both Associated
Common Stock and cash (other than cash received in lieu of fractional
shares of Associated Common Stock), the tax basis of the Associated Common
Stock received will equal the stockholder's tax basis in the Company Common
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Stock exchanged therefor, decreased by the amount of any cash received and
increased by the amount of any gain recognized in the exchange.
(vii) The holding period of the Associated Common Stock received by a
holder of Company Common Stock pursuant to the Merger will include the
period during which the Company Common Stock exchanged therefor was held,
provided that the Company Common Stock surrendered was held as a capital
asset as of the time of the Merger.
(viii) The receipt by a holder of Company Common Stock of cash in lieu
of a fractional share of Associated Common Stock will be treated as if he
or she received such fractional share from Associated and then had it
redeemed for cash. Such receipt of cash will be treated under Section
302(b)(1) of the Code as full payment in exchange for the fractional share,
and the holder of Company Common Stock generally will recognize capital
gain or loss in such exchange equal to the difference between the cash
received and the portion of such stockholder's tax basis that is allocable
to the fractional share so exchanged.
(ix) In the case of holders who receive cash, or a combination of
cash and Associated Common Stock, in the Merger, the determination of
whether the gain received will be treated as capital gain or dividend
income depends upon whether, and to what extent, the exchange reduces the
holder's deemed percentage stock ownership of Associated Common Stock. For
purposes of this determination, the holder is treated as if he or she
received all Associated Common Stock in the Merger and then received cash
from Associated in a hypothetical redemption of those shares. The
hypothetical redemption will satisfy the requirement under Section 302 if
it (i) is "not essentially equivalent to a dividend" or (ii) has the effect
of a "substantially disproportionate" redemption of Associated Common
Stock. The deemed redemption, generally, will be "substantially
disproportionate" with respect to a holder of shares of Company Common
Stock if after the Merger the holder will own less than 50% of all
outstanding Associated Common Stock and the holder's percentage ownership
---
of Associated Common Stock after the Merger is less than 80% of what the
holder's percentage ownership of Associated Common Stock would have been if
no cash elections had been made by Company shareholders in connection with
the Merger. Whether the redemption is "not essentially equivalent to a
dividend" with respect to a holder of shares of Company Common Stock will
depend on the holder's individual facts and circumstances. At a minimum,
the deemed redemption must result in a "meaningful reduction" in the
holder's deemed and actual constructive percentage stock ownership of
Associated. In applying the foregoing tests, a holder is deemed under
Section 318 of the Code to own stock owned and, in some cases,
constructively owned by certain family members, by certain estates and
trusts to which the holder is a beneficiary, and by certain affiliated
entities, as well as stock subject to an option actually or constructively
owned by the holder or such other persons.
In rendering its tax opinion, Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c. will rely on certain written representations as to factual
matters made by appropriate officers of Associated and the Company. Such
representations are customary for opinions of this type; however, this tax
opinion cannot be relied upon if any such representation is, or later becomes,
inaccurate. One particularly important representation will be that the
aggregate fair market value of the Associated Common Stock issued in the Merger
will represent not less than 50% of the aggregate value of the Merger
Consideration as of the effective time (taking into account any
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cash paid in lieu of fractional shares of Associated Common Stock or paid to
holder of Company Common Stock who dissent from the Merger) such that the Merger
will satisfy the "continuity of interest" requirement applicable to tax-free
reorganizations under Section 368 of the Code.
Backup Withholding. Any cash received in the Merger by a holders of
Company Common Stock may be subject to backup withholding at a rate of 31%.
Backup withholding will not apply, however, to a taxpayer who (i) furnishes a
correct taxpayer identification number ("TIN") and certifies that he or she is
not subject to backup withholding on Form W-9 (or an appropriate substitute
form), (ii) provides a certificate of foreign status on Form W-8 (or an
appropriate substitute form), or (iii) is otherwise exempt from backup
withholding. The Service may impose a $50 penalty upon any taxpayer who fails
to provide the correct TIN, as required.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE
A COMPLETE ANALYSIS OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A DECISION OF A
SHAREHOLDER OF THE COMPANY WHETHER TO VOTE IN FAVOR OF THE MERGER, OR WHETHER TO
MAKE A STOCK ELECTION OR A CASH ELECTION. BECAUSE CERTAIN TAX CONSEQUENCES OF
THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH HOLDER
OF COMPANY COMMON STOCK, EACH HOLDER IS URGED TO CONSULT HIS OR HER OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE
MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX
LAWS.
The foregoing is only a general description of certain material federal
income tax consequences of the Merger for holders of the Company Common Stock
who are citizens or residents of the United States and who hold their shares as
capital assets, without regard to the particular facts and circumstances of the
tax situation of each holder of the Company Common Stock. The summary set forth
above does not purport to be a complete analysis of all potential tax effects of
the transactions contemplated by the Merger Agreements or the Merger itself. No
information is provided herein with respect to the application and effect of
state, local and foreign tax laws and the possible effects of changes in federal
laws or other tax laws.
ANTICIPATED ACCOUNTING TREATMENT
The business combination resulting from the Merger will be accounted for
under the purchase method of accounting. Under this method of accounting, the
total consideration paid in the Merger will be allocated among the Company's
assets and liabilities based on the fair values of the assets acquired and the
liabilities assumed and any amount of consideration in excess of the total fair
value of such assets and liabilities will be recorded as goodwill. The
consolidated financial statements of Associated will include the results of
operations of the Company from the date of acquisition.
DISSENTERS' RIGHTS
Under the provisions of Subchapter XIII of the WBCL, a copy of which is
attached to this Proxy Statement/Prospectus as Exhibit C and which provisions
are incorporated herein by reference, any holder of record or beneficial holder
of Company Common Stock has the right to dissent from the Merger and demand
payment of the "fair value" of his or her shares in cash as determined pursuant
to Subchapter XIII of the WBCL ("Dissenters' Rights"). Set forth below is
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a summary of the procedures relating to the exercise of Dissenters' Rights. This
summary does not purport to be a complete statement of the provisions of
Subchapter XIII of the WBCL. Any shareholder who wishes to assert Dissenters'
Rights must deliver a written notice of his or her intent to exercise such right
to Citizens Bankshares, Inc., 129 East Division Street, P.O. Box 456, Shawano,
Wisconsin 54166-0456, Attention Secretary, before the vote on the Merger
Agreement is taken at the special meeting. A PROXY OR VOTE AGAINST THE MERGER
AGREEMENT WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN NOTICE OF INTENT TO
DEMAND PAYMENT FOR PURPOSES OF ASSERTING DISSENTERS' RIGHTS.
A record holder of Company Common Stock may assert Dissenters' Rights as to
fewer than all shares registered in that shareholder's name only if the holder
dissents with respect to all shares beneficially owned by any one person and
notifies the Company in writing of the names and addresses of each person on
whose behalf the shareholder asserts such Dissenters' Rights.
A beneficial shareholder may assert Dissenters' Rights as to shares held on
the shareholder's behalf only if, in addition to meeting the other requirements
to dissent, the beneficial shareholder (i) submits to the Company the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts Dissenters' Rights and (ii) asserts Dissenters'
Rights with respect to all shares of which the shareholder is the beneficial
shareholder or over which the beneficial shareholder has power to direct the
vote.
If the Merger Agreement is approved by the requisite vote of holders of the
Company Common Stock, the Company is required to send a notice (the "Dissenters'
Notice") to all dissenting shareholders containing payment demand and stock
certificate surrender information (the "Payment Demand") within 10 days after
such approval. The return date (the "Payment Demand Date") specified by the
Company for receiving the Payment Demand from dissenting shareholders may not be
less than 30 nor more than 60 days after the date on which the Dissenters'
Notice was first sent. Upon receipt of the Dissenters' Notice, each dissenting
shareholder must return his Payment Demand and Certificate no later than the
Payment Demand Date as provided in the Dissenters' Notice and certify whether he
or she acquired beneficial ownership of the shares prior to the first public
announcement of the terms of the Merger on February 17, 1998. A Payment Demand
may not be withdrawn without the Company's consent.
Upon effecting the Merger, within 60 days after the Payment Demand Date,
the Company will pay each dissenting shareholder who properly complied with the
statutory requirements of Subchapter XIII of the WBCL, the amount that the
Company estimates to be the fair value of such dissenting shareholder's shares,
plus accrued interest from the Effective Time; provided that, with respect to
shares acquired after the first public announcement of the Merger, the Company
may elect to withhold payment until either such shareholder accepts the
Company's offer of fair value or a court determines the fair value of such
shares.
If the Merger is not effected within 60 days of the Payment Demand Date,
the Company will return all deposited certificates to dissenting shareholders.
If the Merger is thereafter effected, the Company will send a new Dissenters'
Notice within 10 days of effecting the Merger and repeat the payment demand
procedure described above.
If any dissenting shareholder is dissatisfied with the Company's
determination of "fair value," such dissenting shareholder may notify the
Company in writing of his or her own estimate of the fair value of his or her
shares and the amount of interest due. A dissenting shareholder must assert
this right within 30 days after the Company makes or offers payment for
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his or her shares or the right is waived. The Company may either accept such
dissenting shareholder's estimate of fair value or commence a proceeding in the
Wisconsin Circuit Court of Shawano County to determine the fair value of the
shares of all dissenting shareholders whose own estimates of fair value are not
accepted by the Company.
In the event any holder of the Company Common Stock fails to perfect his or
her rights to dissent by failing to comply strictly with the applicable
statutory requirements of Subchapter XIII of the WBCL, he or she will be bound
by the terms of the Merger Agreement and will not be entitled to payment for his
or her shares under Subchapter XIII of the WBCL. ANY HOLDER OF COMPANY COMMON
STOCK WHO WISHES TO OBJECT TO THE TRANSACTION AND DEMAND PAYMENT IN CASH FOR HIS
OR HER SHARES SHOULD CONSIDER CONSULTING HIS OR HER OWN LEGAL ADVISOR.
Because an executed Proxy relating to Company Common Stock on which no
voting direction is made will be voted at the Special Meeting in favor of the
Merger, a dissenting shareholder who wishes to have his or her shares of Company
Common Stock represented by proxy at the Special Meeting but preserve his or her
dissenters' rights must mark his or her Proxy either to vote against the Merger
or to abstain from voting thereon, in addition to the foregoing requirements.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Archie Amundson, Vice President of the Company, and another officer of the
Finance Company, each entered into a one-year employment agreement in 1997. The
terms of these employment agreements are automatically extended, in the event of
a "change of control" of the Company (defined to include transactions such as
the Merger), for a period ending one year after the effective date of the change
of control. Another officer of the Bank has an employment agreement through
August 2, 1999, with provisions for payment of the balance of that agreement if
employment is discontinued after the Bank is sold.
OTHER RELATED PARTY TRANSACTIONS
In the ordinary course of conducting their banking and financial services
businesses, each of Associated, the Company and their respective subsidiaries,
may do business and engage in banking transactions with the other party and its
subsidiaries, which may include but not be limited to interests or participation
in loans and interbank advances.
MANAGEMENT AFTER THE MERGER
In the Merger, the Company will be merged into Associated and the separate
corporate existence of the Company will cease. Following the Merger, the Bank
will merge into Associated Bank Green Bay, N.A., a wholly owned subsidiary of
Associated. Associated will thereby acquire control of the Bank and the Bank
will operate under the name "Associated Bank Green Bay." The finance Company
will continue to operate as a subsidiary of Associated..
The officers and directors of Associated prior to the Merger will continue
as officers and directors of the surviving corporation. The directors of the
Bank prior to the Effective Time will continue as directors after the Effective
Time until their successors shall have been duly elected and qualified.
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DIRECTORS OF ASSOCIATED
Information regarding Associated's directors is set forth below.
CLASS A DIRECTORS WITH TERMS EXPIRING APRIL 1999
JOHN S. HOLBROOK, JR. has been a director of Associated since May 1992. He is a
partner in the Madison, Wisconsin, office of the Quarles & Brady law firm in
which he has practiced since 1964. Quarles & Brady has performed legal services
for Associated and its respective subsidiaries. From 1990 to 1992, he was a
director of F&M Financial Services Corporation, a bank holding company acquired
by Associated in 1992. Age: 58.
WILLIAM R. HUTCHINSON has been a director of Associated since April 1994. He
has been Vice President, Financial Operations, of Amoco Corporation, Chicago,
Illinois, since October 1993, and has held the positions of Treasurer,
Controller, and Vice President-Mergers, Acquisitions & Negotiations with Amoco
Corporation since 1981. He has been a director of Associated Bank Chicago, an
affiliate of Associated, since 1981. Mr. Hutchinson also serves as a director
of the Smith Barney Mutual Fund Group. Age: 55.
DR. GEORGE R. LEACH has been a director of Associated since October 1997. He is
presently retired. Before retirement in 1993, he practiced as an optometrist in
Stevens Point, Wisconsin, since 1949. He is a Fellow Emeritus of the American
Academy of Optometry and a past President of the Wisconsin Optometric
Association. From 1965 to 1997 he served on the Board of Directors of First
Financial Corporation, a thrift holding company that merged with Associated in
1997. Age: 74.
JOHN C. SERAMUR has been a director of Associated since October 1997. He has
served as Vice Chairman of Associated since October 1997. He has been
President, Chief Executive Officer, and Chief Operating Officer of First
Financial Corporation, a thrift holding company that merged with Associated in
1997, and its subsidiary, First Financial Bank, since 1966. He served as
President and Chief Executive Officer of one of the predecessor institutions to
the Bank. He served as a director of the Federal Home Loan Bank of Chicago, is
a former member of the Savings Association Insurance Fund Industry Advisory
Committee, and is past Chairman of the Wisconsin League of Financial
Institutions. Mr. Seramur also serves as a director of Northland Cranberries,
Inc. Age: 55.
CLASS B DIRECTORS WITH TERMS EXPIRING APRIL 2000
HARRY B. CONLON has been a director of Associated since 1975. He has served as
Chairman of the Board, President, and Chief Executive Officer of Associated
since 1987 and was President and Chief Executive Officer from 1975 to 1987.
Age: 62.
RONALD R. HARDER has been a director of Associated since July 1991. He has been
the President and Chief Executive Officer of Jewelers Mutual Insurance Company,
Neenah, Wisconsin, since 1982 and has been an officer since 1973. Jewelers
Mutual Insurance Company is a mutual insurance company providing insurance
coverage nationwide for jewelers in retail, wholesale, and manufacturing, as
well as personal jewelry insurance coverage for individuals owning jewelry. He
is a director of Associated Bank, N.A., Neenah, an affiliate of Associated, and
is Chairman of its Trust Committee. Age: 54.
RALPH R. STAVEN has been a director of Associated since October 1997. He served
as Chairman
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of the Board of First Financial Corporation, a thrift holding company that
merged with Associated in 1997, and First Financial Bank from 1984 through 1988,
he was also Chairman of the Board, President, and Chief Executive Officer of a
predecessor savings institution to the Bank and was Chief Executive Officer of
First Financial Corporation and First Financial Bank from 1984 through 1986. Mr.
Staven has over 48 years of experience in the thrift industry. He has served as
President of the Wisconsin Savings League (1973), as director of the Federal
Home Loan Bank of Chicago (1973-1977), and as the representative from the
Chicago District on the Federal Home Loan Bank Board Advisory Committee (1976-
1979). Age: 76.
J. DOUGLAS QUICK has been a director of Associated since July 1991. He has been
President and Chief Executive Officer of Lakeside Foods, Inc., Manitowoc,
Wisconsin, since 1986. Lakeside Foods, Inc. is a food processor of primarily
canned and frozen vegetables. He has been a director of Associated Bank
Lakeshore, National Association, an affiliate of Associated, since 1986. Age:
52.
NORMAN L. WANTA has been a director of Associated since October 1997. He is a
retired attorney. From 1946 through 1982, he engaged in the general practice of
law in the City of Stevens Point and served as corporate counsel to one of the
predecessor savings institutions of First Financial Bank for 17 years. From
1965 to 1997 he served on the Board of Directors of First Financial Corporation,
a thrift holding company that merged with Associated in 1997. Age: 75.
CLASS C DIRECTORS WITH TERMS EXPIRING APRIL 2001
ROBERT S. GAISWINKLER has been a director of Associated since October 1997. He
has been Chairman of the Board of First Financial Bank since 1988. From 1977 to
1997 he served on the Board of Directors of First Financial Corporation, a
thrift holding company that merged with Associated in 1997. From 1977 through
March 1988, he served as President and Chief Executive Officer of National
Savings & Loan Association, which merged into First Financial Bank at such time.
He is past Chairman of America's Community Bankers and former member of the
Advisory Committees of the Federal Home Loan Bank Board and Federal National
Mortgage Association. He is also a past Chairman of the Board of Directors of
Channels 10/36 Friends, Inc., a citizens group supporting public broadcasting.
Mr. Gaiswinkler also served as a member of the State of Wisconsin Savings and
Loan Review Board. Age: 66
ROBERT C. GALLAGHER has been a director of Associated since January 1982. He
has served as Vice Chairman of Associated since July 1996 and as Executive Vice
President since January 1982. He has served as Chairman and Chief Executive
Officer of Associated Bank Green Bay, National Association, an affiliate of
Associated, since 1985. He had served as President since 1982 and has been a
director since October 1980. Mr. Gallagher also serves as a director of WPS
Resources Corporation. Age: 59.
ROBERT P. KONOPACKY has been a director of Associated since October 1997. He is
the retired President of Mid-State Photo, Inc., which was merged into a
subsidiary of Fuqua Industries. Mr. Konopacky was President of Mid-State
Distributors, a wholesale beverage distributor in Stevens Point, Wisconsin, from
1974 through 1987. From 1978 to 1997 he served on the Board of Directors of
First Financial Corporation, a thrift holding company that merged with
Associated in 1997. Age: 74.
JOHN C. MENG has been a director of Associated since January 1991 and has been a
director of Associated Bank Green Bay, National Association, an affiliate of
Associated, since January
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1988. He has been President, Chief Executive Officer, and Director of Schreiber
Foods, Inc., Green Bay, Wisconsin, since December 1989. Schreiber Foods, Inc.
markets cheese and bacon products to the food service industry and national
retailers. Prior to 1989, he was President and Chief Operating Officer of
Schreiber Foods, Inc. Age: 53.
JOHN H. SPROULE has been a director of Associated since October 1997. He has
been retired from Envirex, Inc., a Rexnord Company, since May 1, 1987, after
more than 34 years of service to Rexnord. He was President of Envirex, Inc.,
Waukesha, Wisconsin, a manufacturer of waste and waste water treatment
equipment, from 1983 through October 1986. From 1978 until September 1983, he
was Executive Vice President and General Manager of Envirex, Inc. From 1977 to
1997 he served on the Board of Directors of First Financial Corporation, a
thrift holding company that merged with Associated in 1997. Age: 70.
EXECUTIVE OFFICERS OF ASSOCIATED
Information regarding the executive officers of Associated is set forth
below.
<TABLE>
<CAPTION>
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
---- -------------------------- ----------------
<S> <C> <C>
Harry B. Conlon Chairman, President, Chief Executive Officer and Director March 1, 1975
Age: 62 of Associated Banc-Corp
Robert C. Gallagher Vice Chairman of Associated Banc-Corp; Chairman and Chief April 28, 1982
Age: 59 Executive Officer of Associated Bank Green Bay (affiliate)
Prior to April 1996, Executive Vice President and
Director of Associated Banc-Corp; Chairman, President and
Chief Executive Officer of Associated Bank Green Bay
(affiliate)
John C. Seramur Vice Chairman of Associated Banc-Corp; President and Chief October 27, 1997
Age: 55 Executive Officer of First Financial Bank (affiliate)
Prior to October 1997, President and Chief Executive
Officer of
First Financial Corporation and President and Chief
Executive
Officer of First Financial Bank
Brian R. Bodager Chief Administrative Officer, General Counsel and July 22, 1992
Age: 42 Corporate Secretary of Associated Banc-Corp
Joseph B. Selner Senior Vice President and Chief Financial Officer of January 25, 1978
Age: 51 Associated Banc-Corp
Arthur E. Olsen, III Vice President-General Auditor of Associated Banc-Corp July 28, 1993
Age: 46
Prior to July 1993, Senior manager of a national public
accounting firm
Mary Ann Bamber Senior Vice President-Director of Retail Banking of January 22, 1997
Age: 47 Associated Banc-Corp
From January 1996 to January 1997, Independent consultant
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
---- -------------------------- ----------------
<S> <C> <C>
From January 1996 to January 1997, Senior Officer of an
Iowa-based bank
Prior to January 1996, Senior Officer of a Minnesota-based
holding company
Robert J. Johnson Vice President-Director of Human Resources of Associated January 22, 1997
Age: 52 Banc-Corp
Prior to January 1997, Officer of a Wisconsin
manufacturing company
Donald E. Peters Director of Systems and Operations of Associated October 27, 1997
Age: 48 Banc-Corp; Executive Vice President of First Financial
Bank (affiliate)
Prior to October 1997, Executive Vice President of First
Financial Corporation; Executive Vice President of First
Financial Bank (affiliate)
John P. Evans Chief Executive Officer and Director of Associated Bank August 16, 1993
Age: 48 North (affiliate)
Prior to July 1993, Officer of a Wisconsin bank
David J. Handy President, Chief Executive Officer and Director of May 31, 1991
Age: 58 Associated Bank, National Association (affiliate)
Michael B. Mahlik Executive Vice President, Managing Trust Officer, and January 1, 1991
Age: 45 Director of Associated Bank, National Association
(affiliate); President, Chief Executive Officer, and
Director of Associated Trust Company (subsidiary)
George J. McCarthy President, Chief Executive Officer, and Director of November 11, 1983
Age: 47 Associated Bank Chicago (affiliate)
Mark J. McMullen Executive Vice President and Director of Associated Bank June 2, 1981
Age: 49 Green Bay (affiliate)
Randall J. Peterson President and Director of Associated Bank Green Bay August 2, 1982
Age: 52 (affiliate)
Prior to July 1996, Executive Vice President and Director
of Associated Bank Green Bay (affiliate)
Gary L. Schaefer President and Director of Associated Bank Madison March 1, 1995
Age: 48 (affiliate)
Prior to March 1995, Senior Officer of a Wisconsin bank
Thomas R. Walsh President, Chief Executive Officer, and Director of January 1, 1994
Age: 40 Associated Bank Lakeshore (affiliate)
From September 1992 to January 1994, Senior Officer of
Associated Bank Lakeshore (affiliate)
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
---- -------------------------- ----------------
<S> <C> <C>
Gordon J. Weber President, Chief Executive Officer and Director of December 15, 1993
Age: 50 Associated Bank Milwaukee (affiliate); Director of
Associated Bank Madison (affiliate)
Prior to December 15, 1993, President, Chief Executive
Officer and Director of Associated Bank Lakeshore
(affiliate)
</TABLE>
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, which is attached as Exhibit A to this Proxy Statement/Prospectus and
two amendments to the Merger Agreement which are attached as Exhibit A-1 and
Exhibit A-2 to this Proxy Statement/Prospectus. The Merger Agreement is
incorporated herein by reference. Such summary is qualified in its entirety by
reference to the Merger Agreement.
THE MERGER
The Merger Agreement provides that, following the approval of the Merger
Agreement by the shareholders of the Company and the satisfaction or waiver of
the other conditions to the Merger, the Company will be merged with and into
Associated. If the Merger Agreement is approved by the shareholders of the
Company, the Merger will become effective upon the Effective Time.
At the Effective Time, pursuant to the Merger Agreement, each outstanding
share of the Company Common Stock will be converted into the right to receive
either:
(1) 33.75 shares of Associated Common Stock (subject to the provisions
with respect to fractional shares described below); or
(2) Cash Consideration in an amount equal to 33.75 multiplied by the
average closing prices of a share of Associated Common Stock as quoted on the
Nasdaq National Market during the ten-day trading period ending on the business
day prior to the date of the Special Meeting.
Pursuant to the Merger Agreement, the aggregate amount of the Total Cash
Payments may not exceed 50% of the total Merger Consideration. For these
purposes, the cash paid to Dissenting Shareholders will be deemed to equal the
product of the number of shares held by Dissenting Shareholders multiplied by
the greater of (a) the Cash Consideration or (b) the product of 33.75 multiplied
by the average of the high and low trading prices of the Associated Common Stock
as quoted on the Nasdaq National Market on the Effective Time. Also, for these
purposes, the total Merger Consideration will be deemed to be equal to the sum
of (a) the Total Cash Payments and (b) the product of the number of whole shares
of Associated Common Stock issued in the merger multiplied by the average of the
high and low prices of the Associated Common Stock as quoted on the Nasdaq
National Market on the Effective Time. With regard to the treatment of
fractional share interests, see "The Merger - Conversion of Shares; Procedures
for Exchange of Certificates; Fractional Shares."
49
<PAGE>
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties
relating to, among other things, (i) each of Associated's and the Company's and
their respective subsidiaries' organization and similar corporate matters; (ii)
each of Associated's and the Company's capital structure; (iii) authorization,
execution, delivery, performance and enforceability of the Merger Agreement and
other related matters; (iv) documents filed by Associated with the Commission
and each of Associated and the Company with the Federal Reserve Board and state
banking authorities and the accuracy of information contained therein; (v) the
accuracy of information supplied by each of Associated and the Company in
connection with the Registration Statement and this Proxy Statement/Prospectus;
(vi) compliance with laws including employment and lending laws; (vii) no
material pending or threatened litigation except as otherwise disclosed in
filings by Associated with the Securities and Exchange Commission (the
"Commission") and the Company in the regulatory reports; (viii) filing of tax
returns and payment of taxes; (ix) certain material contracts and contracts
relating to certain employment, consulting and benefits matters of the Company;
(x) matters relating to retirement and other employee plans of the Company; (xi)
the absence of any burdensome contracts, agreements or restrictions; (xii)
absence of certain material changes or events since December 31, 1996, relating
to the occurrence of a material adverse effect in the business operations,
properties (including intangible properties), condition (financial or
otherwise), assets or liabilities (including contingent liabilities) of
Associated or its subsidiaries, taken as a whole, and the Company or its
subsidiaries, taken as a whole; (xiii) maintenance by the Company of books of
account and accounting controls, loan documentation and disclosure; (xiv) no
action taken that would prevent the Merger from qualifying as a reorganization
under Section 368(a)(1)(A) of the Code; (xv) certain environmental matters
relating to the properties of the Company; (xvi) good title to the properties of
the Company and its subsidiaries, free of liens except as specified; (xvii)
certain insurance matters relating to the Company; (xviii) absence of
substandard or related party loans by the Bank; and (xix) disclosure regarding
certain branch sales by the Bank (the "Branch Sales").
CERTAIN COVENANTS
Pursuant to the Merger Agreement, Associated and the Company have each
agreed that prior to the Effective Time (and unless the prior written consent of
the other shall have been obtained) each of them and their respective
subsidiaries will operate their respective businesses in a manner that does not
violate any law. In addition, the Company has agreed that prior to the
Effective Time, the Company will not propose or adopt any amendments to its
corporate charter or bylaws in any way materially adverse to Associated.
Pursuant to the Merger Agreement, the Company has also agreed that prior to
the Effective Time (and unless the prior written consent of Associated shall
have been obtained) the Company and its subsidiaries will (i) carry on business
in the usual, regular and ordinary course consistent with past practice, (ii)
use reasonable efforts to preserve intact their business organization and assets
(and all rights associated therewith), maintain the services of their officers
and key employees and maintain their relationships with customers, (iii) use
reasonable efforts to maintain and keep their properties in good repair and
condition, (iv) use reasonable efforts to keep all insurance and bonds in full
force and effect, (v) perform in all material respects all obligations under all
material contracts, leases and documents relating to or affecting the assets,
properties and business of the Company and its subsidiaries, (vi) purchase and
sell securities in accordance with certain guidelines, (vii) maintain as of
December 31, 1997 and until the Effective Time, a loan loss reserve and reserve
against "other real estate owned" of not less
50
<PAGE>
than $4,085,000, (viii) comply with certain capital requirements and (ix) comply
with and perform in all material respects all obligations and duties imposed by
all applicable laws. The Company has also agreed that prior to the Effective
Time (and unless the prior written consent of Associated shall have been
obtained), neither the Company nor its subsidiaries will: (i) grant any increase
in compensation or bonuses (other than as specified in the Merger Agreement) or
retirement benefits to any employee or otherwise adopt, enter into, amend or
modify any employee benefit plan, or enter into or amend any employment,
severance or similar agreement with any director or officer (other than as is
consistent with the normal severance policy of the Company); (ii) declare or pay
any dividend on its outstanding shares of capital stock, except that in the
event the Effective Time occurs after December 20, 1998, the Company may, prior
to the Effective Time, declare and pay a cash dividend to holders of Company
Common Stock not to exceed $2.00 per share; (iii) redeem, purchase or otherwise
acquire any shares of its capital stock; (iv) merge or consolidate with or into
any other corporation or bank; (v) purchase or otherwise acquire any assets or
stock of any corporation, bank or other business (except for portfolio
investments in the ordinary course of business); (vi) liquidate, sell, dispose
of, or encumber any assets or acquire any assets, other than in the ordinary
course of business consistent with past practice; (vii) split, combine or
reclassify any of the capital stock of the Company or issue, authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock; (viii) issue, deliver, award,
grant or sell, or authorize or propose the issuance, delivery, award, grant or
sale of, any shares of any class of the Company Common Stock or any rights,
warrants or options to acquire, any such shares; (ix) propose or adopt any
amendments to its corporate charter or bylaws in any way materially adverse to
Associated; (x) purchase any shares of Associated Common Stock (except in a
fiduciary capacity for the account of its customers); (xi) change any of its
methods of accounting, or methods of reporting income or deductions for federal
income tax purposes, in effect at December 31, 1996; (xii) except for the
required loan loss reserve, change any lending, investment, liability management
or other material policies concerning the business or operations of the Company
or any subsidiary in any material respect; (xiii) organize any new subsidiaries
or enter into any new non-bank line of business or make any material changes in
its operations; (xiv) incur or assume any material obligation or liability, or
make any loan (excluding loan renewals of a loan not then classified as
"substandard," "doubtful," "loss," "other loans especially mentioned" or any
comparable classifications by the Company, the Bank or banking regulators) or
investment in an amount greater than $100,000; (xv) assume, guarantee, endorse
or otherwise become liable or responsible for the obligations of any other
person or entity; (xvi) mortgage, license, pledge or grant a security interest
in any of its material assets or allow to exist any material lien thereon,
except (A) liabilities and obligations incurred in the ordinary course of
business consistent with past practices and in amounts not material to the
Company or its subsidiaries, and (B) as may be required under existing
agreements to which the Company or any subsidiary is a party; (xvii) acquire
assets (including equipment) or securities in excess of $25,000 in the aggregate
(excluding loans to customers and investments permitted above); (xviii) pay,
discharge, or satisfy any debts or claims not in the ordinary course of business
and consistent with past practices; (xix) settle any claim, action, suit,
litigation, proceeding, arbitration, investigation or controversy of any kind,
for any amount in excess of $25,000 or in any manner which would restrict in any
material respect the operations or business of the Company or its subsidiaries;
(xx) purchase any new financial product or instrument which involves entering
into a contract with a term of six months or longer; or (xxi) take any action or
fail to take any action which individually or in the aggregate can be expected
to have a material adverse effect (as defined in the Merger Agreement) on the
Company or its subsidiaries, taken as a whole.
51
<PAGE>
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that the Company and its respective
subsidiaries will not initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to any Competing Transaction (as defined below) or negotiate
with any person in furtherance of such inquiries or to obtain a Competing
Transaction, or agree to or endorse any Competing Transaction, or authorize or
permit any of its officers, directors or employees or any investment banker,
financial advisor, attorney, accountant or other representative retained by it
or any of its subsidiaries to take any such action. The Company must promptly
notify Associated orally and in writing of all of the relevant details relating
to all inquiries and proposals which it may receive relating to any of such
matters. Notwithstanding the foregoing, the Board of Directors of the Company
is not prohibited from furnishing or permitting any of its officers, directors,
employees, investment bankers, financial advisors, attorneys, accountants or
other representatives to furnish information to any party that requests
information as to the Company if the Board of Directors of the Company, after
consultation with and based upon the written advice of independent legal
counsel, determines in good faith that such action is required for the Board of
Directors of the Company to comply with its fiduciary duties to shareholders
imposed by law, and if prior to furnishing such information to such party, the
Company receives from such party an executed confidentiality agreement in
reasonably customary form and provides Associated seven days' notice of the
Company's intent to furnish such information.
For purposes of the Merger Agreement, a "Competing Transaction" means any
of the following involving the Company or any of the Company's subsidiaries:
(i) any merger, consolidation, share exchange, business combination, or other
similar transactions; (ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of 10% or more of assets in a single transaction or series
of transactions, excluding from the calculation of such percentage any such
transactions undertaken in the ordinary course of business and consistent with
past practice and excluding the Branch Sales; (iii) any sale of 10% or more of
shares of capital stock (or securities convertible or exchangeable into or
otherwise evidencing, or any agreement or instrument evidencing, the right to
acquire capital stock); (iv) any tender offer or exchange offer for 10% or more
of outstanding shares of capital stock; (v) any solicitation of proxies in
opposition to approval by the Company's shareholders of the Merger; (vi) the
filing of an acquisition application (or the giving of acquisition notice)
whether in draft or final form under the BHC Act or the Change in Bank Control
Act with respect to the Company or its subsidiaries; (vii) any person shall have
acquired beneficial ownership or the right to acquire beneficial ownership of,
or any "group" (as such term is defined under Section 13(d) of the Exchange Act
and the rules and regulations promulgated thereunder) shall have been formed
which beneficially owns or has the right to acquire beneficial ownership of, 10%
or more of the then outstanding shares of capital stock; or (viii) any public
announcement of a proposal, plan or intention to do any of the foregoing.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of each party to effect the Merger is subject to
various conditions which include, in addition to other customary closing
conditions, the following: (i) the Merger shall have been approved by the
holders of the Company Common Stock; (ii) the Registration Statement shall have
been declared effective by the Commission under the Securities Act (and no stop
order suspending the effectiveness of the Registration Statement shall have been
issued) and Associated shall also have received all other federal and state
securities
52
<PAGE>
permits and authorizations necessary to pay the Cash Consideration and issue
Associated Common Stock pursuant to the Merger Agreement; (iii) the Merger shall
have been approved by the Federal Reserve Board, the Wisconsin Department and
all other required regulatory agencies, which approvals shall not contain any
condition which is not reasonably satisfactory to Associated or the Company, and
any waiting periods with respect to the Merger shall have expired; and (iv)
there shall not be any injunction or restraining order preventing the
consummation of the Merger in effect.
In addition, Associated's or the Company's respective obligation to effect
the Merger is subject to one or more of the following additional conditions (any
of which may be waived by such party): (i) the representations and warranties
of the other party to the Merger Agreement shall be true and correct in all
material respects and the other party shall have performed in all material
respects all agreements and covenants required to be performed by it under the
Merger Agreement and any agreements entered into in connection therewith, and
the other party shall have obtained all material consents and approvals required
to consummate the Merger; (ii) there shall not be any pending action, proceeding
or investigation before any court or administrative agency or by any government
agency or any other person (a) challenging or seeking material damages in
connection with the Merger, or the conversion of the Company Common Stock into
Associated Common Stock pursuant to the Merger, or (b) seeking to restrain,
prohibit or limit the exercise of full rights of ownership or operation by
Associated or its subsidiaries of all or any portion of the business or assets
of the Company or any of its subsidiaries, which in either case is reasonably
likely to have a material adverse effect on either the Company and its
subsidiaries, taken as a whole, or Associated and its subsidiaries, taken as a
whole; (iii) the parties shall have received the opinion of independent counsel
to Associated that the Merger will be treated for federal income tax purposes as
a "reorganization" within the meaning of Section 368(a)(1)(A) of the Code (see
"The Merger - Certain Material Federal Income Tax Consequences," above); (iv)
the number of shares of Associated Common Stock which would have been issuable
pursuant to the Merger Agreement that will not be issued due to the exercise of
dissenters' rights is not more than 10% of the maximum aggregate number of
shares of Associated Common Stock which could be issuable as a result of the
Merger; (v) Associated and the Company shall have received the opinion of
counsel regarding certain issues under the Securities Act and the WBCL; (vi)
Associated shall have received from each affiliate of the Company a signed
letter regarding certain restrictions on the resale of Associated Common Stock
under Rule 145 of the Securities Act; (vii) receipt by Associated of a written
environmental evaluation by Associated's environmental consultant of the
Company's real property stating that the Company's property complies with
environmental laws and that there are no material contingent liabilities or that
the Company shall have taken reasonably appropriate action in response to any
environmental condition identified by Associated's environmental consultant; and
(viii) receipt by the Company from the Company Financial Advisor of an opinion,
dated as of the date of this Proxy Statement/Prospectus, to the effect that the
Merger Consideration is fair to the Company shareholders from a financial point
of view (See "The Merger - Opinion of Financial Advisor to the Company").
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time by the applicable Board of Directors, whether before or after approval of
the matters presented in connection with the Merger by the shareholders of the
Company: (i) by mutual consent of Associated and the Company; (ii) by either
the Company or Associated (x) if there has been a breach in any material respect
of any representation, warranty, covenant or agreement on the part of the
Company, on the one hand, or Associated, on the other hand, respectively, set
forth in the
53
<PAGE>
Merger Agreement, or (y) if any representation or warranty of the Company, on
the one hand, or Associated, on the other hand, respectively, shall be
discovered to have become untrue in any material respect, in either case which
breach or other condition has not been cured within 10 business days following
receipt by the non-terminating party of notice of such breach or other condition
(provided that the Merger Agreement may not be terminated by the breaching party
or party making any representation or warranty which shall have become untrue in
any material respect); (iii) by either Associated or the Company if any
permanent injunction preventing the consummation of the Merger shall have become
final and nonappealable; (iv) by either Associated or the Company if the Federal
Reserve Board or the Wisconsin Department denies approval of the Merger and
neither Associated nor the Company has, within 30 days after the entry of such
order denying approval, filed a petition seeking review of such order as
provided by applicable law; (v) by either Associated or the Company if the
Merger has not been consummated by January 31, 1999 for a reason other than the
failure of the terminating party to comply with its obligations under the Merger
Agreement; or (vi) by Associated or the Company if all of the conditions to the
terminating party's obligation to consummate the Merger have not been satisfied
on or before January 31, 1999.
In the event of termination of the Merger Agreement by either the Company
or Associated, other than as a result of a material breach by the non-
terminating party, each party will pay its own expenses and the Merger Agreement
will become void and there will be no liability or obligation on the part of
Associated or the Company other than under certain specified provisions of the
Merger Agreement dealing with confidential treatment of non-public information.
In the event of termination of the Merger Agreement by a material breach, in
addition to other remedies at law or equity for breach, the party to have
breached will reimburse the non-breaching party's expenses under the Merger
Agreement.
AMENDMENT AND WAIVER
The Merger Agreement may be amended at any time prior to the Effective Time
by action taken or authorized by the respective Boards of Directors of
Associated and the Company (except that after the Merger Agreement shall have
been approved by the shareholders of the Company, no amendment may be entered
into which would reduce the amount or change the consideration into which each
share of the Company Common Stock shall be converted upon consummation of the
Merger without further shareholder approval). At any time prior to the
Effective Time, either of the parties to the Merger Agreement may extend the
time for the performance of any of the obligations or other acts of the other
party, waive any inaccuracies in the representations and warranties contained in
the Merger Agreement or in any document delivered pursuant to the Merger
Agreement and waive compliance with any of the agreements or conditions
contained in the Merger Agreement.
EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expense (except that the
parties shall share equally in the expense of printing and filing the
Registration Statement and this Proxy Statement/Prospectus and all Commission
and other regulatory filing fees incurred in connection with the Merger
Agreement), except if the Merger Agreement is terminated due to the breach of
the Merger Agreement by either party thereto, then, in addition to other
remedies at law or equity for breach of the Merger Agreement, the party so found
to have breached the Merger Agreement shall indemnify the other party for its
expenses.
54
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CERTAIN INFORMATION CONCERNING ASSOCIATED
Associated is a registered bank holding company pursuant to the BHC Act.
It was incorporated in Wisconsin in 1964 and was inactive until 1969, when
permission was received from the Federal Reserve Board to acquire three banks.
Associated currently owns 8 commercial banks and a federally chartered thrift
located in Wisconsin and Illinois serving their local communities and, measured
by total assets of $10.6 billion held at September 30, 1998, was the third
largest commercial bank holding company headquartered in Wisconsin. As of
September 30, 1998, Associated owned 30 nonbanking subsidiaries located in
Arizona, California, Delaware, Illinois, Missouri, Nevada and Wisconsin.
Associated provides advice and specialized services to its bank and nonbank
subsidiaries (the "Associated Affiliates") in various areas of banking policy
and operations, including auditing, data processing, marketing/advertising,
investing, personnel services, trust services and other financial services
functionally related to banking. Responsibility for the management of the
Associated Affiliates remains with their respective Boards of Directors and
officers. Services rendered to the Associated Affiliates by Associated are
intended to assist the local management of the Associated Affiliates to expand
the scope of the banking services offered by them. At September 30, 1998, bank
and thrift affiliates of Associated provided services through 225 locations in
150 communities.
Associated, through the Associated Affiliates, provides a complete range of
retail banking services to individuals and businesses. These services include
checking and savings accounts, NOW, Super NOW and money market deposit accounts,
business loans, personal loans, residential and commercial mortgage loans, loans
for education, MasterCard, VISA and other consumer-oriented financial services,
including IRA and Keogh accounts, and safe deposit and night depository
facilities. Automated teller machines ("ATMs"), which provide 24 hour banking
services to customers of the Associated Affiliates, have been installed in many
locations in the Associated Affiliates' service areas. The Associated
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 ATM terminals in a multi-state environment. Among the services
designed specifically to meet the needs of businesses are various types of
specialized financing, cash management services and transfer/collection
facilities.
The Associated Affiliates provide lending, depository and related financial
services to commercial, industrial, financial and governmental customers. Term
loans, revolving credit arrangements, letters of credit, inventory and accounts
receivable financing, real estate construction lending and international banking
securities are available.
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 Associated Affiliates
make available check clearing, safekeeping, loan participation, lines of credit,
portfolio analyses, data processing and other services to approximately 150
correspondent financial institutions.
Four of the Associated Affiliates 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.
55
<PAGE>
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. Insurance
brokerage subsidiaries provide commercial and individual insurance services,
including various life, property, casualty, credit, and mortgage products to the
affiliates' customers and the general public. Several investment subsidiaries
located in Nevada hold, manage, and trade cash, stock, and securities
transferred from the Associated Affiliates and reinvest investment income. A
leasing subsidiary provides lease financing for a variety of capital equipment
for commerce and industry. An appraisal subsidiary provides real estate
appraisals for customers, government agencies, and the general public.
The Associated Affiliates also provide certain mortgage banking services
including the origination and warehousing of mortgage loans and the sale of
loans to investors. The primary focus is on one-to-four-family residential and
multi-family properties, all of which the mortgage loans are salable into the
secondary mortgage market.
Associated and the Associated Affiliates are not dependent upon a single or
a few customers, the loss of which would have a material adverse effect on
Associated. No material portion of Associated's or the Associated Affiliates'
business is seasonal.
At September 30, 1998 Associated and the Associated Affiliates, as a
group, employed 3,672 full-time equivalent employees.
SUPERVISION AND REGULATION
Financial institutions are highly regulated both at the federal and state
level. Numerous statutes and regulations affect the business of Associated and
the Associated Affiliates.
The activities of Associated are regulated by the BHC Act. The BHC Act
requires prior approval of the Federal Reserve 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 was permitted. The Riegel-Neal Amendments
Act of 1997 clarifies the applicability of host state laws to any branch in such
state of an out-of-state bank.
The BHC Act also prohibits, with certain exceptions, acquisitions of more
than five percent of the voting shares of any publicly traded 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 Federal Reserve Board.
All of Associated's banking affiliates 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
56
<PAGE>
the FDIC to set assessments in order to maintain the target DRR. The Federal
Reserve 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 Federal
Reserve 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 separated, 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 Associated 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 Associated and its affiliates.
PROPERTIES
Associated's headquarters are located in the City of Green Bay,
Wisconsin, in a leased facility with approximately 8,500 square feet of office
space owned by an affiliated company. The space is currently leased on a month-
to-month basis. Associated, leased approximately 30,000 square feet of office
space in buildings located in the Village of Ashwaubenon to accommodate the
corporate staff and support functions. Associated occupied substantially all of
the office space in October 1998.
The Associated Affiliates, as of September 30, 1998, occupied 225 offices
in 150 different communities within Wisconsin and Illinois. All key facilities,
except Associated Bank Milwaukee and Associated Bank Chicago, are owned by the
Associated 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, Associated owns other real property that, when
considered in the aggregate, is not material to its financial position.
57
<PAGE>
LEGAL PROCEEDINGS
There are legal proceedings pending against certain subsidiaries of Associated
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 Associated has meritorious defenses, and any ultimate liability would not
have a material adverse effect on the consolidated financial position of
Associated.
EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash compensation paid
or accrued for services rendered in all capacities to Associated, First
Financial Corporation and their respective affiliates for the fiscal years ended
December 31, 1997, 1996, and 1995, of those persons who were, at December 31,
1997, the Chief Executive Officer of Associated and the other four most highly
compensated executive officers of Associated or its affiliates (the "Named
Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation (1) Compensation Awards
---------------------- ---------------------
Securities Underlying All Other
Name and Principal Position (2) Year Salary ($) Bonus ($) Options/SARs (#) (3) Compensation ($) (4)
- --------------------------- ------ ----------- ------------ --------------------- --------------------
<S> <C> <C> <C> <C> <C>
Harry B. Conlon 1997 $407,692 $225,000 18,750 $ 73,351 (5)
Chairman, President & CEO, 1996 $375,000 $135,000 18,750 $ 65,366
Associated 1995 $355,000 $130,000 18,750 $ 57,349
John C. Seramur 1997 $745,000 $335,250 0 $ 197,350 (6)
Vice Chairman, Associated; 1996 $720,000 $288,000 0 $ 257,177
President & CEO, FFB 1995 $680,000 $272,000 0 $ 242,544
Robert C. Gallagher 1997 $325,385 $160,000 15,000 $ 52,634 (7)
Vice Chairman, Associated; 1996 $300,000 $128,000 15,000 $ 51,204
Chairman & CEO, ABGB 1995 $287,000 $125,000 15,000 $ 48,944
Donald E. Peters 1997 $273,500 $ 68,376 0 $ 57,944 (8)
Director of Systems and 1996 $261,500 $ 62,999 0 $ 58,165
Operations, Associated 1995 $250,000 $ 60,000 0 $ 51,615
Gordon J. Weber 1997 $234,423 $ 88,000 10,500 $ 26,351 (9)
CEO 1996 $230,000 $ 49,500 11,250 $ 24,363
Associated Southern Region 1995 $209,807 $ 52,500 11,250 $ 25,616
</TABLE>
- -------------------------
(1) Includes amounts earned and payable during the fiscal year whether or not
receipt of such amounts were deferred at the election of the Named Executive
Officer. All Named Executive Officers are eligible to participate in the
Associated Deferred Compensation Plan. During 1997, Messrs. Conlon and
Gallagher participated in such plan. See "Agreements and Reports."
(2) Included in the table are certain executive officers of affiliates of
Associated who perform policymaking functions for Associated. Associated
Bank Green Bay, National Association ("ABGB"), is Associated's largest
subsidiary bank, headquartered in Green Bay, Wisconsin. Associated's
Southern Region consists of six state and national banks which are Wisconsin
subsidiaries of Associated headquartered in Lodi, Madison, Milwaukee,
Portage, Reedsburg, and West Allis. First Financial Bank ("FFB") is a
thrift headquartered in Stevens Point, Wisconsin, with 125 offices located
throughout Wisconsin and northern Illinois.
58
<PAGE>
(3) Option grants reflect a 25% stock split effected in the form of a stock
dividend in 1995, a 20% stock split effected in the form of a stock dividend
in 1997, and a 25% stock split effected in the form of a stock dividend in
1998.
(4) Contributions to the Associated Banc-Corp Profit Sharing & Retirement
Savings Plan (including the 401(k) Plan) (the "Retirement Plan") were made
to the accounts of the Named Executive Officers. Contributions to the
Associated Supplemental Executive Retirement Plan (the "SERP"), which
provides retirement benefits to executives selected by the Administrative
Committee without regard to the limitations set forth in Section 415 of the
Internal Revenue Code of 1986, as amended (the "Code"), were made to the
accounts of the Named Executive Officers. Contributions calculated as 10%
of the amount of stock purchased made to Associated's Employee Stock
Purchase Plan were made to the accounts of the Named Executive Officers.
Life insurance premiums were paid by Associated for Named Executive
Officers.
(5) Includes Retirement Plan contribution of $15,680, SERP contribution of
$46,717, Employee Stock Purchase Plan contribution of $600, and life
insurance premiums of $10,354.
(6) Includes Retirement Plan contribution of $24,029, SERP contribution of
$172,455, and life insurance premiums of $866.
(7) Includes Retirement Plan contribution of $15,680, SERP contribution of
$28,810, and life insurance premiums of $8,144.
(8) Includes Retirement Plan contribution of $24,029, SERP contribution of
$33,049, and life insurance premiums of $866.
(9) Includes Retirement Plan contribution of $12,480, SERP contribution of
$12,431, and life insurance premiums of $1,440.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
--------------------------------- -------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---------------- ------------ ------------- ------------ ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
H. B. Conlon 18,750 5.92% 28.1666 1-29-07 $332,134.66 $841,694.44
J. C. Seramur --- --- --- --- --- ---
R. C. Gallagher 15,000 4.74% 28.1666 1-29-07 $265,707.73 $673,355.55
D. E. Peters --- --- --- --- --- ---
G. J. Weber 10,500 3.32% 28.1666 1-29-07 $185,995.41 $471,348.88
</TABLE>
59
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES (1)
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at FY-End In-the-Money Options/SARs
----------------------
(#) (2) at FY-End ($) (3)
------- -------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) (4) Exercisable Unexercisable Exercisable Unexercisable
------------ ------------ ---------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. B. Conlon --- --- 78,938 37,313 $2,049,047.89 $693,512.51
J. C. Seramur (5) 42,500 $428,450.00 5,259 --- 190,390.73 ---
R. C. Gallagher 21,000 439,995.60 62,774 29,851 1,680,424.45 554,840.96
D. E. Peters (5) 39,938 908,474.38 75,829 --- 2,867,021.40 ---
G. J. Weber --- --- 63,861 21,639 1,855,048.74 404,188.44
</TABLE>
- --------------------
(1) The exercise price for each grant was 100% of the fair market value of the
shares on the date of grant. All granted options are exercisable within
ten years from the date of grant. Within this period, each option is
exercisable from time to time in whole or in part.
(2) Pursuant to the current provisions of the Restated Long-Term Incentive
Stock Plan (the "Stock Plan"), all Options and other awards under the
Stock Plan shall immediately vest and become exercisable upon the
occurrence of a Change in Control of Associated. Such vesting of Options
shall result in all Options and corresponding SARs becoming immediately
exercisable and all Performance Shares and other awards being immediately
payable. The definition of Change of Control is substantially the same as
under the Associated Change of Control Plan. See "Agreements and Reports."
(3) Total value of unexercised options based on the market price of Associated
stock as reported on The Nasdaq Stock Market on December 31, 1997, of
$44.10 per share.
(4) Market price at date of exercise of options, less option exercise price,
times number of shares, equals value realized.
(5) Executives had previously been granted options to purchase shares of
common stock of First Financial which were converted into options to
purchase shares of the Common Stock in connection with the Merger.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The following table sets forth, with respect to the Associated Retirement
Account Plan (the "Account Plan") and the SERP for Named Executive Officers,
the credited years of service to date and at age 65:
<TABLE>
<CAPTION>
Credited Years of Credited Years of
Service to Date Service at Age 65
----------------- -----------------
<S> <C> <C>
H. B. Conlon 33 35
J. C. Seramur 31 41
R. C. Gallagher 17 22
D. E. Peters 16 33
G. J. Weber 26 41
</TABLE>
60
<PAGE>
The following table sets forth, with respect to the Account Plan and the SERP,
the estimated annual retirement benefit payable at age 65 as a straight-life
annuity, based on specified earnings and service levels and a benefit indexing
rate of 5%:
<TABLE>
<CAPTION>
====================================================================================================================
AVERAGE TOTAL
ANNUAL ANNUAL BENEFIT AFTER SPECIFIED YEARS IN PLAN (2)
COMPENSATION (1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
20 25 30 35 40 45
- -------------------------------------------------------------------------------------------------------------------
250,000 49,600 71,600 99,650 135,475 181,200 239,550
- -------------------------------------------------------------------------------------------------------------------
300,000 59,520 85,920 119,580 162,570 217,440 287,460
- -------------------------------------------------------------------------------------------------------------------
350,000 69,440 100,240 139,510 189,665 253,680 335,370
- -------------------------------------------------------------------------------------------------------------------
400,000 79,360 114,560 159,440 216,760 289,920 383,280
- -------------------------------------------------------------------------------------------------------------------
450,000 89,280 128,880 179,370 243,855 326,160 431,190
- -------------------------------------------------------------------------------------------------------------------
500,000 99,200 143,200 199,300 270,950 362,400 479,100
- -------------------------------------------------------------------------------------------------------------------
550,000 109,120 157,520 219,230 298,045 398,640 527,010
- -------------------------------------------------------------------------------------------------------------------
600,000 119,040 171,840 239,160 325,140 434,880 574,920
- -------------------------------------------------------------------------------------------------------------------
650,000 128,960 186,160 259,090 352,235 471,120 622,830
- -------------------------------------------------------------------------------------------------------------------
700,000 138,880 200,480 279,020 379,330 507,360 670,740
- -------------------------------------------------------------------------------------------------------------------
750,000 148,800 214,800 298,950 406,425 543,600 718,650
- -------------------------------------------------------------------------------------------------------------------
800,000 158,720 229,120 318,880 433,520 579,840 766,560
- -------------------------------------------------------------------------------------------------------------------
850,000 168,640 243,440 338,810 460,615 616,080 814,470
- -------------------------------------------------------------------------------------------------------------------
900,000 178,560 257,760 358,740 487,710 652,320 862,380
- -------------------------------------------------------------------------------------------------------------------
950,000 188,480 272,080 378,670 514,805 688,560 910,290
- -------------------------------------------------------------------------------------------------------------------
1,000,000 198,400 286,400 398,600 541,900 724,800 958,200
- -------------------------------------------------------------------------------------------------------------------
1,250,000 248,000 358,000 498,250 677,375 906,000 1,197,750
===================================================================================================================
</TABLE>
(1) Reflects amounts disclosed as salary and bonus for each of the Named
Executive Officers.
(2) The retirement benefits shown above are not subject to any deductions for
social security or other offsetting amounts, and the annual retirement
benefits are subject to certain maximum limitations under the Code (such
limitation was $125,000 for 1997).
CERTAIN TRANSACTIONS
Various officers and directors of Associated and its subsidiaries, members
of their families, and the companies or firms with which they are associated
were customers of, and had banking transactions with, one or more of
Associated's subsidiary banks in the ordinary course of each such bank's
business during 1997. The percentage of consolidated shareholders' equity
represented by loans made in such transactions was 8.95% at December 31, 1997.
Additional transactions may be expected to take place in the ordinary course of
business in the future. All loans and commitments to loans included in such
transactions were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and, in the opinion of the management of Associated's subsidiary
banks, did not involve more than a normal risk of collectibility or present
other unfavorable features.
61
<PAGE>
PRINCIPAL HOLDERS OF ASSOCIATED COMMON STOCK
As of September 30, 1998, the trust departments of four wholly-owned
subsidiaries of Associated were, in a fiduciary capacity, the beneficial owners
of 5,401,038 shares of Associated Common Stock, constituting 8.52% of
Associated's outstanding shares entitled to vote. Such ownership is in the
capacity of fiduciaries with voting and/or investment power. As a result
thereof, Associated may be deemed to indirectly beneficially own such shares.
No other person is known to Associated to own beneficially more than 5% of the
outstanding shares entitled to vote. The information set forth below is
reflective of the foregoing.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
TITLE OF OF BENEFICIAL PERCENT
NAME AND ADDRESS Class Ownership (1)(2)(3) of Class
---------------- ------------ ------------------- -------------
<S> <C> <C> <C>
Associated Bank Green Bay, N.A.
200 North Adams Street Common 4,172,458 6.59%
Green Bay, Wisconsin 54301
Associated Bank, N.A.
100 West Wisconsin Avenue Common 765,787 1.21%
Neenah, Wisconsin 54956
Associated Bank Lakeshore, N.A.
1000 Franklin Street Common 270,808 *
Manitowoc, Wisconsin 54220
Associated Trust Company, N.A.
401 East Kilbourn Avenue Common 191,983 *
Milwaukee, Wisconsin 53202 ------- ------
5,401,038 8.52%
------
</TABLE>
* Denotes percentage is less than 1%.
(1) Shares are deemed to be "beneficially owned" by a person if such person,
directly or indirectly, has or shares (i) the voting power thereof,
including the power to vote or to direct the voting of such shares, or (ii)
the investment power with respect thereto, including the power to dispose
or direct the disposition of such shares. In addition, a person is deemed
to beneficially own any shares which such person has the right to acquire
beneficial ownership of within 60 days.
(2) In the capacity of fiduciaries, the trust departments exercise voting power
where authority has been granted. In other instances, the trust departments
solicit voting preferences from the beneficiaries. In the event responses
are not received as to voting preferences, the shares will not be voted in
favor of or against the proposals.
(3) In the capacity of fiduciaries, included are 1,459,045 shares with sole
voting power; 35,913 shares with shared voting power; 5,021,955 shares with
sole investment power; and 379,083 shares with shared investment power.
SECURITY OWNERSHIP OF MANAGEMENT
Listed below is information as of September 30, 1998, concerning beneficial
ownership of Associated Common Stock for each director and Named Executive
Officer, and by directors and executive officers as a group.
62
<PAGE>
<TABLE>
<CAPTION>
Title of Class Name of Beneficial Owner Amount of Beneficial Ownership Percent
- -------------- ------------------------ ------------------------------ -------
of Class
- --------
<S> <C> <C> <C>
Common Harry B. Conlon 291,656 *
Common Robert Feitler (1) 39,216 *
Common Robert S. Gaiswinkler 139,485 *
Common Robert C. Gallagher 253,757 *
Common Ronald R. Harder 2,420 *
Common John S. Holbrook, Jr. 13,620 *
Common William R. Hutchinson 4,026 *
Common James F. Janz (1) 8,996 *
Common Robert P. Konopacky 62,156 *
Common George R. Leach 64,731 *
Common John C. Meng 10,825 *
Common Donald E. Peters (2) 193,535 *
Common J. Douglas Quick 13,033 *
Common John C. Seramur 872,256 1.38
Common John H. Sproule 77,933 *
Common Ralph R. Staven 189,787 *
Common Norman L. Wanta 80,036 *
Common Gordon J. Weber (2) 126,482 *
Common Directors and Executive Officers (3) 3,040,253 4.80%
* Denotes percentage is less than 1%.
</TABLE>
(1) Retired from the Board of Directors on October 27, 1997.
(2) Named Executive Officer, non-director.
(3) Includes directors and executive officers as a group (31 individuals).
Share ownership includes shares issuable within 60 days upon exercise of stock
options owned by certain officers.
All shares reported herein are owned with voting and investment power in those
persons whose names are provided herein or by their spouses. Some shares may be
owned in joint tenancy, by a spouse, or in the names of minor children.
CERTAIN INFORMATION CONCERNING THE COMPANY
The Company is a bank holding company incorporated under the laws of the
State of Wisconsin with its principal office in Shawano, Wisconsin. The Company
owns all the issued and outstanding stock of the Bank, a national banking
association, and the Finance Company, a Wisconsin corporation. As of June 30,
1998, the Company had total assets of approximately $159.9 million and the Bank
had deposits of approximately $113.8 million.
The Bank is a full service bank serving the banking needs of the
Northeastern Wisconsin community of Shawano. The Bank provides commercial
banking services and products, including savings and demand deposits, real
estate, commercial and consumer loans, collection and safe deposit facilities
and other services tailored to meet the needs of the individual and business
customer. The Company owns the Bank's main banking premises located at 129 East
Division Street, Shawano, Wisconsin.
The Finance Company is a consumer finance company. As of June 30, 1998,
the Finance Company had consumer loan receivables of approximately $22,000,000.
The Finance
63
<PAGE>
Company has 18 offices (including 2 in Illinois) primarily located in Northern
and Eastern Wisconsin.
The Company, the Bank and the Finance Company are not dependent upon a
single or a few customers, the loss of which would have a material adverse
effect on the Company, the Bank or the Finance Company. No material portion of
the Company or the Bank's business is seasonal.
At June 30, 1998, the Company, the Bank and the Finance Company employed
approximately 133 full-time and 10 part-time employees.
OWNERSHIP OF THE COMPANY COMMON STOCK
The following table sets forth information regarding the beneficial
ownership of the Company Common Stock as of the Record Date by each director,
certain executive officers, all directors and executive officers of the Company
as a group and each person who is known by the Company to be the beneficial
owner of more than 5% of the Company Common Stock. The address for the
directors and executive officers is the executive offices of the Company.
<TABLE>
<CAPTION>
NAME OF Number Percent
Beneficial Owner of Shares of Class
---------------- --------- --------
<S> <C> <C>
Archie Amundson...................................................... 2 *
Robert R. Behnke..................................................... 150 *
Mary Bleser Hayes.................................................... 650 2.5%
Andrew B. Hayes (1).................................................. 200 *
Margaret B. Hayes (1)................................................ 200 *
Priscilla Humphrey Mitton............................................ 1,630 6.1
William Humphrey Mitton.............................................. 2,075 7.8
Bernard S. Kubale -- *
Suzanne Mitton Petru................................................. 2,075 7.8
The Estate of Clarence Bleser (2).................................... 13,508 50.8
All directors and executive officers as a class (3 persons).......... 802 3.0
</TABLE>
_______________
* Less than 1 %
(1) Mary Bleser Hayes is the custodian of the shares and has authority to vote
the shares at a meeting of the shareholders.
(2) Mary Bleser Hayes is one of two trustees of the Estate of Clarence Bleser.
EXPERTS
The consolidated financial statements of Associated as of December 31, 1997
and 1996, and for each of the years in the three-year period ended December 31,
1997, have been included herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, included herein, which
are based in part on the reports of Ernst & Young LLP, certified public
accountants, included herein, and upon the authority of said firms as experts in
accounting and auditing.
64
<PAGE>
Associated has retained Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c. to render an opinion on the federal income tax consequences of
the Merger and in connection therewith, Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c. has reviewed the discussion herein entitled "The Merger -
Certain Material Federal Income Tax Consequences." Such opinion has been
included in the registration statement in reliance upon the authority of said
firm as experts in tax matters.
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, included herein, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL OPINIONS
The validity of the shares issued in connection with the Merger and certain
other matters will be passed upon for Associated by Reinhart, Boerner, Van
Deuren, Norris & Rieselbach, s.c., Milwaukee, Wisconsin.
FUTURE SHAREHOLDER PROPOSALS
If the Merger is consummated, shareholders of the Company will become
shareholders of Associated. Pursuant to Rule 14a-8 promulgated under the
Exchange Act, Associated shareholders may present proper proposals for inclusion
in Associated's proxy statement for consideration at the next annual meeting of
its shareholders by submitting their proposals to Associated in a timely manner.
Shareholders of the Company who become shareholders of Associated may present
proposals for inclusion in Associated's proxy statement for its 1999 Annual
Meeting if such proposals are submitted, in writing, at Associated's executive
offices not later than November 24, 1998. Any such proposal must comply with
Rule 14a-8.
WHERE YOU CAN FIND MORE INFORMATION
Associated files annual, quarterly and special reports, proxy statements
and other information with the Commission. You may read and copy any reports,
statements or other information Associated files at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms. Associated's Commission filings are also available to
the public from commercial document retrieval services and at the world wide web
site maintained by the Commission at "http://www.sec.gov."
Associated has filed a Registration Statement on Form S-4 (the
"Registration Statement") to register with the Commission the Associated Common
Stock to be issued to shareholders of Citizens Bankshares in the Merger. This
Proxy Statement/Prospectus is a part of the Registration Statement and
constitutes a prospectus of Associated in addition to being a proxy statement of
Citizens Bankshares for the Special Meeting. As allowed by Commission rules,
this Proxy Statement/Prospectus does not contain all the information you can
find in the Registration Statement or the exhibits to the Registration
Statement, which are incorporated herein by reference.
65
<PAGE>
Associated has supplied all information contained in this Proxy
Statement/Prospectus relating to Associated, and the Company has supplied all
such information relating to the Company.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE MERGER. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS IS DATED
NOVEMBER 4, 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THE
PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND
NEITHER THE MAILING OF THE PROXY STATEMENT/PROSPECTUS TO SHAREHOLDERS NOR THE
ISSUANCE OF ASSOCIATED COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION
TO THE CONTRARY.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
ANY SUCH OFFER OR SOLICITATION.
66
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
BETWEEN
ASSOCIATED BANC-CORP
AND
CITIZENS BANKSHARES, INC.
FEBRUARY 17, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE I
----------
THE MERGER
----------
SECTION 1.01. The Merger......................................2
SECTION 1.02. Effective Time..................................2
SECTION 1.03. Effect of the Merger............................3
SECTION 1.04. Articles of Incorporation and Bylaws............3
SECTION 1.05. Directors and Officers..........................3
SECTION 1.06. Conversion of Securities........................3
SECTION 1.07. Exchange of Certificates........................5
SECTION 1.08. Stock Transfer Books............................7
SECTION 1.09. Anti-Dilution Adjustment........................7
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
SECTION 2.01. Organization and Qualification of the Company;
Subsidiaries.....................................8
SECTION 2.02. Articles of Incorporation and Bylaws.............9
SECTION 2.03. Capitalization...................................9
SECTION 2.04. Authority.......................................11
SECTION 2.05. No Conflict; Required Filings and Consents......12
SECTION 2.06. Compliance; Permits.............................13
SECTION 2.07. Banking Reports and Financial Statements........13
SECTION 2.08. Absence of Certain Changes or Events............14
SECTION 2.09. Absence of Litigation...........................15
SECTION 2.10. Employee Benefit Plans..........................15
SECTION 2.11. Employment Contracts; Material Contracts........18
SECTION 2.12. Registration Statement; Proxy Statement.........18
SECTION 2.13. Title to Property...............................18
SECTION 2.14. Compliance with Environmental Laws..............19
SECTION 2.15. Absence of Agreements...........................21
SECTION 2.16. Taxes...........................................22
SECTION 2.17. Insurance.......................................23
SECTION 2.18. Absence of Adverse Agreements...................23
SECTION 2.19. Internal Controls and Records...................23
SECTION 2.20. Loans...........................................24
SECTION 2.21. Labor Matters...................................24
SECTION 2.22. Brokers.........................................24
<PAGE>
SECTION 2.23. Accounting and Tax Matters......................24
SECTION 2.24. Full Disclosure.................................25
SECTION 2.25. Vote Required...................................25
SECTION 2.26. Branch Sales....................................25
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF
ASSOCIATED
----------
SECTION 3.01. Organization and Qualification..................25
SECTION 3.02. Articles of Incorporation and Bylaws............26
SECTION 3.03. Capitalization..................................26
SECTION 3.04. Authority.......................................26
SECTION 3.05. No Conflict; Required Filings and Consents......27
SECTION 3.06. Compliance; Permits.............................27
SECTION 3.07. Securities Reports; Financial Statements........28
SECTION 3.08. Absence of Certain Changes or Events............29
SECTION 3.09. Absence of Litigation...........................29
SECTION 3.10. Registration Statement; Proxy Statement.........30
SECTION 3.11. Absence of Agreements...........................30
SECTION 3.12. Taxes...........................................30
SECTION 3.13. Brokers.........................................31
SECTION 3.14. Accounting and Tax Matters......................31
SECTION 3.15. Full Disclosure.................................31
ARTICLE IV
----------
COVENANTS OF THE COMPANY
------------------------
SECTION 4.01. Affirmative Covenants...........................32
SECTION 4.02. Negative Covenants..............................33
SECTION 4.03. Access and Information..........................36
SECTION 4.04. Affiliates; Accounting and Tax Treatment........37
SECTION 4.05. Expenses........................................38
SECTION 4.06. Delivery of Shareholder List....................38
ARTICLE V
---------
COVENANTS OF ASSOCIATED
-----------------------
SECTION 5.01. Affirmative Covenants...........................38
SECTION 5.02. Access and Information..........................39
ii
<PAGE>
SECTION 5.03. Accounting and Tax Treatment..........................40
ARTICLE VI
----------
ADDITIONAL AGREEMENTS
---------------------
SECTION 6.01. Registration Statement................................40
SECTION 6.02. Meetings of Shareholders..............................41
SECTION 6.03. Appropriate Action; Consents; Filings.................41
SECTION 6.04. Notification of Certain Matters.......................42
SECTION 6.05. Public Announcements..................................42
SECTION 6.06. Environmental Matters.................................42
SECTION 6.07. Action Requested By Other Party.......................42
ARTICLE VII
-----------
CONDITIONS OF MERGER
--------------------
SECTION 7.01. Conditions to Obligation of Each Party to Effect the
Merger................................................43
SECTION 7.02. Additional Conditions to Obligations of Associated....44
SECTION 7.03. Additional Conditions to Obligations of the Company...46
ARTICLE VIII
------------
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
SECTION 8.01. Termination...........................................48
SECTION 8.02. Effect of Termination.................................49
SECTION 8.03. Amendment.............................................50
SECTION 8.04. Waiver................................................50
ARTICLE IX
----------
GENERAL PROVISIONS
------------------
SECTION 9.01. Non-Survival of Representations, Warranties and
Agreements............................................50
SECTION 9.02. Disclosure Schedules..................................51
SECTION 9.03. Notices...............................................51
SECTION 9.04. Certain Definitions...................................52
SECTION 9.05. Headings..............................................53
SECTION 9.06. Severability..........................................53
iii
<PAGE>
SECTION 9.07. Entire Agreement......................................53
SECTION 9.08. Assignment............................................53
SECTION 9.09. Parties in Interest...................................54
SECTION 9.10. Governing Law.........................................54
SECTION 9.11. Counterparts..........................................54
EXHIBITS
4.01 Capital Requirements; Purchase and Sale of Securities
4.02 Negative Covenants
4.04 Affiliate Letter
7.02(e) Legal Opinion of Company Counsel
7.03 Legal Opinion of Associated Counsel
COMPANY DISCLOSURE SCHEDULE
2.01 Organization and Qualification of the Company; Subsidiaries
2.02 Articles of Incorporation and Bylaws
2.05 No Conflict; Required Filings and Consents
2.07 Banking Reports and Financial Statements
2.08 Absence of Certain Changes or Events
2.09 Absence of Litigation
2.10 Employee Benefit Plans
2.11 Employment Contracts; Material Contracts
2.13 Title to Property
2.14 Compliance with Environmental Laws
2.15 Absence of Agreements
2.16 Taxes
2.17 Insurance
2.20 Loans
2.26 Branch Sales
4.02 Assets Under Contract to Sell
9.04 Knowledge
ASSOCIATED DISCLOSURE SCHEDULE
3.08 Absence of Certain Changes or Events
3.09 Litigation
3.11 Absence of Agreements
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 17, 1998 (the
"Agreement"), between ASSOCIATED BANC-CORP, a Wisconsin corporation
("Associated") and CITIZENS BANKSHARES, INC., a Wisconsin corporation
("Company").
W I T N E S S E T H:
WHEREAS, the Company is a bank holding company, the wholly-owned
subsidiaries of which are Citizens Bank, N.A., a national banking association
located in Shawano, Wisconsin (the "Bank") and Wisconsin Finance Corporation
("WFC"); and
WHEREAS, the Bank has one wholly-owned subsidiary, CB Investments,
Inc. ("CB"), and WFC has one wholly owned subsidiary, Citizens Financial
Services, Inc. ("CFS"). The Bank, CB, WFC and CFS are sometimes individually
referred to as a "Subsidiary" and, collectively, as the "Subsidiaries;" and
WHEREAS, the Company upon the terms and subject to the conditions of
this Agreement and in accordance with the Wisconsin Business Corporation Law
("Wisconsin Law"), will merge with and into Associated (the "Merger"); and
WHEREAS, the Company and its Board of Directors have determined that
the Merger will enhance the ability of the Bank to better serve its existing
depositors and customers and increase the financial strength of the Bank; and
WHEREAS, the Board of Directors of the Company believes that the
Merger with Associated will benefit the shareholders and the employees of the
Company and the Subsidiaries; and
WHEREAS, the respective Boards of Directors of Associated and the
Company have (i) determined that the Merger and the exchange of newly issued
shares of Associated Common Stock (as defined in Section 1.06) for shares of
Company Common Stock (as defined in Section 1.06) pursuant and subject to the
terms and conditions of this Agreement are fair to and in the best interests of
the respective corporations and their shareholders, and (ii) approved and
adopted this Agreement and the transactions contemplated hereby; and
WHEREAS, the Board of Directors of the Company has, subject to its
fiduciary duties under applicable law, resolved to recommend approval of the
Merger by the shareholders of the Company;
<PAGE>
WHEREAS, Associated and the Company intend to effect a merger that
qualifies for pooling-of-interests accounting treatment and as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Associated and the Company hereby agree as follows:
ARTICLE I
---------
THE MERGER
----------
SECTION 1.01. The Merger. Upon the terms and subject to the
----------
conditions set forth in this Agreement, and in accordance with Wisconsin Law, at
the Effective Time (as defined in Section 1.02), the Company shall be merged
with and into Associated. As a result of the Merger, the separate corporate
existence of the Company shall cease and Associated shall continue as the
surviving corporation of the Merger (the "Surviving Corporation").
SECTION 1.02. Effective Time. The parties hereto shall cause the
--------------
Merger to be consummated by filing Articles of Merger (the "Articles of Merger")
with the Department of Financial Institutions of the State of Wisconsin, in such
form as required by, and executed in accordance with the relevant provisions of
Wisconsin Law (a) after the satisfaction, or if permissible, waiver of
conditions set forth in Article VII, and (b) as promptly as possible after the
latest of the following dates:
(i) The date of expiration of any applicable waiting period after
approval by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act of 1956, as
amended;
(ii) Such date as may be prescribed by the Federal Reserve Board or
any other agency or authority pursuant to applicable law, rules or
regulations, prior to which consummation of the transaction described and
referred to herein may not be effected;
(iii)The date of the shareholders meeting of the Company to vote
upon the Merger pursuant to Section 6.02; or
2
<PAGE>
(iv) If the transaction contemplated by this Agreement is being
contested in any legal proceeding and Associated or the Company has elected
to contest the same, the date that such legal proceeding has been brought
to a conclusion favorable, in the judgment of Associated or the Company, to
the consummation of the transaction contemplated hereby.
The date and time of the filing of the Articles of Merger is
hereinafter referred to as the "Effective Time."
SECTION 1.03. Effect of the Merger. At the Effective Time, the effect of
--------------------
the Merger shall be as provided in the applicable provisions of Wisconsin Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, except as otherwise provided herein, all the property, rights,
privileges, powers and franchises of Associated and the Company shall vest in
the Surviving Corporation, and all debts, liabilities and duties of Associated
and the Company shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.04. Articles of Incorporation and Bylaws. At the Effective Time,
------------------------------------
the Articles of Incorporation and the Bylaws of Associated, as in effect
immediately prior to the Effective Time, shall be the Articles of Incorporation
and the Bylaws of the Surviving Corporation.
SECTION 1.05. Directors and Officers. The directors of Associated
----------------------
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation, and the officers of
Associated immediately prior to the Effective Time shall be the initial officers
of the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified.
SECTION 1.06. Conversion of Securities. At the Effective Time, by virtue
------------------------
of the Merger and without any action on the part of Associated, the Company or
the holders of any of the following securities:
(a) each share of common stock, par value $20.00 per share, of the
Company (the "Company Common Stock") (all issued and outstanding shares of
the Company Common Stock being hereinafter collectively referred to as the
"Shares") issued and outstanding immediately prior to the Effective Time
(other than any Shares to be canceled pursuant to Section 1.06(b) and other
than any Dissenting Shares, as defined in Section 1.06(c)) shall be
converted, in accordance with Section 1.07, into the right to receive 27
shares of common stock, par value $.01 per share, of
3
<PAGE>
Associated ("Associated Common Stock"). As of the Effective Time, all such
shares of the Company Common Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
certificate previously representing any such Shares shall thereafter
represent the right to receive a certificate representing shares of
Associated Common Stock into which such Company Common Stock is
convertible. Certificates previously representing shares of Company Common
Stock shall be exchanged for certificates representing whole shares of
Associated Common Stock issued in consideration therefor upon the surrender
of such certificates in accordance with the provisions of Section 1.07,
without interest. No fractional shares of Associated Common Stock shall be
issued, and, in lieu thereof, a cash payment shall be made pursuant to
Section 1.07 hereof.
(b) each Share held in the treasury of the Company and each Share
owned by Associated or any direct or indirect wholly-owned subsidiary of
Associated immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof and no payment shall be made
with respect thereto.
(c) each Share of the Company Common Stock which shall be issued and
outstanding as of the Effective Time and held by a shareholder who has
validly perfected dissenter's rights in accordance with Wisconsin Law,
shall not be converted into and shall not become Associated Common Stock
hereunder (all such shares of the Company Common Stock are hereinafter
called "Dissenting Shares"). The Company shall give Associated prompt
notice upon receipt by the Company of any written notice from any such
shareholder of the Company ("Dissenting Shareholder"). The Company agrees
that prior to the Effective Time, it will not, except with prior written
consent of Associated, voluntarily make any payment with respect to, or
settle or offer to settle, any request for withdrawal pursuant to the
exercise of dissenter's rights. Each Dissenting Shareholder who becomes
entitled, pursuant to the provisions of applicable law, to payment for his
or her shares of the Company Common Stock shall receive payment therefor
from Associated (but only after the amount thereof shall be agreed upon or
finally determined pursuant to the provisions of applicable law). If any
Dissenting Shareholder shall fail to perfect or shall effectively withdraw
or lose his or her right to receive the value of his or her shares of
Associated Common Stock, his or her shares shall be thereupon converted
into Associated Common Stock in accordance with the provisions of Section
1.06(a) and, if applicable, cash under Section 1.07(e).
4
<PAGE>
SECTION 1.07. Exchange of Certificates.
------------------------
(a) Exchange Agent. As of the Effective Time, Associated shall
--------------
deposit, or shall cause to be deposited, with a bank or trust company
designated by Associated and acceptable to the Company (the "Exchange
Agent"), and such deposit shall be solely for the benefit of the holders of
Shares, for exchange in accordance with this Article I through the Exchange
Agent, certificates representing the shares of Associated Common Stock
(such certificates for shares of Associated Common Stock, and cash in lieu
of fractional shares (if any), together with any dividends or distributions
with respect thereto, being hereinafter referred to as the "Exchange Fund")
issuable pursuant to Section 1.06 in exchange for outstanding Shares.
(b) Exchange Procedures. As soon as reasonably practicable after the
-------------------
Effective Time, the Exchange Agent shall mail or personally deliver to each
holder of record (or his or her attorney-in-fact) of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Shares (the "Certificates"), whose Shares were converted into
the right to receive shares of Associated Common Stock pursuant to Section
1.06 and cash in lieu of fractional shares (if any), (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Associated may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Associated Common Stock.
Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Associated Common Stock which
such holder has the right to receive in respect of the Certificate
surrendered pursuant to the provisions of this Article I (after taking into
account all Shares then held by such holder) and cash in lieu of fractional
shares (if any), and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of Shares which is not
registered in the transfer records of the Company, a certificate
representing the proper number of shares of Associated Common Stock may be
issued to a transferee if the Certificate representing such Shares is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Certificates surrendered for exchange by
any affiliate of the Company shall not be exchanged for certificates
representing shares of Associated Common Stock until Associated has
received a written
5
<PAGE>
agreement from such person as provided in Section 4.04 hereof. Until
surrendered as contemplated by this Section 1.07, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the certificate representing shares of
Associated Common Stock and cash in lieu of any fractional shares of
Associated Common Stock as contemplated by Section 1.07(e).
(c) Distributions with Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect
to Associated Common Stock with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Certificate with respect
to the shares of Associated Common Stock represented thereby, and no cash
payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 1.07(e), until the holder of such Certificate shall
surrender such Certificate. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid to the
holder of the certificates representing whole shares of Associated Common
Stock issued in exchange therefor, without interest, (i) promptly, the
amount of any cash payable with respect to a fractional share of Associated
Common Stock to which such holder is entitled pursuant to Section 1.07(e)
and the amount of dividends or other distributions with a record date after
the Effective Time theretofore paid with respect to such whole shares of
Associated Common Stock, and (ii) at the appropriate payment date, the
amount of dividends or other distributions, with a record date after the
Effective Time but prior to surrender and a payment date occurring after
surrender, payable with respect to such whole shares of Associated Common
stock.
(d) No Further Rights in the Shares. All shares of Associated Common
-------------------------------
Stock issued upon conversion of the Shares in accordance with the terms
hereof (including any cash paid pursuant to Section 1.07(e)) shall be
deemed to have been issued in full satisfaction of all rights pertaining to
such Shares.
(e) No Fractional Shares No certificates or scrip representing
--------------------
fractional shares of Associated Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional share interest
will not entitle the owner thereof to vote or to any rights of a
shareholder of Associated. Each holder of a fractional share interest
shall be paid an amount in cash equal to the product obtained by
multiplying such fractional share interest to which such holder (after
taking into account all fractional share interests then held by such
holder) would otherwise be entitled by the "Daily Average Price." For
purposes hereof, the "Daily Average Price"
6
<PAGE>
shall mean the average of the daily closing prices of a share of Associated
Common Stock as quoted on the NASDAQ National Market during the ten
consecutive days commencing on the first business day following the date
the Federal Reserve Board issues an order approving consummation of the
Merger.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
----------------------------
which remains undistributed to the shareholders of the Company for six
months after the Effective Time shall be delivered to Associated, upon
demand, and any shareholders of the Company who have not theretofore
complied with this Article I shall thereafter look only to Associated for
payment of their claim for Associated Common Stock, any cash in lieu of
fractional shares of Associated Common Stock and any dividends or
distributions with respect to Associated Common Stock.
(g) No Liability. Neither Associated or the Company shall be liable
------------
to any holder of Shares for any such Shares (or dividends or distributions
with respect thereto) or cash delivered to a public official pursuant to
any abandoned property, escheat or similar law.
(h) Withholding Rights. Associated shall be entitled to deduct and
------------------
withhold from any cash consideration payable pursuant to this Agreement to
any holder of Shares such amounts as Associated is required to deduct and
withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts
are so withheld by Associated, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the holder of the
Shares in respect of which such deduction and withholding was made by
Associated.
SECTION 1.08. Stock Transfer Books. At the Effective Time, the stock
--------------------
transfer books of the Company shall be closed and there shall be no further
registration of transfers of shares of Company Common Stock thereafter on the
records of the Company. From and after the Effective Time, the holders of
certificates evidencing ownership of shares of the Company Common Stock
outstanding immediately prior to the Effective Time shall cease to have any
rights with respect to such Shares except as otherwise provided herein or by
law. On or after the Effective Time, any Certificates presented to the Exchange
Agent or Associated for any reason shall be converted into shares of Associated
Common Stock in accordance with this Article I.
SECTION 1.09. Anti-Dilution Adjustment. If, subsequent to the date hereof
------------------------
and prior to the Effective Time, Associated shall pay a stock dividend or
7
<PAGE>
make a distribution on Associated Common Stock in shares of Associated Common
Stock or any security convertible into Associated Common Stock or shall combine
or subdivide its stock, then in each such case, from and after the record date
for determining the shareholders entitled to receive such dividend or
distribution or the securities resulting from such combination or subdivision,
an appropriate adjustment (if any) shall be made to the conversion formula set
forth in Section 1.06 above, for purposes of determining the number of shares of
Associated Common Stock into which the Company Common Stock shall be converted.
For purposes hereof, the payment of a dividend in Associated Common Stock, or
the distribution on Associated Common Stock in securities convertible into
Associated Common Stock, shall be deemed to have effected an increase in the
number of outstanding shares of Associated Common Stock equal to the number of
shares of Associated Common Stock into which such securities shall be initially
convertible without the payment by the holder thereof of any consideration other
than the surrender for cancellation of such convertible securities.
Notwithstanding the foregoing, this Section shall not apply to any stock options
issued under option plans of Associated existing as of the date of this
Agreement.
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
Except as set forth in the Disclosure Schedule attached hereto (the
"Company Disclosure Schedule"), the Company hereby represents and warrants to
Associated that:
SECTION 2.01. Organization and Qualification of the Company;
----------------------------------------------
Subsidiaries. The Company is a corporation duly organized and validly existing
- ------------
under the laws of the State of Wisconsin. The Bank is a duly organized and
validly existing national banking association. CB is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. WFC is a corporation duly organized and validly existing under the
laws of the State of Wisconsin. CFS is a corporation duly organized, validly
existing and in good standing under the laws of the State of Illinois. The Bank
and WFC are and have been the only subsidiaries of the Company. CB is and has
been the only subsidiary of the Bank. CFS is and has been the only subsidiary
of WFC. The Company and its Subsidiaries each have the requisite corporate
power and authority and are in possession of all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates, approvals
and orders ("Company Approvals") necessary to own, lease and operate their
properties and to carry on their businesses as they are now being conducted,
except where the failure to be so
8
<PAGE>
organized, existing or in good standing or to have such power, authority and
Company Approvals would not, individually or in the aggregate, have a Material
Adverse Effect (as defined below) on the Company and its Subsidiaries, taken as
a whole. The term "Material Adverse Effect" as used in this Agreement shall mean
any change or effect that is or is reasonably likely to be materially adverse to
a party's business, operations, properties (including intangible properties),
condition (financial or otherwise), assets or liabilities (including contingent
liabilities). The Company has not received any notice of proceedings relating to
the revocation or modification of any Company Approvals. The Company, WFC, CB
and CFS are duly qualified or licensed as foreign corporations to do business,
and are in good standing, in each jurisdiction where the character of the
properties owned, leased or operated by them or the nature of their activities
makes such qualification or licensing necessary, except for such failures to be
so duly qualified or licensed and in good standing that would not, either
individually or in the aggregate, have a Material Adverse Effect on the Company
and its Subsidiaries, taken as a whole. The Company is registered with the
Federal Reserve Board as a one bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). Except for the Subsidiaries and
except for portfolio investments of the Company or any Subsidiary, the Company
holds no interest, either directly or indirectly, in any other entity. Except
for CB and except for portfolio investments of the Company or any Subsidiary,
the Bank holds no interest, either directly or indirectly, in any other entity.
Except for CFS and except for portfolio investments of the Company or any
Subsidiary, WFC holds no interest, either directly or indirectly, in any other
entity.
SECTION 2.02. Articles of Incorporation and Bylaws. The Company has
------------------------------------
heretofore furnished to Associated complete and correct copies of the Articles
of Incorporation and the Bylaws, as amended or restated, of the Company and its
Subsidiaries and such Articles of Incorporation and Bylaws of the Company and
its Subsidiaries are in full force and effect and neither the Company nor its
Subsidiaries are in violation of any of the provisions of their Articles of
Incorporation or Bylaws.
SECTION 2.03. Capitalization.
--------------
(a) Capitalization of the Company. The authorized capital stock of
-----------------------------
the Company consists of 100,000 shares of Common Stock, par value $20.00
per share. As of the date of this Agreement, (i) 26,582 shares of Company
Common Stock are issued and outstanding, all of which are validly issued,
fully paid and non-assessable (except as provided in section 180.0622(2)(b)
of the Wisconsin Law), and all of which have been issued in compliance with
applicable securities laws, and (ii) 1,643 shares of Company Common Stock
are held in the Company's treasury. Except as
9
<PAGE>
set forth in the Company's Disclosure Schedule at Section 2.03(a), as of
the date of this Agreement, there are no options, warrants or other rights,
agreements, arrangements or commitments of any character relating to the
issued or unissued capital stock of the Company or obligating the Company
to issue or sell any shares of capital stock of, or other equity interests
in the Company. There are no obligations, contingent or otherwise, of the
Company to repurchase, redeem or otherwise acquire any shares of Company
Common Stock or to provide funds to or make any investment (in the form of
a loan, capital contribution or otherwise) in any other entity.
(b) Capitalization of the Bank. The authorized capital stock of the
--------------------------
Bank consists of 28,225 shares of common stock, par value $20 per share.
As of the date of this Agreement, (i) 28,225 shares of the Bank's Common
Stock are issued and outstanding, all of which are validly issued, fully
paid and non-assessable, and all of which have been issued in compliance
with applicable securities laws, and (ii) the Company owns all of the
Bank's Common Stock. As of the date of this Agreement, there are no
options, warrants or other rights, agreements, arrangements or commitments
of any character relating to the issued or unissued capital stock of the
Bank or obligating the Bank to issue or sell any shares of capital stock
of, or other equity interests in the Bank. There are no obligations,
contingent or otherwise, of the Bank to repurchase, redeem or otherwise
acquire any shares of the Bank's Common Stock or to provide funds to or
make any investment (in the form of a loan, capital contribution or
otherwise) in any other entity.
(c) Capitalization of CB. The authorized capital stock of CB
--------------------
consists of 3,000 shares of common stock, par value $1 per share. As of
the date of this Agreement, (i) 100 shares of CB's common stock are issued
and outstanding, all of which are validly issued, fully paid and
nonassessable, and all of which have been issued in compliance with
applicable securities laws, and (ii) the Bank owns all of CB's common
stock. As of the date of this Agreement, there are no options, warrants or
other rights, agreements, arrangements or commitments of any character
relating to the issued or unissued capital stock of CB or obligating CB to
issue or sell any shares of capital stock of, or other equity interests in
CB. There are no obligations, contingent or otherwise, of CB to
repurchase, redeem or otherwise acquire any shares of CB's common stock or
to provide funds or to make any investment (in the form of a loan, capital
contribution or otherwise) in any other entity.
(d) Capitalization of WFC. The authorized capital stock of WFC
---------------------
consists of 9,000 shares of common stock, no par value. As of the date of
10
<PAGE>
this Agreement, (i) 2,000 shares of WFC's common stock are issued and
outstanding, all of which are validly issued, fully paid and nonassessable
(except as provided in section 180.0622(2)(b) of the Wisconsin Law), and
all of which have been issued in compliance with applicable securities
laws, and (ii) the Company owns all of WFC's common stock. As of the date
of this Agreement, there are no options, warrants or other rights,
agreements, arrangement or commitments of any character relating to the
issued or unissued capital stock of WFC or obligating WFC to issue or sell
any shares of capital stock of, or other equity interests in, WFC. There
are no obligations, contingent or otherwise, of WFC to repurchase, redeem
or otherwise acquire any shares of WFC's common stock or to provide funds
to or make any investment (in the form of a loan, capital contribution or
otherwise) in any other entity.
(e) Capitalization of CFS. The authorized capital stock of CFS
---------------------
consists of 10,000 shares of common stock, no par value. As of the date of
this Agreement, (i) 3,000 shares of CFS's common stock are issued and
outstanding, all of which are validly issued, fully paid and nonassessable,
and all of which have been issued in compliance with applicable securities
laws and (ii) WFC owns all of CFS's common stock. As of the date of this
Agreement, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or
unissued capital stock of CFS or obligating CFS to issue or sell any shares
of capital stock of, or other equity interest in CFS. There are no
obligations, contingent or otherwise, of CFS to repurchase, redeem or
otherwise acquire any shares of CFS's common stock or to provide funds or
to make any investment (in the form of a loan, capital contribution or
otherwise) in any other entity.
SECTION 2.04. Authority. The Company has the requisite corporate power and
---------
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action and no other corporate proceedings
on the part of the Company are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby (other than, with respect to the
Merger, the approval and adoption of this Agreement by the holders of a majority
of the outstanding shares of the Company Common Stock in accordance with
Wisconsin Law and the Company's Articles of Incorporation and Bylaws). This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery by
11
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Associated, constitutes the legal, valid and binding obligation of the Company
enforceable in accordance with its terms.
SECTION 2.05. No Conflict; Required Filings and Consents.
------------------------------------------
(a) To the knowledge of the Company, the execution and delivery of
this Agreement by the Company does not, and the performance of this
Agreement by the Company shall not, (i) conflict with or violate the
Articles of Incorporation or Bylaws of the Company or the Subsidiaries,
(ii) conflict with or violate any domestic (federal, state or local) or
foreign law, statute, ordinance, rule, regulation, order, judgment or
decree (collectively, "Laws") applicable to the Company or the
Subsidiaries, or by which their respective properties are bound or
affected, or (iii) result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration
or cancellation of, or result in the creation of a lien or encumbrance on
any of the properties or assets of the Company or the Subsidiaries pursuant
to any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which the
Company or any Subsidiary is a party or by which the Company or any
Subsidiary or any of their respective properties are bound or affected,
except for any such breaches, defaults or other occurrences that would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company and the Subsidiaries, taken as a whole. The transactions
contemplated herein (i) will not require a shareholder vote under section
180.1131 of the Wisconsin Law, (ii) are not subject to the restrictions on
business combinations set forth in section 180.1141 of the Wisconsin law
and (iii) are not subject to the control share voting restrictions set
forth in section 180.1150 of the Wisconsin law.
(b) To the knowledge of the Company, the execution and delivery of
this Agreement by the Company does not, and the performance of this
Agreement by the Company shall not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, domestic or foreign, except (i) for
applicable requirements, if any, of the Securities Act of 1933, as amended
(the "Securities Act"), and the Securities Exchange of 1934, as amended
(the "Exchange Act"), state securities or blue sky laws ("Blue Sky Laws"),
BHCA, the banking laws and regulations of the State of Wisconsin (the
"WBL"), the filing and recordation of appropriate merger or other documents
as required by Wisconsin Law, national banking laws and regulations and
laws and regulations regulating finance companies and
12
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(ii) where the failure to obtain such consents, approvals, authorizations
or permits, or to make such filings or notifications, would not prevent or
delay consummation of the Merger, or otherwise prevent the Company from
performing its obligations under this Agreement, and would not have a
Material Adverse Effect on the Company and its Subsidiaries, taken as a
whole.
SECTION 2.06. Compliance; Permits. To the knowledge of the Company,
-------------------
neither the Company nor its Subsidiaries are in conflict with, or in default or
violation of, (a) any law applicable to the Company or the Subsidiaries or by
which any of their respective properties are bound or affected, or (b) any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary or any of their
respective properties are bound or affected, except for any such conflicts,
defaults or violations which would not, individually or in the aggregate, have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
SECTION 2.07. Banking Reports and Financial Statements.
----------------------------------------
(a) During the five year period prior to the Effective Time, the
Company and its Subsidiaries have timely filed all forms, reports and
documents required to be filed with the Federal Reserve Board, the
Wisconsin Department of Financial Institutions, the Office of the
Comptroller of the Currency and any other applicable federal or state
securities or banking authorities (all such reports and statements filed
during such five year period and after the date hereof are collectively
referred to as the "Company Reports"). The Company Reports, including all
Company Reports filed after the date of this Agreement, (i) were or will be
prepared in accordance with the requirements of applicable law and (ii) did
not at the time they were filed, or will not at the time they are filed,
contain any untrue statement of material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Company Reports,
including any Company Reports filed since the date of this Agreement and
prior to or on the Effective Time, have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
thereto) and each fairly presents the consolidated financial position of
the
13
<PAGE>
Company and its Subsidiaries as of the respective dates thereof and the
consolidated results of their operations and changes in financial position
for the periods indicated, except that any unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments
which were not or are not expected to be material in amount.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the Company and its Subsidiaries as of December 31, 1996,
including all notes thereto (the "Company Balance Sheet"), neither the
Company nor the Subsidiaries have any liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) that would be
required to be reflected on a balance sheet, or in the notes thereto,
prepared in accordance with generally accepted accounting principles,
except (i) for liabilities or obligations incurred in the ordinary course
of business since December 31, 1996, that would not, individually or in the
aggregate have a Material Adverse Effect on the Company and the
Subsidiaries, taken as a whole, or (ii) as otherwise reflected in the
reports referred to in Section 2.07(a) hereof.
SECTION 2.08. Absence of Certain Changes or Events. Except as
------------------------------------
disclosed in the Company Reports filed prior to the date of this Agreement,
since December 31, 1996, to the date of this Agreement, the Company and its
Subsidiaries have conducted their businesses only in the ordinary course and in
a manner consistent with past practice and, since December 31, 1996, there has
not been (a) any change in the financial condition, results of operations or
business of the Company or its Subsidiaries having a Material Adverse Effect on
the Company and its Subsidiaries, taken as a whole, (b) any damage, destruction
or loss (whether or not covered by insurance) with respect to any assets of the
Company or its Subsidiaries having a Material Adverse Effect on the Company and
its Subsidiaries, taken as a whole, (c) any change by the Company or its
Subsidiaries in their accounting methods, principles or practices, except for
compliance with applicable new requirements of the Financial Accounting
Standards Board, (d) any revaluation by the Company or its Subsidiaries of any
of their material assets in any material respect, (e) except in the ordinary
course of business, any entry by the Company or its Subsidiaries into any
commitment or transaction material to the Company and its Subsidiaries, taken as
a whole, (f) any declaration, setting aside or payment of any dividends or
distributions in respect of shares of the Company Common Stock or any
redemption, purchase or other acquisition of any of its securities or any of the
securities of any Subsidiary, or (g) any increase in or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards, or restricted stock
awards), stock purchase or other employee benefit plan, or any other increase in
14
<PAGE>
compensation payable or to become payable to any officers or key employees of
the Company or any of its Subsidiaries.
SECTION 2.09. Absence of Litigation. Except as disclosed in the
---------------------
Company Reports filed prior to the date of this Agreement: (a) neither the
Company nor its Subsidiaries are subject to any continuing order of, or written
agreement or memorandum of understanding with, or continuing material
investigation by, any federal or state banking authority or other governmental
entity, or any judgment, order, writ, injunction, decree or award of any
governmental entity or arbitrator, including, without limitation, cease-and-
desist or other orders of any bank regulatory authority, (b) there is no claim
of any kind, action, suit, litigation, proceeding, arbitration, investigation,
or controversy affecting the Company or its Subsidiaries pending or, to the
knowledge of the Company, threatened, except for matters which individually seek
damages not in excess of $20,000 and which otherwise will not have, and cannot
reasonably be expected to have, a Material Adverse Effect on the Company and its
Subsidiaries, taken as a whole, and (c) there are no uncured material
violations, or violations with respect to which material refunds or restitutions
may be required, cited in any compliance report to the Company or the
Subsidiaries as a result of the examination by any bank regulatory authority.
SECTION 2.10. Employee Benefit Plans.
-----------------------
(a) The Company Disclosure Schedule at Section 2.10 lists all
"employee pension benefit plans," as such term is defined in section 3(2)
of the Employee Retirement Income Security Act of 1974 ("ERISA"),
maintained, sponsored or contributed to by the Company or the Subsidiaries
(the "Pension Plans"). The term "Pension Plan" shall also include any
terminated "employee pension benefit plan" previously maintained, sponsored
or contributed to by the Company or any Subsidiary which, as of the
Effective Time, has not distributed all of its assets in full satisfaction
of accrued benefits and/or obligations.
(b) The Company Disclosure Schedule at Section 2.10 lists all
"employee welfare benefit plans," as defined in ERISA section 3(1),
maintained, sponsored or contributed to by the Company or any Subsidiary
(the "Welfare Plans"). The term "Welfare Plans" shall also include any
terminated employee welfare benefit plan previously maintained, sponsored
or contributed to by the Company or any Subsidiary which, as of the
Effective Time, has not distributed all of its assets and/or satisfied all
of its obligations.
15
<PAGE>
(c) The Company Disclosure Schedule at Section 2.10 lists all plans
or programs to provide fringe benefits to the Company's and any
Subsidiary's employees (other than Pension Plans and Welfare Plans)
including, but not limited to, vacation, sick leave, severance pay,
nonqualified deferred compensation plans and other insurance plans or
benefits (the "Fringe Benefit Plans").
(d) The Company has furnished to Associated true and complete copies
of the documents governing each of the Pension Plans and Welfare Plans as
in effect at the Effective Time.
(e) The Company has furnished to Associated true and complete copies
of the documents governing each Fringe Benefit Plan.
(f) Except as set forth on the Company Disclosure Schedule at
section 2.10, the Company has no announced or unannounced plan to change
any Pension Plan, Welfare Plan or Fringe Benefit Plan that would materially
affect any Pension Plan, Welfare Plan or Fringe Benefit Plan. As of the
Effective Time, neither the Company nor any Subsidiary has made any
material modification, within the meaning of ERISA section 102 and the
regulations thereunder, to any existing Pension Plan, Welfare Plan or
Fringe Benefit Plan which is not set forth in the Pension Plan, Welfare
Plan or Fringe Benefit Plan documents provided to Associated.
(g) For purposes of Section 2.10(h), (j), (l) and (m), "Company"
shall include the Company and (i) any trade or business (whether or not
incorporated) which, within the meaning of Code section 414(c), is under
common control with the Company; (ii) any corporation which, within the
meaning of Code section 414(b), is a member of a controlled group of
corporations with the Company; and (iii) any group which, within the
meaning of Code section 414(m), is a member of an affiliated service group
with the Company (together, "ERISA Affiliates").
(h) Neither the Company nor any ERISA Affiliates have ever been
obligated to contribute to any multiemployer plan within the meaning of
ERISA section 3(37).
(i) To the knowledge of the Company, the Pension Plans, Welfare
Plans and Fringe Benefit Plans including the trusts and other funding
vehicles related to the Pension Plans, Welfare Plans and Fringe Benefit
Plans have been administered in all respects in compliance with the
applicable requirements of ERISA, the Code, the plan documents and all
other applicable rules, regulations and laws. The Pension Plans, Welfare
16
<PAGE>
Plans and Fringe Benefit Plans, including the trusts or other funding
vehicles related to the Pension Plans, Welfare Plans and Fringe Benefit
Plans, meet all applicable requirements, in form and in operation, for
favorable tax treatment under the Code. All required contributions
pursuant to the Pension Plans, Welfare Plans and Fringe Benefit Plans for
all periods prior to the Effective Time have been made or will be made or
are adequately reflected as accruals in accordance with generally accepted
accounting principles on the Company's Financial Statements prior to the
Effective Time. There are no pending or, to the knowledge of the Company,
threatened claims, lawsuits or arbitrations which have been asserted or
instituted against the Pension Plans, Welfare Plans or Fringe Benefit Plans
or any fiduciaries thereof with respect to their duties to the Pension
Plans, Welfare Plans or Fringe Benefit Plans, including the assets of any
of the trusts under any Pension Plans, Welfare Plans or Fringe Benefit
Plans. No representations or communications with respect to participation,
eligibility for benefits, vesting, benefit accrual or coverage under the
Pension Plans, Welfare Plans or Fringe Benefit Plans have been made to the
Company's or any Subsidiary's employees other than those which are in
accordance with the terms of such Pension Plans, Welfare Plans or Fringe
Benefit Plans in effect immediately prior to the Effective Time.
(j) With respect to any Welfare Plan which is a "group health plan"
as defined in Code section 4980B, the Company and the ERISA Affiliates have
complied with the continuation coverage requirements of Code section 4980B
for any periods prior to the Effective Time.
(k) With respect to each Pension Plan, Welfare Plan and Fringe
Benefit Plan, the Company has furnished to Associated copies of any
investment management agreements, fiduciary insurance policies, fidelity
bonds, rules, regulations or policies of the trustees or any committee
thereunder, all of which are true and complete.
(l) Except as specified on the Company Disclosure Schedule at
section 2.10, to the knowledge of the Company, since December 31, 1974, no
fiduciary of the Pension Plans or Welfare Plans has engaged in any
"prohibited transaction" (as defined in ERISA section 406 or Code section
4975) nor has any fiduciary breached any fiduciary responsibility, as
described in Part 4 of Title I of ERISA with respect to such Pension Plans
or Welfare Plans.
(m) Except as specified on the Company Disclosure Schedule at
section 2.10, the Company has no knowledge of the occurrence of any event
17
<PAGE>
with respect to any Pension Plan which could result in a liability of the
Company or any ERISA Affiliate to the Pension Benefit Guaranty Corporation
("PBGC"), other than the timely payment of premiums pursuant to section
4007 of ERISA. All required PBGC premiums have been paid for the periods
through the Effective Time.
(n) Except as set forth in the Company Disclosure Schedule at
Section 2.10, no Welfare Plan or Fringe Benefit Plan provides any form of
post-retirement health benefits to retired employees of the Company or the
Subsidiaries, other than benefits required to be provided pursuant to Code
section 4980B.
SECTION 2.11. Employment Contracts; Material Contracts. Except as
----------------------------------------
set forth in the Company Disclosure Schedule at Section 2.11, neither the
Company nor any Subsidiary is a party to or bound by (a) any employment or
consulting contract that is not terminable without penalty by the Company or the
applicable Subsidiary on 60 days' or less notice, (b) any contract or commitment
for capital expenditures in excess of $10,000.00 for any one (1) project, or (c)
contracts or commitments for the purchase of materials or supplies or for the
performance of services over a period of more than 60 days from the date of this
Agreement.
SECTION 2.12. Registration Statement; Proxy Statement. None of the
---------------------------------------
information supplied or to be supplied by the Company for inclusion in (a) the
Registration Statement (as defined in Section 6.01), (b) the Proxy Statement/
Prospectus (as defined in Section 6.01), or (c) any other document to be filed
with the Securities and Exchange Commission (the "SEC") or other regulatory
authority in connection with the transactions contemplated hereby, at the
respective times such documents are filed and, in the case of the Registration
Statement, when it becomes effective and at the Effective Time, and with respect
to the Proxy Statement/Prospectus, when mailed, shall be false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements therein not misleading. In the case of the
Proxy Statement/Prospectus or any amendment thereof or supplement thereto, none
of such information at the time of the Company's shareholders meeting (pursuant
to Section 6.02) (the "Meeting") shall be false or misleading with respect to
any material fact or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Meeting.
SECTION 2.13. Title to Property. The Company Disclosure Schedule at
-----------------
Section 2.13 correctly identifies all real property owned and leased by the
Company and its Subsidiaries. The Company and its Subsidiaries have good and
defensible title to all of their properties and assets, real and personal,
tangible and intangible free and clear of all mortgage liens, and free and clear
of all other liens,
18
<PAGE>
charges and encumbrances except liens for taxes not yet due and payable, pledges
to secure deposits and such minor imperfections of title, if any, as to not
materially detract from the value of or interfere with the present use of the
property affected thereby or which, individually or in the aggregate, would not
have a Material Adverse Effect on the Company and its Subsidiaries, taken as a
whole; and all leases pursuant to which the Company or any Subsidiary leases
from others real or personal property including, without limitation, leases for
branch offices, are in good standing, valid and effective in accordance with
their respective terms, and there is not or there has not occurred, under any of
such leases, any existing material default by the Company or any Subsidiary, or,
to the knowledge of the Company, by any other party thereto or any event of
default by the Company or any Subsidiary, or, to the knowledge of the Company,
by any other party thereto (or event which with notice or lapse of time, or
both, would constitute a material default by the Company or any Subsidiary and
in respect of which the Company or the Subsidiary in question has not taken
adequate steps to prevent such a default from occurring or, to the knowledge of
the Company, event which with notice or lapse of time, or both, would constitute
a material default by any other party and in respect of which such other party
has not taken adequate steps to prevent such default from occurring). The
Company's and its Subsidiaries' buildings and equipment in regular use have been
reasonably maintained and are in good and serviceable condition, reasonable wear
and tear excepted. None of the buildings, structures or appurtenances owned or
leased by the Company or any Subsidiary for their operation or maintenance as
now operated or maintained, contravenes any zoning ordinances or other
administrative regulations (whether or not permitted because of prior non-
conforming use) or violates any restrictive covenant or any provision of law,
the effect of which would materially interfere with or prevent the continued use
of such properties for the purposes for which they are now being used or would
materially and adversely affect the value thereof.
SECTION 2.14. Compliance with Environmental Laws.
----------------------------------
(a) The term "Company's Property" shall mean any real property and
------------------
improvements currently owned, leased, used, operated or occupied by the
Company or any Subsidiary. The term "Company's Property" shall also
include any real property or improvements (i) the Company or any Subsidiary
has acquired title to, or possession or control of, through enforcement of
a security interest, and (ii) on which the Company or any Subsidiary has
engaged in the operation of a business, completion of work-in-progress or
other actions associated with conducting or concluding the borrower's
business;
(b) The term "Environmental Claims" shall mean any and all
--------------------
administrative, regulatory or judicial actions, suits, demands, demand
19
<PAGE>
letters, claims, liens, notices of noncompliance or violation,
investigations or proceedings relating in any way to any applicable
Environmental Law or Environmental Permit;
(c) The term "Environmental Laws" shall mean all federal, state and
------------------
local laws including statutes, regulations and other governmental
restrictions and requirements relating to the discharge of air pollutants,
water pollutants or process wastewater or the disposal of solid or
hazardous waste or otherwise relating to the environment or hazardous
substances or employee health and safety.
(d) The term "Environmental Permits" shall mean all permits,
---------------------
approvals, identification numbers, licenses and other authorizations
required under any applicable Environmental Law.
(e) The term "Hazardous Substances" shall mean all hazardous and
--------------------
toxic substances, wastes and materials; any pollutants or contaminants
(including, without limitation, petroleum products, and asbestos); and any
other similar substances or materials which are regulated under applicable
Environmental Laws.
(f) To the knowledge of the Company, the Environmental Permits (if
any) are in full force and effect and constitute all permits, licenses,
approvals and consents relating to Environmental Laws or Hazardous
Substances required for the conduct of the Company's and the Subsidiaries'
businesses and the use of the Company's Property (as presently conducted
and used) in compliance with applicable Environmental Laws.
(g) To the knowledge of the Company, the Company or a Subsidiary has
filed all reports, returns and other filings required to be filed with
respect to the Company's Property under Environmental Laws and the
Environmental Permits except where the failure to do so would not have a
material adverse effect on the Company's and the Subsidiaries' businesses
or financial condition, taken as a whole. The Company and/or the
Subsidiaries have made no environmental filings after January 1, 1996.
(h) To the knowledge of the Company, the business of the Company and
the Subsidiaries and the Company's Property have been and are being
operated by the Company and Subsidiaries in accordance with all applicable
Environmental Laws and Environmental Permits. Neither the Company nor the
Subsidiaries have received any written notice nor does the Company or any
Subsidiary have knowledge that the Company's Property is
20
<PAGE>
not in material compliance with all Environmental Laws and Environmental
Permits and no proceeding for the suspension, revocation or cancellation of
any Environmental Permit is pending or, to the knowledge of the Company,
threatened.
(i) There are no actions pending, or to the knowledge of the
Company, threatened against the Company or any Subsidiary (naming the
Company or any Subsidiary), which in any case assert or allege (i) the
Company or any Subsidiary violated any Environmental Law or Environmental
Permit or are in default with respect to any Environmental Permit or any
order, writ, judgment, variance, award or decree of any government
authority; (ii) the Company or any Subsidiary is required to clean up or
take remedial or other response action due to the disposal, discharge or
other release of any Hazardous Substance on the Company's Property or
elsewhere; or (iii) the Company or any Subsidiary is required to contribute
to the cost of any past, present or future cleanup or remedial or other
response action which arises out of or is related to the disposal,
discharge or other release or any Hazardous Substance by the Company, any
Subsidiary or others. The Company, the Subsidiaries and, to the knowledge
of the Company, the Company's Property are not subject to any judgment,
stipulation, order, decree or agreement arising under Environmental Laws.
(j) With respect to the period during which the Company or any
Subsidiary occupied the Company's Property, (i) no Hazardous Substances
have been treated, recycled or disposed of by the Company or any Subsidiary
(intentionally or unintentionally) on, under or at the Company's Property;
(ii) to the knowledge of the Company, there has been no release or
threatened release by the Company or any Subsidiary of any Hazardous
Substance on or from the Company's Property; (iii) to the knowledge of the
Company, there have been no activities on the Company's Property which
would subject Associated, any Subsidiary or any subsequent occupier of the
Company's Property to damages, penalties, injunctive relief or cleanup
costs under any Environmental Laws or common law theory of liability.
SECTION 2.15. Absence of Agreements. Neither the Company nor any
---------------------
Subsidiary is a party to any written agreement or memorandum of understanding
with, or a party to any commitment letter or similar undertaking to, or is
subject to any order or directive by, or is a recipient of any extraordinary
supervisory letter which restricts materially the conduct of its business
(including any contract containing covenants which limit the ability of the
Company or any
21
<PAGE>
Subsidiary to compete in any line of business or with any person or which
involve any restriction of the geographical area in which, or method by which,
the Company or any Subsidiary may carry on its business), or in any manner
relates to its capital adequacy, its credit policies or its management nor has
the Company or any Subsidiary been advised that any federal, state or
governmental agency is contemplating issuing or requesting (or is considering
the appropriateness of issuing or requesting) any such order, decree, agreement,
memorandum of understanding, extraordinary supervisory letter commitment letter
or similar submission.
SECTION 2.16. Taxes. The Company and its Subsidiaries have timely
-----
filed all Tax Returns (as defined below) required to be filed by them, and the
Company and its Subsidiaries have timely paid and discharged all Taxes (as
defined below) due in connection with or with respect to the filing of such Tax
Returns and have timely paid all other Taxes as are due, except such as are
being contested in good faith by appropriate proceedings and with respect to
which the Company is maintaining reserves adequate for their payment. To the
knowledge of the Company, the liability for Taxes set forth on each such Tax
Return adequately reflects the Taxes required to be reflected on such Tax
Return. For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes,
charges, fees levies, and other governmental assessments and impositions of any
kind, payable to any federal, state, local or foreign governmental entity or
taxing authority or agency, including, without limitation, (a) income,
franchise, profits, gross receipts, estimated, ad valorem, value added, sales,
-- --------
use, service, real or personal property, capital stock, license, payroll,
withholding, disability, employment, social security, workers compensation,
unemployment compensation, utility, severance, production, excise, stamp,
occupation, premiums, windfall profits, transfer and gains taxes, (b) customs
duties, imposts, charges, levies or other similar assessments of any kind, and
(c) interest, penalties and additions to tax imposed with respect thereto, and
"Tax Returns" shall mean returns, reports, and information statements with
respect to Taxes required to be filed with the United States Internal Revenue
Service (the "IRS") or any other governmental entity or taxing authority or
agency, domestic or foreign, including, without limitation, consolidated,
combined and unitary tax returns. Neither the IRS nor any other governmental
entity or taxing authority or agency is now asserting, either through audits,
administrative proceedings, court proceedings or otherwise, or, to the knowledge
of the Company, threatening to assert against the Company or any Subsidiary any
deficiency or claim for additional Taxes. Neither the Company nor any
Subsidiary has granted any waiver of any statute of limitations with respect to,
or any extension of a period for the assessment of, any Tax. There are no tax
liens on any assets of the Company or any Subsidiary. Neither the Company nor
any Subsidiary has received a ruling or entered into an agreement with the IRS
or any other governmental entity or taxing authority or agency that would have a
Material Adverse Effect on the Company and its Subsidiaries, taken as a whole,
after the Effective Time. The accruals and reserves for taxes reflected in the
Company
22
<PAGE>
Balance Sheet are adequate to cover all Taxes accruable by the Company and its
Subsidiaries on a consolidated basis through the date thereof (including Taxes
being contested) in accordance with generally accepted accounting principles.
Except as may be set forth in the Company Disclosure Schedule at Section 2.16,
no agreements relating to allocating or sharing of Taxes exist between the
Company and any Subsidiary.
SECTION 2.17. Insurance. Complete and correct copies of all material
---------
policies of fire, product or other liability, workers' compensation, directors
and officers, financial institutions bond, errors and omissions and all other
similar forms of insurance owned or held by the Company and its Subsidiaries
have been delivered to Associated. Subject to expirations and renewals of
insurance policies in the ordinary course of business, all such policies are in
full force and effect, all premiums with respect thereto covering all periods up
to and including the date as of which this representation is being made have
been paid (other than retrospective premiums which may be payable with respect
to workers' compensation insurance policies), and no notice of cancellation or
termination has been received with respect to any such policy. Such policies
are and shall remain valid, outstanding and enforceable policies, and will not
be terminated prior to the Effective Time. To the knowledge of the Company, the
insurance policies to which the Company or its Subsidiaries are parties are
sufficient for compliance with all material requirements of law and all material
agreements to which the Company and its Subsidiaries are parties and will be
maintained by the Company and its Subsidiaries until the Effective Time.
Neither the Company nor the Subsidiaries have been refused any insurance with
respect to any material assets or operations, nor has coverage been limited in
any respect material to their operations by any insurance carrier to which they
have applied for any such insurance or with which they have carried insurance
during the last five (5) years.
SECTION 2.18. Absence of Adverse Agreements. Neither the Company nor
-----------------------------
the Subsidiaries are parties to any agreement or instrument or any judgment,
order or decree or any rule or regulation of any court or other governmental
agency or authority which materially and adversely affects or could reasonably
be expected to materially and adversely affect in the future the financial
condition, results or operations, assets, business or prospects of the Company
and its Subsidiaries, taken as a whole.
SECTION 2.19. Internal Controls and Records. The Company and its
-----------------------------
Subsidiaries maintain books of account which accurately and validly reflect, in
all material respects, all loans, mortgages, collateral and other business
transactions and maintain accounting controls sufficient to ensure that all such
transactions are (a) in all material respects, executed in accordance with its
management's general or specific authorization, and (b) recorded in conformity
with generally accepted
23
<PAGE>
accounting principles. There is no amendment to any lending agreement,
collateral document or security which is not fully reflected in the books and
records of the Company and its Subsidiaries.
SECTION 2.20. Loans. Except as disclosed in the Company Disclosure
-----
Schedule at Section 2.20, (a) the Bank is not a party to any written or oral
loan agreement, note or borrowing arrangement which has been classified as
"substandard," "doubtful," "loss," "other loans especially mentioned" or any
comparable classifications by the Company or the Bank or banking regulators; (b)
neither the Company nor any Subsidiary is a party to any written or oral loan
agreement, note, or borrowing arrangement, including any loan guaranty, with any
director or executive officer of the Company or any Subsidiary, or any person,
corporation or enterprise controlling, controlled by or under common control
with any of the foregoing; or (c) neither the Company nor any Subsidiary is a
party to any written or oral loan agreement, note or borrowing arrangement in
violation of any law, regulation or rule of any governmental authority and which
violation could have a Material Adverse Effect on the Company and the
Subsidiaries, taken as a whole.
SECTION 2.21. Labor Matters. Except as will not cause a Material
-------------
Adverse Effect to the Company or its Subsidiaries, (a) the Company and its
Subsidiaries are in compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and
hours, and are not engaged in any unfair labor practice; (b) there is no unfair
labor practice complaint against the Company or its Subsidiaries pending before
the National Labor Relations Board; (c) there is no labor strike, dispute,
slowdown, representation campaign or work stoppage actually pending or
threatened against or affecting the Company or its Subsidiaries; (d) no
grievance or arbitration proceeding arising out of or under collective
bargaining agreements is pending and no claim therefor has been asserted against
the Company or its Subsidiaries; and (e) neither the Company nor its
Subsidiaries are experiencing any material work stoppage.
SECTION 2.22. Brokers. No broker, finder or investment banker is
-------
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company or its Subsidiaries.
SECTION 2.23. Accounting and Tax Matters.
--------------------------
(a) To the knowledge of the Company, neither the Company nor any of
its affiliates has taken or agreed to take any action that would prevent
Associated from accounting for the business combinations to be effected by
24
<PAGE>
the Merger as a pooling-of-interests or would prevent the Merger from
qualifying as a reorganization under Section 368(a)(1)(A) of the Code.
(b) To the knowledge of the Company, there is no plan or intention on
the part of shareholders of the Company who will receive Associated Common
Stock to sell or otherwise dispose of an amount of Associated Common Stock
to be received in the Merger which would reduce their ownership of
Associated Common Stock to a number of shares having in the aggregate a
value at the time of the Merger of less than fifty percent (50%) of the
total value of the Company's Common Stock outstanding immediately prior to
the Merger.
SECTION 2.24. Full Disclosure. No statement contained in this
---------------
Agreement, including the Company Disclosure Schedule, or any certificate
furnished or to be furnished by or at the direction of the Company to Associated
in, or pursuant to the provisions of, this Agreement contains or shall contain
any untrue statement of a material fact or omits or shall omit to state any
material fact necessary, in light of the circumstances under which it was made,
in order to make the statements herein or therein not misleading.
SECTION 2.25. Vote Required. The affirmative vote of a majority of
-------------
the votes that holders of the outstanding shares of the Company Common Stock are
entitled to cast is the only vote of the holders of any class or series of the
Company's capital stock necessary to approve the Merger.
SECTION 2.26. Branch Sales. The Company's Disclosure Schedule at
------------
Section 2.26 sets forth a list of the assets, liabilities and deposits to be
transferred pursuant to the Branch Sales Agreement between the Bank and Horicon
State Bank (Appleton) dated September 19, 1997 and pursuant to the Branch Sales
Agreement between the Bank and Horicon State Bank (Ripon) dated September 19,
1997.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF ASSOCIATED
Except as set forth in the Disclosure Schedule attached hereto (the
"Associated Disclosure Schedule"), Associated hereby represents and warrants to
the Company that:
SECTION 3.01. Organization and Qualification. Associated is a bank
------------------------------
holding company duly organized and validly existing under the laws of the State
of Wisconsin. Associated is registered with the Federal Reserve Board as a bank
25
<PAGE>
holding company under the BHCA. Associated has the requisite corporate power
and authority and is in possession of all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates, approvals and orders (the
"Associated Approvals") necessary to own, lease and operate its properties and
to carry on its business as it is now being conducted, including appropriate
authorizations from the Federal Reserve Board, except where the failure to be so
organized and existing or to have such power, authority and Associated Approvals
would not, individually or in the aggregate, have a Material Adverse Effect on
Associated. Associated has not received any notice of proceedings relating to
the revocation or modification of any such Associated Approvals. Associated is
duly qualified or licensed as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that would not, either individually
or in the aggregate, have a Material Adverse Effect on Associated.
SECTION 3.02. Articles of Incorporation and Bylaws. Associated has
------------------------------------
heretofore furnished to the Company a complete and correct copy of its Articles
of Incorporation and the Bylaws, as amended or restated. Such Articles of
Incorporation and Bylaws are in full force and effect. Associated is not in
violation of any of the provisions of its Articles of Incorporation or Bylaws.
SECTION 3.03. Capitalization. The outstanding capital stock of
--------------
Associated is, and the shares of Associated Common Stock to be issued pursuant
to the Merger, when so issued, will be, duly authorized, validly issued, fully
paid and non-assessable (except as provided in section 180.0622(2)(b) of
Wisconsin Law) and have not, and will not have, been issued in violation of the
preemptive rights of any person.
SECTION 3.04. Authority. Associated has the requisite corporate
---------
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by Associated and the consummation
by Associated of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Associated and no
other corporate proceedings on the part of Associated are necessary to authorize
this Agreement or to consummate the transactions so contemplated hereby. This
Agreement has been duly and validly executed and delivered by Associated and,
assuming the due authorization, execution and delivery by the Company,
constitutes the legal, valid and binding obligation of Associated.
26
<PAGE>
SECTION 3.05. No Conflict; Required Filings and Consents.
------------------------------------------
(a) To the knowledge of Associated, the execution and delivery of this
Agreement by Associated does not, and the performance of this Agreement by
Associated shall not, (i) conflict with or violate the Articles of
Incorporation or Bylaws of Associated, (ii) conflict with or violate any
laws applicable to Associated or its subsidiaries or by which its or their
properties are bound or affected, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a
lien or encumbrance on any of the properties or assets of Associated or any
subsidiary of Associated pursuant to any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument
or obligation to which Associated or any subsidiary of Associated is a
party or by which Associated or any subsidiary of Associated or any of
their properties are bound or affected, except for any such breaches,
defaults or other occurrences that would not, individually or in the
aggregate, have a Material Adverse Effect on Associated and its
subsidiaries, taken as a whole.
(b) To the knowledge of Associated, the execution and delivery of this
Agreement by Associated does not, and the performance of this Agreement by
Associated shall not, require any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or
regulatory authority, domestic or foreign, except (i) for applicable
requirements, if any, of the Securities Act, the Exchange Act, Blue Sky
Laws, the BHCA, the WBL, the filing and recordation of appropriate merger
or other documents as required by Wisconsin Law, national banking laws and
regulations and laws and regulations regulating finance companies, and (ii)
where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not prevent or
delay consummation of the Merger, or otherwise prevent Associated from
performing its obligations under this Agreement, and would not have a
Material Adverse Effect on Associated.
SECTION 3.06. Compliance; Permits. To the knowledge of Associated,
-------------------
neither Associated nor any of its subsidiaries is in conflict with, or in
default or violation of (a) any Law applicable to Associated or any subsidiary
of Associated or by which its or their property is bound or affected, or (b) any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Associated or any
subsidiary of Associated is a party or by which Associated or any subsidiary of
Associated or any of its or their
27
<PAGE>
properties are bound or affected, except for any such conflicts, defaults or
violations which would not, individually or in the aggregate, have a Material
Adverse Effect on Associated and its subsidiaries, taken as a whole.
SECTION 3.07. Securities Reports; Financial Statements.
----------------------------------------
(a) As of the date of this Agreement, Associated has delivered to the
Company in the form filed with the SEC (x)(i) its Annual Reports on Form
10-K for the fiscal years ended December 31, 1993, 1994, 1995 and 1996,
respectively, (ii) its Quarterly Reports on Form 10-Q for the nine-month
period ended September 30, 1997, (iii) all definitive proxy statements
relating to Associated's meetings of shareholders (whether annual or
special) held since December 31, 1993, (iv) all Reports on Form 8-K filed
by Associated with the SEC since December 31, 1993, (v) all other reports
or registration statements (other than Reports on Form 10-Q not referred to
in clause (ii) above and registration statements on Form S-8) filed by
Associated with the SEC since December 31, 1993 and (vi) all amendments and
supplements to all such reports and registration statements filed by
Associated with the SEC since December 31, 1993 (collectively, the
"Associated SEC Reports"). The Associated SEC Reports, including all
Associated SEC Reports filed after the date of this Agreement, (y)(i) were
or will be prepared in all material respects in accordance with the
requirements of applicable law and (ii) did not at the time they were
filed, or will not at the time they are filed, contain any untrue statement
of material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Associated SEC Reports,
including any Associated SEC Reports filed since the date of this Agreement
and prior to or on the Effective Time, have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
thereto) and each fairly presents the consolidated financial position of
Associated and its subsidiaries as of the respective dates thereof and the
consolidated results of its operations and changes in financial position
for the periods indicated, except that any unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments
which were not or are not expected to be material in amount.
28
<PAGE>
(c) Except as and to the extent set forth on the consolidated balance
sheet of Associated and its subsidiaries as of December 31, 1996, including
all notes thereto (the "Associated Balance Sheet"), neither Associated nor
its subsidiaries have any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on a balance sheet, or in the notes thereto, prepared in
accordance with generally accepted accounting principles, except (i) for
liabilities or obligations incurred in the ordinary course of business
since December 31, 1996, that would not, individually or in the aggregate,
have a Material Adverse Effect on Associated and its subsidiaries, taken as
a whole, or (ii) as otherwise reflected in the report referred to in clause
(x)(ii) of Section 3.07(a) hereof.
SECTION 3.08. Absence of Certain Changes or Events. Except as
------------------------------------
disclosed in the Associated SEC Reports filed prior to the date of this
Agreement and except for the restructuring charges described in the Associated
Disclosure Schedule at Section 3.08, since December 31, 1996, to the date of
this Agreement, Associated and its subsidiaries have conducted their businesses
only in the ordinary course and in a manner consistent with past practice and,
since December 31, 1996, there has not been (a) any change in the financial
condition, results of operations or business of Associated or its subsidiaries
having a Material Adverse Effect on Associated and its subsidiaries, taken as a
whole, (b) any damage, destruction or loss (whether or not covered by insurance)
with respect to any assets of Associated or its subsidiaries having a Material
Adverse Effect on Associated and its subsidiaries, taken as a whole, (c) any
change by Associated in its accounting methods, principles or practices, (d) any
revaluation by Associated of any of its material assets in any material respect,
or (e) to the date of this Agreement, any entry by Associated or any of its
subsidiaries into any commitment or transaction material to Associated and its
subsidiaries, taken as a whole.
SECTION 3.09. Absence of Litigation. Except as disclosed in the
---------------------
Associated Disclosure Schedule at Section 3.09 and in the Associated SEC Reports
filed prior to the date of this Agreement, there is no claim, action, suit,
litigation, proceeding, arbitration, investigation, or controversy of any kind
affecting Associated or any of Associated's subsidiaries pending or, to the
knowledge of Associated, threatened, except for matters which individually seek
damages not in excess of $100,000 and which otherwise will not have, and cannot
reasonably be expected to have, a Material Adverse Effect on Associated and its
subsidiaries taken as a whole, and there are no uncured material violations, or
violations with respect to which material refunds or restitutions may be
required, cited in any compliance report to Associated or any of Associated's
subsidiaries as a result of an examination by any bank regulatory authority.
29
<PAGE>
SECTION 3.10. Registration Statement; Proxy Statement. None of the
---------------------------------------
information supplied or to be supplied by Associated for inclusion in (a) the
Registration Statement (as defined in Section 6.01) (b) the Proxy Statement/
Prospectus (as defined in Section 6.01), or (c) any other document to be filed
with the SEC or other regulatory authority in connection with the transactions
contemplated hereby, at the respective time such documents are filed and, in the
case of the Registration Statement, when it becomes effective and at the
Effective Time, and with respect to the Proxy Statement/Prospectus, when mailed,
shall be false or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein not
misleading. In the case of the Proxy Statement/Prospectus or any amendment
thereof or supplement thereto, none of such information at the time of the
Meeting (as provided for in Section 6.02) shall be false or misleading with
respect to any material fact, or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of any proxy for the Meeting. All documents filed with the SEC or
other regulatory authority by Associated in connection with the Merger shall
comply as to form in all material respects with the provisions of applicable
law.
SECTION 3.11. Absence of Agreements. Neither Associated nor any of
---------------------
its subsidiaries is a party to any written agreement or memorandum of
understanding with, or a party to any commitment letter or similar undertaking
to, or is subject to any order or directive by, or is a recipient of any
extraordinary supervisory letter which restricts materially the conduct of its
or their business (including any contract containing covenants which limit the
ability of Associated or any subsidiary of Associated to compete in any line of
business or with any person or which involve any restriction of the geographical
area in which, or any method by which, Associated or any subsidiary of
Associated may carry on its business (other than as may be required by Law or
applicable regulatory authorities)), or in any manner relates to its or their
capital adequacy, credit policies or management, except for those the existence
of which has been disclosed to the Company pursuant to Sections 3.07 and 3.08,
nor has Associated been advised that any federal, state or governmental agency
is contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, decree, agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter or similar
submission, except as may be disclosed by Associated in the Associated
Disclosure Schedule at Section 3.11.
SECTION 3.12. Taxes. Associated and its subsidiaries have timely
-----
filed all Tax Returns required to be filed by them, and Associated and its
subsidiaries have timely paid and discharged all Taxes due in connection with or
with respect to the filing of such Tax Returns and have timely paid all other
Taxes as are due,
30
<PAGE>
except such as are being contested in good faith by appropriate proceedings and
with respect to which Associated is maintaining reserves adequate for their
payment. To the knowledge of Associated, the liability for Taxes set forth on
each such Tax Return adequately reflects the Taxes required to be reflected on
such Tax Return. For purposes of this Section 3.12, references to Associated and
its subsidiaries include former subsidiaries of Associated for the periods
during which any such corporations were owned, directly or indirectly, by
Associated. Neither the IRS nor any other governmental entity or taxing
authority or agency is now asserting, either through audits or administrative
proceedings, court proceedings or otherwise, or, to the knowledge of Associated,
threatening to assert against Associated or any of its subsidiaries any
deficiency or claim for additional Taxes. Neither Associated nor any of its
subsidiaries has granted any waiver of any statute of limitations with respect
to, or any extension of a period for the assessment of, any Tax. There are no
tax liens on any assets of Associated or any of its subsidiaries. Neither
Associated nor any of its subsidiaries has received a ruling or entered into an
agreement with the IRS or any other governmental entity or taxing authority or
agency that would have a Material Adverse Effect on Associated and its
subsidiaries, taken as a whole, after the Effective Time. The accruals and
reserves for taxes reflected in the Associated Balance Sheet are adequate to
cover all Taxes accruable through the date thereof (including Taxes being
contested) in accordance with generally accepted accounting principles. No
agreements relating to allocating or sharing of Taxes exist among Associated and
its subsidiaries.
SECTION 3.13. Brokers. No broker, finder or investment banker is
-------
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Associated.
SECTION 3.14. Accounting and Tax Matters. To the knowledge of
--------------------------
Associated, neither Associated nor any of its affiliates has taken or agreed to
take any action that would prevent Associated from accounting for the business
combinations to be effected by the Merger as a pooling-of-interests or would
prevent the Merger from qualifying as a reorganization under Section
368(a)(1)(A) of the Code.
SECTION 3.15. Full Disclosure. No statement contained in this
---------------
Agreement, including the Associated Disclosure Schedule, or any certificate
furnished or to be furnished by or at the direction of Associated to the
Company, in or pursuant to the provisions of this Agreement, contains or shall
contain any untrue statement of a material fact or omits or shall omit to state
any material fact necessary, in the light of the circumstances under which it
has been made, in order to make the statements herein or therein not misleading.
31
<PAGE>
ARTICLE IV
----------
COVENANTS OF THE COMPANY
------------------------
SECTION 4.01. Affirmative Covenants. The Company hereby covenants
---------------------
and agrees with Associated that prior to the Effective Time, unless the prior
written consent of Associated shall have been obtained and except as otherwise
contemplated herein, it will and it will cause each Subsidiary to:
(a) operate its business only in the usual, regular and ordinary
course consistent with past practices;
(b) use reasonable efforts to preserve intact its business
organization and assets, maintain its rights and franchises, retain the
services of its officers and key employees and maintain its relationships
with customers;
(c) use reasonable efforts to maintain and keep its properties in as
good repair and condition as at present, ordinary wear and tear excepted;
(d) use reasonable efforts to keep in full force and effect insurance
and bonds comparable in amount and scope of coverage to that now maintained
by it;
(e) perform in all material respects all obligations required to be
performed by it under all material contracts, leases, and documents
relating to or affecting its assets, properties, and business;
(f) comply with and perform in all material respects all obligations
and duties imposed upon it by all applicable laws;
(g) purchase and sell securities in accordance with the guidelines set
forth in Exhibit 4.01;
(h) comply with the capital requirements set forth on Exhibit 4.01;
(i) with respect to the Subsidiaries, maintain as of December 31, 1997
and thereafter an aggregate loan loss reserve and reserve against "other
real estate owned" of not less than $4,085,000;
32
<PAGE>
(j) deliver to Associated promptly after issuance, the Company's
audited consolidated financial statements as of December 31, 1997; and
(k) amend the Citizens Bankshares, Inc. 401(k) Profit Sharing Plan and
Trust to provide full vesting of accrued benefits for all participants
thereunder immediately prior to the Effective Time.
SECTION 4.02. Negative Covenants. Except as specifically
------------------
contemplated by this Agreement, from the date of this Agreement until the
Effective Time, the Company shall not do, or permit any Subsidiary to do,
without the prior consent of Associated as set forth in Exhibit 4.02, any of the
following:
(a) (i) grant any general increase in compensation to its employees
as a class, or to its officers or directors, except in accordance with past
practice or as required by Law or increases which are not material, (ii)
effect any change in retirement benefits to any class of employees or
officers (unless any such change shall be required by applicable law) which
would increase its retirement benefit liabilities, (iii) except as the
Company and its Subsidiaries and their respective directors and executive
officers are required to adopt, enter into, amend or modify under
agreements or commitments made prior to the date of this Agreement and so
disclosed in this Agreement, adopt, enter into, amend or modify any
employee benefit plan or make any adjustments pursuant to any employee
benefit plan, or (iv) enter into or amend any employment, severance or
similar agreements or arrangements with any directors or officers, other
than as is consistent with the normal severance policies of the Company and
its Subsidiaries in effect on the date of this Agreement;
(b) except as set forth on Schedule 4.02, declare or pay any
dividend on, or make any other distribution in respect of, its outstanding
shares of capital stock;
(c) (i) redeem, purchase or otherwise acquire any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock, or any options, warrants,
conversion or other rights to acquire any shares of its capital stock or
any such securities or obligations; (ii) merge with or into any other
corporation or bank, permit any other corporation or bank to merge into it
or consolidate with any other corporation or bank, or effect any
reorganization or recapitalization; (iii) purchase or otherwise acquire any
assets or stock of any corporation, bank or other business (except for
portfolio investments in the ordinary course of business); (iv) liquidate,
sell, dispose of, or encumber any assets or acquire any assets, other than
in the ordinary course of its
33
<PAGE>
business consistent with past practice and except that the Company and its
Subsidiaries and their respective directors and executive officers are
permitted to sell or dispose of assets under the terms of any agreement
pre-existing this Agreement and disclosed to Associated as part of this
Agreement; or (v) split, combine or reclassify any of its capital stock or
issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock;
(d) issue, deliver, award, grant or sell, or authorize or propose the
issuance, delivery, award, grant or sale of, any shares of any class of its
capital stock (including shares held in treasury) or any rights, warrants
or options to acquire, any such shares;
(e) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Competing Transaction (as such term is defined
below), or negotiate with any person in furtherance of such inquiries or to
obtain a Competing Transaction, or agree to or endorse any Competing
Transaction, or authorize or permit any of its officers, directors or
employees or any investment banker, financial advisor, attorney, accountant
or other representative retained by it or any Subsidiary to take any such
action, and the Company shall promptly notify Associated orally and in
writing of all of the relevant details relating to all inquiries and
proposals which it may receive relating to any of such matters; provided,
however, that nothing contained in this subsection (e) shall prohibit the
Board of Directors of the Company from furnishing or permitting any of its
officers, directors, employees, investment bankers, financial advisors,
attorneys, accountants or other representatives to furnish information to
any party that requests information as to the Company or its Subsidiaries
if (i) the Board of Directors of the Company, after consultation with and
based upon the written advice of counsel, determines in good faith that
such action is required for the Board of Directors of the Company to comply
with its fiduciary duties to shareholders imposed by law; and (ii) prior to
furnishing such information to such party, the Company receives from such
party an executed confidentiality agreement in customary form and provides
Associated seven days' notice of the Company's intent to furnish such
information. For purposes of this Agreement, "Competing Transaction" shall
---------------------
mean any of the following involving the Company or its Subsidiaries: (i)
any merger, consolidation, share exchange, business combination, or other
similar transactions; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of ten percent or more of assets in a single
transaction or series of transactions, excluding from the calculation of
the
34
<PAGE>
percentage hereunder any such transactions undertaken in the ordinary
course of business and consistent with past practice and excluding the
transfers contemplated by the Branch Sale Agreements referenced in Section
2.26; (iii) any sale of ten percent or more of shares of capital stock (or
securities convertible or exchangeable into or otherwise evidencing, or any
agreement or instrument evidencing, the right to acquire capital stock);
(iv) any tender offer or exchange offer for ten percent or more of
outstanding shares of capital stock; (v) any solicitation of proxies in
opposition to approval by the Company's shareholders of the Merger; (vi)
the filing of an acquisition application (or the giving of acquisition
notice) whether in draft or final form under the BHCA or the Change in Bank
Control Act with respect to the Company or the Subsidiaries; (vii) any
person shall have acquired beneficial ownership or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder) shall have been formed which beneficially owns or has the right
to acquire beneficial ownership of, 10% or more of the then outstanding
shares of capital stock of the Company; or (viii) any public announcement
of a proposal, plan or intention to do any of the foregoing; provided,
however, that the acquisition by any person of capital stock of the Company
by testate or intestate succession or inter vivos gift or similar transfer
without consideration, or by change of or appointment as a fiduciary (or
the filing of an acquisition application or giving of acquisition notice in
connection with any of the foregoing), shall not be deemed a Competing
---------
Transaction.
-----------
(f) propose or adopt any amendments to the corporate charter or Bylaws
in any way materially adverse to Associated;
(g) except in their fiduciary capacities for the account of customers,
purchase any shares of Associated Common Stock;
(h) change any of its methods of accounting in effect at December 31,
1996, or change any of its methods of reporting income or deductions for
federal income tax purposes from those employed in the preparation of the
federal income tax returns for the taxable year ending December 31, 1996,
except as may be required by law or generally accepted accounting
principles;
(i) subject to section 4.01(i), change any lending, investment,
liability management or other material policies concerning the business or
operations of the Company or its Subsidiaries in any material respect;
organize any new subsidiaries or enter into any new non-banking line of
35
<PAGE>
business whether or not permissible under applicable federal or state law,
or make any material changes in its operations;
(j) (i) incur or assume any material obligation or liability (except
deposit liabilities in the ordinary course of business), including without
limitation any obligation for borrowed money, whether or not evidenced by a
note, bond, debenture or similar instrument and whether or not being
incurred to reduce other existing liabilities, or make any loan (not
including any loan renewal of a loan not then classified as "substandard,"
"doubtful," "loss," "other loans especially mentioned" or any comparable
classifications by the Company, the Subsidiaries or banking regulators) or
investment (including U.S. Treasury Securities) in an amount greater than
$100,000.00, (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingent or otherwise) for the obligations
of any other person or entity; (iii) mortgage, license, pledge or grant a
security interest in any of its material assets or allow to exist any
material lien thereon; except (A) for liabilities and obligations
(including corporate debt issuances) incurred in the ordinary course of
business consistent with past practices and in amounts not material to the
Company or its Subsidiaries; and (B) as may be required under existing
agreements to which the Company or any Subsidiary is a party; (iv) acquire
assets (including equipment) or securities in excess of $25,000 in the
aggregate (excluding loans to customers and investments permitted in (i)
above); (vi) pay, discharge, or satisfy any debts or claims not in the
ordinary course of business and consistent with past practices; (vii)
settle any claim, action, suit, litigation, proceeding, arbitration,
investigation or controversy of any kind, for any amount in excess of
$25,000.00 or in any manner which would restrict in any material respect
the operations or business of the Company or its Subsidiaries; (viii)
purchase any new financial product or instrument which involves entering
into a contract with a term of six months or longer, or (ix) take any
action or fail to take any action which individually or in the aggregate
can be expected to have a Material Adverse Effect on the Company and its
Subsidiaries, taken as a whole;; or
(k) agree in writing or otherwise to do any of the foregoing.
With respect to the actions described in section 4.02(j), Associated's
prior consent (as set forth in Exhibit 4.02) shall not be unreasonably withheld.
SECTION 4.03. Access and Information.
----------------------
(a) Prior to the Effective Time and upon reasonable notice, and
without unreasonable disruption to the business carried on by the Company
36
<PAGE>
or its Subsidiaries, the Company shall (and shall cause its Subsidiaries
to) afford to Associated's officers, employees, accountants, legal counsel
and other representatives access, during normal business hours, to all its
properties, books, contracts, commitments and records (other than the
portion of Company board of director minutes which discuss merger proposals
and other than any records which, in the reasonable judgment of the
Company, would, if disclosed, cause the Company or any Subsidiary to waive
its attorney-client privilege with respect to the content of such records).
Prior to the Effective Time, the Company shall (and shall cause the
Subsidiaries to) furnish promptly to Associated (i) a copy of each Company
Report filed by it (to the extent permitted by Law) after the date of this
Agreement and prior to the Effective Time pursuant to the requirements of
federal or state securities laws, the BHCA, any other federal or state
banking laws or any other applicable laws promptly after such documents are
available, (ii) the monthly consolidated financial statements of the
Company and the Subsidiaries; (iii) the unaudited consolidated financial
statements of the Company and the Subsidiaries for the year ended December
31, 1997; (iv) a summary of any action taken by the Board of Directors, or
any committee thereof, of the Company and its Subsidiaries; and (v) all
other information concerning the business, properties and personnel of the
Company or its Subsidiaries as Associated may reasonably request.
(b) Any information provided to Associated by the Company or its
Subsidiaries, whether prior to or subsequent to the date of this Agreement,
shall be kept confidential by the representatives of Associated (and shall
be used by them only in connection with this Agreement and the transactions
contemplated hereby) except to the extent that (i) it was already known to
such representatives when received, (ii) it hereafter becomes lawfully
obtainable from other sources, or (iii) it is required to be disclosed by
Associated in any document required to be filed with any government
authority or agency. Upon any termination of this Agreement pursuant to
Article VIII hereof, Associated agrees to promptly return all information
and documents that it has obtained from the Company in connection herewith.
To the extent that the terms of this Section 4.03(b) are inconsistent with
the terms of the Confidentiality Agreement dated October 29, 1997 between
the Company and Associated, the terms of the Confidentiality Agreement
shall control.
SECTION 4.04. Affiliates; Accounting and Tax Treatment. Within
----------------------------------------
thirty (30) days after the date of this Agreement, (a) the Company shall deliver
to Associated a letter identifying all persons who are then "affiliates" of the
Company, including, without limitation, all directors and executive officers of
the
37
<PAGE>
Company for purposes of Rule 145 promulgated under the Securities Act and (b)
the Company shall advise the persons identified in such letter of the resale
restrictions imposed by applicable securities laws and required to cause the
Merger to qualify for pooling-of-interests accounting treatment, and shall use
reasonable efforts to obtain from each person identified in such letter a
written agreement, substantially in the form attached hereto as Exhibit 4.04.
The Company shall use reasonable efforts to obtain from any person who becomes
an affiliate of the Company after the Company's delivery of the letter referred
to above, and on or prior to the Effective Time, a written agreement
substantially in the form attached hereto as Exhibit 4.04 as soon as practicable
after attaining such status. The Company will use its best efforts to cause the
Merger to qualify for pooling-of-interests accounting treatment and as a
reorganization under Section 368(a)(1)(A) of the Code.
SECTION 4.05. Expenses.
--------
(a) Except as provided in Section 8.02, below, all Expenses (as
defined below) incurred by Associated and the Company shall be borne solely
and entirely by the party which has incurred the same, except that the
parties shall share equally in the expense of printing and filing the
Registration Statement and the Proxy Statement/Prospectus and all SEC and
other regulatory filing fees incurred in connection herewith.
(b) "Expenses" as used in this Agreement shall include all out-of-
--------
pocket expenses (including without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants to the
party and its affiliates) incurred by a party or on its behalf in
connection with or related to the authorization, preparation and execution
of this Agreement, the solicitation of shareholder approvals and all other
matters related to the closing of the transactions contemplated hereby.
SECTION 4.06. Delivery of Shareholder List. The Company shall
----------------------------
deliver to Associated or its designee, from time to time prior to the Effective
Time, a true and complete list setting forth the names and addresses of the
shareholders of the Company, their holdings of stock as of the latest
practicable date, and such other shareholder information as Associated may
reasonably request.
ARTICLE V
---------
COVENANTS OF ASSOCIATED
-----------------------
SECTION 5.01. Affirmative Covenants. Associated hereby covenants and
---------------------
agrees with the Company that prior to the Effective Time, unless the prior
written
38
<PAGE>
consent of the Company shall have been obtained, and except as otherwise
contemplated herein it will:
(a) maintain its corporate existence in good standing and maintain all
books and records in accordance with accounting principles and practices as
utilized in Associated's financial statements applied on consistent basis;
(b) conduct its business in a manner that does not violate any law,
except for possible violations which individually or in the aggregate do
not, and insofar as reasonably can be foreseen, in the future will not,
have a Material Adverse Effect on Associated or its subsidiaries, taken as
a whole; and
(c) will, to the best of its ability and in all material respects, (i)
comply with applicable Blue Sky Laws and regulations, the Securities Act,
and the Exchange Act, and (ii) remain qualified under the Exchange Act and
the rules and regulations thereunder.
SECTION 5.02. Access and Information.
----------------------
(a) After the date of this Agreement and prior to the Effective Time,
Associated shall (and shall cause each of its subsidiaries to) furnish
promptly to the Company (i) a copy of each Associated SEC Report filed by
it or received by it (to the extent permitted by law) after the date of
this Agreement and prior to the Effective Time pursuant to the requirements
of federal or state securities laws, the BHCA, any other federal or state
banking laws or any other applicable laws promptly after such documents are
available, and (ii) all other information concerning the business,
properties and personnel of Associated or its subsidiaries as the Company
may reasonably request.
(b) Any information provided to the Company by Associated whether
prior to or subsequent to the date of this Agreement shall be kept
confidential by the representatives of the Company (and shall be used by
them only in connection with this Agreement and the transactions
contemplated hereby) except to the extent that (i) it was already known to
such representatives when received, (ii) it hereafter becomes lawfully
obtainable from other sources, or (iii) it is required to be disclosed by
the Company in any document required to be filed with the Company or any
government authority or agency. Upon any termination of this Agreement
pursuant to Article VIII hereof, the Company agrees to promptly return all
39
<PAGE>
information and documents that it has obtained from Associated in
connection herewith.
SECTION 5.03. Accounting and Tax Treatment. Associated will use its
----------------------------
best efforts to cause the Merger to qualify for pooling-of-interests accounting
treatment and as a reorganization under Section 368(a)(1)(A) of the Code.
ARTICLE VI
----------
ADDITIONAL AGREEMENTS
---------------------
SECTION 6.01. Registration Statement. As promptly as practicable
----------------------
after the execution of this Agreement, Associated shall prepare and file a
registration statement on Form S-4 (the registration statement together with the
amendments thereto are defined as the "Registration Statement" and the
prospectus and proxy materials contained therein are defined as the "Proxy
Statement/Prospectus") with the SEC covering the Associated Common Stock to be
issued in the Merger (subject to the immediately following sentence), with a
view toward permitting the Registration Statement to become effective as soon as
reasonably practicable. Associated does not undertake to file post-effective
amendments to Form S-4 or to file a separate registration statement to register
the sale of Associated Common Stock by affiliates of the Company pursuant to
Rule 145 promulgated under the Securities Act. The Company will furnish to
Associated all information concerning the Company and its Subsidiaries required
to be set forth in the Registration Statement and Associated will provide the
Company and its counsel the opportunity to review and approve such information
as set forth in the Registration Statement and Proxy Statement/Prospectus.
Associated and the Company will each render to the other its full cooperation in
preparing, filing, prosecuting the filing of, and amending the Registration
Statement such that it comports at all times with the requirements of the
Securities Act and the Exchange Act. Specifically, but without limitation, each
will promptly advise the other if at any time before the Effective Time any
information provided by it for inclusion in the Registration Statement appear to
have been, or shall have become, incorrect or incomplete and will furnish the
information necessary to correct such misstatements or omissions. As promptly
as practicable after the effective date of the Registration Statement, the
Company will mail to its shareholders (a) the Proxy Statement/Prospectus, and
(b) as promptly as practicable after approval thereof by Associated, such other
supplementary proxy materials as may be necessary to make the Proxy
Statement/Prospectus comply with the requirements of the Securities Act and the
Exchange Act. Except as provided above and except with the prior written
consent of Associated, the Company will not mail or otherwise furnish or publish
to shareholders of the Company any proxy solicitation material
40
<PAGE>
or other material relating to the Merger that constitutes a "prospectus" within
the meaning of the Securities Act. Associated shall also take any reasonable
action required to be taken under any applicable Blue Sky Laws in connection
with the issuance of the shares of Associated Common Stock to be issued as set
forth in this Agreement and the Company and the Subsidiaries shall furnish all
information concerning the Company and the Subsidiaries, and the holders of the
Company's Common Stock and other assistance as Associated may reasonably request
in connection with such action.
SECTION 6.02. Meeting of Shareholders. The Company and its officers
-----------------------
and directors shall: (a) cause the Company's shareholders Meeting to be duly
called and held as soon as practicable to consider and vote upon the Merger and
any related matters in accordance with the applicable provisions of applicable
law, (b) submit this Agreement to the Company's shareholders together with a
recommendation for approval by the Board of Directors of the Company, (c)
solicit the approval thereof by the Company's shareholders by mailing or
delivering to each shareholder a combined Prospectus/Proxy Statement, and (d)
use their best efforts to obtain the approval and adoption of the Merger by the
requisite percentage of the Company's shareholders; provided, however, that the
obligations of the Company's officers and directors under this Section 6.02 are
subject to any action which the officers and directors, after consultation with
and based upon the written advice of legal counsel, determine in good faith is
required to comply with their fiduciary duties to shareholders imposed by law.
SECTION 6.03. Appropriate Action; Consents; Filings. The Company and
-------------------------------------
Associated shall use all reasonable efforts to (a) take, or cause to be taken,
all appropriate action, and do, or cause to be done, all things necessary,
proper or advisable under applicable law to consummate and make effective the
transactions contemplated by this Agreement; (b) obtain all consents, licenses,
permits, waivers, approvals, authorizations or orders required under Law
(including, without limitation, all foreign and domestic (federal, state and
local) governmental and regulatory rulings and approvals and parties to
contracts) in connection with the authorization, execution and delivery of this
Agreement and the consummation by them of the transactions contemplated hereby
and thereby, including, without limitation, the Merger; and (c) make all
necessary filings, and thereafter make any other required submissions, with
respect to this Agreement and the Merger required under (i) the Securities Act
and the Exchange Act and the rules and regulations thereunder, and any other
applicable federal or state securities laws, (ii) any applicable federal or
state banking laws and (iii) any other applicable law; provided that Associated
--------
and the Company shall cooperate with each other in connection with the making of
all such filings, including providing copies of all such documents to the non-
filing party and its advisors prior to filing and, if requested, to accept all
reasonable additions, deletions or changes suggested in
41
<PAGE>
connection therewith. The Company and Associated shall furnish all information
required for any application or other filing to be made pursuant to the rules
and regulations of any applicable law (including all information required to be
included in the Proxy Statement/Prospectus and the Registration statement) in
connection with the transactions contemplated by this Agreement. In case at any
time after the Effective Time any further action is necessary or desirable to
carry out the purposes of this Agreement, the proper officers and directors of
each party to this Agreement shall use all reasonable efforts to take all such
necessary action.
SECTION 6.04. Notification of Certain Matters. The Company shall
-------------------------------
give prompt notice to Associated, and Associated shall give prompt notice to the
Company, of (a) the occurrence, or non-occurrence, of any event the occurrence,
or non-occurrence, of which would be likely to cause any representation or
warranty contained in this Agreement to be untrue or inaccurate, and (b) any
failure of the Company or Associated, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
--------- --------
this Section 6.04 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
SECTION 6.05. Public Announcements. Associated and the Company shall
--------------------
consult with each other before issuing any press release or otherwise making any
public statements with respect to the Merger and shall not issue any such press
release or make any such public statement prior to such consultation and with
mutual consent of both parties, except as may be required by law or any listing
agreement with the National Association of Securities Dealers.
SECTION 6.06. Environmental Matters. In the event Drake Environmental (the
---------------------
"Environmental Consultant") discovers or determines the existence of any
environmental condition (including, without limitation, a spill, discharge or
contamination) the result of which, in the opinion of Environmental Consultant,
requires investigative or remedial action pursuant to any applicable
Environmental Law or may be the basis for the assertion of any third party
claims, including the claims of government entities, Associated shall promptly
provide the Company with written notice thereof. Upon receipt of such notice,
the Company, at its sole option, shall (a) at its sole cost and expense, proceed
with due diligence to take reasonably appropriate action in response thereto or
(b) terminate this Agreement, with the effect set forth in Section 8.02(a).
SECTION 6.07. Action Requested by Other Party. No action or inaction
-------------------------------
by Associated or any of its subsidiaries or affiliates shall constitute or form
the basis for a breach by Associated of any representation, warranty, covenant
or additional agreement set forth in this Agreement or form the basis for any
failure
42
<PAGE>
of condition to the obligations of the Company or for termination by the
Company, if such action or inaction shall be requested by the Company. No
action or inaction by the Company or any of its affiliates or any Subsidiary
shall constitute or form the basis for a breach by the Company of any
representation, warranty, covenant or additional agreement set forth in this
Agreement or form the basis for any failure of condition to the obligations of
Associated or for termination by Associated, if such action or inaction shall be
requested by Associated.
ARTICLE VII
-----------
CONDITIONS OF MERGER
--------------------
SECTION 7.01. Conditions to Obligation of Each Party to Effect the
----------------------------------------------------
Merger. The respective obligations of each party to effect the Merger shall be
- ------
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Effectiveness of the Registration Statement. The Registration
-------------------------------------------
Statement shall have been declared effective by the SEC under the
Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceedings
for that purpose shall, on or prior to the Effective Time, have been
initiated or, to the knowledge of Associated or the Company, threatened by
the SEC. Associated shall have received all other federal or state
securities permits and other authorizations necessary to issue Associated
Common Stock in exchange for the Company Common Stock and to consummate the
Merger.
(b) Shareholder Approvals. This Agreement and the Merger shall have
---------------------
been approved and adopted by the requisite vote of the shareholders of the
Company.
(c) Regulatory Approvals. The Merger shall have been approved by the
--------------------
Federal Reserve Board, the Division of Banking of the Wisconsin Department
of Financial Institutions and all other required regulatory agencies, which
approvals shall not contain any condition which is not reasonably
satisfactory to Associated or the Company, all conditions required to be
satisfied prior to the Effective Time imposed by the terms of such
approvals shall have been satisfied and all waiting periods relating to
such approvals shall have expired.
(d) No Order. No federal or state governmental or regulatory
--------
authority or other agency or commission, or federal or state court of
competent jurisdiction, shall have enacted, issued, promulgated, enforced
or
43
<PAGE>
entered any statute, rule, regulation, executive order, decree, injunction
or other order (whether temporary, preliminary or permanent) which is in
effect restricting, preventing or prohibiting consummation of the
transactions contemplated by this Agreement.
SECTION 7.02. Additional Conditions to Obligations of Associated.
--------------------------------------------------
The obligations of Associated to effect the Merger are also subject to the
following conditions:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties of the Company contained in this Agreement shall be complete and
correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality,
such statement shall be true and correct in all respects) as of the
Effective Time as though made at the Effective Time with the same force and
effect as if made on and as of the Effective Time. Associated shall have
received a certificate of the President of the Company to that effect.
(b) Agreements and Covenants. The Company shall have performed or
------------------------
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Effective Time.
(c) Consents Obtained. All material consents, waivers, approvals,
-----------------
authorizations or orders required to be obtained, and all filings required
to be made by the Company for the authorization, execution and delivery of
this Agreement and the consummation by it of the transactions contemplated
hereby shall have been obtained and made by the Company.
(d) No Challenge. There shall not be pending any action, proceeding
------------
or investigation before any court or administrative agency or by any
government agency or any other person (i) challenging or seeking material
damages in connection with the Merger or the conversion of the Company
Common Stock into Associated Common Stock pursuant to the Merger, or (ii)
seeking to restrain, prohibit or limit the exercise of full rights of
ownership or operation by Associated or its subsidiaries of all or any
portion of the business or assets of the Company or its Subsidiaries, which
in either case is reasonably likely to have a Material Adverse Effect on
either the Company or its Subsidiaries, taken as a whole, or Associated or
its subsidiaries, taken as a whole.
(e) Opinion of Counsel. Associated shall have received from Foley &
------------------
Lardner or other independent counsel for the Company reasonably
44
<PAGE>
satisfactory to Associated, an opinion dated the Effective Time, in form
and substance reasonably satisfactory to Associated, covering the matters
set forth in Exhibit 7.02(e) hereto, which opinion shall be based on such
assumptions and containing such qualifications and limitations as are
appropriate and reasonably satisfactory to Associated.
(f) Tax Opinion. Associated shall have received from Reinhart,
-----------
Boerner, Van Deuren, Norris & Rieselbach, s.c., an opinion (i) dated on or
about the date that is two business days prior to the date the Proxy
Statement/Prospectus is first mailed to shareholders of the Company, (ii)
which shall not have been withdrawn or modified in any material respect
prior to the Effective Time, (iii) to the effect that:
[a] the Merger will qualify as a reorganization within the
meaning of section 368(a)(1)(A) of the Code;
[b] the Company and Associated will each be party to a
reorganization within the meaning of Section 368(b) of the Code;
[c] no gain or loss will be recognized by any shareholder of the
Company upon consummation of the Merger (except with respect to cash
received in lieu of a fractional share interest in Associated Common
Stock); and
[d] the aggregate income tax basis of Associated Common Stock
received by the shareholders of the Company pursuant to the Merger
will be the same as the aggregate tax basis of the Company Common
Stock surrendered in exchange therefor (reduced by any amount
allocable to a fractional share interest for which cash is received).
(g) Pooling Opinions. Associated shall have received an opinion from
----------------
KPMG Peat Marwick LLP to the effect that the Merger qualifies for pooling-
of-interests accounting treatment if consummated in accordance with this
Agreement.
(h) Affiliate Agreements. Associated shall have received from each
--------------------
person who is identified in the affiliate letter as an "affiliate" of the
Company a signed affiliate agreement in the form attached hereto as Exhibit
4.04.
(i) Burdensome Condition. There shall not be any action taken, or any
--------------------
statute, rule, regulation or order enacted, entered, enforced or
45
<PAGE>
deemed applicable to the Merger, by any federal or state governmental
entity which, in connection with the grant of any regulatory approval,
imposes any condition or restriction upon the Company or Associated or
their respective subsidiaries (or the Surviving Corporation or its
subsidiaries after the Effective Time), including, without limitation, any
requirement to raise additional capital, which would so materially
adversely impact the economic or business benefits of the transactions
contemplated by this Agreement as to render inadvisable the consummation of
the Merger.
(j) Fractional Shares; Dissenters. The aggregate of (i) the
-----------------------------
fractional share interests in Associated Common Stock to be paid in cash
pursuant to Section 1.07 of this Agreement and (ii) the shares of
Associated Common Stock that would be issuable by virtue of the Merger with
respect to shares of the Company's Common Stock outstanding on the record
date for the meeting of the Company's shareholders to consider the Merger
that will not be converted into Associated Common Stock due, directly or
indirectly, to the exercise of dissenters' rights under Wisconsin Law,
shall not be more than 10% of the maximum aggregate number of shares of
Associated Common Stock which could be issued as a result of the Merger.
(k) Environmental Report. Associated shall have received from the
--------------------
Environmental Consultant a written environmental evaluation of the
Company's Property evidencing that:
(i) The Company's Property complies in all material respects
with all Environmental Laws;
(ii) No material capital improvements should reasonably be
required to maintain compliance with all Environmental Laws; and
(iii) There are no material contingent liabilities affecting the
Company's Property arising under Environmental Laws or under
Environmental Permits;
or the Company shall have complied in all material respects with all of its
obligations under Section 6.06.
SECTION 7.03. Additional Conditions to Obligations of the Company.
---------------------------------------------------
The obligation of the Company to effect the Merger is also subject to the
following conditions:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties of Associated contained in this Agreement shall be complete
46
<PAGE>
and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a statement of materiality,
such statement shall be true and correct in all respects) as of the
Effective Time as though made on and as of the Effective Time with the same
force and effect as if made on and as of the Effective Time. The Company
shall have received a certificate of the President of Associated to that
effect.
(b) Agreements and Covenants. Associated shall have performed or
------------------------
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Effective Time.
(c) Consents Obtained. All material consents, waivers, approvals,
-----------------
authorizations or orders required to be obtained, and all filings required
to be made by Associated for the authorization, execution and delivery of
this Agreement and the consummation by it of the transactions contemplated
hereby shall have been obtained and made by Associated.
(d) Opinion of Counsel. The Company shall have received from
------------------
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c. or other
independent counsel for Associated reasonably satisfactory to the Company,
an opinion dated the Effective Time, in form and substance reasonably
satisfactory to the Company, covering the matters set forth in Exhibit
7.03, which opinions shall be based on such assumptions and contain such
qualifications and limitations as are appropriate and reasonably
satisfactory to the Company.
(e) Tax Opinion. The Company shall have received from Reinhart,
-----------
Boerner, Van Deuren, Norris & Rieselbach, s.c., an opinion (i) dated on or
about the date that is two business days prior to the date the Proxy
Statement/Prospectus is first mailed to shareholders of the Company, (ii)
which shall not have been withdrawn or modified in any material respect
prior to the Effective Time, (iii) to the effect that:
[a] the Merger will qualify as a reorganization within the
meaning of section 368(a)(1)(A) of the Code;
[b] the Company and Associated will each be party to a
reorganization within the meaning of Section 368(b) of the Code;
[c] no gain or loss will be recognized by any shareholder of the
Company upon consummation of the Merger (except with
47
<PAGE>
respect to cash received in lieu of a fractional share interest in
Associated Common Stock); and
[d] the aggregate income tax basis of the Associated Common
Stock received by the shareholders of the Company pursuant to the
Merger will be the same as the aggregate tax basis of the Company
Common Stock surrendered in exchange therefor (reduced by any amount
allocable to a fractional share interest for which cash is received).
(f) Fairness Opinion. The Company shall have received from Robert W.
----------------
Baird & Co. (or another recognized investment banking or valuation firm) an
opinion, dated as of the date of the Proxy Statement/Prospectus, to the
effect that the consideration which the Company's shareholders will receive
pursuant to the Merger is fair to the Company's shareholders from a
financial point of view.
ARTICLE VIII
------------
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
SECTION 8.01. Termination.
-----------
(a) This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the matters presented
in connection with the Merger by the shareholders of the Company:
(i) by mutual written consent of Associated and the Company;
(ii) by the Company or Associated (A) if there has been a breach
in any material respect (except that where any statement in a
representation or warranty expressly includes a standard of
materiality, such statement shall have been breached in any respect)
of any representation, warranty, covenant or agreement on the part of
the Company, on the one hand, or Associated, on the other hand,
respectively, set forth in this Agreement, or (B) if any
representation or warranty of the Company, on the one hand, or
Associated, on the other hand, respectively, shall be discovered to
have become untrue in any material respect (except that where any
statement in a representation or warranty expressly includes a
standard of materiality, such statement shall have become untrue in
any respect),
48
<PAGE>
in either case which breach or other condition has not been cured
within 10 business days following receipt by the nonterminating party
of notice of such breach or other condition; provided, however, this
-------- -------
Agreement may not be terminated pursuant to this clause (ii) by the
breaching party or party making any representation or warranty which
shall have become untrue in any material respect;
(iii) by either Associated or the Company if any permanent
injunction preventing the consummation of the Merger shall have become
final and nonappealable;
(iv) by either Associated or the Company if the Merger shall not
have been consummated before September 30, 1998, for a reason other
than the failure of the terminating party to comply with its
obligations under this Agreement;
(v) by either Associated or the Company if the Federal Reserve
Board or the Wisconsin Department of Financial Institutions has denied
approval of the Merger and neither Associated nor the Company has,
within thirty (30) days after the entry of such order denying
approval, filed a petition seeking review of such order as provided by
applicable law;
(vi) by Associated, if all of the conditions set forth in
Section 7.02 are not satisfied on or before September 30, 1998;
(vii) by the Company, if all of the conditions set forth in
Section 7.03 are not satisfied on or before September 30, 1998; or
(viii) by either Associated or the Company if all of the
conditions set forth in Section 7.01 are not satisfied on or before
September 30, 1998.
(b) In the event of termination and abandonment by any party as
provided above, written notice shall forthwith be given to the other party,
which notice shall specifically describe the basis for such termination.
SECTION 8.02. Effect of Termination.
---------------------
(a) If the Merger is not consummated as the result of termination of
this Agreement caused otherwise than by breach of a party hereto, the
Company and Associated each shall pay its own Expenses (as defined in
Section 4.05 above) and this Agreement shall immediately terminate,
49
<PAGE>
except as set forth in Section 9.01 hereof, and neither the Company nor
Associated shall have any liability under this Agreement for damages or
otherwise.
(b) If termination of this Agreement shall have been caused by breach
of this Agreement by any party hereto, then, in addition to other remedies
at law or equity for breach of this Agreement, the party so found to have
breached this Agreement shall indemnify and reimburse the other party for
its expenses.
(c) Notwithstanding Section 8.02(a), if this Agreement is terminated
by Associated as a result of the failure of the condition set forth in
Section 7.02(g) due to the exercise of dissenters' rights by Dissenting
Shareholders, the Company shall pay Associated a fee equal to $50,000.
Such fee shall be paid to Associated within two days after the date of any
such termination in immediately available funds.
SECTION 8.03. Amendment. This Agreement may be amended by the
---------
parties hereto by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time; provided, however, that,
--------- --------
after approval of the Merger by the shareholders of the Company, no amendment
may be made which would reduce the amount or change the type of consideration
into which each Share shall be converted pursuant to this Agreement upon
consummation of the Merger. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
SECTION 8.04. Waiver. At any time prior to the Effective Time, any
------
party hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other party hereto, (b) waive any inaccuracies
in the representations and warranties contained herein or in any document
delivered pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party or parties to be bound
thereby.
ARTICLE IX
----------
GENERAL PROVISIONS
------------------
SECTION 9.01. Non-Survival of Representations, Warranties and
-----------------------------------------------
Agreements. The representations, warranties and agreements in this Agreement
- ----------
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Article VIII, except that the agreements set forth in Article I
shall
50
<PAGE>
survive the Effective Time indefinitely and those set forth in Sections 4.03(b),
4.05, 5.02(b), 8.02 and Article IX hereof shall survive termination
indefinitely.
SECTION 9.02. Disclosure Schedules. The schedules and information
--------------------
set forth in the Disclosure Schedules specifically refer to the Section (and
paragraph, if applicable) of this Agreement to which such schedule and
information is responsive. Notwithstanding the foregoing, the information
disclosed under a particular Section shall be deemed to be disclosed for
purposes of all relevant Sections. The Disclosure Schedules shall not vary,
change or alter the literal meaning of the representations and warranties of the
parties contained in this Agreement, other than creating exceptions thereto
which are directly responsive to the language of the representations and
warranties contained in this Agreement.
SECTION 9.03. Notices. All notices and other communications given or
-------
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered or mailed if delivered personally or
mailed by registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like changes of address) and shall be
effective upon receipt:
(a) If to Associated:
Associated Banc-Corp
112 North Adams Street
P.O. Box 13307
Green Bay, WI 54307-3307
Telecopier: (920) 433-3261
Attention: H. B. Conlon, Chairman
With a copy to:
Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, s.c.
1000 North Water Street, Suite 2100
Milwaukee, WI 53202
Telecopier: (414) 298-8097
Attention: Richard W. Graber, Esq.
51
<PAGE>
(b) If to Company:
Citizens Bankshares, Inc.
P.O. Box 456
Shawano, WI 54166-0456
Telecopier: (715) 524-3528
Attention: Mary B. Hayes, Chairwoman
with a copy to:
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, WI 53202-8387
Telecopier: (414) 297-4900
Attn: Rodney H. Dow, Esq.
SECTION 9.04. Certain Definitions. For purposes of this Agreement,
-------------------
the term:
(a) "affiliate" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person; including, without limitation,
any partnership or joint venture in which the Company (either alone, or
through or together with any other subsidiary) has, directly or indirectly,
an interest of 5% or more;
(b) "beneficial owner" with respect to any Shares, means a person who
shall be deemed to be the beneficial owner of such Shares (i) which such
person or any of its affiliates or associates beneficially owns, directly
or indirectly, (ii) which such person or any of its affiliates or
associates (as such term defined in Rule 12b-2 of the Exchange Act) has,
directly or indirectly, (A) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time), pursuant
to any agreement, arrangement or understanding or upon the exercise of
consideration rights, exchange rights, warranties or options, or otherwise,
or (B) the right to vote pursuant to any agreement, arrangement or
understanding, (iii) which are beneficially owned, directly or indirectly,
by any other persons with whom such person or any of its affiliates or
associates has any agreement, arrangement or understanding for the purposes
of requiring, holding, voting or disposing of any Shares or (iv) pursuant
to Section 13(d) of the Exchange Act and any rules or regulations
promulgated thereunder;
52
<PAGE>
(c) "business day" means any day other than a day on which banks in
Wisconsin are required or authorized to be closed;
(d) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management or policies of a person, whether through the ownership of stock
or as trustee or executor, by contract or credit arrangement or otherwise;
and
(e) "to the knowledge of the Company" or similar references shall mean
the actual knowledge of the persons listed on the Company Disclosure
Schedule at Section 9.04, after due inquiry and investigation.
(f) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d) of the "Exchange Act).
SECTION 9.05. Headings. The headings contained in this Agreement are
--------
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 9.06. Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
SECTION 9.07. Entire Agreement. This Agreement together with the
----------------
Disclosure Schedules and Exhibits hereto and the Confidentiality Agreement dated
October 29, 1997 between the Company and Associated constitute the entire
agreement of the parties and supersede all prior agreements and undertakings,
both written and oral, between the parties, or any of them, with respect to the
subject matter hereof and, except as otherwise expressly provided herein, are
not intended to confer upon any other person any rights or remedies hereunder.
SECTION 9.08. Assignment. This Agreement shall not be assigned by
----------
operation of law or otherwise, except that Associated may assign all or any of
its
53
<PAGE>
rights hereunder to any affiliate provided that no such assignment shall
relieve the assigning party of its obligations hereunder (and Associated shall
expressly assume in writing all obligations of the Company as if it were the
surviving corporation under section 180.1106 of the Wisconsin Law), and the
assignee agrees to be bound by the terms and conditions of this Agreement
including the requirement of conversion and delivery of shares of Associated
Common Stock pursuant to Section 1.06 hereof.
SECTION 9.09. Parties in Interest. This Agreement shall be binding
-------------------
upon and inure solely to the benefit of each party hereto and its successors,
and nothing in this Agreement, express or implied, is intended to or shall
confer upon any other person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement, except for the right to receive
the consideration payable pursuant to Article I.
SECTION 9.10. Governing Law. This Agreement shall be governed by,
-------------
and construed in accordance with, the laws of the State of Wisconsin, regardless
of the laws that might otherwise govern under applicable principles of conflicts
of law.
SECTION 9.11. Counterparts. This Agreement may be executed in one or
------------
more counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, Associated and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
ASSOCIATED BANC-CORP
By: /s/ H.B. Conlon
---------------------------------------------------
Name: H. B. Conlon
Title: Chairman, President, and Chief Executive Officer
CITIZENS BANKSHARES, INC.
By: /s/ Mary B. Hayes
----------------------------------------------------
Name: Mary B. Hayes
Title: President and Chairwoman of the Board of Directors
54
<PAGE>
EXHIBIT A-1
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER dated as of
October 8, 1998 between ASSOCIATED BANC CORP., a Wisconsin corporation
("Associated") and CITIZENS BANKSHARES, INC., a Wisconsin corporation
("Company").
RECITALS
A. Associated and the Company are parties to an Agreement and Plan
of Merger dated February 17, 1998 (the "Agreement").
B. Associated and the Company desire to amend the Agreement in the
manner set forth below .
AGREEMENTS
In consideration of the foregoing and the mutual covenants and
agreements contained herein and in the Agreement, and intending to be legally
bound hereby, Associated and the Company hereby agree as follows:
1. Amendment of Sixth Recital. The sixth recital of the Agreement is
--------------------------
hereby amended to read as follows:
WHEREAS, the respective Boards of Directors of Associated and the
Company have (i) determined that the Merger and the exchange of
newly issued shares of Associated Common Stock (as defined in
Section 1.06) and/or cash for shares of Company Common Stock (as
defined in Section 1.06) pursuant and subject to the terms and
conditions of this Agreement are fair to and in the best
interests of the respective corporations and their shareholders,
and (ii) approved and adopted this Agreement and the transactions
contemplated hereby; and
<PAGE>
2. Amendment of Eighth Recital. The eighth recital of the Agreement
---------------------------
is hereby amended to read as follows:
WHEREAS, Associated and the Company intend to effect a merger
that qualifies as a tax-free reorganization under the Internal
Revenue Code of 1986, as amended (the "Code").
3. Amendment of Section 1.02(b)(iii). Section 1.02(b)(iii) of the
---------------------------------
Agreement is hereby amended to read as follows:
(iii) Subject to the requirements of Section 1.06(d)(i),
the date which is 15 business days after the mailing of
Election Forms as provided in Section 1.07(b); or
4. Amendment of Section 1.06(a). Section 1.06(a) of the Agreement is
----------------------------
hereby amended to read as follows:
(a) except as otherwise provided in and subject to the
limitations set forth in Section 1.06(d), each share of common
stock, par value $20.00 per share, of the Company (the "Company
Common Stock") (all issued and outstanding shares of the Company
Common Stock being hereinafter collectively referred to as the
"Shares") issued and outstanding immediately prior to the
Effective Time (other than any Shares to be canceled pursuant to
Section 1.06(b) and other than any Dissenting Shares, as defined
in Section 1.06(c)) shall, at the election of the holder of each
such Share, (i) be converted, in accordance with Section 1.07,
into the right to receive 33.75 shares of common stock, par value
$.01 per share, of Associated ("Associated Common Stock") or (ii)
be converted into the right to receive Cash Consideration (as
defined below); provided, however, that the aggregate amount of
(i) Cash Consideration, (ii) cash paid to Dissenting Shareholders
pursuant to Section 1.06(c) and (iii) cash paid in lieu of
fractional shares pursuant to Section 1.07(e) (collectively, the
"Total Cash Payments") shall not be more than 50% of the
aggregate consideration to be received by such shareholders as of
the Effective Time (the "Merger Consideration"). For purposes
hereof, Cash Consideration shall mean the amount equal to 33.75
times the average of the closing prices of a share of Associated
Common Stock as quoted on the NASDAQ National Market
2
<PAGE>
during the ten-day trading period ending on the business day
prior to the date of the Meeting pursuant to Section 6.02; the
cash paid to Dissenting Shareholders pursuant to Section 1.06(c)
shall be deemed to be equal to the product of the number of
Dissenting Shares times the greater of (w) the Cash Consideration
or (x) the product of 33.75 times the average of the high and low
trading prices of a share of Associated Common Stock as quoted on
the NASDAQ National Market on the Effective Time; and the Merger
Consideration shall be equal to the sum of (y) the Total Cash
Payments plus (z) the product of the number of whole shares of
Associated Common Stock issued in the Merger times the average of
the high and low trading prices of a share of Associated Common
Stock as quoted on the NASDAQ National Market on the Effective
Time. As of the Effective Time, all such shares of the Company
Common Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist,
and each certificate previously representing any such Shares
shall thereafter represent the right to receive the Cash
Consideration therefor and/or a certificate representing shares
of Associated Common Stock into which such Company Common Stock
is convertible. Certificates previously representing shares of
Company Common Stock shall be exchanged for such Cash
Consideration and/or certificates representing whole shares of
Associated Common Stock issued in consideration therefor upon the
surrender of such certificates in accordance with the provisions
of Section 1.07, without interest. No fractional shares of
Associated Common Stock shall be issued, and, in lieu thereof, a
cash payment shall be made pursuant to Section 1.07 hereof.
5. Amendment of Section 1.06(c). Section 1.06(c) of the Agreement is
----------------------------
hereby amended to read as follows:
(c) each Share of the Company Common Stock which shall
be issued and outstanding as of the Effective Time and held by a
shareholder who has validly perfected dissenter's rights in
accordance with Wisconsin Law, shall not be converted into and
shall not become Cash Consideration or Associated Common Stock
hereunder (all such shares of the Company Common Stock are
hereinafter called "Dissenting Shares"). The Company shall give
Associated prompt notice
3
<PAGE>
upon receipt by the Company of any written notice from any such
shareholder of the Company ("Dissenting Shareholder"). The
Company agrees that prior to the Effective Time, it will not,
except with prior written consent of Associated, voluntarily make
any payment with respect to, or settle or offer to settle, any
request for withdrawal pursuant to the exercise of dissenter's
rights. Each Dissenting Shareholder who becomes entitled,
pursuant to the provisions of applicable law, to payment for his
or her shares of the Company Common Stock shall receive payment
therefor from Associated (but only after the amount thereof shall
be agreed upon or finally determined pursuant to the provisions
of applicable law). If any Dissenting Shareholder shall fail to
perfect or shall effectively withdraw or lose his or her right to
receive the value of his or her shares of Associated Common
Stock, his or her shares shall be thereupon no longer be
considered Dissenting Shares and shall be converted into Cash
Consideration and/or Associated Common Stock in accordance with
the provisions of Section 1.06(a) and, if applicable, cash under
Section 1.07(e).
6. Amendment of Section 1.06. Section 1.06 of the Agreement is
------------
hereby amended to add the following immediately after Section 1.06(c):
(d) (i) Each Election Form (as defined in Section 1.07(b))
shall permit the holder of Shares of Company Common Stock
(or the beneficial owner though appropriate and customary
documentation and instructions), other than a holder of
Dissenting Shares or Shares to be cancelled in accordance
with Section 1.06(b), to (A) elect to receive Associated
Common Stock with respect to all or a portion of such
holder's Company Common Stock (a "Stock Election") and/or
(B) elect to receive cash with respect to all or a portion
of such holder's Company Common Stock (a "Cash Election").
Shares of Company Common Stock as to which a Stock Election
is made are referred to herein as "Stock Election Shares,"
and Shares of Company Common Stock as to which a Cash
Election is made are referred to herein as "Cash Election
Shares." Any Company Common Stock with respect to which the
holder (or
4
<PAGE>
the beneficial owner, as the case may be) shall not have
submitted to the Exchange Agent an effective, properly
completed Election Form on or before 5:00 P.M., Central
Time, on the business day that is two business days prior to
the Effective Time (the "Election Deadline") shall be deemed
to be Stock Election Shares. Any such election shall have
been properly made only if the Exchange Agent shall have
actually received a properly completed Election Form by the
Election Deadline. The Exchange Agent shall mail written
notice of the scheduled Effective Time (and assumed Election
Deadline) to Company shareholders of record as soon as
practicable but in no event less than eight business days
prior to the Effective Time. An Election Form shall be
deemed properly completed only if accompanied by one or more
Certificates (or customary affidavits and indemnification
regarding the loss or destruction of such Certificates or
the guaranteed delivery of such Certificates) representing
all Shares of Company Common Stock covered by such Election
Form, together with duly executed transmittal materials. Any
Election Form may be revoked or changed by the person
submitting such Election Form prior to the Election
Deadline. Subject to the terms of this Agreement and of the
Election Form, the Exchange Agent shall have reasonable
discretion to determine whether any election, revocation or
change has been properly or timely made and to disregard
immaterial defects in the Election Forms, and any good faith
decisions of the Exchange Agent regarding such matters shall
be binding and conclusive. None of Associated, the Company
and the Exchange Agent shall be under any obligation to
notify any person of any defect in an Election Form.
(ii) If the number of Cash Election Shares is such that
the amount of Total Cash Payments exceeds 50% of the
aggregate Merger Consideration, Associated and the Company
will reduce the number of Cash Election Shares by the number
necessary to cause Total Cash Payments to be 50% of the
Merger Consideration and 50% of the Merger Consideration to
be Associated
5
<PAGE>
Common Stock. The number of Cash Election Shares which may
not be so converted into Cash Consideration shall be
converted into Stock Election Shares and exchanged for
Associated Common Stock in accordance with Section 1.06(a).
The reduction in Cash Election Shares shall be made pro
rata among the shareholders of the Company making Cash
Elections based upon the number of Shares for which each
such shareholder has made a Cash Election.
7. Amendment of Section 1.07(a). Section 1.07(a) of the Agreement is
----------------------------
hereby amended to read as follows:
(a) Exchange Agent. As of the Effective Time, Associated
--------------
shall deposit, or shall cause to be deposited, with a bank or
trust company designated by Associated and acceptable to the
Company (the "Exchange Agent"), and such deposit shall be solely
for the benefit of the holders of Shares, for exchange in
accordance with this Article I through the Exchange Agent, cash
and certificates representing the shares of Associated Common
Stock (such cash and certificates for shares of Associated Common
Stock, and cash in lieu of fractional shares (if any), together
with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") payable or
issuable pursuant to Section 1.06 in exchange for outstanding
Shares.
8. Amendment of Section 1.07(b). Section 1.07(b) of the Agreement is
----------------------------
hereby amended to read as follows:
(b) Exchange Procedures. As soon as reasonably practicable
-------------------
after approval of the Merger by the shareholders of the Company,
the Exchange Agent shall mail or personally deliver to each
holder of record (or his or her attorney-in-fact) of a
certificate or certificates which represent outstanding Shares
(the "Certificates"), whose Shares will be converted into the
right to receive Cash Consideration and/or shares of Associated
Common Stock pursuant to Section 1.06 and cash in lieu of
fractional shares (if any), (i) a letter of transmittal (which
shall specify that delivery shall be effected only upon delivery
of the Certificates to the Exchange Agent and shall be in such
form and have such other provisions as Associated may reasonably
specify), (ii) instructions for use in effecting
6
<PAGE>
the surrender of the Certificates in exchange for Cash
Consideration and/or certificates representing shares of
Associated Common Stock, and (iii) forms mutually agreeable to
Associated and the Company for the exercise of elections as
described in Section 1.06(d) ("Election Forms"). At the Effective
Time and upon surrender of a Certificate for cancellation to the
Exchange Agent, together with such letter of transmittal and, for
shareholders electing to receive Cash Consideration, such
Election Form, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor the Cash
Consideration and/or a certificate representing that number of
whole shares of Associated Common Stock which such holder has the
right to and, subject to Section 1.06(d), has elected (or deemed
to have elected) to receive in respect of the Certificate
surrendered pursuant to the provisions of this Article I (after
taking into account all Shares then held by such holder) and cash
in lieu of fractional shares (if any), and the Certificate so
surrendered shall forthwith be canceled and the Cash
Consideration and/or cash in lieu of fractional shares and/or
certificate representing shares of Associated Common Stock shall
be sent as promptly as practicable to such holder. In the event
of a transfer of ownership of Shares which is not registered in
the transfer records of the Company, Cash Consideration and/or a
certificate representing the proper number of shares of
Associated Common Stock may be issued to a transferee if the
Certificate representing such Shares is presented to the Exchange
Agent, accompanied by all documents required to evidence and
effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. The Exchange Agent shall make
reasonable efforts to make available additional letters of
transmittal, instructions and Election Forms to all such persons
who become holders (or beneficial owners) of Company Common Stock
prior to the Election Deadline. Certificates surrendered for
exchange by any affiliate of the Company shall not be exchanged
for certificates representing shares of Associated Common Stock
until Associated has received a written agreement from such
person as provided in Section 4.04 hereof. Until surrendered as
contemplated by and subject to this Section 1.07 and Section
1.06, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such
surrender Cash Consideration and/or the certificate
7
<PAGE>
representing shares of Associated Common Stock and cash in lieu
of any fractional shares of Associated Common Stock as
contemplated by Section 1.07(e). In the event that this Agreement
is terminated pursuant to the provisions hereof and any Shares of
Company Common Stock have been transmitted to the Exchange Agent,
such Shares shall be returned as promptly as practicable without
charge to the person submitting same.
9. Amendment of Section 1.07(c). Section 1.07(c) of the Agreement is
----------------------------
hereby amended to read as follows:
(c) Distributions with Respect to Unexchanged Shares. To the
------------------------------------------------
extent a shareholder of the Company makes a Stock Election, no
dividends or other distributions declared or made after the
Effective Time with respect to such Associated Common Stock with
a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the
shares of Associated Common Stock represented thereby, and no
cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to Section 1.07(e), until the holder of such
Certificate shall surrender such Certificate. Subject to the
effect of applicable laws, following surrender of any such
Certificate, there shall be paid to the holder of the
certificates representing whole shares of Associated Common Stock
issued in exchange therefor, without interest, (i) promptly, the
amount of any cash payable with respect to a fractional share of
Associated Common Stock to which such holder is entitled pursuant
to Section 1.07(e) and the amount of dividends or other
distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Associated
Common Stock, and (ii) at the appropriate payment date, the
amount of dividends or other distributions, with a record date
after the Effective Time but prior to surrender and a payment
date occurring after surrender, payable with respect to such
whole shares of Associated Common Stock.
8
<PAGE>
10. Amendment of Section 1.07(d). Section 1.07(d) of the Agreement is
----------------------------
hereby amended to read as follows:
(d) No Further Rights in the Shares. All Cash Consideration
-------------------------------
and shares of Associated Common Stock issued upon conversion of
the Shares in accordance with the terms hereof (including any
cash paid pursuant to Section 1.07(e)) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such
Shares.
11. Amendment of Section 1.07(f). Section 1.07(f) of the Agreement is
----------------------------
hereby amended to read as follows:
(f) Termination of Exchange Fund. Any portion of the Exchange
----------------------------
Fund which remains undistributed to the shareholders of the
Company for six months after the Effective Time shall be
delivered to Associated, upon demand, and any shareholders of the
Company who have not theretofore complied with this Article I
shall thereafter look only to Associated for payment of their
claim for Cash Consideration and/or Associated Common Stock, any
cash in lieu of fractional shares of Associated Common Stock and
any dividends or distributions with respect to Associated Common
Stock.
12. Amendment of Section 1.08. Section 1.08 of the Agreement is
-------------------------
hereby amended to read as follows:
SECTION 1.08. Stock Transfer Books. At the Effective
--------------------
Time, the stock transfer books of the Company shall be closed and
there shall be no further registration of transfers of shares of
Company Common Stock thereafter on the records of the Company.
From and after the Effective Time, the holders of certificates
evidencing ownership of shares of the Company Common Stock
outstanding immediately prior to the Effective Time shall cease
to have any rights with respect to such Shares except as
otherwise provided herein or by law. On or after the Effective
Time, any Certificates presented to the Exchange Agent or
Associated for any reason shall be converted into Cash
Consideration and/or shares of Associated Common Stock in
accordance with this Article I.
9
<PAGE>
13. Amendment of Section 1.09. Section 1.09 of the Agreement is
-------------------------
hereby amended to read as follows:
SECTION 1.09. Anti-Dilution Adjustment. If, subsequent
------------------------
to October 5, 1998, and prior to the Effective Time, Associated
shall pay a stock dividend or make a distribution on Associated
Common Stock in shares of Associated Common Stock or any security
convertible into Associated Common Stock or shall combine or
subdivide its stock, then in each such case, from and after the
record date for determining the shareholders entitled to receive
such dividend or distribution or the securities resulting from
such combination or subdivision, an appropriate adjustment (if
any) shall be made to the conversion formula set forth in Section
1.06 above, for purposes of determining the number of shares of
Associated Common Stock into which the Company Common Stock may
be converted and to the computation of cash paid to Dissenting
Shareholders pursuant to Section 1.06(a). For purposes hereof,
the payment of a dividend in Associated Common Stock, or the
distribution on Associated Common Stock in securities convertible
into Associated Common Stock, shall be deemed to have effected an
increase in the number of outstanding shares of Associated Common
Stock equal to the number of shares of Associated Common Stock
into which such securities shall be initially convertible without
the payment by the holder thereof of any consideration other than
the surrender for cancellation of such convertible securities.
Notwithstanding the foregoing, this Section shall not apply to
any stock options issued under option plans of Associated
existing as of the date of this Agreement.
14. Amendment of Section 2.23. Section 2.23 of the Agreement is
-------------------------
hereby amended to read as follows:
SECTION 2.23. Tax Matters. To the knowledge of the
-----------
Company, neither the Company nor any of its affiliates has taken
or agreed to take any action that would prevent the Merger from
qualifying as a reorganization under Section 368(a)(1)(A) of the
Code.
10
<PAGE>
15. Amendment of Section 3.14. Section 3.14 of the Agreement is
-------------------------
hereby amended to read as follows:
SECTION 3.14. Tax Matters. To the knowledge of
-----------
Associated, neither Associated nor any of its affiliates has
taken or agreed to take any action that would prevent the Merger
from qualifying as a reorganization under Section 368(a)(1)(A) of
the Code. Neither Associated nor any of its affiliates has owned
any Company Common Stock during the five-year period immediately
preceding the Effective Time. Notwithstanding the foregoing,
Associated makes no representation with respect to Shares of
Company Common Stock which may have been owned by Associated or
any of its affiliates during such period in a fiduciary capacity.
16. Amendment of Section 4.04. Section 4.04 of the Agreement is
-------------------------
hereby amended to read as follows:
SECTION 4.04. Affiliates; Tax Treatment. Within thirty
-------------------------
(30) days after the date of this Agreement, (a) the Company shall
deliver to Associated a letter identifying all persons who are
then "affiliates" of the Company, including, without limitation,
all directors and executive officers of the Company for purposes
of Rule 145 promulgated under the Securities Act and (b) the
Company shall advise the persons identified in such letter of the
resale restrictions imposed by applicable securities laws. As
soon as practicable after October 8, 1998, the Company shall use
reasonable efforts to obtain from each person identified in such
letter a written agreement, substantially in the form attached
hereto as Exhibit 4.04, as amended. The Company shall use
reasonable efforts to obtain from any person who becomes an
affiliate of the Company after the Company's delivery of the
letter referred to above, and on or prior to the Effective Time,
a written agreement substantially in the form attached hereto as
Exhibit 4.04, as amended, as soon as practicable after attaining
such status. The Company will use its best efforts to cause the
Merger to qualify as a reorganization under Section 368(a)(1)(A)
of the Code.
11
<PAGE>
17. Amendment of Section 5.03. Section 5.03 of the Agreement is
-------------------------
hereby amended to read as follows:
SECTION 5.03. Tax Treatment. Associated will use its
-------------
best efforts to cause the Merger to qualify as a reorganization
under Section 368(a)(1)(A) of the Code. For a period of five
years after the Effective Time, neither Associated nor its
affiliates will purchase or otherwise acquire Associated Common
Stock issued in the Merger, except (a) pursuant to an ongoing
stock repurchase program which is not created or modified in
connection with the Merger and limited to open-market purchases
of a small percentage of Associated's outstanding common stock as
set forth in Treasury Regulations section 1.368-(1)(e), or (b)
any purchase or acquisition which will not result in the purchase
of an amount of Associated Common Stock issued in the Merger so
as to cause the Merger to fail to qualify as a tax-free
reorganization under Internal Revenue Code section 368(a).
18. Amendment of Section 7.01(a). Section 7.01(a) of the Agreement is
----------------------------
hereby amended to read as follows:
(a) Effectiveness of the Registration Statement. The
-------------------------------------------
Registration Statement shall have been declared effective by the
SEC under the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been
issued by the SEC and no proceedings for that purpose shall, on
or prior to the Effective Time, have been initiated or, to the
knowledge of Associated or the Company, threatened by the SEC.
Associated shall have received all other federal or state
securities permits and other authorizations necessary to pay Cash
Consideration and issue Associated Common Stock in exchange for
the Company Common Stock and to consummate the Merger.
19. Amendment of Section 7.02(d). Section 7.02(d) of the Agreement is
----------------------------
hereby amended to read as follows:
(d) No Challenge. There shall not be pending any action,
------------
proceeding or investigation before any court or administrative
agency or by any government agency or any other person (i)
challenging or seeking material damages in
12
<PAGE>
connection with the Merger or the conversion of the Company
Common Stock into Cash Consideration and/or Associated Common
Stock pursuant to the Merger, or (ii) seeking to restrain,
prohibit or limit the exercise of full rights of ownership or
operation by Associated or its subsidiaries of all or any portion
of the business or assets of the Company or its Subsidiaries,
which in either case is reasonably likely to have a Material
Adverse Effect on either the Company or its Subsidiaries, taken
as a whole, or Associated or its subsidiaries, taken as a whole.
20. Amendment of Section 7.02(f). Section 7.02(f) of the Agreement is
----------------------------
hereby amended to read as follows:
(f) Tax Opinion. Associated shall have received from
-----------
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c., an
opinion (i) dated on or about the date that is two business days
prior to the date the Proxy Statement/Prospectus is first mailed to
shareholders of the Company, (ii) which shall not have been
withdrawn or modified in any material respect prior to the
Effective Time, (iii) to the effect that:
[a] the Merger will qualify as a reorganization within the
meaning of section 368(a)(1)(A) of the Code;
[b] the Company and Associated will each be party to a
reorganization within the meaning of Section 368(b) of the Code;
[c] no gain or loss will be recognized by any shareholder of the
Company upon consummation of the Merger (except with respect to cash
received in lieu of a fractional share interest in Associated Common
Stock, consideration received as a result of exercise of the
dissenter's rights or Cash Consideration paid to such shareholder);
and
[d] the basis of the Associated Common Stock to be received by
the Company shareholders in the Merger will, in each case, be the same
as the basis of the Company Common Stock surrendered in exchange
therefor, decreased by the amount of the cash and the fair market
value of the other property received and increased by the amount
treated as a dividend, if any, and by the amount of gain recognized on
the exchange (not including any portion of the gain that is treated as
a dividend).
13
<PAGE>
21. Deletion of Section 7.02(g). Section 7.02(g) of the Agreement is
---------------------------
hereby deleted in its entirety.
22. Amendment of Section 7.02(j). Section 7.02(j) of the Agreement is
----------------------------
hereby amended to read as follows:
(j) Dissenters. The number of shares of Associated Common
----------
Stock that could be issuable by virtue of the Merger with respect
to shares of the Company's Common Stock outstanding on the record
date for the meeting of the Company's shareholders to consider
the Merger that will not be converted into Associated Common
Stock due, directly or indirectly, to the exercise of dissenters'
rights under Wisconsin Law, shall not be more than 10% of the
maximum aggregate number of shares of Associated Common Stock
which could be issued as a result of the Merger.
23. Amendment of Section 7.03(e). Section 7.03(e) of the Agreement is
----------------------------
hereby amended to read as follows:
(e) Tax Opinion. The Company shall have received from
-----------
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c., an
opinion (i) dated on or about the date that is two business days
prior to the date the Proxy Statement/Prospectus is first mailed to
shareholders of the Company, (ii) which shall not have been
withdrawn or modified in any material respect prior to the
Effective Time, (iii) to the effect that:
[a] the Merger will qualify as a reorganization within the
meaning of section 368(a)(1)(A) of the Code;
[b] the Company and Associated will each be party to a
reorganization within the meaning of Section 368(b) of the Code;
[c] no gain or loss will be recognized by any shareholder of the
Company upon consummation of the Merger (except with respect to cash
received in lieu of a fractional share interest in Associated Common
Stock, consideration received as a result of exercise of the
dissenter's rights or Cash Consideration paid to such shareholder);
and
[d] the basis of the Associated Common Stock to be received by
the Company shareholders in the Merger will, in each case, be the same
as the basis of the Company Common Stock
14
<PAGE>
surrendered in exchange therefor, decreased by the amount of the cash
and the fair market value of the other property received and increased
by the amount treated as a dividend, if any, and by the amount of gain
recognized on the exchange (not including any portion of the gain that
is treated as a dividend).
24. Deletion of Section 8.02(c). Section 8.02(c) of the Agreement is
---------------------------
hereby deleted in its entirety.
25. Amendment to Section 9.01. Section 9.01 of the Agreement is
-------------------------
hereby amended to read as follows:
9.01 Non-Survival of Representations, Warranties and
-----------------------------------------------
Agreements. The representations, warranties and agreements in
----------
this Agreement shall terminate at the Effective Time or upon the
termination of this Agreement pursuant to Article VIII, except
that the agreements set forth in Article I and in Section 5.03
shall survive the Effective Time indefinitely and those set forth
in Sections 4.03(b), 4.05, 5.02(b), 8.02 and Article IX hereof
shall survive termination indefinitely.
26. Amendment of Section 9.08. Section 9.08 of the Agreement is
-------------------------
hereby amended to read as follows:
SECTION 9.08. Assignment. This Agreement shall not be
----------
assigned by operation of law or otherwise, except that Associated
may assign all or any of its rights hereunder to any affiliate
provided that no such assignment shall relieve the assigning
party of its obligations hereunder (and Associated shall
expressly assume in writing all obligations of the Company as if
it were the surviving corporation under section 180.1106 of the
Wisconsin Law), and the assignee agrees to be bound by the terms
and conditions of this Agreement including the requirement of
conversion and delivery of Cash Consideration and shares of
Associated Common Stock pursuant to Section 1.06 hereof.
15
<PAGE>
27. Amendment of Section 9.09. Section 9.09 of the Agreement is
-------------------------
hereby amended to read as follows:
SECTION 9.09 Parties in Interest. This Agreement shall be
-------------------
binding upon and inure solely to the benefit of each party hereto
and its successors and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement, except for the right to receive the
consideration payable pursuant to Article I and except that
shareholders of the Company who receive Associated Common Stock
in the Merger shall be third party beneficiaries of Section 5.03
and shall receive and be entitled to all rights, benefits or
remedies resulting therefrom.
28. Amendment of Exhibit 4.04. Exhibit 4.04 of the Agreement is
-------------------------
amended to read in the form attached.
29. Full Force and Effect. All remaining provisions of the Agreement
---------------------
remain unchanged and in full force and effect.
IN WITNESS WHEREOF, Associated and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
ASSOCIATED BANC-CORP
By: /s/ H.B. Conlon
--------------------------------------
Name: H. B. Conlon
Title: Chairman, President, and Chief Executive Officer
CITIZENS BANKSHARES, INC.
By: /s/ Mary B. Hayes
--------------------------------------
Name: Mary B. Hayes
Title: President and Chairwoman of the Board of Directors
16
<PAGE>
EXHIBIT A-2
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of
October 27, 1998 between ASSOCIATED BANC CORP, a Wisconsin corporation
("Associated") and CITIZENS BANKSHARES, INC., a Wisconsin corporation
("Company").
RECITALS
A. Associated and the Company are parties to an Agreement and Plan
of Merger dated February 17, 1998, as amended by the First Amendment to
Agreement and Plan of Merger dated October 8, 1998 (the "Agreement").
B. Associated and the Company desire to amend the Agreement in the
manner set forth below.
AGREEMENTS
In consideration of the foregoing and the mutual covenants and
agreements contained herein and in the Agreement, and intending to be legally
bound hereby, Associated and the Company hereby agree as follows:
1. Amendment of Section 1.09. Section 1.09 of the Agreement, as
-------------------------
amended to read as follows:
SECTION 1.09. Anti-Dilution Adjustment. If, subsequent
------------------------
to October 5, 1998, and prior to the Effective Time, Associated
shall pay a stock dividend or make a distribution on Associated
Common Stock in shares of Associated Common Stock or any security
convertible into Associated Common Stock or shall combine or
subdivide its stock, then in each such case, from and after the
record date for determining the shareholders entitled to receive
such dividend or distribution or the securities resulting from
such combination or subdivision, an appropriate adjustment (if
any) shall be made to the conversion formulas set forth in
Section 1.06 above, for purposes of determining (a) the number of
shares of Associated Common Stock into which the Company Common
Stock may be converted, (b) the computation of Cash Consideration
and (c) the computation of cash paid to Dissenting Shareholders.
For purposes hereof, the payment of a dividend in Associated
Common Stock, or the distribution on Associated Common Stock in
securities
<PAGE>
convertible into Associated Common Stock, shall be deemed to have
effected an increase in the number of outstanding shares of
Associated Common Stock equal to the number of shares of
Associated Common Stock into which such securities shall be
initially convertible without the payment by the holder thereof
of any consideration other than the surrender for cancellation of
such convertible securities. Notwithstanding the foregoing, this
Section shall not apply to any stock options issued under option
plans of Associated existing as of the date of this Agreement.
2. Amendment of Section 2.08(f). Section 2.08(f) of the Agreement
----------------------------
is hereby amended to read as follows:
(f) any declaration, setting aside or payment of any
dividends or distributions in respect of shares of the Company
Common Stock (except as permitted by Section 4.02(b) hereof)
or any redemption, purchase or other acquisition of any of its
securities or any of the securities of any Subsidiary, or
3. Amendment of Section 4.02(b). Section 4.02(b) of the Agreement
----------------------------
is hereby amended to read as follows:
(b) declare or pay any dividend on, or make any other
distribution in respect of, its outstanding shares of capital
stock; provided, however, that in the event the Effective Time
occurs after December 20, 1998, the Company may, prior to the
Effective Time, declare and pay a cash dividend to the holders
of Company Common Stock. Any such dividend shall not, under
any circumstances, exceed $2 per share.
4. Amendment to Section 8.01. The references to the date "September
-------------------------
30, 1998" in Sections 8.01(a)(iv), (vi), (vii) and (viii) of the Agreement are
hereby deleted and replaced with the date "December 31, 1998."
5. Amendment of Section 8.01. Section 8.01 of the Agreement is
-------------------------
further amended to add the following immediately after section 8.01(a)(viii):
(ix) anything to the contrary notwithstanding, in
the event the Proxy Statement/ Prospectus is mailed to the
Company's shareholders after October 23, 1998 but prior to
November 16,
2
<PAGE>
1998, the date referenced in Section 8.01(a)(iv), (vi), (vii)
and (viii) shall be deemed to be "January 31, 1999" and, in
the event the Proxy Statement/ Prospectus is mailed to the
Company's shareholders on or after November 16, 1998, the date
referenced in Sections 8.01(a) (iv), (vi), (vii) and (viii)
shall be deemed to be "March 31, 1999."
5. Full Force and Effect. All remaining provisions of the Agreement
---------------------
remain unchanged and in full force and effect.
ASSOCIATED BANC CORP CITIZENS BANKSHARES, INC.
By /s/ H.B. Conlon BY /s/ Mary B. Hayes
---------------------------------- ------------------------------------
H.B. Conlon, Chairman, President Mary B. Hayes, President and
and Chief Executive Officer Chairwoman of the Board of
Directors
3
<PAGE>
EXHIBIT B
October 16, 1998
Board of Directors
Citizens Bankshares, Inc.
129 East Division Street
Shawano, Wisconsin 54166
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the outstanding shares of common stock of Citizens
Bankshares, Inc. ("Citizens"), of the consideration (the "Consideration") to be
paid for the exchange of Citizens common shares in the merger (the "Merger") of
Citizens with Associated Banc-Corp ("Associated"), pursuant to the Agreement and
amendments, originally dated February 17, 1998, between Citizens and Associated
(the "Merger Agreement").
Howe Barnes Investments, Inc. ("HBI"), as part of its investment banking
business, is regularly engaged in the valuation of banks and bank holding
companies, thrifts and thrift holding companies, and various other financial
services companies, in connection with mergers and acquisitions, initial and
secondary offerings of securities, and valuations for other purposes. In
rendering this fairness opinion we have acted on behalf of the Board of
Directors of Citizens and will receive a fee for our services.
Pursuant to the Merger Agreement, Citizens will merge into Associated and
Citizens as a separate corporate entity will cease. Each share of Citizens
common stock outstanding immediately prior to the effective time of the Merger
(other than shares as to which statutory dissenters' appraisal rights have been
exercised) will be converted into and exchanged for 33.75 shares of Associated
common stock. Alternatively, each Citizens shareholder has been given the option
of electing cash in an amount equal to 33.75 times the average closing price of
Associated common stock during a 10 day trading period immediately prior to the
Citizens shareholder meeting, so long as at least 50% of the aggregate
consideration is in the form of stock. The maximum number of Associated Shares
to be exchanged as part of the merger is 897,143. The terms of the Merger are
fully set forth in the Merger Agreement as amended.
For purposes of this opinion and in connection with our review of the proposed
transaction, we have, among other things:
1. Participated in discussions with senior management of Citizens
concerning Citizens's financial condition, businesses, assets,
earnings, prospects, and such
<PAGE>
Board of Directors
Citizens Bankshares, Inc.
Page 2
- --------------------------------------------------------------------------------
senior management's views as to the future financial performance;
2. Reviewed the terms of the Merger Agreement;
3. Reviewed certain publicly available financial statements, both audited
(where available) and unaudited, and related financial information of
Citizens and Associated, including those in their respective audited
financials for the past three years and Quarterly Reports for the
periods ended June 30, 1997, September 30, 1997, March 31, 1998 and
June 30, 1998 as well as other reports governing other key financial
and operating issues;
4. Reviewed certain financial forecasts and projections of Citizens
prepared by its management and reviewed publicly available
information, earnings estimates, and research reports available for
Associated;
5. Discussed and reviewed certain aspects of the past and current
business operations, financial condition, and future prospects of
Associated with certain members of senior management;
6. Reviewed reported market prices and historical trading activity of
Associated common stock;
7. Reviewed certain aspects of the financial performance of Citizens and
Associated and compared such financial performance of Citizens and
Associated, together with stock market data relating to Associated
common stock, with similar data available for certain other financial
institutions and certain of their publicly traded securities; and
8. Reviewed certain of the financial terms, to the extent publicly
available, of certain recent business combinations involving other
financial institutions.
We have assumed and relied, without independent verification, upon the accuracy
and completeness of all of the financial and other information that has been
provided to us by Citizens, Associated, their respective representatives, and of
the publicly available information that was reviewed by us. We are not experts
in the evaluation of allowances for loan losses and have not independently
verified such allowances, and have relied on and assumed that the aggregate
allowances for loan losses set forth in the balance sheets of each of Citizens
and Associated at June 30, 1998 are adequate to cover such losses and complied
fully with applicable law, regulatory policy and sound banking practice as of
the date of such financial statements. We were not retained to and we did not
conduct a physical inspection of any of the
2
<PAGE>
Board of Directors
Citizens Bankshares, Inc.
Page 3
- --------------------------------------------------------------------------------
properties or facilities of Citizens or Associated, did not make any independent
evaluation or appraisal of the assets, liabilities or prospects of Citizens or
Associated, were not furnished with any such evaluation or appraisal, and did
not review any individual credit files. Our opinion is necessarily based on
economic, market, and other conditions as in effect on, and the information made
available to us as of, the date hereof.
We are not expressing any opinion herein as to the prices at which shares of
Associated Common Stock issued in the Merger may trade if and when they are
issued or at any future time. Our opinion as expressed herein is limited to the
fairness, from a financial point of view, of the Consideration to the holders of
Citizens Common Stock and does not address Citizens' underlying business
decision to proceed with the Merger. We have been retained on behalf of the
Board of Directors of Citizens, and our opinion does not constitute a
recommendation to any holder of Citizens Common Stock as to how such holder
should vote with respect to the Merger Agreement at any meeting of holders of
Citizens Common Stock.
Subject to the foregoing and based on our experience as investment bankers, our
activities as described above, and other factors we have deemed relevant, we are
of the opinion as of the date hereof that the Consideration is fair, from a
financial point of view, to the holders of Citizens common stock.
Sincerely,
HOWE BARNES INVESTMENTS, INC.
/s/ David W. Giesen
__________________________________________
By: David W. Giesen, First Vice President
3
<PAGE>
EXHIBIT C
Subchapter XIII of the Wisconsin Business Corporation Law
Dissenters' Rights
180.1301 DEFINITIONS.
In (S)(S)180.1301 to 180.1331:
(1) "Beneficial shareholder" means a person who is a beneficial owner
of shares held by a nominee as the shareholder.
(1m) "Business combination" has the meaning given in (S)180.1130(3).
(2) "Corporation" means the issuer corporation or, if the corporate
action giving rise to dissenters' rights under (S)180.1302 is a merger or share
exchange that has been effectuated, the surviving domestic corporation or
foreign corporation of he merger or the acquiring domestic corporation or
foreign corporation of the share exchange.
(3) "Dissenter" means a shareholder or beneficial shareholder who is
entitled to dissent from corporate action under (S)180.1302 and who exercises
that right when and in the manner required by (S)(S)180.1320 to 180.1328.
(4) "Fair value," with respect to a dissenter's shares other than in
a business combination, means the value of the shares immediately before the
effectuation of the corporate action to which the dissenter objects, excluding
any appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable. "Fair value," with respect to a dissenter's
shares in a business combination, means market value, as defined in
(S)180.1130(9)(a) 1 to 4.
(5) "Interest" means interest from the effectuation date of the
corporate action until the date of payment, at the average rate currently paid
by the corporation on its principal bank loans or, if none, at a rate that is
fair and equitable under all of the circumstances.
(6) "Issuer corporation" means a domestic corporation that is the
issuer of the shares held by a dissenter before the corporate action.
C-1
<PAGE>
180.1302 RIGHT TO DISSENT.
(1) Except as provided in sub. (4) and (S)180.1008(3), a shareholder
or beneficial shareholder may dissent from, and obtain payment of the fair value
of his or her shares in the event of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the issuer
corporation is a party if any of the following applies:
1. Shareholder approval is required for the merger by
(S)180.1103 or by the articles of incorporation.
2. The issuer corporation is a subsidiary that is merged with
its parent under (S)180.1104.
(b) Consummation of a plan of share exchange if the issuer
corporation's shares will be acquired, and the shareholder or the
shareholder holding shares on behalf of the beneficial shareholder is
entitled to vote on the plan.
(c) Consummation of a sale or exchange of all, or substantially
all, of the property of the issuer corporation other than in the usual and
regular course of business, including a sale in dissolution, but not
including any of the following:
1. A sale pursuant to court order.
2. A sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed
to the shareholders within one year after the date of sale.
(d) Except as provided in sub. (2), any other corporate action
taken pursuant to a shareholder vote to the extent that the articles of
incorporation, bylaws or a resolution of the board of directors provides
that the voting or nonvoting shareholder or beneficial shareholder may
dissent and obtain payment for his or her shares.
(2) Except as provided in sub. (4) and (S)180.1008(3), the articles
of incorporation may allow a shareholder or beneficial shareholder to dissent
from an amendment of the articles of incorporation and obtain payment of the
fair value of his or her shares if the amendment materially and adversely
affects rights in respect of a dissenter's shares because it does any of the
following:
C-2
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(a) Alters or abolishes a preferential right of the shares.
(b) Creates, alters or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares.
(c) Alters or abolishes a preemptive right of the holder of shares
to acquire shares or other securities.
(d) Excludes or limits the right of the shares to vote on any
matter or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights.
(e) Reduces the number of shares owned by the shareholder or
beneficial shareholder to a fraction of a share if the fractional share so
created is to be acquired for cash under (S)180.0604.
(3) Notwithstanding sub. (l)(a) to (c), if the issuer corporation is a
statutory close corporation under (S)180.1801 to 180.1837, a shareholder of the
statutory close corporation may dissent from a corporate action and obtain
payment of the fair value of his or her shares, to the extent permitted under
sub. (l)(d) or (2) or (S)(S)180.1803, 180.1813(1)(d) or (2)(b), or
(S)180.1829(1)(c).
(4) Except in a business combination or unless the articles of
incorporation provide otherwise, subs. (1) and (2) do not apply to the holders
of shares of any class or series if the shares of the class or series are
registered on a national securities exchange or quoted on the National
Association of Securities Dealers, Inc., automated quotations system on the
record date filed to determine the shareholders entitled to notice of a
shareholders meeting at which shareholders are to vote on the proposed corporate
action.
(5) Except as provided in (S)180.1833, a shareholder or beneficial
shareholder entitled to dissent and obtain payment for his or her shares under
(S)(S)180.1301 to 180.1331 may not challenge the corporate action creating his
or her entitlement unless the action is unlawful or fraudulent with respect to
the shareholder, beneficial shareholder or issuer corporation.
180.1303 DISSENT BY SHAREHOLDERS AND BENEFICIAL SHAREHOLDERS.
(1) A shareholder may assert dissenters' rights as to fewer than all
of the shares registered in his or her name only if the shareholder dissents
with
C-3
<PAGE>
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf he
or she asserts dissenters' rights. The rights of a shareholder who under this
subsection asserts dissenters' rights as to fewer than all of the shares
registered in his or her name are determined as if the shares as to which he or
she dissents and his or her other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on his or her behalf only if the beneficial shareholder does all of
the following:
(a) Submits to the corporation the shareholder's written consent
to the dissent not later than the time that the beneficial shareholder
asserts dissenters' rights.
(b) Submits the consent under par. (a) with respect to all shares
of which he or she is the beneficial shareholder.
180.1320 NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under
(S)180.1302 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders and beneficial shareholders are or may been
titled to dissenters' rights under (S)(S)180.1301 to l80.1331 and shall be
accompanied by a copy of those sections.
(2) If corporate action creating dissenters' rights under (S)180.1302
is authorized without a vote of shareholders, the corporation shall notify, in
writing and in accordance with (S)180.0141, all shareholders entitled to assert
dissenters' rights that the action was authorized and send them the dissenters'
notice described in (S)180.1322.
180.1321 NOTICE OF INTENT TO DEMAND PAYMENT.
(1) If proposed corporate action creating dissenters' rights under
(S)180.1302 is submitted to a vote at a shareholders' meeting, a shareholder or
beneficial shareholder who wishes to assert dissenters' rights shall do all of
the following:
(a) Deliver to the issuer corporation before the vote is taken
written notice that complies with (S)180.0141 of the shareholder's or
beneficial shareholder's intent to demand payment for his or her shares if
the proposed action is effectuated.
C-4
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(b) Not vote his or her shares in favor of the proposed action.
(2) A shareholder or beneficial shareholder who fails to satisfy sub.
(1) is not entitled to payment for his or her shares under (S)(S)180.1301 to
180.1331.
180.1322 DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under
(S)180.1302 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders and beneficial
shareholders who satisfied (S)180.1321.
(2) The dissenters' notice shall be sent no later than 10 days after
the corporate action is authorized at a shareholders' meeting or without a vote
of shareholders, whichever is applicable. The dissenters' notice shall comply
with 180.0141 and shall include or have attached all of the following:
(a) A statement indicating where the shareholder or beneficial
shareholder must send the payment demand and where and when certificates
for certificated shares must be deposited.
(b) For holders of uncertificated shares, an explanation of the
extent to which transfer of the shares will be restricted after the payment
demand is received.
(c) A form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and that requires the shareholder or beneficial
shareholder asserting dissenters' rights to certify whether he or she
acquired beneficial ownership of the shares before that date.
(d) A date by which the corporation must receive the payment
demand, which may not be fewer than 30 days nor more than 60 days after the
date on which the dissenters' notice is delivered.
(e) A copy of (S)(S)180.1301 to 180.1331.
C-5
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180.1323 DUTY TO DEMAND PAYMENT.
(1) A shareholder or beneficial shareholder who is sent a dissenters'
notice described in (S)180.1322, or a beneficial shareholder whose shares are
held by a nominee who is sent a dissenters' notice described in (S)180.1322,
must demand payment in writing and certify whether he or she acquired beneficial
ownership of the shares before the date specified in the dissenters' notice
under (S)180.1322(2)(c). A shareholder or beneficial shareholder with
certificated shares must also deposit his or her certificates in accordance with
the terms of the notice.
(2) A shareholder or beneficial shareholder with certificated shares
who demands payment and deposits his or her share certificates under sub. (1)
retains all other rights of a shareholder or beneficial shareholder until these
rights are canceled or modified by the effectuation of the corporate action.
(3) A shareholder or beneficial shareholder with certificated or
uncertificated shares who does not demand payment by the date set in the
dissenters' notice, or a shareholder or beneficial shareholder with certificated
shares who does not deposit his or her share certificates where required and by
the date set in the dissenters' notice is not entitled to payment for his or her
shares under (S)(S)180.1301 to 180.1331.
180.1324 RESTRICTIONS ON UNCERTIFICATED SHARES.
(1) The issuer corporation may restrict the transfer of uncertificated
shares from the date that the demand for payment for those shares is received
until the corporate action is effectuated or the restrictions released under
(S)180.1326.
(2) The shareholder or beneficial shareholder who asserts dissenters'
rights as to uncertificated shares retains all of the rights of a shareholder or
beneficial shareholder, other than those restricted under sub. (1), until these
rights are canceled or modified by the effectuation of the corporate action.
180.1325 PAYMENT.
(1) Except as provided in (S)180.1327, as soon as the corporate
action is effectuated or upon receipt of a payment demand, whichever is later,
the corporation shall pay each shareholder or beneficial shareholder who has
complied with (S)180.1323 the amount that the corporation estimates to be the
fair value of his or her shares, plus accrued interest.
C-6
<PAGE>
(2) The payment shall be accompanied by all of the following:
(a) The corporation's latest available financial statements,
audited and including footnote disclosure if available, but including not
less than a balance sheet as of the end of a fiscal year ending not more
than 16 months before the date of payment, an income statement for that
year, a statement of changes in shareholders' equity for that year and the
latest available interim financial statements, if any.
(b) A statement of the corporation's estimate of the fair value of
the shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment under
(S)180.1328 if the dissenter is dissatisfied with the payment.
(e) A copy of (S)(S)180.1301 to 180.1331.
180.1326 FAILURE TO TAKE ACTION.
(1) If an issuer corporation does not effectuate the corporate action
within 60 days after the date set under (S)180.1322 for demanding payment, the
issuer corporation shall return the deposited certificates and release the
transfer restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the issuer corporation effectuates the corporate action, the
corporation shall deliver a new dissenters' notice under (S)180.1322 and repeat
the payment demand procedure.
180.1327 AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by
(S)180.1325 from a dissenter unless the dissenter was the beneficial owner of
the shares before the date specified in the dissenters' notice under
(S)180.1322(2)(c) as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action.
(2) To the extent that the corporation elects to withhold payment
under sub. (1) after effectuating the corporate action, it shall estimate the
fair value of the shares, plus accrued interest, and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of his or her
demand. The corporation
C-7
<PAGE>
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a statement of
the dissenter's right to demand payment under (S)180.1328 if the dissenter is
dissatisfied with the offer.
180.1328 PROCEDURE IF DISSENTER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter may, in the manner provided in sub. (2), notify the
corporation of the dissenter's estimate of the fair value of his or her shares
and amount of interest due, and demand payment of his or her estimate, less any
payment received under (S)180.1325, or reject the offer under (S)180.1327 and
demand payment of the fair value of his or her shares and interest due, if any
of the following applies:
(a) The dissenter believes that the amount paid under (S)180.1325
or offered under (S)180.1327 is less than the fair value of his or her
shares or that the interest due is incorrectly calculated.
(b) The corporation fails to make payment under (S)180.1325 within
60 days after the date set under (S)180.1322 for demanding payment.
(c) The issuer corporation, having failed to effectuate the
corporate action, does not return the deposited certificates or release the
transfer restrictions imposed of uncertificated shares within 60 days after
the date set under (S)180.1322 for demanding payment.
(2) A dissenter waives his or her right to demand payment under this
section unless the dissenter notifies the corporation of his or her demand under
sub. (1) in writing within 30 days after the corporation made or offered payment
for his or her shares. The notice shall comply with (S)180.0141.
180.1330 COURT ACTION.
(1) If a demand for payment under (S)180.1328 remains unsettled, the
corporation shall bring a special proceeding within 60 days after receiving the
payment demand under (S)180.1328 and petition the court to determine the fair
value of the shares and accrued interest. If the corporation does not bring the
special proceeding within the 60-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
C-8
<PAGE>
(2) The corporation shall bring the special proceeding in the circuit
court for the county where its principal office or, if none in this state, its
registered office is located. If the corporation is a foreign corporation
without a registered office in this state, it shall bring the special proceeding
in the county in this state in which was located the registered office of the
issuer corporation that merged with or whose shares were acquired by the foreign
corporation.
(3) The corporation shall make all dissenters, whether or not
residents of this state, whose demands remain unsettled parties to the special
proceeding. Each party to the special proceeding shall be served with a copy of
the petition as provided in (S)801.14.
(4) The jurisdiction of the court in which the special proceeding is
brought under sub. (2) is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. An appraiser has the power described in the order
appointing him or her or in any amendment to the order. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the special proceeding is entitled
to judgment for any of the following:
(a) The amount, if any, by which the court finds the fair value of
his or her shares plus interest, exceeds the amount paid by the
corporation.
(b) The fair value, plus accrued interest, of his or her shares
acquired on or after the date specified in the dissenters' notice under
(S)180.1322(2)(c), for which the corporation elected to withhold payment
under (S)180.1327.
180.1331 COURT COSTS AND COUNSEL FEES.
(1) (a) Notwithstanding (S)(S)814.01 to 814.04, the court in a
special proceeding brought under (S)180.1330 shall determine all costs of
the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court and shall assess the costs against the
corporation, except as provided in par. (b).
(b) Notwithstanding (S)(S)814.01 and 814.04, the court may assess
costs against all or some of the dissenters, in amounts that the court
finds to be equitable, to the extent that the court finds the dissenters
acted
C-9
<PAGE>
arbitrarily, vexatiously or not in good faith in demanding payment under
(S)180.1328.
(2) The parties shall bear their own expenses of the proceeding,
except that, notwithstanding (S)(S)814.01 to 814.04, the court may also assess
the fees and expenses of counsel and experts for the respective parties, in
amounts that the court finds to be equitable, as follows:
(a) Against the corporation and in favor of any dissenter if the
court finds that the corporation did not substantially comply with
(S)(S)180.1320 to 180.1328.
(b) Against the corporation or against a dissenter, in favor of
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously or not in good
faith with respect to the rights provided by this chapter.
(3) Notwithstanding (S)(S)814.01 to 814.04, if the court finds that
the services of counsel and experts for any dissenter were of substantial
benefit to other dissenters similarly situated, the court may award to these
counsel and experts reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
C-10
<PAGE>
EXHIBIT D
ASSOCIATED BANC-CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EARNINGS SUMMARY AND SELECTED FINANCIAL DATA (1)
<TABLE>
<CAPTION>
Six Months Ended Twelve Months Ended
June 30, December 31,
------------------------------ ----------------------------------------
(In Thousands, Except Per Share and Ratio Data) 1998 1997 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 394,705 $ 384,798 $ 787,244 $ 731,197 $ 696,858
Interest expense 206,706 199,362 411,637 375,923 360,499
--------------------------------------------------------------------------
Net interest income 187,999 185,436 375,607 355,274 336,359
Less: Provision for possible loan losses 7,133 6,559 31,668 13,695 14,029
--------------------------------------------------------------------------
Net interest income after provision for possible
loan losses 180,866 178,877 343,939 341,579 322,330
--------------------------------------------------------------------------
Plus: Noninterest income 86,845 61,750 95,976 116,845 104,989
Less: Noninterest expense 144,433 133,657 323,647 293,235 252,927
--------------------------------------------------------------------------
Net noninterest expense 57,588 71,907 227,671 176,390 147,938
--------------------------------------------------------------------------
Income before income taxes and extraordinary 123,278 106,970 116,268 165,189 174,392
item/cum eff of acctg chg
Income tax expense 42,414 39,631 63,909 57,487 62,381
Extraordinary item - - - (686) -
Cumulative effect of an accounting change - - - - -
--------------------------------------------------------------------------
NET INCOME $ 80,864 $ 67,339 $ 52,359 $ 107,016 $ 112,011
==========================================================================
Basic earnings per share (2)
Inc before extrao item/cum eff of acctg chg $ 1.28 $ 1.10 $ 0.83 $ 1.70 $ 1.82
Net income $ 1.28 $ 1.10 $ 0.83 $ 1.69 $ 1.82
Diluted earnings per share (2)
Inc before extrao item/cum eff of acctg chg $ 1.26 $ 1.08 $ 0.82 $ 1.67 $ 1.79
Net income $ 1.26 $ 1.08 $ 0.82 $ 1.66 $ 1.79
Cash dividends per share (2) $ 0.46 $ 0.43 $ 0.89 $ 0.76 $ 0.65
Weighted average shares outstanding
Basic 63,271 62,938 62,884 63,205 61,386
Diluted 64,061 63,987 63,935 64,380 62,473
==========================================================================
SELECTED FINANCIAL DATA
Period-End Balance:
Loans (including loans held for sale) $ 7,297,354 $ 6,997,290 $ 7,190,577 $ 6,700,847 $6,418,683
Allowance for possible loan losses 91,708 73,682 92,731 71,767 68,560
Investment securities 2,719,198 2,963,163 2,940,218 2,753,938 2,266,895
Assets 10,561,667 10,531,246 10,691,439 10,123,383 9,393,609
Deposits 8,467,148 8,130,180 8,364,137 7,959,298 7,570,201
Long-term borrowings 27,758 29,479 15,270 33,329 36,907
Stockholders' equity 867,286 842,561 813,693 803,562 725,211
Stockholders' equity per share (2) 13.70 13.44 12.92 12.81 11.75
--------------------------------------------------------------------------
Average for the Period:
Loans (including loans held for sale) $ 7,244,110 $ 6,800,031 $ 6,962,820 $ 6,586,639 $6,157,655
Investment securities 2,751,000 2,848,981 2,905,948 2,523,757 2,421,379
Assets 10,558,758 10,182,132 10,395,615 9,643,657 9,123,981
Deposits 8,365,620 7,968,904 8,122,011 7,778,257 7,409,409
Stockholders' equity 839,158 817,484 839,859 775,180 674,368
--------------------------------------------------------------------------
Financial Ratios:
Return on average equity (3) 19.43% 17.10% 16.93% 16.64% 17.21%
Return on average assets (3) 1.54% 1.37% 1.37% 1.34% 1.27%
Net interest margin (tax-equivalent) 3.78% 3.87% 3.85% 3.95% 3.95%
Average equity to average assets 7.95% 8.03% 8.08% 8.04% 7.39%
Dividend payout ratio (3) (4) 36.25% 37.95% 39.27% 37.24% 34.28%
==========================================================================
</TABLE>
D-1
<PAGE>
(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.
(3) Ratio is based upon income prior to merger integration and other one-time
charges, extraordinary items or cumulative effects of an accounting change.
(4) Ratio is based upon basic earnings per share.
The following discussion is management's analysis of the consolidated financial
condition and results of operations of Associated Banc-Corp and its subsidiaries
(the "Corporation"), which may not otherwise be apparent from the consolidated
financial statements included in this exhibit. Reference should be made to the
consolidated financial statements and the selected financial data presented
elsewhere in this exhibit for an understanding of the following discussion and
analysis.
SIX MONTH AND QUARTERLY PERIODS ENDED JUNE 30, 1998 AND 1997
EARNINGS
The following discussion will focus upon "operating earnings", with respect to
the fourth quarter of 1997, for Associated. Operating earnings for the fourth
quarter of 1997 exclude the impact of the merger, integration and other one-time
charges recorded by Associated (an $89.8 million reduction to net income). All
references to pre-tax operating income, noninterest income, noninterest expense,
tax expense, net income and net income per share are based upon operating
earnings.
In October 1997, Associated completed the acquisition of the $6.0 billion First
Financial Corporation (FFC) in Stevens Point, WI. This acquisition was accounted
for using the pooling-of-interests method. All consolidated financial
information has been restated as if the transaction had been effected as of the
beginning of the earliest reporting period.
All prior period per share results, period end shares and weighted average
shares have been restated to reflect the five-for-four stock split effected in
the form of a 25 percent stock dividend paid to shareholders on June 12, 1998.
Net income for the second quarter of 1998 was $41.0 million, up 15.6% over 1997
second quarter net income of $35.5 million, and up from the $39.9 million
reported in the first quarter of 1998. Earnings per basic share were $0.65 in
the second quarter of 1998, up 14.0% over the $0.57 reported in the second
quarter of 1997, and up from the $0.63 net income per share reported in the
first quarter of 1998. Earnings per diluted share were $0.64 in the second
quarter of 1998, up 14.3% over the $0.56 reported in the second quarter of 1997,
and up from the $0.62 net income per share reported in the first quarter of
1998. Diluted earnings take into account shares that could be issued through
stock option plans, convertible securities or other contracts.
Net income for the first six months of 1998 was $80.9 million, up 20.1% over the
net income in the same period of 1997 of $69.3 million. Earnings per basic
share were $1.28 in the first six months of 1998, up 16.4% over the $1.10
reported in the first six months of 1997. Earnings per diluted share were $1.26
in the first six months of 1998, up 16.7% over the $1.08 reported in the first
six months of 1997.
Return on average assets (ROA) for the second quarter of 1998 was 1.56%, up from
1.38% during the same period last year. Second quarter 1998 ROA increased from
1.53% in the first quarter of 1998. Return on average equity (ROE) for the
first quarter of 1998 was 19.36%, up from 17.41% during the same period last
year. Second quarter 1998 ROE decreased from the 19.51% reported in the first
quarter of 1998.
Return on average assets (ROA) for the first six months of 1998 was 1.54%, up
from 1.37% during the same period last year. Return on average equity (ROE) for
the first six months of 1998 was 19.43%, up from 17.10% during the same period
last year.
The change in second quarter 1998 net income (increase of $5.5 million, or
15.6%), when compared to the same period last year, was a result of higher
noninterest income (up $14.0 million, or 44.9%), offset by higher provision for
loan losses (up $189,000, or 5.9%), higher noninterest expense (up $6.1 million,
or 9.1%) and higher tax expense (up $2.2 million, or 11.5%).
The change in second quarter 1998 net income (increase of $1.1 million, or
2.9%), when compared to the first quarter of 1998, was a result of lower
provisions for loan losses (down $384,000, or 10.2%), higher noninterest income
(up $3.3 million, or 8.0%), offset by lower net interest income (down $686,000,
or 0.7%), higher noninterest expense (up $1.3 million, or 1.8%), and higher
income tax expense (up $616,000, or 2.9%).
The change in the first six months of 1998 net income (increase of $11.5
million, .or 16.6%), when compared to the same period last year, was a result of
higher net interest income (up $2.6 million, or 1.4%) and higher noninterest
income (up $25.1 million, or
D-2
<PAGE>
40.6%), offset by higher provision for loan losses (up $574,000, or 8.8%),
higher noninterest expense (up $10.8 million, or 8.1%), and higher income tax
expense (up $4.8 million, or 12.7%) .
<TABLE>
<CAPTION>
Net Income
Quarterly Trends
(In Thousands)
- -------------------------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Net Income (Qtr) $41,004 $39,860 $ 36,018 $ 36,822 $35,480
Operating Net Income (YTD) $80,864 $39,860 $142,178 $106,161 $69,339
Consolidated Net Income (Loss) (Qtr) $41,004 $39,860 $(53,802) $ 36,822 $35,480
Consolidated Net Income (YTD) $80,864 $39,860 $ 52,359 $106,161 $69,339
Operating EPS - Basic (Qtr) $ .65 $ .63 $ .57 $ .59 $ .57
Operating EPS - Diluted (Qtr) $ .64 $ .62 $ .57 $ .58 $ .56
Operating EPS - Basic (YTD) $ 1.28 $ .63 $ 2.26 $ 1.69 $ 1.10
Operating EPS - Diluted (YTD) $ 1.26 $ .62 $ 2.22 $ 1.66 $ 1.08
Consolidated EPS - Basic (Qtr) $ .65 $ .63 $ (1.86) $ .59 $ .57
Consolidated EPS - Diluted (Qtr) $ .64 $ .62 $ ( .85) $ .58 $ .56
Consolidated EPS - Basic (YTD) $ 1.28 $ .63 $ .83 $ 1.69 $ 1.10
Consolidated EPS - Diluted (YTD) $ 1.26 $ .62 $ .82 $ 1.66 $ 1.08
Operating ROE - Quarter 19.36% 19.51% 16.46% 17.33% 17.41%
Operating ROE - YTD 19.43% 19.51% 16.93% 17.09% 17.10%
Operating ROA - Quarter 1.56% 1.53% 1.34% 1.40% 1.38%
Operating ROA - YTD 1.54% 1.53% 1.37% 1.38% 1.37%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST INCOME
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997:
Fully taxable equivalent (FTE) net interest income in the second quarter of 1998
was $95.2 million, an increase of $208,246 over the second quarter of 1997 FTE
net interest income of $95.0 million.
The increase in FTE net interest income was attributable to larger volumes of
earning assets (up $246 million) when compared to the second quarter of 1997.
The increase in net interest income due to the volume variance (change in
interest income from incremental earning assets less the change in interest
expense from incremental volumes of interest-bearing liabilities) was $5.2
million. This large increase was offset by a negative rate variance (change in
interest income from incremental yields on earning assets less the change in
interest expense from incremental rates on interest-bearing liabilities) of $5.0
million. The contribution from the growth in earning assets was essentially
offset by a 9 basis point decrease in the net interest margin. The growth in
earning assets was concentrated in loans, with loans increasing $416 million
offset by a $197 million decrease in investment securities, when compared to the
second quarter of 1997.
The net interest margin for the second quarter of 1998 was 3.77%, compared with
3.86% in the second quarter of 1997. The contribution from net free funds in
the second quarter of 1998 increased to 0.60% from 0.54% for the same period in
1997. The rate spread decreased to 3.17% from 3.32% reported a year ago.
Average earning assets grew $246 million from the second quarter of 1997. The
average loans to average deposits ratio increased to 86.7%, up from 85.6% in the
second quarter of 1997.
The growth in average loans of $416 million was funded by increased time
deposits (personal CDs and Brokered CDs) of $115 million ($123 million increase
in personal CDs and an $8 million decrease in Brokered CDs), higher balances of
Savings, NOW and MMA of $166 million and higher net free funds of $142 million,
a decrease in the balances of investments and short-term investments of $170,
offset by a $177 million decrease in wholesale borrowings ( funds purchased,
repurchase agreements, FHLB borrowings, and long-term borrowings).
D-3
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income
Tax Equivalent Basis
(In Thousands)
- --------------------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $196,255 $198,451 $201,798 $200,647 $195,056
Tax Equivalent Adjustment 1,543 1,509 1,464 1,406 1,355
-------- -------- -------- -------- --------
Tax Equivalent Interest Income $197,798 $199,960 $203,262 $202,053 $196,411
Interest Expense 102,598 104,108 106,418 105,857 101,419
-------- -------- -------- -------- --------
Tax Equivalent Net Interest Income $ 95,200 $ 95,852 $ 96,844 $ 96,196 $ 94,992
- --------------------------------------------------------------------------------------------------------------
</TABLE>
SECOND QUARTER 1998 COMPARED TO FIRST QUARTER 1998:
Fully taxable equivalent (FTE) net interest income in the second quarter of 1998
was $95.2 million, a decrease of $652,000 compared to the first quarter of 1998
FTE net interest income of $95.9 million.
The decrease in FTE net interest income was attributable to lower volumes of
earning assets (down $38 million) when compared to the first quarter of 1998.
The increase in net interest income due to the volume variance (change in
interest income from incremental earning assets less the change in interest
expense from incremental volumes of interest-bearing liabilities) was $938,000.
This variance is primarily attributable to a shift in earning assets to higher
yielding loans from lower yielding investments. This increase was more than
offset by a negative rate variance (change in interest income from incremental
yields on earning assets less the change in interest expense from incremental
rates on interest-bearing liabilities) of $1.7 million. Additionally, the extra
day in the second quarter compared to the first quarter contributed $116,000 to
net interest income. The contribution from the change in mix of earning assets
was more than offset by the 2 basis point decrease in the net interest margin.
The change in earning assets resulted as loans increased $84 million offset by a
$122 million decrease in investment securities, when compared to the first
quarter of 1998.
The net interest margin for the second quarter of 1998 was 3.77%, compared with
3.79% in the first quarter of 1998. The contribution from net free funds in the
second quarter of 1998 increased to 0.60% from 0.59% compared to the first
quarter of 1998. The rate spread decreased to 3.17% from 3.20% reported last
quarter.
Average earning assets decreased $38 million from the first quarter of 1998.
Total loans grew $84 million. Included in the change in the average loan
balance for the quarter is a $24 million reduction from the sale of an affinity
credit card portfolio which resulted in a gain of $3.0 million. The average
loans to average deposits ratio increased to 86.7%, up from 86.5 % in the first
quarter of 1998. The ratio of average loans to average earning assets increased
to 72.6% for the second quarter of 1998 compared to 71.5% in the first quarter
of 1998.
The growth in average loans of $84 million was funded by time deposits (personal
CDs and Brokered CDs) of $0 million ($8 million increase in personal CDs and an
$8 million decrease in Brokered CDs), higher balances of Savings, NOW and MMA of
$55 million and higher net free funds of $49 million, a decrease in the balances
of investments and short-term investments of $122, offset by a $142 million
decrease in wholesale borrowings (funds purchased, repurchase agreements, FHLB
borrowings, and long-term borrowings).
<TABLE>
<CAPTION>
Net Interest Margin
Quarterly Trends
(Quarterly Info Only)
- ----------------------------------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Yield on Earning Assets 7.86% 7.97% 7.95% 8.07% 8.01%
Cost of Interest-Bearing Liabilities 4.69% 4.77% 4.78% 4.79% 4.69%
----- ----- ----- ----- -----
Interest Rate Spread 3.17% 3.20% 3.17% 3.28% 3.32%
Net Free Funds Contribution 0.60% 0.59% 0.63% 0.57% 0.54%
----- ----- ----- ----- -----
Net Interest Margin 3.77% 3.79% 3.80% 3.85% 3.86%
===== ===== ===== ===== =====
Average Earning Assets to Average Assets 95.30% 95.24% 95.34% 95.23% 95.27%
Free Funds Ratio (% of Earning Assets) 12.86% 12.33% 13.12% 11.96% 11.73%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
YTD SECOND QUARTER 1998 COMPARED TO YTD SECOND QUARTER 1997:
FTE net interest income in the first six months of 1998 was $191.1 million, an
increase of $2.8 million over the same period in 1997 FTE net interest income of
$188.2 million.
D-4
<PAGE>
The increase for this period was primarily attributable to a volume variance
(change in interest income from incremental earning assets less the change in
interest expense from incremental volumes of interest-bearing liabilities) of
$11.2 million, offset by a negative rate variance (change in interest income
from incremental yields on earning assets less the change in interest expense
from incremental rates on interest-bearing liabilities) of $8.4 million.
The net interest margin for the first six months of 1998 was 3.78%, compared
with 3.87% in the first six months of 1997. The largest factor contributing to
the decrease in net interest margin was the 14 basis point reduction in interest
rate spread. Contributing to this decline in spread was a 10 basis point
reduction in the yield on total earning assets (loans down 14 basis points,
investments down 7 basis points) and a higher rate on total interest-bearing
liabilities of 4 basis points (retail deposits up 6 basis points and wholesale
funds up 2 basis points). This 14 basis point reduction in interest rate spread
was offset by a 5 basis point increase in contribution from net free funds.
Average earning assets increased $372 million in the first six months of 1998
compared to the same period last year. Total average loans grew $444 million in
the first six months of 1998 compared to the first six months of 1997.
The average loan growth of $444 million was a result of increased time deposits
(personal CDs and Brokered CDs) of $153 million ($141 million increase in
personal CDs and a $12 million increase in Brokered CDs), higher balances of
Savings, Now and MMA of $157 million, increased net free funds of $134 million,
decreased balances of investments and short-term investments of $73 million
offset by increased wholesale borrowings (funds purchased, repurchase
agreements, FHLB borrowings and long-term borrowings) of $73 million.
<TABLE>
<CAPTION>
Earning Asset and Interest-Bearing Liability Volumes
Quarterly Trends
(In Thousands)
- -----------------------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Loans $ 7,285,819 $ 7,201,937 $ 7,161,090 $6,990,922 $6,869,948
Average Earning Assets 10,039,967 10,078,411 10,150,486 9,940,700 9,794,201
Average Noninterest-Bearing
Deposits 769,465 778,957 824,393 726,945 704,798
Average Interest-Bearing
Deposits 7,605,270 7,550,146 7,511,209 7,403,326 7,323,884
Average Deposits 8,401,735 8,329,103 8,355,602 8,130,271 8,028,682
Average Interest-Bearing
Liabilities $ 8,748,600 $ 8,835,493 $ 8,818,256 $8,751,596 $8,644,990
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
LOAN LOSS
The loan loss provision for the second quarter of 1998 was $3.4 million, a
decrease of $384,000 from the first quarter of 1998 provision of $3.8 million
and an increase of $186,000 from the second quarter of 1997.
As of June 30, 1998, the allowance for possible loan losses of $91.7 million
represented 1.27% of total outstanding loans, down from the 1.31% reported at
December 31, 1997, and up from 1.06% reported at June 30, 1997. The increase in
allowance for possible loan losses to loans from the second quarter of 1997 to
the first quarter of 1998 is attributable to the $16.8 million one-time charge
recorded at year end 1997 in conjunction with the acquisition of First
Financial. The decrease in the ratio of allowance for possible loan losses to
period end loans in the second quarter of 1998 compared to the first quarter of
1998 is attributable to net charge-offs exceeding the provision for loan losses
by $1.7 million and period end loans increasing by $43 million. Combined, these
two factors caused the allowance to decrease to 1.27% of loans as of June 30,
1998.
During the second quarter of 1998, net charge-offs of $5.1 million were
recorded. The majority of net charge-offs were related to the charge-offs of a
single commercial creditor totaling $2.0 million and the credit card portfolio
net charge-offs totaling $2.2 million.
The second quarter of 1998 net charge-offs as a percent of average loans (on an
annualized basis) of 0.28% increased when compared to net charge-offs to average
loans (on an annualized basis) of 0.16% in the second quarter of 1997 and net
charge-offs as a percent of average loans (on an annualized basis) of 0.17% in
the first quarter of 1998.
D-5
<PAGE>
<TABLE>
<CAPTION>
Allowance for Possible Loan Losses
Quarterly Trends
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision Expense - Qtr $ 3,375 $ 3,759 $ 4,571 $ 3,739 $ 3,186
Merger Adjustment - Qtr --- --- 16,800 --- ---
Provision Expense - YTD 7,134 3,759 14,868 10,297 6,559
Merger Adjustment - YTD --- --- 16,800 --- ---
Net Charge-Offs - Qtr 5,081 3,075 3,113 2,947 2,752
Net Charge-Offs - YTD 8,156 3,075 11,432 8,319 5,372
Allowance at Period End $91,708 $93,415 $92,731 $74,454 $73,682
Allowance to Loans 1.27% 1.30% 1.31% 1.05% 1.06%
Net Charge-Offs to Average Loans (Annualized) -
Qtr .28% .17% .17% .16% .16%
Net Charge-Offs to Average Loans (Annualized) -
YTD .23% .17% .16% .16% .16%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING LOANS
Management is committed to a nonaccrual and problem loan identification
philosophy. This philosophy is embodied through the monitoring and reviewing of
credit policies and procedures to ensure that all problem loans are identified
quickly and the risk of loss is minimized.
Nonperforming loans are considered a leading indicator of future loan losses.
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing and restructured loans. The Corporation specifically
excludes student loan balances that are 90 days or more past due and still
accruing and that have contractual government guarantees as to collection of
principal and interest, from its definition of nonperforming loans.
Loans are normally placed in nonaccrual 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 nonaccrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously
accrued and uncollected interest on such loans is reversed and income is
recorded only to the extent that interest payments are subsequently received in
cash and a determination has been made that the principal balance of the loan is
collectible. If collectibility of the principal is in doubt, payments received
are applied to loan principal.
Loans past due 90 days or more but still accruing interest, with the exception
of guaranteed student loans, are also included in nonperforming loans. Student
loans past due 90 days or more but still accruing interest were $7.4 million at
June 30, 1998, compared to $8.0 million at March 31, 1998, and $8.0 million at
December 31, 1997. Loans past due 90 days or more but still accruing interest
are classified as such where the underlying loans are both well-secured (the
collateral value is sufficient to cover principal and accrued interest) and in
the process of collection. Also included in nonperforming loans are
"restructured" loans. Restructured loans involve the granting of some
concession to the borrower involving the modification of terms of the loan, such
as changes in payment schedule or interest rate.
Total nonperforming loans at June 30, 1998 were $46.2 million, an increase of
$12.3 million from March 31, 1998 and an $11.9 million increase from December
31, 1997. The ratio of nonperforming loans to total loans at June 30, 1998 was
.64% compared to .47% at March 31, 1998 and .61% at June 30, 1997. Other real
estate owned decreased in the second quarter to $4.0 million at June 30, 1998,
down from $4.3 million at March 31, 1998. The increase in nonaccrual loans is
primarily attributable to a single large commercial credit totaling $6.3
million.
<TABLE>
<CAPTION>
Nonperforming Loans and Other Real Estate
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/98 3/31/98 12/31/97 9/30/97 6/30/97
-------- -------- --------- -------- --------
Nonaccrual Loans $ 39,512 $ 30,072 $ 32,415 $ 36,202 $ 34,877
Accruing Loans Past Due 90 Days
or More 6,404 3,414 1,324 1,648 7,040
Restructured Loans 287 455 558 186 471
-------- -------- --------- -------- --------
Total Nonperforming Loans $ 46,203 $ 33,941 $ 34,297 $ 38,036 $ 42,388
======== ======== ========= ======== ========
Nonperforming Loans as a
Percent of Loans 0.64% 0.47% 0.48% 0.54% 0.61%
Other Real Estate Owned $ 4,012 $ 4,265 $ 2,067 $ 2,447 $ 2,510
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Impaired loans are defined as those loans where it is probable that all amounts
due according to contractual terms, including principal and interest, will not
be collected. The Corporation has determined that commercial loans and
commercial real estate loans that have a nonaccrual status or have had their
terms restructured meet the definition. Impaired loans are measured at the fair
D-6
<PAGE>
value of the collateral, if the loan is collateral dependent, or alternatively
at the present value of expected future cash flows. Interest income on impaired
loans is recognized only at the time that cash is received, unless applied to
reduce principal.
At June 30, 1998, the recorded investment in impaired loans totaled $20.1
million. Included in this amount is $18.6 million of impaired loans that do not
require a related allowance for possible loan losses and $1.5 million of
impaired loans for which the related allowance for possible loan losses totaled
$776,000. The average recorded investment in impaired loans during the twelve
months ended June 30, 1998, was approximately $14.5 million. Interest income
recognized on a cash basis on impaired loans during the first six months of 1998
totaled $960,000.
The following table shows, for those loans accounted for on a nonaccrual basis
and restructured loans for the six months ended June 30, 1998, 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>
<CAPTION>
For the Six Months
Ended June 30, 1998
-------------------
(In Thousands)
<S> <C>
Interest income in accordance with original terms $ 2,391
Interest income recognized (1,293)
-------
Reduction in interest income $ 1,098
=======
</TABLE>
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 June 30, 1998, potential problem loans totaled $63.0 million compared to
$74.0 million at the end of 1997. The loans that have been reported as
potential problem loans are not concentrated in a particular industry, but
rather cover a diverse range of businesses, e.g. communications, wholesale
trade, manufacturing, finance/insurance/real estate, and services. Management
does not presently expect significant losses from credits in this category.
LOAN CONCENTRATIONS
Loan concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that would cause them
to be similarly impacted by economic or other conditions. The Corporation's
loans are widely diversified by borrower, industry group and area. At June 30,
1998, no concentrations existed in the Corporation's loan portfolio in excess of
10% of total loans.
Real estate construction loans at June 30, 1998, totaled $329 million, or 4.5%
of loans while agricultural loans were 0.8% of total loans.
As of June 30, 1998, the Corporation did not have any cross-border outstandings
to borrowers in any foreign country where such outstandings exceeded 1% of total
assets.
NONINTEREST INCOME
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
Noninterest income increased $14.0 million, or 44.9% over the second quarter of
1997. Noninterest income, excluding net investment securities gains, increased
$13.5 million, or 43.8%. Income from service charges on deposit accounts and
retail commission income decreased from the second quarter of 1997. All other
categories of noninterest income increased from the second quarter of 1997.
Trust service fees increased $1.1 million, or 15.5% compared to the same quarter
last year. The increase is a result of higher trust assets under management and
general market conditions.
Net investment securities gains increased $454,000, or 241.5% over the second
quarter of 1997. The $642,000 in net investment securities gains recognized in
the second quarter of 1998 consisted primarily of gains from the sale of equity
securities held as available for sale.
D-7
<PAGE>
Mortgage banking income increased $5.7 million, or 105.6% from the second
quarter of 1997. Increases were recognized in higher origination fees (up
$314,000), underwriting fees (up $382,000), servicing fees (up $91,000), escrow
waiver fees (up $136,000) and gains on sales of loans (up $4.8 million). The
production related revenue, (origination, underwriting and escrow waiver fees)
was higher due to higher production volumes in the second quarter of 1998 ($539
million) compared to the same period last year ($190 million). The increased
gains on sales of loans is the result of this increased production in a more
favorable mortgage banking rate environment.
Retail commission income decreased $5,000, or 0.1% compared to the same period
last year. Decreases in income from annuities (down $204,000) and stocks (down
$400,000) were offset, in part, by an increase in income from mutual funds (up
$449,000).
Income from loan fees increased $796,000, or 19.5% compared to the second
quarter of 1997. The increase is a result of increased fees on credit cards (up
$666,000) and real estate loans (up $174,000).
Asset sale gains increased $6.0 million over the second quarter of 1997. Gains
recognized in the second quarter of 1998 include gains of $2.9 million on sales
of office buildings, a gain of $3.0 million on the sale of an affinity credit
card portfolio, a gain of $138,000 on sale of land trusts, and a gain of $92,000
on the sale of leased equipment.
Other miscellaneous income, from a variety of sources, increased $92,000, or
2.8% over the second quarter of 1997. The increase is primarily attributable to
higher income from TYME/electronic funds transfer and automatic teller machine
fees (up $339,000) and increased international income of $53,000 offset by lower
income from real estate held for investments (down $381,000). The reduced
income from real estate held for investments was a result of the sale of an
office building in early April. Rental income from tenants leasing the facility
ceased at that time.
<TABLE>
<CAPTION>
Noninterest Income
Quarterly Trends
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust Servicing Fees $ 8,066 $ 7,915 $ 7,744 $ 7,089 $ 6,983
Service Charges on Deposit Accounts 6,816 6,370 7,177 7,211 7,023
Mortgage Banking Activity 11,183 10,896 8,410 6,745 5,438
Loan Fees 4,870 4,160 4,379 4,270 4,074
Retail Commission Income 3,987 3,390 3,614 3,969 3,992
Asset Sale Gains (Losses), net 6,191 185 (23) 511 165
Other 3,341 3,522 3,780 3,509 3,249
------- ------- -------- ------- -------
Total, excluding Securities Gains $44,454 $36,438 $ 35,081 $33,304 $30,924
Investment Security Gains, net 642 5,311 280 851 188
Merger, Integration and Other One-Time Charges --- --- (35,290) --- ---
------- ------- -------- ------- -------
Total Noninterest Income $45,096 $41,749 $ 71 $34,155 $31,112
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SECOND QUARTER 1998 COMPARED TO FIRST QUARTER 1998
Noninterest income increased $3.3 million, or 8.0% in the second quarter of 1998
compared to the first quarter of 1998. Noninterest income, excluding net
investment securities gains, increased $8.0 million, or 22.0%. All categories
of noninterest income, with the exception of investment securities gains and
other, increased in the second quarter of 1998 when compared to the first
quarter of 1998.
Service charges on deposit accounts increased $446,000, or 7.0% during the
quarter. The increases were primarily due to increased service charges on
business accounts (up $235,000) and overdraft/NSF fees (up $265,000).
Net investment security gains decreased $4.7 million. In the fourth quarter of
1997, the Corporation hedged certain agency issued zero coupon bonds by
executing various interest rate futures contracts. In the first quarter of 1998,
these contracts were closed and the zero coupon bonds were sold. As a result, a
net gain of $5.1 million was recognized. The $642,000 in net investment
securities gains recognized in the second quarter of 1998 consisted primarily of
gains from the sale of equity securities.
Mortgage banking income increased $287,000, or 2.6% from the first quarter of
1998. Increases were recognized in higher origination fees (up $40,000), escrow
waiver fees (up $53,000) and gains on sales of loans (up $396,000), offset by
lower underwriting fees and servicing fees. The production related revenue
(origination and escrow waiver fees) was higher due to higher production volumes
in the second quarter of 1998 ($539 million) compared to the first quarter of
1998 ($495 million). The increased gains on sales of loans is the result of
increased production and a more favorable mortgage banking rate environment.
D-8
<PAGE>
Retail commission income increased $597,000, or 17.6% compared to the same
period last year. Increases in income from annuities (up $419,000), mutual
funds (up $83,000) and insurance (up $80,000) accounted for the increase in the
second quarter.
Income from loan fees increased $710,000, or 17.1% from the first quarter of
1998 to the second quarter of 1998. The increase is a result of increased fees
on credit cards (up $846,000) and real estate loans (up $132,000) offset by
decreases in commercial loan fees (down $221,000) and letter of credit/SBA fees
(down $61,000).
Asset sale gains increased $6.0 million over the first quarter of 1998. Gains
recognized in the second quarter of 1998 were gains of $2.9 million on sales of
office buildings, a gain of $3.0 million on the sale of an affinity credit card
portfolio, a gain of $138,000 on sale of land trusts, and a gain of $92,000 on
sale of leased equipment.
Other miscellaneous income, from a variety of sources, decreased $181,000, or
5.1% compared to the first quarter of 1998. The decrease is primarily
attributable to reduced income from real estate held for investments as a result
of the sale of an office building in early April. Rental income from tenants
leasing the facility ceased at that time.
YTD SECOND QUARTER 1998 COMPARED TO YTD SECOND QUARTER 1997
Noninterest income increased $25.1 million, or 40.6% in the first six months of
1998 compared to the same period last year. Noninterest income, excluding net
investment securities gains, increased $20.5 million, or 34.0%. Decreases in
service charges on deposit accounts and retail commission income were more than
offset by increases in trust service fees, net investment security gains,
mortgage banking activity, loan fees and net asset sale gains compared to the
first six months of 1997.
Trust service fees increased $2.1 million, or 14.7% compared to the same period
last year. The increase is a result of higher trust assets under management and
general market conditions.
Service charges on deposit accounts decreased $336,000, or 2.5% during the first
six months of 1998. Lower levels of service charges on personal deposit
accounts and overdraft/NSF fees (approximately $500,000 lower) were somewhat
offset by higher fees collected on business accounts.
Net investment security gains increased $4.6 million. In the fourth quarter of
1997, the Corporation hedged certain agency issued zero-coupon bonds by
executing various interest rate futures contracts. In the first quarter of
1998, these contracts were closed and the zero-coupon bonds were sold. As a
result, a net gain of $5.1 million was recognized. The first six months of 1998
also includes gains of $642,000 recognized in the second quarter of 1998. These
gains consisted primarily of gains from the sale of equity securities. The
first six months of 1997 included gains on sales of mortgage-related securities
($721,000) and gains on sales of Sallie Mae stock.
Mortgage banking income increased $11.5 million, or 109.2% from the first six
months of 1997. Increases were recognized in higher origination fees (up
$573,000), underwriting fees (up $857,000), servicing fees (up $288,000), escrow
waiver fees (up $221,000) and gains on sales of loans (up $9.6 million). The
production related revenue (origination, underwriting and escrow fees) was
higher due to higher production volumes in the first six months of 1998 ($1.034
billion) compared to the first six months of 1997 ($385 million). The increased
gains on sales of loans is the result of increased production and a more
favorable mortgage banking rate environment.
Retail commission income decreased $485,000, or 6.2% compared to the same period
last year. Increases in income from mutual funds (up $823,000), was offset by
lower fees on stocks (down $798,000) and annuities (down $622,000).
Income from loan fees increased $1.3 million, or 16.4% from the first six months
of 1997 to the first six months of 1998. The increase is a result of increased
fees on credit cards (up $673,000), real estate loans (up $296,000) and
commercial loan fees (up $306,000).
Asset sale gains increased $6.0 million over the first six months of 1997.
Gains recognized in the first six months of 1998 included gains of $2.9 million
on sales of office buildings, a gain of $3.0 million on the sale of an affinity
credit card portfolio, a gain of $138,000 on sale of land trusts, a gain of
$117,000 on the sale of leased equipment, and a gain of $85,000 on the sale of
an operations building.
D-9
<PAGE>
NONINTEREST EXPENSE
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
Total noninterest expense increased $6.1 million, or 9.1% in the second quarter
of 1998 compared to the same period last year. All categories of noninterest
expense, with the exception of net occupancy expense and deposit insurance
premiums, increased when compared to the second quarter of last year.
Salaries and employee benefit expenses increased $3.6 million, or 10.7% when
compared to the second quarter of 1997. Total salary related expenses increased
$2.9 million, or 9.9%, compared to the second quarter of 1997, while fringe
benefit related expenses increased $673,000, or 9.7%. The 9.9% increase in
salary expense is attributable to base merit increases, transitional overlapping
positions as support functions are centralized, and new positions added. The
fringe benefit increase was primarily due to higher social security tax expense
(up $275,000), pension expense ($195,000), health insurance premiums ($177,000)
and profit sharing expense ($177,000). All except the health insurance premium
increase are linked to the higher levels of salary expense.
Equipment rentals, depreciation and maintenance increased $432,000, or 14.3%
over the second quarter of 1997. This increase was primarily attributable to
higher levels of depreciation on computer equipment ($501,000).
Data processing increased $519,000, or 12.2%, compared to the second quarter of
1997. This increase is primarily due to the cost of processing volumes in
excess of the volumes covered in the base contract.
Business development and advertising increased $282,000, or 7.4%, compared to
the second quarter of 1997. The increased costs are attributable to higher
levels of newspaper directory and other advertising costs offset, in part, by
lower direct mail costs resulting, in part, from the merger with First Financial
Corporation.
Other miscellaneous expense, from various sources, increased $1.2 million
compared to the second quarter of 1997. The increase was the result of a higher
amortization of mortgage servicing rights, partially offset by lower
miscellaneous expense accruals.
<TABLE>
<CAPTION>
Noninterest Expense
Quarterly Trends
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits $37,103 $35,943 $ 32,933 $33,883 $33,518
Net Occupancy Expense 5,053 5,168 4,432 5,010 5,193
Equipment Rentals, Depreciation and
Maintenance 3,458 3,409 3,230 3,165 3,026
Data Processing Expense 4,789 4,654 4,347 4,155 4,270
Stationery and Supplies 1,486 1,396 1,505 1,450 1,249
Business Development and Advertising 4,069 3,266 4,283 3,962 3,787
FDIC Expense 817 830 831 810 840
Other 16,084 16,908 18,459 15,913 14,909
------- ------- -------- ------- -------
Noninterest Expense, Excluding Merger,
Integration and Other One-Time
Charges 72,859 71,574 70,020 68,348 66,792
Merger, Integration and Other One-Time
Charges -- -- 51,622 -- --
------- ------- -------- ------- -------
Total Noninterest Expense $72,859 $71,574 $121,642 $68,348 $66,792
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECOND QUARTER 1998 COMPARED TO FIRST QUARTER 1998
Total noninterest expense increased $1.6 million, or 2.2% in the second quarter
of 1998 compared to the first quarter of 1998. Increases in salaries and
employee benefits, net occupancy expense, equipment rentals, depreciation and
maintenance and data processing expense were partially offset by decreases in
stationery and supplies, business development and advertising, FDIC expense and
other expenses.
Salaries and employee benefit expenses increased $1.2 million, or 1.9% when
compared to the first quarter of 1998. Salary expense accounted for the entire
increase. Increases are attributable to overtime, temporary help, an extra day
of pay in the quarter, contractual earn-outs, incremental commissions paid to
sales driven positions, and the reflection of continued centralization of
support staff.
D-10
<PAGE>
Business development and advertising increased $803,000, or 24.6% in the second
quarter of 1998 compared to the first quarter. The increase was primarily a
result of reduced marketing initiatives in the first quarter.
Other miscellaneous expense, from various sources, decreased by $824,000, or
4.9% compared to the first quarter of 1998. The decrease was a result of lower
consulting costs and lower miscellaneous expense accruals offset by higher
mortgage servicing rights amortization and higher legal and professional fees.
YTD SECOND QUARTER 1998 COMPARED TO YTD SECOND QUARTER 1997
Total noninterest expense increased $10.8 million, or 8.1% in the first six
months of 1998 compared to the same period last year. Increases in salaries and
employee benefits, equipment rentals, depreciation and maintenance, data
processing expense and others were partially offset by decreases in net
occupancy and business development and advertising.
Salaries and employee benefit expenses increased $6.2 million, or 9.3% when
compared to the first six months of 1997. Total salary related expenses
increased $5.2 million, or 9.9% in the first six months while fringe benefit
related expenses increased $1.0 million, or 7.1%. Salary expense is up
primarily as a result of base merit increases (approximately $3.0 million),
variable pay (commissions/incentives up $1.8 million), transitional overlapping
positions as support functions are centralized, and new positions added at the
parent and other affiliates. Fringe benefit expenses increased due to higher
health insurance expense (up $293,000), profit sharing expense (up $407,000),
social security expense (up $409,000) and pension expense (up $270,000).
Net occupancy expense decreased $633,000, or 5.8% in the first six months of
1998 compared to the first six months of 1997. All categories of occupancy
expense have contributed to the decline.
Equipment rentals, depreciation and maintenance increased $662,000 or 10.7% over
the first six months of 1997. This increase was primarily attributable to
higher levels of depreciation on computer equipment (up $948,000) offset by
lower levels of depreciation on furniture and other equipment (down $329,000).
Data processing increased $1.0 million, or 12.4%, compared to the first six
months of 1997. This increase is primarily due to increases in the base
contract processing costs and additional systems engineer hours.
Business development and advertising decreased $356,000, or 4.6% in the first
six months of 1998 compared to the same period last year. The favorable
variance was primarily due to the savings from reduced direct mail costs
resulting, in part, from the merger with First Financial Corporation.
Other miscellaneous expense, from various sources, increased by $3.5 million, or
12.0% compared to the first six months of 1997. This increase was primarily due
to increased mortgage servicing rights amortization, increased
placement/relocation/moving expenses, and increased consultant fees.
<TABLE>
<CAPTION>
Expense Control
Quarterly Trends
- ----------------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Efficiency Ratio - Quarter 52.17% 54.10% 53.08% 52.78% 53.05%
Efficiency Ratio - Year 53.11% 54.10% 53.33% 53.43% 53.76%
Expense Ratio - Quarter 1.13% 1.41% 1.37% 1.40% 1.47%
Expense Ratio - Year 1.27% 1.41% 1.45% 1.48% 1.53%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
D-11
<PAGE>
INCOME TAXES
The effective tax rate for the second quarter of 1998 remained stable at 34.41%,
down from both the 35.22% in the second quarter of 1997 and the 35.86% in the
fourth quarter of 1997.
<TABLE>
<CAPTION>
Income Tax Expense
Quarterly Trends
(In Thousands)
- -------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Income Before Taxes $62,519 $60,759 $ 56,151 $56,859 $54,771
------- ------- --------- ------- -------
Merger, Integration and Other
One-Time Charges Before
Taxes -- -- (103,713) -- --
------- ------- --------- ------- -------
State Tax Expense - Operating $ 1,401 $ 1,747 $ 1,478 $ 1,836 $ 1,676
Federal Tax Expense - Operating 20,114 19,152 18,655 18,201 17,615
------- ------- --------- ------- -------
Total Income Tax Expense - $21,515 $20,899 $ 20,133 $20,037 $19,291
Operating
Federal Tax - Merger, Integration
and Other
One-Time Charges -- -- (13,893) -- --
------- ------- --------- ------- -------
Total Income Tax Expense $21,515 $20,899 $ 6,240 $20,037 $19,291
======= ======= ========= ======= =======
Effective Tax Rate 34.41% 34.40% 35.86% 35.24% 35.22%
======= ======= ========= ======= =======
- -------------------------------------------------------------------------------------------------
</TABLE>
BALANCE SHEET
JUNE 30, 1998 COMPARED TO JUNE 30, 1997
During the past twelve months, total assets increased $30 million, or 0.3%.
Loans (including loans held for sale) increased $300 million, or 4.3%. The loan
growth was all in commercial and other loans (up $404 million or 17.7%) and
loans held for sale (up $44 million, or 104.5%). Real estate and consumer loans
decreased from June 30, 1997 ($100 million or 2.7% and $48 million or 5.2%,
respectively). A sale of an affinity credit card portfolio, $24 million of
outstanding balances, in the second quarter of 1998 contributed to the decline
in consumer loans. The loan growth was funded with an increase in interest-
bearing deposits of $233 million, a decrease in investments of $243 and $165
million increase in net free funds offset by a $341 million decrease in
wholesale funding. The $233 million increase in interest-bearing deposits
reflects a $40 million decrease in outstanding brokered CDs offset by an
increase of $273 million in retail interest-bearing deposits.
JUNE 30, 1998 COMPARED TO DECEMBER 31, 1997
During the first six months of 1998, total assets decreased by $130 million, or
2.4% on an annualized basis. Loans (including loans held for sale) increased
$107 million, or 3.0% on an annualized basis. The loan growth was all in
commercial (up $232 million, or 19.0% on an annualized basis). Real estate and
consumer loans decreased from December 31, 1997 ($46 million, or 2.5% and $53
million, or 11.3% on an annualized basis, respectively). A sale of an affinity
credit card portfolio, $24 million of outstanding balances, in the second
quarter of 1998 contributed to the decline in consumer loans. Loans held for
resale also declined by $27 million, or 48.0% on an annualized basis. The loan
growth was funded with a $214 million reduction of investments and short-term
investments and a $166 million increase of interest-bearing deposits offset by a
$15 million decrease in net free funds and a $258 million decrease in wholesale
funding. The $166 million increase in interest-bearing deposits reflects a $7
million increase in outstanding brokered CDs and an increase of $159 million in
retail interest-bearing deposits.
JUNE 30, 1998 COMPARED TO MARCH 31, 1998
During the second quarter of 1998, total assets decreased by $131 million, or
4.9% on an annualized basis. Loans, including loans held for sale, increased
$28 million, or 1.6% on an annualized basis. The loan growth was all in
commercial and other loans (up $75 million, or 11.6% on an annualized basis).
Loans held for sale and consumer loans decreased from March 31, 1998 ($15
million, or 59.0% and $35 million, or 15.1% on an annualized basis,
respectively). The loan growth was funded with a $152 million reduction of
investments and short-term investments and a $34 million increase in net free
funds offset by a $41 million decrease in interest-bearing deposits and a $117
million decrease in wholesale funding. The $41 million decrease in interest-
D-12
<PAGE>
bearing deposits reflects a $5 million decrease in outstanding brokered CDs and
a decrease of $36 million in retail interest-bearing deposits.
LIQUIDITY
Liquidity refers to the ability of the Corporation to generate adequate amounts
of cash to meet the Corporation's needs for cash. The subsidiary banks and the
parent company of the Corporation have different liquidity considerations.
Banking subsidiaries meet their cash flow requirements by having funds available
to satisfy customer credit needs as well as having available funds to satisfy
deposit withdrawal requests. Liquidity at banking subsidiaries is derived from
deposit growth, money market assets, maturing loans, the maturity of securities,
access to other funding sources and markets, and a strong capital position.
Deposit growth is the primary source of liquidity at the banking subsidiaries.
Interest-bearing deposits increased $165.6 million, while noninterest-bearing
deposits fell $62.6 million from the seasonally high year-end balance.
As of June 30, 1998, the securities portfolio contained $371.2 million at
amortized cost of U.S. Treasury and federal agency securities available for
sale, representing 13.9% of the total securities portfolio. These government
securities are highly marketable and had a market value equal to 100.5% of
amortized cost at quarter end.
Money market investments, consisting of federal funds sold, securities purchased
under agreements to resell, and interest-bearing deposits in other financial
institutions, averaged $63.6 million in the second quarter of 1998 compared to
$37.0 million during the same period in 1997. Being short-term and liquid by
nature, money market investments generally provide a lower yield than other
earning assets. The Corporation has a strategy of maintaining a sufficient level
of liquidity to accommodate fluctuations in funding sources and will
periodically take advantage of specific opportunities to temporarily invest
excess funds at narrower than normal rate spreads while still generating
additional net interest income. At June 30, 1998, the Corporation had $23.1
million outstanding in short-term money market investments, serving as an
essential source of liquidity. The amount at quarter end represents .2% of
total assets compared to .1% at December 31, 1997.
Short-term borrowings totaled $1.1 billion at June 30, 1998, compared with $1.3
billion at the end of 1997. Within the classification of short-term borrowings
are federal funds purchased, securities sold under agreements to repurchase and
FHLB advances with a remaining maturity of less than one year. Federal funds
are purchased from a sizable network of correspondent banks while securities
sold under agreements to repurchase are obtained from a base of individual,
business and public entity customers. FHLB advances with a remaining maturity
of greater than one year are included in long-term borrowings.
Deposit growth will continue to be the primary source of bank subsidiary
liquidity on a long-term basis, along with stable earnings, the resulting cash
generated by operating activities and strong capital positions. Shorter-term
liquidity needs will mainly be derived from growth in short-term borrowings,
maturing securities and money market assets, loan maturities and access to other
funding sources.
Liquidity is also necessary at the parent company level. The parent company's
primary sources of funds are dividends and service fees from subsidiaries,
borrowings and proceeds from the issuance of equity. The parent company manages
its liquidity position to provide the funds necessary to pay dividends to
shareholders, service debt, invest in subsidiaries and satisfy other operating
requirements. Dividends received from subsidiaries totaled $38.6 million in the
first six months of 1998 and will continue to be the parent's main source of
long-term liquidity.
At June 30, 1998, the parent company had $150 million of established lines of
credit with non-affiliated banks, of which $78 million was in use for nonbank
affiliates.
The Corporation's long-term debt to equity ratio at June 30, 1998, was 3.2%,
compared to 1.9% at December 31, 1997. This increase is primarily attributable
to an increase in outstanding long-term FHLB advances.
Management believes that, in the current economic environment, the Corporation's
subsidiaries and parent company liquidity positions are adequate. There are no
known trends nor any known demands, commitments, events or uncertainties that
will result or are reasonably likely to result in a material increase or
decrease in the Corporation's liquidity.
CAPITAL
Stockholders' equity at June 30, 1998, increased $53.6 million, or 6.6% since
December 31, 1997. This increase was composed of $51.5 million of retained
earnings, $9.4 million from option exercises and a $5.7 million increase in the
unrealized gain on
D-13
<PAGE>
available for sale securities, reduced by $13.0 million from treasury stock
purchases. Equity to assets at June 30, 1998 increased to 8.21%, with the Tier 1
leverage ratio climbing to 7.62%.
Cash dividends of $0.232 were paid in the second quarter of 1998, representing a
payout ratio of 35.69% for the quarter.
<TABLE>
<CAPTION>
Capital
Quarterly Trends
(In Thousands)
- ---------------------------------------------------------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stockholders' Equity $867,286 $836,826 $813,693 $874,027 $842,561
Average Equity to Average Assets 8.06% 7.83% 8.15% 8.08% 7.95%
Equity to Assets - Period End 8.21% 7.83% 7.61% 8.16% 8.00%
Tier 1 Capital to Risk Weighted
Assets - Period End 12.14% 10.89% 10.61% 12.45% 12.21%
Total Capital to Risk Weighted
Assets - Period End 13.37% 12.14% 11.86% 13.49% 13.26%
Tier 1 Leverage Ratio - Period End 7.63% 7.34% 7.10% 7.77% 7.72%
Market Value Per Share - Period End $ 37.63 $ 43.16 $ 44.09 $ 36.05 $ 31.59
Book Value Per Share - Period End $ 13.70 $ 13.24 $ 12.92 $ 13.91 $ 13.44
Market Value Per Share to Book Value
Per Share 275% 326% 341% 259% 235%
Dividends Per Share - This Quarter $ 0.232 $ 0.232 $ 0.232 $ 0.232 $ 0.232
Dividends Per Share - Year to Date $ 0.464 $ 0.232 $ 0.889 $ 0.657 $ 0.425
Basic Operating Earnings Per
Share - This Quarter $ 0.65 $ 0.63 $ 0.57 $ 0.59 $ 0.57
Basic Operating Earnings Per
Share - Year to Date $ 1.28 $ 0.63 $ 2.26 $ 1.69 $ 1.12
Dividend Payout Ratio - This Quarter 35.69% 36.83% 40.70% 39.32% 40.70%
Dividend Payout Ratio - Year to Date 36.25% 36.83% 39.34% 38.88% 37.95%
- ---------------------------------------------------------------------------------------------------
</TABLE>
The adequacy of the Corporation's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends on a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management.
As of June 30, 1998, the Corporation's tier 1 risk-based capital ratio, total
risk-based capital (tier 1 and tier 2) ratio and tier 1 leverage ratio were well
in excess of regulatory minimums. Management of the Corporation expects to
continue to exceed the minimum standards in the future.
Similar capital guidelines are also required of the individual banking
subsidiaries of the Corporation. As of June 30, 1998, each banking subsidiary
exceeded the minimum ratios for tier 1 capital, total capital and the tier 1
leverage ratio.
Management actively reviews capital strategies for the Corporation and each of
its subsidiaries to ensure that capital levels are appropriate based on the
perceived business risks, future growth opportunities, industry standards and
regulatory requirements.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
PERFORMANCE SUMMARY
The following management's discussion and analysis will focus upon "operating
earnings" of the Corporation for the past three years. To arrive at operating
earnings, reported results for these periods were adjusted by the following:
D-14
<PAGE>
. 1997 operating earnings exclude the merger, integration and other one-time
charges recorded by the Corporation in conjunction with the merger of FFC of
$103.7 million, or $89.8 million after-tax. This pre-tax charge includes a
$35.3 million adjustment to securities for other than temporary impairment
of value, $16.8 million of conforming provision for loan losses, and $51.6
million of merger, integration and other one-time charges. The $51.6 million
of merger, integration and other one-time charges includes $12.6 million for
employee and director severance and contract costs, $20.2 million for costs
associated with elimination of duplicative facilities, computer systems,
software and integration, and $11.2 million for investment banking, legal
and accounting fees and $7.7 million for other one-time charges. These
charges reduced basic earnings per share by $1.43 and diluted earnings per
share by $1.40.
. 1996 operating earnings exclude a one-time pre-tax charge of $28.8 million
associated with the recapitalization of the Savings Association Insurance
Fund and a one-time pre-tax charge of $4.2 million relating to a change in
accounting for the amortization of goodwill and other intangible assets and
an extraordinary after-tax charge of $686,000 resulting from the costs
associated with the early redemption of subordinated notes (all recorded at
FFC). These charges, $22.7 million after-tax, reduced basic earnings per
share by $0.35 and diluted earnings per share by $0.34.
. 1995 operating earnings exclude a one-time pre-tax charge of $6.5 million
relating to acquisition-related expenses incurred relative to the
acquisition of FirstRock Bancorp, Inc. by FFC. The $6.5 million of merger,
integration and other one-time charges include $3.8 million for employee and
director severance and contract costs, $740,000 for costs associated with
duplicative facilities, computer systems, software and integration, $1.0
million for investment banking, legal and accounting fees and $870,000 for
other charges. These charges, $4.0 million after-tax, reduced basic earnings
per share by $0.06 and diluted earnings per share by $0.06.
Performance ratios for these periods are also calculated excluding these items.
The Corporation achieved record operating earnings in 1997. Operating net
income grew to $142.2 million, a 9.6% increase over the $129.7 million earned in
1996. This follows an 11.7% increase over operating net income of $116.0
million in 1995.
Basic operating net income per share increased to $2.26 per share in 1997
compared to $2.05 and $1.89 per share in 1996 and 1995, respectively. The 10.5%
increase over 1996 basic operating earnings per share followed an 8.5% increase
in 1996 over 1995. On a diluted operating earnings per share basis, the
Corporation recorded $2.22 per share in 1997, compared to $2.02 and $1.86 per
share in 1996 and 1995, respectively.
The presentation of basic and diluted earnings per share on the consolidated
statements of income is in accordance with the Corporation's adoption of
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share." Under the provisions of SFAS No. 128, primary and fully diluted earnings
per share reporting were replaced with basic and diluted earnings per share.
The improvement in the Corporation's 1997 operating net income was led by a
$20.6 million increase in fully-taxable equivalent ("FTE") net interest income.
Growth in earning assets of $762 million more than offset a 10 basis point
decline in the net interest margin. FTE interest income increased $56.3
million while interest expense increased $35.7 million.
Provision for loan losses (excluding the merger-related charges) increased to
$14.9 million compared to $13.7 million in 1996. The higher provision was in
response to higher volumes of loans in 1997. Net charge-offs decreased to $11.4
million in 1997 compared to $14.0 million in 1996 as the Corporation recorded
lower levels of commercial and installment loans to individuals charge-offs.
Noninterest income (excluding securities gains and losses) increased to $128.8
million in 1997 over the $127.5 million recorded in 1996. 1996 noninterest
income includes a $11.2 million gain on the sale of credit card loans recorded
by FFC. The Corporation recorded increases in trust service fees, service
charges on deposit accounts, mortgage banking income, loan fees and retail
commission income.
Noninterest expense (excluding merger, integration and other one-time charges)
increased 4.5%, or $11.8 million to $272.0 million in 1997. Increases in
salaries and employee benefits, business development and advertising, data
processing, and other expenses were offset by a decrease in FDIC premiums.
Return on average assets increased in 1997 to 1.37% compared to 1.34% in 1996.
Return on average equity increased to 16.93% in 1997 compared to 16.64% in 1996.
The Corporation's efficiency ratio remained stable, increasing to 53.33% in
1997 compared to 53.31% in 1996.
D-15
<PAGE>
Cash dividends paid in 1997 increased by 16.8% to $0.89 per share over the $0.76
per share paid in 1996. This followed a 17.3% increase in 1996 dividends per
share over the $0.65 per share paid in 1995.
All share and per share information has been restated to reflect the 6-for-5
stock split declared January 22, 1997, effected in the form of a 20% stock
dividend, paid to shareholders on March 17, 1997, and the 5-for-4 stock split
effected in the form of a 25% stock dividend, paid to shareholders on June 12,
1998.
BUSINESS COMBINATIONS
On October 29, 1997 the Corporation merged with FFC, parent company of the $6.0
billion FFB. FFB has 128 locations throughout Wisconsin and Illinois. In
conjunction with this acquisition, the Corporation issued 34.8 million shares of
common stock. This transaction 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. FFC's
product mix is primarily retail, with a concentration of real-estate mortgage
products (both traditional mortgage products and home equity loans), credit card
and student loans funded primarily with retail interest-bearing deposits.
Throughout the management's discussion and analysis, the impact of combining
FFC's balance sheet with the more traditional commercial banking balance sheet
of the Corporation is presented and discussed.
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 number of shares issued totaled 517,956. The
transaction was accounted for as a pooling of interests. However, the
transaction was not material to prior years' reported operating results and,
accordingly, previously reported results were not restated. The bank was
subsequently renamed Associated Bank West Allis.
In April 1996, the Corporation completed the acquisition of Greater Columbia
Bancshares, Inc., parent company of the $211 million asset 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, National
Association.
The Corporation also completed two other acquisitions in 1996 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 Bancshares,
Inc., parent company of the $68 million asset The State Bank of Lodi. In July
1996, the Corporation completed the acquisition of the $139 million asset F&M
Bankshares of Reedsburg, Inc., parent company of Farmers & Merchants Bank. The
banks were renamed Associated Bank Lodi and Associated Bank Reedsburg,
respectively.
In August 1995, the Corporation acquired GN Bancorp, Inc., parent company of the
$130 million asset 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 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. Mid-America National Bank 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.
In July 1995, the Corporation completed the cash acquisition of Great Northern
Mortgage Company, subsequently renamed Associated 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 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 February 1995, FFC acquired FirstRock Bancorp, Inc. ("FirstRock") of
Rockford, Illinois in a stock-for-stock merger. Upon closing, FirstRock's
subsidiary, First Federal Savings Bank, FSB was merged into FFB with First
Federal's six offices operating as branch banking offices of FFB. FirstRock was
merged into FFC. The transaction 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.
NET INTEREST INCOME
Net interest income continues to be the largest component of the Corporation's
operating income (net interest income plus noninterest income), accounting for
74.1% of 1997 total operating income, compared to 75.3% and 76.2% in 1996 and
1995,
D-16
<PAGE>
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 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 an FTE basis in
order to provide comparability among the types of interest earned.
FTE net interest income reached $381.3 million in 1997, an increase of 5.7% over
the 1996 level of $360.6 million. This increase follows a $19.9 million, or
5.8% increase in 1996 over the $340.8 million recorded in 1995. The net
interest margin, or FTE net interest income as a percent of total average
earning assets, decreased to 3.85% in 1997, down from 3.95% in 1996 and 1995.
Strong growth in earning assets more than offset the 10 basis point decline in
the net interest margin, creating the increase in net interest income in 1997.
The $19.9 million increase in 1996 over 1995 was a result of earning assets
increasing by $505 million while the net interest margin remained stable.
D-17
<PAGE>
TABLE 2: AVERAGE BALANCES AND INTEREST RATES (INCOME AND RATES ON A TAX-
EQUIVALENT BASIS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (In Thousands)
Earning assets:
Loans, net of unearned
income(1)(2)(3) $ 6,962,820 $592,984 8.52% $6,586,639 $564,576 8.57%
Investment securities:
Taxable 2,725,566 184,231 6.76 2,345,489 156,967 6.69
Tax exempt (1) 180,382 13,925 7.72 178,268 13,322 7.47
Interest-bearing deposits
in other financial institutions 14,428 779 5.40 5,188 437 8.43
Federal funds sold and
securities purchased
under agreements to resell 16,237 999 6.15 21,750 1,267 5.83
---------------------------------------------------------------------------------
Total earning assets $ 9,899,433 $792,918 8.01% $9,137,334 $736,569 8.06%
---------------------------------------------------------------------------------
Allowance for possible
loan losses (73,748) (72,168)
Cash and due from banks 229,994 246,509
Other assets 339,936 331,982
---------------------------------------------------------------------------------
Total Assets $10,395,615 $9,643,657
=================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits $ 1,073,244 24,396 2.27% $1,121,531 $ 27,501 2.45%
NOW deposits 712,458 11,905 1.67 673,106 11,397 1.69
Money market deposits 902,186 34,054 3.77 799,795 28,229 3.53
Time deposits 4,692,333 267,088 5.69 4,486,355 253,788 5.66
Federal funds purchased
and securities sold
under agreements to
repurchase 538,097 29,046 5.40 444,676 22,976 5.17
Other short-term
borrowings 749,803 43,463 5.80 484,266 29,208 6.03
Long-term borrowings 26,929 1,685 6.26 44,799 2,824 6.30
---------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 8,695,050 411,637 4.73% $8,054,528 $375,923 4.67%
---------------------------------------------------------------------------------
Demand deposits 741,790 697,470
Accrued expenses and
other liabilities 118,916 116,479
Stockholders' equity 839,859 775,180
---------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $10,395,615 $9,643,657
=================================================================================
Net interest income and
rate spread(1) $381,281 3.28% $360,646 3.39%
Net yield on earning
assets(1) 3.85% 3.95%
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995
---------------------------------------
Average Average
Balance Interest Rate
---------------------------------------
<S> <C> <C> <C>
ASSETS
Earning assets:
Loans, net of unearned
income(1)(2)(3) $6,157,655 $535,168 8.69%
Investment securities:
Taxable 2,272,696 151,983 6.69
Tax exempt (1) 148,683 11,114 7.47
Interest-bearing deposits
in other financial institutions 11,413 596 5.22
Federal funds sold and
securities purchased
under agreements to resell 41,660 2,426 5.82
---------------------------------------
Total earning assets $8,632,107 $701,287 8.12%
---------------------------------------
Allowance for possible
loan losses (68,180)
Cash and due from banks 235,445
Other assets 324,609
---------------------------------------
Total Assets $9,123,981
=======================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits $1,146,282 $30,723 2.68%
NOW deposits 603,734 10,405 1.72
Money market deposits 697,128 24,624 3.53
Time deposits 4,296,466 237,331 5.52
Federal funds purchased
and securities sold
under agreements to
repurchase 521,164 29,215 5.61
Other short-term
borrowings 370,331 25,890 6.99
Long-term borrowings 32,445 2,311 7.12
---------------------------------------
Total interest-bearing
liabilities $7,667,550 $360,499 4.70%
---------------------------------------
Demand deposits 665,799
Accrued expenses and
other liabilities 116,264
Stockholders' equity 674,368
---------------------------------------
Total liabilities and
stockholders' equity $9,123,981
=======================================
Net interest income and
rate spread(1) $340,788 3.42%
Net yield on earning
assets(1) 3.95%
=======================================
</TABLE>
(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) Nonaccrual loans have been included in the average balances.
(3) Interest income includes net loan fees.
Total average loans outstanding grew from $6.6 billion to $7.0 billion in 1997,
an increase of 5.7%. This followed the 7.0% growth from 1995 to 1996.
Investment securities increased to $2.9 billion in 1997, up from $2.5 billion in
1996 and $2.4 billion in 1995. The composition of the Corporation's earning
assets has changed significantly in 1997 in conjunction with the merger with
FFC. A larger portion of earning assets is now comprised of taxable investment
securities. The yield on taxable investment
D-18
<PAGE>
securities in 1997 was 176 basis points lower than the yield on loans.
Historically, the Corporation had approximately 21.3% of its earning assets in
investment securities compared to 29.4% in 1997. The Corporation's funding mix
was also significantly impacted by the merger with FFC. In prior years, the
Corporation depended heavily upon net free funds (difference between earning
assets and interest-bearing liabilities) as a funding source. Historically, the
Corporation has funded approximately 18% of its earning asset base with interest
free net free funds. FFC relied heavily upon certificates of deposit and
wholesale funds to fund its earning asset base. In 1997, 12.2% of the
Corporation's earning asset base was funded by interest free net free funds. The
combination of a higher mix of lower yielding investment securities and lower
levels of interest free net free funds has caused the Corporation's net interest
margin, as reported historically, to decline by approximately 58 basis points.
In 1997 the Corporation's net interest margin decreased to 3.85%, compared to
3.95% in 1996 and 1995. The interest rate spread, or difference between the
yield on earning assets and the rate on interest-bearing liabilities, decreased
11 basis points in 1997. The yield on earning assets decreased by 5 basis
points while the rate on interest-bearing liabilities increased by 6 basis
points. The contribution from net free funds increased by 1 basis point.
Combined, these factors decreased the net interest margin by 10 basis points in
1997.
TABLE 3: RATE/VOLUME ANALYSIS(1)
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Interest income:
Loans, net of unearned income(2) $32,058 $(3,650) $28,408 $36,855 $(7,447) $29,408
Investment securities:
Taxable 25,676 1,588 27,264 4,871 113 4,984
Tax-exempt(2) 159 444 603 2,211 (3) 2,208
Interest-bearing deposits in other
financial institutions 547 (205) 342 (419) 260 (159)
Federal funds sold and securities
purchased under agreements to resell (337) 69 (268) (1,159) -- (1,159)
------------------------------------------------------------------------------------------
Total earning assets(2) $58,103 $(1,754) $56,349 $42,359 $(7,077) $35,282
------------------------------------------------------------------------------------------
Interest expense:
Savings deposits $(1,152) $(1,953) $(3,105) $ (652) $(2,570) $(3,222)
NOW deposits 659 (151) 508 1,177 (186) 992
Money market deposits 3,777 2,048 5,825 3,623 (18) 3,605
Time deposits 11,754 1,546 13,300 8,361 8,096 16,457
Federal funds purchased and securities
sold under agreements to repurchase 5,005 1,065 6,070 (4,069) (2,170) (6,239)
Other short-term borrowings 15,433 (1,178) 14,255 7,210 (3,892) 3,318
Long-term borrowings (1,118) (21) (1,139) 802 (289) 513
------------------------------------------------------------------------------------------
Total interest-bearing liabilities $34,358 $ 1,356 $35,714 $16,453 $(1,029) $15,424
------------------------------------------------------------------------------------------
Net interest income(2) $23,745 $(3,110) $20,635 $25,906 $(6,048) $19,858
------------------------------------------------------------------------------------------
</TABLE>
(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 reported increase in FTE net interest income in 1997 was
primarily driven by larger volumes of earning assets. Net of related funding
costs, this growth increased FTE net interest income by $23.7 million. This
increase was tempered by a negative impact from interest rates. FTE interest
income from earning assets declined $1.8 million due to the change in rates
while interest expense increased $1.3 million due to the change in rates
combining to decrease net interest income by $3.1 million. This negative impact
from change in interest rates combined with the growth in the balance sheet
caused FTE net interest income to increase by $20.6 million in 1997.
The FTE net interest income reported in 1996 increased by $19.9 million over
1995. This increase was also primarily driven by larger volumes of earning
assets. Higher volumes of earning assets, net of related funding costs
increased FTE net interest income by $25.9 million. This increase was offset by
a negative impact from the change in interest rates of $6.0 million.
The Corporation's total cost of funds increased by 6 basis points in 1997, after
decreasing by 3 basis points in 1996. This increase was attributable to a
higher dependence upon wholesale funding in 1997. Retail interest-bearing
deposits as a percent of total interest-bearing liabilities decreased to 84.9%
in 1997 from 87.9% in 1996 and 1995. The rate on total retail interest-bearing
deposits increased to 4.57% in 1997, up from 4.53% in 1996 and 4.49% in 1995.
The cost of total wholesale funds decreased slightly in 1997 to 5.64%, down from
5.65% in 1996 and 6.21% in 1995. As funding shifted to a higher reliance on
wholesale funding in 1997, costing 107 basis points more, the Corporation's
total cost of funding increased by 6 basis points.
D-19
<PAGE>
TABLE 4: INTEREST RATE SPREAD AND INTEREST MARGIN (ON A TAX-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1997 Average 1996 Average
------------------------------------------------------------------------------
% of Earning % of Earning
Assets Assets
Balance Rate Balance Rate
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------
Earning assets $9,899,433 100.0% 8.01% $9,137,334 100.0% 8.06%
------------------------------------------------------------------------------
Financed by:
Interest-bearing funds $8,695,050 87.8% 4.73% $8,054,528 88.1% 4.67%
Noninterest-bearing funds 1,204,383 12.2% 1,082,806 11.9%
------------------------------------------------------------------------------
Total funds sources $9,899,433 100.0% 4.16% $9,137,334 100.0% 4.12%
==============================================================================
Interest rate spread 3.28% 3.39%
Contribution from net
free funds .57% .56%
Net interest margin 3.85% 3.95%
==============================================================================
Average prime rate* 8.44% 8.27%
Average fed funds rate* 5.46% 5.30%
Average spread 298BP 297BP
</TABLE>
<TABLE>
<CAPTION>
1995 Average
---------------------------------------------
% of
Earning
Balance Assets Rate
---------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Earning assets $8,632,107 100.0% 8.12%
---------------------------------------------
Financed by:
Interest-bearing funds $7,667,550 88.8% 4.70%
Noninterest-bearing funds 964,557 11.2%
Total funds sources $8,632,107 100.0% 4.17%
=============================================
Interest rate spread 3.42%
Contribution from net
free funds .53%
Net interest margin 3.95%
=============================================
Average prime rate* 8.83%
Average fed funds rate* 5.84%
Average spread 299BP
*Source: Federal Reserve Statistics
</TABLE>
The Corporation continued to experience a narrowing of loan spreads in 1997. The
yield on total loans decreased by 5 basis points, after decreasing 12 basis
points in 1996. Total loans represent 70.3% of total earning assets in 197, down
from 72.1% in 1996 and 71.3% in 1995. A change in the total yield on the loan
portfolio will have the largest impact on total net interest income. A benchmark
measurement of loan capacity is the loan to deposits (including demand) ratio.
This ratio increased to 85.7% in 1997, up from 84.7% in 1996 and 83.1% in 1995.
This indicates the capacity of the Corporation to accelerate loan growth and
replace lower yielding investments as they mature without placing undue pressure
upon retail deposit generation. The growth of net free funds (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), and
the subsequent contribution from these funds, increased in 1997. Net free funds
balances grew at a rate of 11.2%, faster than the 8.3% growth of earning assets.
The higher percentage of funding provided by net free funds coupled with the
higher value placed on them (cost of total interest-bearing liabilities) helped
offset the decline in the interest rate spread.
TABLE 5: SELECTED AVERAGE BALANCES
<TABLE>
<CAPTION>
% of Total % of Total % of $
1997 Assets 1996 Assets Change
-----------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Loans, net of unearned income $ 6,962,820 67.0% $6,586,639 68.3% 5.7%
Investment securities
Taxable 2,725,566 26.2 2,345,489 24.3 16.2
Tax-exempt 180,382 1.7 178,268 1.8 1.2
Interest-bearing deposits in other
financial institutions 14,428 0.1 5,188 0.1 178.1
Federal funds sold and securities
purchased under agreements to resell 16,237 0.2 21,750 0.2 (25.3)
-------------------------------------------------------------------------------------
Total earning assets 9,899,433 95.2 9,137,334 94.7 8.3
Other assets 496,181 4.8 506,323 5.3 (2.0)
-------------------------------------------------------------------------------------
Total assets $10,395,615 100.0% $9,643,657 100.0% 7.8%
-------------------------------------------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing deposits $ 7,380,221 71.0% $7,080,787 73.4% 4.2%
Short-term borrowings 1,287,900 12.4 928,942 9.6 38.6
Long-term borrowings 26,929 0.2 44,799 0.5 (39.9)
-------------------------------------------------------------------------------------
Total interest-bearing liabilities 8,695,050 83.6 8,054,528 83.5 8.0
Demand deposits 741,790 7.1 697,470 7.2 6.4
Accrued expenses and other liabilities 118,916 1.2 116,479 1.2 2.1
Stockholders' equity 839,859 8.1 775,180 8.1 8.3
-------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,395,615 100.0% $9,643,657 100.0% 7.8%
=====================================================================================
</TABLE>
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 three years has been a
result of the growth in the level of earning asset volumes. The merger with FFC
with its higher reliance on the growth of investment securities, primarily
mortgage-related, has increased the importance of managing net interest income.
The Corporation uses certain modeling and analysis techniques to manage net
interest income and the related interest rate risk position (See Interest Rate
D-20
<PAGE>
Sensitivity and Market Risk). 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 in 1997 was $14.9 million, excluding the
$16.8 million additional provision to conform FFC with the policies, practices
and procedures of the Corporation, compared to $13.7 million in 1996 and $14.0
million in 1995. The increase in provision reflects the loan growth recorded in
1997. Including the additional provision, the ratio of allowance for possible
loan losses to total loans increased to 1.31%, up from 1.08% at December 31,
1996 and 1.12% at December 31, 1995. (See Allowance for Possible Loan Losses
for additional discussion.)
NONINTEREST INCOME
Total operating noninterest income, excluding gains or losses from security
transactions, increased $1.2 million or 1.0% compared to an increase of $24.0
million, or 23.2% in 1996 over 1995. Excluding an $11.2 million gain on sale of
credit cards recorded in 1996 by FFC, the increase in operating noninterest
income in 1997 would have been $12.4 million, or 10.7% compared to an increase
of $12.8 million, or 12.4% in 1996 over 1995. The addition of FFC has broadened
the Corporation's recurring sources of noninterest income beyond its traditional
trust service fees and service fees on deposit accounts. Mortgage servicing
revenue, fees on loans (primarily credit card fees) and retail commission income
now represent significant sources of revenue. Historically, as the Corporation
had continued to develop additional sources of noninterest income, trust service
fees and service charges on deposits had represented a slowly declining portion
of total noninterest income. As historically reported, these two components had
represented 64.4% of total noninterest income in 1994 and 58.9% in 1996. With
the addition of FFC, this percentage has now dropped to 44.0%, with mortgage
banking income, loan fees and retail commission income now representing 44.7% in
1997.
Trust service fees increased to $28.8 million in 1997, up from $25.2 million in
1996 and $22.2 million in 1995. This represents increases of 14.2% and 13.2% in
1997 and 1996, respectively. These large increases represent the continued
improvement in trust business volume and growth in assets under management.
Trust assets under management totaled $4.0 billion at December 31, 1997 compared
with $3.5 billion at December 31, 1996.
Income from mortgage banking activity increased 7.7% in 1997, or $1.8 million.
This followed an increase of $5.8 million, or 32.2% in 1996. Mortgage banking
income is comprised mainly of fees related to servicing mortgage loans,
residential loan origination fees, underwriting fees, escrow waiver fees and the
gain or loss on sale of mortgage loans to the secondary market. Servicing
revenues increased by $384,000 in 1997 over 1996 to $13.7 million from $13.4
million. The increase in servicing revenue reflects the Corporation's larger
servicing portfolio, as serviced 1- to 4-family residential loans increased to
$5.0 billion at the end of 1997 compared to $4.8 billion and $4.4 billion at the
end of 1996 and 1995, respectively. Net gains on sales of mortgage loans
accounted for the majority of the remaining increase in 1997.
Loan fees increased $1.9 million, or 13.1% in 1997 after increasing $1.5
million, or 11.4% in 1996. Loan fees include late charges and service charges
on real estate loans held in the Corporation's portfolio, credit card consumer
late charges, home equity line service charges, and late charges and commitment
fees on commercial loans. The largest component of this category is credit card
fees, accounting for $10.3 million of the total fees in 1997. Credit card fees
increased $1.6 million in 1997 compared to 1996.
Retail commission income increased $2.7 million, or 21.1% when compared to the
full year of 1996. Retail commission income includes commissions from insurance
product sales, equity brokerage product sales and the sale of annuities.
D-21
<PAGE>
TABLE 6: NONINTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31, % Change From Prior Year
---------------------------------------------------------------
1997 1996 1995 1997 1996
--------- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Trust service fees $ 28,764 $ 25,185 $ 22,243 14.2 13.2
Service charges on deposit accounts 27,909 26,004 23,861 7.3 9.0
Mortgage banking income 25,709 23,873 18,052 7.7 32.2
Loan fees 16,407 14,505 13,023 13.1 11.4
Retail commission income 15,446 12,757 10,760 21.1 18.6
Asset sale gains, net 852 12,520 428 N/M N/M
Other 13,665 12,679 15,110 7.8 (16.1)
---------------------------------------------------------------
Total, excluding securities gains 128,752 127,523 103,477 1.0 23.2
Investment securities gains, net (operating) 2,514 (10,678) 1,512 N/M N/M
Merger, integration and other one-time charges (35,290) -- -- N/M N/M
---------------------------------------------------------------
Total noninterest income $ 95,976 $116,845 $104,989 (17.9) 11.3
===============================================================
</TABLE>
N/M -- not meaningful
Net asset sale gains represent the net gain or loss on the sale of assets such
as fixed assets, other real estate owned, leased equipment, real estate held for
investment, and loans not held for sale (credit card or student loans). Net
asset sale gains decreased by $11.7 million in 1997, compared to 1996. The
majority of this decrease is attributable to a gain on sale of credit card loans
of $11.2 million recognized by FFC in 1996.
Other miscellaneous income, from a variety of sources, increased $986,000, or
7.8% in 1997. This increase is primarily attributable to higher levels of
Electronic Funds Transfer (EFT) fees. Net EFT fees increased by $967,000 in
1997.
Investment securities gains of $2.5 million represent an increase of $13.2
million over 1996. This increase is primarily attributable to a $13.1 million
loss recognized by FFC on the sale of mortgage-related securities in 1996.
The merger, integration and other one-time charges consist of writedowns taken
to record other than temporary impairment of value of securities. Concurrent
with the consummation of the merger with FFC, the Corporation transferred all
nonagency mortgage-related securities and an agency security, with a combined
amortized cost of $251.9 million from securities held to maturity to securities
available for sale. These mortgage-related securities were transferred to
maintain the existing interest rate risk position and credit risk policy of the
Corporation.
Concurrent with the transfer, the Corporation recorded a $32.5 million pre-tax
charge to earnings relative to one agency security with an amortized cost of
$130.6 million. Management recorded this other than temporary impairment of
value in the fourth quarter of 1997. This security is highly complex, comprised
of multiple cash flows predominated by an inverse floater tied to libor, for
which stress tests indicate that the cash flows are volatile in higher interest
rate environments. The estimated fair value of this security at the time of the
other than temporary impairment charge was based on quoted prices of instruments
with similar characteristics and cash flow valuation techniques.
Additionally, the Corporation recorded a $2.8 million pre-tax charge, on other
nonagency mortgage-related securities that were transferred to available for
sale, with an amortized cost of $18.9 million to reflect an other than temporary
impairment of value in the fourth quarter of 1997. These securities were
subsequently sold with no additional loss in January 1998.
NONINTEREST EXPENSE
Total operating noninterest expense, excluding merger, integration and other
one-time charges, increased $11.8 million, or 4.5% in 1997. This follows a
$13.8 million, or 5.6% increase in 1996 over 1995. All categories, with the
exception of FDIC insurance premiums, recorded increases in 1997.
Salaries and employee benefits increased $7.5 million or 5.9% compared to 1996.
This followed a $10.3 million, or 8.9% increase in 1996 compared to 1995. This
category continues to be the largest component of noninterest expense,
representing 49.1% of operating expenses in 1997 and 48.5% and 47.0% in 1996 and
1995, respectively. The increase in 1997 was comprised of higher salary
expenses of $6.2 million and higher fringe benefit costs of $1.3 million. The
increase in salary expense reflects base merit pay increases and new positions
added. The fringe benefit increase is attributable to FICA taxes, 401k and
profit sharing expenses. These fringe benefit increases were a result of higher
levels of base compensation and changes made to benefit plans. Full-time
equivalent (FTE) employees at December 31, 1997 totaled 3,679 compared to 3,666
at December 31, 1996. As the Corporation continues to expand to take advantage
of business opportunities and the related revenues, management will continue to
review its significant investment in salaries and employee benefit expenses.
D-22
<PAGE>
TABLE 7: NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31, % Change From Prior Year
-------------------------------------------------------------------
1997 1996 1995 1997 1996
-------- -------------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Salaries and employee benefits $133,656 $126,154 $115,837 5.9 8.9
Net occupancy expense 20,297 19,563 19,159 3.8 2.1
Data processing expense 16,900 15,905 15,068 6.3 5.6
Business development and advertising 15,936 14,754 11,120 8.0 32.7
Equipment rentals, depreciation, and
maintenance 12,600 12,033 11,433 4.7 5.2
Stationery and supplies 5,532 5,030 5,325 10.0 (5.5)
FDIC expense 3,284 9,675 13,799 (66.1) (29.9)
Other 63,820 57,116 54,728 11.7 4.4
-------------------------------------------------------------------
Total noninterest expense (operating) 272,025 260,230 246,469 4.5 5.6
Merger, integration and other one-time charges 51,622 33,005 6,458 N/M N/M
-------------------------------------------------------------------
Total noninterest expense $323,647 $293,235 $252,927 10.4 15.9
===================================================================
</TABLE>
N/M -- not meaningful
Net occupancy, data processing, and equipment rentals, depreciation and
maintenance reflect the continued investment in the systems and operations
center. Increased depreciation, maintenance and utilities directly reflect the
investment made in the systems and operations center in 1996. Higher data
processing fees are due to the processing volumes in excess of the base contract
with the third party processor.
Business development and advertising includes all business development related
costs, which include public relations, travel, meals, club and association dues,
and auto costs, and all advertising and marketing costs, including market
research, direct mail, television, radio, newsprint and all other promotions
increased $1.2 million, or 8.0% in 1997. This followed a $3.6 million, or
32.7%, increase in 1996 over 1995.
FDIC expense represents the regular premiums paid to the FDIC. FFC historically
has paid a higher percentage for insurance premiums. FFC's FDIC assessment was
decreased to 6.4 cents per $100 of assessable deposits from the rate of 23 cents
per $100 which was in effect prior to September 30, 1996. The Corporation's
banking affiliates that existed prior to the FFC acquisition had their premiums
virtually eliminated in 1996, with the assessment rate lowered to 1.2 cents per
$100 of assessable deposits for 1997. Total FDIC premiums paid decreased to
$3.3 million in 1997, down from $9.7 million and $13.8 million in 1996 and 1995,
respectively. The one-time charge related to the recapitalization of the SAIF,
paid by FFC in 1996, is not included in this category. This charge of $28.8
million on a pre-tax basis is included in the merger, integration and other one-
time charges category.
Other noninterest expense increased by $6.7 million, or 11.7%, in 1997 compared
to 1996. This increase is attributable to higher levels of mortgage servicing
rights amortization, increased consulting costs, higher communication and
courier costs. This increase follows a $2.4 million, or 4.4%, increase in 1996
over 1995.
Merger, integration and other one-time charges include the following amounts for
each applicable year:
. 1997 charges include $51.6 million of pre-tax charges related to the
merger with FFC. These charges includes $12.6 million for employee and
director severance and contract costs, $20.2 million for costs associated
with elimination of duplicative facilities, computer systems, software
and integration, $11.2 million for investment banking, legal and
accounting fees and $7.7 million for other one-time charges.
. 1996 charges include a one-time charge of $28.8 million associated with
the recapitalization of the SAIF and a one-time charge of $4.2 million
relating to a change in accounting for the amortization of goodwill and
other intangible assets recorded at FFC.
. 1995 charges include a one-time charge of $6.5 million relating to
acquisition-related expenses incurred relative to the acquisition of
FirstRock Bancorp, Inc. by FFC. These charges include $3.8 million for
employee and director severance and contract costs, $740,000 for costs
associated with duplicative facilities, computer systems, software and
integration, $1.0 million for investment banking, legal and accounting
fees and $870,000 for other charges.
INCOME TAXES
Income tax expense, excluding the applicable income tax effect on merger,
integration and other one-time charges, increased to $77.8 in 1997 compared to
$68.5 million and $64.9 million in 1996 and 1995, respectively. The
Corporation's effective tax rate (operating income tax expense divided by
operating income before taxes) was 35.4%, 34.6% and 35.9% in 1997, 1996 and
1995, respectively.
D-23
<PAGE>
BALANCE SHEET ANALYSIS
LOANS
Total loans, including loans held for sale, increased by $489 million, or 7.3%
to $7.2 billion at the end of 1997. This follows a $282 million, or 4.4 %
increase in 1996 compared to 1995. In 1997 increases were experienced in
commercial, financial and agricultural, real estate-construction and real
estate-mortgage loans, each up $146 million, $101 million and $260 million,
respectively. Included in the increase in real estate-mortgage loans is an
increase of $72 million in mortgage loans held for sale.
TABLE 8: LOAN COMPOSITION
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------------------
Amount % of Total Amount % of Total Amount % of Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Commercial, financial, and
agricultural $ 986,839 14% $ 841,145 13% $ 801,004 13%
Real estate - construction 335,978 5 235,478 3 217,223 3
Real estate - mortgage 5,060,264 70 4,799,900 72 4,569,362 71
Installment loans to individuals 793,424 11 813,875 12 821,351 13
Lease financing 14,072 -- 10,449 -- 9,743 --
----------------------------------------------------------------------------------
Total loans (including loans
held for sale) $7,190,577 100% $6,700,847 100% $6,418,683 100%
==================================================================================
As of December 31,
----------------------------------------------
1994 1993
---------------------------------------------
% of Total % of Total
Amount Amount
---------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and
agricultural
Real estate - construction $ 710,285 12% $ 758,925 14%
Real estate - mortgage 199,376 3 168,232 3
Installment loans to individuals 4,278,825 71 3,719,199 69
Lease financing 801,302 14 728,582 14
6,176 -- 5,144 --
Total loans (including loans ---------------------------------------------
held for sale) $5,995,964 100% $5,380,082 100%
=============================================
</TABLE>
The acquisition of FFC had a major impact on the loan composition of the
Corporation. As previously reported prior to the 1997 pooling restatements, at
December 31, 1996 the Corporation's loan composition consisted of 57% real
estate-mortgage, 26% commercial, financial and agricultural, 9% installment
loans to individuals, 7% real estate-construction, and 1% leasing. At December
31, 1997 this mix has changed to 70% real estate-mortgage, 14% commercial,
financial and agricultural, 11% installment loans to individuals and 5% real
estate-construction. The mix of loans at December 31, 1997 reflects FFC's mix
of loans, primarily real estate-mortgage and installment loans to individuals,
as the merger brought together FFC's consumer banking franchise with the
Corporation's existing business banking and asset management expertise.
Real estate-mortgage loans totaled $5.1 billion at the end of 1997 and $4.8
billion at the end of 1996. Loans in this classification in 1997 include $3.8
billion of loans secured by 1- to 4-family residential properties. 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 Illinois. Residential real estate loans generally limit the
maximum loan to 75%-80% of collateral value. Also included in the real estate-
mortgage classification are loans secured by nonfarm, nonresidential real estate
properties. Loans in this group totaled $966 million at December 31, 1997.
Real estate loans secured by nonresidential real estate 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
Illinois. Credit risk is managed in a similar manner 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 $1.0 billion at the end of
1997, comprising 14% of total loans outstanding, up from 13% at the end of 1996.
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 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 commercial, financial and agricultural classification at December 31,
1997, loans to finance agricultural production total $35.4 million or 0.5% of
total loans.
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.
D-24
<PAGE>
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 multiple number of
borrowers engaged in similar activities that would cause them to be similarly
impacted by economic or other conditions. At December 31, 1997, no
concentrations existed in the Corporation's portfolio in excess of 10% of total
loans, or $708 million.
Real estate construction loans totaled $336 million, or 5% of the total loan
portfolio at the end of 1997 compared to $235 million, or 3% at the end of 1996.
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 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)
<TABLE>
<CAPTION>
Maturity(2)
-------------------------------------------------------------------------------
December 31, 1997 Within 1 Year 1-5 Years After 5 Years Total
- ----------------- -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $670,252 $287,163 $29,424 $ 986,839
Real estate-construction 208,415 119,941 7,622 335,978
-------------------------------------------------------------------------------
Total $878,667 $407,104 $37,046 $1,322,817
===============================================================================
Fixed rate $256,654 $359,825 $35,569 $ 652,048
Floating or adjustable rate 622,013 47,279 1,477 670,769
-------------------------------------------------------------------------------
Total $878,667 $407,104 $37,046 $1,322,817
===============================================================================
Percent 66% 31% 3% 100%
- -------------------------------------------------
</TABLE>
(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 $793 million, down $20 million, or 2.5%
compared to 1996. This followed a $7 million, or 0.9% decrease in 1996 from
year-end 1995. 1996 was impacted by a sale of a $47.9 million credit card
affinity group portfolio. 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 Illinois. Credit risk for these types of
loans is generally greatly 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 nonaccrual and charge-off policies.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
As of December 31, 1997, the allowance for possible loan losses of $92.7 million
represented 1.31% of total loans outstanding, compared to $71.8 million, or
1.08% at December 31, 1996. The majority of this increase is attributable to a
one-time charge of $16.8 million related to the acquisition of FFC to conform
its allowance for possible loan losses to the policies, practices and procedures
of the Corporation.
D-25
<PAGE>
TABLE 10: LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Average loans outstanding $6,962,820 $6,586,639 $6,157,655 $5,636,601 $5,136,319
Balance of allowance for possible loan
losses at beginning of period $ 71,767 $ 68,560 $ 65,774 $ 63,415 $ 56,011
========================================================================
Loans charged-off:
Commercial, financial, and agricultural 1,327 2,916 3,356 2,593 4,520
Real estate - construction 600 193 191 89 131
Real estate - mortgage 3,222 2,813 3,099 4,224 6,070
Installment loans to individuals 9,900 11,693 9,221 9,038 7,950
Lease financing --- 1 5 18 50
------------------------------------------------------------------------
Total loans charged-off 15,049 17,616 15,872 15,962 18,721
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural 513 1,255 1,856 3,086 2,193
Real estate - construction --- 3 70 --- 173
Real estate - mortgage 1,312 837 931 1,151 695
Installment loans to individuals 1,792 1,514 1,764 1,676 1,718
Lease financing --- 8 8 7 20
------------------------------------------------------------------------
Total recoveries 3,617 3,617 4,629 5,920 4,799
------------------------------------------------------------------------
Net loans charged-off 11,432 13,999 11,243 10,042 13,922
Balance related to acquisitions 728 3,511 --- 3,366 4,885
Additions to the allowance charged to
operating expense 31,668 13,695 14,029 9,035 16,441
------------------------------------------------------------------------
Balance at end of period $ 92,731 $ 71,767 $ 68,560 $ 65,774 $ 63,415
========================================================================
Ratio of net charge-offs to average
loans outstanding .16% .21% .18% .18% .27%
Ratio of allowance for possible loan losses
to total loans at end of period 1.31% 1.08% 1.12% 1.16% 1.20%
========================================================================
</TABLE>
The provision for possible loan losses, excluding the one-time charge of $16.8
million, increased to $14.9 million, up from $13.7 million in 1996 and $14.0
million in 1995. Total net charge-offs in 1997 were $11.4 million, compared to
$14.0 million in 1996 and $11.2 million in 1995. Net charge-offs to average
loans was .16% in 1997, .21% in 1996 and .18% in 1995. Reflecting the changes in
the Corporation's loan portfolio mix, described earlier, the Corporation's
updated five-year goals include maintaining net charge-offs to average loans
below .30%. Each of the last five years' results have been within this revised
future goal.
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 included the
levels of nonperforming 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 at December
31, 1997, is adequate to absorb potential loan losses as evidenced by its
charge-off experience and allowance coverage of nonperforming 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
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $33,682 $27,943 $22,753 $21,279 $19,194
Real estate - construction 2,016 1,047 929 1,133 1,440
Real estate - mortgage 30,360 19,116 22,331 23,254 25,304
Installment loans to individuals 16,870 16,239 14,848 14,896 14,142
Lease financing 493 530 460 331 136
Unallocated 9,310 6,892 7,239 4,881 3,199
--------------------------------------------------
Total $92,731 $71,767 $68,560 $65,774 $63,415
==================================================
</TABLE>
D-26
<PAGE>
The allocation of the Corporation's allowance for possible loan losses for the
last five years is shown in Table 11. Management has developed methodologies
designed to assess the adequacy of the allowance for possible loan losses. The
allocation methodology applied by the Corporation focuses on changes in the size
and character of the loan portfolio, changes in levels of impaired and other
nonperforming and past due loans, the risk inherent in specific loans,
concentrations of loans to specific borrowers or industries, existing and
prospective economic conditions and historical losses on each portfolio
category. The indirect risk in the form of off-balance sheet unfunded
commitments is also taken into consideration. Management continues to target
and maintain the allowance for possible loan losses equal to the allocated
requirement plus an unallocated portion, as deemed necessary. Management
believes this is appropriate in light of current and expected economic
conditions and trends, the geographic and industry mix of the loan portfolio and
other risk related matters.
NONPERFORMING LOANS, POTENTIAL PROBLEM LOANS, AND OTHER REAL ESTATE
Management is committed to an aggressive nonaccrual and problem loan
identification philosophy. This philosophy is embodied through the monitoring
and reviewing of credit policies and procedures to ensure that all problem loans
are identified quickly and the risk of loss is minimized.
Nonperforming loans are considered a leading indicator of future loan losses.
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing, and restructured loans. The Corporation specifically
excludes student loan balances that are 90 days or more past due and still
accruing and that have contractual government guarantees as to collection of
principal and interest, from its definition of nonperforming loans.
Loans are normally placed on nonaccrual 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 nonaccrual 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, with the exception
of approximately $8 million of guaranteed student loans at December 31, 1997,
are also included in nonperforming loans. Loans past due 90 days or more but
still accruing are classified as such where the underlying loans are both well
secured (the collateral value is sufficient to cover principal and accrued
interest) and in the process of collection. Also included in nonperforming loans
are "restructured" loans. Restructured loans involve the granting of some
concession to the borrower involving the modification of terms of the loan, such
as changes in payment schedule or interest rate.
TABLE 12: NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $32,415 $32,287 $28,787 $28,025 $34,580
Accruing loans past due 90 days or more 1,324 1,801 1,320 1,484 2,469
Restructured loans 558 534 1,704 1,888 1,992
------------------------------------------------------
Total nonperforming loans $34,297 $34,622 $31,811 $31,397 $39,041
======================================================
Ratio of nonperforming loans to total loans at period end .48% .52% .50% .53% .73%
Ratio of the allowance for possible loans losses
to nonperforming loans at period end 270.38% 207.29% 215.52% 209.49% 162.43%
------------------------------------------------------
Other real estate owned $ 2,067 $ 1,939 $ 4,852 $ 6,172 $10,262
======================================================
</TABLE>
Nonperforming loans at December 31, 1997 were $34.3 million, a decrease of
$325,000 from December 31, 1996. The ratio of nonperforming loans to total
loans at the end of 1997 was .48%, an improvement from .52% at December 31, 1996
and .50% at December 31, 1995. The Corporation's allowance for possible loan
losses to nonperforming loans was 270% at year-end 1997. This increased from
207% and 216% at year-end's 1996 and 1995, respectively. The increase in
coverage of nonperforming loans is attributable to the $16.8 million one-time
charge related to the merger with FFC to conform the level of the allowance for
possible loan losses to the policies, practices and procedures of the
Corporation.
The following table shows, for those loans accounted for on a nonaccrual 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 interest
income for the period.
D-27
<PAGE>
TABLE 13: FOREGONE LOAN INTEREST
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
(In Thousands)
<S> <C> <C> <C>
Interest income in accordance with original terms $ 2,332 $ 2,764 $ 2,905
Interest income recognized (1,215) (1,086) (1,110)
--------------------------------------
Reduction in interest income $ 1,117 $ 1,678 $ 1,795
======================================
</TABLE>
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 indicate 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, 1997, potential problem loans totaled $74.0 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 was $2.1 million at December 31, 1997 compared to $1.9
million at the end of 1996. 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, at amortized cost, including those held
to maturity and available for sale, totaled $2.9 billion at December 31, 1997
compared to $2.8 billion at the end of 1996.
TABLE 14: INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Investment Securities Held to Maturity:
U.S. Treasury securities $ 498 $ 4,204 $ 10,036
Federal agency securities 146,259 143,927 184,158
Mortgage-related securities 361,298 673,990 791,341
Obligations of states and political subdivisions 183,286 195,860 170,971
Other securities (debt) 81,183 61,768 60,621
-------------------------------------------
Total Amortized Cost $ 772,524 $1,079,749 $1,217,127
===========================================
Total Fair Market Value $ 782,240 $1,074,412 $1,209,820
===========================================
Investment Securities Available for Sale:
U.S. Treasury securities $ 109,200 $ 149,314 $ 174,360
Federal agency securities 324,708 326,049 220,801
Mortgage-related securities 1,536,134 1,057,992 585,300
Obligations of state and political subdivisions 14,312 --- ---
Other securities (debt and equity) 142,081 127,787 68,679
-------------------------------------------
Total Amortized Cost $2,126,435 $1,661,142 $1,049,140
===========================================
Total Fair Market Value $2,167,694 $1,674,189 $1,049,768
===========================================
</TABLE>
The merger with FFC had a major impact on the Corporation's total investment
portfolio. The relationship of investments to total earning assets was altered
as a result of the acquisition. As reported historically, at the end of 1996,
the Corporation's average investment portfolio comprised 21.3% of total average
earning assets. Subsequent to the merger with FFC, average investments to total
average earning assets equaled 29.4% in 1997. The composition of the investment
portfolio was altered as well. As previously reported, at the end of 1996
Treasury and Federal Agency securities totaled 55.9%, mortgage-related
securities totaled 9.9%, municipal securities totaled 23.1%, and other debt and
equity securities totaled 11.1% of the total investment portfolio, at amortized
cost. At December 31, 1997, the mix changed to 65.5% mortgage-related
securities, 20.0% treasury and federal agency securities, 6.8% municipal
securities and 7.7% other debt and equity securities.
Mortgage-related securities are subject to inherent risks based upon the future
performance of the underlying collateral (i.e. mortgage loans) for these
securities. Among these risks are prepayment risk and interest rate risk. Should
general interest rate
D-28
<PAGE>
levels decline, the mortgage-related securities portfolio would be subject to 1)
prepayments as borrowers typically would seek to obtain financing at lower
rates, 2) a decline in interest income received on adjustable-rate issuances,
and 3) an increase in the fair value of fixed rate issuances. Conversely, should
general interest rate levels increase, the mortgage-related securities portfolio
would be subject to 1) a longer term to maturity as borrowers would be less
likely to prepay their loans, 2) an increase in interest income received on
adjustable rate issuances, 3) a decline in the fair value of fixed rate
issuances, and 4) a decline in fair value of adjustable rate issuances to an
extent dependent upon the level of interest rate increases, the time period to
the next interest rate repricing date for the individual security and the
applicable periodic (annual and/or lifetime) cap which could limit the degree to
which the individual security could reprice within a given time period.
The mortgage-related security portfolio includes both U.S. Government agency
issuances and nonagency issuances. Unlike U.S. Government agency issued
mortgage-related securities which include a guarantee of principal and interest
payments on the underlying collateral, nonagency securities are generally
structured with a senior ownership position and subordinate ownership
position(s) providing credit support for the senior position. The structure of
nonagency mortgage-related securities may expose the Corporation to credit risk
in addition to interest rate risk and prepayment risk as discussed above.
Management monitors the major factors affecting the performance of nonagency
mortgage-related securities including, 1) delinquencies, foreclosures,
repossessions and recoveries relative to the underlying mortgage loans
collateralizing each security, 2) the level of available subordination or other
credit enhancements, 3) the competence of the servicer of the underlying
mortgage portfolio, and 4) the rating assigned to each security by independent
national rating agencies.
Concurrent with the consummation of the merger with FFC, the Corporation
transferred all nonagency mortgage-related securities and an agency security,
with a combined amortized cost of $251.9 million from securities held to
maturity to securities available for sale. These mortgage-related securities
were transferred to maintain the existing interest rate risk position and credit
risk policy of the Corporation.
Concurrent with the transfer, the Corporation recorded a $32.5 million pre-tax
charge to earnings relative to one agency security with an amortized cost of
$130.6 million. Management recorded this other than temporary impairment of
value in the fourth quarter of 1997. This security is highly complex, comprised
of multiple cash flows predominated by an inverse floater tied to LIBOR, for
which stress tests indicate that the cash flows are volatile in higher interest
rate environments. The estimated fair value of this security at the time of the
other than temporary impairment charge was based on quoted prices of instruments
with similar characteristics and cash flow valuation techniques.
Additionally, the Corporation recorded a $2.8 million pre-tax charge on other
nonagency mortgage-related securities that were transferred to available for
sale, with an amortized cost of $18.9 million, to reflect an other than
temporary impairment of value in the fourth quarter of 1997. These securities
were subsequently sold with no additional loss in January 1998.
In November 1997, the Corporation hedged certain agency issued zero-coupon bonds
held by FFC, with a carrying value of $37.2 million and a market value of $41.6
million, by executing various interest rate futures contracts. These contracts
had a notional value of $70.5 million and a maturity date of March 1998.
Subsequently, in January 1998, the futures contracts were closed and the zero-
coupon bonds were sold. A net gain of $5.1 million will be recognized, in
investment securities gains, in the first quarter of 1998 from these
transactions.
Taxable securities were 93.2% of total securities at the end of 1997 compared to
92.9% at the end of 1996. The aggregate market value of the securities
portfolio was approximately $2.95 billion compared to an amortized cost of $2.90
billion at December 31, 1997.
At December 31, 1997, 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 $81.4 million.
D-29
<PAGE>
TABLE 15: INVESTMENT SECURITIES PORTFOLIO MATURITY DISTRIBUTION(1)
December 31, 1997
<TABLE>
<CAPTION>
Investment Securities Held to Maturity - Maturity Distribution and Weighted Average Yield
----------------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
----------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($In Thousands)
U. S. Treasury Securities $ 498 6.10% $ --- --- $ --- --- $ --- ---
Federal agency securities 55,502 5.39% 77,258 6.25% 13,499 6.97% --- ---
Obligations of states and
political subdivisions 24,110 7.40% 92,965 7.51% 65,700 7.19% 511 7.35%
Mortgage-related securities --- --- --- --- --- --- --- ---
Other securities (debt) 9,852 6.20% 56,708 6.89% 14,623 6.76% --- ---
----------------------------------------------------------------------------------------------
Total Amortized Cost $ 89,962 6.02% $226,931 6.93% $93,822 7.09% $ 511 7.35%
==============================================================================================
Total Fair Value $ 89,990 $230,130 $95,636 $ 532
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Investment Securities Held to Maturity -
Maturity Distribution and Weighted Average Yield
--------------------------------------------------------------
Mortgage-Related
Securities Total Total
--------------------------------------------------------------
Amount Yield Amount Yield Fair Value
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($In Thousands)
U. S. Treasury Securities $ --- --- $ 498 6.10% $ 500
Federal agency securities --- --- 146,259 5.99% 146,818
Obligations of states and
political subdivisions --- --- 183,286 7.38% 186,300
Mortgage-related securities 361,298 7.21% 361,298 7.21% 365,952
Other securities (debt) --- --- 81,183 6.78% 82,670
--------------------------------------------------------------
Total Amortized Cost $ 361,298 7.21% $ 772,524 6.97% $ 782,240
==============================================================
Total Fair Value $ 365,952 $ 782,240
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Investment Securities Available for Sale - Maturity Distribution and Weighted Average Yield
-------------------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
-------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------------------------------
($In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury securities $ 41,019 5.95% $ 68,181 6.14% $ --- --- $ --- ---
Federal agency securities 70,197 5.85% 213,669 6.19% 8,188 6.75% 32,654 7.20%
Obligations of states and
political subdivisions 200 8.63% 2,179 8.25% 11,564 6.94% 369 9.28%
Mortgage-related securities --- --- --- --- --- --- --- ---
Other securities (debt
and equity) 137,712 5.58% $ 3,894 6.72% 475 6.82% --- ---
-------------------------------------------------------------------------------------------------
Total Amortized Cost $249,128 6.34% $287,923 6.48% $20,227 6.97% $33,023 6.19%
=================================================================================================
Total Fair Value $262,597 $289,219 $20,169 $38,106
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Investment Securities Available for Sale -
Maturity Distribution and Weighted Average Yield
-----------------------------------------------------------
Mortgage-Related
Securities Total Total
-----------------------------------------------------------
Amount Yield Amount Yield Fair Value
-----------------------------------------------------------
($In Thousands)
<S> <C> <C> <C> <C> <C>
U. S. Treasury securities $ --- --- $ 109,200 6.07% $ 109,841
Federal agency securities --- --- 324,708 6.23% 330,542
Obligations of states and
political subdivisions --- --- 14,312 7.22% 14,136
Mortgage-related securities 1,536,134 6.55% 1,536,134 6.55% 1,557,603
Other securities (debt
and equity) --- --- 142,081 5.61% 155,572
-----------------------------------------------------------
Total Amortized Cost $1,536,134 6.55% $2,126,435 6.42% $2,167,694
===========================================================
Total Fair Value $1,557,603 $2,167,694
===========================================================
</TABLE>
(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 1997 were $8.1 billion, an increase of 4.4% or $344
million over 1996. Included in this growth is $59.7 million of increase in the
balance of purchased brokered CDs. For the full year of 1997, the average
balance of brokered CDs in total deposits was $139.7 million, which is included
in time deposits in the table shown below. Adjusted for brokered CDs, internal
deposit growth in 1997 was 3.7%.
TABLE 16: AVERAGE DEPOSITS DISTRIBUTION
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Noninterest-bearing demand deposits $ 741,790 $ 697,470 $ 665,799
Interest-bearing demand deposits 712,458 673,106 603,734
Savings deposits 1,073,244 1,121,531 1,146,282
Money market deposits 902,186 799,795 697,128
Time deposits 4,692,333 4,486,355 4,296,466
-------------------------------------------
Total deposits $8,122,011 $7,778,257 $7,409,409
===========================================
</TABLE>
Year-end 1997 noninterest-bearing deposits were $905 million compared to $804
million at the end of 1996. These amounts are substantially above the
respective yearly average balance amounts. Demand deposits normally show a
sizable 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 increased to 9.1% in 1997 compared to
9.0% for both 1996 and 1995.
D-30
<PAGE>
TABLE 17: AVERAGE RATES PAID ON DEPOSITS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Interest-bearing demand deposits 1.67% 1.69% 1.72%
Savings deposits 2.27 2.45 2.68
Money market deposits 3.77 3.53 3.53
Time deposits 5.69 5.66 5.52
Total interest-bearing deposits 4.57% 4.53% 4.49%
</TABLE>
The total average interest-bearing demand, savings, and money market deposits
increased to $2.69 billion for 1997 from $2.59 billion in 1996. These deposits
as a percentage of total average deposits have remained relatively stable over
the past three years at 33.1% in 1997, 33.4% in 1996 and 33.0% in 1995.
TABLE 18: MATURITY DISTRIBUTION-CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS
OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Certificates of Deposit Other Time Deposits
-----------------------------------------------
(In Thousands)
<S> <C> <C>
Three months or less $326,911 $56,858
Over three months through six months 146,204 13,695
Over six months through twelve months 133,903 ---
Over twelve months 102,283 ---
-----------------------------------------------
Total $709,301 $70,553
===============================================
</TABLE>
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 1997, the Corporation's affiliates 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, securities sold under
repurchase agreements, Federal Home Loan Bank notes, notes payable to banks,
commercial paper, treasury tax and loan notes, collateralized mortgage
obligations and industrial revenue bonds. Average total short-term borrowings
were $1.29 billion compared with $929 million in 1996.
TABLE 19: SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1996 1995
--------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Federal funds purchased and securities sold under
agreements to repurchase $ 712,250 $ 666,030 $ 451,197
Federal Home Loan Bank 525,317 451,380 335,644
Notes payable to banks 87,139 68,937 66,647
Subordinated notes --- --- 54,925
Commercial paper 1,250 2,172 2,326
Current maturities of long-term borrowings --- 3,067 800
Other borrowed funds 11,052 9,807 7,852
--------------------------------------------
Total $1,337,008 $1,201,393 $ 919,391
============================================
Average amounts outstanding during year $1,287,900 $ 928,942 $ 891,495
Average interest rates on amounts outstanding during year 5.63% 5.62% 6.18%
Maximum month-end amounts outstanding $1,405,233 $1,201,393 $1,071,284
Average interest rates on amounts outstanding at end of year 5.75% 5.82% 5.89%
</TABLE>
The change in short-term borrowings outstanding is attributable to larger
amounts of overnight federal funds purchased and Federal Home Loan Bank notes
with a remaining maturity less than 1 year as subsidiary banks continue to
supplement the funding of asset growth with wholesale funds. 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.
D-31
<PAGE>
LIQUIDITY
Liquidity refers to the ability of the Corporation to generate adequate amounts
of cash to meet the Corporation's needs for cash. The affiliates and the parent
company of the Corporation have different liquidity considerations.
Affiliates 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 $405 million from 1996 to 1997. The
Corporation's overall deposit base grew an average of $344 million, or 4.4%
during 1997. 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, 1997, excluding mortgage-related securities, the amortized cost of
securities, both securities held to maturity and securities available for sale,
maturing within one year amounted to $339 million. At the end of 1997, the
securities portfolio contained $434 million at amortized cost of U.S. Treasury
and federal agency securities available for sale. These government securities
are highly marketable and had a market value of $440 million or 101.5% of
amortized cost at year-end.
The loan portfolio is also a source of additional liquidity. The Corporation
has $906 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 $3.8 billion of loans
secured 1- to 4-family residential property that could possibly be securitized.
Within the classification of short-term borrowings at year-end 1997, federal
funds purchased and securities sold under agreements to repurchase totaled $712
million compared to $666 million at the end of 1996. Federal funds are
purchased from a sizable network of correspondent banks while securities sold
under agreements to repurchase are obtained from a base of individual, business
and public entity customers.
The aggregate subsidiary liquidity resources were sufficient in 1997 to fund the
growth in loans and the investment securities portfolio, and to meet other needs
for cash when necessary. As of December 31, 1997, there were no material
commitments for capital expenditures, i.e. to purchase fixed assets.
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 investments 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
stockholders, service debt, invest in subsidiaries and satisfy other operating
requirements. Dividends received from subsidiaries totaled $63.4 million in
1997 and will continue to be the parent's main source of long-term liquidity.
The dividends from subsidiaries, along with a $17.3 million increase in net
short-term borrowed funds, were sufficient to pay cash dividends to the
Corporation's common stockholders of $49.3 million in 1997 and fund increased
lending activities of nonbanking subsidiaries of $16.3 million.
At December 31, 1997, $131.0 million in dividends could be paid to the parent by
affiliates without obtaining prior regulatory approval, subject to the capital
needs of the banks. Additionally, the parent company had $120 million of
established lines of credit with nonaffiliated banks, of which $87.1 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 nonbanking subsidiaries.
Commercial paper outstanding at December 31, 1997, totaled $1.3 million.
The Corporation's long-term debt-to-equity ratio at December 31, 1997 was 1.9%
compared to 4.1% at December 31, 1996. The decrease is attributable to the
change in current maturities of long-term borrowings between years.
D-32
<PAGE>
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 AND MARKET RISK
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
ALCO's, 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.
D-33
<PAGE>
Table 20 reflects the Corporations expected cash flows and applicable yields on
earning assets and interest-bearing liabilities and the resulting current fair
market value after discounting expected cash flows at existing market rates.
TABLE 20: MARKET RISK ANALYSIS INTEREST RATE RISK
<TABLE>
<CAPTION>
Expected Period of Maturity
--------------------------------------------------------------------------------------------------
Within 1 - 2 2 - 3 3 - 4 4 - 5
1 YEAR YEARS YEARS YEARS YEARS
--------------------------------------------------------------------------------------------------
YIELD/ YIELD/ YIELD/ YIELD/ YIELD/
BAL RATE BAL RATE BAL RATE BAL RATE BAL RATE
- ---------------------------------------------------------------------------------------------------------------------------------
($In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments (V) $ 16 5.36% $ --- --- $--- --- $--- --- $--- ---
Loans held for sale (V) 114 7.44% --- --- --- --- --- --- --- ---
Treasury, Agency, Other
Securities (F) 284 5.70% 113 6.20% 80 6.36% 103 6.35% 102 6.65%
Treasury, Agency, Other
Securities (V) 13 4.38% --- --- 3 5.11% 1 7.75% 31 5.51%
Mortgage-related securities (F) 2 6.16% 3 6.78% 2 6.10% 60 6.93% 42 6.77%
Mortgage-related securities (V) --- --- --- --- --- --- --- --- --- ---
Municipal securities (F) 23 7.21% 24 7.61% 18 7.75% 26 7.61% 26 7.20%
Residential real estate loans (F) 491 8.03% 341 8.07% 264 8.08% 156 7.95% 115 7.89%
Residential real estate loans (V) 745 8.56% 283 7.40% 240 7.55% 127 7.51% 102 7.53%
Commercial loans (F) 594 8.86% 266 8.57% 248 8.44% 90 8.31% 68 8.34%
Commercial loans (V) 883 8.82% 32 8.47% 30 8.46% 28 8.45% 27 8.45%
Consumer loans (F) 252 8.92% 157 8.82% 110 8.72% 64 8.50% 39 8.31%
Consumer loans (V) 515 10.04% 16 13.38% --- --- --- --- --- ---
--------------------------------------------------------------------------------------------------
Total interest earning assets $3,932 8.53% $1,235 8.01% $995 7.97% $655 7.63% $552 7.45%
--------------------------------------------------------------------------------------------------
Interest-bearing deposits (F) $3,221 5.69% $1,038 5.97% $181 6.11% $ 39 5.72% $ 25 5.84%
Interest-bearing deposits (V) 2,949 2.82% 4 5.55% --- --- --- --- --- ---
Short-term borrowings (V) 1,337 5.67% --- --- --- --- --- --- --- ---
Long-term borrowings (F) --- --- 4 14.27% 1 6.42% 1 7.17% 1 6.80%
--------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $7,507 4.56% $1,046 6.01% $182 6.11% $ 40 5.75% $ 26 5.85%
--------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Expected Period
of Maturity
----------------
GREATER THAN
5 YEARS TOTAL
----------------
FAIR
YIELD/ MARKET
BAL RATE BAL RATE VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term investments (V) $ --- --- $ 16 5.36% $ 16
Loans held for sale (V) --- --- 114 7.44% 114
Treasury, Agency, Other
Securities (F) 73 6.95% 755 6.18% 778
Treasury, Agency, Other
Securities (V) 1 7.58% 49 5.26% 49
Mortgage-related securities (F) 356 7.13% 465 7.06% 471
Mortgage-related securities (V) 1,433 6.59% 1,433 6.59% 1,452
Municipal securities (F) 81 7.23% 198 7.37% 200
Residential real estate loans (F) 234 7.98% 1,601 8.02% 1,614
Residential real estate loans (V) 275 7.53% 1,772 7.94% 1,791
Commercial loans (F) 133 8.28% 1,399 8.61% 1,399
Commercial loans (V) 82 8.44% 1,082 8.75% 1,082
Consumer loans (F) 69 8.08% 691 8.71% 693
Consumer loans (V) --- --- 531 10.14% 530
--------------------------------------------------
Total interest earning assets $2,737 7.08% $10,016 7.90% $10,189
--------------------------------------------------
Interest-bearing deposits (F) $ 2 6.34% $ 4,506 5.78% $ 4,520
Interest-bearing deposits (V) --- --- 2,953 2.83% 2,953
Short-term borrowings (V) --- --- 1,337 5.67% 1,337
Long-term borrowings (F) 8 6.62% 15 8.94% 15
--------------------------------------------------
Total interest-bearing
liabilities $ 10 6.56% $ 8,811 4.78% $ 8,825
--------------------------------------------------
</TABLE>
(V) Variable repricing terms
(F) Fixed repricing terms
In November 1997, the Corporation hedged certain agency issued zero-coupon bonds
held by FFC, with a carrying value of $37.2 million and a market value of $41.6
million, by executing various interest rate futures contracts. These contracts
had a notional value of $70.5 million and a maturity date of March 1998.
Subsequently, in January 1998, the futures contracts were closed and the zero-
coupon bonds were sold. A net gain of $5.1 million will be recognized, in
investment securities gains, in the first quarter of 1998 from these
transactions.
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 80.2% at December 31, 1997.
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.
Gap analysis also does not reflect the modification of the receipt of cash flows
from principal repayments on mortgage related products, both loan and
investments, due to changes in interest rate environments. Rising rates would
extend the receipt of principal repayments closer to contractual maturity, while
declining rates would accelerate the receipt of principal repayments.
D-34
<PAGE>
TABLE 21: INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------
Interest Sensitivity Period
------------------------------------------------------------------
Total Within
0-90 Days 91-180 Days 181-365 Days 1 Year
------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Earning assets:
Loans, held for sale $ 114,001 $ --- $ --- $ 114,001
Investment securities(1) 746,661 375,446 754,847 1,876,954
Loans, net of unearned income 2,449,779 524,329 1,032,766 4,006,874
Other earning assets 15,665 --- --- 15,665
------------------------------------------------------------------
Total $ 3,326,106 $ 899,775 $ 1,787,613 $ 6,013,494
==================================================================
Interest-bearing liabilities:
Interest-bearing deposits(2) $ 3,981,761 $ 894,645 $ 1,284,355 $ 6,160,761
Other interest-bearing liabilities 860,135 417,984 58,889 1,337,007
------------------------------------------------------------------
Total interest-bearing liabilities 4,841,896 1,312,629 1,343,244 7,497,768
==================================================================
Interest sensitivity gap (1,515,790) (412,854) 444,370 (1,484,274)
------------------------------------------------------------------
Cumulative interest sensitivity gap (1,515,790) (1,928,644) (1,484,274)
Cumulative ratio of rate sensitive assets
to rate sensitive liabilities at
December 31, 1997 68.7% 68.7% 80.2%
==================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------
Interest Sensitivity Period
----------------------------
Over 1 Year Total
----------------------------
(In Thousands)
<S> <C> <C>
Earning assets:
Loans, held for sale $ --- $ 114,001
Investment securities(1) 1,022,004 2,898,959
Loans, net of unearned income 3,069,702 7,076,576
Other earning assets --- 15,665
----------------------------
Total $4,091,706 $10,105,201
============================
Interest-bearing liabilities:
Interest-bearing deposits(2) $1,298,666 $ 7,459,427
Other interest-bearing liabilities 15,271 1,352,278
----------------------------
Total interest-bearing liabilities 1,313,937 8,811,705
============================
Interest sensitivity gap 2,777,770 1,293,496
----------------------------
Cumulative interest sensitivity gap
Cumulative ratio of rate sensitive assets
to rate sensitive liabilities at
December 31, 1997
============================
</TABLE>
(1) Securities balances exclude $41.3 million of unrealized gains relating to
available for sale securities.
(2) Savings, NOW, and money market account balances totaling $2.76 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.
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.
CAPITAL
Stockholders' equity at December 31, 1997, increased to $813.7 million or $12.92
per share compared with $803.6 million or $12.81 per share at the end of 1996.
The growth in stockholders' equity in 1997 was diminished by the $89.8 million
after-tax charge for merger, integration and other one-time charges related to
the merger with FFC. Year-end capital includes a $26.1 million equity component
compared to $8.3 million at December 31, 1996, related to unrealized gains on
securities available for sale, net of tax effect. Period-end stockholders'
equity to assets in 1997 was 7.61% compared to 7.94% at the end of 1996.
Cash dividends paid in 1997 were $0.89 per share compared with $0.76 per share
in 1996, an increase of 17.0%. Cash dividends have increased at a 16.8%
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, 1997 and 1996, 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 19, Regulatory Matters, of the notes to
consolidated financial statements.
In 1997, the Corporation's Board of Directors authorized management to
repurchase up to 125,000 shares of the Corporation's common stock each calendar
quarter in the market. 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
102,170 of its common shares in 1997 and 115,855 in 1996.
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 capital employed. Management
actively
D-35
<PAGE>
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.
YEAR 2000
The Year 2000 issue relates to systems designed to use two digits rather than
four to define the applicable year. The Corporation uses third party service
providers and software vendors almost exclusively. As such, product and service
upgrades are the primary remediation strategy which, along with testing, are the
major parts of the Corporation's Year 2000 project plan. The Corporation
previously completed an initial assessment of the Year 2000 issue, which was
performed by an independent third party. Based upon experience to date and
recently issued guidance from banking industry regulators and the SEC,
management continues to revisit and revise its Year 2000 project plans and
related cost estimates. Delivery commitments of Year 2000 ready products from
vendors and service providers have been integrated with the Corporation's Year
2000 project plan to ensure that all Mission Critical systems are tested and
implemented by the second quarter of 1999. While the Year 2000 related costs
have increased from initial estimates, management believes that the costs for
Year 2000 compliance are not material and, thus, will not have a significant
impact on the Corporation's results of operations, liquidity or capital
resources.
RECENT DEVELOPMENTS
On April 22, 1998, the Corporation announced the awarding of a 5-for-4 stock
split to be effected as a 25 percent stock dividend. The 5-for-4 stock split
effected in the form of a 25 percent stock dividend was paid on June 12, 1998,
to shareholders of record at the close of business on June 1, 1998. All share
data has been adjusted retroactively to reflect the stock split effected in the
form of a stock dividend. Any fractional shares resulting from the dividend were
paid in cash.
PENDING COMBINATIONS
On February 17, 1998 the Corporation announced the signing of a definitive
agreement to acquire Citizens Bankshares, Inc. ("Citizens"), parent company of
the $164 million Citizens Bank, N.A., with four banking locations in Northeast
Wisconsin. The stock-for-stock merger transaction is contingent upon approval of
regulatory authorities and the shareholders of Citizens. The transaction,
expected to be completed in the fourth quarter of 1998, will be accounted for
using the purchase method.
On October 1, 1998, the Corporation announced the signing of a definitive
agreement to acquire Windsor Bancshares, Inc. ("Windsor"), in a stock-for-stock
merger transaction. Windsor is a $190 million one bank holding company with
main office in Minneapolis, Minnesota. Subject to regulatory approval and
approval by the shareholders of Windsor, this transaction is expected to be
completed in the first quarter of 1999.
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Corporation adopted SFAS No. 131 on January 1, 1998, and required disclosures
will be included beginning with the Corporation's 1998 Form 10-K Annual Report.
The FASB has issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits," which is effective for fiscal years beginning
after December 15, 1997. This statement revises employers' disclosures about
pension and other post-retirement benefit plans. It does not change the
measurement of recognition of those plans. It standardizes the disclosure
requirements for pensions and other post-retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful. The
Corporation adopted SFAS No. 132 on January 1, 1998, and required disclosures
will be included beginning with the Corporation's 1998 Form 10-K Annual Report.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued by FASB in June 1998. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may
D-36
<PAGE>
elect to designate a derivative instrument as a hedge of exposures to changes in
fair values, cash flows, or foreign currencies. If the hedged exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately. The Corporation
anticipates that the adoption of SFAS No. 133 will not have a material impact in
the Corporation's financial statements.
D-37
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF ASSOCIATED BANC-CORP
AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1997,
1996 AND 1995:
Consolidated Statements of Financial Condition D-39
Consolidated Statements of Income D-40
Consolidated Statements of Changes in Stockholders' Equity D-41
Consolidated Statements of Cash Flows D-42
Notes to Consolidated Financial Statements D-43
Independent Auditors Reports D-68
CONSOLIDATED FINANCIAL STATEMENTS OF ASSOCIATED BANC-CORP
AND SUBSIDIARIES FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND 1997 (UNAUDITED):
Consolidated Statements of Financial Condition (Unaudited) D-70
Consolidated Statements of Income (Unaudited) D-71
Consolidated Statements of Cash Flows (Unaudited) D-72
Notes to Consolidated Financial Statements D-73
</TABLE>
D-38
<PAGE>
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------------------
(In Thousands Except Share Data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 288,021 $ 369,842
Interest-bearing deposits in other financial institutions 4,154 3,183
Federal funds sold and securities purchased under agreements to resell 11,511 27,977
Investment securities:
Held to maturity - at amortized cost
(Fair value of approximately $782,240 and $1,074,412 at
December 31, 1997 and 1996, respectively) 772,524 1,079,749
Available for sale - at fair value 2,167,694 1,674,189
Loans held for sale 114,001 42,490
Loans 7,076,576 6,658,357
Allowance for possible loan losses (92,731) (71,767)
- ----------------------------------------------------------------------------------------------------------------------
Loans, net 6,983,845 6,586,590
Premises and equipment 127,823 127,708
Other assets 221,866 211,655
- ----------------------------------------------------------------------------------------------------------------------
Total assets $10,691,439 $10,123,383
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 904,710 $ 804,020
Interest-bearing deposits 7,459,427 7,155,278
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 8,364,137 7,959,298
Short-term borrowings 1,337,008 1,201,393
Long-term borrowings 15,270 33,329
Accrued expenses and other liabilities 161,331 125,801
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 9,877,746 9,319,821
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities --- ---
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock (Par value $1.00 per share, authorized 750,000 shares,
no shares issued) --- ---
Common stock (Par value $0.01 per share, authorized 100,000,000
shares, issued 62,993,309 and 62,763,964 shares at
December 31, 1997 and 1996, respectively) 504 465
Surplus 218,072 230,810
Retained earnings 569,996 564,924
Net unrealized gain on securities available for sale, net of taxes 26,144 8,281
Less: Treasury stock at cost (23,618 shares in 1997 and
32,783 shares in 1996) (1,023) (918)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 813,693 803,562
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,691,439 $10,123,383
======================================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
D-39
<PAGE>
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
---------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $592,071 $563,699 $534,269
Interest and dividends on investment securities:
Taxable 184,231 156,967 151,575
Tax-exempt 9,164 8,827 7,584
Interest on deposits in other financial institutions 779 437 596
Interest on federal funds sold and securities purchased
under agreements to resell 999 1,267 2,426
Interest on trading account securities --- --- 408
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 787,244 731,197 696,858
- --------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 337,443 320,915 303,083
Interest on short-term borrowings 72,509 52,184 55,105
Interest on long-term borrowings 1,685 2,824 2,311
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 411,637 375,923 360,499
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 375,607 355,274 336,359
Provision for possible loan losses 31,668 13,695 14,029
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 343,939 341,579 322,330
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust service fees 28,764 25,185 22,243
Service charges on deposit accounts 27,909 26,004 23,861
Mortgage banking income 25,709 23,873 18,052
Loan fees 16,407 14,505 13,023
Retail commission income 15,446 12,757 10,760
Asset sale gains, net 852 12,520 428
Investment securities gains (losses), net (32,776) (10,678) 1,512
Other 13,665 12,679 15,110
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 95,976 116,845 104,989
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 133,656 126,154 115,837
Net occupancy expense 20,297 19,563 19,159
Data processing expense 16,900 15,905 15,068
Business development and advertising 15,936 14,754 11,120
Equipment rentals, depreciation and maintenance 12,600 12,033 11,433
Stationery and supplies 5,532 5,030 5,325
FDIC expense 3,284 9,675 13,799
Merger, integration and other one-time charges 51,622 33,005 6,458
Other 63,820 57,116 54,728
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 323,647 293,235 252,927
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 116,268 165,189 174,392
Income tax expense 63,909 57,487 62,381
- --------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 52,359 107,702 112,011
Extraordinary item, net of income taxes of $370 --- (686) ---
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 52,359 $107,016 $112,011
==========================================================================================================================
Earnings per share:
Basic:
Income before extraordinary item $ 0.83 $ 1.70 $ 1.82
Extraordinary item --- (.01) ---
Net income $ 0.83 $ 1.69 $ 1.82
Diluted:
Income before extraordinary item $ 0.82 $ 1.67 $ 1.79
Extraordinary item --- (.01) ---
Net Income $ 0.82 $ 1.66 $ 1.79
==========================================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
D-40
<PAGE>
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Common Stock on Securities
---------------- Retained Available Treasury
Shares Amount Surplus Earnings for Sale Stock
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994, as previously reported 14,531 $145 $159,086 $148,081 $ (3,986) $(4,043)
Adjustment to retroactively restate 1997 business
combinations accounted for as pooling of interests 27,850 278 75,214 261,949 (8,619) ---
--------------------------------------------------------------------------
Balance December 31, 1994, as restated 42,381 423 234,300 410,030 (12,605) (4,043)
--------------------------------------------------------------------------
Net income --- --- --- 112,011 --- ---
Cash dividends, $0.65 per share --- --- --- (16,924) --- ---
Cash dividends of pooled affiliates --- --- --- (14,156) --- ---
5-for-4 stock split effected in the form of a
stock dividend 3,153 32 --- (32) --- ---
Exercise of incentive stock options 509 5 2,610 --- --- 1,863
Payment on ESOP loan --- --- --- --- --- ---
Tax benefits of restricted shares and options --- --- 443 --- --- ---
Change in unrealized gain (loss) on securities
available for sale, net of related income taxes --- --- --- --- 12,693 ---
Reissuance of treasury stock in a business
combination (15) --- (478) --- --- 478
Purchase of treasury stock --- --- --- --- --- (2,085)
Pre-merger transactions of pooled company 44 --- 822 --- --- ---
--------------------------------------------------------------------------
Balance, December 31, 1995 46,072 460 237,697 490,929 88 (3,787)
--------------------------------------------------------------------------
Net income --- --- --- 107,016 --- ---
Cash dividends, $0.76 per share --- --- --- (20,278) --- ---
Cash dividends of pooled affiliates --- --- --- (19,309) --- ---
Issuance of stock in connection with business
combinations 868 9 9,800 6,566 8 ---
Exercise of incentive stock options 303 3 966 --- --- 2,208
Tax benefits of restricted shares and options --- --- 564 --- --- ---
Retirement of stock previously issued in
connection with a business combination (212) (2) (3,760) --- --- 3,762
Payment on ESOP loan --- --- --- --- --- ---
Change in unrealized gain (loss) on securities
available for sale, net of related income taxes --- --- --- --- 8,185 ---
Purchase of treasury stock --- --- --- --- --- (3,101)
Pre-merger transactions of pooled company (496) (5) (14,457) --- --- ---
--------------------------------------------------------------------------
Balance, December 31, 1996 46,535 465 230,810 564,924 8,281 (918)
--------------------------------------------------------------------------
Net income --- --- --- 52,359 --- ---
Cash dividends, $0.89 per share --- --- --- (16,983) --- ---
Cash dividends of pooled affiliates --- --- --- (32,345) --- ---
6-for-5 stock split effected in the form of a
stock dividend 3,746 37 (37) --- --- ---
Issuance of stock in connection with business
combinations 345 4 3,778 4,218 64 ---
Exercise of incentive stock options 382 4 3,847 (2,177) --- 3,494
Tax benefits of restricted shares and options --- --- 716 --- --- ---
Change in unrealized gain (loss) on securities
available for sale, net of related income taxes --- --- --- --- 17,799 ---
Purchase of treasury stock --- --- --- --- --- (3,599)
Pre-merger transactions of pooled company (613) (6) (21,042) --- --- ---
--------------------------------------------------------------------------
Balance, December 31, 1997, prior to subsequent 50,395 504 218,072 569,996 26,144 (1,023)
event
--------------------------------------------------------------------------
Subsequent Event (Note 21) 12,598 126 (126) --- --- ---
--------------------------------------------------------------------------
Balance, December 31, 1997 62,993 $630 $217,946 $569,996 $ 26,144 $(1,023)
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
Common Stock
Purchased
by ESOP Total
<S> <C> <C>
Balance, December 31, 1994, as previously reported $ --- $299,283
Adjustment to retroactively restate 1997 business
combinations accounted for as pooling of interests (1,608) 327,214
-----------------------------
Balance December 31, 1994, as restated (1,608) 626,497
-----------------------------
Net income --- 112,011
Cash dividends, $0.65 per share --- (16,924)
Cash dividends of pooled affiliates --- (14,156)
5-for-4 stock split effected in the form of a
stock dividend --- ---
Exercise of incentive stock options --- 4,478
Payment on ESOP loan 790 790
Tax benefits of restricted shares and options --- 443
Change in unrealized gain (loss) on securities
available for sale, net of related income taxes --- 12,693
Reissuance of treasury stock in a business
combination --- ---
Purchase of treasury stock --- (2,085)
Pre-merger transactions of pooled company 547 1,369
-----------------------------
Balance, December 31, 1995 (271) 725,116
-----------------------------
Net income --- 107,016
Cash dividends, $0.76 per share --- (20,278)
Cash dividends of pooled affiliates --- (19,309)
Issuance of stock in connection with business
combinations --- 16,383
Exercise of incentive stock options --- 3,177
Tax benefits of restricted shares and options --- 564
Retirement of stock previously issued in
connection with a business combination --- ---
Payment on ESOP loan 271 271
Change in unrealized gain (loss) on securities
available for sale, net of related income taxes --- 8,185
Purchase of treasury stock (3,101)
Pre-merger transactions of pooled company --- (14,462)
-----------------------------
Balance, December 31, 1996 --- 803,562
-----------------------------
Net income --- 52,359
Cash dividends, $0.89 per share --- (16,983)
Cash dividends of pooled affiliates --- (32,345)
6-for-5 stock split effected in the form of a
stock dividend --- ---
Issuance of stock in connection with business
combinations --- 8,064
Exercise of incentive stock options --- 5,168
Tax benefits of restricted shares and options --- 716
Change in unrealized gain (loss) on securities
available for sale, net of related income taxes --- 17,799
Purchase of treasury stock --- (3,599)
Pre-merger transactions of pooled company --- (21,048)
-----------------------------
Balance, December 31, 1997, prior to subsequent --- 813,693
event
-----------------------------
Subsequent Event (Note 21) --- ---
-----------------------------
Balance, December 31, 1997 --- $813,693
=============================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
D-41
<PAGE>
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 52,359 $ 107,016 $ 112,011
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 31,668 13,695 14,029
Provision for losses on other real estate owned --- (467) 502
Depreciation and amortization 14,418 14,415 13,075
Amortization of mortgage servicing rights 6,472 4,237 2,537
Amortization of intangibles 6,217 11,983 8,306
Deferred income taxes (20,953) (4,342) (6,174)
Net amortization (accretion) of premiums and discounts (1,499) (9,116) 1,091
(Gain) loss on sales of securities, net 32,776 10,678 (1,512)
Decrease (increase) in interest receivable and other assets (1,663) 8,369 (9,548)
Increase in interest payable and other liabilities 33,597 7,842 16,389
Amortization (accretion) of loan fees and costs (522) 151 (224)
Purchase of trading account securities --- (5) (1,294)
Proceeds from sales of trading account securities --- 37 1,332
Net (increase) decrease in loans held for sale 5,810 29,586 (17,112)
Gain on sales of loans held for sale, net (8,981) (6,976) (3,390)
Gain on other asset sale, net (852) (12,520) (428)
Other, net --- (417) 165
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 148,847 $ 174,166 $ 129,755
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net decrease in federal funds sold and securities purchased under agreements to
resell $ 20,891 $ 31,698 $ 12,535
Net decrease (increase) in interest-bearing deposits in other financial institutions (971) 32,398 (11,391)
Purchases of held to maturity securities (203,759) (192,744) (205,029)
Purchases of available for sale securities (316,112) (1,156,929) (132,740)
Proceeds from sales of available for sale securities 71,178 434,145 20,946
Maturities of held to maturity securities 258,034 351,966 408,376
Maturities of available for sale securities 29,260 362,536 149,199
Net increase in loans (466,093) (418,676) (427,980)
Proceeds from sales of other real estate owned 7,177 9,262 9,440
Purchases of premises and equipment, net of disposals (11,805) (27,528) (7,737)
Mortgage servicing rights additions (9,801) (8,867) (8,341)
Net cash received (paid) in acquisition of subsidiary 5,051 461 (480)
Proceeds from sale of other assets 343 62,573 182
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities $(616,607) $ (519,705) $(193,020)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits $ 337,191 $ 163,736 $ 229,058
Net increase (decrease) in short-term borrowings 117,555 264,186 (40,723)
Cash dividends (49,328) (39,587) (31,080)
Repayment of long-term borrowings --- (2,644) (80,081)
Proceeds from issuance of long-term borrowings --- 6,000 15,000
Proceeds from exercise of stock options 5,168 3,177 4,478
Proceeds from vesting of employee benefit plans --- 271 1,929
Stock purchases by pooled company (21,048) (14,447) ---
Purchase of treasury stock (3,599) (3,101) (2,085)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 385,939 $ 377,591 $ 96,496
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (81,821) 32,052 33,231
Cash and due from banks at beginning of year 369,842 337,790 304,559
- ------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 288,021 $ 369,842 $ 337,790
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 409,797 $ 375,318 $ 349,899
Income taxes 79,440 59,661 67,741
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate 5,263 9,135 7,409
Loans made in connection with the disposition of other real estate 240 223 177
Mortgage loans securitized and transferred to securities available for sale --- 161,087 ---
Securities transferred from held to maturity to available for sale 251,946 --- 412,771
Mortgage loans transferred to loans held for sale 68,340 27,068 15,467
Acquisitions:
Fair value of assets acquired, including cash and cash equivalents --- 40,715 3,670
Value ascribed to intangibles --- 1,900 1,462
Liabilities assumed --- 34,772 5,132
==============================================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
D-42
<PAGE>
ASSOCIATED BANC-CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
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.
Throughout the notes to Consolidated Financial Statements, references are made
to FFC (First Financial Corporation) and its wholly owned subsidiary FFB (First
Financial Bank).
BUSINESS
The Corporation provides a full range of banking and related financial services
to individual and corporate customers through its network of bank and nonbank
affiliates in Wisconsin, Illinois, Nevada, Arizona, California and Missouri. 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.
The Consolidated Financial Statements have been restated to include companies
acquired under pooling of interests when material. Certain amounts in the 1995
and 1996 consolidated financial statements have been reclassified to conform
with the 1997 presentation.
In preparing the Consolidated 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 include the
determination of the allowance for possible loan losses and the valuation of
investments and mortgage servicing rights.
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. The amortized cost of debt securities classified as
held to maturity or available for sale is adjusted for amortization of premiums
and accretion of discounts to earlier of call date or maturity, or in the case
of mortgage-related securities, over the estimated life of the security. Such
amortization and accretion is included in interest income from the related
security. 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 and declines in value judged to be other than temporary are included in
investment securities gains (losses), net in the consolidated statements of
income. The cost of securities sold is based on the specific identification
method. Any security for which there has been other than temporary impairment of
value is written down to its estimated market value.
In determining if declines in value are other than temporary, management
estimates future cash flows to be generated by pools of loans underlying the
mortgage-related securities. Included in this evaluation are such factors as
(i) estimated loan prepayment rates, (ii) a review of delinquencies,
foreclosures, repossessions and recovery rates relative to the underlying
mortgage loans collateralizing each security, (iii) the level of available
subordination or
D-43
<PAGE>
other credit enhancements, (iv) an assessment of the servicer of the underlying
mortgage portfolio and (v) the rating assigned to each security by independent
national rating agencies.
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 nonaccrual 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 nonaccrual 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 collectable. 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. Nonrefundable fees and direct origination costs associated
with installment loans are 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 sale are also
not accounted for as an adjustment of yield. All other loan fees are included in
other income.
LOANS HELD FOR SALE
Loans held for sale are recorded at the lower of cost or market as determined on
an aggregate basis and generally consist of current production of certain fixed-
rate first mortgage loans. 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. 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 loans, general economic
conditions, deterioration in credit concentration or pledged collateral,
historical loss experience, and trends in portfolio volume, maturity,
composition, delinquencies and nonaccruals. Estimated credit losses related to
off balance sheet arrangements, if any, are included in accrued expenses and
other liabilities.
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 commercial
real estate loans that have a nonaccrual status or have had their terms
restructured meet this definition. Large groups of homogeneous loans, such as
mortgage and installment loans and leases, are collectively evaluated for
impairment. 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 collectable.
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
D-44
<PAGE>
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 expensed.
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 straight-line and accelerated methods.
Goodwill is amortized to operating expense over periods of 10 to 40 years. Core
deposit intangibles are amortized to expense over periods of 7 to 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.
During 1997 and 1996, the Corporation recorded additional goodwill and deposit
base intangible amortization of $1.6 million and $4.2 million, respectively.
Goodwill outstanding, net of accumulated amortization, at December 31, 1997 and
1996 was $22.7 million and $26.7 million, respectively. Deposit base
intangibles outstanding, net of accumulated amortization, at December 31, 1997
and 1996 was $11.7 million and $15.6 million, respectively.
MORTGAGE SERVICING RIGHTS
The Corporation recognizes as separate assets the rights to service mortgage
loans for others, however those rights are acquired. Capitalized mortgage
servicing rights are assessed 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. 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
D-45
<PAGE>
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.
Effective January 1, 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 125 requires
that after a transfer of financial assets, the Corporation must recognize the
financial and servicing assets controlled and liabilities incurred, and
derecognize financial assets and liabilities in which control is surrendered or
debt is extinguished. In such cases, servicing assets are determined based on
estimated future revenues from contractually specified servicing fees and other
ancillary revenues that are expected to compensate the Corporation for
performing the servicing. The adoption of SFAS No. 125 has not had a material
effect on the Corporation's consolidated financial statements.
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.
DERIVATIVE FINANCIAL INSTRUMENTS
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 interest
income over the remaining life of the asset related to the terminated agreement.
Interest rate futures contracts are commitments to either purchase or sell a
financial instrument at a specified price on an agreed-upon future date. These
contracts may be settled either in cash or by delivery of the underlying
financial instruments. Positions which are designated and effectively hedge
specific securities are correlated based on certain duration and convexity
parameters. Realized gains and losses on positions used in the management of
specific asset positions are deferred and amortized over the terms of the item
hedged as adjustments to interest income. Gains or losses from terminated
contracts are recognized as an adjustment to the hedged asset's recognized gain
or loss, included in investment security sales gains or losses in noninterest
income.
STOCK OPTION PLAN
The Corporation accounts for its stock option and equity awards in accordance
with Accounting Principles and Board Opinion No. 25 (APB Opinion No. 25) and
related interpretations. The Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" in 1996. The Corporation has included in Note 11 the
impact of the fair value of employee stock-based compensation plans on net
income and earnings per share on a pro forma basis for awards granted since
January 1, 1995, pursuant to SFAS No. 123.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents are considered to include cash and due from banks.
D-46
<PAGE>
PER SHARE COMPUTATIONS
The Corporation adopted SFAS No. 128, "Earnings Per Share," which became
effective at year end 1997 for all periods presented. Under the provisions of
SFAS No. 128, primary and fully diluted earnings per share were replaced with
basic and diluted earnings per share. Basic earnings per share is calculated by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding. Diluted earnings per share is calculated
by dividing net income by the weighted average number of shares adjusted for the
dilutive effect of outstanding stock options.
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, the 6-for-5 stock split, effected as a 20% stock
dividend, paid to shareholders on March 17, 1997, and the 5-for-4 stock split,
effected as a 25% stock dividend, payable to shareholders on June 12, 1998 (Note
21). The Corporation issued 500,995 shares of common stock to a wholly owned
subsidiary as part of the 1996 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 were they adjusted for the 1997 6-for-5
stock split or the 1998 5-for-4 stock split.
NOTE 2 BUSINESS COMBINATIONS:
The following table summarizes completed transactions during the three years
ended December 31, 1997:
<TABLE>
<CAPTION>
Consideration Paid
-----------------------------
Shares of
Date Method of Cash Common Total Assets Intangibles
Name of Acquired Company Acquired Accounting (In Millions) Stock(A) (In Millions) (In Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FirstRock Bancorp, Inc. (C)(F) 2/95 Pooling of $--- 5,219,226 $ 377 $---
Rockford, Illinois interests
Great Northern Mortgage Company 7/95 Purchase 1.2 --- (B) 1.5
Rolling Meadows, Illinois
GN Bancorp, Inc. (C) 8/95 Pooling of --- 1,121,439 130 ---
Chicago, Illinois interests
SBL Capital Bank Shares, Inc. (D) 3/96 Pooling of --- 499,435 68 ---
Lodi, Wisconsin interests
Greater Columbia Bank Shares, Inc. (C) 4/96 Pooling of --- 1,451,451 211 ---
Portage, Wisconsin interests
F&M Bankshares of Reedsburg, Inc. 7/96 Pooling of --- 802,485 139 ---
Reedsburg, Wisconsin (D)(E) interests
Mid-America National Bancorp, Inc. 7/96 Purchase 7.8 --- 39 1.9
Chicago, Illinois
Centra Financial, Inc. (D) 2/97 Pooling of --- 517,956 76 ---
West Allis, Wisconsin interests
First Financial Corporation (C) 10/97 Pooling of 0.1 34,794,911 6,005 ---
Stevens Point, Wisconsin interests
</TABLE>
(A) Share amounts have been restated to reflect the 6-for-5 stock split to be
effected as a 20% stock dividend paid on March 17, 1997, and to reflect the
5-for-4 stock split to be effected as a 25% stock dividend paid on June 12,
1998.
(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) Acquired by FFC prior to its merger with the Corporation.
NOTE 3 MERGER, INTEGRATION AND OTHER ONE-TIME CHARGES:
The Corporation recorded merger, integration and other one-time charges of $51.6
million, $33.0 million and $6.5 million in 1997, 1996 and 1995, respectively.
Merger, integration and other one-time charges of $51.6 million recorded in 1997
were associated with the acquisition of FFC. One-time charges in 1996 consist
of $28.8 million
D-47
<PAGE>
associated with the recapitalization of the Savings Association Insurance Fund
(SAIF) and $4.2 million relating to a change in accounting for the amortization
of goodwill and other intangible assets. Merger and integration charges recorded
in 1995 relate to the acquisition of FirstRock Bancorp, Inc. by FFC. The
components of the charges are shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
(In Thousands)
Employee/director severance and contract costs $12,598 $ --- $3,813
SAIF recapitalization charge --- 28,767 ---
Costs associated with duplicative facilities, computer systems, 20,181 --- 740
software and integration
Investment banking, legal and accounting fees 11,151 --- 1,035
Change in accounting for the amortization of goodwill
and other intangible assets --- 4,238 ---
Other 7,692 --- 870
-------------------------------
Total merger, integration and other one-time charges $51,622 $33,005 $6,458
===============================
</TABLE>
The pretax impact of merger, integration and other one-time charges on basic
earnings per share was $0.82, $0.52 and $0.10 in 1997, 1996 and 1995
respectively. The pretax effect of these charges on diluted earnings per share
was $0.81 in 1997, $0.51 in 1996, and $0.10 in 1995.
The 1997 merger, integration and other one-time charges of $51.6 million
consisted of $22.5 million in cash expenditures made in 1997, $4.5 million in
noncash asset write-downs and $24.6 million in anticipated cash expenditures
which the Corporation expects will be paid in 1998.
In addition, as a result of the merger with FFC, the Corporation also recorded
an additional provision for possible loan losses of $16.8 million in order to
conform with the policies, practices and procedures of the Corporation, and as
discussed in Note 5, Investment Securities, a $35.3 million pre-tax charge for
other than temporary impairment of value in the fourth quarter of 1997.
NOTE 4 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 $57.4 million at December 31,
1997.
NOTE 5 INVESTMENT SECURITIES:
The amortized cost and fair values of securities held to maturity at December
31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 498 $ 2 $ --- $ 500
Federal agency securities 146,259 896 (337) 146,818
Mortgage-related securities 361,298 6,540 (1,886) 365,952
Obligations of state and political subdivisions 183,286 3,038 (24) 186,300
Other securities (debt) 81,183 1,491 (4) 82,670
----------------------------------------------------
Total $772,524 $11,967 $(2,251) $782,240
====================================================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 4,204 $ 9 $ (10) $ 4,203
Federal agency securities 143,927 922 (928) 143,921
Mortgage-related securities 673,990 6,676 (12,298) 668,368
Obligations of state and political subdivisions 195,860 1,326 (1,621) 195,565
Other securities (debt) 61,768 674 (87) 62,355
-----------------------------------------------------
Total $1,079,749 $9,607 $(14,944) $1,074,412
=====================================================
</TABLE>
D-48
<PAGE>
The amortized cost and fair values of securities available for sale at December
31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 109,200 $ 737 $ (96) $ 109,841
Federal agency securities 324,708 7,558 (1,724) 330,542
Mortgage-related securities 1,536,134 21,848 (379) 1,557,603
Obligations of state and political subdivisions 14,312 229 (405) 14,136
Other securities (debt and equity) 142,081 14,178 (687) 155,572
-----------------------------------------------------
Total $2,126,435 $44,550 $(3,291) $2,167,694
=====================================================
1996
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-----------------------------------------------------
(In Thousands)
U. S. Treasury securities $ 149,314 $ 655 $ (233) $ 149,736
Federal agency securities 326,049 2,156 (828) 327,377
Mortgage-related securities 1,057,992 5,667 (4,058) 1,059,601
Other securities (debt and equity) 127,787 10,446 (758) 137,475
-----------------------------------------------------
Total $1,661,142 $18,924 $(5,877) $1,674,189
=====================================================
</TABLE>
The amortized cost and fair values of securities held to maturity and securities
available for sale at December 31, 1997, 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.
<TABLE>
<CAPTION>
December 31, 1997
Investment Securities Held to Maturity Amortized Cost Fair Value
------------------------------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 89,962 $ 89,990
Due after one year through five years 226,931 230,130
Due after five years through ten years 93,822 95,636
Due after ten years 511 532
------------------------------
Total (excluding mortgage-related securities) 411,226 416,288
------------------------------
Mortgage-related securities 361,298 365,952
------------------------------
Total Investment Securities Held to Maturity $ 772,524 $ 782,240
==============================
Investment Securities Available for Sale Amortized Cost Fair Value
------------------------------
(In Thousands)
Due in one year or less $ 249,128 $ 262,597
Due after one year through five years 287,923 289,219
Due after five years through ten years 20,227 20,169
Due after ten years 33,023 38,106
------------------------------
Total (excluding mortgage-related securities) 590,301 610,091
------------------------------
Mortgage-related securities 1,536,134 1,557,603
------------------------------
Total Investment Securities Available for Sale $2,126,435 $2,167,694
==============================
</TABLE>
Total proceeds and gross realized gains and losses from sale of securities
available for sale for each of the three years ended December 31 were:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------
(In Thousands)
<S> <C> <C> <C>
Proceeds $71,178 $434,145 $20,946
Gross gains 2,462 6,875 1,311
Gross losses --- 17,588 5
================================
</TABLE>
Concurrent with the consummation of the merger with FFC, the Corporation
transferred all nonagency mortgage-related securities and an agency security,
with a combined amortized cost of $251.9 million from securities held to
maturity to securities available for sale. These mortgage-related securities
were transferred to maintain the existing interest rate risk position and credit
risk policy of the Corporation.
Concurrent with the transfer, the Corporation recorded a $32.5 million pre-tax
charge to earnings relative to one agency security with an amortized cost of
$130.6 million. Management recorded this other than temporary impairment of
value in the fourth quarter of 1997. This security is highly complex, comprised
of multiple cash
D-49
<PAGE>
flows predominated by an inverse floater tied to libor for which stress tests
indicate that the cash flows are volatile in higher interest rate environments.
The estimated fair value of this security at the time of the other than
temporary impairment charge was based on quoted prices of instruments with
similar characteristics and cash flow valuation techniques.
Additionally, the Corporation recorded a $2.8 million pre-tax charge, on other
nonagency mortgage-related securities that were transferred to available for
sale, with an amortized cost of $18.9 million to reflect an other than temporary
impairment of value in the fourth quarter of 1997. These securities were
subsequently sold with no additional loss in January 1998.
The net unrealized gain on the nonagency mortgage-related securities transferred
to available for sale from held to maturity in 1997 that were not deemed to have
an other than temporary impairment of value was $588,000, which was credited to
stockholders' equity, net of income tax of $206,000.
On November 25, 1996, the Corporation 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.
Securities with an amortized cost of approximately $836 million at December 31,
1997 and $668 million at December 31, 1996 were pledged to secure certain
deposits, Federal Home Loan Bank advances, or for other purposes as required or
permitted by law.
NOTE 6 LOANS:
Loans at December 31 are summarized below:
<TABLE>
<CAPTION>
1997 1996
--------------------------
(In Thousands)
<S> <C> <C>
Commercial and financial $ 951,396 $ 807,503
Agricultural 35,443 33,642
Real estate - construction 335,978 235,478
Real estate - mortgage 4,946,263 4,757,410
Installment loans to individuals 793,424 813,875
Lease financing 14,072 10,449
--------------------------
Total $7,076,576 $6,658,357
==========================
</TABLE>
A summary of the changes in the allowance for possible loan losses for the years
indicated is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 71,767 $ 68,560 $ 65,774
Balance related to acquisitions 728 3,511 ---
Charge-offs (15,049) (17,616) (15,872)
Recoveries 3,617 3,617 4,629
-----------------------------------
Net charge-offs (11,432) (13,999) (11,243)
Provision charged to expense 31,668 13,695 14,029
-----------------------------------
Balance at end of year $ 92,731 $ 71,767 $ 68,560
===================================
</TABLE>
Nonaccrual loans totaled $32.4 million and $32.3 million at December 31, 1997
and 1996, respectively.
Management has determined that commercial loans and commercial real estate loans
that have a nonaccrual status or have had their terms restructured are defined
as impaired loans.
D-50
<PAGE>
The following table presents data on impaired loans at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------
(In Thousands)
<S> <C> <C>
Impaired loans for which an allowance has been provided $ 2,252 $ 1,920
Impaired loans for which no allowance has been provided 10,652 10,558
-------------------
Total loans determined to be impaired $12,904 $12,478
===================
Required allowance $ 1,206 $ 1,001
===================
1997 1996 1995
-----------------------------
(In Thousands)
For the years ended December 31:
Average recorded investment in impaired loans $13,103 $12,280 $10,668
=============================
Cash basis interest income recognized from impaired loans $ 650 $ 594 $ 695
=============================
</TABLE>
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 1997 is as follows:
<TABLE>
<CAPTION>
1997
--------------
(In Thousands)
<S> <C>
Balance at beginning of year $ 73,945
New loans 31,779
Repayments (31,234)
Other changes (1,629)
--------------
Balance at end of year $ 72,861
==============
</TABLE>
The other changes primarily consisted of: loans to companies where an
individual director had a related interest, but as of December 31, 1997, that
individual was no longer a director; loans to directors, or their affiliated
companies, newly elected in 1997; the beginning-of-year balance of loans to
directors, or their affiliated companies, from an acquisition accounted for as
pooling of interests, but not restated.
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, primarily in Wisconsin and 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, 1997, no
concentrations existed in the Corporation's loan portfolio in excess of 10% of
total loans, or $708 million.
Other real estate owned, which is included in other assets, totaled $2.1 million
and $1.9 million at December 31, 1997 and 1996, respectively.
D-51
<PAGE>
NOTE 7 LOAN SERVICING RIGHTS:
A summary of changes in the balance of mortgage servicing rights is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $20,238 $15,634 $ 9,891
Additions 9,801 8,867 8,341
Amortization (6,472) (4,237) (2,598)
Sales of servicing rights --- --- ---
Valuation allowance (1,032) (26) ---
----------------------------------
Balance at end of year $22,535 $20,238 $15,634
==================================
</TABLE>
At December 31, 1997, the Corporation was servicing 1- to 4-family residential
mortgage loans owned by other investors with balances totaling $4.97 billion
compared with $4.80 billion and $4.37 billion at December 31, 1996 and 1995,
respectively.
NOTE 8 PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------
(In Thousands)
<S> <C> <C>
Premises $ 120,570 $ 114,210
Land and land improvements 26,180 25,358
Furniture and equipment 102,193 99,022
Leasehold improvements 11,476 11,717
Less: Accumulated depreciation and amortization (132,596) (122,599)
-------------------------
Total $ 127,823 $ 127,708
=========================
</TABLE>
Depreciation and amortization of premises and equipment totaled $14.2 million in
1997, $13.2 million in 1996, and $12.8 million in 1995.
Third parties provide data processing and management information system services
to the Corporation pursuant to agreements for information technology services.
As of December 31, 1997, the Corporation was engaged in the renegotiations of
agreements with its current primary providers. The current agreements are in
effect through August 1, 2001 and February 28, 1999. The agreements provide for
the delivery of certain information technology services over the life of the
agreements. The agreements call 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 agreements, while operational costs are
expenses as incurred. Operational costs are subject to annual adjustment,
indexed to changes in the Consumer Price Index (CPI). The facilities housing
the data processing operations are owned by the Corporation, although remote
processing locations are provided by vendors. Certain data processing and other
related equipment is leased on a month-to-month basis. The costs associated with
these contracts are included in the minimum annual rental and commitment table
shown below.
The Corporation and certain subsidiaries are obligated under a number of
noncancelable 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.
D-52
<PAGE>
The approximate minimum annual rentals and commitments under these noncancelable
agreements and leases with remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C>
1998 $12,856
1999 9,030
2000 8,685
2001 5,826
2002 2,229
Thereafter 17,650
- --------------------------------------------------------------------------------
Total $56,276
================================================================================
</TABLE>
Total rental and service expense under leases and other agreements, net of
sublease income, totaled $21.6 million in 1997, $21.1 million in 1996, and $20.1
million in 1995.
NOTE 9 DEPOSITS:
The distribution of deposits at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------
(In Thousands)
<S> <C> <C>
Noninterest-bearing demand deposits $ 904,710 $ 804,020
Interest-bearing demand deposits 736,540 719,682
Savings deposits 1,012,050 1,046,604
Money market deposits 1,014,365 834,202
Time deposits 4,696,472 4,554,790
--------------------------
Total deposits $8,364,137 $7,959,298
==========================
</TABLE>
Time deposits of $100,000 or more were $779.9 million and $765.2 million at
December 31, 1997 and 1996, respectively. Aggregate annual maturities of
certificate accounts at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Matures During Year End
December 31, (In Thousands)
- --------------------------------------------------------------------------------
<S> <C>
1998 $3,392,741
1999 1,050,804
2000 184,385
2001 39,921
2002 25,837
Thereafter 2,784
- --------------------------------------------------------------------------------
Total $4,696,472
================================================================================
</TABLE>
NOTE 10 SHORT-TERM BORROWINGS:
Short-term borrowings at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------
(In Thousands)
<S> <C> <C>
Federal funds purchased and securities sold under agreements to repurchase $ 712,250 $ 666,030
Federal Home Loan Bank advances 525,317 451,380
Notes payable to banks 87,139 68,937
Commercial paper 1,250 2,172
Current maturities of long-term borrowings --- 3,067
Other borrowed funds 11,052 9,807
--------------------------
Total $1,337,008 $1,201,393
==========================
</TABLE>
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, 1997, the
Corporation's parent company had $120 million of established lines of credit
with various nonaffiliated banks, of which $87.1 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.
D-53
<PAGE>
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 $1.1 billion and $1.30
billion were maintained as collateral to secure Federal Home Loan Bank advances
at December 31, 1997, and December 31, 1996, respectively. In addition, at
December 31, 1997, an affiliate bank maintained as collateral to secure Federal
Home Loan Bank advances, $12 million of mortgage-related securities.
Included in short-term Federal Home Loan Bank advances are callable notes that
have original maturities exceeding one year. However, these notes have one-year
call premiums, which the Corporation expects to be called.
NOTE 11 LONG-TERM BORROWINGS:
Long-term borrowings at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------
(In Thousands)
Parent company:
<S> <C> <C>
8.6% senior unsecured notes $ --- $ 400
9.35% subordinated capital note --- 2,667
Subsidiaries:
Federal Home Loan Bank, 4.84% to 7.63% maturing in 1999 through 2004 5,882 21,698
Industrial development revenue bonds, 6.40% to 7.25% 5,900 6,015
Collateralized mortgage obligations 3,488 5,616
Less: Current maturities of long-term borrowings --- (3,067)
--------------------
Total $15,270 $33,329
====================
</TABLE>
The table below summarizes the maturities of the Corporation's long-term
borrowings:
<TABLE>
<CAPTION>
Year (In Thousands)
================================================================================
<S> <C>
1998 $ ---
1999 4,010
2000 2,090
2001 735
2002 140
Thereafter 8,295
- --------------------------------------------------------------------------------
Total 15,270
Current maturities of long-term borrowings ---
- --------------------------------------------------------------------------------
Total long-term borrowings $15,270
================================================================================
</TABLE>
The industrial revenue bonds are payable in seven annual installments ranging
from $120,000 to $150,000 with additional payments of $1,910,000 and $3,320,000
due October 1, 2012 and 2021, respectively. Interest is payable semi-annually.
The bonds were used to refinance an apartment project which was previously sold.
The bonds are collateralized by mortgage-backed securities with a carrying value
and fair value of $8,093,000 and $8,302,000, respectively, at December 31, 1997.
FFB has a loan receivable from the buyer of $5,669,000 at December 31, 1997,
which is secured by a first mortgage on the apartment project.
UFS Capital Corporation and FFS Funding Corporation, wholly-owned finance
subsidiaries of FFB, have issued the collateralized mortgage obligations.
Principal repayments are scheduled in varying amounts through January, 2003. The
obligations are collateralized by mortgage-backed securities held by UFS Capital
Corporation with a carrying value of $6,847,000, and a fair value of $7,088,000
at December 31, 1997.
In January 1996, FFC redeemed all of its outstanding 8% subordinated notes due
November 1999, which aggregated $54,925,000 at the date of redemption. The
after-tax cost of $686,000 associated with the redemption has been reported as
an extraordinary charge in 1996.
D-54
<PAGE>
NOTE 12 STOCKHOLDERS' EQUITY:
On March 17, 1997, the Corporation distributed 3.7 million shares of common
stock in connection with a 6-for-5 stock split effected in the form of a 20%
stock dividend. Additionally, on October 29, 1997, the Corporation issued 27.8
million shares in connection with the merger with FFC. On June 12, 1998, the
Corporation issued 12.7 million shares in connection with a 5-for-4 stock split
effected in the form of a 25% stock dividend (See Note 21).
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.
At December 31, 1997, subsidiary net assets equaled $746.1 million, of which
approximately $131.0 million could be transferred to the Corporation in the form
of cash dividends without prior regulatory approval, subject to the capital
needs of each subsidiary.
The Corporation has an Incentive Stock Option Plan that 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. As of December 31, 1997, 13,884 shares remain available for
granting. No options have been granted from this plan since 1985.
In January 1997, the Board of Directors, with subsequent approval of the
Corporation's shareholders approved an amendment, increasing the number of
shares available to be issued by an additional 900,000 shares, to the Restated
Long-Term Incentive Stock Plan ("Stock Plan"). The Stock Plan was adopted by
the Board of Directors and originally approved by shareholders in 1987 and
amended in 1994. Options are generally exercisable up to 10 years from the date
of grant and vest over two to three years. As of December 31, 1997, 1,081,598
shares remain available for grants.
The stock incentive plans of acquired companies were terminated at each
respective merger date. Option holders under such plans received the
Corporation's common stock, or options to buy the Corporation's common stock,
based on the conversion terms of the various merger agreements. The historical
option information presented below has been restated to reflect the options
originally granted under the acquired companies' plans.
<TABLE>
<CAPTION>
Weighted Average
Options Outstanding Exercise Price Exercisable
--------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1994 3,162,568 $2.59 - $17.46 1,582,195
Granted 409,866 13.18 - 19.34 155,844
Exercised (799,917) 3.23 - 19.34 ---
Forfeited (23,677) 15.42 - 19.34 ---
--------------------------------------------------------
Balance, December 31, 1995 2,748,840 $2.59 - $19.34 1,738,039
--------------------------------------------------------
Granted 454,830 17.36 - 24.58 83,554
Exercised (479,469) 2.59 - 19.34 ---
Forfeited (28,862) 8.36 - 24.58 ---
--------------------------------------------------------
Balance, December 31, 1996 2,695,339 $2.59 - $24.58 1,821,593
--------------------------------------------------------
Granted 317,213 28.17 - 32.58 ---
Exercised (608,378) 2.71 - 24.58 ---
Forfeited (8,055) 12.34 - 28.17 ---
--------------------------------------------------------
Balance, December 31, 1997 2,396,119 $2.59 - $32.58 1,821,593
========================================================
</TABLE>
Share and price information has been adjusted to reflect the March 17, 1997, 6-
for-5 stock split effected as a 20% stock dividend and the June 12, 1998, 5-for-
4 stock split effected as a 25% stock dividend (See Note 21).
The following table summarizes information about the Corporation's stock
option's outstanding at December 31, 1997:
D-55
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Options Weighted Average Remaining Grants Weighted Average
Outstanding Exercise Price Life (Years) Exercisable Exercise Price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Range of Exercise Price:
$2.59 - $3.50 81,596 $ 2.81 2.51 81,596 $ 2.81
$4.10 - $5.34 66,954 5.14 4.15 66,954 5.14
$6.70 - $8.36 797,423 7.99 4.34 797,423 7.99
$11.40 - $17.09 460,830 15.95 5.66 454,258 15.99
$17.36 - $24.58 674,355 20.70 7.25 421,362 19.50
Greater than $28.17 314,961 28.25 9.09 --- ---
---------------------------------------------------------------------------------
TOTAL 2,396,119 $15.50 5.97 1,821,593 $12.31
=================================================================================
</TABLE>
The Corporation applies APB Opinion No. 25 in accounting for the Stock Plan and,
accordingly, compensation cost based on fair value at grant date has not been
recognized for its stock options in the consolidated financial statements during
the three years ended December 31, 1997. Had the Corporation determined the
compensation cost based on the fair value at 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:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1997 1996 1995
---------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net Income As Reported $52,359 $107,016 $112,011
Pro Forma $51,179 $106,293 $111,551
Basic Net Income Per Share As Reported $ 0.83 $ 1.69 $ 1.82
Pro Forma $ 0.81 $ 1.68 $ 1.81
Diluted Net Income Per Share As Reported $ 0.82 $ 1.66 $ 1.79
Pro Forma $ 0.80 $ 1.65 $ 1.78
</TABLE>
Pro Forma net income reflects only options granted in 1997, 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 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
estimating the fair value for options granted in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Dividend yield 2.10% 3.00% 2.70%
Risk free interest rate 6.47% 5.46% 7.65%
Weighted average expected life 7 yrs. 7 yrs. 7 yrs.
Expected volatility 19.64% 20.49% 21.54%
</TABLE>
The weighted average per share fair values of options granted in 1997, 1996 and
1995 were $8.00, $5.54 and $5.59, respectively.
NOTE 13 RETIREMENT PLAN:
The Corporation has a noncontributory 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.
D-56
<PAGE>
The following table sets forth the plan's funded status at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------
(In Thousands)
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $(23,940) $(20,103) $(19,471)
Nonvested (1,983) (1,829) (1,888)
-----------------------------------
Total $(25,923) $(21,932) $(21,359)
===================================
Projected benefit obligation $(27,058) $(22,823) $(22,362)
Plan assets at fair value, primarily marketable securities 30,085 24,783 21,778
-----------------------------------
Plan assets in excess of (less than) projected benefit obligation 3,027 1,960 (584)
Unrecognized net asset (1,759) (1,955) (2,150)
Unrecognized prior service cost 483 314 334
Unrecognized gain (5,700) (3,615) (1,639)
-----------------------------------
Accrued pension liability $ (3,949) $ (3,296) $ (4,039)
===================================
Net periodic pension costs include the following components:
Service cost-benefits earned during the period $ 1,582 $ 1,465 $ 1,308
Interest cost on projected benefit obligation 1,729 1,593 1,622
Actual return on assets (6,131) (2,824) (4,515)
Net amortization and deferral 4,144 1,048 2,856
-----------------------------------
Net periodic pension expense $ 1,324 $ 1,282 $ 1,271
===================================
Assumptions used in expense calculations were:
Discount rates 7.50% 7.00% 8.00%
Rates of increase in compensation levels 5.00% 5.00% 5.00%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
-----------------------------------
</TABLE>
Assumptions used for the December 31, 1997 liability included a discount rate of
7.00% and a 5.00% increase in compensation levels.
The Corporation and its subsidiaries, excluding FFC, also have a Profit
Sharing/Retirement Savings Plan. Total expense related to contributions to the
plan was $4.5 million, $4.4 million, and $3.7 million in 1997, 1996, and 1995,
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.
FFC has a noncontributory defined benefit retirement plan covering substantially
all Illinois-based 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. This plan was merged into the Corporation's plan on January 1,
1998.
D-57
<PAGE>
The following table sets forth the plan's funded status at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------
(In Thousands)
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $(3,281) $(2,936) $(2,971)
Nonvested (698) (491) (155)
----------------------------------
Total $(3,979) $(3,427) $(3,126)
==================================
Projected benefit obligation $(4,086) $(3,530) $(3,238)
Plan assets at fair value, primarily marketable securities 4,145 4,080 4,143
----------------------------------
Plan assets in excess of (less than) projected benefit obligation 59 550 905
Unrecognized net asset (919) (1,047) (1,175)
Unrecognized prior service cost 180 190 201
Unrecognized loss 646 480 500
----------------------------------
Accrued pension liability (receivable) $ (34) $ 173 $ 431
==================================
Net periodic pension costs include the following components:
Service cost-benefits earned during the period $ 374 $ 363 $ 291
Interest cost on projected benefit obligation 286 256 240
Actual return on assets (554) (319) (765)
Net amortization and deferral 101 (140) 357
----------------------------------
Net periodic pension expense $ 207 $ 160 $ 123
==================================
Assumptions used in expense calculations were:
Discount rates 7.50% 7.25% 8.25%
Rates of increase in compensation levels 5.00% 5.00% 5.00%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
----------------------------------
</TABLE>
Assumptions used for the December 31, 1997 liability included a discount rate of
7.00% and a 5.00% increase in compensation levels.
FFC also has a defined-contribution profit sharing plan covering all full-time
employees who have completed one year of service and are at least twenty-one
years old. Corporate contributions are discretionary. Total expense related to
contributions to the plan was $3.5 million, $2.1 million, and $0 in 1997, 1996,
and 1995, respectively. This plan was merged into the Corporation's plan on
January 1, 1998.
FFC sponsored a supplemental executive retirement plan for certain executive
officers, which is partially funded through life insurance and provides
additional benefit at retirement, and an unfunded defined benefit retirement
plan for all outside directors. FFC also entered into employment agreements
with certain executive officers. As a result of the merger with the
Corporation, FFC recorded a charge of $11.7 million for the year ended December
31, 1997 to terminate the plans and employment agreements. This charge is
included in the Corporation's merger, integration and other one-time charges as
described in Note 3. Expense for the supplemental retirement plan and defined-
benefit retirement plan for outside directors was $480,000 and $341,000 for the
years ended December 31, 1996 and 1995, respectively.
D-58
<PAGE>
NOTE 14 INCOME TAX EXPENSE:
The current and deferred amounts of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 75,238 $55,660 $59,350
State 9,624 6,169 9,205
------------------------------------
Total current 84,862 61,829 68,555
------------------------------------
Deferred:
Federal (17,860) (2,875) (4,218)
State (3,093) (1,467) (1,956)
------------------------------------
Total deferred (20,953) (4,342) (6,174)
------------------------------------
Total income tax expense 63,909 57,487 62,381
------------------------------------
Extraordinary item --- (370) ---
------------------------------------
Total after extraordinary item $ 63,909 $57,117 $62,381
====================================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
------------------------
(In Thousands)
<S> <C> <C>
Gross deferred tax assets:
Allowance for possible loan losses $ 36,463 $27,891
Accrued liabilities 13,025 2,044
Accrued pension expense 1,325 1,325
Deferred compensation 6,554 4,988
Securities valuation adjustment 17,532 3,511
Deposit base intangible amortization 3,409 4,053
Benefit of tax loss carryforwards 14,420 9,225
Other 4,065 3,008
------------------------
Total gross deferred tax assets 96,793 56,045
Valuation adjustment for deferred tax assets (22,276) (4,024)
------------------------
74,517 52,021
Gross deferred tax liabilities:
Premises and equipment 3,723 4,005
Deferred loan fee income and other loan yield adjustment 2,527 1,487
FHLB bank stock dividend 1,059 1,059
State income taxes 1,740 1,633
Other 2,594 1,916
------------------------
Total gross deferred tax liabilities 11,643 10,100
------------------------
Net deferred tax assets 62,874 41,921
------------------------
Tax effect of unrealized gain related to available for sale securities (14,938) (4,884)
------------------------
Net deferred tax assets including unrealized gain related to
available for sale securities $ 47,936 $37,037
========================
</TABLE>
Components of the 1996 deferred tax assets have been adjusted to reflect the
filing of corporate income tax returns.
For financial reporting purposes, a valuation allowance has been recognized to
offset deferred tax assets related to state net operating loss carryforwards of
a subsidiary and other temporary differences. When realized, the tax benefit
for these items will be used to reduce current tax expense for that period.
D-59
<PAGE>
The effective income tax rate differs from the statutory federal tax rate. The
major reasons for this difference are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------
<S> <C> <C> <C>
Federal income tax rate at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) resulting from:
Tax-exempt interest and dividends (2.9) (2.0) (1.5)
State income taxes (net of federal income taxes) 3.3 1.8 2.7
Merger, integration and other one-time charges 3.4 --- ---
Change in valuation allowance for deferred tax assets 15.7 --- ---
Other 0.5 0.1 (0.4)
-----------------------
Effective income tax rate 55.0% 34.9% 35.8%
</TABLE>
As of December 31, 1997, the Corporation had approximately $4.2 million 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. In addition, the Corporation has net operating loss carryforwards for
state income tax purposes of $97.0 million, which are available to offset future
state taxable income, if any, through 2012.
FFB qualified under provisions of the Internal Revenue Code that permitted it to
deduct from taxable income an allowance for bad debts that differed from the
provision for such losses charged to income for financial reporting purposes.
Accordingly, no provision for income taxes has been made for $79,243,000 of
retained income at December 31, 1997. If income taxes had been provided, the
deferred tax liability would have been approximately $31,804,000.
NOTE 15 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 nonperformance 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:
<TABLE>
<CAPTION>
1997 1996
----------------------------
(In Thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $2,459,154 $2,265,225
Commercial letters of credit 3,981 3,489
Standby letters of credit and financial guarantees written 95,410 52,287
Financial instruments whose notional or contract amount exceeds the
amount of credit risk:
Interest rate swap agreements 3,300 3,400
Futures 70,500 ---
Loans sold with recourse 12,000 27,000
</TABLE>
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.
D-60
<PAGE>
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 nonfinancial 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. At December 31, 1997 and
1996, $3.3 million and $3.4 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, 1997, the market value of interest rate swaps was a positive $14,000.
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 $107,000 at December 31, 1997, 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 interest income
in the following periods: $97,000 in 1998, and $10,000 in 1999.
The Corporation enters into various interest rate futures contracts to hedge
specific investment securities. These contracts are commitments to either
purchase or sell a financial instrument at a specified price on an agreed-upon
future date. In November 1997, the Corporation hedged certain agency issued
zero-coupon bonds held by FFC, with a carrying value of $37.2 million and a
market value of $41.6 million, by executing various interest rate futures
contracts. These contracts had a notional value of $70.5 million and a maturity
date of March 1998. Initial margin requirements on futures contracts are
provided by investment securities provided as collateral. Unrealized losses,
net of tax, of $924,000 on the futures contracts outstanding have been recorded
as a component of the net unrealized gain on securities available for sale at
December 31, 1997. Subsequently, in January 1998, the futures contracts were
closed and the zero-coupon bonds were sold. A net gain of $5.1 million will be
recognized, in investment securities gains, in the first quarter of 1998 from
these transactions.
All loans currently sold to others are sold on a nonrecourse basis with the
servicing rights of these loans retained by the Corporation. At December 31,
1997 and 1996, $12 million and $27 million, respectively, of the serviced loans
were previously sold with recourse, the majority of which is either federally-
insured or federally-guaranteed.
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
D-61
<PAGE>
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 16 PARENT COMPANY FINANCIAL INFORMATION:
Presented below are condensed statements of financial condition, income and cash
flows for the Parent Company:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 1996
-----------------------
(In Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 5 $ 309
Notes receivable from subsidiaries 138,897 110,992
Investment in subsidiaries 746,081 752,387
Other assets 41,939 26,904
-----------------------
Total assets $926,922 $890,592
=======================
LIABILITY AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 88,389 $ 74,176
Accrued expenses and other liabilities 24,840 12,854
-----------------------
Total liabilities 113,229 87,030
Stockholders' equity 813,693 803,562
-----------------------
Total liabilities and stockholders' equity $926,922 $890,592
=======================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries $63,355 $ 51,283 $ 30,467
Management and service fees from subsidiaries 4,685 4,267 3,963
Interest income on notes receivable 7,615 6,088 4,562
Other income 514 234 267
-----------------------------------------
Total income 76,169 61,872 39,259
-----------------------------------------
EXPENSE
Interest expense on borrowed funds 4,634 4,449 3,593
Salaries and employee benefits 3,871 3,287 3,331
Merger, integration and other one-time charges 20,837 --- ---
Other expense 5,203 5,030 4,931
-----------------------------------------
Total expense 34,545 12,766 11,855
-----------------------------------------
Income before income tax benefit and equity in undistributed
income 41,624 49,106 27,404
Income tax benefit (6,155) (547) (663)
-----------------------------------------
Income before equity in undistributed net income of subsidiaries 47,779 49,653 28,067
Equity in undistributed net income of subsidiaries 4,580 57,363 83,944
-----------------------------------------
Net income $52,359 $107,016 $112,011
=========================================
</TABLE>
D-62
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING INCOME
Net income $ 52,359 $107,016 $112,011
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiaries (4,580) (57,363) (83,944)
Depreciation and other amortization 161 135 199
Amortization of intangibles 446 805 871
Loss (gain) on sales of assets, net (356) --- 2
(Increase) decrease in interest receivable and other assets (10,714) 599 (7,488)
Increase (decrease) in interest payable and other liabilities 12,080 (252) 1,290
Other, net --- (154) (30)
-----------------------------------
Net cash provided by operating activities 49,396 50,786 22,911
INVESTING ACTIVITIES
Proceeds from sales of investment securities 357 --- ---
Purchases of investment securities --- --- (780)
Net increase in notes receivable (16,335) (12,374) (32,547)
Purchase of premises and equipment, net of disposals (176) (82) (81)
Capital contribution to subsidiaries --- (9,200) (500)
-----------------------------------
Net cash used by investing activities (16,154) (21,656) (33,908)
-----------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings 14,213 (8,546) 30,165
Cash dividends (49,328) (20,278) (16,924)
Proceeds from exercise of stock options 5,168 1,476 1,454
Purchase of treasury stock (3,599) (3,101) (2,085)
-----------------------------------
Net cash provided (used) by financing activities (33,546) (30,449) 12,610
-----------------------------------
Net increase (decrease) in cash and cash equivalents (304) (1,319) 1,613
Cash and due from banks at beginning of year 309 1,628 15
-----------------------------------
Cash and due from banks at end of year $ 5 $ 309 $ 1,628
===================================
</TABLE>
NOTE 17 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.
The estimated fair values of the Corporation's financial instruments at December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------------
Contract or Contract or
Notional Carrying Notional Carrying
Amount Amount Fair Value Amount Amount Fair Value
----------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 288,021 $ 288,021 $ 369,842 $ 369,842
Interest-bearing deposits in other
financial institutions 4,154 4,154 3,183 3,183
Federal funds sold and securities
purchase under agreements to resell 11,511 11,511 27,977 27,977
Investment securities:
Held to maturity 772,524 782,240 1,079,749 1,074,412
Available for sale 2,167,694 2,167,694 1,674,189 1,674,189
Loans held for sale 114,001 114,001 42,490 42,490
Loans 7,076,576 7,109,315 6,658,357 6,652,466
Financial liabilities:
Deposits 8,364,137 8,378,493 7,959,298 7,940,967
Short-term borrowings 1,337,008 1,337,008 1,201,393 1,201,393
Long-term borrowings 15,270 15,387 33,329 34,011
Off balance sheet:
Interest swap agreements $ 3,300 2 14 $3,400 2 36
</TABLE>
D-63
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Futures contracts 70,500 (1,421) (1,421) --- --- ---
----------------------------------------------------------------------------------
</TABLE>
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 HELD FOR SALE
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.
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.
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,
nonaccruals or potential charge-offs.
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.
COMMITMENTS TO EXTEND CREDIT, COMMERCIAL LETTERS OF CREDIT, STANDBY LETTERS OF
CREDIT AND FINANCIAL GUARANTEES WRITTEN
Fair values for commitments to extend credit, commercial letters of credit,
standby letters of credit and financial guarantees written are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements, the counterparties' credit standing and
discounted cash flow analyses. The fair value of these off-balance-sheet items
approximates the recorded amounts of the related fees and is not material at
December 31, 1997 and 1996.
D-64
<PAGE>
INTEREST RATE SWAP AGREEMENTS AND FUTURES CONTRACTS
The fair value of interest rate swap agreements and futures contracts 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.
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.
NOTE 18 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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 Quarter Ended
---------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income $189,742 $195,056 $200,648 $201,798
Interest expense 97,943 101,419 105,857 106,418
Provision for possible loan losses 3,373 3,186 3,738 21,371
Investment securities gains (losses), net 1,195 188 852 (35,011)
Income (loss) before income tax expense 52,200 54,771 56,859 (47,562)
Net income (loss) 33,860 35,480 36,821 (53,802)
Basic earnings (loss) per share $ 0.54 $ 0.57 $ 0.58 $ (0.86)
Diluted earnings (loss) per share $ 0.53 $ 0.56 $ 0.58 $ (0.85)
Basic weighted average shares 63,183 62,696 62,738 62,925
Diluted weighted average shares 64,420 63,559 64,020 63,745
<CAPTION>
1996 Quarter Ended
---------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income $179,631 $178,898 $185,842 $186,826
Interest expense 92,880 91,933 95,261 95,849
Provision for possible loan losses 3,072 3,052 3,861 3,710
Investment securities gains (losses), net (614) (321) (10,370) 627
Income before income tax expense 45,659 48,493 17,563 53,474
Net income before extraordinary item 30,727 31,710 10,962 34,303
Extraordinary item (686) --- --- ---
Net income 30,041 31,710 10,962 34,303
Basic earnings per share $ 0.48 $ 0.50 $ 0.17 $ 0.54
Diluted earnings per share $ 0.47 $ 0.49 $ 0.17 $ 0.53
Basic weighted average shares 63,159 63,290 63,289 63,080
Diluted weighted average shares 64,304 64,399 64,373 64,655
</TABLE>
Net income in the fourth quarter of 1997 includes $89.8 million of merger,
integration and other one-time charges and the third quarter of 1996 includes
$22.7 million of merger, integration and other one-time charges.
NOTE 19 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.
D-65
<PAGE>
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, 1997, that the
Corporation and the subsidiary banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997 and 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, FFB and
Associated Bank Green Bay as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well 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, FFB and Associated
Bank Green Bay are also presented in the table. No deductions from capital were
made for interest rate risk in 1997.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under Prompt
For Capital Corrective Action
($In Thousands) Actual Adequacy Purposes Provisions:
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio* Amount Ratio* Amount Ratio*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
- ------------------------
Associated Banc-Corp
- --------------------
Total Capital $841,883 11.86% $567,666 greater than or equal to 8.00% $709,852 greater than or equal to 10.00%
Tier I Capital $753,135 10.61% $283,833 greater than or equal to 4.00% $425,749 greater than or equal to 6.00%
Leverage $753,135 7.10% $424,482 greater than or equal to 4.00% $530,603 greater than or equal to 5.00%
First Financial Bank
- --------------------
Total Capital $396,629 13.63% $232,784 greater than or equal to 8.00% $290,980 greater than or equal to 10.00%
Tier I Capital $360,219 12.38% $116,387 greater than or equal to 4.00% $174,588 greater than or equal to 6.00%
Leverage $360,219 6.11% $235,823 greater than or equal to 4.00% $294,591 greater than or equal to 5.00%
Associated Bank Green Bay
- -------------------------
Total Capital $108,061 10.39% $ 83,227 greater than or equal to 8.00% $104,033 greater than or equal to 10.00%
Tier I Capital $ 83,035 7.98% $ 41,613 greater than or equal to 4.00% $ 62,420 greater than or equal to 6.00%
Leverage $ 83,035 6.47% $ 51,318 greater than or equal to 4.00% $ 64,147 greater than or equal to 5.00%
As of December 31, 1996:
- ------------------------
Associated Banc-Corp
- --------------------
Total Capital $786,821 13.53% $465,391 greater than or equal to 8.00% $581,739 greater than or equal to 10.00%
Tier I Capital $763,230 13.12% $232,696 greater than or equal to 4.00% $349,043 greater than or equal to 6.00%
Leverage $763,230 7.68% $397,625 greater than or equal to 4.00% $497,032 greater than or equal to 5.00%
First Financial Bank
- --------------------
Total Capital $346,133 13.91% $199,134 greater than or equal to 8.00% $248,918 greater than or equal to 10.00%
Tier I Capital $364,146 14.63% $ 99,561 greater than or equal to 4.00% $149,351 greater than or equal to 6.00%
Leverage $364,146 6.39% $227,947 greater than or equal to 4.00% $285,155 greater than or equal to 5.00%
Associated Bank Green Bay
- -------------------------
Total Capital $100,777 10.52% $ 76,651 greater than or equal to 8.00% $ 95,814 greater than or equal to 10.00%
Tier I Capital $ 76,782 8.01% $ 38,326 greater than or equal to 4.00% $ 57,488 greater than or equal to 6.00%
Leverage $ 76,782 6.46% $ 47,536 greater than or equal to 4.00% $ 59,420 greater than or equal to 5.00%
</TABLE>
* 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.
D-66
<PAGE>
NOTE 20 EARNINGS PER SHARE:
Presented below are the calculations for basic and diluted earnings per share:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Basic:
Income before extraordinary item $52,359 $107,702 $112,011
Extraordinary item --- (686) ---
-----------------------------------------
Net income available to common stockholders $52,359 $107,016 $112,011
Weighted average shares outstanding 62,884 63,205 61,386
Basic earnings per common share before extraordinary item $ 0.83 $ 1.70 $ 1.82
Basic earnings per common share $ 0.83 $ 1.69 $ 1.82
Diluted:
Income before extraordinary item $52,359 $107,702 $112,011
Extraordinary item --- (686) ---
-----------------------------------------
Net income available to common stockholders $52,359 $107,016 $112,011
Weighted average shares outstanding 62,884 63,205 61,386
Effect of dilutive stock options outstanding 1,051 1,175 1,087
-----------------------------------------
Diluted weighted average shares outstanding 63,935 64,380 62,473
Diluted earnings per common share before extraordinary item $ 0.82 $ 1.67 $ 1.79
Diluted earnings per common share $ 0.82 $ 1.66 $ 1.79
</TABLE>
NOTE 21 SUBSEQUENT EVENT:
On April 22, 1998, the Board of Directors declared a 5-for-4 stock split to be
effected as a 25 percent stock dividend payable on June 12, 1998, to
shareholders of record at the close of business on June 1, 1998. Any fractional
shares resulting from the dividend will be paid in cash. All share and per
share amounts contained in the consolidated financial statements have been
restated to reflect the effect of this stock split.
D-67
<PAGE>
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, 1997 and 1996, 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,
1997. 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 did not audit
the consolidated financial statements of First Financial Corporation and
subsidiaries, a wholly-owned subsidiary of Associated Banc-Corp, which
statements reflect total assets constituting 55.2% and 56.3% as of December 31,
1997 and 1996, respectively and total revenues constituting 52.6%, 55.5% and
58.2% for the years ended December 31, 1997, 1996 and 1995, respectively, of the
related consolidated totals. Those financial statements were audited by Ernst &
Young LLP whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for First Financial Corporation and
subsidiaries, is based solely on the report of Ernst & Young LLP.
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 and the report of Ernst & Young LLP provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of Ernst & Young LLP, 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Chicago, Illinois
January 22, 1998, Except for Note 21
which is as of April 22, 1998
D-68
<PAGE>
INDEPENDENT AUDITORS' REPORT
FIRST FINANCIAL CORPORATION
The Board of Directors
First Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of First Financial Corporation and subsidiaries as of December 31, 1997 and
1996, 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, 1997 (not presented separately herein). These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these 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 First Financial
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Milwaukee, Wisconsin
January 22, 1998
D-69
<PAGE>
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(In Thousands, Except Share Data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 275,844 $ 288,021
Interest-bearing deposits in other financial institutions 4,619 4,154
Federal funds sold and securities purchased under agreements to resell
18,500 11,511
Investment securities:
Held to maturity at amortized cost(Fair value of approximately $685,495
and $782,240 at June 30, 1998 and December 31, 1997, respectively) 674,691 772,524
Available for sale-stated at fair value 2,044,507 2,167,694
Loans, held for sale 86,851 114,001
Loans, net of unearned income 7,210,503 7,076,576
Less: Allowance for possible loan losses (91,708) (92,731)
----------- -----------
Loans, net 7,118,795 6,983,845
Premises and equipment 128,573 127,823
Other assets 209,287 221,866
----------- -----------
Total assets $10,561,667 $10,691,439
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 842,077 $ 904,710
Interest-bearing deposits 7,625,071 7,459,427
----------- -----------
Total deposits 8,467,148 8,364,137
Short-term borrowings 1,066,287 1,337,008
Accrued expenses and other liabilities 133,188 161,331
Long-term borrowings 27,758 15,270
----------- -----------
Total liabilities 9,694,381 9,877,746
Commitments and contingent liabilities --- ---
Stockholders' equity
Preferred stock --- ---
Common stock (par value $0.01 per share, authorized
100,000,000 shares issued; 63,389,734 and 62,993,309
shares, respectively) 634 504
Surplus 224,982 218,072
Retained earnings 613,314 569,996
Accumulated other comprehensive income 31,810 26,144
Less: Treasury stock (81,148 and 23,618 shares, respectively
at cost) (3,454) (1,023)
----------- -----------
Total stockholders' equity 867,286 813,693
----------- -----------
Total liabilities and stockholders' equity $10,561,667 $10,691,439
=========== ===========
</TABLE>
(See accompanying notes to Consolidated Financial Statements.)
D-70
<PAGE>
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $151,247 $146,162 $302,131 $288,417
Interest and dividends on investment securities:
Taxable 41,564 46,127 85,837 90,692
Tax exempt 2,603 2,300 5,065 4,650
Interest on deposits in other financial institutions 609 256 1,185 533
Interest on federal funds sold and securities
purchased under agreements to resell 232 211 487 506
-------- -------- -------- --------
Total interest income 196,255 195,056 394,705 384,798
INTEREST EXPENSE
Interest on deposits 86,775 82,821 173,071 163,856
Interest on short-term borrowings 15,280 18,052 32,650 34,472
Interest on long-term borrowings 543 546 985 1,034
-------- -------- -------- --------
Total interest expense 102,598 101,419 206,706 199,362
-------- -------- -------- --------
NET INTEREST INCOME 93,657 93,637 187,999 185,436
Provision for possible loan losses 3,375 3,186 7,133 6,559
-------- -------- -------- --------
Net interest income after provision for possible loan
losses 90,282 90,451 180,866 178,877
NONINTEREST INCOME
Trust service fees 8,066 6,983 15,981 13,931
Service charges on deposit accounts 6,816 7,023 13,186 13,522
Investment securities gains, net 642 188 5,953 1,383
Mortgage banking activity 11,183 5,438 22,079 10,554
Retail commission income 3,987 3,992 7,377 7,862
Loan fees 4,870 4,074 9,030 7,758
Asset sale gains, net 6,191 165 6,376 363
Other 3,341 3,249 6,863 6,377
-------- -------- -------- --------
Total noninterest income 45,096 31,112 86,845 61,750
NONINTEREST EXPENSE
Salaries and employee benefits 37,103 33,518 73,046 66,839
Net occupancy expense 5,053 5,193 10,222 10,855
Equipment rentals, depreciation and maintenance 3,458 3,026 6,867 6,205
Data processing expense 4,789 4,270 9,443 8,399
Stationery and supplies 1,486 1,249 2,882 2,577
Business development and advertising 4,069 3,787 7,335 7,691
FDIC expense 817 840 1,646 1,642
Other 16,084 14,909 32,992 29,449
-------- -------- -------- --------
Total noninterest expense 72,859 66,792 144,433 133,657
-------- -------- -------- --------
Income before income taxes 62,519 54,771 123,278 106,970
Income tax expense 21,515 19,291 42,414 37,631
-------- -------- -------- --------
NET INCOME $ 41,004 $ 35,480 $ 80,864 $ 69,339
======== ======== ======== ========
Earnings per share:
Basic $0.65 $0.57 $1.28 $1.10
Diluted $0.64 $0.56 $1.26 $1.08
</TABLE>
(See accompanying notes to Consolidated Financial Statements)
D-71
<PAGE>
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
--------- ---------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 80,864 $ 69,339
Adjustments to reconcile net income to net cash used by
operating activities:
Provision for possible loan losses 7,133 6,559
Depreciation and amortization 7,915 7,084
Amortization of mortgage servicing rights 3,183 2,492
Amortization of intangibles 2,920 3,116
Net amortization (accretion) of premiums and discounts 882 (4,372)
Loss on sales of investment securities, net (5,953) (1,383)
Increase (decrease) in interest receivable and other assets 12,334 (2,546)
Decrease in interest payable and other liabilities (28,143) (3,941)
Amortization of loan fees and costs 31 26
Net increase in mortgage loans acquired for sale 34,848 1,269
Loss on sales of mortgage loans held for sale (7,698) (1,246)
Loss on other asset sales (6,376) (363)
--------- ---------
Net cash provided by operating activities 101,940 76,034
INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold and securities purchased
under agreements to resell (6,989) 15,523
Net increase in interest-bearing deposits in
other financial institutions (465) (1,892)
Purchases of held to maturity securities (10,019) (97,286)
Purchases of available for sale securities (216,432) (498,843)
Proceeds from sales of available for sale securities 60,366 33,612
Maturities of held to maturity securities 107,601 144,742
Maturities of available for sale securities 296,619 249,760
Net increase in loans (174,024) (268,397)
Proceeds from sales of other real estate 3,513 3,872
Purchases of premises and equipment, net of disposals (10,611) (8,016)
Purchase of mortgage servicing rights (10,345) (3,588)
Net cash received in purchase of subsidiary --- 5,051
Proceeds from sale of other assets 38,086 544
--------- ---------
Net cash used in investing activities 77,300 (424,918)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 103,011 103,233
Net increase (decrease) in short-term borrowings (271,732) 199,565
Cash dividends (29,368) (22,764)
Proceeds from issuance of long-term borrowings 13,500 425
Proceeds from exercise of stock options 6,177 2,308
Stock purchases by pooled company --- (21,048)
Purchase of treasury stock (13,005) (1,524)
--------- ---------
Net cash provided by (used in) financing activities (191,417) (260,195)
Net decrease in cash and cash equivalents (12,177) (88,689)
Cash and due from banks at beginning of period 288,021 369,842
--------- ---------
Cash and due from banks at end of period $ 275,844 $ 281,153
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 202,821 $ 193,348
Income taxes 3,839 37,092
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate 4,160 13,465
Loans made in connection with the disposition of other real estate 237 3,807
</TABLE>
(See accompanying notes to Consolidated Financial Statements.)
D-72
<PAGE>
ASSOCIATED BANC-CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
Associated Banc-Corp's ("Corporation") financial position, results of its
operations and cash flows for the periods presented. All adjustments necessary
to the fair presentation of the financial statements are of a normal recurring
nature. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
NOTE 2: The consolidated financial statements include the accounts of all
subsidiaries. All material intercompany transactions and balances are
eliminated. The Corporation has not changed its accounting and reporting
policies from those stated in the Corporation's 1997 Form 10-K Annual Report.
NOTE 3: Business Combinations
The following table summarizes completed transactions during 1997 and 1998
(through June 30):
<TABLE>
<CAPTION>
Consideration Paid
-----------------------------
Shares of
Date Method of Cash Common Total Assets Intangibles
Name of Acquired Acquired Accounting (In Millions) Stock (In Millions) (In Millions)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Centra Financial, Inc. [A] 2/97 Pooling of $ --- 517,956 $ 76 $ ---
West Allis, Wisconsin Interests
First Financial Corporation [B] 10/97 Pooling of 0.1 34,794,911 6,005 ---
Stevens Point, Wisconsin Interests
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
[A] The transaction, accounted for using the pooling-of-interests method, was
not material to operating results for years prior to the acquisition and,
accordingly, results for years prior to the acquisition were not restated.
[B] All consolidated financial information has been restated as if the
transaction had been effected as of the beginning of the earliest period
presented.
D-73
<PAGE>
NOTE 4: Investment Securities
The amortized cost and fair values of investment securities held to maturity and
securities available for sale for the periods indicated were as follows:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES HELD TO MATURITY
- --------------------------------------------------------------------------------
(In thousands) June 30, 1998
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Federal agency securities $107,815 $108,447
Mortgage-related securities 314,062 319,875
Obligations of state and political subdivisions 178,795 181,632
Other securities (debt) 74,019 75,541
- --------------------------------------------------------------------------------
Total $674,691 $685,495
================================================================================
<CAPTION>
(In thousands) December 31, 1997
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 498 $ 500
Federal agency securities 146,259 146,818
Mortgage-related securities 361,298 365,952
Obligations of state and political subdivisions 183,286 186,300
Other securities (debt) 81,183 82,670
- --------------------------------------------------------------------------------
Total $772,524 $782,240
================================================================================
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------
(In thousands) June 30, 1998
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury securities $ 94,559 $ 95,248
Federal agency securities 276,715 277,726
Mortgage-related securities 1,394,195 1,426,950
Obligations of state and political subdivisions 51,219 51,383
Other securities (debt and equity) 177,660 193,200
- --------------------------------------------------------------------------------
Total $1,994,348 $2,044,507
================================================================================
<CAPTION>
(In thousands) December 31, 1997
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 109,200 $ 109,841
Federal agency securities 324,708 330,542
Mortgage-related securities 1,536,134 1,557,603
Obligations of state and political subdivisions 14,312 14,136
Other securities (debt and equity) 142,081 155,572
- --------------------------------------------------------------------------------
Total $2,126,435 $2,167,694
================================================================================
</TABLE>
NOTE 5: Allowance for Possible Loan Losses
A summary of the changes in the allowance for possible loan losses for the
periods indicated is as follows:
<TABLE>
<CAPTION>
For the Six Months For the Year
Ended Ended
June 30, December 31,
1998 1997
---- ----
(In Thousands)
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $92,731 $ 71,767
Balance related to acquisition --- 728
Provisions charged to operating expense 7,133 31,668
Net loan charge-offs (8,156) (11,432)
------- --------
Balance at end of period $91,708 $ 92,731
- -------------------------------------------------------------------------------
</TABLE>
NOTE 6: Mortgage Servicing Rights
The Corporation recognizes as separate assets (capitalized) the rights to
service mortgage loans for others whether the servicing rights are acquired
through purchases or loan origination. The
D-74
<PAGE>
fair value of capitalized mortgage servicing rights is based upon the present
value of estimated expected future cash flows. Based upon current fair values,
capitalized mortgage servicing rights are assessed periodically for impairment,
which is recognized in the statement of income during the period in which
impairment occurs by establishing a corresponding valuation allowance. For
purposes of performing its impairment evaluation, the Corporation stratifies its
portfolio of capitalized mortgage servicing rights on the basis of certain risk
characteristics.
A summary of the changes in the balance of mortgage servicing rights is as
follows:
<TABLE>
<CAPTION>
For the Six Months For the Year
Ended Ended
June 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Balance at beginning of period $22,535 $20,238
Additions 10,345 9,801
Amortization (3,183) (6,472)
Sales of servicing rights --- ---
Change in valuation allowance (3,055) (1,032)
------- -------
Balance at end of period $26,642 $22,535
- --------------------------------------------------------------------------------
</TABLE>
NOTE 7: Per Share Computations
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," which became effective at year end 1997 for all
periods presented. Under the provisions of SFAS No. 128, primary and fully
diluted earnings per share were replaced with basic and diluted earnings per
share. Basic earnings per share is calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share is calculated by dividing net income by
the weighted average number of shares adjusted for the dilutive effect of
outstanding stock options.
The Corporation issued 500,995 shares of common stock to a wholly-owned
subsidiary as part of the 1996 acquisition of F&M Bankshares of Reedsburg, Inc.
These shares are not reflected on the Consolidated Statements of Financial
Condition as issued or outstanding.
NOTE 8: Earnings Per Share
Presented below are the calculations for basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
(In Thousands, Except Per Share Data)
Basic:
Net income available to common stockholders $41,004 $35,480 $80,864 $69,339
Weighted average shares outstanding 63,261 62,696 63,271 62,938
Basic earnings per share $ 0.65 $ 0.57 $ 1.28 $ 1.10
======= ======= ======= =======
Diluted:
Net income available to common stockholders $41,004 $35,480 $80,864 $69,339
Weighted average shares outstanding 63,261 62,696 63,271 62,938
Effect of dilutive stock options outstanding 769 863 790 1,049
------- ------- ------- -------
Diluted weighted average shares outstanding 64,030 63,559 64,061 63,987
Diluted earnings per common share $ 0.64 $ 0.56 $ 1.26 $ 1.08
======= ======= ======= =======
</TABLE>
D-75
<PAGE>
NOTE 9: Comprehensive Income
The Financial Accounting Standards Board (FASB) has issued SFAS No. 130,
"Reporting Comprehensive Income", which is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Corporation adopted SFAS No. 130 on January 1, 1998,
and all annual required disclosures will be included beginning with the
Corporation's 1998 Form 10-K Annual Report.
The Corporation's comprehensive income for the three and six month periods ended
June 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $41,004 $35,480 $80,864 $69,339
Other comprehensive income, net of tax - unrealized gain on
securities:
Unrealized holding gains arising during the period 2,940 11,962 9,535 5,587
Less: reclassification adjustment for net gains realized in net
income (417) (122) (3,869) (899)
------- ------- ------- -------
Subtotals 2,523 11,840 5,666 4,688
------- ------- ------- -------
Comprehensive income $43,527 $47,320 $86,530 $74,027
======= ======= ======= =======
</TABLE>
D-76
<PAGE>
EXHIBIT E
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA -- COMPANY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND RATIO DATA)
<TABLE>
<CAPTION>
UNAUDITED AUDITED
AS OF AND FOR THE SIX AS OF AND FOR THE YEAR ENDED
MONTHS ENDED JUNE 30, DECEMBER 31,
------------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income statement data:
Interest income $ 7,984 $ 7,769 $ 15,800 $ 16,313 $ 16,400
Interest expense 3,233 3,479 6,991 7,619 8,423
----------- ---------- ----------- ---------- ----------
Net interest income 4,751 4,290 8,809 8,694 7,977
Provision for credit losses 197 221 1,922 872 1,624
Other income 1,376 713 1,451 1,518 1,574
Other expenses 3,643 4,057 9,009 7,937 8,762
----------- ---------- ----------- ---------- ----------
Income (loss) before income taxes 2,287 725 (671) 1,403 (835)
Income tax expense (benefit) 821 220 701 431 (523)
----------- ---------- ----------- ---------- ----------
Net income (loss) $ 1,466 $ 505 $ (1,372) $ 972 $ (312)
=========== ========== =========== ========== ==========
Per common share data:
Net income per share 55.14 18.98 (51.62) 36.58 (11.72)
Cash dividends per share - - 2.00 2.00 -
Weighted average common shares outstanding 26,581 26,580 26,581 26,580 26,589
Balance sheet data:
Total assets $159,905 $171,906 $169,599 $174,554 $190,159
Loans, net 105,898 119,796 119,544 117,810 128,586
Allowance for loan losses 4,091 2,868 4,209 3,238 4,169
Total deposits 113,767 126,828 125,500 131,361 138,710
Stockholders' equity 16,547 16,957 15,109 16,466 15,815
Financial ratios:
Return on beginning assets 1.23% 0.58% (0.79)% 0.51% -0.17%
Return on beginning equity 13.82% 6.13% (8.33)% 6.15% -2.04%
Equity to total assets (period end) 10.35% 9.86% 8.91% 9.43% 8.32%
Book value per share $ 622.51 $ 637.96 $ 568.41 $ 619.49 $ 594.79
=========== ========== =========== ========== ==========
</TABLE>
Management's discussion and analysis of financial condition and results of
operations of Citizens Bankshares, Inc. and its subsidiaries (the "Company"), is
intended as a review of significant factors affecting the Company's consolidated
results of operations during the six-month periods ended June 30, 1998 and 1997
and the three-year period ended December 31, 1997 and the Company's consolidated
financial condition at June 30, 1998 and 1997 and at the end of each year during
this period. This Discussion and Analysis should be read in conjunction with
the Consolidated Financial Statements including the accompanying notes, and the
Selected Financial Data presented elsewhere in this Proxy Statement/Prospectus.
The Company's principal subsidiaries are Citizens Bank, N.A. (the "Bank") and
the Wisconsin Finance Corporation (the "Finance Company").
GENERAL OVERVIEW AND RECENT EVENTS
In 1995, following a period of rapid growth, the Company experienced a number of
difficulties primarily in connection with the condition and operation of its
Bank subsidiary. Both loan asset quality and liquidity had deteriorated at the
Bank, and management deficiencies became apparent. Reduced loan asset quality
adversely affected the Bank because of charge-offs of uncollectable loans, lost
income from non-performing loans, additional expense incurred to address
problem credits, and diversion of management time from other activities.
Reduced liquidity forced the Bank to pay higher rates to attract deposits and
other funds, thereby adversely affecting net interest spread. Consequently, the
Company's earnings and capital adequacy declined.
E-1
<PAGE>
On May 17, 1995, the Bank entered into a written Formal Agreement with its
primary regulatory agency, the Office of the Comptroller of the Currency (the
"OCC"). Under the Formal Agreement the Bank agreed to, among other things,
establish a liquidity plan, employ an outside management consultant to review
and report on management of the Bank, develop and implement a program to improve
the Bank's loan administration, take action to address criticized assets, adopt
and implement an asset diversification program, establish an independent loan
review system to periodically review the Bank's loan portfolio to assure timely
identification of problem credits, establish a program for maintenance of an
adequate allowance for loan and lease losses, and maintain minimum specified
levels of capital. The Formal Agreement terminated on June 29, 1998.
As a result of the difficulties which surfaced in 1995, several senior officers
left the Bank at that time and a number of new executive officers assumed
positions of responsibility. Subsequent to 1995, the Bank's liquidity and asset
quality improved, although asset quality continues to require management
attention. The problems which surfaced in 1995 have had a significant impact on
the Company's financial condition and results of operations throughout the
period covered by this Discussion and Analysis. During this same period, the
Finance Company, which was established in late 1992, grew in assets from
$18,100,000 at December 31, 1994 to $23,700,000 at June 30, 1998.
On January 31, 1998, the Bank completed a sale of two branch offices to another
bank. The sale included land and buildings, loans, and an assumption of deposit
liabilities, and therefore reduced the assets and liabilities of the Bank while
also increasing earnings in the first quarter of 1998 through the recognition of
gains on the sale. The sale resulted in a pre-tax gain of approximately
$702,000 which was recorded in the first quarter of 1998.
CHANGES IN FINANCIAL CONDITION
During the six months ended June 30, 1998, the Company's total assets declined
$9,700,000 with the principal factor behind this change being the sale by the
Bank of two of its branches. This resulted in reductions in net loans of
approximately $6,400,000 and premises and equipment of $2,100,000. In addition,
net loans declined $7,200,000 due to scheduled payments, seasonal paydowns,
repayments from commercial and real estate loan refinancing activities, and
problem loan repayments. Funds from these activities and the reduction in cash
produced most of the increase in federal funds sold. The Bank's total deposits
declined $11,600,000 from the sale of $10,200,000 in deposits at the branches
sold. The Bank repaid the remaining $1,200,000 in Federal Home Loan Bank notes
to reduce borrowed funds. The Company's equity increased $1,438,000, primarily
from the first quarter earnings.
During 1997, the Company experienced a $5,000,000 decline in its total assets as
the decline in Bank assets exceeded the growth in Finance Company assets. The
Bank's continuing efforts to improve its interest margin resulted in a decrease
of $5,900,000 in deposits. The Bank also repaid $1,800,000 in high rate
borrowings from the Federal Home Loan Bank. These changes at the Bank were
principally funded by normal maturities of investment securities and a continued
decline in net loans of $1,700,000. The Bank's commercial loan growth
principally in the second half of 1997 was more than offset by declines in the
other loan portfolios. The Finance Company experienced growth of $1,500,000 in
net loans, most of it in the fourth quarter and funding for this was provided
through its normal bank lines of credit. The Company's equity declined
$1,400,000 from the operating loss in the period.
During 1996, the Company's total assets declined $15,600,000. The Finance
Company's balance sheet was nearly unchanged while the Bank's balance sheet in
1996 showed major changes as it continued the efforts started in 1995 to address
loan quality, liquidity, and the low net interest margin. Total net loans at
the Bank declined $9,500,000 with declines of $6,400,000, $2,400,000, and
$3,000,000 in commercial, real estate, and consumer loans, respectively. The
allowance for loan losses declined $1,000,000 with charge-offs of just over
$2,000,000. The funds provided by these activities and a reduction in federal
funds sold allowed the Bank to reduce its then higher cost time deposits,
securities sold under agreement
E-2
<PAGE>
to repurchase, and Federal Home Loan Bank borrowings by $5,500,000, $1,900,000,
and $6,800,000, respectively. The Bank also sold its $10,700,000 position in
illiquid mortgage related securities and reinvested the funds in short-term US
Treasury and Agency securities which improved its liquidity and capital ratios.
During 1995, total assets of the Company changed only modestly as the Finance
Company grew and the Bank's balance sheet underwent major change as new
management started to address significant asset quality, liquidity, and net
interest margin problems. Total net loans at the Bank decreased $14,500,000
primarily from declines of $8,100,000 and $3,100,000 in commercial and consumer
loans, respectively. The Finance Company's total net loans rose $2,300,000.
The Company's allowance for loan losses increased $1,100,000 after net charge-
offs. The funds provided by these activities resulted in an increase in Federal
Funds sold of $13,400,000. A net increase in total deposits, after a decrease
in higher cost time deposits of $7,100,000 and a greater increase in lower cost
interest bearing demand and money market deposits, more than offset the
reduction in borrowed funds. The Bank reduced its high cost borrowings from the
Federal Home Loan Bank by $6,100,000 while the Finance Company increased its
borrowings under its bank lines of credit by $2,400,000 to fund its loan growth.
The Company's equity increased $500,000, even with a net loss of $300,000, due
to an increase in the unrealized gain on securities of $800,000.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997
For the six months ended June 30, 1998, the Company's net income increased
$1,000,000 over the same period in 1997. Increased interest income of
approximately $400,000 from Finance Company operations combined with a decrease
in interest expense on deposits of $300,000 from Bank operations produced an
increase in the net interest income of $500,000. Non-interest revenue from
normal operations was relatively unchanged but, the gain on the sale of two Bank
branches added $700,000 in revenue in the 1998 period. Staff reductions in the
Bank lowered salary and benefits expense $200,000 and combined with other non-
interest expense reductions to lower total non-interest expense by $400,000.
The above changes combined to increase pre-tax income by $1,600,000 and to
increase net income $1,000,000 in the 1998 period.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
The Company's earnings have been well below the industry norms for all three
years with significant year-to-year swings resulting from, but originating prior
to 1995, the Bank's rapid loan growth and significant credit quality problems
associated with that growth; a major increase in investments in mortgage related
securities; and a major increase in the cost of funds to fund these activities
and subsequent liquidity problems. The Finance Company's earnings, however,
have been stable with consistent year-to-year growth until 1997 when management
elected to increase its loss reserves from 2% to 3% or $200,000 because of its
concerns that there could possibly be an increase in credit problems and to make
a change in accounting estimate related to goodwill amortization resulting in a
$179,000 charge to expense. The Company's interest income increased 22% or
$3,000,000 in 1995 after a significant decrease of interest income in the prior
year; however, the Bank's interest income then declined $300,000 in both 1996
and 1997 reflecting the continued decline in the level of Bank loans;
persistently high levels of non-performing bank loans; and lower market rates.
Interest expense increased 53% or $2,900,000 in 1995 from the addition of high
rate deposits and Federal Home Loan Bank borrowings. Bank management
subsequently sold the mortgage related securities and that, combined with the
decline in loans, provided the liquidity which allowed management to lower the
rates offered on deposits to reduce interest expense on deposits in 1996 and
1997 by $400,000 in each year and pay down the Federal Home Loan Bank borrowings
and reduce the related interest expense on borrowed funds. These reductions in
interest on borrowed funds at the Bank exceeded the rise in the interest on
borrowed funds for the Finance Company by $400,000 and $200,000 in 1996 and
1997,
E-3
<PAGE>
respectively. As a result, the Company's net interest income rose consistently
in all three years but the increase of $700,000 in 1996 was impacted by a
recovery of $300,000 of previously reversed interest on one loan. Increases in
the estimated loss on certain loans combined with the further deterioration in
the financial conditions of some of the Bank's borrowers prompted management to
continue to charge operations for substantial loan loss provisions. In 1995
management noted deterioration in the financial condition of some of the Bank's
borrowers which prompted management to record a provision for loan losses in the
amount of $1,600,000. During the last three years management has focused their
efforts on these credit concerns to resolve problem loans. However, net loan
charge-offs, including Finance Company loans have totaled $550,000, $1,803,000
and $951,000 during 1995, 1996 and 1997, respectively. In 1997, management
recorded a provision for loan losses of $1,922,000. This increase in the
provision from 1996 resulted from higher reserve percentages being applied to
identified risk-rated loan categories.
Non-interest revenue increased $200,000 and $300,000 at the Bank and Finance
Company, respectively, in 1995. In 1996, non-interest revenue at the Bank
declined $200,000 and, at the Finance Company it grew $100,000 while revenue in
this area was unchanged in 1997.
In 1995, the Company's non-interest expense increased $1,800,000. Management
replacements and additions to Bank staff in the lending function to address the
credit issues added nearly $600,000 to salary and benefits expense. Increased
professional fees and the cost of foreclosures added $200,000 to expenses.
Consulting fees and non-compete fees from the acquisition of Farmers Merchants
Bank, Greenwood, a write-down of supplies inventories and, a loss on a demand
deposit account comprised the major portion of the increase in other operating
expense of $400,000. Real estate purchased in 1994 for a Bank branch site was
written down to its estimated fair market value resulting a charge to expense of
over $300,000 in 1995.
In 1996, non-interest expenses generally declined but in 1997 they rose
$1,100,000 with increases in professional services of $500,000 related to the
sale of two Bank branches and costs related to the proposed merger, and an
increase of $179,000 resulting from management's valuation of goodwill
associated with a 1994 purchase by the Finance Company. In addition, a charge
of $600,000 was recorded to reduce the carrying value of properties, previously
acquired by the Bank through foreclosure, to their estimated net fair value.
The Bank has actively marketed these properties for sale, but a reduction in
fair value was necessary based upon recent indications of potential sale values.
In 1995, the Company's net income declined by $600,000 to a net loss of $300,000
from the increase in expenses and, in 1996, increased revenues and reduced
expenses increased net income by $1,300,000. In 1997, management increased the
valuation allowance for deferred tax assets as a result of an evaluation of the
realization of the deferred tax assets. The deferred tax valuation allowance
was increased $964,000 during 1997 resulting in a reduced net deferred tax asset
of $773,000. This increase in the valuation allowance resulted in a provision
for income taxes of $701,000 even though a loss of $671,000 was recorded. This
resulted in a decline in net income of $2,300,000 to the loss of $1,400,000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents the Company's ability to generate sufficient cash flow to
fund its commitments to provide loans to borrowers; repurchase securities sold
under agreement to repurchase; and to fund withdrawals by depositors, capital
expenditures, and cash operating expenses. The nature, trend and contractual
commitments of the Company are routinely monitored by Company management to
ensure that adequate funds will be available when needed. In some cases the
Company matches earning asset investments to material time deposit maturities
where cash demand at maturity is reasonably anticipated.
Liquidity for Bank operations is provided in part by scheduled loan repayments
but primarily by federal funds sold, interest bearing deposits, and the entire
investment portfolio which is held available for sale.
E-4
<PAGE>
These primary sources totaled $37,000,000 at December 31, 1997 and $45,000,000
at June 30, 1998. Liquidity for Finance Company operations is principally
provided by scheduled loan repayments and funds available from its bank lines of
credit. The Company has no current plans for major capital expenditures and
there are no known trends, demands, commitments, events and no uncertainties
that could reasonably be expected to result in a material increase or decrease
in the Company's liquidity.
EFFECTS OF INFLATION
The Company's unaudited consolidated financial statements for the six months
ended June 30, 1998 and 1997 and its audited consolidated financial statements
and notes thereto for the years ended December 31, 1997, 1996, and 1995 have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Nearly all of the Company's
assets and liabilities are monetary in nature and, as a result, changes in and
the level of interest rates have a greater impact on the Company's performance
than do the effects of the general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
REGULATORY CAPITAL REQUIREMENTS
The Company's primary regulator is the Federal Reserve Board and the Bank
subsidiary's primary regulator is the OCC, both of which have adopted risk-based
capital regulations which require that capital as a percent of risk weighted
assets be maintained at certain minimum levels. Those levels compared to the
Company's actual levels are detailed in the footnotes to the financial
statements. The Company and the Bank meet the definition of well capitalized
and are in compliance with all capital requirements as of June 30, 1998 and
December 31, 1997 and management believes that they will continue to meet all
current regulatory requirements. Certain legal and regulatory restrictions exist
regarding the ability of the Bank to pay cash dividends to the Company.
Management is not aware of any pending requirements or recommendations would
have a material adverse effect on the Company's capital, liquidity or results of
operations.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
For each period ended shown, the allowance for credit losses has been allocated
to the following categories in amounts deemed reasonably necessary to provide
for the possibility of losses being incurred within each category of loans at
the dates indicated.
E-5
<PAGE>
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTS)
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- ----------------------------- ------------------------
PERCENT OF PERCENT OF PERCENT
LOANS IN LOANS IN OF LOANS IN
EACH EACH EACH
ALLOWANCES CATEGORY ALLOWANCES FOR CATEGORY ALLOWANCES CATEGORY
BALANCE AT END FOR LOAN TO TOTAL FOR LOAN TO TOTAL FOR TO TOTAL
OF PERIOD APPLICABLE TO: LOSSES LOANS LOSSES LOANS LOAN LOSSES LOANS
- ------------------------ ---------- ----------- -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $2,875 42.15% $2,195 39.44% $3,269 41.79%
Real estate mortgage 549 29.86% 534 33.93% 376 39.02%
Installment and other loans 753 25.59% 482 23.94% 508 17.53%
Municipal 32 2.40% 27 2.69% 16 1.66%
---------- ----------- -------------- ------------ ----------- -----------
Total $4,209 100.00% $3,238 100.00% $4,169 100.00%
========== =========== =============== ============ =========== ===========
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the loan balance at the end of each period;
changes in the allowance for credit losses arising from loans charged off and
recoveries on loans previously charged off, by loan category; and additions to
the allowance which have been charged to operating expenses.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Loan balance at year end $119,544 $117,810 $128,586
Balance of allowance for credit losses at beginning of period $ 3,238 $ 4,169 $ 3,096
Loans charged off:
Commercial, financial and agricultural 550 1,418 246
Real estate mortgage 70 22 58
Installment and other loans 587 572 428
Municipal - - -
Total loans charged off 1,207 2,012 732
---------- --------- ---------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 112 78 91
Real estate mortgage - 3 16
Installment and other loans 144 128 74
Municipal - - -
---------- --------- ---------
Total recoveries 256 209 181
Net loans charged off 951 1,803 551
Additions to allowance for credit losses charged to operating expense 1,922 872 1,624
---------- --------- ---------
Balance of allowance for credit losses at end of period $ 4,209 $ 3, 238 $ 4,169
========== ========= =========
Ratio of net charge-offs during period to loans outstanding at period ended 0.80% 1.53% 0.43%
========== ========== =========
</TABLE>
E-6
<PAGE>
LOAN COMPOSITION
The following table summarizes the loan composition at the end of each period.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
1997 1996
------------------- -------------------
<S> <C> <C>
Commercial, financial and agricultural $ 53,345 $ 48,710
Real estate mortgage 37,802 41,905
Installment and other loans 32,395 29,570
Municipal 3,038 3,330
------------------- -------------------
126,580 123,515
Less:
Allowance for credit losses 4,209 3,238
Unamortized discounts 2,827 2,467
------------------- -------------------
Total net loans $119,544 $117,810
=================== ===================
</TABLE>
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES AS OF
DECEMBER 31, 1997
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
LOAN MATURITIES
---------------------------------------------------------------------------
AFTER 1
1 YEAR THROUGH AFTER 5
OR LESS 5 YEARS YEARS TOTAL
--------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $35,752 $17,423 $ 170 $ 53,345
Real estate mortgage 21,631 13,195 2,976 37,802
Installment and other loans 14,574 16,309 1,512 32,395
Municipal 1,273 1,127 638 3,038
--------------- ------------- ------------- -----------
Total $73,230 $48,054 $5,296 $126,580
=============== ============= ============= ===========
Amount over one year with:
Fixed rates $ 37,951
Floating or adjustable rates $ 15,399
============
</TABLE>
PAST DUE AND NONPERFORMING LOANS
The following table reflects as of the periods ended the aggregate amounts of
loans which are nonaccrual or troubled debt restructurings. There were no
accruing loans past due 90 days or longer as to principal or interest payments
for any of the periods shown.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
December 31,
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Nonaccrual loans $ 5,700 $ 5,600 $ 9,200
Restructured loans 329 23 25
=========== ========== ==========
Total $ 6,029 $ 5,623 $ 9,225
=========== ========== ==========
</TABLE>
If interest on the nonaccrual loans had been accrued, such income would have
approximated $566,378 for the year ended December 31, 1997, $617,582 for the
year ended December 31, 1996 and $902,264 for the year ended December 31, 1995.
Loans are normally placed on non-accrual status when they become contractually
past due 90 days or more as to interest or principal payments. 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 the principal.
As of December 31, 1997, management believes that there are no potential problem
loans which would require disclosure.
E-7
<PAGE>
Loan concentrations exceeding 10% of the total loan portfolio consist of
residential real estate and commercial real estate loans which approximate
42.50% and 16.10%, respectively of total loans as of December 31, 1997.
E-8
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF CITIZENS BANKSHARES,
INC. AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND
1995:
Independent Auditor's Report E-10
Consolidated Balance Sheets E-11
Consolidated Statements of Income E-12
Consolidated Statements of Stockholders' Equity E-13
Consolidated Statements of Cash Flows E-14
Notes to Consolidated Financial Statements E-15
CONSOLIDATED FINANCIAL STATEMENTS OF CITIZENS BANKSHARES,
INC. AND SUBSIDIARIES FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1997 (UNAUDITED):
Consolidated Balance Sheets E-30
Consolidated Statements of Income E-31
Consolidated Statements of Cash Flows E-32
Notes to Consolidated Financial Statements E-33
</TABLE>
E-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Citizens Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Citizens
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company'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 Citizens Bankshares,
Inc. and its subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Milwaukee, Wisconsin
April 21, 1998
E-10
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1997 1996
----------------------- ---------------------
<S> <C> <C>
Cash and due from banks $ 5,561,092 $ 5,081,862
Federal funds sold 7,350,000 7,500,000
----------------------- ---------------------
CASH AND CASH EQUIVALENTS 12,911,092 12,581,862
Interest bearing deposits 1,421,697 829,783
Investment securities available for sale 28,271,997 34,187,554
Loans, net 119,544,446 117,810,418
Accrued interest receivable 1,082,770 1,105,754
Bank premises and equipment 3,906,479 4,341,788
Goodwill (less accumulated amortization of
$1,036,921 - 1997; $614,990 - 1996) 931,670 1,353,601
Assets acquired through foreclosure (net
of allowance of $475,000 - 1997) 574,291 973,131
Other assets 954,504 1,369,657
----------------------- ---------------------
TOTAL ASSETS $169,598,946 $174,553,548
======================= =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $125,499,520 $131,360,746
Borrowed funds 20,271,700 20,671,700
Securities sold under agreements to repurchase 6,345,096 3,887,395
Accrued interest payable 652,843 766,732
Capital lease payable -- 20,700
Other liabilities 1,721,236 1,380,129
----------------------- ---------------------
TOTAL LIABILITIES 154,490,395 158,087,402
Stockholders' Equity:
Common stock, $20.00 par value per share;
100,000 shares authorized; 28,225 shares issued 564,500 564,500
Capital surplus 4,754,318 4,753,444
Less treasury stock at cost:
1997--1,643 shares; 1996--1,645 shares (419,139) (419,512)
Net unrealized gain on securities available for sale 215,638 149,075
Retained earnings 9,993,234 11,418,639
----------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 15,108,551 16,466,146
----------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $169,598,946 $174,553,548
======================= =====================
</TABLE>
See notes to consolidated financial statements.
E-11
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans $13,487,619 $13,765,656 $14,067,608
Securities:
Taxable 1,763,918 1,725,274 1,666,689
Nontaxable 235,163 238,636 343,204
Federal funds sold 313,305 582,930 322,435
-------------- -------------- --------------
TOTAL INTEREST INCOME 15,800,005 16,312,496 16,399,936
Interest expense:
Deposits 5,019,135 5,394,729 5,782,204
Borrowed funds 1,971,898 2,224,395 2,640,755
-------------- -------------- --------------
TOTAL INTEREST EXPENSE 6,991,033 7,619,124 8,422,959
-------------- -------------- --------------
NET INTEREST INCOME 8,808,972 8,693,372 7,976,977
Provision for credit losses 1,922,187 871,957 1,623,824
-------------- -------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 6,886,785 7,821,415 6,353,153
Noninterest income:
Service charges on deposit accounts 579,430 665,433 601,791
Insurance commissions 376,132 329,137 276,003
Loan fees and service charges 127,286 117,835 167,900
Gain on sale of investment securities, net -- 61,890 105,930
Other 367,705 344,625 422,628
-------------- -------------- --------------
TOTAL NONINTEREST INCOME 1,450,553 1,518,920 1,574,252
-------------- -------------- --------------
Noninterest expense:
Salaries and employee benefits 4,516,208 4,404,860 4,300,761
Bank premises and equipment 1,142,864 1,295,080 1,257,035
Professional services 783,233 257,068 349,463
Amortization of goodwill 421,931 220,539 217,924
Regulatory fees 103,674 189,016 320,820
Net costs of operation of foreclosed assets 84,278 125,479 251,128
Write down of foreclosed assets 594,598 -- --
Other 1,361,458 1,444,925 1,728,612
Write down of premises -- -- 335,827
-------------- -------------- --------------
TOTAL NONINTEREST EXPENSE 9,008,244 7,936,967 8,761,570
-------------- -------------- --------------
INCOME (LOSS)BEFORE INCOME TAXES (670,906) 1,403,368 (834,165)
Income tax expense (benefit) 701,335 431,118 (522,433)
-------------- -------------- --------------
NET INCOME (LOSS) $(1,372,241) $ 972,250 $ (311,732)
============== ============== ==============
NET INCOME (LOSS) PER SHARE-BASIC $ (51.62) $ 36.58 $ (11.72)
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
E-12
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
On Securities
Common Capital Treasury Available Retained
Stock Surplus Stock For Sale Earnings Total
------------ ------------ ------------ ------------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 564,500 $4,751,850 ($412,059) ($414,740) $10,811,282 $15,300,833
Net loss (311,732) (311,732)
Purchase of treasury stock,
19 shares (8,199) (8,199)
Sale of treasury stock,
2 shares 822 373 1,195
Change in net unrealized gains
on securities available-for-sale,
net of tax 832,507 832,507
------------ ------------ ------------ ------------------ ------------- ------------
BALANCE AT
DECEMBER 31, 1995 $ 564,500 $4,752,672 ($419,885) $ 417,767 $10,499,550 $15,814,604
Net income 972,250 972,250
Sale of treasury stock,
2 shares 772 373 1,145
Cash dividends declared,
$2.00 per share (53,161) (53,161)
Change in net unrealized gains
on securities available-for-sale,
net of tax (268,692) (268,692)
------------ ------------ ------------ ------------------ ------------- ------------
BALANCE AT
DECEMBER 31, 1996 $ 564,500 $4,753,444 ($419,512 $ 149,075 $11,418,639 $16,466,146
Net loss (1,372,241) (1,372,241)
Sale of treasury stock,
2 shares 874 373 1,247
Cash dividends declared,
$2.00 per share (53,164) (53,164)
Change in net unrealized gains
on securities available-for-sale,
net of tax 66,563 66,563
------------ ------------ ------------ ------------------ ------------- ------------
BALANCE AT
DECEMBER 31, 1997 $ 564,500 $4,754,318 ($419,139) $ 215,638 $ 9,993,234 $15,108,551
============ ============ ============ ================== ============= ============
</TABLE>
See notes to consolidated financial statements.
E-13
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------- ------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($1,372,241) $ 972,250 ($311,732)
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses 1,922,187 871,957 1,623,824
Write down of assets acquired through foreclosure 594,598 -- --
Provision for depreciation and amortization 491,435 504,564 487,323
Net accretion of investment security discounts (91,670) (88,226) (56,501)
Net amortization of loan premiums and discounts 359,998 (672,132) (346,090)
Goodwill amortization 421,931 220,539 217,924
Deferred income taxes 253,884 (17,878) (593,027)
Realized gains on investment securities, net -- (61,890) (105,930)
Write down of premises -- -- 335,827
(Increase) decrease in accrued interest receivable 22,984 20,396 (30,981)
Increase (decrease) in interest payable (113,889) (123,005) 171,121
Other 543,190 326,208 501,433
----------------- ------------ --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,032,407 1,952,783 1,893,191
INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits at banks (591,914) 322,498 21,056
Proceeds from sales of investment securities -- 11,151,291 6,829,019
Proceeds from maturity of investment securities 23,055,450 18,075,124 5,937,037
Purchase of investment securities (16,981,660) (31,121,420) (13,847,070)
Net (increase) decrease in loans (4,635,826) 7,688,460 10,107,335
Payments received on assets acquired through foreclosure 423,855 633,842 377,375
Purchases of premises and equipment (96,940) (253,119) (200,300)
----------------- ------------ --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,172,965 6,496,676 9,224,452
FINANCING ACTIVITIES
Net increase (decrease) in deposits (5,861,226) (7,349,518) 4,281,761
Increase (decrease) in borrowed funds 2,057,701 (9,033,264) (1,865,222)
Payment of cash dividends (53,164) (53,161) --
Repayment of capital lease obligation (20,700) (49,404) (50,207)
Sale (purchase) of treasury stock 1,247 1,145 (7,004)
----------------- ------------ --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,876,142) (16,484,202) 2,359,328
----------------- ------------ --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 329,230 (8,034,743) 13,476,971
Cash and cash equivalents at beginning of year 12,581,862 20,616,605 7,139,634
----------------- ------------ --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,911,092 $ 12,581,862 $ 20,616,605
================= ============ ==============
Supplemental cash flow information:
Interest paid on deposits and borrowings $ 7,105,000 $ 7,496,000 $ 8,252,000
Income taxes paid, net $ 318,500 $ 384,000 $ 10,000
Loans receivable transferred to foreclosed properties $ 619,613 $ 1,379,597 $ 513,159
</TABLE>
See notes to consolidated financial statements.
E-14
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Citizens Bankshares, Inc. (the Company), provides a full range of
financial services to individual customers in Wisconsin through its wholly-owned
insured banking subsidiary, Citizens Bank, N.A. (the Bank). Financial services
are also provided to customers throughout Wisconsin and two locations in
Illinois by Wisconsin Finance Corporation (WFC), a wholly-owned financing
subsidiary. The Company and its subsidiaries are subject to regulations of
certain federal agencies and undergo periodic examinations by these regulatory
authorities.
In preparing 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 these estimates.
CONSOLIDATION: The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of the Company and its wholly-owned subsidiaries: The Bank and the
Bank's wholly-owned subsidiary, CB Investments, Inc.; and Wisconsin Finance
Corporation and WFC's wholly-owned subsidiary, Citizens Financial Services, Inc.
All significant intercompany accounts have been eliminated.
CASH EQUIVALENTS: Cash equivalents include amounts due from banks and federal
funds sold. Generally, federal funds are sold for one-day periods.
INVESTMENT SECURITIES: Management determines the appropriate classification of
debt and equity securities at the time of purchase. Debt and equity securities
are classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost. Debt and equity securities not classified as held-to-
maturity are classified as available-for-sale. Available-for-sale securities
are stated at aggregate fair value, with unrealized gains and losses, net of
tax, reported as a separate component of stockholders' equity. Fair values for
securities are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments. The Company does not hold any securities in a trading
account. The cost of debt and equity securities classified as held-to-maturity
or available-for-sale are adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Interest and dividends are included in interest income. Realized gains and
losses are included in net securities gains (losses). The cost of securities
sold is based on the specific identification method.
LOANS: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity are carried at their unpaid principal
balance reduced by unearned discount and the allowance for loan losses.
Interest on commercial, municipal and real estate mortgage loans is computed
using the simple interest method. Interest on precomputed installment loans
held by WFC is computed using the Rule of 78. Interest on all other installment
loans is computed using a method which approximates a level-yield method or the
simple interest method, as appropriate. Interest on loans is recorded using the
accrual method. The accrual of interest income is discontinued when a loan
becomes 90 days past due as to principal or interest. When interest accruals are
discontinued, previously accrued interest is reversed and charged against
current operations.
E-15
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Impaired loans are loans for which it is probable that the creditor will be
unable to collect all amounts due according to the terms of the loan agreement.
Large groups of homogeneous loans such as mortgage and installment loans and
leases are collectively evaluated for impairment. Impaired loans are measured
and reported based on the present value of expected cash flows discounted at the
loan's effective interest rate, or at the fair value of the loan's collateral if
the loans is deemed "collateral dependent." A valuation allowance is required
to the extent that the measure of the impaired loans is less than the recorded
investment.
Nonaccrual loans are loans on which the accrual of interest ceases because the
timely collection of interest payments is determined to be uncertain by
management. It is the general policy of the Company to discontinue the accrual
of interest when principal or interest payments are delinquent 90 days or more
unless the loan is well collateralized and in process of collection. When
interest accrual is discontinued, all unpaid interest is reversed. 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 FEES: Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amount amortized as an
adjustment of the yield over the contractual life of the related loans. Such
fees are recorded as income upon prepayment of the related loans.
ASSETS ACQUIRED THROUGH FORECLOSURE: Assets acquired through foreclosure are
initially recorded at the lower of cost or fair value, net of estimated selling
costs at the date of foreclosure. After foreclosure, valuations are periodically
performed by management and the asset is carried at the lower of carrying amount
or fair value. Costs relating to improvement of the property are capitalized;
holding costs and changes in the valuation allowance are charged to expense.
ALLOWANCE FOR CREDIT LOSSES: The allowance for credit losses is increased
through a provision for credit losses charged to expense. Loans are charged
against the allowance when management believes that the collectibility of the
principal amount is unlikely. Recoveries of amounts previously charged off are
credited to the allowance. The allowance for credit losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolio. Management's periodic evaluation of the adequacy of the allowance is
based on an evaluation of the portfolio, including past loan loss experience,
known or inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation. The cost of premises and equipment is being
depreciated using the straight-line method, over the estimated useful lives of
the assets generally 3 to 40 years.
GOODWILL: Costs in excess of the fair value of acquired businesses is
amortized over the estimated useful lives using the straight line method,
generally seven to fifteen years. The Company periodically evaluates the
carrying value and remaining amortization periods of all long lived assets
including goodwill for impairment by reviewing various attributes including
expected loan and customer runoff. As a result of this evaluation during 1997,
a charge of $179,000 was taken to reduce the amortization period from seven to
five years.
E-16
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
INCOME TAXES: The Company and its subsidiaries file consolidated federal and
separate state income tax returns. The Company accounts for income taxes using
the asset and liability method. Deferred income tax assets and liabilities are
adjusted regularly to amounts estimated to be receivable or payable based on
current applicable income tax rates. Consequently, tax expense in future years
may be impacted by changes in tax rates and tax return limitations.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share is computed by
dividing net income by the weighted average number of common shares outstanding
during the year. The weighted average number of common shares outstanding was
26,581 in 1997, 26,580 in 1996 and 26,589 in 1995. The Company does not have
any common stock equivalents; therefore, diluted per share amounts equal the
basic per share amounts.
NOTE B -- INVESTMENT SECURITIES
The following is a summary of investment securities available-for-sale:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------- --------------- ------------------- -------------------
<S> <C> <C> <C> <C>
U.S. Government and federal
agency securities $21,302,821 $ 72,590 $12,806 $21,362,605
State and municipal 3,577,571 258,017 143 3,835,445
Other, principally equity securities 3,061,316 13,477 846 3,073,947
------------------- --------------- ------------------- -------------------
Total securities $27,941,708 $344,084 $13,795 $28,271,997
=================== =============== =================== ===================
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------- --------------- ------------------- -------------------
<S> <C> <C> <C> <C>
U.S. Government and federal
agency securities $26,890,152 $ 58,800 $64,065 $26,884,887
State and municipal 3,918,063 233,239 - 4,151,302
Other, principally equity securities 3,151,365 - - 3,151,365
------------------- --------------- ------------------- -------------------
Total securities $33,959,580 $292,039 $64,065 $34,187,554
=================== =============== =================== ===================
</TABLE>
Securities with a carrying value of $17,024,001 at December 31, 1997 and
$15,148,834 at December 31, 1996 were pledged to secure liabilities to the U.S.
Treasury, customer repurchase agreements and municipal deposits.
The amortized cost and estimated fair value of securities at December 31, 1997,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
certain of these obligations with or without call or prepayment penalties.
E-17
<PAGE>
CITIZENS BANKSHARES, INC. SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------------- -------------------
<S> <C> <C>
Due in one year or less $14,756,154 $14,792,444
Due after one year through five years 7,509,732 7,586,072
Due after five years through ten years 1,391,326 1,533,640
Due after ten years 1,223,180 1,285,894
------------------- -------------------
24,880,392 25,198,050
Other, principally equity securities 3,061,316 3,073,947
------------------- -------------------
Total securities $27,941,708 $28,271,997
=================== ===================
</TABLE>
Information concerning sale of securities is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------------ ------------------- -------------------
<S> <C> <C> <C>
Proceeds from sales of securities $ - $11,151,291 $ 6,829,019
Gross gains realized from sales of securities $ - $ 123,268 $ 125,216
Gross losses realized from sales of securities $ - $ 61,378 $ 19,286
</TABLE>
NOTE C -- LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loan balances classified by type are as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
-------------- --------------
<S> <C> <C>
Commercial, financial and agriculture $ 53,345,355 $ 48,710,332
Real 37,801,932 41,905,010
estate
mortgage
Installment 32,394,609 29,570,390
Municipal 3,038,187 3,329,649
-------------- --------------
126,580,083 123,515,381
Less:
Allowance for credit losses 4,208,878 3,238,202
Unamortized discounts 2,826,759 2,466,761
-------------- --------------
Total loan balances $119,544,446 $117,810,418
============== ==============
</TABLE>
Information concerning impaired loans which includes all nonaccrual loans is as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
--------------------- --------------------- -----------------
<S> <C> <C> <C>
Impaired loans $5,700,000 $5,600,000 $9,200,000
Impaired loans with a valuation allowance $2,714,000 $3,661,000 $9,200,000
Valuation allowance for impaired loans $1,227,000 $1,401,000 $2,931,000
</TABLE>
No significant income was recognized on impaired loans for each of the years in
the three year period ending December 31, 1997.
E-18
<PAGE>
CITIZENS BANKSHARES, INC. SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Activity in the allowance for credit losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------------- --------------- --------------
<S> <C> <C> <C>
Balance at beginning of year $ 3,238,202 $ 4,169,428 $3,095,530
Provisions 1,922,187 871,957 1,623,824
Recoveries 255,643 208,511 181,311
Charge-offs (1,207,154) (2,011,694) (731,237)
-------------- --------------- --------------
Balance at end of year $ 4,208,878 $ 3,238,202 $4,169,428
============== =============== ==============
</TABLE>
The Bank has loans outstanding to executive officers, directors, and to parties
which have the ability to significantly influence the Bank or the Company's
management or operating policies. These loans were made in the ordinary course
of business on the same terms and conditions, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other customers and did not involve more than the normal risk of collectibility.
Activity in 1997 associated with loans made to related parties was as follows:
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Balance at beginning of year $ 959,458
New loans 273,140
Repayments (183,540)
--------------
Balance at end of year $1,049,058
==============
</TABLE>
NOTE D -- PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Land and improvements $ 783,074 $ 783,074
Building and improvements 3,569,497 3,550,117
Furniture and equipment 1,574,375 1,630,595
Capital leased equipment - 536,143
Data processing equipment 953,824 939,549
Leasehold improvements 12,921 12,921
---------------- ----------------
6,893,691 7,452,399
Less accumulated depreciation
and amortization (2,987,212) (3,110,611)
---------------- ----------------
Total $ 3,906,479 $ 4,341,788
================ ================
</TABLE>
E-19
<PAGE>
CITIZENS BANKSHARES, INC. SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E -- DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------------- ---------------------------------
Amount Percent Amount Percent
------------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Demand deposit accounts (non-interest bearing) $ 15,500,728 12.35% $ 14,145,522 10.77%
Interest bearing checking accounts 10,421,974 8.30% 12,313,707 9.37%
Passbook savings accounts 16,069,340 12.81% 17,217,898 13.11%
Money market accounts 28,668,997 22.84% 27,552,542 20.97%
Time deposit accounts 54,838,481 43.70% 60,131,077 45.78%
------------------- ----------------- ----------------- --------------
$125,499,520 100.00% $131,360,746 100.00%
=================== ================= ================= ==============
</TABLE>
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 41,369,481
1999 7,138,000
2000 3,535,000
2001 2,796,000
$ 54,838,481
===================
</TABLE>
Time deposits include approximately $1,696,000 and $2,989,000 of certificates of
deposit of $100,000 or more at December 31, 1997 and 1996 respectively.
Interest expense on such deposits for the years ended December 31, 1997, 1996
and 1995 was approximately $163,000, $117,000 and 314,000, respectively.
NOTE F -- BORROWED FUNDS
Borrowings are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------------------------ --------------------------------------
Amount Interest Rate Amount Interest Rate
-------------------- -------------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Note payable to bank, due May 1, 1998 $ 3,559,200 8.50% $ 2,877,500 8.25%
Note payable to bank, due April 30, 1998 3,512,500 8.50% 2,794,200 8.25%
Note payable to bank, due November 1, 2000 6,000,000 8.25% 6,000,000 8.25%
Note payable to bank, due December 1, 2000 6,000,000 8.25% 6,000,000 8.25%
Federal Home Loan Bank, due September 22, 1997 1,000,000 7.02%
Federal Home Loan Bank, due June 23, 1999 600,000 6.81% 1,000,000 6.81%
Federal Home Loan Bank, due May 13, 1999 600,000 6.94% 1,000,000 6.94%
-------------------- -------------------- -------------------- ---------------
$20,271,700 $20,671,700
==================== ====================
</TABLE>
The $3,559,200 and $3,512,500 notes payable to a bank in 1997 and $2,877,500 and
$2,794,200 in 1996 represent borrowings by WFC under lines of credit totaling
$11,000,000 in 1997 and $10,000,000 in 1996. Interest is payable monthly.
Borrowings are secured by a guaranty of Citizens Bankshares, Inc.
The Bank is required to maintain unencumbered 1-4 family mortgage loans in its
portfolio aggregating at least 167% or pledge securities for any outstanding
advances from the Federal Home Loan Bank (FHLB) as collateral on these
borrowings. In addition, these notes are collateralized by all FHLB stock. The
Company owns $469,000 of Federal Home Loan Bank stock and has a line of credit
approximately
E-20
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
$52,179,400 of which $4,539,920 is available without purchasing additional FHLB
stock. Interest under each FHLB note is payable monthly and are at fixed rates
for the term of the notes. These notes cannot be prepaid without prepayment
penalties.
NOTE G -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Securities sold under agreements to repurchase:
Balance at December 31 $ 6,345,096 $3,887,395 $5,750,659
Maximum month-end balance 11,518,719 7,007,118 8,538,345
Average balance during the year 6,639,805 5,954,893 6,131,954
Average rate at year-end 5.11% 4.60% 5.12%
</TABLE>
NOTE H -- PROFIT SHARING AND RETIREMENT PLAN
The Company has a contributory profit sharing and retirement plan covering
substantially all full-time employees meeting certain age and length-of-service
requirements. Annual contributions are determined by the Board of Directors.
The expense associated with this plan was $113,418 and $47,429 for the years
ended December 31, 1997 and 1996, respectively. There was no expense for the
year ended December 31, 1995.
The Company has a 401(k) profit sharing plan covering substantially all full-
time employees meeting certain age and length-of-service requirements. The
Company matches 100% of employee contributions, not to exceed 3% of
participants' compensation for the plan year. Additional contributions may be
made as determined by the Company's Board of Directors. Total expenses
associated with the plan were $87,950 in 1997, $70,951 in 1996 and $66,869 in
1995.
NOTE I -- INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------------- ----------------- -------------------
<S> <C> <C> <C>
Current:
Federal $364,678 $400,996 $ 70,594
State 82,773 48,000 -
----------------- ----------------- -------------------
447,451 448,996 70,594
Deferred:
Federal 228,807 (15,504) (495,077)
State 25,077 (2,374) (97,950)
----------------- ----------------- -------------------
253,884 (17,878) (593,027)
$701,335 $431,118 ($522,433)
================= ================= ===================
</TABLE>
Included in the deferred tax expense for the year ended December 31, 1997 is an
increase in the beginning of the year valuation allowance of $471,000. A
reconciliation between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before income taxes is
as follows:
E-21
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------------- ------------------ ----------------
<S> <C> <C> <C>
Income tax expense (benefit)
at statutory rate $(228,108) $ 477,145 $ (283,616)
Increase (decrease) resulting from:
Tax exempt interest income (129,344) (110,381) (195,548)
Change in valuation allowance 964,408 - -
State income tax 54,630 30,420 (64,647)
Acquisition costs 72,449 - -
Other (32,700) 33,934 21,378
------------------- ------------------ ----------------
$ 701,335 $ 431,118 ($522,433)
=================== ================== ================
</TABLE>
The deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------- ----------------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $1,515,520 $1,134,587
State tax carryforwards 40,797 13,374
Goodwill 197,793 99,039
Premises and equipment 23,439 -
Other 102,027 35,881
----------------- ----------------
1,879,576 1,282,881
Valuation allowance (974,382) (9,974)
----------------- ----------------
Net deferred tax asset 905,194 1,272,907
Deferred tax liabilities:
Premises and equipment - (113,829)
Unrealized gain on securities (132,486) (89,399)
----------------- ----------------
$ 772,708 $1,069,679
================= ================
</TABLE>
NOTE J -- STOCKHOLDERS' EQUITY
The Company and the Bank 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk-weightings and other factors.
Quantitative measure established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 Capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes as of December 31,
1997 that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997 and 1996, the most recent notification from the Office
of the Comptroller of the Currency and the Federal Deposit Insurance Corporation
categorized the Company and the Bank as
E-22
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Company and the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 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 Company and the Bank are presented in the
following table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------- ----------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital: The Company $15,371,000 13.85% $8,881,000 8.00% $11,101,000 10.00%
The Bank $12,368,000 13.68% $7,234,000 8.00% $ 9,043,000 10.00%
Tier 1 Capital: The Company $13,949,000 12.57% $4,440,000 4.00% $ 6,661,000 6.00%
The Bank
$11,208,000 12.39% $3,617,000 4.00% $ 5,426,000 6.00%
Leverage: The Company $13,949,000 8.10% $6,890,000 4.00% $ 8,612,000 5.00%
The Bank
$11,208,000 7.46% $6,007,000 4.00% $ 7,509,000 5.00%
As of December 31, 1996
Total Capital: The Company $16,391,000 14.53% $9,027,000 8.00% $11,284,000 10.00%
The Bank
$13,752,000 14.90% $7,387,000 8.00% $ 9,233,000 10.00%
Tier 1 Capital: The Company $14,958,000 13.26% $4,514,000 4.00% $ 6,770,000 6.00%
The Bank
$12,577,000 13.60% $3,693,000 4.00% $ 5,540,000 6.00%
Leverage: The Company $14,958,000 8.71% $6,869,000 4.00% $ 8,586,000 5.00%
The Bank
$12,577,000 8.20% $6,119,000 4.00% $ 7,649,000 5.00%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain legal and regulatory restrictions exist regarding the ability of the
Bank to pay cash dividends to the Company.
NOTE K -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments consist principally of commitments to extend credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The contract
amounts noted below reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's maximum exposure to credit loss for commitments to extend credit
is represented by the contract amount of those instruments.
E-23
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Financial instruments whose contract amounts represent potential credit risk at
December 31:
<TABLE>
<CAPTION>
1997
---------------------
<S> <C>
Commitments to extend credit $1,740,000
Standby letters of credit 292,000
Unused lines of credit 7,521,000
1996
---------------------
Commitments to extend credit $1,764,000
Standby letters of credit 346,000
Unused lines of credit 7,876,000
</TABLE>
Commitments to extend credit and lines of credit are agreements to lend 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 generally require payment of a fee. Since some
commitments expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit are
conditional commitments issued by the bank to guarantee the performance of a
customer to a third party. The Company evaluates the creditworthiness of each
customer on a case by case basis. The Company generally extends credit only on
a secured basis. Collateral obtained varies, but consists primarily of real
estate, business inventories and accounts receivable.
Commitments to extend credit on a fixed rate basis expose the Company to a
certain amount of interest rate risk if market rates of interest substantially
increase during the commitment period.
NOTE L -- LEASE AGREEMENTS
The Company's future minimum rental commitments for leased premises under
operating and capital leases during the twelve month periods following December
31 are as follows:
<TABLE>
<CAPTION>
Date Amount
---------- --------
<S> <C>
1998 $139,542
1999 103,263
2000 56,788
2001 36,991
2002 22,791
2003 4,549
--------
$363,924
========
</TABLE>
Rental expense for the years ended December 31, 1997, 1996 and 1995 was
$169,371, $176,785 and $179,432, respectively.
Amortization of assets under capital lease arrangements has been included with
depreciation expense.
NOTE M -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (Statement No. 107), requires the disclosure of
estimated fair values of all asset, liability, and off-balance sheet financial
instruments. The estimated fair value amounts under amounts under Statement No.
107 have been determined as of a specific point in time utilizing various
available market information, assumptions, and appropriate valuation
methodologies. Accordingly, the estimated fair values presented herein are not
necessarily representative of the underlying value of the Company. Rather the
disclosures are limited to reasonable estimates of the fair value of only the
financial
E-24
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
instruments of the Company. The use of assumptions and various valuation
techniques, as well as the absence of secondary assets for certain financial
instruments, will likely reduce the comparability of fair value disclosures
between financial institutions. The estimated fair values of the financial
instruments of the Company as of December 31, 1997 and 1996 are set forth in the
following table.
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash, Due From Banks & Fed Funds Sold $ 12,911,092 $ 12,911,092 $ 12,581,862 $ 12,581,862
Interest-Bearing Deposits 1,421,697 1,421,697 829,783 829,666
Investment Securities 28,271,997 28,271,997 34,187,554 34,187,554
Loans 119,544,446 117,689,960 117,810,418 115,198,056
Financial Liabilities:
Demand, Checking,
Passbook and Money
Market Accounts $ 70,661,039 $ 70,661,039 $ 71,229,669 $ 71,229,669
Time Deposit Accounts 54,838,481 54,792,113 60,131,077 60,058,077
Borrowed Funds 20,271,700 20,265,941 20,671,700 20,655,515
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions are used by the Company in estimating the
fair value for its financial instruments:
(A) CASH, DUE FROM BANKS, & FEDERAL FUNDS SOLD
The carrying value of cash, due from banks, and federal funds sold approximates
fair value due to the short period of time between origination of the instrument
and their expected realization.
(B) INTEREST-EARNING DEPOSITS
The fair value of these instruments were estimated by discounting the
contractual cash flows using available market information for instruments with
similar financial characteristics.
(C) INVESTMENT SECURITIES
The fair value of these financial instruments were estimated using quoted market
prices.
(D) LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, by fixed and adjustable rate
interest terms, and by performing and nonperforming categories. The fair value
is calculated using assumptions regarding credit risk, cash flows, and discount
rates judgmentally determined using available market information.
(E) DEPOSITS
The fair value of deposits with no stated maturity, such as demand, checking,
passbook and money market accounts are disclosed as the amount payable on
demand. The fair value of the Company's time deposits is calculated using cash
flows and discount rates judgmentally determined using available market
information. The fair value estimates do not include the benefit that results
from the low-cost funding provided by the deposit liabilities company to the
cost of borrowing funds in the market.
E-25
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(F) BORROWED FUNDS
The fair value of the Company's long-term borrowings are estimated using the
discounted cash flow analysis based on the Company's current incremental
borrowing rates for similar types and maturities of instruments.
(G) OFF-BALANCE SHEET ITEMS
The fair value of commitments to extend credit was estimated using fees
currently charged to enter such agreements and is not considered material and
therefore it has not been included herein.
NOTE N -- FINANCIAL INFORMATION OF CITIZENS BANKSHARES, INC. (PARENT COMPANY
ONLY)
Presented below are condensed financial statements for Citizens Bankshares, Inc.
(Parent Company) only:
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
Assets: 1997 1996
------------------- -------------------
<S> <C> <C>
Cash and due from banks $ 110,922 $ 112,267
Investment securities available for sale 73,872 73,872
Investment in Wisconsin Finance Corporation 2,621,828 2,350,261
Investment in Citizens Bank, N.A. 12,214,830 13,622,109
Premises and equipment 19,602 31,745
Other assets 187,427 306,205
------------------- -------------------
TOTAL ASSETS $15,228,481 $16,496,459
=================== ===================
Liabilities and Stockholders' Equity:
Other liabilities $ 119,930 $ 30,313
------------------- -------------------
Stockholders' Equity:
Common stock, $20.00 par value per share;
100,000 shares authorized; 28,225 shares issued $ 564,500 $ 564,500
Capital surplus 4,754,318 4,753,444
Less treasury stock at cost: (419,139) (419,512)
Net unrealized gain on securities available for sale 215,638 149,075
Retained Earnings 9,993,234 11,418,639
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 15,108,551 16,466,146
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,228,481 $16,496,459
=================== ===================
</TABLE>
E-26
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------- ------------------ ---------------
<S> <C> <C> <C>
Income:
Support service fee income from subsidiaries $ 674,223 $ 666,974 $ 592,576
Other 4,720 5,920 4,400
------------------- ------------------ ---------------
TOTAL INCOME 678,943 672,894 596,976
Expenses:
Salaries and employee benefits 548,737 591,240 503,063
Premises and equipment 38,620 29,884 24,716
Professional services 279,698 20,832 34,770
Other 40,052 36,760 44,896
------------------- ------------------ ---------------
TOTAL EXPENSE 907,107 678,716 607,445
LOSS BEFORE INCOME TAXES AND UNDISTRIBUTED
NET EARNINGS (LOSS) OF SUBSIDIARIES (228,164) (5,822) (10,469)
Income tax benefit (5,035) (1,857) (3,958)
------------------- ------------------ ---------------
LOSS BEFORE UNDISTRIBUTED
NET EARNINGS (LOSS) OF SUBSIDIARIES (223,129) (3,965) (6,511)
Equity in undistributed net earnings (loss) of subsidiaries (1,149,112) 976,215 (305,221)
------------------- ------------------ ---------------
NET INCOME (LOSS) $(1,372,241) $ 972,250 $(311,732)
=================== ================== ===============
</TABLE>
E-27
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,372,241) $ 972,250 $(311,732)
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net earnings (loss) of subsidiaries 1,149,112 (976,215) 305,221
Depreciation 7,834 1,099 970
Decrease in other assets 118,778 96,241 83,389
(Decrease) increase in other liabilities 89,617 66,474 (102,801)
------------ ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (6,900) 159,849 (24,953)
INVESTING ACTIVITIES
Reclassification of premises and equipment 4,308 (32,571) (2,210)
------------ ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,308 (32,571) (2,210)
FINANCING ACTIVITIES
Payment of cash dividends - (53,161) -
Sale (purchase) of treasury stock 1,247 1,145 (7,004)
------------ ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,247 (52,016) (7,004)
------------ ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,345) 75,262 (34,167)
Cash and cash equivalents at beginning of year 112,267 37,005 71,172
------------ ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 110,922 $ 112,267 $ 37,005
============ ========== ==========
</TABLE>
NOTE O -- SUBSEQUENT EVENTS
On January 31, 1998, the Bank completed the sale of two of its branch banking
offices with combined premises and equipment of approximately $2,115,000, loans
of approximately $6,399,000 and deposits of approximately $10,183,000. The sale
resulted in a pre-tax gain of approximately $702,000 which was recorded in the
first quarter of 1998.
On February 17, 1998, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with Associated Banc-Corp ("Associated") wherein
shareholders of the Company would receive shares of Associated in exchange for
their shares of the Company. The proposed merger is subject to the appropriate
regulatory and shareholder approvals and compliance with the terms of the Merger
Agreement by the Company and Associated. The terms of the proposed transaction,
which is expected to be consummated in mid 1998, require that the transaction be
accounted for as a pooling of interests under generally accepted accounting
principles. Under the terms of the Merger Agreement, each issued and
outstanding share of common stock of the Company shall be converted into the
right to receive 27 shares of common stock of Associated to be adjusted for any
stock splits. Pursuant to the Merger Agreement, a cash payment will be made in
lieu of issuance of fractional shares.
E-28
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P -- EVENT UNAUDITED SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
Subsequent to April 21, 1998, the Company amended certain terms of the Agreement
and Plan of Merger with Associated Banc-Corp ("Associated"). (See Note O). The
terms of the amended agreement allow the shareholders of the Company to elect
the receipt of cash or shares of Associated in exchange for the shares of the
Company, however, the total amount of cash payments will not exceed 50% of the
merger consideration. The proposed transaction, which is expected to be
consummated by the end of the year, will be accounted for as a purchase under
generally accepted accounting principles. Under the terms of the amended
agreement, each share of the Company common stock exchanged will be converted
into the right to receive 33.75 shares of common stock of Associated or a cash
payment equal to 33.75 multiplied by the average closing prices of the
Associated common stock on the NASDAQ National Market over the ten trading days
ending on the business day prior to the date of the special meeting of
shareholders held for the purpose of voting on the proposed merger. The 33.75
exchange ratio is reflective of a 5 for 4 stock split effected by Associated
subsequent to April 21, 1998.
E-29
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
---------------- ----------------
<S> <C> <C>
Cash and due from banks $ 3,954,137 $ 5,193,594
Federal funds sold 13,470,000 4,600,000
---------------- ----------------
CASH AND CASH EQUIVALENTS 17,424,137 9,793,594
Interest bearing deposits 1,423,268 580,161
Investment securities available for sale 30,195,259 32,732,639
Loans, net 105,898,380 119,795,622
Accrued interest receivable 1,171,559 1,092,872
Premises and equipment 1,679,330 4,110,526
Goodwill (less accumulated amortization of
$1,099,500 - 1998, $725,084 - 1997) 806,091 1,243,508
Assets acquired through foreclosure 450,241 1,285,577
Other assets 856,910 1,271,227
---------------- ----------------
TOTAL ASSETS $159,905,175 $171,905,776
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $113,767,267 $126,828,447
Borrowed funds 19,745,000 18,946,700
Securities sold under agreements to repurchase 7,576,435 7,106,378
Accrued interest payable 620,818 749,401
Other liabilities 1,649,150 1,317,992
---------------- ----------------
TOTAL LIABILITIES $143,358,670 $154,948,918
================ ================
Stockholders' Equity:
Common stock, $20.00 par value per share;
100,000 shares authorized; 28,225 shares issued 564,500 564,500
Capital surplus 4,754,318 4,753,444
Less treasury stock at cost:
1998--1,643 shares; 1997--1,645 shares (419,139) (419,512)
Accumulated other comprehensive income 188,001 135,209
Retained earnings 11,458,825 11,923,217
----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY $ 16,546,505 $ 16,956,858
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $159,905,175 $171,905,776
================= ================
</TABLE>
E-30
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Interest income:
Loans $6,781,679 $6,610,805
Securities:
Taxable 798,540 892,345
Nontaxable 109,153 119,392
Federal funds sold 294,367 146,502
----------------- -----------------
TOTAL INTEREST INCOME 7,983,739 7,769,044
Interest expense:
Deposits 2,246,369 2,536,661
Borrowed funds 987,083 942,407
----------------- -----------------
TOTAL INTEREST EXPENSE 3,233,452 3,479,068
----------------- -----------------
NET INTEREST INCOME 4,750,287 4,289,976
Provision for loan losses 196,558 221,311
----------------- -----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,553,729 4,068,665
Noninterest income:
Service charges on deposit accounts 241,664 291,593
Insurance commissions 190,116 189,674
Loan fees and service charges 63,200 62,802
Gain on sale of bank branches 702,593 --
Other 178,713 168,391
----------------- -----------------
TOTAL NONINTEREST INCOME 1,376,286 712,460
----------------- -----------------
Noninterest expense:
Salaries and employee benefits 2,132,798 2,319,470
Premises and equipment 506,461 647,556
Professional services 303,977 224,127
Amortization of goodwill 125,579 110,094
Regulatory fees 54,793 52,477
Net costs of operation of foreclosed assets (29,305) 63,063
Other 549,296 639,832
----------------- -----------------
TOTAL NONINTEREST EXPENSE 3,643,599 4,056,619
----------------- -----------------
INCOME BEFORE INCOME TAXES 2,286,416 724,506
Income tax expense 820,825 219,921
NET INCOME $1,465,591 504,585
================= =================
NET INCOME PER SHARE BASIC $ 55.14 $ 18.98
================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING 26,581 26,580
</TABLE>
E-31
<PAGE>
CITIZENS BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,465,591 $ 504,585
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 196,556 221,311
Provision for depreciation and amortization 164,782 263,845
Net accretion of investment security discounts (19,183) (54,278)
Net amortization of loan premiums and discounts (1,657,470) 26,476
Goodwill amortization 125,579 110,094
(Increase) decrease in accrued interest receivable (88,789) 12,882
Decrease in interest payable (32,025) (17,331)
Gain on sale of bank branches (702,593) -
Other 1,465,281 64,388
------------------ -----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 917,731 1,131,972
INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits at banks (1,571) 249,622
Proceeds from maturity of investment securities and
principal repayments on mortgage-related securities 9,762,800 10,551,200
Purchase of investment and mortgage-related securities (11,703,046) (9,063,240)
Net (increase) decrease in loans 8,378,556 (2,769,758)
Payments received on assets acquired through foreclosure 630,516 224,321
Cash paid in connection with branch sales (2,576,150) --
Purchase of premises and equipment (52,974) (53,369)
------------------ -----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,438,131 (861,224)
FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,547,456) (4,532,299)
Increase (decrease) in borrowed funds 704,639 1,493,983
Repayment of capital lease obligation -- (20,700)
------------------ -----------------
NET CASH USED IN FINANCING ACTIVITIES (842,817) (3,059,016)
------------------ -----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,513,045 (2,788,268)
Cash and cash equivalents at beginning of year 12,911,092 12,581,862
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,424,137 $ 9,793,594
================== =================
Supplemental cash flow information:
Interest paid on deposits and borrowings $ 3,265,000 $ 3,496,000
Income taxes paid, net $ 41,500 $ 106,000
Loans receivable transferred to foreclosed properties $ 329,466 $ 536,767
</TABLE>
E-32
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1 -- GENERAL
The accounting and reporting policies of Citizens Bankshares, Inc. and
subsidiaries (the "Company") conform to generally accepted accounting principles
and to general practices within the banking industry. Significant accounting
policies used by the Company are described in the summary of significant
accounting policies included as part of the December 31, 1997, 1996 and 1995
audited consolidated financial statements.
The condensed financial statements reflect adjustments, all of which are of a
normal recurring nature, and in, the opinion of management, necessary for a fair
statement of results for the interim periods. The operating results for the six
months ended June 30, 1998 are not necessarily indicative of the results which
may be expected for the entire year. The accompanying condensed consolidated
financial statements should be read in conjunction with the Company's December
31, 1997, 1996 and 1995 audited consolidated financial statements and related
notes.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") which establishes standards
for reporting and the display of comprehensive income and its components in a
full set of general purpose financial statements. SFAS 130 is displayed in
equal prominence with other financial statements. The Company is required to
classify items of "other comprehensive income" by their nature in the financial
statement and display the balance of other comprehensive income separately in
the stockholders' equity section of the balance sheet. For interim reporting
purposes, the disclosure of other comprehensive income may be included in the
notes to the interim financial statements.
The Company's comprehensive income includes net income and other comprehensive
income comprised entirely of unrealized gains or losses on securities available
for sale, net of tax. Total comprehensive income for the six months ended June
30, 1998 and 1997 was $1,437,954 and $490,719, respectively.
On January 31, 1998, the Bank completed the sale of two of its branch banking
offices with combined premises and equipment of approximately $2,115,000, loans
of approximately $6,399,000 and deposits of approximately $10,183,000. The sale
resulted in a pre-tax gain of approximately $702,000 which was recorded in the
first quarter of 1998.
NOTE 2 -- ALLOWANCE FOR LOAN LOSSES
A summary of the changes in the allowance for loan losses is a follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
-------------------------- ----------------------------
<S> <C> <C>
Balance, beginning of period $4,209 $3,238
Provision charged to expense 197 221
Loan charge-offs (375) (760)
Loan recoveries 60 169
-------------------------- ----------------------------
Balance, end of period $4,091 $2,868
</TABLE>
E-33
<PAGE>
NOTE 3 -- NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
-------------------------- ----------------------------
<S> <C> <C>
NONPERFORMING LOANS $4,692 $5,355
</TABLE>
NOTE 4 -- NET INCOME (LOSS) PER SHARE
For purposes of calculating net income (loss) per share, the weighted average
number of shares outstanding for the six months ended June 30, 1998 was 26,581
and for the six months ended June 30, 1997 was 26,580 shares.
NOTE 5 -- MERGER AGREEMENT
On February 17, 1998, the Company entered into an Agreement and Plan of Merger
(as amended the "Merger Agreement") with Associated Banc-Corp ("Associated").
The terms of the Merger Agreement allow the shareholders of the Company's stock
to elect the receipt of cash or shares of Associated in exchange for the shares
of the Company, however, the total amount of cash payments will not exceed 50%
of the merger consideration. The proposed transaction, which is expected to be
consummated by the end of the year, will be accounted for as a purchase under
generally accepted accounting principles. Under the terms of the Merger
Agreement, each share of the Company common stock exchanged will be converted
into the right to receive 33.75 shares of common stock of Associated or a cash
payment equal to 33.75 multiplied by the average closing prices of the
Associated common stock on the NASDAQ National Market over the ten trading days
ending on the business day prior to the date of the special meeting of
shareholders held for the purpose of voting on the proposed merger. The 33.75
exchange ratio is reflective of a 5 or 4 stock split effected by Associated
subsequent to February 17, 1998.
E-34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Registrant is incorporated under the Wisconsin Business Corporation Law
(the "WBCL"). Under Section 180.0851 of the WBCL, the Registrant shall
indemnify a director or officer, to the extent such person is successful on the
merits or otherwise in the defense of a proceeding, for all reasonable expenses
incurred in the proceeding, if such person was a party to such proceeding
because he or she was a director or officer of the Registrant. In all other
cases, the Registrant shall indemnify a director or officer against liability
incurred in a proceeding to which such person was a party because he or she was
a director or officer of the Registrant; unless liability was incurred because
he or she breached or failed to perform a duty owed to the Registrant and such
breach or failure to perform constitutes: (i) a willful failure to deal fairly
with the Registrant or its shareholders in connection with a matter in which the
director or officer has a material conflict of interest; (ii) a violation of
criminal law, unless the director or officer had reasonable cause to believe his
or her conduct was lawful or no reasonable cause to believe his or her conduct
was unlawful; (iii) a transaction from which the director or officer derived an
improper personal profit; or (iv) willful misconduct. Section 180.0858 of the
WBCL provides that subject to certain limitations, the mandatory indemnification
provisions do not preclude any additional right to indemnification or allowance
of expenses that a director or officer may have under the Registrant's articles
of incorporation, bylaws, a written agreement between the director or officer
and the Registrant or a resolution of the Board of Directors or adopted by
majority vote of the Registrant's shareholders.
Section 180.0859 of the WBCL provides that it is the public policy of the
State of Wisconsin to require or permit indemnification, allowance of expenses
and insurance to the extent required or permitted under Sections 180.0850 to
180.0858 of the WBCL for any liability incurred in connection with a proceeding
involving a federal or state statute, rule or regulation regulating the offer,
sale or purchase of securities.
The Registrant's Articles of Incorporation contains no provisions in
relation to the indemnification of directors and officers of the Registrant.
Article XI of the Registrant's By-laws ("Article XI") authorizes
indemnification of officers and directors of the Registrant consistent with the
description of the indemnification provisions in Section 180.0851 of the WBCL as
described above. Article XI provides that the Registrant shall indemnify a
II-1
<PAGE>
director, officer, employee or agent of the Registrant to the extent such
individual has been successful on the merits or otherwise in the defense of any
threatened, pending or completed civil, criminal, administrative or
investigative action, suit, arbitration or other proceeding, whether formal or
informal (including, but not limited to, any act or failure to act alleged or
determined (i) to have been negligent, (ii) to have violated the Employee
Retirement Income Security Act of 1974; or (iii) to have violated Sections
180.0832, 180.0833 and 180.1202 of the WBCL, or any successor thereto, regarding
loans to directors, unlawful distributions and distributions of assets, which
involves foreign, federal, state or local law and which is brought by or in the
right of the Registrant or by any other person or entity, to which the director,
officer, employee or agent was a party because he or she is a director, officer,
employee or agent. In all other cases, the Registrant shall indemnify a
director, officer, employee or agent of the Registrant against liability and
expenses incurred by such person in a proceeding unless it shall have been
proven by final judicial adjudication that such person breached or failed to
perform a duty owed to the Registrant under the circumstances described above as
set forth in Section 180.0851 of the WBCL. Article XI defines a "director,
officer, employee or agent" as (i) a natural person who, is or was a director,
officer, employee or agent of the Registrant, (ii) a natural person who, while a
director, officer, employee or agent of the Registrant, is or was serving either
pursuant to the Registrant's specific request or as a result of the nature of
such person's duties to the Registrant as a director, officer, partner, trustee,
member of any governing or decision making committee, employee or agent of
another corporation or foreign corporation, partnership, joint venture, trust or
other enterprise and (iii) a person who, while a director, officer, employee or
agent of the Registrant, is or was serving an employee benefit plan because his
or her duties to the Registrant also impose duties on, or otherwise involve
services by, the person to the plan or to participants in or beneficiaries of
the plan. Unless the context requires otherwise, Article XI indemnification
extends to the estate or personal representative of a director, officer,
employee or agent.
All officers, directors, employees and agents of controlled subsidiaries of
the Registrant shall be deemed for purposes of Article XI to be serving as such
officers, directors, employees and agents at the request of the Registrant. The
right to indemnification granted to such officers and directors by Article XI is
not subject to any limitation or restriction imposed by any provision of the
Articles of Incorporation or Bylaws of a controlled subsidiary. For purposes of
Article XI, a "controlled subsidiary" means any corporation at least 80% of the
outstanding voting stock of which is owned by the Registrant or another
controlled subsidiary of the Registrant.
Upon written request by a director, officer, employee or agent who is a
party to a proceeding, the Registrant shall pay or reimburse his or her
reasonable
II-2
<PAGE>
expenses as incurred if the director, officer, employee or agent provides the
Registrant with: (i) a written affirmation of his or her good faith belief that
he or she is entitled to indemnification under Article XI; and (ii) a written
undertaking to repay all amounts advanced without interest to the extent that it
is ultimately determined that indemnification under Article XI is prohibited.
The Registrant shall have the power to purchase and maintain insurance on behalf
of any person who is a director, officer, employee or agent against any
liability asserted against or incurred by the individual in any such capacity
arising out of his or her status as such, regardless of whether the Registrant
is required or authorized to indemnify or allow expenses to the individual under
Article XI.
The right to indemnification under Article XI may be amended only by a
majority vote of the shareholders and any reduction in the right to
indemnification may only be prospective from the date of such vote.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
Exhibit No.
- -----------
2(a) Agreement and Plan of Merger dated as of February 17, 1998
between the Registrant and Citizens Bankshares, Inc.,
incorporated by reference to Exhibit A to the Proxy
Statement/Prospectus of the Registrant and Citizens Bankshares,
Inc. (the "Proxy Statement/Prospectus").
2(b) First Amendment to Agreement and Plan of Merger dated as of
October 8, 1998, between the Registrant and Citizens Bankshares,
Inc., incorporated by reference to Exhibit A-1 to the Proxy
Statement/Prospectus.
2(c) Second Amendment to Agreement and Plan of Merger dated as of
October 27, 1998, between the Registrant and Citizens
Bankshares, Inc., incorporated by reference to Exhibit A-2 to the
Proxy Statement/Prospectus.
3(a) Articles of Incorporation, as amended and restated, incorporated
by reference to Exhibit 3 of the Registrant's Quarterly Report on
Form 10-Q filed for the quarter ended June 30, 1993, SEC File No.
0-5519.
II-3
<PAGE>
3(b) Articles of Amendment to Articles of Incorporation, as amended
and restated, incorporated by reference to Exhibit 3(a) of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, SEC File No. 0-5519.
3(c) Bylaws, as amended, incorporated by reference to Exhibit 3(b) of
the Registrant's Annual Report on Form 10-K filed for the year
ended December 31, 1997, SEC File No. 0-5519.
4 The Registrant has outstanding certain long term debt. None of
such debt exceeds 10% of the total assets of the Registrant and
its consolidated subsidiaries. Thus, copies of the constituent
instruments defining the rights of the holders of such debt are
not included as exhibits to this Registration Statement. The
Registrant agrees to furnish copies of such instruments to the
Commission upon request.
5 Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
s.c. regarding legality of issuance of the Registrant's
securities.
8* Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
s.c. regarding certain federal income tax matters.
10(a) The 1982 Incentive Stock Option Plan of the Registrant
incorporated by reference to Exhibit 10 to Annual Report on Form
10-K for fiscal year ended December 31, 1987.
10(b) The Restated Long-Term Incentive Stock Option Plan of the
Registrant incorporated by reference to Exhibit 10 filed with the
Registrant's registration statement (33-86790) on Form S-8 filed
under the Securities Act of 1933.
10(c) Change of Control Plan of the Registrant effective April 25, 1994
incorporated by reference to Exhibit 10(d) of the Registrant's
Annual Report on Form 10-K for fiscal year ended December 31,
1994, SEC File No. 0-5519.
10(d) Deferred Compensation Plan and Deferred Compensation Trust
effective as of December 16, 1993, and Deferred Compensation
Agreement of the Registrant dated December 31, 1994, incorporated
by reference to
II-4
<PAGE>
Exhibit 10(e) of the Registrant's Annual Report on Form 10-K
for fiscal year ended December 31, 1994, SEC File No. 0-5519.
11 Statement Re Computation of Per Share Earnings incorporated by
reference to Exhibit 11 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and Exhibit 11
of the Registrant's Quarterly Report on Form 10-Q filed for the
quarter ended June 30, 1998, SEC File No. 0-5519.
21 List of Subsidiaries of the Registrant incorporated by reference
to Exhibit 21 of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, SEC File No. 0-5519.
23(a) Consents of KPMG Peat Marwick LLP.
23(b) Consent of Ernst & Young LLP.
23(c) Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
s.c. incorporated by reference to Exhibit 5.
24 Powers of Attorney.
_____________________
*To be filed by amendment.
(b) No financial statement schedules are required to be filed herewith pursuant
to Item 21(b) or (c) of this Form.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (and, where
applicable, each filing of an employee benefit plan's annual report to Section
15(d) of the Exchange Act), that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy, as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Green Bay, State of
Wisconsin, on this 30th day of October, 1998.
ASSOCIATED BANC-CORP
By: /s/ Harry B. Conlon
-----------------------------------
Harry B. Conlon,
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Harry B. Conlon, Chairman, President, Chief October 30, 1998
- --------------------------
Harry B. Conlon Executive Officer and a
Director (Principal
Executive Officer)
Joseph B. Selner Senior Vice President and October 30, 1998
- --------------------------
Joseph B. Selner Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
* Vice Chairman and a October 30, 1998
- --------------------------
Robert C. Gallagher Director
* Vice Chairman and a October 30, 1998
- --------------------------
John C. Seramur Director
II-7
<PAGE>
Signature Title Date
--------- ----- ----
* Director October 30, 1998
- --------------------------
Robert S. Gaiswinkler
* Director October 30, 1998
- --------------------------
Ronald R. Harder
* Director October 30, 1998
- --------------------------
John S. Holbrook, Jr.
* Director October 30, 1998
- --------------------------
William R. Hutchinson
* Director October 30, 1998
- --------------------------
Robert P. Konopacky
* Director October 30, 1998
- --------------------------
Dr. George R. Leach
* Director October 30, 1998
- --------------------------
John C. Meng
* Director October 30, 1998
- --------------------------
J. Douglas Quick
* Director October 30, 1998
- --------------------------
John H. Sproule
* Director October 30, 1998
- --------------------------
Ralph R. Staven
* Director October 30, 1998
- --------------------------
Norman L. Wanta
*Brian R. Bodager hereby signs this registration statement on October 30,
1998 on behalf of each of the indicated persons for whom he is attorney-in-fact
pursuant to a power of attorney filed herewith.
*By: /s/ Brian R. Bodager
-------------------------------
Brian R. Bodager
II-8
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
2(a) Agreement and Plan of Merger dated as of February 17, 1998
between the Registrant and Citizens Bankshares, Inc.,
incorporated by reference to Exhibit A to the Proxy
Statement/Prospectus of the Registrant and Citizens Bankshares,
Inc. (the "Proxy Statement/Prospectus").
2(b) First Amendment to Agreement and Plan of Merger dated as of
October 8, 1998, between the Registrant and Citizens Bankshares,
Inc., incorporated by reference to Exhibit A-1 to the Proxy
Statement/Prospectus.
2(c) Second Amendment to Agreement and Plan of Merger dated as of
October 27, 1998, between the Registrant and Citizens
Bankshares, Inc., incorporated by reference to Exhibit A-2 to the
Proxy Statement/Prospectus.
3(a) Articles of Incorporation, as amended and restated, incorporated
by reference to Exhibit 3 of the Registrant's Quarterly Report on
Form 10-Q filed for the quarter ended June 30, 1993, SEC File No.
0-5519.
3(b) Articles of Amendment to Articles of Incorporation, as amended
and restated, incorporated by reference to Exhibit 3(a) of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, SEC File No. 0-5519.
3(c) Bylaws, as amended, incorporated by reference to Exhibit 3(b) of
the Registrant's Annual Report on Form 10-K filed for the year
ended December 31, 1997, SEC File No. 0-5519.
4 The Registrant has outstanding certain long term debt. None of
such debt exceeds 10% of the total assets of the Registrant and
its consolidated subsidiaries. Thus, copies of the constituent
instruments defining the rights of the holders of such debt are
not included as exhibits to this Registration Statement. The
Registrant agrees to furnish copies of such instruments to the
Commission upon request.
<PAGE>
5 Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
s.c. regarding legality of issuance of the Registrant's
securities.
8* Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
s.c. regarding certain federal income tax matters.
10(a) The 1982 Incentive Stock Option Plan of the Registrant
incorporated by reference to Exhibit 10 to Annual Report on Form
10-K for fiscal year ended December 31, 1987.
10(b) The Restated Long-Term Incentive Stock Option Plan of the
Registrant incorporated by reference to Exhibit 10 filed with the
Registrant's registration statement (33-86790) on Form S-8 filed
under the Securities Act of 1933.
10(c) Change of Control Plan of the Registrant effective April 25, 1994
incorporated by reference to Exhibit 10(d) of the Registrant's
Annual Report on Form 10-K for fiscal year ended December 31,
1994, SEC File No. 0-5519.
10(d) Deferred Compensation Plan and Deferred Compensation Trust
effective as of December 16, 1993, and Deferred Compensation
Agreement of the Registrant dated December 31, 1994, incorporated
by reference to Exhibit 10(e) of the Registrant's Annual Report
on Form 10-K for fiscal year ended December 31, 1994, SEC File
No. 0-5519.
11 Statement Re Computation of Per Share Earnings incorporated by
reference to Exhibit 11 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and Exhibit 11
of the Registrant's Quarterly Report on Form 10-Q filed for the
quarter ended June 30, 1998, SEC File No. 0-5519.
21 List of Subsidiaries of the Registrant incorporated by reference
to Exhibit 21 of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, SEC File No. 0-5519.
23(a) Consents of KPMG Peat Marwick LLP.
ii
<PAGE>
23(b) Consent of Ernst & Young LLP.
23(c) Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
s.c. incorporated by reference to Exhibit 5.
24 Powers of Attorney.
________________
*To be filed by amendment.
iii
<PAGE>
October 30, 1998
Associated Banc-Corp
112 North Adams Street
P.O. Box 13307
Green Bay, WI 54307
Gentlemen: Re: Registration Statement on Form S-4
We have acted as counsel for Associated Banc-Corp, a Wisconsin
corporation (the "Company"), in connection with the issuance by the Company of
up to 897,143 shares of Common Stock, par value $.01 per share, of the Company
(the "Shares"). The Shares will be issued to the shareholders of Citizens
Bankshares, Inc. ("Citizens") pursuant to the Agreement and Plan of Merger,
dated as of February 17, 1998 (as amended, the "Merger Agreement"), by and
between the Company and Citizens.
In such capacity, we have examined, among other documents, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on the date hereof or shortly hereafter (the "Registration
Statement"), including the Proxy Statement/Prospectus contained therein, to
effect the registration of the Shares under the Securities Act of 1933, as
amended (the "Act"). In making our examination, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
certified or photostatic copies and the capacity of each party executing a
document to so execute such document.
Based upon the foregoing, and upon such further examination as we have
deemed relevant and necessary, we are of the opinion that the Shares have been
legally and validly authorized under the Articles of Incorporation of the
Company and the laws of the State of Wisconsin and, when issued and delivered to
the shareholders of Citizens pursuant to the Merger Agreement and as provided
under applicable Wisconsin law, the Registration Statement and the Company's
Articles of Incorporation and By-Laws, will be validly issued and outstanding
and fully
<PAGE>
Associated Banc-Corp
October 30, 1998
Page 2
paid and nonassessable, except as set forth in section 180.0622(2)(b) of the
Wisconsin Business Corporation Law, as interpreted.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
We hereby consent to the use of our name beneath the caption "Legal
Matters" in the Proxy Statement/Prospectus forming part of the Registration
Statement and to the filing of a copy of this opinion as an exhibit thereto. In
giving our consent, we do not admit that we are "experts" within the meaning of
section 11 of the Act or within the category of persons whose consent is
required by section 7 of the Act.
Yours very truly,
REINHART, BOERNER, VAN DEUREN,
NORRIS & RIESELBACH, s.c.
BY /s/ James M. Bedore
James M. Bedore
<PAGE>
Exhibit 23(a)
Consent of Independent Public Accountants
We consent to the use of our reports included herein and to the reference of our
firm under the "Experts" heading in the registration statement.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
October 27, 1998
<PAGE>
Exhibit 23(a)
Consent of Independent Public Accountants
We consent to the use of our report included herein and to the reference of our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
October 28, 1998
<PAGE>
Exhibit 23(b)
Consent of Independent Auditors
We consent to the reference of our firm under the caption "Experts" and to the
use of our reports dated January 22, 1998, with respect to the financial
statements of First Financial Corporation included in the Registration Statement
of Associated Banc-Corp for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
October 28, 1998
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ John C. Seramur
---------------------------------------
John C. Seramur
Vice Chairman and Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ Robert C. Gallagher
---------------------------------------
Robert C. Gallagher
Vice Chairman and Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ Robert S. Gaiswinkler
---------------------------------------
Robert S. Gaiswinkler
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ John S. Holbrook, Jr.
---------------------------------------
John S. Holbrook, Jr.
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 11th day of May, 1998.
/s/ William R. Hutchinson
---------------------------------------
William R. Hutchinson
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ Robert P. Konopacky
---------------------------------------
Robert P. Konopacky
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ John C. Meng
---------------------------------------
John C. Meng
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ J. Douglas Quick
---------------------------------------
J. Douglas Quick
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ George R. Leach
---------------------------------------
Dr. George R. Leach
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 9th day of May, 1998.
/s/ Ralph R. Staven
---------------------------------------
Ralph R. Staven
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 6th day of May, 1998.
/s/ Norman L. Wanta
---------------------------------------
Norman L. Wanta
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ John H. Sproule
---------------------------------------
John H. Sproule
Director
<PAGE>
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), hereby
constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact
and agent to sign on his behalf a registration statement on Form S-4 in
connection with the issuance of shares of common stock to shareholders of
Citizens Bankshares, Inc.
Said attorney-in-fact and agent shall have full power to act for him
and in his name, place, and stead in any and all capacities, to sign such Form
S-4 Registration Statement and any and all amendments thereto (including post-
effective amendments), with power where appropriate to affix the corporate seal
of the Corporation thereto and to attest such seal, and to file such Form S-4
and each amendment (including post-effective amendments) so signed, with all
exhibits thereto, and any and all documents in connection therewith, with the
SEC, and to appear before the SEC in connection with any matter relating to such
Form S-4 and to any and all amendments thereto (including post-effective
amendments).
The undersigned hereby grants such attorney-in-fact and agent full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney as of the 5th day of May, 1998.
/s/ Ronald R. Harder
---------------------------------------
Ronald R. Harder
Director
