-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, f2PYOUQMgP3vgpQ0ZxifmY3eXJSazVTux9AKj2snojdOrCLSjmXsyZeLiVANSilC Da8EhIuwU1NuVeuIFBxKfQ== 0000062741-94-000021.txt : 19940518 0000062741-94-000021.hdr.sgml : 19940518 ACCESSION NUMBER: 0000062741-94-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARSHALL & ILSLEY CORP/WI/ CENTRAL INDEX KEY: 0000062741 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 390968604 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-01220 FILM NUMBER: 94528066 BUSINESS ADDRESS: STREET 1: 770 N WATER ST CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4147657801 10-Q 1 10-Q FOR 03/31/94 (1ST QUARTER) FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1994 --------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________ Commission file number 0 - 1220 -------------------------------- MARSHALL & ILSLEY CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) Wisconsin 39-0968604 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 770 North Water Street Milwaukee, Wisconsin 53202 -------------------- ----- (Address of principal executive offices) (Zip Code) (414) 765 - 7801 ---------------- (Registrant's telephone number, including area code) None ---- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class April 30, 1994 ----- ---------------- Common Stock, $1.00 Par Value 59,830,085 PART 1 - FINANCIAL INFORMATION MARSHALL & ILSLEY CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ($000's except share data) March 31 December 31 March 31 Assets 1994 1993 1993 - - ------ ----------- ----------- ----------- Cash and cash equivalents: Cash and due from banks $445,106 $479,473 $394,465 Federal funds sold and security resale agreements 228,814 59,696 98,958 Money market funds 40,612 35,866 25,780 ----------- ----------- ----------- Total cash and cash equivalents 714,532 575,035 519,203 Trading securities 6,440 2,305 6,613 Other short-term investments 44,661 49,365 67,841 Investment securities held to maturity, market value $158,387 ($173,262 December 31, and $282,368 March 31, 1993) 157,076 169,484 276,172 Investment securities available for sale at market value March 31, 1994 (amortized cost December 31 and March 31, 1993). Market value $1,521,401 and $1,599,274 at December 31 and March 31, 1993, respectively. 1,452,898 1,504,197 1,566,298 ----------- ----------- ----------- Total investment securities 1,609,974 1,673,681 1,842,470 Loans 5,426,960 5,371,085 4,922,366 Less: Allowance for loan losses 94,871 93,189 88,430 ----------- ----------- ----------- Net loans 5,332,089 5,277,896 4,833,936 Premises and equipment, net 197,512 196,530 171,066 Accrued interest and other assets 200,778 195,402 187,891 ----------- ----------- ----------- Total Assets $8,105,986 $7,970,214 $7,629,020 =========== =========== =========== Liabilities and Shareholders' Equity - - ------------------------------------ Deposits: Noninterest bearing $1,558,428 $1,724,256 $1,373,558 Interest bearing 4,420,907 4,471,618 4,443,813 ----------- ----------- ----------- Total deposits 5,979,335 6,195,874 5,817,371 Funds purchased and security repurchase agreements 861,616 454,980 638,375 Other short-term borrowings 152,303 178,688 99,479 Long-term borrowings 197,534 202,817 125,091 Accrued expenses and other liabilities 163,801 187,503 162,671 ----------- ----------- ----------- Total liabilities 7,354,589 7,219,862 6,842,987 Shareholders' equity: Series A convertible preferred stock, $1.00 par value; 185,314 shares issued 185 185 185 Common stock, $1.00 par value; 66,424,646 shares issued (66,424,646 December 31, and 22,109,445 March 31, 1993) 66,425 66,425 22,109 Additional paid-in capital 49,190 50,184 93,767 Retained earnings 775,997 756,556 689,326 Less: Treasury common stock, at cost; 6,550,461 shares (5,821,786 December 31, and 564,447 March 31, 1993) 136,379 121,106 16,479 Deferred compensation 1,690 1,892 2,875 Net unrealized losses on securities available for sale, net of related taxes 2,331 - - ----------- ----------- ----------- Total shareholders' equity 751,397 750,352 786,033 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $8,105,986 $7,970,214 $7,629,020 =========== =========== =========== See notes to financial statements. MARSHALL & ILSLEY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($000's except per share data) Three Months Ended March 31, ----------------------------- 1994 1993 Interest income: ------------ ------------ Loans $96,746 $93,979 Investment securities: Taxable 17,152 23,135 Exempt from Federal income taxes 2,214 3,864 Trading securities 39 39 Short-term investments 1,599 1,823 ------------ ------------ Total interest income 117,750 122,840 Interest expense: Deposits 32,607 38,313 Short-term borrowings 6,464 4,489 Long-term borrowings 4,383 3,464 ------------ ------------ Total interest expense 43,454 46,266 ------------ ------------ Net interest income 74,296 76,574 Provision for loan losses 1,771 2,146 ------------ ------------ Net interest income after provision for loan losses 72,525 74,428 Other income: Data processing services 38,308 30,971 Trust services 12,477 12,137 Other customer services 19,962 19,579 Net securities gains 839 1,861 Other 4,981 5,972 ------------ ------------ Total other income 76,567 70,520 Other expense: Salaries and employee benefits 61,076 56,107 Net occupancy 6,488 6,168 Equipment 11,915 10,199 Payments to regulatory agencies 3,552 3,637 Processing charges 3,679 3,094 Supplies and printing 2,673 2,427 Professional services 1,597 1,724 Other 13,366 14,023 ------------ ------------ Total other expense 104,346 97,379 ------------ ------------ Income before income taxes 44,746 47,569 Provision for income taxes 16,572 16,534 ------------ ------------ Net income $28,174 $31,035 ============ ============ Net income per common share: Primary $0.44 $0.46 Fully Diluted $0.42 $0.43 Dividends paid per common share $0.14 $0.12 Weighted average common shares outstanding: Primary 63,514 68,128 Fully diluted 69,228 74,101 See notes to financial statements MARSHALL & ILSLEY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($000's) Three Months Ended March 31, ----------------------------- 1994 1993 ------------ ------------ Net Cash Provided by Operating Activities $42,609 $53,427 Cash Flows From Investing Activities: Net decrease in securities with maturities of three months or less 4,750 31,550 Proceeds from sales of securities available for sale 1,861 10,315 Proceeds from maturities of longer term securities 261,316 337,738 Purchases of longer term securities (206,314) (164,149) Net increase in loans (98,062) (73,032) Purchases of assets to be leased (15,747) (20,419) Principal payments on lease receivables 28,270 25,752 Fixed asset purchases, net (8,979) (8,442) Other (617) 1,270 ------------ ------------ Net cash provided by (used in) investing activities (33,522) 140,583 ------------ ------------ Cash Flows From Financing Activities: Net decrease in deposits (216,539) (394,757) Proceeds from issuance of commercial paper 267,746 171,420 Payments for maturity of commercial paper (291,548) (213,733) Net increase in other short-term borrowings 398,433 226,041 Proceeds from issuance of long-term debt 7,774 4,821 Payments of long-term debt (7,628) (6,648) Dividends paid (8,722) (8,200) Purchases of treasury stock (19,886) - Other 780 2,220 ------------ ------------ Net cash provided by (used in) financing activities 130,410 (218,836) ------------ ------------ Net increase (decrease) in cash and cash equivalents 139,497 (24,826) Cash and cash equivalents, beginning of year 575,035 544,029 ------------ ------------ Cash and cash equivalents, end of period $714,532 $519,203 ============ ============ Supplemental cash flow information: Cash paid during the period for: Interest $44,008 $43,951 Income taxes 8,221 7,235 See notes to financial statements MARSHALL & ILSLEY CORPORATION Notes to Financial Statements March 31, 1994 & 1993 (Unaudited) 1. The accompanying unaudited consolidated financial statements should be read in conjunction with Marshall & Ilsley Corporation's ("Corporation") 1993 Annual Report on Form 10-K. The unaudited financial information included in this report reflects all adjustments (consisting only of normal recurring accruals) which are necessary for a fair statement of the financial position and results of operations as of and for the three months ended March 31, 1994 and 1993. The results of operations for the three months ended March 31, 1994 and 1993 are not necessarily indicative of results to be expected for the entire year. 2. The Corporation declared a three for one stock split effected in the form of a 200% stock dividend which was distributed to shareholders on May 28, 1993. All per share data for 1993 has been retroactively restated for the stock split. 3. The Corporation has 5,000,000 shares of preferred stock authorized, of which, the Board of Directors has designated 500,000 shares as Series A convertible, with a $100 value per share for conversion and liquidation purposes. The Corporation has 160,000,000 (80,000,000 in 1993) shares of its $1.00 par value common stock authorized. 4. The Corporation's loan portfolio consists of the following ($000's): March 31 December 31 March 31 1994 1993 1993 ----------- ----------- ----------- Commercial financial & agricultural $1,959,006 $1,889,578 $1,829,539 Real estate: Construction 202,884 214,369 $153,503 Residential Mortgage 1,207,554 1,254,748 1,164,851 Commercial Mortgage 1,107,088 1,061,635 937,247 ----------- ----------- ----------- Total real estate 2,517,526 2,530,752 2,255,601 Personal 717,754 711,194 607,769 Lease financing 232,674 239,561 229,457 ----------- ----------- ----------- $5,426,960 $5,371,085 $4,922,366 =========== =========== =========== 5. Effective January 1, 1994, the Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115). Accordingly, investment securites classified as available for sale are carried at fair value with fair value adjustments, net of their related income tax effects, reported as a component of shareholders' equity. The effect of adopting FAS 115 resulted in an increase to shareholders' equity of $9,467 at January 1, 1994. The net unrealized loss (net of unrealized gains but before income tax effects) for investment securities classified as available for sale at March 31, 1994 amounted to $3,698 which resulted in a decrease to shareholders' equity of $2,331. Investment securities classifed as available for sale at December 31 and March 31, 1993, are carried at amortized cost in the accompanying consolidated balance sheets. Investment securities, by type, held by the Corporation are as follows ($000's): March 31 December 31 March 31 1994 1993 1993 ----------- ----------- ----------- Investment securities held to maturity: State and political subdivisions $152,704 $160,238 $259,719 Other 4,372 9,246 16,453 ----------- ----------- ----------- Investment securities held to maturity 157,076 169,484 276,172 ----------- ----------- ----------- Investment securities available for sale: U.S. treasury and government agencies 1,394,169 1,460,009 1,529,646 Other 58,729 44,188 36,652 ----------- ----------- ----------- Investment securities available for sale 1,452,898 1,504,197 1,566,298 ----------- ----------- ----------- Total Investment Securities $1,609,974 $1,673,681 $1,842,470 =========== =========== =========== MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Concluded March 31, 1994 & 1993 (Unaudited) 6. In September 1993, the Corporation ("M&I") entered into an Agreement and Plan of Merger ("Merger Agreement") whereby Valley Bancorporation ("Valley"), a Wisconsin bank holding company located in Appleton, Wisconsin, with consolidated assets of approximately $4.4 billion, will merge with and into the Corporation ("the Merger"). Under the terms of the Merger Agreement, each share of Valley common stock will be converted into the right to receive 1.72 shares of the Corporation's common stock in a tax-free reorganization which is to be accounted for as a pooling of interests. The following information summarizes certain financial data of M&I and Valley for the three month period ended March 31, 1994, along with pro forma information which would result from the combination ($ in thousands, except per share data): M&I Valley Pro Forma ----------- ----------- ----------- Net Interest Income $74,296 $44,112 $117,612 Provision for Loan Losses 1,771 2,181 3,952 Net Income 28,174 10,339 38,513 Fully Diluted Net Income Per Share $0.42 $0.50 $0.37 The pro forma financial information does not include the effect of the one time merger related and restructuring charges associated with the combination which is estimated to be approximately $48 million (after tax) nor does it include the effects of the proposed divestitures or any potential cost savings which are anticipated after the merger is completed. See Management's Discussion and Analysis of Financial Position and Results of Operations for a further discussion of the status of the pending Merger. Potential loan loss provisions may be recorded at or near the consummation of the Merger. While the amounts have not been quantified, an additional provision may be necessary to conform Valley's loan valuation policies with those of M&I. M&I does not anticipate that the amount of such provision will be material to the combined entity. MARSHALL & ILSLEY CORPORATION CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited) ($000's) Three Months Ended March 31, ----------------------------- 1994 1993 ------------ ------------ Assets - - ------ Cash and due from banks $474,317 $426,651 Short-term investments 194,598 223,936 Trading securities 3,341 3,826 Investment securities: U.S. Treasury and government agencies 1,428,366 1,522,744 States and political subdivisions 155,681 269,292 Other 64,603 54,934 ------------ ------------ Total investment securities 1,648,650 1,846,970 Loans: Commercial 1,903,159 1,769,757 Real estate 2,513,105 2,224,152 Personal 707,869 604,215 Lease financing 234,639 229,666 ------------ ------------ 5,358,772 4,827,790 Less: Allowance for loan losses 94,339 87,282 ------------ ------------ Total loans 5,264,433 4,740,508 Premises and equipment, net 196,831 170,025 Accrued interest and other assets 185,817 180,599 ------------ ------------ Total Assets $7,967,987 $7,592,515 ============ ============ Liabilities and Shareholders' Equity - - ------------------------------------ Deposits: Noninterest bearing $1,544,237 $1,395,223 Interest bearing 4,433,860 4,479,034 ------------ ------------ Total deposits 5,978,097 5,874,257 Funds purchased and security repurchase agreements 713,583 545,154 Other short-term borrowings 109,959 67,170 Long-term borrowings 240,868 171,038 Accrued expenses and other liabilities 159,811 160,154 ------------ ------------ Total liabilities 7,202,318 6,817,773 Shareholders' equity 765,669 774,742 ------------ ------------ Total Liabilities and Shareholders' Equity $7,967,987 $7,592,515 ============ ============ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1994 AND 1993 __________________________________________ Net income for the first quarter of 1994 was $28.2 million compared to $31.0 million for the same period one year ago. Fully diluted earnings per share amounted to $.42 this quarter and $.43 for the same quarter last year. The Corporation's return on average assets and return on average shareholders' equity were 1.43% and 14.92% for the three months ended March 31, 1994 and 1.66% and 16.25% for the three months ended March 31, 1993, respectively. The decrease in net income of $2.8 million or 9.2% is attributable to a decline in net interest income, lower security gains and slower fee revenue growth from the Corporation's banking and trust services affiliates. PROVISION FOR LOAN LOSSES AND CREDIT QUALITY ____________________________________________ The provision for loan losses amounted to $1.8 million in the first quarter of 1994 compared to $2.4 million and $2.1 million in the fourth and first quarters of 1993, respectively. The 1994 provision level reflects the continued current favorable trends in nonperforming assets and net charge-offs in relation to the allowance for loan losses. At March 31, 1994, nonperforming assets were $44.1 million, the lowest level reported over the past five quarters. Nonaccrual loans, the largest component of nonperforming assets, declined $2.4 million or 8.8% since December 31, 1993. Each major loan type exhibited a decline in nonaccrual loans at March 31, 1994 compared to year-end 1993. Net charge-offs in the first quarter of 1994 amounted to $.09 million or .01% of average loans annualized. During the first quarter of 1993, the Corporation's lead bank, M&I Marshall & Ilsley Bank, and its Arizona affiliate, M&I Thunderbird Bank, had net recoveries which contributed to consolidated net recoveries of $0.4 million. The allowance for loan losses was $94.9 million or 1.75% of total loans at March 31, 1994 compared to $93.2 million or 1.74% of total loans at December 31, 1993 and $88.4 million or 1.80% of total loans at March 31, 1993. The coverage of the allowance for loan losses to nonperforming loans increased from 261% at year-end 1993 to 284% at the end of the current quarter primarily due to the decrease in nonperforming loans of $2.4 million or 6.6%. At March 31, 1993, such coverage was 188%. The following tables present certain credit quality information and statistics for the Corporation and its major affiliate groups at March 31, 1994 as well as the previous four quarters. CONSOLIDATED CREDIT QUALITY INFORMATION ($000's) 1994 1993 _______ __________________________________ First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter _______ __________________________________ NONPERFORMING ASSETS Nonaccrual $25,432 $27,880 $31,762 $36,165 $37,494 Renegotiated 1,965 2,195 2,241 2,267 3,012 Past Due 90 Days or More 6,021 5,694 5,008 5,406 6,411 _______ _______ _______ _______ _______ Total Nonperforming Loans 33,418 35,769 39,011 43,838 46,917 Other Real Estate Owned 10,676 10,634 12,184 13,195 14,184 _______ _______ _______ _______ _______ Total Nonperforming Assets $44,094 $46,403 $51,195 $57,033 $61,101 ======= ======= ======= ======= ======= ALLOWANCE FOR LOAN LOSSES $94,871 $93,189 $92,005 $89,989 $88,430 ======= ======= ======= ======= ======= NONACCRUAL LOANS BY TYPE Commercial Commercial, Financial & Agricultural $ 5,284 $ 5,663 $ 7,160 $12,601 $13,088 Lease Financing Receivables 2,756 2,819 3,524 2,807 1,965 _______ _______ _______ _______ _______ Total Commercial 8,040 8,482 10,684 15,408 15,053 Real Estate Construction and Land Development 63 388 45 -- 1,123 Commercial Mortgage 11,338 12,578 13,146 11,766 12,611 Residential Mortgage 4,788 5,014 6,276 7,017 6,625 _______ _______ _______ _______ _______ Total Real Estate 16,189 17,980 19,467 18,783 20,359 Personal 1,203 1,418 1,611 1,974 2,082 _______ _______ _______ _______ _______ Total Nonaccrual Loans $25,432 $27,880 $31,762 $36,165 $37,494 ======= ======= ======= ======= ======= 1994 1993 _______ __________________________________ First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter _______ __________________________________ NET LOAN AND LEASE CHARGE-OFFS (RECOVERIES) Loan and Lease Charge-offs $ 1,424 $ 2,381 $ 1,222 $ 1,987 $ 1,196 Loan and Lease Recoveries 1,335 1,174 992 1,264 1,596 _______ _______ _______ _______ _______ Net Loan and Lease Charge-offs (Recoveries) $ 89 $ 1,207 $ 230 $ 723 $ (400) ======= ======= ======= ======= ======= CONSOLIDATED STATISTICS Net Charge-offs (Recoveries) to Average Loans Annualized 0.01% 0.09% 0.02% 0.06% (0.03%) Total Nonperforming Loans to Total Loans 0.62 0.67 0.75 0.87 0.95 Total Nonperforming Assets to Total Loans and Other Real Estate Owned 0.81 0.86 0.98 1.12 1.24 Allowance for Loan Losses to Total Loans 1.75 1.74 1.76 1.78 1.80 Allowance for Loan Losses to Nonperforming Loans 284 261 236 205 188 MAJOR AFFILIATE GROUP CREDIT QUALITY INFORMATION ($000's) 1994 1993 _______ __________________________________ First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter _______ __________________________________ TOTAL NONPERFORMING ASSETS M&I Marshall & Ilsley Bank $11,968 $13,656 $13,917 $19,095 $20,045 Other Wisconsin Affiliates 27,835 28,733 31,162 31,517 34,068 M&I Thunderbird Bank 4,291 4,014 6,116 6,421 6,988 _______ _______ _______ _______ _______ Total Nonperforming Assets $44,094 $46,403 $51,195 $57,033 $61,101 ======= ======= ======= ======= ======= PROVISIONS FOR LOAN LOSSES M&I Marshall & Ilsley Bank $ 300 $ 300 $ 300 $ 300 $ 300 Other Wisconsin Affiliates 1,246 1,866 1,721 1,757 1,846 M&I Thunderbird Bank 225 225 225 225 -- _______ _______ _______ _______ _______ Total Provisions for Loan Losses $ 1,771 $ 2,391 $ 2,246 $ 2,282 $ 2,146 ======= ======= ======= ======= ======= 1994 1993 _______ __________________________________ RATIO OF ALLOWANCE FOR LOAN First Fourth Third Second First LOSSES TO NONPERFORMING LOANS Quarter Quarter Quarter Quarter Quarter _______ __________________________________ M&I Marshall & Ilsley Bank 590% 455% 469% 269% 243% Other Wisconsin Affiliates 206 193 174 171 160 M&I Thunderbird Bank 405 434 291 265 226 _______ _______ _______ _______ _______ Consolidated 284% 261% 236% 205% 188% ======= ======= ======= ======= ======= INCOME STATEMENT COMPONENTS AS A PERCENT OF AVERAGE TOTAL ASSETS ________________________________________________________________ The following table presents a summarized view of each of the major elements of the consolidated income statement for the comparative quarters. Each of the elements is stated as a percent of the average total assets for the respective quarter and, where appropriate, is converted to a fully taxable basis. ROA 1994 1993 IMPACT ______ ______ ______ Interest Income 6.06% 6.67% (0.61)% Interest Expense (2.21) (2.47) 0.26 ______ ______ ______ Net Interest Income 3.85 4.20 (0.35) Provision for Loan Losses (0.09) (0.11) 0.02 Net Securities Gains 0.04 0.10 (0.06) Other Income 3.85 3.67 0.18 Other Expense (5.31) (5.20) (0.11) ______ ______ ______ Income Before Income Taxes 2.34 2.66 (0.32) Income Taxes (0.91) (1.00) 0.09 ______ ______ ______ Return on Assets (ROA) 1.43% 1.66% (0.23)% ====== ====== ====== NET INTEREST INCOME ___________________ Net interest income in the first quarter of 1994 was $74.3 million compared to $76.6 million for the same period one year ago, a decrease of $2.3 million or 3%. The benefit of the increase in the average volume of earning assets, primarily loans, together with the benefit of the decline in cost of interest bearing deposits was not sufficient to offset the decrease in yields on earning assets. Average earning assets increased $302.8 million or 4.4% in the first quarter of 1994 compared to the same period one year ago. Average loan growth of $531.0 million or 11% was offset, in part, by a decline in average securities of $198.3 million and a decrease in average other earning assets. The growth and composition of the Corporation's quarterly average loan portfolio for the current quarter and previous four quarters are reflected below (amounts in millions): 1994 1993 ________ ________________________________________ Annual First Fourth Third Second First Growth Quarter Quarter Quarter Quarter Quarter PCT ________ ________________________________________ ______ Commercial Loans $1,903 $1,849 $1,815 $1,851 $1,770 7.5% Real Estate Loans Construction 214 205 174 155 146 46.2 Commercial Mortgages 1,086 1,030 990 941 909 19.5 Residential Mortgages 1,213 1,235 1,209 1,196 1,169 3.8 ________ _______ _______ _______ ______ _____ Total Real Estate Loans 2,513 2,470 2,373 2,292 2,224 13.0 Personal Loans Personal Loans 519 521 503 478 465 11.4 Student Loans 189 166 149 143 139 36.4 ________ _______ _______ _______ ______ _____ Total Personal Loans 708 687 652 621 604 17.2 Lease Financing Receivables 235 236 232 230 230 2.2 ________ _______ _______ _______ ______ _____ Total Consolidated Average Loans $5,359 $5,242 $5,072 $4,994 $4,828 11.0% ======== ======== ======= ======= ====== ===== Each major category of loans increased since the first quarter of 1993. The Corporation's average commercial portfolio grew 11.8% while the portfolio of average loans to individuals increased 9.7% reflecting increased confidence by both the business and consumer sectors since last year. Average interest bearing liabilities grew $235.9 million or 4.5% for the three months ended March 31, 1994, compared to the same period in 1993. The decline in average interest bearing deposits of $45.2 million or 1.0% was offset by a $149.0 million or 10.7% increase in noninterest bearing deposits. Average short-term borrowings increased $211.2 million or 34.5% in response to the slow growth in total average deposits in order to fund the increase in average loans. The increase in average long-term borrowings of $69.8 million or 40.8% is primarily due to the $100 million ten year 6.375% subordinated notes which were issued in July 1993 for general corporate purposes including financing the common share repurchase program announced in April 1993. Since the announcement, the Corporation has cumulatively repurchased 5.8 million common shares at an aggregate cost of approximately $134.4 million through March 31, 1994. The estimated impact of the program in the first quarter of 1994 was to increase interest expense by approximately $1.8 million, however, average common shares outstanding decreased by 5.3 million shares which had a positive impact on primary and fully diluted earnings per share. The composition of the Corporation's quarterly average deposits for the current quarter and prior year's quarters are as follows (amounts in millions): 1994 1993 _________ __________________________________________ Annual First Fourth Third Second First Growth Quarter Quarter Quarter Quarter Quarter PCT _________ __________________________________________ ______ Noninterest Bearing Commercial $ 979 $1,027 $ 973 $ 942 $ 887 10.4% Personal 262 260 249 249 241 8.5 Other 303 353 313 277 267 13.5 ________ _______ _______ _______ ______ _____ Total Noninterest Bearing 1,544 1,640 1,535 1,468 1,395 10.7 Interest Bearing Savings & NOW 1,626 1,626 1,585 1,534 1,507 7.9 Money Market 1,108 1,161 1,131 1,125 1,136 (2.5) Other CDs & Time Deposits 1,499 1,523 1,566 1,605 1,632 (8.2) CDs Greater than $100 201 203 209 202 204 (1.4) ________ _______ _______ _______ ______ _____ Total Interest Bearing 4,434 4,513 4,491 4,466 4,479 (1.0) ________ _______ _______ _______ ______ _____ Total Consolidated Average Deposits $5,978 $6,153 $6,026 $5,934 $5,874 1.8% ======== ======== ======= ======= ====== ===== The overall interest margin was negatively impacted by the current interest rate environment. The decline in yields on average interest earning assets of 64 basis points offset, in part, by the decrease in cost of average interest bearing liabilities of 36 basis points, reduced the interest margin by $6.5 million this quarter compared to the same period last year. This decrease was mitigated by the increase in the average volume of earning assets which provided a positive impact on the net margin of $4.2 million. At the present time, the Corporation is not involved in any derivative product arrangements to hedge against interest rate risk.
Yield & Cost Analysis 1994 1993 ($000's) _____________________________ ____________________________ Average Average Average Yield or Average Yield or Balance Interest Cost Balance Interest Cost _____________________________ ____________________________ Loans $5,358,772 $ 97,091 7.35% $4,827,790 $ 94,396 7.93% Investment Securities: Taxable 1,455,810 17,152 4.78 1,551,466 23,135 6.05 Tax Exempt 192,840 3,233 6.80 295,504 5,543 7.61 Funds Sold and Security Resale Agreements 107,625 933 3.52 52,473 412 3.18 Other Short-term Investments 90,314 709 3.18 175,289 1,453 3.36 __________ ________ ______ __________ ________ ______ Total Interest Earning Assets $7,205,361 $119,118 6.70% $6,902,522 $124,939 7.34% ========== ======== ====== ========== ======== ====== Savings & NOW $1,625,834 $ 8,074 2.01% $1,507,145 $ 9,449 2.54% Money Market 1,108,196 6,538 2.39 1,136,118 7,668 2.74 Other CDs & Time Deposits 1,499,070 16,102 4.36 1,632,164 19,184 4.77 CD's Greater than $100 200,760 1,893 3.82 203,607 2,012 4.01 __________ ________ ______ __________ ________ ______ Total Interest Bearing Deposits 4,433,860 32,607 2.98 4,479,034 38,313 3.47 Short-term Borrowings 823,542 6,464 3.18 612,324 4,489 2.97 Long-term Borrowings 240,868 4,383 7.38 171,038 3,464 8.21 __________ ________ ______ __________ ________ ______ Total Interest Bearing Liabilities $5,498,270 $ 43,454 3.21% $5,262,396 $ 46,266 3.57% ========== ======== ====== ========== ======== ====== Net Interest Margin (FTE) as a Percent of Average Earning Assets $ 75,664 4.26% $ 78,673 4.62% ======== ====== ======== ======
OTHER INCOME ____________ Total other income was $76.6 million for the first quarter of 1994, an increase of $6.0 million or 8.6% over the $70.5 million earned in the first quarter of 1993. Fees from data processing services grew $7.3 million or 23.7% to $38.3 million this quarter compared to $31.0 million for the same period last year. The increase was primarily attributable to processing revenue. Trust fees increased 2.8% while fees from other customer services grew a modest $0.4 million or 2.0%. Other income decreased $1.0 million or 16.6% this quarter compared to the same quarter last year. The decline in revenue from the origination and sale of mortgage loans to the secondary market accounted for the majority of the decrease. Net realized gains from the sale of non-affiliate corporate equity securities classified as available for sale decreased $1.0 million. OTHER EXPENSE _____________ Total noninterest expense for the three months ended March 31, 1994 amounted to $104.3 million compared to $97.4 million reported last year, an increase of $7.0 million or 7.2%. Salaries and employee benefits, the largest component of noninterest expense, increased $5.0 million or 8.9%. M&I Data Services, Inc. (DSI), the Corporation's data processing subsidiary, contributed 82% of the increase through additional overtime and a 17.1% increase in average FTE employees (+276) which includes, in part, the effect of the acquisition of a data processing center which was completed during the third quarter of 1993. Also contributing to the increase in salaries and benefits was a $0.6 million or 69% increase in postretirement health benefit expense which is primarily due to the lowering of the discount rate used in determining the benefit liability at the end of 1993. DSI also contributed approximately 94% of the aggregate $2.6 million increase in first quarter 1994 versus first quarter 1993 expense increases in the items of net occupancy, equipment and processing charges. Other noninterest expense decreased from $14.0 million in the first quarter of 1993 to $13.4 million in the current quarter. This line item is affected by the capitalization of costs, net of amortization, associated with software development and data processing conversions. During the first quarter of 1994, the amount of cost capitalized, net of amortization, exceeded the amount recorded in the first quarter of 1993 by approximately $1.4 million and was primarily associated with conversion activity. CAPITAL RESOURCES _________________ At March 31, 1994, total shareholders' equity was $751.4 million compared to $750.4 and $786.0 million at December 31 and March 31, 1993, respectively. During the first quarter of 1994, the Corporation purchased 0.8 million shares of its common stock at an aggregate cost of $17.0 million as part of the repurchase program, announced in April 1993, to acquire shares in anticipation of the conversion of its $50 million 8.5% convertible notes and continue its ongoing program to fund obligations of the Corporation's stock option and other benefit plans. It is anticipated that a portion of the convertible notes will be converted sometime in the second quarter of 1994. Accordingly, approximately $13.0 million of such convertible debt was classified as short-term at March 31, 1994. In February 1994, the Shareholders approved a proposal to amend the Corporation's Restated Articles of Incorporation to increase the authorized common stock of the Corporation from 80 million shares to 160 million shares. The impact of the adoption of FAS 115 and change in the interest rate environment resulted in a decrease in shareholders' equity of $2.3 million at March 31, 1994. Shareholders' equity to total assets was 9.27% at March 31, 1994. The Corporation continues to have a strong capital base and its regulatory capital ratios remain significantly above the defined minimum regulatory ratios as shown in the following tables as of March 31, 1994. RISK-BASED CAPITAL RATIOS ($ in millions) Amount Ratio ------ ----- Tier 1 capital $ 735 12.17% Tier 1 capital minimum requirement 242 4.00 ------ ----- Excess $ 493 8.17% ====== ===== Total capital $ 933 15.45% Total capital minimum requirement 483 8.00 ------ ----- Excess $ 450 7.45% ====== ===== Risk-adjusted assets $6,039 LEVERAGE RATIO ($ in millions) --------------------------- Amount Ratio ---------- ----------- Tier 1 capital to adjusted total assets $ 735 9.25% Minimum leverage requirement (1) 238 - 397 3.00 - 5.00 ---------- ----------- Excess $497 - 338 6.25 - 4.25% ========== =========== Adjusted average total assets $ 7,943 (1) The 3% Ratio Shown is effective for banking organizations which have received the top bank rating from their principal federal banking regulator. Organizations receiving lower ratings are required to meet a higher minimum Leverage Ratio of between 4% and 5%. RECENT DEVELOPMENTS ___________________ Merger with Valley Bancorporation _________________________________ The merger of Valley with and into M&I, announced in September 1993, is proceeding as planned. In February 1994, the shareholders of M&I and Valley approved the Merger Agreement. In April 1994, the Board of Governors of the Federal Reserve in Washington, D.C. approved the application for the merger. Consummation of the merger is anticipated to occur May 31, 1994. Bank Note Program _________________ Beginning in the second quarter of 1994, the Corporation's banking subsidiaries "Issuing Banks" may offer from time to time Bank Notes up to a maximum of $1.0 billion aggregate principal amount outstanding at any time, subject to such additional limits as each Issuing Bank may establish. The Bank Notes provide an additional funding source along with those currently available to financial institutions. Each of the Corporation's banking subsidiaries is a potential Issuing Bank which may issue Bank Notes with maturities ranging from 30 days to 15 years at a fixed or floating rate. The Bank Notes will be offered through certain designated Agents and will be offered and sold only to institutional investors. The Bank Notes will be sole obligations of the respective Issuing Banks and will not be obligations of or guaranteed by the Corporation. Increase in Dividend ____________________ In April 1994, the Corporation announced that its Board of Directors approved an increase in the quarterly cash dividend on common stock to $.15 per share from $.14 per share. PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders ____________________________________________________________ A. The Corporation held a Special Meeting of Shareholders on February 15, 1994. B. Votes cast for items presented for consideration and approval are as follows: 1. Approval of Agreement and Plan of Merger dated September 19, 1993 between the Corporation and Valley Bancorporation. For 50,189,322 Against 676,094 Withheld 2,265,834 Abstain 246,391 Broker Non-Vote 0 2. Approval to amend the Corporation's Restated Articles of Incorporation, as amended to: a. Increase authorized Common Stock to 160 million shares b. Remove limitation on number of Directors and replace it with a provision establishing a minimum number of Directors. c. Remove limitation concerning newly created directorships that may be filled by the Directors between annual meetings of shareholders. For 49,095,706 Against 1,629,048 Withheld 2,265,834 Abstain 387,053 Broker Non-Vote 0 3. Approval of 1993 Executive Stock Option Plan For 47,293,188 Against 4,736,266 Withheld 0 Abstain 1,348,187 Broker Non-Vote 0 Item 6 - Exhibits and Reports on Form 8-K _________________________________________ A. Exhibits Exhibit 11 - Statement re computation of earnings per share. Exhibit 12 - Marshall & Ilsley Corporation Computation of Ratio of Earnings to Fixed Changes. Exhibit 12.1 - Valley Bancorporation Computation of Ratio of Earnings to Fixed Changes Exhibit 12.2 - Marshall & Ilsley Corporation/Valley Bancorporation Pro Forma Combined Computation of Ratio of Earnings to Fixed Changes. Exhibit 23 - Consent of Independent Public Accountants Exhibit 99 - Valley Bancorporation - Annual Report on Form 10-K year ended December 31, 1993. Exhibit 99.1 - Pro Forma Combined Condensed Balance Sheets, March 31, 1994. Exhibit 99.2 - Pro Forma Combined Condensed Income Statements, three months ended March 31, 1994 and 1993 and year ended December 31, 1993. B. Reports on Form 8-K In February 1994, the Corporation filed a Report on Form 8-K including certain exhibits to: 1. Provide an update on the pending merger between the Corporation and Valley Bancorporation. 2. Announce the results of the Special Meeting of Shareholders held February 15, 1994. 3. Update the description of the Corporation's common stock contained in the Corporation's Registration Statement on Form 8-A under Section 12(g) of the Securities Exchange Act of 1934. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARSHALL & ILSLEY CORPORATION (Registrant) /s/ P. R. Justiliano _______________________________ P. R. Justiliano Senior Vice President and Corporate Controller (Chief Accounting Officer) /s/ J. E. Sandy _______________________________ J. E. Sandy Vice President May 13, 1994 EX-11 2 EXHIBIT 11/EARNINGS PER SHARE/10-Q - 03/31/94 MARSHALL & ILSLEY CORPORATION EXHIBIT 11 CALCULATION OF EARNINGS PER SHARE ($000's except per share data) Three Months Ended March 31, ----------------------------- PRIMARY 1994 1993 - - ------- ------------ ------------ Earnings: Net income $28,174 $31,035 ============ ============ Shares: Weighted average number of common shares outstanding 60,391 64,469 Additional shares relating to: Convertible preferred stock 1,963 1,963 Stock options outstanding (a) 1,129 1,582 Stock options exercised (c) 31 114 ------------ ------------ Total average primary shares outstanding 63,514 68,128 ============ ============ PRIMARY EARNINGS PER SHARE $0.44 $0.46 ============ ============ FULLY DILUTED - - ------------- Earnings: Net income $28,174 $31,035 Add: Interest on convertible notes, net of income tax effect 691 713 ------------ ------------ Total earnings as adjusted $28,865 $31,748 ============ ============ Shares: Weighted average number of common shares outstanding 60,391 64,469 Additional shares relating to: Convertible preferred stock 1,963 1,963 Stock options outstanding (b) 1,129 1,685 Stock options exercised (c) 31 114 Assumed conversion of convertible notes 5,714 5,870 ------------ ------------ Total average fully diluted shares outstanding 69,228 74,101 ============ ============ FULLY DILUTED EARNINGS PER SHARE $0.42 $0.43 ============ ============ Notes: - - ------ (a) Based on the treasury stock method using average market price. (b) Based on the treasury stock method using period-end market price or average market price, whichever is higher. (c) Based on the treasury stock method using market price at date of exercise. EX-12 3 EXHIBIT 12/RATIO OF EARNINGS TO FIXED CHARGES/10-Q - 03/31/94 EXHIBIT 12 MARSHALL & ILSLEY CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($OOO's) 3 Months March 31 EARNINGS 1994 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- --------- Earnings before income taxes and cumulative effect of changes in accounting principles $44,746 $196,563 $174,457 $146,482 $104,255 $123,184 Fixed charges, excluding interest on deposits 12,141 37,710 38,709 52,515 73,497 88,759 --------- --------- --------- --------- --------- --------- Earnings including fixed charges but excluding interest on deposits 56,887 234,273 213,166 198,997 177,752 211,943 Interest on deposits 32,607 145,717 190,582 271,454 297,063 273,546 --------- --------- --------- --------- --------- --------- Earnings including fixed charges and interest on deposits $89,494 $379,990 $403,748 $470,451 $474,815 $485,489 ========= ========= ========= ========= ========= ========= FIXED CHARGES: Interest Expense: Borrowings: Short-term $6,464 $16,714 $14,600 $27,288 $50,763 $66,866 Long-term 4,383 15,927 19,085 20,146 18,540 18,004 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor) 1,294 5,069 5,024 5,081 4,194 3,889 --------- --------- --------- --------- --------- --------- Fixed charges excluding interest on deposits 12,141 37,710 38,709 52,515 73,497 88,759 Interest on Deposits 32,607 145,717 190,582 271,454 297,063 273,546 --------- --------- --------- --------- --------- --------- Fixed charges including interest on deposits $44,748 $183,427 $229,291 $323,969 $370,560 $362,305 ========= ========= ========= ========= ========= ========= RATIO OF EARNINGS TO FIXED CHARGES Excluding interest on deposits 4.69 x 6.21 x 5.51 x 3.79 x 2.42 x 2.39 x Including interest on deposits 2.00 x 2.07 x 1.76 x 1.45 x 1.28 x 1.34 x EX-12 4 EXHIBIT 12.1/RATIO OF EARNINGS TO FIXED CHARGES/10-Q - 03/31/94 EXHIBIT 12.1 VALLEY BANCORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($OOO's) 3 Months March 31 EARNINGS 1994 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- --------- Earnings before income taxes and cumulative effect of changes in accounting principles $15,265 $68,021 $57,335 $40,256 $38,937 $37,956 Fixed charges, excluding interest on deposits 3,255 11,558 13,218 14,921 11,737 13,639 --------- --------- --------- --------- --------- --------- Earnings including fixed charges but excluding interest on deposits 18,520 79,579 70,553 55,177 50,674 51,595 Interest on deposits 28,915 126,027 143,488 176,957 169,474 152,462 --------- --------- --------- --------- --------- --------- Earnings including fixed charges and interest on deposits $47,435 $205,606 $214,041 $232,134 $220,148 $204,057 ========= ========= ========= ========= ========= ========= FIXED CHARGES: Interest Expense: Borrowings: Short-term $1,460 $3,097 $4,099 $5,434 $6,086 $7,965 Long-term 1,354 6,723 7,501 7,762 3,984 4,053 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor) 441 1,738 1,618 1,725 1,667 1,621 --------- --------- --------- --------- --------- --------- Fixed charges excluding interest on deposits 3,255 11,558 13,218 14,921 11,737 13,639 Interest on Deposits 28,915 126,027 143,488 176,957 169,474 152,462 --------- --------- --------- --------- --------- --------- Fixed charges including interest on deposits $32,170 $137,585 $156,706 $191,878 $181,211 $166,101 ========= ========= ========= ========= ========= ========= RATIO OF EARNINGS TO FIXED CHARGES Excluding interest on deposits 5.69 x 6.89 x 5.34 x 3.70 x 4.32 x 3.78 x Including interest on deposits 1.47 x 1.49 x 1.37 x 1.21 x 1.21 x 1.23 x EX-12 5 EXHIBIT 12.2/RATIO OF EARNINGS TO FIXED CHARGES/10-Q - 03/31/94 EXHIBIT 12.2 MARSHALL & ILSLEY CORPORATION / VALLEY BANCORPORATION PRO FORMA COMBINED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($OOO's) 3 Months March 31 EARNINGS 1994 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- --------- Earnings before income taxes and cumulative effect of changes in accounting principles $60,011 $264,584 $231,792 $186,738 $143,192 $161,140 Fixed charges, excluding interest on deposits 14,618 48,036 51,927 67,436 85,234 102,398 --------- --------- --------- --------- --------- --------- Earnings including fixed charges but excluding interest on deposits 74,629 312,620 283,719 254,174 228,426 263,538 Interest on deposits 61,522 271,744 334,070 448,411 466,537 426,008 --------- --------- --------- --------- --------- --------- Earnings including fixed charges and interest on deposits $136,151 $584,364 $617,789 $702,585 $694,963 $689,546 ========= ========= ========= ========= ========= ========= FIXED CHARGES: Interest Expense: Borrowings: Short-term $7,146 $18,579 $18,699 $32,722 $56,849 $74,831 Long-term 5,737 22,650 26,586 27,908 22,524 22,057 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor) 1,735 6,807 6,642 6,806 5,861 5,510 --------- --------- --------- --------- --------- --------- Fixed charges excluding interest on deposits 14,618 48,036 51,927 67,436 85,234 102,398 Interest on Deposits 61,522 271,744 334,070 448,411 466,537 426,008 --------- --------- --------- --------- --------- --------- Fixed charges including interest on deposits $76,140 $319,780 $385,997 $515,847 $551,771 $528,406 ========= ========= ========= ========= ========= ========= RATIO OF EARNINGS TO FIXED CHARGES Excluding interest on deposits 5.11 x 6.51 x 5.46 x 3.77 x 2.68 x 2.57 x Including interest on deposits 1.79 x 1.83 x 1.60 x 1.36 x 1.26 x 1.30 x EXHIBIT 12.2 MARSHALL & ILSLEY CORPORATION / VALLEY BANCORPORATION PRO FORMA COMBINED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES The ratio of earnings to fixed charges has been computed by dividing earnings before income taxes and fixed charges by fixed charges. Fixed charges, excluding interest on deposits, consists of interest on indebtedness and one-third of rental expense (which is deemed representative of the interest factor). Fixed charges, including interest on deposits, consists of both the foregoing item plus interest on deposits. The following table sets forth the pro forma combined ratios of earnings to fixed charges for the periods indicated, giving effect to the proposed Merger of Valley with and into M&I as if it had been consummated on January 1, 1989. Pro forma adjustments made to arrive at the pro forma combined amounts are based on the pooling-of-interests method of accounting. No adjustment for the divestitures which are required in connection with the merger have been included in the pro forma combined ratio of earnings to fixed charges. The pro forma combined ratios of earnings to fixed charges are intended for informational purposes and are not necessarily indicative of the future ratios of earnings to fixed charges of the combined company or the ratios of earnings to fixed charges of the combined company that would have actually occurred had the Merger been consummated on January 1, 1989. The pro forma combined ratios of earnings to fixed charges should be read in conjunction with and are qualified in their entirety by the consolidated financial statements, including the accompanying notes, of M&I and Valley in their respective Annual Reports on Form 10-K and the pro forma combined condensed financial statements and accompanying discussion and notes included as Exhibit 99.1 and Exhibit 99.2. EX-23 6 EXHIBIT 23/CONSENT OF ACCOUNTANTS/10-Q - 03/31/94 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated January 18, 1994 included in Valley Bancorporation's Form l0-K for the year ended December 31, 1993 included in this Form 10-Q for the quarter ended March 31, 1994 of Marshall & Ilsley Corporation, and to all references to our firm. We also consent to the incorporation by reference of such report in the following Registration Statements of Marshall & Ilsley Corporation: Registration Statement No. 33-3415 (Form S-8) pertaining to the Marshall & Ilsley Corporation Retirement Growth Plan; Registration Statement No. 33-33153 (Form S-8) pertaining to the Marshall & Ilsley Corporation 1989 Executive Stock Option and Restricted Stock Plan; Registration Statement No. 33-33090 (Form S-8) pertaining to the Marshall & Ilsley Corporation 1988 Restricted Stock Plan; Registration Statement No. 33-2642 (Form S-8) pertaining to the Marshall & Ilsley Corporation 1985 Executive Stock Option and Restricted Stock Plan; Registration Statement No. 2-89605 (Form S-8) pertaining to the Marshall & Ilsley Corporation 1983 Executive Stock Option and Restricted Stock Plan; Registration Statement No. 2-80293 (Form S-3) pertaining to shares of Marshall & Ilsley Corporation held by those persons named in such Registration Statement; Registration Statement No. 33-21377 (Form S-3) pertaining to the issuance by Marshall & Ilsley Corporation of Debt Securities; and Registration Statement No. 33-64054 (Form S-3) pertaining to the issuance by Marshall & Ilsley Corporation of Debt Securities; and Registration Statement No. 33-53155 (Form S-8) pertaining to the Marshall & Ilsley Corporation 1993 Executive Stock Option Plan. ARTHUR ANDERSEN & CO. Milwaukee, Wisconsin, May 12, 1994. RJE-Consent of Independent Public(3) (con-ipa3.rje) EX-99 7 EXHIBIT 99/VALLEY BANCORPORATION 10-K - 12/31/93/10-Q - 03/31/94 EXHIBIT 99 CONFORMED COPY WITH EXHIBITS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1993 ----------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ---------------------- Commission file number 0-2453 ------------------------------------------------------- VALLEY BANCORPORATION (Exact name of registrant as specified in its charter) Wisconsin 39-6047319 (State of Incorporation) (IRS Employer Identification No.) 100 W. Lawrence Street, P.O. Box 1061, Appleton, Wisconsin 54912-1061 - - ---------------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 738-3830 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.50 par value Series A Preferred Share Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 25, 1994, 20,741,690 shares of Common Stock were outstanding, and the aggregate market value of the Common Stock (based upon the $35.00 last sale price on that date on the NASDAQ National Market System) held by non-affiliates (excludes a total of 3,745,912 shares reported as beneficially owned by directors and executive officers or held in the registrant's employee benefit plans-does not constitute an admission as to affiliate status) was approximately $594,852,000. DOCUMENTS INCORPORATED BY REFERENCE None VALLEY BANCORPORATION * * * * * TABLE OF CONTENTS ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1993 Page ---- Part I Item 1. Business..................................................... 1 Item 2. Properties................................................... 8 Item 3. Legal Proceedings............................................ 9 Item 4. Submission of Matters to a Vote of Security Holders.......... 9 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................. 9 Item 6. Selected Financial Data...................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 25 Item 8. Financial Statements and Supplementary Data.................. 57 Report of Independent Public Accountants..................... 57 Consolidated Statements of Financial Position as of December 31, 1993 and 1992................................... 58 Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991............................. 59 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991......... 60 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991............................. 61 Notes to Consolidated Financial Statements................... 62 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 85 Part III Item 10. Directors and Executive Officers of the Registrant........... 86 Item 11. Executive Compensation....................................... 91 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 98 Item 13. Certain Relationships and Related Transactions............... 99 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 100 Signatures Exhibit Index Computation of Net Income Per Common Share.................... Exhibit 11.1 PART I ITEM 1. BUSINESS General Valley Bancorporation ("Valley"), is a diversified financial services company headquartered in Appleton, Wisconsin that was incorporated in Wisconsin in 1962. In the following year it acquired control of three Appleton area banks and began operations as a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"). In the ensuing years Valley acquired many additional banks and banking organizations, organized additional banks, opened new banking offices and began offering to its customers the additional financial services described below under "Financial Service Subsidiaries". In 1991, Valley also became a registered savings and loan holding company under the Home Owners' Loan Act of 1933, as amended (the "HOLA"), and acquired its first two savings associations. Valley's principal assets are the stock of its subsidiaries. Valley presently owns substantially all of the capital stock of 15 banks and 2 savings associations with a total of 160 offices in Wisconsin. Valley also owns several companies engaged in businesses which are closely related to banking, including the businesses of trust and fiduciary services, credit card products and processing, brokerage services and insurance agency services. Valley provides financial and managerial assistance and services to its subsidiaries. At December 31, 1993, Valley had consolidated total assets of approximately $4.6 billion, consolidated total deposits of approximately $4.0 billion, and consolidated shareholders' equity of approximately $366 million. Pending Merger With Marshall & Ilsley Corporation On September 20, 1993, Valley and Marshall & Ilsley Corporation ("M&I") jointly announced the execution of an Agreement and Plan of Merger between Valley and M&I dated as of September 19, 1993 (the "Merger Agreement"), which provides for the combination of the two companies through a merger of Valley into M&I (the "Merger"). Under the Merger Agreement, which has been approved by the shareholders of both companies, each share of Valley common stock, par value $.50 per share ("Valley Common Stock"), outstanding at the time the Merger is consummated (other than any shares owned by M&I for its own account) will be converted into the right to receive 1.72 (the "Exchange Rate") shares of M&I common stock, par value $1.00 per share ("M&I Common Stock"), in a tax-free reorganization to be accounted for as a pooling of interests. Resulting fractional share interests will be paid in cash in lieu of issuing fractional shares. Then outstanding Valley employee and director stock options will be converted at the Exchange Rate into options to acquire M&I Common Stock. M&I is a Wisconsin corporation incorporated in 1959 and a registered bank holding company under the BHCA. M&I will also become a registered savings and loan holding company under HOLA in connection with the Merger. M&I's principal assets are the stock of its subsidiaries. M&I presently owns substantially all of the capital stock of 38 banks with a total of 131 offices in Wisconsin and 12 offices in Arizona. M&I also owns a number of companies engaged in businesses which are closely related to banking, including the businesses of data processing, investment management, trust services, mortgage banking, equipment leasing, venture capital and financial advisory services, brokerage services, and insurance agency services. As a bank holding company, M&I provides financial and managerial assistance and services to its subsidiaries. At December 31, 1993, M&I had consolidated total assets of approximately $8.0 billion, consolidated total deposits of approximately $6.2 billion and consolidated shareholders' equity of approximately $750 million. M&I's headquarters are located in Milwaukee, Wisconsin. The consummation of the Merger, which is currently expected to occur in the second quarter of 1994, is subject to various conditions set forth in the Merger Agreement, including all requisite regulatory approvals. In connection with the Merger Agreement, the parties entered into a Stock Option Agreement, dated as of September 19, 1993 (the "Stock Option Agreement"), by which Valley granted M&I an option (the "Option") to purchase up to 4,045,795 newly issued shares of Valley Common Stock (19.9% of the number of shares then outstanding, and subject to adjustment to maintain that percentage) at an exercise price of $35.75 per share, exercisable upon the occurrence of certain events and subject to certain conditions set forth in the Stock Option Agreement. The Stock Option Agreement also provides M&I the right to receive a termination fee to the extent that the Option has not been exercised after the occurrence of an event which makes the Option exercisable. As required by the Merger Agreement, the Rights Agreement, dated as of October 21, 1988 (the "Rights Agreement") between Valley and The First National Bank of Boston (the "Rights Agent") has been amended by Amendment No. 1 thereto, dated as of September 19, 1993, between Valley and the Rights Agent. The Amendment provides that neither M&I nor any affiliate of M&I controlled by M&I shall become an "Acquiring Person" and that no "Shares Acquisition Date" or "Distribution Date" (as such terms are defined in the Rights Agreement) will occur as a result of the execution, delivery or performance of the Merger Agreement or the Stock Option Agreement. In accordance with the provisions of the Rights Agreement, the number of Series A Preferred Share Purchase Rights ("Rights") appertaining to each outstanding share of Valley Common Stock has been adjusted from one (1) to two-thirds (2/3), to reflect the 3-for-2 stock split effected in the form of a 50% stock dividend distributed on August 27, 1993. Valley share and per share data appearing in this report have been adjusted to reflect the stock split. Under the Merger Agreement, the shares of M&I Common Stock into which the outstanding shares of Valley Common Stock will be converted in the Merger will be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Valley Common Stock, including the Rights appertaining thereto. The Rights will cease to exist and will not attach to the shares of M&I Common Stock issued in connection with the Merger. The foregoing descriptions regarding the Merger Agreement and the Rights Agreement are qualified by reference to the provisions of the Merger Agreement, the Stock Option Agreement, the Rights Agreement and Amendment No. 1 to the Rights Agreement, copies of which are incorporated by reference as exhibits to this report. Further information concerning the Merger and related matters is set forth in M&I and Valley's Joint Proxy Statement dated December 30, 1993 for their respective special meetings of shareholders on February 15, 1994, at which the Merger Agreement was approved by the shareholders of M&I and Valley, respectively. The Joint Proxy Statement is also the Prospectus of M&I contained in its registration statement filed under the Securities Act of 1933 to register the shares of M&I Common Stock to be issued in the Merger. Following the Merger, the operations of Valley will be consolidated with the operations of M&I to enhance the efficiencies and achieve the benefits contemplated by the strategic combination of the two companies in the Merger. Growth and Expansion Since 1982, Valley's assets grew rapidly through its acquisitions of individual banks and banking organizations. The more significant steps included entry into the Green Bay market in 1982 by acquiring United Bankshares, Inc. ($204 million); its entries into the Janesville and Madison markets in 1985 by combining with BANCWIS Corporation ($170 million) and United Banks of Wisconsin, Inc. ($360 million); its expansion in the Madison area market through its 1987 acquisition of Community Banks, Inc. ($350 million); and its 1988 acquisition of Colonial Bancorporation, Inc. ($148 million), which primarily served the northern fringe of the Milwaukee metropolitan area. During 1990, Valley acquired three banks, First National Bank, Chippewa Falls ($118 million), Peoples State Bank, Three Lakes ($21 million), and Citizens State Bank, Kiel ($44 million) and organized a state commercial bank in Milwaukee County. In 1991, Valley acquired Western Federal Savings and Loan Association, Sparta ($90 million) (Western), which expanded Valley's presence in western Wisconsin, and Great American Savings Bank, FSB ($180 million) (Great American), serving metropolitan Milwaukee. Prior to their acquisition, Western had been a federal mutual savings and loan association and Great American had been a federal mutual savings bank. Valley continues to operate Western as a federal stock savings bank. Promptly following its acquisition, Great American was merged into Valley Bank, Milwaukee. During 1991, Valley also acquired Exchange State Bank, La Crosse ($55 million). In 1992, Valley acquired United Savings and Loan Association ($320 million) (United), Sheboygan, Wisconsin, which converted from a stated chartered mutual savings and loan association to a state stock savings association and now operates as a separate subsidiary of Valley. Valley consummated the acquisition of 98% of the outstanding stock of Pierce County Bank and Trust Company ($112 million) (Pierce County) as of November 6, 1993. Valley's asset size is the third largest among banking organizations headquartered in Wisconsin, and its Madison bank has the greatest consolidated total assets among commercial banks in the state's second largest banking market. Information on Valley's growth and certain other information as to its business during the years 1988 through 1993 is shown on a consolidated basis in the tables under "Selected Financial Data" in Item 6 of this report. See Note 2 of Notes to Consolidated Financial Statements in Item 8 hereof for further information regarding the acquisitions consummated during the last three fiscal years and the pending Merger with M&I. Banking Services Each Valley Bank (which term includes savings associations) provides complete retail banking services, including money market type accounts, and full service banking for commercial, industrial and agricultural customers. In order to broaden its services to customers, improve management controls and achieve operating efficiencies, Valley began a program in 1987 of consolidating its banking units into a relatively few larger banks. At 1993 year end, Valley had 17 banking subsidiaries serving customers from a total of 160 locations in Wisconsin. The four largest Valley Banks, in Madison ($876 million), Appleton ($623 million), Green Bay ($511 million) and Milwaukee ($452 million), represented more than half of Valley's total assets. Valley has undertaken several major initiatives intended to enhance its operating efficiencies and reduce bank operating costs, including the centralization of its administrative operations, the installation of a company-wide data processing and information network known as VISION, and the concurrent conversion of Valley Banks' data processing operations to the VISION system. Valley completed the centralization of its administrative operations during the third quarter of 1991. The operational efficiencies associated with this consolidation have had a positive impact on net earnings thereafter. Corporate Organization The Valley Banks are organized into Northern and Southern Divisions, each of which is divided into two banking regions, and the Lakeshore Region which was added in conjunction with the acquisition of United. Corporate officers have designated responsibilities for the Valley Banks within each division and region, and for related financial services. They also provide an additional resource to Valley's individual units by consulting with and providing advice to officers of the individual banking and financial service subsidiaries, and monitoring their performance. Through its corporate staff and certain personnel of its financial service subsidiaries, Valley provides a broad range of management and other specialized services to its individual units. The knowledge and expertise of its staff enhance the capability of each individual unit's management and expand the variety of products which the unit can offer to customers. Valley's units utilize this specialized knowledge and expertise in numerous aspects of bank policy and operations, including auditing; data processing and automation; credit and loan analysis and review; investments; bank operations and systems analysis; facilities and equipment planning; marketing; employee benefit programs; human resources management, recruiting and training; trust services; and community development. Service charges, which Valley believes to be reasonable, are paid by subsidiaries for such assistance. To increase the efficiency of Valley Banks, Valley operates under a service corporation concept through its subsidiary Valley BankService Corporation whereby all day-to-day bank operational activities, including data processing, are managed centrally and performed at regional service centers. Moreover, Valley organized a mortgage servicing subsidiary, Valley Real Estate Services Corporation, to service residential mortgage loans originated in Wisconsin by Valley Banks that have been sold in the secondary market, to assume management of the interest rate risk, and to act as a resource to all Valley Banks in the underwriting, processing and servicing of these mortgage loans. Relieved of various operations responsibilities, Valley Banks have the opportunity to focus more on business development and customer sales and service. Financial Service Subsidiaries Through certain subsidiaries, Valley makes available to its customers a variety of trust and fiduciary services, credit cards, insurance sales and securities brokerage services. Other subsidiaries offer credit life reinsurance for loans originated by Valley Banks and extensive data processing services, which are utilized primarily by Valley Banks. Valley also offers equipment leasing services through one of its subsidiary banks. Valley Trust Company Created in 1972 as the successor to the separate trust department activities of several of the Valley Banks, Valley Trust Company provides a broad spectrum of trust services to customers in banking markets served by Valley. Valley Trust Company has over $3.1 billion of assets under its management, and services its customers through 17 offices in conjunction with Valley Banks located throughout Wisconsin. Services provided include professional investment management, asset safekeeping and accounting, employee benefit plan design and administration, acting as fiduciary under wills and trusts, and other specialized financial services to individuals and corporations. Insurance Services, Inc. Valley Bank, Appleton acquired Insurance Services, Inc. (ISI) in 1984. ISI is one of the largest independent insurance agencies in Wisconsin, based on premium volume, with a staff of 60 employees representing over 40 insurance companies. Through the Commercial Lines Department, ISI provides specialized insurance coverages for corporate clients, both large and small. ISI's Personal Lines Department provides the insurance coverage needed by families and individuals. ISI's agents provide a full line of insurance coverages (homeowner, automobile, life and health). These services are also offered through agents located in Valley Banks in Appleton, Green Bay, Madison, Milwaukee and Janesville. ISI's Financial Services Division provides business with a wide variety of group life, health and disability plans which range from fully insured plans to completely self-insured plans depending upon size and needs. A Surety Division provides bonding to contractors, financial institutions and municipalities. ISI also has a Claims Department and serves as third party administrator to those customers who wish to self-insure their Workers' Compensation exposures. Credit life and disability insurance needs and tax deferred annuities are made available through selected licensed Valley bankers. Valley Bancard, Inc. Created in 1986 to provide VISA and MasterCard products and processing for customers of Valley Banks, Valley Bancard processed in excess of $500 million VISA and MasterCard sales drafts from more than 7,800 merchants in 1993. At 1993 year end Valley Bancard had approximately 65,000 active accounts with balances of $59 million. Products provided for cardholders are VISA, MasterCard and MasterCard Gold cards. Products provided for merchants are standard paper, point of sale and electronic draft capture processing of their VISA, MasterCard, DISCOVER and American Express transactions. Valley Securities, Inc. Valley began offering discount securities brokerage services in 1983, and since 1986 has conducted this business through a separate subsidiary. The services available through Valley Securities' nine locations include the traditional discount trading activities, as well as recommendations of selected investments, including mutual funds, unit trusts and variable and fixed annuities. One of the larger nationwide securities clearing firms executes and clears transactions initiated by Valley Securities. Community Life Insurance Company Since 1981, this subsidiary has acted as a reinsurer in underwriting credit life insurance and credit accident and health insurance related to loans made by Valley Banks. Competition Each Valley Bank competes actively with other banks located in or near its service area. Such competition encompasses efforts to obtain new deposits, type and convenience of services offered, loan rates charged and interest rates paid on time deposits, as well as other aspects of banking. In addition, all of the Valley Banks encounter substantial competition from other financial institutions engaged in the business of making loans or accepting savings deposits such as savings and loan associations, savings banks, small loan companies, credit unions, certain governmental agencies, insurance companies, and various mutual and money market funds. Those financial service subsidiaries which deal directly with customers also encounter vigorous competition, including that from much larger organizations. Valley Trust Company competes with similar units of other bank holding companies, trust departments of individual banks and other entities which concentrate upon certain of the services it offers, such as investment management firms and employee benefit consultants. ISI competes with numerous independent insurance agencies and also with insurance companies which write coverage directly through employed agents. Other large banking organizations throughout the United States, as well as affiliates of large, diverse businesses, solicit credit card accounts in Valley's market area. Valley Securities competes with a number of nationwide discount brokerage firms, as well as with many national and regional investment firms which, because of legal restrictions upon bank holding company affiliates, are able to provide a much broader range of services. Employees At December 31, 1993, Valley and its subsidiaries had 2,807 full-time equivalent employees. Valley provides a wide range of benefits to employees, including educational opportunities, and considers its employee relations to be excellent. Valley conducts extensive training programs in order to enhance the job-related knowledge and skills of its people and to imbue its employees with a sales-oriented approach to customers. Eligible employees of Valley participate in pension, thrift and sharing and stock option plans as well as group life and major medical insurance programs. Supervision and Regulation The operations of financial institutions, including bank and savings and loan holding companies, commercial banks and savings associations, are highly regulated, both at the federal and state levels. Numerous statutes and regulations affect the businesses of Valley and its financial service subsidiaries. Valley's own activities are regulated by the BHCA, which requires each holding company to obtain the prior approval of the Federal Reserve Board (the "Board") before acquiring direct or indirect ownership or control of more than five percent of the voting shares of any bank. (M&I's acquisition of Valley requires such approval, as well as the approval of the OTS under HOLA.) The BHCA prohibits acquisition of shares of a bank located outside the state in which the operations of Valley's banking subsidiaries are principally conducted, unless specifically authorized by statute of the other state. Since 1987, Wisconsin law has permitted interstate bank acquisitions within those states in a nine-state region which have adopted similar legislation. Laws reciprocal to the Wisconsin law have been enacted by Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota and Ohio. A Wisconsin-based holding company, such as Valley, may also acquire banks in certain other states which expressly permit nationwide acquisitions with no requirement for reciprocal legislation. The BHCA also prohibits, with certain exceptions for savings associations and other entities engaged in bank-related activities, acquisition of more than five percent of the voting shares of any company which is not a bank and the conduct by a holding company (directly or through its subsidiaries) of any business other than banking or performing services for its subsidiaries, without prior approval of the Board. Pursuant to the BHCA, Valley is supervised and regularly examined by the Board. As a savings and loan holding company, Valley is subject to oversight, regulation and examination by the Office of Thrift Supervision (OTS). In addition, the OTS has enforcement authority over Valley and its non-insured subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to a savings association. Each Valley Bank is also supervised and regularly examined by regulatory agencies pursuant to applicable banking laws. The deposits of each Valley Bank (except those which are savings associations) are insured by the Bank Insurance Fund (BIF) administered by the Federal Deposit Insurance Corporation (FDIC). State-chartered Valley Banks and Valley Trust Company are supervised by the Office of the Wisconsin Commissioner of Banking and regularly examined by that agency and the FDIC. Valley Banks which are national banks are supervised and regularly examined by the Office of the Comptroller of the Currency (OCC), and are also subject to regulation by the Board and the FDIC. Western and United are supervised and regularly examined by regulatory agencies pursuant to applicable laws governing savings associations. As a federally charted savings association, Western is subject to supervision and regulation by the OTS. As a state chartered savings association, United is subject to supervision and regulation by the Wisconsin Commissioner of Savings and Loan. The deposits of savings associations are insured by the Savings Association Insurance Fund (SAIF) administered by the FDIC. As a result, both Western and United are subject to regulation and supervision by the FDIC, to the extent deemed necessary by the FDIC to insure the safety and soundness of the SAIF. Regulatory requirements applicable to them include maintenance of a sufficient portion of assets in housing-related loans and assets to meet a "qualified thrift lender" test; and limitations upon certain types of loans and investments. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) has significantly affected the operation of financial institutions, including banks, bank holding companies and savings associations. As was authorized by FIRREA, deposit insurance premiums payable by the Valley Banks to the BIF and SAIF have been significantly increased. FIRREA also redefined applicable capital standards for banks and savings associations and significantly increased the minimum levels of capital required to be maintained by savings associations. Regulations adopted by the FDIC, the OCC and the OTS since the enactment of FIRREA have established minimum leverage capital requirements for banks and savings associations. Western, United, and all of Valley's banks are in compliance with the minimum capital requirements applicable to them. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) provides for, among other things, establishment by the federal banking agencies of revised risk-based capital requirements designed to account for interest rate risk, concentration of credit risk and the risks of nontraditional activities; the recapitalization of BIF; enhanced federal supervision of depository institutions, including greater authority for the appointment of a conservator or receiver for undercapitalized institutions; the establishment of risk-based deposit insurance premiums; limitation of equity investments and other activities permissible to state banks and savings associations to those permissible for national banks and federal savings associations, respectively; liberalization of the qualified thrift lender test; greater restrictions on transactions with affiliates; and mandated consumer protection disclosures with respect to deposit accounts. Certain provisions of FDICIA which are potentially applicable to Valley and its affiliates are discussed below. FDICIA requires the federal banking regulators to define five levels of regulatory capital (i.e., well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), and mandates specific enforcement actions that the federal banking agencies must take with respect to depository institutions whose capital level is significantly below the required minimums. Depending on the capital level which the institution fails to meet, such an institution may be prohibited from increasing its assets, acquiring another institution, establishing a branch, engaging in any new activities, or making capital distributions. Any company controlling such an institution, including Valley, may be required to guarantee that the institution will achieve minimum capital levels in accordance with a capital restoration plan approved by the federal banking agency. Other actions which the federal banking agencies may take with respect to such an institution include requiring the issuance of additional voting securities; placing limitations on asset growth; mandating asset reduction; mandating changes in senior management; requiring the divestiture, merger or acquisition of the institution; placing restrictions on executive compensation; and any other action that the agency deems appropriate. If the depository institution's capital levels fall below certain levels, FDICIA requires that the appropriate federal banking agency be appointed as a receiver or conservator of the institution. Federal banking regulators have proposed and adopted regulations required to implement the provisions of FDICIA. Among the more important of these regulations, the Board, FDIC, OTS and OCC adopted uniform regulations establishing criteria to define the five levels of regulatory capital specified under FDICIA. Under those regulations, all of the Valley Banks fall into the category of well-capitalized, and the provisions of FDICIA described in the preceding paragraph are therefore not expected to have any material adverse effect on Valley. The FDIC also adopted a final rule establishing a risk-based insurance premium assessment system. Under this regulation, insurance premiums of both BIF and SAIF insured institutions range between $.23 and $.31 on each $100 of deposits, depending on the regulatory capital level and supervisory rating of the institution. This new risk-based premium assessment system is not expected to result in any material increase in insurance premium assessments applicable to Valley Banks because of their relatively high levels of regulatory capital and generally favorable supervisory ratings. However, the FDIC has indicated it will regularly review the adequacy of the premium assessment levels and will make further changes in premium rates as necessary to assure sufficient reserves are maintained in the insurance funds. Other significant regulatory developments under FDICIA are summarized below. Although applicable to Valley and its subsidiaries, none of these regulations are expected to have any material adverse effect on Valley's financial condition or future operations. The FDIC has adopted regulations requiring all insured depository institutions with $500 million or more in assets to have annual audits by an independent public accountant and an independent audit committee made up of outside directors, and requiring annual reports by management on its responsibility for preparing financial statements and establishing and maintaining an internal control structure for financial reporting and compliance, unless these requirements are satisfied at the parent holding company level. The Board, FDIC and OTS have all adopted rules further limiting the types and amounts of loans that insured depository institutions may make to their officers, directors and principal shareholders. The FDIC adopted a rule prohibiting insured depository institutions from soliciting deposits by offering rates significantly higher than community rates or the national rates paid on deposits of comparable maturity. The Board, FDIC, OCC and OTS have established uniform rules and guidelines for real estate lending, but these rules do not preclude individual institutions from establishing their own specific standards. The FDIC adopted a rules which prohibits, with certain exceptions including investments in majority-owned subsidiaries, any state bank from acquiring or retaining any equity investment of a type not permissible for a national bank. Finally, the Board adopted a rule under the Truth in Savings Act imposing certain disclosure and advertising requirements for interest-bearing transaction and savings accounts, and requiring that individual and other non-business accounts offered by depository institutions be accompanied by disclosures of the terms, conditions, fees and yields applicable to the account. This rule also establishes standardized terms that must be used in connection with interest-bearing deposits. Certain other rules mandated under FDICIA have been proposed or adopted, including rules limiting the activities of state banks and their subsidiaries to activities permissible for national banks, uniform rules designed to take interest rate risk into account in calculating risk-based regulatory capital, rules addressing the treatment of purchased mortgage servicing rights for purposes of calculating regulatory capital, and others. Proposals for new legislation or rule making affecting the financial services industry are continuously being advanced and considered at both the national and state levels. There can be no assurance as to the substance of any legislation or regulations that may ultimately emerge from such proposals or what effect they may have on Valley and its operations in the future. Monetary Policy and Economic Conditions The monetary policies of regulatory authorities, including the Board, have a significant effect on the operating results of holding companies and their subsidiary depository institutions. The Board regulates the national supply of bank credit, and utilizes its powers in efforts to curb inflationary pressures and combat economic recession. Among the means available to the Board are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid for deposits. Most of the Valley Banks are state banks and are not members of the Federal Reserve System. They are, however, subject to regulation by the Wisconsin Commissioner of Banking as to required reserves. Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The historic statements of income of Valley reflect the effects of monetary policies during the periods covered thereby. The nature of future monetary policies and the effects thereof on the future business and earnings of Valley and its subsidiaries cannot be predicted. Additional Information Additional information in response to this Item 1 is incorporated by reference to the following portions of this report: "Average Balances, Mix, Interest, Average Rate and Key Ratios" and "Quarterly Average Balances, Interest, Average Rates and Key Ratios" in Item 6, "Management Discussion and Analysis of Financial Condition and Results of Operations" (which includes statistical disclosure required by Guide 3) in Item 7, and Note 8 of the Notes to Consolidated Financial Statements in Item 8 hereof. ITEM 2. PROPERTIES The principal executive offices of the holding company occupy leased facilities in downtown Appleton. Additional holding company staff operate from facilities at several Valley Banks. A building owned by Valley houses the main offices of Valley Bank, Appleton, and Valley Trust Company. Separate owned structures in Appleton provide facilities for Valley BankService Corporation, which also owns a remote entry site at Sun Prairie. Valley leases space in downtown Appleton which contains the main office of Valley Securities and additional offices used by Valley BankService Corporation - Financial Services Division. Valley Bancard leases office space in Madison for its operations. ISI occupies leased office space in Appleton. Valley Real Estate Services Corporation occupies a new facility completed in 1993. Additional financial service subsidiaries share space in buildings occupied by other Valley Banks. Most of the bank premises are owned by the respective Valley Banks, either directly or through a subsidiary, although some of the buildings housing branches of the Madison Bank were sold and leased back before Valley acquired those units in 1987. Each of Valley's banking offices is a well maintained concrete, stone or brick building which Valley considers to be attractive and efficient. Convenient drive-in facilities are provided at each of the larger banking offices. Valley also leases space for its supermarket branch locations from several different companies. ITEM 3. LEGAL PROCEEDINGS Neither Valley nor any of its subsidiaries is a party to any legal proceeding which is material to Valley and its subsidiaries taken as a whole. Valley's subsidiaries are routinely involved in certain types of proceedings, especially collection and foreclosure actions, incidental to their businesses. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1993. However, the Merger Agreement with M&I was approved at the special meeting of Valley shareholders held on February 15, 1994. Of the 20,721,290 outstanding shares of Valley Common Stock entitled to vote on the Merger Agreement, the Inspector of Election certified that 16,635,928 shares, or approximately 80.3%, were voted for such approval, 612,406 shares were voted against, and there were 147,365 abstentions. There were no broker non-votes. Additional information concerning the Merger Agreement is contained in, and referred to in, Item 1 of this report. See "Business--Pending Merger With Marshall & Ilsley Corporation." PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information in response to this Item 5 is incorporated herein by reference to Table 19: "Market Price of Common Stock and Related Security Matters" in Item 7 of this report, and to the discussion of dividend restrictions in Note 9 of the Notes to Consolidated Financial Statements in Item 8 of this report. Also, in the Merger Agreement, Valley has agreed that it will not, without the prior written consent of M&I, declare or pay any dividend other than regular quarterly cash dividends on Valley Common Stock not in excess of $.24 per share (provided that in the quarter that the Merger occurs, shareholders of Valley will receive cash dividends only with respect to shares of Valley Common Stock held or with respect to shares of M&I Common Stock received pursuant to the Merger Agreement, but not both). The Valley Common Stock is traded on the NASDAQ National Market System under the symbol VYBN. At December 31, 1993, there were approximately 7,630 holders of record of Valley Common Stock, excluding individual participants in security position listings. ITEM 6. SELECTED FINANCIAL DATA
Five Year Compound Growth (dollars in thousands) 1993 1992 1991 1990 1989 1988 Rate - - ----------------------------------------------------------------------------------------------------- Balance Sheet, December 31, - - ----------------------------------------------------------------------------------------------------- Cash and due from banks $ 202,370 $ 230,858 $ 213,916 $ 247,874 $ 191,299 $ 180,100 2.36% - - ----------------------------------------------------------------------------------------------------- Funds sold 2,640 16,117 47,213 17,929 148,786 70,116 (48.68) - - ----------------------------------------------------------------------------------------------------- Interest-bearing deposits with other banks 756 3,950 19,710 42,705 42,012 21,243 (48.10) - - ----------------------------------------------------------------------------------------------------- Investment securities (1) 972,203 915,330 887,156 772,305 616,866 695,111 6.94 - - ----------------------------------------------------------------------------------------------------- Mortgages held for sale 60,421 38,430 21,995 1,816 19,710 --- NMF - - ----------------------------------------------------------------------------------------------------- Loans 3,190,485 3,017,338 2,612,518 2,312,399 2,001,676 1,863,325 11.36 - - ----------------------------------------------------------------------------------------------------- Reserve for loan losses (40,411) (37,921) (31,241) (25,422) (22,150) (20,408) 14.64 - - ----------------------------------------------------------------------------------------------------- Premises and equipment, net 103,271 103,485 106,362 95,771 78,836 72,486 7.34 - - ----------------------------------------------------------------------------------------------------- Other assets 100,458 96,719 98,313 85,455 76,775 75,812 5.79 - - ----------------------------------------------------------------------------------------------------- Total assets $4,592,193 $4,384,306 $3,975,942 $3,550,832 $3,153,810 $2,957,785 9.20 ===================================================================================================== Noninterest-bearing deposits 571,751 537,845 469,266 451,705 417,449 405,205 7.13 - - ----------------------------------------------------------------------------------------------------- Interest-bearing deposits 3,406,358 3,294,779 2,971,940 2,604,890 2,339,610 2,170,700 9.43 - - ----------------------------------------------------------------------------------------------------- Total deposits 3,978,109 3,832,624 3,441,206 3,056,595 2,757,059 2,575,905 9.08 - - ----------------------------------------------------------------------------------------------------- Short-term borrowings 132,004 86,894 132,410 113,161 84,349 82,237 9.93 - - ----------------------------------------------------------------------------------------------------- Long-term borrowings 53,251 68,311 75,842 81,299 29,778 45,151 3.36 - - ----------------------------------------------------------------------------------------------------- Other liabilities 62,921 69,701 56,635 47,375 48,073 39,178 9.94 - - ----------------------------------------------------------------------------------------------------- Shareholders' equity 365,908 326,776 269,849 252,402 234,551 215,314 11.19 - - ----------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $4,592,193 $4,384,306 $3,975,942 $3,550,832 $3,153,810 $2,957,785 9.20 ===================================================================================================== Selected Average Balances - - ----------------------------------------------------------------------------------------------------- Loans $3,111,702 $2,843,439 $2,527,722 $2,186,253 $1,943,180 $1,754,078 12.15 - - ----------------------------------------------------------------------------------------------------- Funds sold 5,926 23,952 67,698 80,283 70,861 85,010 (41.30) - - ----------------------------------------------------------------------------------------------------- Taxable securities 729,098 663,978 573,721 504,645 470,115 424,046 11.45 - - ----------------------------------------------------------------------------------------------------- Nontaxable securities 188,568 223,699 264,675 219,601 227,050 248,929 (5.40) - - ----------------------------------------------------------------------------------------------------- Interest-earning assets 4,035,294 3,755,068 3,433,816 2,990,782 2,711,206 2,512,063 9.94 - - ----------------------------------------------------------------------------------------------------- Total assets 4,359,951 4,079,790 3,750,237 3,286,307 2,974,979 2,770,416 9.49 - - ----------------------------------------------------------------------------------------------------- Interest-bearing deposits 3,282,195 3,081,395 2,869,939 2,491,096 2,230,196 2,069,752 9.66 - - ----------------------------------------------------------------------------------------------------- Short-term borrowings 110,168 120,349 106,076 84,369 98,086 75,757 7.78 - - ----------------------------------------------------------------------------------------------------- Long-term borrowings 63,269 71,676 79,414 44,619 37,084 46,142 6.52 - - ----------------------------------------------------------------------------------------------------- Interest-bearing liabilities 3,455,632 3,273,420 3,055,429 2,620,084 2,365,366 2,191,651 9.53 - - ----------------------------------------------------------------------------------------------------- Shareholders' equity 344,237 298,062 262,567 244,773 225,245 204,988 10.92 ===================================================================================================== Average Rates Earned and Paid - - -------------------------------------------------------------------------------------------- Earning assets - - -------------------------------------------------------------------------------------------- Loans 8.43% 9.28% 10.43% 10.98% 11.07% 10.50% - - -------------------------------------------------------------------------------------------- Funds sold 2.23 3.77 5.46 7.96 8.94 7.59 - - -------------------------------------------------------------------------------------------- Taxable securities 5.30 6.45 7.94 8.57 8.47 7.76 - - -------------------------------------------------------------------------------------------- Nontaxable securities 8.12 9.20 10.40 11.21 11.39 10.80 - - -------------------------------------------------------------------------------------------- Total earning assets 7.84 8.74 9.91 10.50 10.59 9.97 - - -------------------------------------------------------------------------------------------- Interest-bearing liabilities - - -------------------------------------------------------------------------------------------- N.O.W. & money market deposits 2.14 2.68 4.22 4.83 5.11 4.98 - - -------------------------------------------------------------------------------------------- Savings deposits 2.51 2.83 4.11 4.52 4.61 4.66 - - -------------------------------------------------------------------------------------------- Time deposits 4.73 5.69 7.20 8.03 8.10 7.17 - - -------------------------------------------------------------------------------------------- Short-term borrowings 2.81 3.41 5.12 7.21 8.12 6.54 - - -------------------------------------------------------------------------------------------- Long-term borrowings 10.63 10.47 9.77 8.93 10.93 10.24 - - -------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3.93 4.74 6.22 6.85 6.95 6.22 - - -------------------------------------------------------------------------------------------- Rate spread 3.91 4.00 3.69 3.65 3.64 3.75 - - -------------------------------------------------------------------------------------------- Net yield on earning assets 4.47 4.61 4.37 4.50 4.53 4.55 ============================================================================================
(1) Includes investment securities held to maturity and investment securities available for sale. NMF = Not Meaningful
Five Years ended December 31, Year ----------------------------------------------------------------- Compound (dollars in thousands Growth except per share data) 1993 1992 1991 1990 1989 1988 Rate - - ----------------------------------------------------------------------------------------------------- Summary of Operations - - ----------------------------------------------------------------------------------------------------- Interest income* $ 316,363 $ 328,012 $ 340,304 $ 314,252 $ 287,175 $ 251,201 4.72% - - ----------------------------------------------------------------------------------------------------- Interest expense 135,847 155,088 190,154 179,544 164,480 136,244 (.06) - - ----------------------------------------------------------------------------------------------------- Taxable equivalent net interest income 180,516 172,924 150,150 134,708 122,695 114,957 9.45 - - ----------------------------------------------------------------------------------------------------- Provision for loan losses 8,970 8,395 8,369 7,864 6,796 5,226 11.41 - - ----------------------------------------------------------------------------------------------------- Taxable equivalent net interest income after provision for loan losses 171,546 164,529 141,781 126,844 115,899 109,731 1.10 - - ----------------------------------------------------------------------------------------------------- Noninterest income 66,061 59,292 48,018 40,143 35,466 32,358 15.34 - - ----------------------------------------------------------------------------------------------------- Noninterest expense 164,481 160,103 140,999 120,410 105,382 98,365 10.83 - - ----------------------------------------------------------------------------------------------------- FTE income before income taxes 73,126 63,718 48,800 38,937 37,956 35,143 10.59 - - ----------------------------------------------------------------------------------------------------- Income taxes 22,118 17,556 9,589 9,909 8,270 8,633 20.70 - - ----------------------------------------------------------------------------------------------------- Taxable equivalent adjustment 5,105 6,383 8,545 7,640 8,027 8,581 (9.87) - - ----------------------------------------------------------------------------------------------------- Net income $ 45,903 $ 39,779 $ 30,666 $ 29,028 $ 29,686 $ 26,510 11.61 ===================================================================================================== Weighted average shares** 20,326 19,244 18,336 18,015 17,800 17,535 - - -------------------------------------------------------------------------------------------- Net income per share** $ 2.26 $ 2.07 $ 1.67 $ 1.61 $ 1.67 $ 1.51 - - -------------------------------------------------------------------------------------------- Selected Ratios - - -------------------------------------------------------------------------------------------- Performance - - -------------------------------------------------------------------------------------------- Net Income to: - - -------------------------------------------------------------------------------------------- Average assets 1.05% .98% .82% .88% 1.00% .96% - - -------------------------------------------------------------------------------------------- Average shareholders' equity 13.33 13.35 11.68 11.86 13.18 12.93 - - -------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 1.49 1.37 1.21 1.21 1.23 1.26 - - -------------------------------------------------------------------------------------------- Efficiency ratio 66.84 69.20 71.41 68.85 66.63 67.04 - - -------------------------------------------------------------------------------------------- Capital Adequacy - - -------------------------------------------------------------------------------------------- Shareholders' equity to assets at year end 7.97% 7.45% 6.79% 7.11% 7.44% 7.28% - - -------------------------------------------------------------------------------------------- Risk-based capital-Tier 1 10.05 9.44 8.33 8.37 N/A N/A - - -------------------------------------------------------------------------------------------- Risk-based capital-Total 11.27 10.76 9.67 9.72 N/A N/A - - -------------------------------------------------------------------------------------------- Tier I Leverage at year end 7.26 6.71 5.87 6.25 6.55 6.27 - - -------------------------------------------------------------------------------------------- Debt to equity 14.55 20.90 28.11 32.21 12.70 20.97 - - -------------------------------------------------------------------------------------------- Asset Quality - - -------------------------------------------------------------------------------------------- Net charge-offs to average loans .25% .21% .27% .27% .26% .25% - - -------------------------------------------------------------------------------------------- Reserve for loan losses to loans 1.27 1.26 1.20 1.10 1.11 1.10 - - -------------------------------------------------------------------------------------------- Nonperforming loans to loans .65 .86 1.47 1.13 1.24 1.33 - - -------------------------------------------------------------------------------------------- Nonperforming assets to assets .50 .68 1.09 .84 .91 .94 - - -------------------------------------------------------------------------------------------- Stock Performance** - - -------------------------------------------------------------------------------------------- Dividends paid per share - - -------------------------------------------------------------------------------------------- (Historical) $ .94 $ .85 $ .80 $ .75 $ .69 $ .59 - - -------------------------------------------------------------------------------------------- Market price: - - -------------------------------------------------------------------------------------------- High $ 39.63 $ 26.50 $ 20.00 $ 17.00 $ 18.17 $ 17.50 - - -------------------------------------------------------------------------------------------- Low 24.83 18.00 11.83 11.33 15.00 13.33 - - -------------------------------------------------------------------------------------------- At year end 39.63 25.09 18.79 12.00 16.50 17.25 - - -------------------------------------------------------------------------------------------- Average market price for the year 30.69 22.52 16.60 14.75 16.69 15.10 - - -------------------------------------------------------------------------------------------- Book value at year end 17.65 16.24 14.69 13.95 13.12 12.18 - - -------------------------------------------------------------------------------------------- Market to book value 225% 154% 128% 86% 126% 142% at year end - - -------------------------------------------------------------------------------------------- Dividend payout percentage - - -------------------------------------------------------------------------------------------- (Historical) 41% 41% 48% 46% 42% 38% - - -------------------------------------------------------------------------------------------- Dividend yield (based on average price for the year) 3.06% 3.78% 4.82% 5.08% 4.13% 3.91% - - -------------------------------------------------------------------------------------------- Price/earnings ratio (based on year end stock price) 17.54x 12.12x 11.25x 7.45x 9.88x 11.42x - - -------------------------------------------------------------------------------------------- Other Historical Data - - -------------------------------------------------------------------------------------------- Shareholders at year end 7,630 7,641 7,415 7,428 7,455 7,505 - - -------------------------------------------------------------------------------------------- Full time equivalent employees 2,807 2,648 2,530 2,250 2,032 2,012 - - -------------------------------------------------------------------------------------------- Number of banking offices at year end 160 151 137 118 96 98 ============================================================================================
*Income computed on a fully taxable equivalent basis. **Data has been restated for the three for two stock split, effected in the form of a 50% stock dividend, distributed on August 27, 1993. Average Balances, Mix, Interest, Average Rates and Key Ratios
1993 --------------------------------------------- Average Average (dollars in thousands) Balance Mix Interest Rate - - ----------------------------------------------------------------------------------- Assets - - ----------------------------------------------------------------------------------- Earning assets: - - ----------------------------------------------------------------------------------- Loans, net of unearned discount (1) $3,111,702 71.4% $ 262,263 8.43% - - ----------------------------------------------------------------------------------- Funds sold 5,926 .2 132 2.23 - - ----------------------------------------------------------------------------------- Investment securities (2) - - ----------------------------------------------------------------------------------- Taxable (3) 729,098 16.7 38,651 5.30 - - ----------------------------------------------------------------------------------- Nontaxable 188,568 4.3 15,317 8.12 - - ----------------------------------------------------------------------------------- Total investment securities 917,666 21.0 53,968 5.88 - - ----------------------------------------------------------------------------------- Total earning assets 4,035,294 92.6 316,363 7.84 - - ----------------------------------------------------------------------------------- Reserve for loan losses (39,852) (.9) - - ----------------------------------------------------------------------------------- Cash and due from banks 172,111 3.9 - - ----------------------------------------------------------------------------------- Premises and equipment, net 103,087 2.4 - - ----------------------------------------------------------------------------------- Other assets 89,311 2.0 - - ----------------------------------------------------------------------------------- Total assets $4,359,951 100.0% =================================================================================== Liabilities and Shareholders' Equity - - ----------------------------------------------------------------------------------- Interest-bearing liabilities: - - ----------------------------------------------------------------------------------- N.O.W. and money market deposits $ 776,256 17.8% $ 16,647 2.14 - - ----------------------------------------------------------------------------------- Savings deposits 411,525 9.4 10,318 2.51 - - ----------------------------------------------------------------------------------- Time deposits 2,094,414 48.0 99,062 4.73 - - ----------------------------------------------------------------------------------- Short-term borrowings 110,168 2.5 3,097 2.81 - - ----------------------------------------------------------------------------------- Long-term borrowings 63,269 1.5 6,723 10.63 - - ----------------------------------------------------------------------------------- Total interest-bearing liabilities 3,455,632 79.2 135,847 3.93 - - ----------------------------------------------------------------------------------- Demand deposits 492,232 11.3 - - ----------------------------------------------------------------------------------- Accrued expenses and other liabilities 67,850 1.6 - - ----------------------------------------------------------------------------------- Total liabilities 4,015,714 92.1 - - ----------------------------------------------------------------------------------- Shareholders' equity 344,237 7.9 - - ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity $4,359,951 100.0% =================================================================================== Taxable equivalent net interest income and rate spread $ 180,516 3.91% - - ----------------------------------------------------------------------------------- Net yield on earning assets 4.47% - - -----------------------------------------------------------------------------------
(1) Non-performing loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes investment securities held to maturity and investment securities available for sale. (3) Includes time deposits with other banks. Key Average Balance Ratios - - ------------------------------------------------------------------------------ Loans to assets 71.37% - - ------------------------------------------------------------------------------ Earning assets to total assets 92.55 - - ------------------------------------------------------------------------------ Reserve for loan losses to loans 1.28 - - ------------------------------------------------------------------------------ Net loans charged off as a % of loans .25 - - ------------------------------------------------------------------------------ Long-term borrowings to shareholders' equity 18.38 - - ------------------------------------------------------------------------------ Shareholders' equity to total assets 7.90 ============================================================================== Average Balances, Mix, Interest, Average Rates and Key Ratios
1992 --------------------------------------------- Average Average (dollars in thousands) Balance Mix Interest Rate - - ----------------------------------------------------------------------------------- Assets - - ----------------------------------------------------------------------------------- Earning assets: - - ----------------------------------------------------------------------------------- Loans, net of unearned discount (1) $2,843,439 69.7% $ 263,737 9.28% - - ----------------------------------------------------------------------------------- Funds sold 23,952 .6 903 3.77 - - ----------------------------------------------------------------------------------- Investment securities (2) - - ----------------------------------------------------------------------------------- Taxable (3) 663,978 16.2 42,797 6.45 - - ----------------------------------------------------------------------------------- Nontaxable 223,699 5.5 20,575 9.20 - - ----------------------------------------------------------------------------------- Total investment securities 887,677 21.7 63,372 7.14 - - ----------------------------------------------------------------------------------- Total earning assets 3,755,068 92.0 328,012 8.74 - - ----------------------------------------------------------------------------------- Reserve for loan losses (35,090) (.9) - - ----------------------------------------------------------------------------------- Cash and due from banks 157,986 3.9 - - ----------------------------------------------------------------------------------- Premises and equipment, net 108,528 2.7 - - ----------------------------------------------------------------------------------- Other assets 93,298 2.3 - - ----------------------------------------------------------------------------------- Total assets $4,079,790 100.0% =================================================================================== Liabilities and Shareholders'Equity - - ----------------------------------------------------------------------------------- Interest-bearing liabilities: - - ----------------------------------------------------------------------------------- N.O.W. and money market deposits $747,076 18.3% $ 20,004 2.68% - - ----------------------------------------------------------------------------------- Savings deposits 327,447 8.0 9,267 2.83 - - ----------------------------------------------------------------------------------- Time deposits 2,006,872 49.2 114,217 5.69 - - ----------------------------------------------------------------------------------- Short-term borrowings 120,349 2.9 4,099 3.41 - - ----------------------------------------------------------------------------------- Long-term borrowings 71,676 1.8 7,501 10.47 - - ----------------------------------------------------------------------------------- Total interest-bearing liabilities 3,273,420 80.2 155,088 4.74 - - ----------------------------------------------------------------------------------- Demand deposits 438,802 10.8 - - ----------------------------------------------------------------------------------- Accrued expenses and other liabilities 69,506 1.7 - - ----------------------------------------------------------------------------------- Total liabilities 3,781,728 92.7 - - ----------------------------------------------------------------------------------- Shareholders' equity 298,062 7.3 - - ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity $4,079,790 100.0% =================================================================================== Taxable equivalent net interest income and rate spread $ 172,924 4.00% - - ----------------------------------------------------------------------------------- Net yield on earning assets 4.61% - - -----------------------------------------------------------------------------------
(1) Non-performing loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes investment securities held to maturity and investment securities available for sale. (3) Includes time deposits with other banks. Key Average Balance Ratios - - ------------------------------------------------------------------------------ Loans to assets 69.70% - - ------------------------------------------------------------------------------ Earning assets to total assets 92.04 - - ------------------------------------------------------------------------------ Reserve for loan losses to loans 1.23 - - ------------------------------------------------------------------------------ Net loans charged off as a % of loans .21 - - ------------------------------------------------------------------------------ Long-term borrowings to shareholders' equity 24.05 - - ------------------------------------------------------------------------------ Shareholders' equity to total assets 7.31 ============================================================================== Average Balances, Mix, Interest, Average Rates and Key Ratios
1991 --------------------------------------------- Average Average (dollars in thousands) Balance Mix Interest Rate - - ----------------------------------------------------------------------------------- Assets - - ----------------------------------------------------------------------------------- Earning assets: - - ----------------------------------------------------------------------------------- Loans, net of unearned discount (1) $2,527,722 67.4% $ 263,527 10.43% - - ----------------------------------------------------------------------------------- Funds sold 67,698 1.8 3,696 5.46 - - ----------------------------------------------------------------------------------- Investment securities (2) - - ----------------------------------------------------------------------------------- Taxable (3) 573,721 15.3 45,544 7.94 - - ----------------------------------------------------------------------------------- Nontaxable 264,675 7.1 27,537 10.40 - - ----------------------------------------------------------------------------------- Total investment securities 838,396 22.4 73,081 8.72 - - ----------------------------------------------------------------------------------- Total earning assets 3,433,816 91.6 340,304 9.91 - - ----------------------------------------------------------------------------------- Reserve for loan losses (28,406) (.8) - - ----------------------------------------------------------------------------------- Cash and due from banks 152,972 4.1 - - ----------------------------------------------------------------------------------- Premises and equipment, net 104,165 2.8 - - ----------------------------------------------------------------------------------- Other assets 87,690 2.3 - - ----------------------------------------------------------------------------------- Total assets $3,750,237 100.0% =================================================================================== Liabilities and Shareholders' Equity - - ----------------------------------------------------------------------------------- Interest-bearing liabilities: - - ----------------------------------------------------------------------------------- N.O.W. and money market deposits $ 683,454 18.2% $ 28,823 4.22% - - ----------------------------------------------------------------------------------- Savings deposits 301,471 8.1 12,396 4.11 - - ----------------------------------------------------------------------------------- Time deposits 1,885,014 50.3 135,739 7.20 - - ----------------------------------------------------------------------------------- Short-term borrowings 106,076 2.8 5,434 5.12 - - ----------------------------------------------------------------------------------- Long-term borrowings 79,414 2.1 7,762 9.77 - - ----------------------------------------------------------------------------------- Total interest-bearing liabilities 3,055,429 81.5 190,154 6.22 - - ----------------------------------------------------------------------------------- Demand deposits 387,316 10.3 - - ----------------------------------------------------------------------------------- Accrued expenses and other liabilities 44,925 1.2 - - ----------------------------------------------------------------------------------- Total liabilities 3,487,670 93.0 - - ----------------------------------------------------------------------------------- Shareholders' equity 262,567 7.0 - - ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity $3,750,237 100.0% =================================================================================== Taxable equivalent net interest income and rate spread $ 150,150 3.69% - - ----------------------------------------------------------------------------------- Net yield on earning assets 4.37% - - -----------------------------------------------------------------------------------
(1) Non-performing loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes investment securities held to maturity and investment securities available for sale. (3) Includes time deposits with other banks. Key Average Balance Ratios - - ------------------------------------------------------------------------------ Loans to assets 67.40% - - ------------------------------------------------------------------------------ Earning assets to total assets 91.56 - - ------------------------------------------------------------------------------ Reserve for loan losses to loans 1.12 - - ------------------------------------------------------------------------------ Net loans charged off as a % of loans .27 - - ------------------------------------------------------------------------------ Long-term borrowings to shareholders' equity 30.25 - - ------------------------------------------------------------------------------ Shareholders' equity to total assets 7.00 ============================================================================== Average Balances, Mix, Interest, Average Rates and Key Ratios
1990 --------------------------------------------- Average Average (dollars in thousands) Balance Mix Interest Rate - - ----------------------------------------------------------------------------------- Assets - - ----------------------------------------------------------------------------------- Earning assets: - - ----------------------------------------------------------------------------------- Loans, net of unearned discount (1) $2,186,253 66.5% $ 239,990 10.98% - - ----------------------------------------------------------------------------------- Funds sold 80,283 2.4 6,389 7.96 - - ----------------------------------------------------------------------------------- Investment securities (2) - - ----------------------------------------------------------------------------------- Taxable (3) 504,645 15.4 43,256 8.57 - - ----------------------------------------------------------------------------------- Nontaxable 219,601 6.7 24,617 11.21 - - ----------------------------------------------------------------------------------- Total investment securities 724,246 22.1 67,873 9.58 - - ----------------------------------------------------------------------------------- Total earning assets 2,990,782 91.0 314,252 10.50 - - ----------------------------------------------------------------------------------- Reserve for loan losses (24,016) (.7) - - ----------------------------------------------------------------------------------- Cash and due from banks 148,700 4.5 - - ----------------------------------------------------------------------------------- Premises and equipment, net 85,964 2.6 - - ----------------------------------------------------------------------------------- Other assets 84,877 2.6 - - ----------------------------------------------------------------------------------- Total assets $3,286,307 100.0% =================================================================================== Liabilities and Shareholders'Equity - - ----------------------------------------------------------------------------------- Interest-bearing liabilities: - - ----------------------------------------------------------------------------------- N.O.W. and money market deposits $ 663,778 20.2% $ 32,062 4.83% - - ----------------------------------------------------------------------------------- Savings deposits 267,959 8.2 12,125 4.52 - - ----------------------------------------------------------------------------------- Time deposits 1,559,359 47.4 125,287 8.03 - - ----------------------------------------------------------------------------------- Short-term borrowings 84,369 2.6 6,086 7.21 - - ----------------------------------------------------------------------------------- Long-term borrowings 44,619 1.3 3,984 8.93 - - ----------------------------------------------------------------------------------- Total interest-bearing liabilities 2,620,084 79.7 179,544 6.85 - - ----------------------------------------------------------------------------------- Demand deposits 367,582 11.2 - - ----------------------------------------------------------------------------------- Accrued expenses and other liabilities 53,868 1.6 - - ----------------------------------------------------------------------------------- Total liabilities 3,041,534 92.5 - - ----------------------------------------------------------------------------------- Shareholders' equity 244,773 7.5 - - ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity $3,286,307 100.0% =================================================================================== Taxable equivalent net interest income and rate spread $ 134,708 3.65% - - ----------------------------------------------------------------------------------- Net yield on earning assets 4.50% - - -----------------------------------------------------------------------------------
(1) Non-performing loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes investment securities held to maturity and investment securities available for sale. (3) Includes time deposits with other banks. Key Average Balance Ratios - - ------------------------------------------------------------------------------ Loans to assets 66.53% - - ------------------------------------------------------------------------------ Earning assets to total assets 91.00 - - ------------------------------------------------------------------------------ Reserve for loan losses to loans 1.10 - - ------------------------------------------------------------------------------ Net loans charged off as a % of loans .27 - - ------------------------------------------------------------------------------ Long-term borrowings to shareholders' equity 18.23 - - ------------------------------------------------------------------------------ Shareholders' equity to total assets 7.45 ============================================================================== Average Balances, Mix, Interest, Average Rates and Key Ratios
1989 --------------------------------------------- Average Average (dollars in thousands) Balance Mix Interest Rate - - ----------------------------------------------------------------------------------- Assets - - ----------------------------------------------------------------------------------- Earning assets: - - ----------------------------------------------------------------------------------- Loans, net of unearned discount (1) $1,943,180 65.3% $ 215,153 11.07% - - ----------------------------------------------------------------------------------- Funds sold 70,861 2.4 6,338 8.94 - - ----------------------------------------------------------------------------------- Investment securities (2) - - ----------------------------------------------------------------------------------- Taxable (3) 470,115 15.8 39,819 8.47 - - ----------------------------------------------------------------------------------- Nontaxable 227,050 7.6 25,865 11.39 - - ----------------------------------------------------------------------------------- Total investment securities 697,165 23.4 65,684 9.42 - - ----------------------------------------------------------------------------------- Total earning assets 2,711,206 91.1 287,175 10.59 - - ----------------------------------------------------------------------------------- Reserve for loan losses (21,316) (.7) - - ----------------------------------------------------------------------------------- Cash and due from banks 135,303 4.6 - - ----------------------------------------------------------------------------------- Premises and equipment, net 74,881 2.5 - - ----------------------------------------------------------------------------------- Other assets 74,905 2.5 - - ----------------------------------------------------------------------------------- Total assets $2,974,979 100.0% =================================================================================== Liabilities and Shareholders'Equity - - ----------------------------------------------------------------------------------- Interest-bearing liabilities: - - ----------------------------------------------------------------------------------- N.O.W. and money market deposits $ 647,214 21.8% $ 33,059 5.11% - - ----------------------------------------------------------------------------------- Savings deposits 250,938 8.4 11,571 4.61 - - ----------------------------------------------------------------------------------- Time deposits 1,332,044 44.8 107,832 8.10 - - ----------------------------------------------------------------------------------- Short-term borrowings 98,086 3.3 7,965 8.12 - - ----------------------------------------------------------------------------------- Long-term borrowings 37,084 1.2 4,053 10.93 - - ----------------------------------------------------------------------------------- Total interest-bearing liabilities 2,365,366 79.5 164,480 6.95 - - ----------------------------------------------------------------------------------- Demand deposits 341,090 11.5 - - ----------------------------------------------------------------------------------- Accrued expenses and other liabilities 43,278 1.4 - - ----------------------------------------------------------------------------------- Total liabilities 2,749,734 92.4 - - ----------------------------------------------------------------------------------- Shareholders' equity 225,245 7.6 - - ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity $2,974,979 100.0% =================================================================================== Taxable equivalent net interest income and rate spread $ 122,695 3.64% - - ----------------------------------------------------------------------------------- Net yield on earning assets 4.53% - - -----------------------------------------------------------------------------------
(1) Non-performing loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes investment securities held to maturity and investment securities available for sale. (3) Includes time deposits with other banks. Key Average Balance Ratios - - ------------------------------------------------------------------------------ Loans to assets 65.32% - - ------------------------------------------------------------------------------ Earning assets to total assets 91.13 - - ------------------------------------------------------------------------------ Reserve for loan losses to loans 1.10 - - ------------------------------------------------------------------------------ Net loans charged off as a % of loans .26 - - ------------------------------------------------------------------------------ Long-term borrowings to shareholders' equity 16.46 - - ------------------------------------------------------------------------------ Shareholders' equity to total assets 7.57 ============================================================================== Quarterly Average Balances, Interest, Average Rates and Key Ratios
1993 ---------------------------------------------------------------- Fourth Quarter Third Quarter ---------------------------------------------------------------- Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate - - ------------------------------------------------------------------------------------------ Assets - - ------------------------------------------------------------------------------------------ Earning assets: - - ------------------------------------------------------------------------------------------ Loans, net of unearned discount (1) $3,191,052 $ 65,969 8.27% $3,123,147 $ 65,667 8.41% - - ------------------------------------------------------------------------------------------ Funds sold 4,411 27 2.45 8,329 39 1.88 - - ------------------------------------------------------------------------------------------ Investment securities (2) - - ------------------------------------------------------------------------------------------ Taxable (3) 758,015 9,595 5.06 714,578 9,328 5.22 - - ------------------------------------------------------------------------------------------ Nontaxable 202,845 3,806 7.50 188,948 4,071 8.62 - - ------------------------------------------------------------------------------------------ Total investment securities 960,860 13,401 5.58 903,526 13,399 5.93 - - ------------------------------------------------------------------------------------------ Total earning assets 4,156,323 79,397 7.64 4,035,002 79,105 7.84 - - ------------------------------------------------------------------------------------------ Reserve for loan losses (40,215) (40,449) - - ------------------------------------------------------------------------------------------ Cash and due from banks 180,769 176,398 - - ------------------------------------------------------------------------------------------ Premises and equipment, net 102,982 102,109 - - ------------------------------------------------------------------------------------------ Other assets 88,435 88,076 - - ------------------------------------------------------------------------------------------ Total assets $4,488,294 $4,361,136 ========================================================================================== Liabilities and Shareholders' Equity - - ------------------------------------------------------------------------------------------ Interest-bearing liabilities: - - ------------------------------------------------------------------------------------------ N.O.W. and money market deposits $ 798,684 $ 4,056 2.03 $ 774,879 $ 4,103 2.12% - - ------------------------------------------------------------------------------------------ Savings deposits 437,181 2,660 2.43 414,966 3,085 2.97 - - ------------------------------------------------------------------------------------------ Time deposits 2,121,063 24,177 4.56 2,064,502 23,780 4.61 - - ------------------------------------------------------------------------------------------ Short-term borrowings 103,529 761 2.94 133,059 920 2.76 - - ------------------------------------------------------------------------------------------ Long-term borrowings 53,150 1,352 10.17 63,256 1,811 11.45 - - ------------------------------------------------------------------------------------------ Total interest-bearing liabilities 3,513,607 33,006 3.76 3,450,662 33,699 3.91 - - ------------------------------------------------------------------------------------------ Demand deposits 541,159 501,348 - - ------------------------------------------------------------------------------------------ Accrued expenses and other liabilities 74,707 61,931 - - ------------------------------------------------------------------------------------------ Total liabilities 4,129,473 4,013,941 - - ------------------------------------------------------------------------------------------ Shareholders' equity 358,821 347,195 - - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $4,488,294 $4,361,136 ========================================================================================== Taxable equivalent net interest income and rate spread $46,391 3.88% $45,406 3.93% - - ------------------------------------------------------------------------------------------ Net yield on earning assets 4.45% 4.50% - - ------------------------------------------------------------------------------------------
(1) Non-performing loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes investment securities held to maturity and investment securities available for sale. (3) Includes time deposits with other banks. Key Average Balance Ratios - - ------------------------------------------------------------------------------ Loans to assets 71.10% 71.61% - - ------------------------------------------------------------------------------ Earning assets to total assets 92.60 92.52 - - ------------------------------------------------------------------------------ Reserve for loan losses to loans 1.26 1.30 - - ------------------------------------------------------------------------------ Net loans charged off as a % of loans .10 .06 - - ------------------------------------------------------------------------------ Long-term borrowings to shareholders' equity 14.81 18.22 - - ------------------------------------------------------------------------------ Shareholders' equity to total assets 7.99 7.96 ============================================================================== Quarterly Average Balances, Interest, Average Rates and Key Ratios
1993 ---------------------------------------------------------------- Second Quarter First Quarter ---------------------------------------------------------------- Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate - - ------------------------------------------------------------------------------------------ Assets - - ------------------------------------------------------------------------------------------ Earning assets: - - ------------------------------------------------------------------------------------------ Loans, net of unearned discount (1) $3,086,578 $ 65,643 8.51% $3,046,032 $ 64,984 8.53% - - ------------------------------------------------------------------------------------------ Funds sold 2,137 12 2.25 8,827 54 2.45 - - ------------------------------------------------------------------------------------------ Investment securities (2) - - ------------------------------------------------------------------------------------------ Taxable (3) 718,727 9,620 5.35 725,071 10,108 5.58 - - ------------------------------------------------------------------------------------------ Nontaxable 178,550 3,633 8.14 183,930 3,807 8.28 - - ------------------------------------------------------------------------------------------ Total investment securities 897,277 13,253 5.91 909,001 13,915 6.12 - - ------------------------------------------------------------------------------------------ Total earning assets 3,963,860 78,953 7.97 3,985,992 78,908 7.92 - - ------------------------------------------------------------------------------------------ Reserve for loan losses (39,946) (38,798) - - ------------------------------------------------------------------------------------------ Cash and due from banks 166,796 164,480 - - ------------------------------------------------------------------------------------------ Premises and equipment, net 103,613 103,643 - - ------------------------------------------------------------------------------------------ Other assets 90,309 90,425 - - ------------------------------------------------------------------------------------------ Total assets $4,306,764 $4,283,610 ========================================================================================== Liabilities and Shareholders' Equity - - ------------------------------------------------------------------------------------------ Interest-bearing liabilities: - - ------------------------------------------------------------------------------------------ N.O.W. and money market deposits $ 757,764 $ 4,131 2.18% $ 773,698 $ 4,357 2.25% - - ------------------------------------------------------------------------------------------ Savings deposits 455,898 2,602 2.28 338,054 1,971 2.33 - - ------------------------------------------------------------------------------------------ Time deposits 2,038,633 24,803 4.87 2,153,459 26,302 4.89 - - ------------------------------------------------------------------------------------------ Short-term borrowings 102,948 711 2.76 101,136 705 2.79 - - ------------------------------------------------------------------------------------------ Long-term borrowings 68,330 1,780 10.42 68,340 1,780 10.42 - - ------------------------------------------------------------------------------------------ Total interest-bearing liabilities 3,423,573 34,027 3.98 3,434,687 35,115 4.09 - - ------------------------------------------------------------------------------------------ Demand deposits 473,705 452,717 - - ------------------------------------------------------------------------------------------ Accrued expenses and other liabilities 70,186 64,907 - - ------------------------------------------------------------------------------------------ Total liabilities 3,967,464 3,952,311 - - ------------------------------------------------------------------------------------------ Shareholders' equity 339,300 331,299 - - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $4,306,764 $4,283,610 ========================================================================================== Taxable equivalent net interest income and rate spread $ 44,881 3.94% $ 43,838 3.88% - - ------------------------------------------------------------------------------------------ Net yield on earning assets 4.50% 4.42% - - ------------------------------------------------------------------------------------------
(1) Non-performing loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes investment securities held to maturity and investment securities available for sale. (3) Includes time deposits with other banks. Key Average Balance Ratios - - ------------------------------------------------------------------------------ Loans to assets 71.67% 71.11% - - ------------------------------------------------------------------------------ Earning assets to total assets 92.55 92.54 - - ------------------------------------------------------------------------------ Reserve for loan losses to loans 1.29 1.27 - - ------------------------------------------------------------------------------ Net loans charged off as a % of loans .05 .04 - - ------------------------------------------------------------------------------ Long-term borrowings to shareholders' equity 20.14 20.63 - - ------------------------------------------------------------------------------ Shareholders' equity to total assets 7.87 7.73 ============================================================================== Quarterly Average Balances, Interest, Average Rates and Key Ratios
1992 ---------------------------------------------------------------- Fourth Quarter Third Quarter ---------------------------------------------------------------- Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate - - ------------------------------------------------------------------------------------------ Assets - - ------------------------------------------------------------------------------------------ Earning assets: - - ------------------------------------------------------------------------------------------ Loans, net of unearned discount (1) $3,060,974 $ 67,940 8.88% $3,011,928 $ 68,995 9.16% - - ------------------------------------------------------------------------------------------ Funds sold 19,452 160 3.29 28,548 263 3.69 - - ------------------------------------------------------------------------------------------ Investment securities (2) - - ------------------------------------------------------------------------------------------ Taxable (3) 689,710 10,093 5.85 673,591 10,704 6.36 - - ------------------------------------------------------------------------------------------ Nontaxable 199,099 4,311 8.66 213,249 4,845 9.09 - - ------------------------------------------------------------------------------------------ Total investment securities 888,809 14,404 6.48 886,840 15,549 7.01 - - ------------------------------------------------------------------------------------------ Total earning assets 3,969,235 82,504 8.31 3,927,316 84,807 8.64 - - ------------------------------------------------------------------------------------------ Reserve for loan losses (40,757) (36,727) - - ------------------------------------------------------------------------------------------ Cash and due from banks 168,036 160,984 - - ------------------------------------------------------------------------------------------ Premises and equipment, net 107,910 111,538 - - ------------------------------------------------------------------------------------------ Other assets 92,482 101,654 - - ------------------------------------------------------------------------------------------ Total assets $4,296,906 $4,264,765 ========================================================================================== Liabilities and Shareholders' Equity - - ------------------------------------------------------------------------------------------ Interest-bearing liabilities: - - ------------------------------------------------------------------------------------------ N.O.W. and money market deposits $ 780,016 $ 4,658 2.39% $ 771,881 4,828 2.50% - - ------------------------------------------------------------------------------------------ Savings deposits 341,004 2,220 2.60 333,432 2,306 2.77 - - ------------------------------------------------------------------------------------------ Time deposits 2,129,116 27,556 5.18 2,097,221 28,711 5.48 - - ------------------------------------------------------------------------------------------ Short-term borrowings 87,862 662 3.01 139,734 1,107 3.17 - - ------------------------------------------------------------------------------------------ Long-term borrowings 68,298 1,775 10.40 71,532 1,880 10.51 - - ------------------------------------------------------------------------------------------ Total interest-bearing liabilities 3,406,296 36,871 4.33 3,413,800 38,832 4.55 - - ------------------------------------------------------------------------------------------ Demand deposits 479,425 447,207 - - ------------------------------------------------------------------------------------------ Accrued expenses and other liabilities 87,985 87,921 - - ------------------------------------------------------------------------------------------ Total liabilities 3,973,706 3,948,928 - - ------------------------------------------------------------------------------------------ Shareholders' equity 323,200 315,837 - - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $4,296,906 $4,264,706 ========================================================================================== Taxable equivalent net interest income and rate spread $ 45,633 3.98% $ 45,975 4.09% - - ------------------------------------------------------------------------------------------ Net yield on earning assets 4.60% 4.68% - - ------------------------------------------------------------------------------------------
(1) Non-performing loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes investment securities held to maturity and investment securities available for sale. (3) Includes time deposits with other banks. Key Average Balance Ratios - - ------------------------------------------------------------------------------ Loans to assets 71.24% 70.62% - - ------------------------------------------------------------------------------ Earning assets to total assets 92.37 92.09 - - ------------------------------------------------------------------------------ Reserve for loan losses to loans 1.33 1.22 - - ------------------------------------------------------------------------------ Net loans charged off as a % of loans .08 .04 - - ------------------------------------------------------------------------------ Long-term borrowings to shareholders' equity 21.13 22.65 - - ------------------------------------------------------------------------------ Shareholders' equity to total assets 7.52 7.41 ============================================================================== Quarterly Average Balances, Interest, Average Rates and Key Ratios
1992 ---------------------------------------------------------------- Second Quarter First Quarter ---------------------------------------------------------------- Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate - - ------------------------------------------------------------------------------------------ Assets - - ------------------------------------------------------------------------------------------ Earning assets: - - ------------------------------------------------------------------------------------------ Loans, net of unearned discount (1) $2,668,362 $ 63,180 9.47% $2,632,492 $ 63,623 9.67% - - ------------------------------------------------------------------------------------------ Funds sold 22,878 219 3.83 24,930 261 4.19 - - ------------------------------------------------------------------------------------------ Investment securities (2) - - ------------------------------------------------------------------------------------------ Taxable (3) 642,513 10,544 6.56 650,098 11,455 7.05 - - ------------------------------------------------------------------------------------------ Nontaxable 237,162 5,545 9.35 245,286 5,874 9.58 - - ------------------------------------------------------------------------------------------ Total investment securities 879,675 16,089 7.32 895,384 17,329 7.74 - - ------------------------------------------------------------------------------------------ Total earning assets 3,570,915 79,488 8.90 3,552,806 81,213 9.14 - - ------------------------------------------------------------------------------------------ Reserve for loan losses (30,825) (32,051) - - ------------------------------------------------------------------------------------------ Cash and due from banks 150,637 152,287 - - ------------------------------------------------------------------------------------------ Premises and equipment, net 107,400 107,264 - - ------------------------------------------------------------------------------------------ Other assets 86,272 92,784 - - ------------------------------------------------------------------------------------------ Total assets $3,884,399 $3,873,090 ========================================================================================== Liabilities and Shareholders' Equity - - ------------------------------------------------------------------------------------------ Interest-bearing liabilities: - - ------------------------------------------------------------------------------------------ N.O.W. and money market deposits $ 713,943 $ 5,039 2.82% $ 722,463 $ 5,480 3.03% - - ------------------------------------------------------------------------------------------ Savings deposits 325,683 2,421 2.97 309,669 2,320 3.00 - - ------------------------------------------------------------------------------------------ Time deposits 1,875,394 27,570 5.88 1,925,760 30,380 6.30 - - ------------------------------------------------------------------------------------------ Short-term borrowings 143,255 1,313 3.67 110,545 1,017 3.68 - - ------------------------------------------------------------------------------------------ Long-term borrowings 73,450 1,922 10.47 73,424 1,924 10.48 - - ------------------------------------------------------------------------------------------ Total interest-bearing liabilities 3,131,725 38,265 4.89 3,141,861 41,121 5.24 - - ------------------------------------------------------------------------------------------ Demand deposits 419,448 409,128 - - ------------------------------------------------------------------------------------------ Accrued expenses and other liabilities 54,033 48,827 - - ------------------------------------------------------------------------------------------ Total liabilities 3,605,206 3,599,816 - - ------------------------------------------------------------------------------------------ Shareholders' equity 279,193 273,274 - - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $3,884,399 $3,873,090 ========================================================================================== Taxable equivalent net interest income and rate spread $ 41,223 4.01% $40,092 3.90% - - ------------------------------------------------------------------------------------------ Net yield on earning assets 4.62% 4.51% - - ------------------------------------------------------------------------------------------
(1) Non-performing loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes investment securities held to maturity and investment securities available for sale. (3) Includes time deposits with other banks. Key Average Balance Ratios - - ------------------------------------------------------------------------------ Loans to assets 68.69% 67.97% - - ------------------------------------------------------------------------------ Earning assets to total assets 91.93 91.73 - - ------------------------------------------------------------------------------ Reserve for loan losses to loans 1.16 1.22 - - ------------------------------------------------------------------------------ Net loans charged off as a % of loans .03 .06 - - ------------------------------------------------------------------------------ Long-term borrowings to shareholders' equity 26.31 26.87 - - ------------------------------------------------------------------------------ Shareholders' equity to total assets 7.19 7.06 ============================================================================== Glossary of Financial Terms Average Balance - The sum of the daily balances at the end of each day divided by the number of days in the period. Book Value Per Share - The value of a share of common stock determined by dividing total shareholders' equity at the end of the period by the total number of common shares then outstanding. Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Common Dividend Payout Ratio - The percentage of net income that was paid to common shareholders as dividends. Earning Assets - Assets that generate interest income and yield-related fee income, such as loans, short-term investments, and investment securities. Efficiency Ratio - A measurement of overhead expense efficiency. It is computed by dividing noninterest expense by the sum of fully taxable- equivalent (FTE) net interest income and noninterest income (excluding security gains or losses on sales). Fully Taxable-Equivalent Income (FTE) - Refers to tax-exempt income which has been converted to put tax-exempt and taxable income on a comparable basis before application of income taxes. Gap - The amount by which interest-rate sensitive assets exceed interest-rate sensitive liabilities for a designated time period is referred to as a positive gap. An excess of liabilities would represent a negative gap. Interest-bearing Liabilities - Liabilities upon which interest is paid for the use of funds, such as savings and time deposits, short-term borrowings, and long-term borrowings. Interest-rate Sensitive Assets/Liabilities - Earning assets and interest- bearing liabilities whose yields and rates vary within a specific time period, due to either maturity or in association with market interest rates. Internal Capital Generation Rate - The rate at which equity is generated internally. It is computed by dividing earnings retained by the corporation (net income less dividends) by the average balance of shareholders' equity for a given period. Liquidity - The ability of a corporation to generate adequate funds to meet its cash flow requirements. Money Market Interest Rates - Interest rates which are determined by the demand and supply of funds in the money market. These rates include the federal funds rate, treasury bill rate and national commercial/prime rates. Net Interest Income - The difference between total interest income and total interest expense. Net Rate Spread - The difference between the yield on interest-earning assets (FTE basis) and the rate paid on interest-bearing liabilities. Net Yield on Earning Assets - A measurement of how effectively the corporation utilizes its earning assets in relationship to the interest cost of funding them. It is computed by dividing net interest income (FTE basis) by average interest-earning assets. Nonaccrual Loans - Loans on which interest accruals have been discontinued due to the borrower's financial difficulties. Interest income on these loans is reported on the cash basis as it is collected. Nonperforming Loans - The total of nonaccrual loans, past due loans and restructured loans. Past Due Loans - Loans that are contractually past due 90 or more days as to interest or principal. Provision for Loan Losses - A charge to earnings which appears on the income statement. This charge increases the reserve for loan losses. Reserve for Loan Losses - A valuation allowance offset against total loans which appears on the balance sheet. This reserve represents the amount considered by management to be adequate to cover estimated losses inherent in the loan portfolio. Restructured Loans - A loan is considered restructured when a bank for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Return on Average Assets - A measure of profitability that indicates how effectively the corporation utilized its assets. It is calculated by dividing net income by total average assets. Return on Average Equity - A measure of profitability that indicates what the corporation earned on its shareholders' investment. It is calculated by dividing net income by total average shareholders' equity. Risk-Based Capital - Tier I - As defined by regulatory authorities, includes among other things common stock, surplus, retained earnings, qualified preferred stock and minority interests in consolidated subsidiaries reduced by certain intangible assets. Risk-Based Capital - Tier II - As defined by regulatory authorities, includes the qualified portion of the reserve for loan losses and qualified long-term borrowings. Risk-Based Capital - Total - The sum of Tier I and Tier II Risk-Based Capital. Standby Letter of Credit - An instrument issued by a bank which represents an obligation to honor demands for payment upon compliance with specified conditions. It may be used to back up a commercial paper issue or to serve as a guarantee of funding for a real estate project. If a customer defaults on loan payments, the issuer of the standby letter would be called upon to make the payments. Standby letters of credit represent contingent liabilities and therefore they are not included on a bank's balance sheet. [Valley Bancorporation Letterhead] Valley Bancorporation 100 West Lawrence Street, P.O. Box 1061, Appleton, WI 54912-1061 (414) 738-3830 January 18, 1994 The management of Valley Bancorporation ("Valley") is responsible for the preparation, integrity, and fair presentation of Valley's consolidated financial statements for the year ended December 31, 1993. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on judgments and estimates made by management. The consolidated financial statements referred to above have been audited by Arthur Andersen & Co., who have been given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the board of directors, and committees of the board. Management believes that all representations made to Arthur Andersen & Co. during the audit were valid and appropriate. /s/ Peter M. Platten, III /s/ Gary A. Lichtenberg ------------------------- --------------------------- Peter M. Platten, III Gary A. Lichtenberg President and Chief Senior Vice President/Chief Executive Officer Financial Officer and Secretary ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See ITEM 1. "Business -- Pending Merger with Marshall & Ilsley Corporation" for information concerning Valley's merger into M&I which is incorporated herein by reference. The following discussion will cover Valley's results of operations, asset quality, financial position, liquidity, interest rate sensitivity and capital resources for the years 1991 through 1993. The information included in this discussion is intended to assist readers in their analysis of, and should be read in conjunction with, the consolidated financial statements and related notes and other supplemental information presented elsewhere in this report. Throughout this discussion, the term "bank(s)" includes commercial banks and savings associations, unless otherwise indicated. Results of Operations Overview Valley reported net income of $45.903 million in 1993, an increase of 15.39% from the $39.779 million in 1992. Net income per share was $2.26 in 1993, compared with $2.07 (adjusted for three for two stock split on August 27, 1993) per share in 1992. In 1991, net income was $30.666 million, which amounted to $1.67 (adjusted) per share. In July 1992, Valley completed its acquisition of United Savings and Loan Association (United). United, a Wisconsin savings association, is being operated as a separate subsidiary of Valley. In November 1993, Valley acquired Pierce County Bank & Trust Company (Pierce County). Both of these acquisitions were accounted for as purchases and the results of their operations are included in Valley's results of operations from their acquisition dates forward. At Valley, maintaining excellent credit quality continues to be a priority. Nonperforming loans as a percent of loans fell to .65% as of December 31, 1993, down from .86% at December 31, 1992. Provision for loan losses for 1993 was $8.970 million as compared to $8.395 million in 1992, a 6.8% increase between periods. Reserve for loan losses as a percent of loans increased to 1.27% at December 31, 1993 as compared to 1.26% at December 31, 1992. Reserve for loan losses as a percent of nonperforming loans, increased to 196%, up from 146% a year ago. This ratio represents the extent of coverage of nonperforming loans in the reserve for loan losses. Net loans charged off as a percent of average loans was .25% for 1993. This ratio compares to .21% reported at year end 1992 and .27% at year end 1991. This net charge off ratio compares favorably to other financial institutions in the Midwest and is a positive reflection on Valley's overall credit quality. During 1993, Valley continued recognizing the benefits from several expense reduction initiatives undertaken in 1990 and 1991 to enhance its operating efficiencies and reduce its operating costs. Valley's bank backroom operations and other bank support functions have been centralized and standardized at two regional service centers. Valley also converted the majority of its banks to an in-house data processing system (VISION) and centralized and standardized mortgage lending operations. These initiatives have eliminated many duplications of effort and significantly enhanced operating efficiencies. During 1993, the continued low interest rate environment fueled mortgage lending activities which resulted in strong fee income, along with significant gains on sales of mortgage loans to the secondary market. Valley recognized $6.786 million in gains on sale of mortgage loans to the secondary market in 1993, up from the $3.274 million recognized in 1992. Earnings also benefitted from an increase in fully-taxable equivalent (FTE) net interest income between years of $7.591 million. This increase resulted primarily from growth in average earning assets between periods of 7.5%, or $280.226 million. Table 1 highlights the major factors affecting the changes in earnings per share during the last three years. Growth in net interest income, stability in the provision for loan losses and increases in noninterest income all contributed to the improved earnings. Table 1: Changes in Earnings and Earnings Per Share
Years Ended December 31, Income/ExpenseChange 1993 1992 1991 1993/1992 1992/1991 (dollars in thousands) Dollars Dollars Dollars Dollars Per Share** Dollars Per Share** - - ----------------------------------------------------------------------------------------------------------- Net Income, prior period N/A N/A N/A $ 39,779 $ 2.07 $ 30,666 $1.67 - - ----------------------------------------------------------------------------------------------------------- Increase(decrease) attributable to: - - ----------------------------------------------------------------------------------------------------------- Interest Income* $316,363 $328,012 $340,304 (11,649) (.60) (12,292) (.67) - - ----------------------------------------------------------------------------------------------------------- Interest Expense 135,847 155,088 190,154 19,241 1.00 35,066 1.91 - - ----------------------------------------------------------------------------------------------------------- Net Interest Income 180,516 172,924 150,150 7,592 .40 22,774 1.24 - - ----------------------------------------------------------------------------------------------------------- Provision for loan losses 8,970 8,395 8,369 (575) (.03) (26) (.01) - - ----------------------------------------------------------------------------------------------------------- Noninterest Income: - - ----------------------------------------------------------------------------------------------------------- Service charges on deposit accounts 17,167 15,707 13,606 1,460 .08 2,101 .12 - - ----------------------------------------------------------------------------------------------------------- Trust service fees 12,631 12,455 10,927 176 .01 1,528 .08 - - ----------------------------------------------------------------------------------------------------------- Other service charges, 11,839 11,043 8,673 796 .04 2,370 .13 commissions and fees - - ----------------------------------------------------------------------------------------------------------- Insurance related 7,325 7,573 6,672 (248) (.01) 901 .05 - - ----------------------------------------------------------------------------------------------------------- Credit card 7,186 6,147 5,466 1,039 .05 681 .04 - - ----------------------------------------------------------------------------------------------------------- Net securities gains 497 864 724 (367) (.02) 140 .01 - - ----------------------------------------------------------------------------------------------------------- Other 9,416 5,503 1,950 3,913 .20 3,553 .19 - - ----------------------------------------------------------------------------------------------------------- Total noninterest income 66,061 59,292 48,018 6,769 .35 11,274 .62 - - ----------------------------------------------------------------------------------------------------------- Noninterest Expense: - - ----------------------------------------------------------------------------------------------------------- Salaries and wages 72,200 66,542 59,579 (5,658) (.30) (6,963) (.38) - - ----------------------------------------------------------------------------------------------------------- Pensions and other employee 20,406 23,636 17,710 3,230 .17 (5,926) (.32) benefits - - ----------------------------------------------------------------------------------------------------------- Equipment 16,615 16,134 13,639 (481) (.03) (2,495) (.14) - - ----------------------------------------------------------------------------------------------------------- Net occupancy 12,816 11,598 10,773 (1,218) (.06) (825) (.04) - - ----------------------------------------------------------------------------------------------------------- FDIC Insurance 8,333 7,923 6,640 (410) (.02) (1,283) (.07) - - ----------------------------------------------------------------------------------------------------------- Credit card 3,896 3,325 2,961 (571) (.03) (364) (.02) - - ----------------------------------------------------------------------------------------------------------- Other 30,215 30,945 29,697 730 .04 (1,248) (.07) - - ----------------------------------------------------------------------------------------------------------- Total noninterest expense 164,481 160,103 140,999 (4,378) (.23) (19,104) (1.04) - - ----------------------------------------------------------------------------------------------------------- FTE income before taxes 73,126 63,718 48,800 9,408 .49 14,918 .81 - - ----------------------------------------------------------------------------------------------------------- Income taxes 22,118 17,556 9,589 (4,562) (.24) (7,967) (.43) - - ----------------------------------------------------------------------------------------------------------- Taxable equivalent adjustment 5,105 6,383 8,545 1,278 .07 2,162 .12 - - ----------------------------------------------------------------------------------------------------------- Additional shares outstanding --- --- --- --- (.13) --- (.10) - - ----------------------------------------------------------------------------------------------------------- Net change --- --- --- 6,124 .19 9,113 .40 - - ----------------------------------------------------------------------------------------------------------- Net income, current period $ 45,903 $ 39,779 $ 30,666 $ 45,903 $2.26 $ 39,779 $2.07 ===========================================================================================================
* Income computed on a fully taxable equivalent basis. ** Per share data has been restated for the three for two stock split, effected in the form of a 50% stock dividend, distributed on August 27, 1993. Bank analysts consider 15.00% return on average equity and 1.00% return on average assets to be benchmarks for high performing financial institutions in the Midwest. Valley's return on average equity in 1993 was 13.33%, compared to 13.35% and 11.68% reported in 1992 and 1991, respectively. Return on average assets reached 1.05% in 1993, up from .98% and .82% in 1992 and 1991, respectively. Table 2 highlights certain relationships between significant financial ratios. Table 2: Financial Ratios 1993 1992 1991 1990 1989 - - -------------------------------------------------------------------- Return on average assets 1.05% .98% .82% .88% 1.00% - - -------------------------------------------------------------------- divided by - - -------------------------------------------------------------------- Average equity as a % of 7.89 7.31 7.00 7.45 7.57 average assets - - -------------------------------------------------------------------- equals - - -------------------------------------------------------------------- Return on average equity (%) 13.33 13.35 11.68 11.86 13.18 - - -------------------------------------------------------------------- multiplied by - - -------------------------------------------------------------------- Earnings retained (%) 58.58 58.71 52.14 53.63 58.40 - - -------------------------------------------------------------------- equals - - -------------------------------------------------------------------- Internal capital growth (%) 7.81 7.84 6.09 6.36 7.70 ==================================================================== The remainder of this discussion provides a more detailed explanation of factors affecting the changes in results of operations and the changes in financial position of Valley for the past three years. Net Interest Income Net interest income is the most significant component of earnings. For analytical purposes, interest earned on tax exempt assets, such as industrial development revenue bonds and state and municipal obligations, is adjusted to an FTE basis. This adjustment is based upon the applicable federal corporate income tax rate (currently 35%), and any interest expense which is disallowed as a deduction in connection with carrying these tax exempt assets, and thus facilitates a meaningful comparison between taxable and nontaxable earning assets. Table 3 shows the sources of interest income and expense between years and the variances resulting from fluctuations in interest rate (rate) and changes in the amount and type (volume) of earning assets and interest- bearing liabilities. Table 3: Changes in Net Interest Income - Taxable Equivalent Basis
1993-1992 ---------------------------- Average Balances Average Rates Interest Income ---------------------- Increase/ --------------------------------- Expense Volume Rate (dollars in thousands) 1993 1992 (Decrease) 1993 1992 1993 1992 Variance Variance Variance - - ---------------------------------------------------------------------------------------------------------------------------- Loans(1) $3,111,702 $2,843,439 $268,263 8.43% 9.28% $262,263 $263,737 $(1,474) $23,727 $(25,201) - - ---------------------------------------------------------------------------------------------------------------------------- Funds sold 5,926 23,952 (18,026) 2.23 3.77 132 903 (771) (500) (271) - - ---------------------------------------------------------------------------------------------------------------------------- Investment securities -taxable(2) 729,098 663,978 65,120 5.30 6.45 38,651 42,797 (4,146) 3,932 (8,078) - - ---------------------------------------------------------------------------------------------------------------------------- Investment securities -nontaxable 188,568 223,699 (35,131) 8.12 9.20 15,317 20,575 (5,258) (3,015) (2,243) - - ---------------------------------------------------------------------------------------------------------------------------- Total earning assets 4,035,294 3,755,068 280,226 7.84 8.74 316,363 328,012 (11,649) 24,144 (35,793) - - ---------------------------------------------------------------------------------------------------------------------------- Reserve for loan losses (39,852) (35,090) (4,762) - - ------------------------------------------------------------ Cash and due from banks 172,111 157,986 14,125 - - ------------------------------------------------------------ Premises and equipment 103,087 108,528 (5,441) - - ------------------------------------------------------------ Other assets 89,311 93,298 (3,987) - - ------------------------------------------------------------ Total assets $4,359,951 $4,079,790 $280,161 ============================================================ N.O.W. and money market deposits $ 776,256 $ 747,076 $ 29,180 2.14 2.68 16,647 20,004 (3,357) 755 (4,112) - - ---------------------------------------------------------------------------------------------------------------------------- Savings deposits 411,525 327,447 84,078 2.51 2.83 10,318 9,267 1,051 2,191 (1,140) - - ---------------------------------------------------------------------------------------------------------------------------- Time deposits 2,094,414 2,006,872 87,542 4.73 5.69 99,062 114,217 (15,155) 4,809 (19,964) - - ---------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 110,168 120,349 (10,181) 2.81 3.41 3,097 4,099 (1,002) (327) (675) - - ---------------------------------------------------------------------------------------------------------------------------- Long-term borrowings 63,269 71,676 (8,407) 10.63 10.47 6,723 7,501 (778) (891) 113 - - ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,455,632 3,273,420 $182,212 3.93 4.74 135,847 155,088 (19,241) 6,537 (25,778) - - ---------------------------------------------------------------------------------------------------------------------------- Demand deposits 492,232 438,802 53,430 - - ------------------------------------------------------------ Accrued expenses and other liabilities 67,850 69,506 (1,656) - - ------------------------------------------------------------ Shareholders' equity 344,237 298,062 46,175 - - ------------------------------------------------------------ Total liabilities and shareholders' equity $4,359,951 $4,079,790 $280,161 ============================================================ Rate spread 3.91 4.00 - - ---------------------------------------------------------------------------------------------------------------------------- Net interest margin/revenue 4.47% 4.61% $180,516 $172,924 $ 7,592 $17,607 $(10,015) ============================================================================================================================
Changes in interest due to volume and rate were defined as follows: Volume variance-change in average balance multiplied by prior year rate; Rate variance-change in rate multiplied by prior year average balance; and Rate/ Volume variance-change in average balance multiplied by the change in rate. The change in interest due to both rate and volume has been allocated proportionately to volume variance and rate variance based on the relationship of the absolute dollar change in each. (1) Nonperforming loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes time deposits with other banks and investment securities available for sale. Table 3: Changes in Net Interest Income - Taxable Equivalent Basis
1992-1991 ---------------------------- Average Balances Average Rates Interest Income ---------------------- Increase/ --------------------------------- Expense Volume Rate (dollars in thousands) 1992 1991 (Decrease) 1992 1991 1992 1991 Variance Variance Variance - - ---------------------------------------------------------------------------------------------------------------------------- Loans(1) $2,843,439 $2,527,722 $315,717 9.28% 10.43% $263,737 $263,527 $ 210 $30,987 $(30,777) - - ---------------------------------------------------------------------------------------------------------------------------- Funds sold 23,952 67,698 (43,746) 3.77 5.46 903 3,696 (2,793) (1,888) (905) - - ---------------------------------------------------------------------------------------------------------------------------- Investment securities -taxable(2) 663,978 573,721 90,257 6.45 7.94 42,797 45,544 (2,747) 6,551 (9,298) - - ---------------------------------------------------------------------------------------------------------------------------- Investment securities -nontaxable 223,699 264,675 (40,976) 9.20 10.40 20,575 27,537 (6,962) (3,981) (2,981) - - ---------------------------------------------------------------------------------------------------------------------------- Total earning assets 3,755,068 3,433,816 321,252 8.74 9.91 328,012 340,304 (12,292) 31,669 (43,961) - - ---------------------------------------------------------------------------------------------------------------------------- Reserve for loan losses (35,090) (28,406) (6,684) - - ------------------------------------------------------------ Cash and due from banks 157,986 152,972 5,014 - - ------------------------------------------------------------ Premises and equipment 108,528 104,165 4,363 - - ------------------------------------------------------------ Other assets 93,298 87,690 5,608 - - ------------------------------------------------------------ Total assets $4,079,790 $3,750,237 $329,553 ============================================================ N.O.W. and money market deposits $ 747,076 $ 683,454 $ 63,622 2.68 4.22 20,004 28,823 (8,819) 2,485 (11,304) - - ---------------------------------------------------------------------------------------------------------------------------- Savings deposits 327,447 301,471 25,976 2.83 4.11 9,267 12,396 (3,129) 996 (4,125) - - ---------------------------------------------------------------------------------------------------------------------------- Time deposits 2,006,872 1,885,014 121,858 5.69 7.20 114,217 135,739 (21,522) 8,341 (29,863) - - ---------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 120,349 106,076 14,273 3.41 5.12 4,099 5,434 (1,335) 661 (1,996) - - ---------------------------------------------------------------------------------------------------------------------------- Long-term borrowings 71,676 79,414 (7,738) 10.47 9.77 7,501 7,762 (261) (788) 527 - - ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,273,420 3,055,429 217,991 4.74 6.22 155,088 190,154 (35,066) 11,695 (46,761) - - ---------------------------------------------------------------------------------------------------------------------------- Demand deposits 438,802 387,316 51,486 - - ------------------------------------------------------------ Accrued expenses and other liabilities 69,506 44,925 24,581 - - ------------------------------------------------------------ Shareholders' equity 298,062 262,567 35,495 - - ------------------------------------------------------------ Total liabilities and shareholders' equity $4,079,790 $3,750,237 $329,553 ============================================================ Rate spread 4.00 3.69 - - ---------------------------------------------------------------------------------------------------------------------------- Net interest margin/revenue 4.61% 4.37% $172,924 $150,150 $22,774 $19,974 $ 2,800 ============================================================================================================================
Changes in interest due to volume and rate were defined as follows: Volume variance-change in average balance multiplied by prior year rate; Rate variance-change in rate multiplied by prior year average balance; and Rate/ Volume variance-change in average balance multiplied by the change in rate. The change in interest due to both rate and volume has been allocated proportionately to volume variance and rate variance based on the relationship of the absolute dollar change in each. (1) Nonperforming loans and mortgages held for sale are included in average balances used to determine average rates. (2) Includes time deposits with other banks and investment securities available for sale. Net interest income on an FTE basis increased to $180.516 million in 1993, compared with $172.924 million in 1992 and $150.150 million in 1991. This increase of $7.592 million in net interest income in 1993 was due to a larger increase in the volume of earning assets in 1993 (a $280.226 million increase), than in the increase in interest-bearing liabilities (a $182.212 million increase) which accounted for $17.607 million of the increase in net interest income. The total increase in average earning assets was primarily due to an increase in average loans of $268.263 million. Approximately 55%, of this growth was external, due to acquisitions, while the remaining 45% was internally generated. Interest-bearing deposits increased by $200.800 million in 1993. Approximately 55% of this growth was due to acquisitions. The continued volume of mortgage loan refinancings has negatively impacted Valley's net interest income. The impact on earning assets from the declining rate environment (a decrease of $35.793 million) was offset by aggressive repricing of interest-bearing liabilities (a $25.778 million decrease). The resulting $10.015 million decrease in net interest income from rate variances was offset by a positive volume variance of $17.607 million between 1992 and 1993. As a result of these factors, Valley's net interest margin declined to 4.47% in 1993, down from 4.61% for 1992. The impact of interest not recorded on nonperforming loans was not material for the reported periods. See "Interest Rate Sensitivity" below for additional information as to the effect of rate changes. The increase in FTE net interest income in 1992 over 1991 of $22.774 million was primarily a result of an increase in the volume of average earning assets of $321.252 million, partially offset by a slightly lower volume increase in average interest-bearing liabilities. An increase in average loans of $315.717 million in 1992 over 1991 accounted for the majority of the $321.252 million increase in average earning assets. Approximately 64% of this loan growth resulted from acquisitions and the balance was internally generated. Contributing to the increase in net interest income in 1992 was Valley's aggressive repricing of its interest-bearing liabilities, as general market rates declined, in late 1991 and early 1992. The decrease in the average rate on earning assets of 117 basis points was more than offset by a 148 basis point decrease in the average rate on interest-bearing liabilities, resulting in a $2.800 million increase in net interest income. The impact of interest not recorded on nonperforming loans was not material for the reported periods. The net interest margin was affected not only by the increase in average balances and declining interest rates, as noted above, but also by changes in the mix of earning assets and interest-bearing liabilities. Table 4 shows the sources and mix of net interest income. As shown in this table, the mix of nontaxable interest income to total interest on earning assets declined significantly from 1991 to 1993. Valley's commitment to lending is evident in the increase in the relationship of interest and fees on loans as a percent of total interest on earning assets for the years shown. The decrease in the level of nontaxable interest income was caused by Valley employing other investment alternatives in response to the decrease in the FTE yields of "bank qualified" municipal obligations, in relation to other taxable investment alternatives. Table 4: Sources of Net Interest Income
Years Ended December 31, ---------------------------------------------------------------- (dollars in thousands) 1993 Mix 1992 Mix 1991 Mix - - -------------------------------------------------------------------------------------------------------- Interest Income - - -------------------------------------------------------------------------------------------------------- Loans (1) $262,263 82.9% $263,737 80.4% $263,527 77.4% - - -------------------------------------------------------------------------------------------------------- Funds sold 132 .1 903 .3 3,696 1.1 - - -------------------------------------------------------------------------------------------------------- Taxable securities (2) 38,651 12.2 42,797 13.0 45,544 13.4 - - -------------------------------------------------------------------------------------------------------- Nontaxable securities 15,317 4.8 20,575 6.3 27,537 8.1 - - -------------------------------------------------------------------------------------------------------- Total earning assets $316,363 100.0% $328,012 100.0% $340,304 100.0% - - -------------------------------------------------------------------------------------------------------- Interest Expense - - -------------------------------------------------------------------------------------------------------- N.O.W. & money market deposits $ 16,647 12.3% $ 20,004 12.9% $ 28,823 15.2% - - -------------------------------------------------------------------------------------------------------- Savings deposits 10,318 7.6 9,267 6.0 12,396 6.5 - - -------------------------------------------------------------------------------------------------------- Time deposits 99,062 72.9 114,217 73.7 135,739 71.4 - - -------------------------------------------------------------------------------------------------------- Short-term borrowings 3,097 2.3 4,099 2.6 5,434 2.8 - - -------------------------------------------------------------------------------------------------------- Long-term borrowings 6,723 4.9 7,501 4.8 7,762 4.1 - - -------------------------------------------------------------------------------------------------------- Total interest-bearing funds $135,847 100.0% $155,088 100.0% $190,154 100.0% - - -------------------------------------------------------------------------------------------------------- Net interest income -- taxable equivalent basis $180,516 $172,924 $150,150 ======================================================================================================== Average Rates - - -------------------------------------------------------------------------------------------------------- Earning assets 7.84% 8.74% 9.91% - - -------------------------------------------------------------------------------------------------------- Interest-bearing funds 3.93 4.74 6.22 - - -------------------------------------------------------------------------------------------------------- Net yield on earning assets 4.47 4.61 4.37 ========================================================================================================
(1) Includes mortgages held for sale. (2) Includes time deposits with other banks and investment securities available for sale. Provision for Loan Losses In 1993, the provision for loan losses amounted to $8.970 million compared with $8.395 million in 1992 and $8.369 million in 1991. The 1993 provision is comprised of two elements: 1) restoration of the reserve for the 1993 net charge-offs, amounting to $7.646 million; and 2) establishing a reserve on the $173.148 million increase in loans outstanding from December 31, 1992 (excluding the impact of Pierce County's loans outstanding at date of acquisition), amounting to $1.167 million. Noninterest Income Total noninterest income amounted to $66.061 million in 1993 compared to $59.292 million in 1992 and $48.018 million in 1991, an 11.4% increase in 1993 from 1992 and a 23.5% increase in 1992 from 1991. All categories of noninterest income reflect increases due to Valley's acquisitions of Western Federal and Great American in April 1991, United in July 1992, and Pierce County in November 1993. Their results of operations are included in Valley's from the dates of acquisition forward. Table 5 shows the major categories of noninterest income for 1993, 1992 and 1991, and the percentage change between years. Table 5: Noninterest Income
Years Ended December 31, % Increase (Decrease) ----------------------------------- ----------------------- (dollars in thousands) 1993 1992 1991 1993-1992 1992-1991 - - --------------------------------------------------------------------------------- ----------------------- Service charges on deposit accounts $17,167 $15,707 $13,606 9.3 15.4 - - --------------------------------------------------------------------------------- ----------------------- Trust service fees 12,631 12,455 10,927 1.4 14.0 - - --------------------------------------------------------------------------------- ----------------------- Other service charges, commissions and fees 11,839 11,043 8,673 7.2 27.3 - - --------------------------------------------------------------------------------- ----------------------- Credit card 7,186 6,147 5,466 16.9 12.5 - - --------------------------------------------------------------------------------- ----------------------- Gain on sales of mortgage loans 6,786 3,274 1,412 107.3 131.9 - - --------------------------------------------------------------------------------- ----------------------- Insurance related 5,511 5,367 5,317 2.7 0.9 - - --------------------------------------------------------------------------------- ----------------------- Other 2,048 1,422 538 44.0 164.3 - - --------------------------------------------------------------------------------- ----------------------- Annuity commissions 1,814 2,206 1,355 (17.8) 62.8 - - --------------------------------------------------------------------------------- ----------------------- Accretion of negative goodwill 1,576 807 --- 95.3 NMF - - --------------------------------------------------------------------------------- ----------------------- Subtotal 66,558 58,428 47,294 13.9 23.5 - - --------------------------------------------------------------------------------- ----------------------- Net securities gains 497 864 724 (42.5) 19.3 - - --------------------------------------------------------------------------------- ----------------------- Total noninterest income $66,061 $59,292 $48,018 11.4 23.5 ================================================================================= =======================
Service charges on deposit accounts make up the largest portion of noninterest income. Service charges increased by $1.460 million, or 9.3% over the amounts recorded in 1992. Valley has repeatedly increased deposit service fees at subsidiary banks to help offset increased operating expenses such as the FDIC insurance premiums which have increased dramatically in recent years. See "Noninterest Expense". Trust service fees originate from the activities of Valley Trust Company, which has over $3.1 billion of assets under management and services customers in 17 Valley Bank locations throughout Wisconsin. Trust service fees recorded in 1993 were $12.631 million, a $.176 million increase over 1992. Other service charges, commissions and fees recorded in 1993 were $11.839 million, a 7.2% increase over the $11.043 million in 1992 and a 27.3% increase over the $8.673 million in 1991. This category is comprised mainly of loan commissions, safe deposit fees, check charges and fees from Valley's securities operation. Valley Securities, Inc. reported a 23% increase in revenues over the 1992 amounts recorded, attributable to increased market activity along with sales through ten Valley Banks located throughout Wisconsin. Loan commissions recorded in 1993 increased by 10%, mainly due to continued increased mortgage lending. Insurance related revenues are generated primarily by Insurance Services, Inc. through the sale of commercial and personal insurance coverage and by Community Life Insurance Company through the sale of credit reinsurance. In early 1991, Valley began to place a major emphasis on the sale of tax deferred annuities (TDAs). Income from the sale of TDAs totalled $1.814 million in 1993, compared to $2.206 million and $1.355 million in 1992 and 1991, respectively. Total insurance related revenue, including the sale of TDAs, has grown from $2.815 million in 1984 to $7.325 million in 1993, a compound growth rate of 11.2%. In 1993, Valley Bancard generated noninterest income from its credit card processing activity of $7.186 million, a 16.9% increase over the $6.147 million recorded in 1992 and a 12.5% increase over the $5.466 million in 1991. Gain on sales of mortgage loans to the secondary market were $6.786 million in 1993 and $3.274 million in 1992. These gains largely resulted from the sale of certain mortgages at a premium during a declining interest rate environment. Significant gains on mortgage sales to the secondary market are not anticipated for future periods. Valley recognized accretion of negative goodwill in the amount of $1.576 million in 1993, substantially all of which is attributable to the United acquisition completed on July 1, 1992. The negative goodwill attributable to United is being accreted over a 10 year period, commencing on July 1, 1992, in equal annual amounts of $1.537 million. Other noninterest income is derived from a wide range of services, collectively totalling $2.048 million in 1993 compared to $1.422 million in 1992. Net securities gains amounted to $.497 million in 1993 and $.864 million in 1992. Securities classified as available for sale had an estimated market value in excess of their carrying amounts of $6.755 million at December 31, 1993. Valley has no current intention of selling these securities, but they may not be held until maturity. Noninterest Expense Noninterest expense increased to $164.481 million in 1993, compared to $160.102 million in 1992 and $140.999 million in 1991. All categories of noninterest expenses reflect increases due to Valley's acquisitions of Western Federal and Great American in April 1991, United in July 1992, and Pierce County in November 1993. Their results of operations are included in Valley's from their dates of acquisition forward. Table 6 shows the major categories of noninterest expense for 1993, 1992 and 1991, and the percentage change between years. Table 6: Noninterest Expense
Years Ended December 31, % Increase (Decrease) ----------------------------------- ----------------------- (dollars in thousands) 1993 1992 1991 1993-1992 1992-1991 - - --------------------------------------------------------------------------------- ----------------------- Salaries and wages $ 72,200 $ 66,542 $ 59,579 8.5 11.7 - - --------------------------------------------------------------------------------- ----------------------- Pensions and other employee benefits 20,406 23,636 17,710 (13.7) 33.5 - - --------------------------------------------------------------------------------- ----------------------- Equipment 16,615 16,134 13,639 3.0 18.3 - - --------------------------------------------------------------------------------- ----------------------- Net occupancy 12,816 11,598 10,773 10.5 7.7 - - --------------------------------------------------------------------------------- ----------------------- FDIC insurance 8,333 7,923 6,640 5.2 19.3 - - --------------------------------------------------------------------------------- ----------------------- Business development 6,503 6,291 5,847 3.4 7.6 - - --------------------------------------------------------------------------------- ----------------------- Communication/Delivery 6,502 6,005 5,408 8.3 11.0 - - --------------------------------------------------------------------------------- ----------------------- Professional services 6,408 5,210 4,384 23.0 18.8 - - --------------------------------------------------------------------------------- ----------------------- Credit Card 3,896 3,325 2,961 17.2 12.3 - - --------------------------------------------------------------------------------- ----------------------- Intangible amortization 3,506 3,499 3,389 .2 3.2 - - --------------------------------------------------------------------------------- ----------------------- Supplies 3,359 3,317 3,110 1.3 6.7 - - --------------------------------------------------------------------------------- ----------------------- Processing costs 3,303 3,840 4,717 (14.0) (18.6) - - --------------------------------------------------------------------------------- ----------------------- Other 634 2,782 2,842 (77.2) (2.1) - - --------------------------------------------------------------------------------- ----------------------- Total noninterest expense $164,481 $160,102 $140,999 2.7 13.5 ================================================================================= =======================
Valley's efficiency ratio (noninterest expense as a percent of total FTE income excluding securities gains or losses) decreased to 66.84% in 1993, from 69.20% in 1992. This decrease reflects the cost control measures Valley implemented in 1991, 1992, and 1993. The largest component of noninterest expense is salaries and wages. Salaries and wages increased to $72.200 million in 1993, up from $66.542 million in 1992 and $59.579 million in 1991. Pensions and other employee benefits totalled $20.406 million in 1993, compared to $23.636 million in 1992 and $17.710 million in 1991. These two categories make up over 56% of Valley's total noninterest expense. Valley currently offers post retirement health care benefits to retired employees over the age of 54 who have rendered at least 10 years of service to Valley. These benefits are subject to deductibles, copayment provisions and other limitations. Only those employees retiring on or before December 31, 1994 will be eligible for such benefits. Valley adopted Statement of Financial Accounting Standards (SFAS) No. 106 "Employers' Accounting for Post Retirement Benefits Other Than Pensions", on January 1, 1993. Pursuant to this new standard, the expected cost of these benefits must be charged to expense during the years that the employees render service. As of January 1, 1993, Valley's accumulated post retirement benefit obligation (also its transition obligation) totalled $2.855 million. In accordance with this new standard, this unfunded liability will be amortized over a twenty year period. The annual expense for 1993, in conjunction with the adoption of SFAS No. 106, was $365,000. In 1992 the Financial Accounting Standards Board (FASB) issued SFAS No. 112 "Employers' Accounting for Post Employment Benefits." This statement requires accrual accounting for the estimated cost of benefits provided to former employees after employment, but before retirement. Valley is required to adopt the new standard no later than 1994. Valley currently accrues for severance benefits when identified and therefore, has determined that adoption of the new standard will not have a material impact. Equipment expense increased by $.481 million in 1993. Net occupancy costs increased by 10.5% over 1992. These costs are associated with owning and leasing all of Valley's facilities and include depreciation, insurance, rent, taxes and maintenance. Business development, primarily marketing, contributions and employee reimbursable expenses, increased by 3.4% in 1993 to $6.503 million from the $6.291 million in 1992. Increased marketing costs are associated with Valley's entrance into new markets, and support of its large network of locations. Communication and delivery costs increased to $6.502 million in 1993, up from $6.005 million in 1992 and $5.408 million in 1991. This category includes telephone, postage and express courier service. The increase in professional services reflects the costs associated with complying with additional regulatory and accounting regulations. This category is comprised mainly of legal fees, accounting fees, liability insurance, and directors fees. This category of expenses showed a 23.0% increase in 1993 over 1992. Processing costs reflect the expenses Valley incurs to externally process the remainder of its banks not converted to VISION and external processing at various non-banking subsidiaries. These costs decreased by 14.0% in 1993, from $3.840 million in 1992 to $3.303 million in 1992. Intangible amortization results primarily from goodwill and deposit base intangibles which arise as part of acquisitions accounted for as purchases. This category also includes amortization of customer lists at Insurance Services, Inc., and capitalized fees paid in association with Valley's supermarket branch locations. The costs of operating Valley Bancard (excluding salaries and benefits, equipment and occupancy) are shown in the credit card category. The increase in costs is a result of increased charge card activity in 1993. The increase in these expenses, a $.571 million increase in 1993 from 1992, was more than offset by the increase in revenue generated by these activities (see "Noninterest Income"). Supplies expense includes daily office supplies, supplies for Valley's internal print shop, general supplies for the data processing center and equipment and software costs not capitalized. These costs increased 1.3% from the 1992 total of $3.317 million. Valley has made significant efforts in controlling these costs throughout 1993 and 1992. Other expenses include a wide range of miscellaneous expense types which decreased by 77.2% from 1992 to 1993. Expenses associated with foreclosed real estate are included in this category; these expenses totalled $1.336 million, $1.521 million and $1.061 million in 1993, 1992 and 1991, respectively. Income Taxes Income tax expense was $22.118 million in 1993 compared to $17.556 million and $9.589 million in 1992 and 1991, respectively. The increase in tax expense in 1993 of $4.562 million over 1992 resulted primarily from three factors: 1) an increase of income before income taxes of $10.685 million, 2) a decrease in nontaxable interest income of $3.978 million, and 3) the corporate tax rate increase in 1993 from 34% to 35%, which resulted in an increase in tax expense of $.560 million in 1993. The increase in tax expense in 1992 of $7.967 million over 1991 resulted primarily from two factors: 1) an increase of $5.807 million of Federal tax expense and $.996 million of State tax expense (net of Federal benefit) resulting from increased income before taxes of $17.080 million; and 2) an increase of $1.283 million of federal tax expense resulting from decreased nontaxable interest income of $3.774 million. On January 1, 1993, Valley adopted SFAS No. 109, "Accounting for Income Taxes." The effect of adoption of this new standard was not material. Reserve for Loan Losses The reserve for loan losses (reserve) totalled $40.411 million or 1.27% of total loans at 1993 year end compared with $37.921 million or 1.26% of total loans at 1992 year end and $31.241 million or 1.20% of total loans at the end of 1991. The percentage increase in the reserve from 1991 to 1993 was due primarily to the 1991 and 1992 acquisitions of financial institutions requiring higher reserves than Valley's. The level of the reserve is established by management based upon an assessment of overall risk in the loan portfolio. Valley uses a loan grading system to continuously monitor problem credits. A loan is graded based upon a number of factors, which include collateral values, financial condition of borrowers and assessment of ultimate collectibility. The reserve is based upon reasonable estimates, from which actual losses may vary. Reserve estimates are reviewed quarterly and evaluated based upon current conditions relating to individual customers and the economy in general. Adjustments to the reserve are reflected through the provision for loan losses. Valley implemented a new method of establishing and evaluating the reserve levels at all of its affiliate banks, based upon current regulatory methodology, in 1992. This method sets reserve requirements based upon a combination of estimated potential losses plus an additional percentage of the remaining balance of problem loans, and establishes a general reserve based upon the loan composition of the bank's loan portfolio. Overall, reserves were determined to be adequate based on the new methodology. Loans charged off, net of recoveries, totalled $7.646 million in 1993, compared with $5.999 million and $6.894 million in 1992 and 1991, respectively. Net loans charged off as a percent of loans amounted to .25% in 1993. This percentage compares to .21% and .27% in 1992 and 1991, respectively. Table 7 shows a five year summary of reserve activity, including charge offs, recoveries and provision for loan losses and the reserve allocated by loan type. The allocation of reserve is provided for analytical purposes. Loan classifications vary from those shown in the consolidated statements of financial condition. Table 7: Reserve for Loan Losses - Five-Year Summary
December 31, ------------------------------------------------------------- (dollars in thousands) 1993 1992 1991 1990 1989 - - ---------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 37,921 $ 31,241 $ 25,422 $ 22,150 $ 20,408 - - ---------------------------------------------------------------------------------------------------------- Loans charged off: - - ---------------------------------------------------------------------------------------------------------- Real estate-mortgage 517 675 1,168 631 533 - - ---------------------------------------------------------------------------------------------------------- Real estate-construction 38 52 10 --- --- - - ---------------------------------------------------------------------------------------------------------- Installment 1,586 2,030 2,627 1,394 1,075 - - ---------------------------------------------------------------------------------------------------------- Check credit and credit card 1,133 1,095 833 915 700 - - ---------------------------------------------------------------------------------------------------------- Commercial real estate 895 716 --- --- --- - - ---------------------------------------------------------------------------------------------------------- Agricultural 268 188 --- --- --- - - ---------------------------------------------------------------------------------------------------------- Commercial and other (1) 6,243 3,996 4,185 4,650 4,809 - - ---------------------------------------------------------------------------------------------------------- Total loans charged off 10,680 8,752 8,823 7,590 7,117 - - ---------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: - - ---------------------------------------------------------------------------------------------------------- Real estate-mortgage 383 276 325 72 552 - - ---------------------------------------------------------------------------------------------------------- Real estate-construction 9 --- --- --- --- - - ---------------------------------------------------------------------------------------------------------- Installment 737 717 576 378 410 - - ---------------------------------------------------------------------------------------------------------- Check credit and credit card 173 163 118 129 79 - - ---------------------------------------------------------------------------------------------------------- Commercial real estate 435 285 --- --- --- - - ---------------------------------------------------------------------------------------------------------- Agricultural 161 455 --- --- --- - - ---------------------------------------------------------------------------------------------------------- Commercial and other (1) 1,135 857 910 1,000 1,022 - - ---------------------------------------------------------------------------------------------------------- Total recoveries of loans previously charged off 3,033 2,753 1,929 1,579 2,063 - - ---------------------------------------------------------------------------------------------------------- Net loans charged off 7,647 5,999 6,894 6,011 5,054 - - ---------------------------------------------------------------------------------------------------------- Provision charged to expense 8,970 8,395 8,369 7,864 6,796 - - ---------------------------------------------------------------------------------------------------------- Reserve at date of acquisition of banks acquired,accounted for as purchases and other 1,167 4,284 4,344 1,419 --- - - ---------------------------------------------------------------------------------------------------------- Balance at end of period $ 40,411 $ 37,921 $ 31,241 $ 25,422 $ 22,150 ========================================================================================================== Reserve as a percent of loans 1.27% 1.26% 1.20% 1.10% 1.11% - - ---------------------------------------------------------------------------------------------------------- Net loans charged off as a percent of average loans (2) .25% .21% .27% .27% .26% - - ---------------------------------------------------------------------------------------------------------- Loans outstanding at period end $3,190,485 $3,017,338 $2,612,518 $2,312,399 $2,001,676 - - ---------------------------------------------------------------------------------------------------------- Average loans outstanding during period (2) $3,111,702 $2,843,439 $2,527,722 $2,186,253 $1,943,180 ==========================================================================================================
Allocation of Reserve for Loan Losses
At December 31, 1993 ----------------------------------------------- Reserve for Loan Loans Loan Losses Outstanding Mix ---------------------------------------------------------------------------------------- Real estate-mortgage $ 2,849 $ 798,985 25.0% ---------------------------------------------------------------------------------------- Commercial real estate 12,144 922,531 28.9 ---------------------------------------------------------------------------------------- Commercial 13,882 613,850 19.2 ---------------------------------------------------------------------------------------- Agricultural 3,142 204,742 6.4 ---------------------------------------------------------------------------------------- Installment 6,013 650,377 20.4 ---------------------------------------------------------------------------------------- Unallocated 2,381 --- --- ---------------------------------------------------------------------------------------- Total Reserve for Loan Losses $40,411 $3,190,485 100.0% ========================================================================================
(1) For years 1989 through 1991, includes commercial real estate and agricultural charge-offs and recoveries. (2) Non-performing loans and mortgages held for sale are included in average balances. Asset Quality The most significant risk of loss in a financial institution is from its loan portfolio. Valley manages its loan portfolio to limit risk through initial review of credit applications, approval of loans by a review committee and loan documentation and compliance procedures. Valley also has a corporate credit administration and loan review staff. This staff performs loan reviews at subsidiary banks. This review process assists banks in early recognition of problem credits. This staff also provides expertise in loan workouts to limit credit losses. Valley's banks prepare quarterly problem loan action reports (PLARs) to monitor nonperforming loans and determine the adequacy of the reserve. All loans classified for regulatory purposes as loss, doubtful or substandard are included in the PLARs. The PLARs also include all loans classified as nonperforming. Valley's lending philosophy is to make high-quality loans to Wisconsin consumers and businesses, allowing the banks to efficiently monitor and control credit risk. The majority of the portfolio is composed of loans to individuals and small and medium-sized businesses. Consistent with its corporate-wide lending and investment policies, Valley's banks' portfolios have no foreign loans, energy loans or out-of-market credit card balances. Valley's loan underwriting policies discourage the making of out-of-market real estate loans and loans relating to highly leveraged transactions. Valley's banks do not hold non-investment grade debt securities in their investment portfolios and Valley does not invest in any interest only or principal only investment securities. Loan loss exposure is also limited through industry diversification. Valley's loan portfolio is well diversified with no excessive concentration in any one industry. Agricultural loans at Valley represent approximately 6.4% of the portfolio, while loans to finance non-owner occupied commercial real estate development amounted to approximately $485 million, or 15.2% of year end 1993 loans. Valley does a limited amount of lease financing, comprised primarily of leases to individuals and small and medium sized businesses. Leases outstanding amounted to $17.0 million at December 31, 1993 compared to $12.3 million at December 31, 1992. Senior management also reviews the PLARs quarterly with the corporate credit administration and loan review staff to determine if there are any trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources. In addition, senior management determines if there is any information regarding large credits that may cause management to question the ability of such borrowers to comply with loan repayment terms. Valley has an environmental policy which establishes procedures to limit the exposure for loss related to environmental problems on any properties foreclosed upon or properties securing extensions of credit by Valley. This policy generally requires the borrower to complete an environmental questionnaire and calls for an on site inspection of the real estate securing the loan. The policy also requires that, prior to taking title to any real property by foreclosure, an investigation must be made of the property to determine if there is any potential environmental liability. Nonperforming Loans and Assets In accordance with regulatory standards, loans are placed in nonaccrual status when they reach a prescribed delinquency stage, generally when payments are 90 days past due or when other events occur which make the collection of all principal and interest owing on the loan questionable. Nonperforming loans, which include nonaccrual loans, loans past due 90 days or more and loans with restructured terms, totalled $20.586 million at the end of 1993, down from the $25.993 million and $38.501 million reported at year end 1992 and 1991, respectively. Nonperforming loans as a percent of loans outstanding fell to .65% at year end 1993, compared to .86% at year end 1992 and 1.47% at year end 1991. The 1993 nonperforming loan percentage is the lowest ever reported by Valley. This reflects Valley's commitment to maintaining excellent credit quality. Nonperforming assets, which include nonperforming loans and other real estate owned acquired in foreclosure, totalled $22.880 million at year end 1993, compared to $29.938 million and $43.214 million at year end 1992 and 1991, respectively. In addition to the loans classified as nonperforming, there were other loans aggregating approximately $66 million at December 31, 1993 and $70 million at December 31, 1992, where management is closely following the borrowers' ability to continue to comply with loan payment terms. Current conditions do not warrant classification of these loans as nonperforming, nor is any principal loss on these loans considered likely at this time. Table 8 shows balances of nonperforming loans and assets, reserve for loan losses and key asset quality performance ratios for the last five years. Table 9 shows the impact nonperforming loans have had on Valley's interest income for the last five years. Table 8: Nonperforming Assets and Reserve For Loan Losses
December 31, ------------------------------------------------------------- (dollars in thousands) 1993 1992 1991 1990 1989 - - ---------------------------------------------------------------------------------------------------------- Nonperforming Assets: - - ---------------------------------------------------------------------------------------------------------- Nonaccrual loans $ 16,306 $ 21,181 $ 31,368 $ 20,833 $ 18,566 - - ---------------------------------------------------------------------------------------------------------- Loans past due 90 days or more 2,212 2,088 3,182 2,281 1,993 - - ---------------------------------------------------------------------------------------------------------- Restructured loans 2,068 2,724 3,951 2,997 4,163 - - ---------------------------------------------------------------------------------------------------------- Total nonperforming loans 20,586 25,993 38,501 26,111 24,722 - - ---------------------------------------------------------------------------------------------------------- Other real estate owned 2,294 3,945 4,713 3,680 3,893 - - ---------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 22,880 $ 29,938 $ 43,214 $ 29,791 $ 28,615 ========================================================================================================== Nonperforming loans as a % of loans .65% .86% 1.47% 1.13% 1.24% - - ---------------------------------------------------------------------------------------------------------- Nonperforming assets as a % of assets .50% .68% 1.09% .84% .91% - - ---------------------------------------------------------------------------------------------------------- Reserve for Loan Losses: - - ---------------------------------------------------------------------------------------------------------- At period end $ 40,411 $ 37,921 $ 31,241 $ 25,422 $ 22,150 - - ---------------------------------------------------------------------------------------------------------- As a % of loans 1.27% 1.26% 1.20% 1.10% 1.11% - - ---------------------------------------------------------------------------------------------------------- As a % of nonperforming loans 196.30% 145.89% 81.14% 97.36% 89.60% - - ---------------------------------------------------------------------------------------------------------- As a % of nonaccrual loans 247.83% 179.03% 99.60% 122.03% 119.30% ==========================================================================================================
Table 9: Impact of Nonperforming Loans on Interest Income
December 31, ------------------------------------------------------------- (dollars in thousands) 1993 1992 1991 1990 1989 - - ---------------------------------------------------------------------------------------------------------- Interest income that would have been recorded at original rate $ 1,821 $ 2,660 $ 3,301 $ 2,447 $ 2,588 - - ---------------------------------------------------------------------------------------------------------- Interest income that was actually recorded 2,960 2,779 3,034 2,146 2,199 - - ---------------------------------------------------------------------------------------------------------- Net interest (earned) lost $(1,139) $ (119) $ 267 $ 301 $ 389 ==========================================================================================================
Valley's credit quality compares very favorably with other bank holding companies in the Midwest. The level of nonperforming loans as a percent of loans is among the best in the Midwest. The net loans charged off as a percent of average loans of .25% also compares favorably with peers in the Midwest. Valley places a high priority on maintaining the credit quality of its loan portfolio. Emphasis is placed on hiring and maintaining highly skilled loan officers. A thorough review and analysis of credit requests along with proper follow-up of supporting documentation, including legal filings and current financial statements of borrowers, are necessary procedures for maintaining sound credit quality. Valley's management believes that early recognition of problem loans is the key to minimizing losses. Valley evaluates its reserve in relation to the level of nonperforming loans, measuring its adequacy to sustain anticipated losses. Financial Position Total average assets grew to $4.360 billion in 1993, an increase of $280.161 million over 1992 average assets of $4.080 billion. Approximately $11.0 million of this growth was external (acquisitions) and $92.6 million was internally generated. Average earning assets have consistently accounted for over 90% of total average assets. Average earning assets represented 92.6% of total average assets for 1993. Average loans increased to $3.112 billion in 1993, compared to $2.843 billion in 1992 and $2.528 billion in 1991. Of the increase of $268.263 million, or 9.4%, in average loans from 1992, approximately $145 million from external growth (acquisitions) and $113 million was internally generated. In addition to the $268 million in average loan growth, Valley produced approximately $425 million of real estate loans not included in year end balances, which were packaged and sold into the secondary market. Valley's general policy is not to retain long-term fixed rate mortgages in its loan portfolio. Loans as a percent of assets have increased from 63.5% at year end 1989 to 69.5% at year end 1993. The five year compound growth rate of loans is 11.36% compared to 9.20% for total assets. Table 10 shows the loan portfolio mix for the past five years. The table shows Valley's mix of real estate and commercial loans changing dramatically in the past three years but this is due primarily to a reclassification as a result of Valley's VISION conversion project. As banks' loan portfolios were converted to the VISION system, loan note type classifications were reviewed and reclassified, as appropriate. Valley's management believes the classifications shown in 1993 accurately reflect the mix of its loan portfolio. The acquisition of savings associations in 1991 and 1992 have also had an impact on the mix of loans. The three savings associations' loan portfolios were primarily made up of real estate loans. Table 10: Loan Portfolio Review
December 31, -------------------------------------------------------------------------------------------------- (dollars in thousands 1993 MIX 1992 MIX 1991 MIX 1990 MIX 1989 MIX - - ----------------------------------------------------------------------------------------------------------------------------------- Commercial real estate $ 847,594 26.6% $ 705,242 23.4% $ 410,485 15.7% N/A N/A N/A N/A - - ----------------------------------------------------------------------------------------------------------------------------------- Real estate-mortgage (1st lien) 758,510 23.8 812,330 26.9 681,985 26.1 $1,008,679 43.6% $ 860,201 43.0% - - ----------------------------------------------------------------------------------------------------------------------------------- Commercial 593,060 18.6 629,516 20.9 850,778 32.6 830,037 35.9 740,876 37.0 - - ----------------------------------------------------------------------------------------------------------------------------------- Consumer 368,022 11.5 327,225 10.8 298,973 11.4 385,302 16.7 329,973 16.5 - - ----------------------------------------------------------------------------------------------------------------------------------- Agricultural 204,707 6.4 184,623 6.1 76,802 2.9 N/A N/A N/A N/A - - ----------------------------------------------------------------------------------------------------------------------------------- Real estate-mortgage (2nd lien) 150,179 4.7 109,949 3.6 70,216 2.7 N/A N/A N/A N/A - - ----------------------------------------------------------------------------------------------------------------------------------- Real estate-construction 119,240 3.7 114,949 3.8 95,630 3.7 88,381 3.8 70,626 3.5 - - ---------------------------------------------------------------------------------------------------------------------------------- Check credit and credit card 66,897 2.1 61,604 2.0 58,192 2.2 N/A N/A N/A N/A - - ----------------------------------------------------------------------------------------------------------------------------------- Student 65,279 2.1 59,600 2.0 57,214 2.2 N/A N/A N/A N/A - - ----------------------------------------------------------------------------------------------------------------------------------- Leasing 16,997 .5 12,300 .4 12,243 .5 N/A N/A N/A N/A - - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 3,190,485 100.0% 3,017,338 100.0% 2,612,518 100.0% 2,312,399 100.0% 2,001,676 100.0% - - ----------------------------------------------------------------------------------------------------------------------------------- Reserve for loan losses (40,411) (37,921) (31,241) (25,422) (22,150) - - ----------------------------------------------------------------------------------------------------------------------------------- Total loans, net $3,150,074 $2,979,417 $2,581,277 $2,286,977 $1,979,526 - - ----------------------------------------------------------------------------------------------------------------------------------- Loans as a % of assets 69.5% 68.8% 65.7% 65.1% 63.5% ===================================================================================================================================
TABLE 10: Loan Portfolio Review (Pie Chart) A pie chart depicting the following categories and percentages was presented: Commercial real estate 26.60% ---------------------------------------- Real estate-mortgage (1st liens) 23.80% ---------------------------------------- Commercial 18.60% ---------------------------------------- Consumer 11.50% ---------------------------------------- Agricultural 6.40% ---------------------------------------- Real estate-mortgage (2nd lien) 4.70% ---------------------------------------- Real estate-construction 3.70% ---------------------------------------- Check credit and credit card 2.10% ---------------------------------------- Student 2.10% ---------------------------------------- Leasing .50% ---------------------------------------- Total loans 100.00% ======================================== Table 11 shows the carrying value of investment securities for the past three years. In 1992, Valley evaluated the conditions under which it might sell any of its investment securities. Those securities that might be sold in the future as part of Valley's efforts to manage interest rate risk or in response to changes in interest rate or other economic factors are shown as investment securities available for sale. Total investment securities comprise 21.2% of total 1993 year end assets compared to 20.9% at year end 1992. Table 11 also shows that balances of collateralized mortgage obligations (CMOs) increased from $203.206 million at the end of 1991 to $239.842 million at year end 1992. Valley changed the mix of its investment securities portfolio in 1992 to include to include more CMOs due to their credit quality and attractive yields. CMOs added to the portfolio have short estimated lives, favorable yields and excellent credit quality as a result of federal agency collateral. Valley does not invest in any interest only or principal only CMOs because of their perceived higher risk. In December of 1993, Valley, in anticipation of adopting SFAS 115 on January 1, 1994, conducted a review of its investment portfolio. This review resulted in reclassifications of investment securities available for sale and investment securities held to maturity. Table 11: Carrying Value of Investment Securities
December 31, ---------------------------------- (dollars in thousands) 1993 1992 1991 - - ----------------------------------------------------------------------------------- Investment securities available for sale: - - ----------------------------------------------------------------------------------- U.S. Government $393,612 $ --- $ --- - - ----------------------------------------------------------------------------------- CMOs 198,796 --- --- - - ----------------------------------------------------------------------------------- Federal agencies 101,772 --- --- - - ----------------------------------------------------------------------------------- Other 39,623 --- --- - - ----------------------------------------------------------------------------------- Mortgage pass-throughs 29,117 27,063 --- - - ----------------------------------------------------------------------------------- Corporate 2,906 11,278 --- - - ----------------------------------------------------------------------------------- Total investment securities available for sale $765,826 $38,341 $ --- =================================================================================== Investment securities held to maturity: - - ----------------------------------------------------------------------------------- U.S. Government $ --- $297,896 $203,281 - - ----------------------------------------------------------------------------------- CMOs --- 239,842 203,206 - - ----------------------------------------------------------------------------------- Federal agencies --- 117,916 153,995 - - ----------------------------------------------------------------------------------- Other --- 24,848 64,970 - - ----------------------------------------------------------------------------------- State and political subdivisions 206,377 196,487 261,704 - - ----------------------------------------------------------------------------------- Total investment securities held to maturity $206,377 $876,989 $887,156 - - ----------------------------------------------------------------------------------- Total investments $972,203 $915,330 $887,156 ===================================================================================
Deposits are the primary source of funds for Valley. Average deposits accounted for 95.6% of the total source of funds for 1993, with interest- bearing deposits representing 87.0% of total average deposits. Table 12 shows the breakdown of deposits at the end of the last three years and the maturity stratification of time certificates of deposit in principal amounts of $100,000 or more at year end 1993, which includes $20.724 million of brokered CDs. Brokered CDs offered attractive rates as a funding source in 1993. Valley considers itself to be asset driven and believes that future loan growth will continue to be primarily funded at reasonable rates with deposits from its own markets. Table 12: Deposits
Years ended December 31, ---------------------------------- (average balance-dollars in thousands) 1993 1992 1991 - - ----------------------------------------------------------------------------------- Demand $ 492,232 $ 438,802 $ 387,316 - - ----------------------------------------------------------------------------------- N.O.W. and Money Market 776,256 747,076 683,454 - - ----------------------------------------------------------------------------------- Savings 411,525 327,447 301,471 - - ----------------------------------------------------------------------------------- Time 2,094,414 2,006,872 1,885,014 - - ----------------------------------------------------------------------------------- Total Deposits $3,774,427 $3,520,197 $3,257,255 ===================================================================================
Time certificates of deposit of $100,000 or more at 12/31/93 maturing in: - - ---------------------------------------------------------- Less than 3 months $ 187,130 - - ---------------------------------------------------------- 3 to 6 months 51,623 - - ---------------------------------------------------------- 6 to 12 months 56,388 - - ---------------------------------------------------------- Over 12 months 67,078 - - ---------------------------------------------------------- Total $ 362,219 ========================================================== Investment Securities/Liquidity Liquidity is necessary to ensure that adequate funds will be available to support deposit outflows and meet borrowing requirements of customers. This goal is accomplished primarily by maintaining sufficient liquid assets along with consistent core deposit growth to fund earning assets. Other sources of liquidity at Valley are marketable investment securities, unused capacity to borrow funds in the national money market and brokered CDs. The goal of management is to provide maximum investment earnings and liquidity within prudent investment risk parameters. The liquidity of Valley's portfolio is provided by a relatively short average maturity. Valley has specifically identified investments available for sale which could provide needed liquidity. Interest rate risk management is also considered when selecting investment securities. Historically, Valley has managed the maturity structure of its portfolio to more closely match the maturity structure of its source of funds. Investment securities classified as "held to maturity" are purchased with the intent and ability to hold the securities to maturity. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. At December 31, 1993, the average yield of total investment securities held to maturity was 7.11% and the average maturity was three years and two months. Investment securities classified as "available for sale", described above, may be sold in future periods. These securities are carried at the lower of amortized cost or market value. At December 31, 1993, the average yield of total investment securities available for sale was 5.12% and the average maturity was three years and one month. Investment decisions are made after considering current balance sheet structure, current economic and interest rate conditions, and the relationship of various types of securities in the marketplace. On rare occasions, significant and unforeseen changes may occur in the economic and interest rate environment which cause changes to the balance sheet structure, liquidity and interest rate risk position. Table 13 shows the maturity distribution and yields of investment securities at December 31, 1993. Table 14 shows the comparative maturity distribution and average maturity of investments at year end 1993 and 1992. As shown in Table 14, the average maturity of total investments at year end 1993 was three years and one month compared to an average maturity of two years and eight months at year end 1992. Table 15 provides information on the maturity of certain loans. This table excludes installment and real estate mortgage loans. Table 13: Relative Maturities and Weighted Average Rates of Investment Securities
Investment Securities at December 31, 1993, Maturing -------------------------------------------------------------------------------------------- After one but After five but Within one year within five years within ten years After ten years Total -------------------------------------------------------------------------------------------- (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - - ---------------------------------------------------------------------------------------------------------------------- Investment securities available for sale: - - ---------------------------------------------------------------------------------------------------------------------- U.S. Government $103,154 5.35% $288,831 4.92% $ 1,627 5.59% $ --- --% $393,612 5.03% - - ---------------------------------------------------------------------------------------------------------------------- CMOs 2,075 6.92 123,348 5.69 72,291 5.88 1,083 5.65 198,797 5.77 - - ---------------------------------------------------------------------------------------------------------------------- Federal agencies 56,454 4.63 36,134 4.40 2,504 8.17 6,680 5.84 101,772 4.72 - - ---------------------------------------------------------------------------------------------------------------------- Other 39,424 2.45 199 4.75 --- -- --- -- 39,623 2.46 - - ---------------------------------------------------------------------------------------------------------------------- Mortgage pass-throughs --- -- 6,848 5.47 12,416 8.14 9,853 6.70 29,117 7.02 - - ---------------------------------------------------------------------------------------------------------------------- Corporates 499 4.94 2,186 4.28 220 6.48 --- -- 2,905 4.56 - - ---------------------------------------------------------------------------------------------------------------------- Total investment securities available for sale $201,606 4.60% $457,546 5.09% $ 89,058 6.26% $ 17,616 6.31% $765,826 5.12% - - ---------------------------------------------------------------------------------------------------------------------- Investment securities held to maturity: - - ---------------------------------------------------------------------------------------------------------------------- State and political subdivisions $ 60,515 4.45% $ 95,771 7.98% $ 40,010 7.27% $ 10,081 14.20% $206,377 7.11% - - ---------------------------------------------------------------------------------------------------------------------- Total investment securities held to maturity $ 60,515 4.45% $ 95,771 7.98% $ 40,010 7.27% $ 10,081 14.20% $206,377 7.11% ====================================================================================================================== Tax equivalent $ 936 $ 2,659 $ 1,012 $ 498 $ 5,105 - - ---------------------------------------------------------------------------------------------------------------------- Total investments $262,121 4.56% $553,317 5.59% $129,068 6.57% $ 27,697 9.18% $972,203 5.55% ======================================================================================================================
Table 14: Investment Securities Maturity Distribution
Investment Securities at December 31, 1993 -------------------------------------------------------------------------------------------- Investment Securities Available for Sale -------------------------------------------------------------------------------------------- Mortgage Total Total U.S. Federal Pass- Book Market (dollars in thousands) Government CMOs Agencies Other throughs Corporates Value Value - - -------------------------------------------------------------------------------------------------------------------- 1993 - - -------------------------------------------------------------------------------------------------------------------- Within 1 year $103,154 $ 2,075 $ 56,454 $ 39,424 $ --- $ 499 $201,606 $204,475 - - -------------------------------------------------------------------------------------------------------------------- 1-5 years 288,831 123,348 36,134 199 6,848 2,186 457,546 460,093 - - -------------------------------------------------------------------------------------------------------------------- 5-10 years 1,627 72,291 2,504 --- 12,416 220 89,058 90,104 - - -------------------------------------------------------------------------------------------------------------------- Over 10 years --- 1,083 6,680 --- 9,853 --- 17,616 17,909 - - -------------------------------------------------------------------------------------------------------------------- Total $393,612 $198,797 $101,772 $ 39,623 $29,117 $2,905 $765,826 $772,581 ==================================================================================================================== Average maturity years/months 2/1 4/4 2/8 0/8 11/9 2/2 3/1 ====================================================================================================================
Investment Securities at December 31, 1993 ----------------------------------------------------------------- Investment Securities Held to Maturity Total Investments ----------------------------------------------------------------- Total Total Total State & Political Book Market Book Market (dollars in thousands) Subdivisions Value Value Value Value - - ----------------------------------------------------------------------------------------------- 1993 - - ----------------------------------------------------------------------------------------------- Within 1 year $ 60,515 $ 60,515 $ 60,690 $262,121 $265,165 - - ----------------------------------------------------------------------------------------------- 1-5 years 95,771 95,771 97,822 553,317 557,915 - - ----------------------------------------------------------------------------------------------- 5-10 years 40,010 40,010 40,189 129,068 130,293 - - ----------------------------------------------------------------------------------------------- Over 10 years 10,081 10,081 10,376 27,697 28,285 - - ----------------------------------------------------------------------------------------------- Total $206,377 $206,377 $209,077 $972,203 $981,658 =============================================================================================== Average maturity years/months 3/2 3/2 3/1 ===============================================================================================
Investment Securities at December 31, 1992 ------------------------------------------------- Investment Securities Available for Sale ------------------------------------------------- Mortgage Total Total Pass- Book Market (dollars in thousands) Throughs Corporates Value Value - - ---------------------------------------------------------------------------------- 1992 - - ---------------------------------------------------------------------------------- Within 1 year $ --- $ 5,010 $ 5,010 $ 5,080 - - ---------------------------------------------------------------------------------- 1-5 years 2,652 1,519 4,171 4,246 - - ---------------------------------------------------------------------------------- 5-10 years 16,004 4,749 20,753 20,975 - - ---------------------------------------------------------------------------------- Over 10 years 8,407 --- 8,407 9,056 - - ---------------------------------------------------------------------------------- Total $ 27,063 $ 11,278 $ 38,341 $ 39,357 ================================================================================== Average maturity years/months 11/1 2/10 8/8 ==================================================================================
Investment Securities at December 31, 1992 ------------------------------------------------------------------------------------------ Investment Securities Held to Maturity Total Investments ------------------------------------------------------------------------------------------ State & Total Total Total Total U.S. Federal Political Book Market Book Market (dollars in thousands) Government CMOs Agencies Other Subdivision Value Value Value Value - - ----------------------------------------------------------------------------------------------------------------- 1992 - - ----------------------------------------------------------------------------------------------------------------- Within 1 year $133,982 $ 11,867 $ 76,621 $ 24,848 $ 75,962 $323,280 $326,740 $328,290 $331,820 - - ----------------------------------------------------------------------------------------------------------------- 1-5 years 163,321 161,662 37,507 --- 83,442 445,932 452,262 450,103 456,508 - - ----------------------------------------------------------------------------------------------------------------- 5-10 years 593 60,974 1,493 --- 27,330 90,390 90,451 111,143 111,426 - - ----------------------------------------------------------------------------------------------------------------- Over 10 years --- 5,339 2,295 --- 9,753 17,387 17,528 25,794 26,584 - - ----------------------------------------------------------------------------------------------------------------- Total $297,896 $239,842 $117,916 $ 24,848 $196,487 $876,989 $886,981 $915,330 $926,338 ================================================================================================================= Average maturity years/months 1/6 4/2 1/1 0/8 2/8 2/6 2/6 =================================================================================================================
Table 15: Loan Portfolio Maturity Distribution
Loans at December 31, 1993, Maturing In ------------------------------------------------------------------------- One to five years After five years ---------------------------------------------------------- Less Fixed Variable Fixed Variable than one Interest Interest Interest Interest (dollars in thousands) year (a) Rates Rates (b) Rates Rates (b) - - -------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $406,345 $159,251 $ 86,821 $ 11,814 $ 59,710 - - -------------------------------------------------------------------------------------------------------- Real estate-construction 58,001 24,109 11,433 3,542 22,155 ========================================================================================================
(a) Includes demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts. (b) The variable interest rate loans generally fluctuate according to a formula based on the prime rate. Interest Rate Sensitivity Asset and liability rate sensitivity management attempts to maintain an appropriate balance between the growth of net interest income and the risks associated with significant changes in market interest rates. Interest rate sensitivity is determined by the relative amounts of assets and liabilities that are subject to repricing within a specified time period. Liquidity management attempts to align the sources and uses of funds to meet cash flow requirements of customers and Valley. Liquidity and interest rate sensitivity must be managed together since action taken with respect to one often impacts the other. A historical tool for measuring interest rate sensitivity is the gap analysis presented in Table 16. The sensitivity presented in this table is based upon a gap analysis which assumes an equal degree of rate sensitivity between rate sensitive assets and liabilities. As an example, in an environment of increasing interest rates, the increase in yields on assets such as variable rate commercial loans is assumed to be equal to the increase in rates paid on liabilities such as money market deposit accounts. Table 16: Interest Rate Sensitivity Analysis at December 31, 1993
Zero to Three to Six Months Total One to Over Floating Three Six to Within Five Five Nonrate (dollars in thousands) Rate Months Months One Year One Year Years Years Sensitive Total - - ----------------------------------------------------------------------------------------------------------------------------------- Assets: - - ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks $ --- $ --- $ --- $ --- $ --- $ --- $ --- $ 202,370 $ 202,370 - - ----------------------------------------------------------------------------------------------------------------------------------- Interest-bearing deposits with other banks --- --- --- --- --- --- --- 756 756 - - ----------------------------------------------------------------------------------------------------------------------------------- Funds sold 2,640 --- --- --- 2,640 --- --- --- 2,640 - - ---------------------------------------------------------------------------------------------------------------------------------- Investment securities -taxable (1) 34,663 50,676 41,506 125,249 252,094 428,324 85,408 --- 765,826 - - ----------------------------------------------------------------------------------------------------------------------------------- Investment securities -nontaxable 10,026 6,052 5,669 47,659 69,406 95,529 41,442 --- 206,377 - - ----------------------------------------------------------------------------------------------------------------------------------- Mortgages held for sale --- 60,420 --- --- 60,420 --- --- --- 60,420 - - ----------------------------------------------------------------------------------------------------------------------------------- Loans: - - ----------------------------------------------------------------------------------------------------------------------------------- Commercial 388,588 45,518 56,222 71,687 562,015 129,890 32,037 --- 723,942 - - ----------------------------------------------------------------------------------------------------------------------------------- Real estate (2) 354,899 106,651 178,680 269,522 909,752 815,018 91,408 --- 1,816,178 - - ----------------------------------------------------------------------------------------------------------------------------------- Installment 170,521 29,420 38,899 69,305 308,145 265,299 76,922 --- 650,366 - - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 914,008 181,589 273,801 410,514 1,779,912 1,210,207 200,367 --- 3,190,486 - - ----------------------------------------------------------------------------------------------------------------------------------- Reserve for loan losses --- --- --- --- --- --- --- (40,411) (40,411) - - ----------------------------------------------------------------------------------------------------------------------------------- Total loans, net 914,008 181,589 273,801 410,514 1,779,912 1,210,207 200,367 (40,411) 3,150,075 - - ----------------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net --- --- --- --- --- --- --- 103,271 103,271 - - ----------------------------------------------------------------------------------------------------------------------------------- Other assets --- --- --- --- --- --- --- 100,458 100,458 - - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 961,337 $ 298,737 $ 320,976 $ 583,422 $2,164,472 $1,734,060 $ 327,217 $ 366,444 $4,592,193 =================================================================================================================================== Liabilities and Shareholders' Equity - - ----------------------------------------------------------------------------------------------------------------------------------- Deposits: - - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing $ --- $ --- $ --- $ --- $ --- $ --- $ --- $ 571,751 $ 571,751 - - ----------------------------------------------------------------------------------------------------------------------------------- Interest bearing 1,650,750 268,883 314,979 464,146 2,698,758 658,459 49,141 --- 3,406,358 - - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 1,650,750 268,883 314,979 464,146 2,698,758 658,459 49,141 571,751 3,978,109 - - ----------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 132,004 --- --- --- 132,004 --- --- --- 132,004 - - ----------------------------------------------------------------------------------------------------------------------------------- Long-term borrowings --- --- --- 23,000 23,000 30,251 --- --- 53,251 - - ----------------------------------------------------------------------------------------------------------------------------------- Other liabilities --- --- --- --- --- --- --- 62,921 62,921 - - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,782,754 268,883 314,979 487,146 2,853,762 688,710 49,141 634,672 4,226,285 - - ----------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity --- --- --- --- --- --- --- 365,908 365,908 - - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,782,754 $ 268,883 $ 314,979 $ 487,146 $2,853,762 $ 688,710 $ 49,141 $1,000,580 $4,592,193 =================================================================================================================================== Interest rate sensitive gap-period $ (821,417) $ 29,854 $ 5,997 $ 96,276 $ (689,290) $1,045,350 $ 278,076 $ (634,136) $ --- - - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap-cumulative $ (821,417) $ (791,563) $ (785,566) $ (689,290) $ (689,290) $ 356,060 $ 634,136 $ --- $ --- ===================================================================================================================================
(1) Includes investment securities available for sale. (2) Includes real estate-mortgage and real estate-construction. At December 31, 1993, for maturities of one year or less, Valley was in a cumulative net liability-sensitive position of $689.290 million. Included in the $2.854 billion of rate sensitive liabilities are $1.272 billion of savings, N.O.W. and money market deposits, which do not reprice in the same proportion as rate-sensitive assets. Rate-sensitive assets reprice with changes to general market indicators, such as T-bill and prime rates. The ratio of rate-sensitive assets to rate-sensitive liabilities within the one year time frame was .76, which shows liabilities at 1993 year end slightly more interest rate sensitive than assets. However, within the time frame of one year, there are managed gaps which provide the flexibility to change the positions should interest rates change significantly. Valley's net interest margin for the year ended 1993 was 4.47%, compared to 4.61% for 1992. Valley's hedging activities are not material to the consolidated financial statements. Capital Resources Shareholders' equity increased to $365.908 million at December 31, 1993 compared to $326.776 million at December 31, 1992 and $269.849 million at December 31, 1991. The increase from 1992 in shareholders' equity of $39.132 million was comprised mainly of $26.889 million in net earnings retained. The Federal Reserve Board has adopted final capital guidelines. They relate capital to level of risk by assigning risk weightings to assets and off-balance sheet items. Capital is measured by two risk-based ratios: Tier I capital, and total capital which includes Tier II capital. Tier I capital consists of shareholders' equity and minority interests reduced for certain intangibles, while Tier II includes certain long-term borrowings and reserve for loan losses up to 1.25% of gross risk-weighted assets. The rules require minimums of 4% and 8% for Tier I and total capital, respectively. Table 17 shows Valley's consolidated capital structure and risk-based capital ratios at December 31, 1993 and 1992. Valley's Tier I ratio of 10.05% at year end is well above the regulatory minimum of 4%. The total capital ratio of 11.27% at December 31, 1993 is also well above the regulatory minimum of 8%. Table 17: Capital Resources December 31, December 31, 1993 1992 - - --------------------------------------------------------------------- Capital Structure - - --------------------------------------------------------------------- Long-term debt $ 53,251,185 $ 68,310,434 - - --------------------------------------------------------------------- Shareholders' equity 365,907,853 326,775,936 - - --------------------------------------------------------------------- Total capitalization $ 419,159,038 $ 395,086,370 - - --------------------------------------------------------------------- Tangible equity $ 330,653,918 $ 291,303,184 - - --------------------------------------------------------------------- Intangible Assets - - --------------------------------------------------------------------- Goodwill - parent $ 17,362,541 $ 17,143,773 - - --------------------------------------------------------------------- Core deposit premium - parent 1,512,782 2,178,052 - - --------------------------------------------------------------------- Subsidiaries: - - --------------------------------------------------------------------- Goodwill 13,621,866 12,341,694 - - --------------------------------------------------------------------- Core deposit premium 2,514,175 3,265,879 - - --------------------------------------------------------------------- Other identifiable intangibles 242,571 543,354 - - --------------------------------------------------------------------- Total intangibles $ 35,253,935 $ 35,472,752 ===================================================================== Risk-Based Capital - - --------------------------------------------------------------------- Tier I capital: - - --------------------------------------------------------------------- Shareholders' equity $ 365,907,853 $ 326,775,936 - - --------------------------------------------------------------------- Minority interest 330,030 161,570 - - --------------------------------------------------------------------- Less intangibles (35,253,935) (35,472,752) - - --------------------------------------------------------------------- Total Tier I capital $ 330,983,948 $ 291,464,754 ===================================================================== Tier II capital: - - --------------------------------------------------------------------- Allowable reserve for loan losses $ 40,410,907 $ 37,920,674 - - --------------------------------------------------------------------- Qualifying long-term debt --- 3,000,000 - - --------------------------------------------------------------------- Total Tier II capital $ 40,410,907 $ 40,920,674 ===================================================================== Total capital $ 371,394,855 $ 332,385,428 ===================================================================== Risk-Weighted Assets $3,294,529,000 $3,089,094,000 - - --------------------------------------------------------------------- Risk-based capital ratios: - - --------------------------------------------------------------------- Tier I 10.05% 9.44% - - --------------------------------------------------------------------- Total 11.27% 10.76% - - --------------------------------------------------------------------- Tier I Leverage 7.26% 6.71% ===================================================================== As discussed in "Noninterest Expense", the FDIC implemented a risk- based deposit insurance fee assessment program beginning January 1, 1993. The FDIC has created three risk classifications for capital. These three classifications are then used as one of the factors in determining the amount per $100 of domestic deposits each bank will pay in FDIC deposit insurance premiums. The classification is based on a bank's Tier I capital, total capital and Tier I leverage (Tier I capital as a percent of total assets) ratios. The classifications and qualifiers for each are: Well capitalized: Total risk-based capital ratio greater than 10%, and Tier I capital ratio greater than 6%, and Tier I leverage ratio greater than 5%. Adequately capitalized: Failing the well capitalized test, and Total risk-based capital ratio greater than 8%, and Tier I capital ratio greater than 4%, and Tier I leverage ratio greater than 4% Undercapitalized: Failing both well and adequately capitalized tests A depository institution falling within any one of the foregoing capital categories will be assessed one of three different premium rates established for that category, depending on the composite rating it is assigned by its primary regulatory examiner. Under this structure, a "well capitalized" institution may be assessed a premium rate of $.23, $.26 or $.29, depending on its overall composite rating. The corresponding rates for an "adequately capitalized" institution are $.26, $.29 and $.30, and for an "under capitalized" institution the rates are $.29, $.30 and $.31. Valley's FDIC deposit insurance premium rate, for the first six months of 1993, was $.23 per $100 of its total domestic deposits for all but one of its banks. At this time, all of Valley's banks are paying the minimum FDIC insurance rate. Valley intends to maintain capital levels and otherwise manage its banks so as to minimize the FDIC deposit insurance expense. During each of 1993 and 1992, $5.0 million of 11.25% senior notes issued in 1985 were paid at maturity. Also in 1993, Valley prepaid the remaining $10 million. On July 1, 1992, Valley completed the acquisition of United in a merger/conversion transaction. In conjunction with this acquisition, Valley issued 1,002,225 shares of its common stock at $32.75 ($21.83 post-split basis) per share, receiving $29.865 million in net proceeds. Concurrent with United's conversion to stock form, United issued shares of its newly authorized common stock to Valley in exchange for $18.0 million of the net proceeds of Valley's stock issuance. Net proceeds received by Valley from the sale of common stock in excess of the $18.0 million were retained by Valley and are being used for general corporate purposes. On November 6, 1993, Valley completed the acquisition of Pierce County Bank & Trust Company (Pierce County). Pierce County, with December 31, 1993 assets of $112 million, serves western Wisconsin markets through seven branch offices. The acquisition of Pierce County was funded primarily through internal means. Shareholders have benefitted from Valley's growth. Valley's policy is to increase dividends as earnings increase, with a targeted payout of approximately 35% to 40% of net income. Table 18 shows the relationship between earnings and dividends per share for the last five years (restated for the three for two stock split distributed on August 27, 1993). In order to maintain their historical integrity, these figures have not been restated for poolings- of-interests and a change in accounting principle. Restated information is shown under "Selected Financial Data" elsewhere in this report. Table 18: Historical Dividend Payout Per Share ---------------------- Dividend Net Dividends Payout Income Paid Ratio - - --------------------------------------------------------- 1993 $2.26 $.94 41% - - --------------------------------------------------------- 1992 2.07 .85 41 - - --------------------------------------------------------- 1991 1.67 .80 48 - - --------------------------------------------------------- 1990 1.61 .75 46 - - --------------------------------------------------------- 1989 1.67 .69 42 ========================================================= During 1993, Valley increased its quarterly dividend from an annualized $.85 (adjusted) per share in the fourth quarter of 1992 to an annualized $.94 (adjusted) per share in the fourth quarter of 1993. This 1993 dividend increase marks the 26th consecutive year that Valley increased dividends to shareholders. Table 19 shows quarterly information relative to Valley stock and related shareholders' equity for 1993 and 1992. Table 19: Market Price of Common Stock and Related Security Matters***
Common Per Share Stock Price Range* Shares --------------------------- ------------------- Shareholders' Outstanding Net Dividends** Book Equity (in Income (Historical) Value Low High Quarter Ended (in millions) thousands) - - ------------------------------------------------------------------------------------------------- December 31, 1993 $366 20,726 $.58 $.2350 $17.65 $35.00 $39.63 - - ------------------------------------------------------------------------------------------------- September 30, 1993 350 20,343 .57 .2350 17.23 28.25 38.00 - - ------------------------------------------------------------------------------------------------- June 30, 1993 343 20,296 .57 .2350 16.88 25.83 30.50 - - ------------------------------------------------------------------------------------------------- March 31, 1993 335 20,222 .54 .2350 16.55 24.83 29.50 - - ------------------------------------------------------------------------------------------------- December 31, 1992 327 20,122 .55 .2125 16.24 23.00 26.00 - - ------------------------------------------------------------------------------------------------- September 30, 1992 319 20,041 .57 .2125 15.91 22.17 26.50 - - ------------------------------------------------------------------------------------------------- June 30, 1992 281 18,481 .50 .2125 15.21 20.00 22.50 - - ------------------------------------------------------------------------------------------------- March 31, 1992 275 18,458 .45 .2125 14.92 18.00 21.67 =================================================================================================
* High and low sales prices in the NASDAQ National Market System as reported by NASDAQ. ** See note 9 of notes to consolidated financial statements as to restrictions upon the payment of cash dividends. *** Restated for the three for two stock split, effected in the form of a 50% stock dividend, distributed on August 27, 1993. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of Valley Bancorporation: We have audited the accompanying consolidated statements of financial position of Valley Bancorporation (a Wisconsin corporation) and subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Corporation'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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 Valley Bancorporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Notes 11 and 12 to the consolidated financial statements, effective January 1, 1993, the Corporation changed its methods of accounting for income taxes and post retirement benefits other than pensions. ARTHUR ANDERSEN & CO. Milwaukee, Wisconsin, January 18, 1994. Consolidated Statements of Financial Position
December 31, -------------------------------------- Assets 1993 1992 - - ----------------------------------------------------------------------------------------------- Cash and due from banks $ 202,369,683 $ 230,858,324 - - ----------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under resale agreements 2,640,000 16,116,620 - - ----------------------------------------------------------------------------------------------- Total cash and cash equivalents 205,009,683 246,974,944 - - ----------------------------------------------------------------------------------------------- Interest-bearing deposits with other banks 756,010 3,949,763 - - ----------------------------------------------------------------------------------------------- Investments: (Note 5) - - ----------------------------------------------------------------------------------------------- Investment securities available for sale (market value $772,580,974 and $39,357,276, respectively) 765,825,981 38,341,347 - - ----------------------------------------------------------------------------------------------- Investment securities held to maturity (market value $209,076,438 and $886,980,723, respectively) 206,376,848 876,988,861 - - ----------------------------------------------------------------------------------------------- Total investments 972,202,829 915,330,208 - - ----------------------------------------------------------------------------------------------- Mortgages held for sale 60,420,582 38,430,117 - - ----------------------------------------------------------------------------------------------- Loans: (Note 6) - - ----------------------------------------------------------------------------------------------- Commercial 723,941,280 746,813,049 - - ----------------------------------------------------------------------------------------------- Real estate-construction 119,240,431 114,949,293 - - ----------------------------------------------------------------------------------------------- Real estate-mortgage 1,696,927,013 1,597,197,891 - - ----------------------------------------------------------------------------------------------- Installment (primarily simple interest) 650,376,812 558,377,513 - - ----------------------------------------------------------------------------------------------- Total loans 3,190,485,536 3,017,337,746 - - ----------------------------------------------------------------------------------------------- Reserve for loan losses (Note 7) (40,410,907) (37,920,674) - - ----------------------------------------------------------------------------------------------- Total loans, net 3,150,074,629 2,979,417,072 - - ----------------------------------------------------------------------------------------------- Premises and equipment, net 103,271,225 103,484,643 - - ----------------------------------------------------------------------------------------------- Other assets 100,457,657 96,719,274 - - ----------------------------------------------------------------------------------------------- Total assets $4,592,192,615 $4,384,306,021 =============================================================================================== Liabilities and Shareholders' Equity - - ----------------------------------------------------------------------------------------------- Deposits: - - ----------------------------------------------------------------------------------------------- Noninterest-bearing $ 571,750,622 $ 537,844,699 - - ----------------------------------------------------------------------------------------------- Interest-bearing 3,406,358,245 3,294,779,422 - - ----------------------------------------------------------------------------------------------- Total deposits 3,978,108,867 3,832,624,121 - - ----------------------------------------------------------------------------------------------- Short-term borrowings (Note 8) 132,004,071 86,894,354 - - ----------------------------------------------------------------------------------------------- Long-term borrowings (Note 9) 53,251,185 68,310,434 - - ----------------------------------------------------------------------------------------------- Other liabilities 62,920,639 69,701,176 - - ----------------------------------------------------------------------------------------------- Total liabilities 4,226,284,762 4,057,530,085 - - ----------------------------------------------------------------------------------------------- Shareholders' equity: - - ----------------------------------------------------------------------------------------------- Preferred stock, cumulative, par value $1 per share, 1,000,000 shares authorized; none issued (Note 3) --- --- - - ----------------------------------------------------------------------------------------------- Common stock, par value $.50 per share, 40,000,000 shares authorized; 20,725,790 and 13,414,513 shares issued and outstanding, respectively (Note 10) 10,362,895 6,707,257 - - ----------------------------------------------------------------------------------------------- Capital surplus 213,230,599 204,642,969 - - ----------------------------------------------------------------------------------------------- Retained earnings 142,314,359 115,425,710 - - ----------------------------------------------------------------------------------------------- Total shareholders' equity 365,907,853 326,775,936 - - ----------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $4,592,192,615 $4,384,306,021 ===============================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. Consolidated Statements of Income
Years ended December 31, --------------------------------------------- Interest Income 1993 1992 1991 - - ----------------------------------------------------------------------------------------------- Interest and fees on loans $262,262,797 $263,738,012 $263,527,130 - - ----------------------------------------------------------------------------------------------- Interest on federal funds sold and securities purchased under resale agreements 131,974 903,372 3,696,841 - - ----------------------------------------------------------------------------------------------- Interest on interest-bearing deposits with other banks 125,800 700,703 1,345,668 - - ----------------------------------------------------------------------------------------------- Interest on investment securities-taxable 38,525,615 42,096,133 44,197,429 - - ----------------------------------------------------------------------------------------------- Interest on investment securities-nontaxable 10,210,998 14,189,321 18,991,320 - - ----------------------------------------------------------------------------------------------- Total interest income 311,257,184 321,627,541 331,758,388 - - ----------------------------------------------------------------------------------------------- Interest Expense - - ----------------------------------------------------------------------------------------------- Deposits 126,027,134 143,488,168 176,957,337 - - ----------------------------------------------------------------------------------------------- Short-term borrowings 3,097,149 4,098,829 5,433,896 - - ----------------------------------------------------------------------------------------------- Long-term borrowings 6,722,608 7,500,892 7,761,432 - - ----------------------------------------------------------------------------------------------- Total interest expense 135,846,891 155,087,889 190,152,665 - - ----------------------------------------------------------------------------------------------- Net Interest Income 175,410,293 166,539,652 141,605,723 - - ----------------------------------------------------------------------------------------------- Provision for loan losses (Note 7) 8,969,600 8,394,670 8,368,810 - - ----------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 166,440,693 158,144,982 133,236,913 - - ----------------------------------------------------------------------------------------------- Noninterest Income - - ----------------------------------------------------------------------------------------------- Service charges on deposit accounts 17,167,120 15,707,029 13,605,252 - - ----------------------------------------------------------------------------------------------- Trust service fees 12,631,254 12,455,207 10,927,066 - - ----------------------------------------------------------------------------------------------- Other service charges, commissions and fees 11,839,320 11,042,772 8,673,142 - - ----------------------------------------------------------------------------------------------- Insurance related 7,325,368 7,572,980 6,671,882 - - ----------------------------------------------------------------------------------------------- Credit card 7,185,534 6,147,392 5,466,209 - - ----------------------------------------------------------------------------------------------- Gain on sale of mortgage loans 6,786,265 3,274,302 1,412,456 - - ----------------------------------------------------------------------------------------------- Net securities gains 497,202 863,497 724,829 - - ----------------------------------------------------------------------------------------------- Other 2,629,398 2,228,789 537,268 - - ----------------------------------------------------------------------------------------------- Total noninterest income 66,061,461 59,291,968 48,018,104 - - ----------------------------------------------------------------------------------------------- Noninterest Expense - - ----------------------------------------------------------------------------------------------- Salaries and wages 72,199,853 66,541,506 59,578,562 - - ----------------------------------------------------------------------------------------------- Pensions and other employee benefits (Note 12) 20,406,264 23,636,183 17,710,095 - - ----------------------------------------------------------------------------------------------- Equipment 16,614,615 16,133,516 13,639,011 - - ----------------------------------------------------------------------------------------------- Net occupancy 12,816,126 11,597,853 10,773,016 - - ----------------------------------------------------------------------------------------------- FDIC insurance 8,333,361 7,922,601 6,640,357 - - ----------------------------------------------------------------------------------------------- Credit card 3,896,283 3,325,331 2,961,118 - - ----------------------------------------------------------------------------------------------- Other 30,214,987 30,944,588 29,696,331 - - ----------------------------------------------------------------------------------------------- Total noninterest expense 164,481,489 160,101,578 140,998,490 - - ----------------------------------------------------------------------------------------------- Income Before Income Taxes 68,020,665 57,335,372 40,256,527 - - ----------------------------------------------------------------------------------------------- Provision for income taxes (Note 11) 22,117,899 17,555,947 9,590,464 - - ----------------------------------------------------------------------------------------------- Net Income $ 45,902,766 $ 39,779,425 $ 30,666,063 =============================================================================================== - - ----------------------------------------------------------------------------------------------- Net Income Per Share* (Note 1) $2.26 $2.07 $1.67 ===============================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. *Per share data has been restated for the three for two stock split, effected in the form of a 50% stock dividend, distributed on August 27, 1993. Consolidated Statements of Shareholders' Equity
Common Stock Capital Retained Shares Par Value Surplus Earnings Total - - -------------------------------------------------------------------------------------------------------- Balance, December 31, 1990 12,067,273 $ 6,033,637 $170,285,922 $ 76,082,685 $252,402,244 - - -------------------------------------------------------------------------------------------------------- Net income --- --- --- 30,666,063 30,666,063 - - -------------------------------------------------------------------------------------------------------- Cash dividends --- --- --- (14,676,553) (14,676,553) - - -------------------------------------------------------------------------------------------------------- Common stock issued pursuant to stock option plans 103,916 51,958 1,413,298 --- 1,465,256 - - -------------------------------------------------------------------------------------------------------- Acquisition of savings associations 174,274 87,137 2,355,470 --- 2,442,607 - - -------------------------------------------------------------------------------------------------------- Treasury stock purchased (100,400) (50,200) (2,637,828) --- (2,688,028) - - -------------------------------------------------------------------------------------------------------- Tax benefit on stock options --- --- 236,960 --- 236,960 - - -------------------------------------------------------------------------------------------------------- Balance, December 31, 1991 12,245,063 6,122,532 171,653,822 92,072,195 269,848,549 - - -------------------------------------------------------------------------------------------------------- Net income --- --- --- 39,779,425 39,779,425 - - -------------------------------------------------------------------------------------------------------- Cash dividends --- --- --- (16,425,910) (16,425,910) - - -------------------------------------------------------------------------------------------------------- Common stock issued pursuant to stock option plans 167,225 83,612 2,857,647 --- 2,941,259 - - -------------------------------------------------------------------------------------------------------- Acquisition of a mutual savings association 1,002,225 501,113 29,363,909 --- 29,865,022 - - -------------------------------------------------------------------------------------------------------- Tax benefit on stock options --- --- 767,591 --- 767,591 - - -------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 13,414,513 6,707,257 204,642,969 115,425,710 326,775,936 - - -------------------------------------------------------------------------------------------------------- Net income --- --- --- 45,902,766 45,902,766 - - -------------------------------------------------------------------------------------------------------- Cash dividends --- --- --- (19,014,117) (19,014,117) - - -------------------------------------------------------------------------------------------------------- Three for two stock split 6,776,745 3,388,373 (3,388,373) --- --- - - -------------------------------------------------------------------------------------------------------- Common stock issued pursuant to stock option plans 534,532 267,265 8,700,097 --- 8,967,362 - - -------------------------------------------------------------------------------------------------------- Tax benefit on stock options --- --- 3,275,906 --- 3,275,906 - - -------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 20,725,790 $10,362,895 $213,230,599 $142,314,359 $365,907,853 ========================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. Consolidated Statements of Cash Flows
Years ended December 31, --------------------------------------------- 1993 1992 1991 - - ----------------------------------------------------------------------------------------------- Operating Activities - - ----------------------------------------------------------------------------------------------- Net Income $ 45,902,766 $ 39,779,425 $ 30,666,063 - - ----------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: - - ----------------------------------------------------------------------------------------------- Provision for loan losses 8,969,600 8,394,670 8,368,810 - - ----------------------------------------------------------------------------------------------- Origination of loans held for resale (578,203,000) (431,957,920) (213,687,051) - - ----------------------------------------------------------------------------------------------- Proceeds from sale of loans held for resale 563,311,868 418,955,157 193,508,000 - - ----------------------------------------------------------------------------------------------- Depreciation 13,527,266 12,678,633 10,558,110 - - ----------------------------------------------------------------------------------------------- Amortization/accretion of intangibles 1,929,901 2,692,058 3,389,334 - - ----------------------------------------------------------------------------------------------- Accretion of valuation adjustments (1,633,056) (1,706,803) (289,935) - - ----------------------------------------------------------------------------------------------- Amortization of premium on investment securities 9,243,857 8,173,647 5,955,940 - - ----------------------------------------------------------------------------------------------- Accretion of discount on investment securities (251,184) (637,962) (1,093,198) - - ----------------------------------------------------------------------------------------------- Provision for (benefit of) deferred taxes 2,080,736 (403,910) 615,253 - - ----------------------------------------------------------------------------------------------- Other, net (14,717,846) (13,696,667) (1,392,067) - - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 50,160,908 42,270,328 36,599,259 - - ----------------------------------------------------------------------------------------------- Investing Activities - - ----------------------------------------------------------------------------------------------- Proceeds from sales of investment securities 11,243,616 40,701,125 66,118,985 - - ----------------------------------------------------------------------------------------------- Proceeds from matured investment securities 709,954,827 488,933,665 368,579,752 - - ----------------------------------------------------------------------------------------------- Purchases of investment securities (733,713,704) (538,184,145) (498,403,247) - - ----------------------------------------------------------------------------------------------- Net decrease in time deposits with other banks 3,193,913 22,602,102 22,950,945 - - ----------------------------------------------------------------------------------------------- Net increase in loans (134,520,885) (155,018,509) (79,992,227) - - ----------------------------------------------------------------------------------------------- Cash of banks acquired, net of payment for purchase (Note 2) (11,136,184) 6,124,766 19,258,492 - - ----------------------------------------------------------------------------------------------- Purchase of premises and equipment, net of disposals (10,601,642) (9,697,724) (15,179,094) - - ----------------------------------------------------------------------------------------------- Recoveries of loans charged off 3,033,612 2,753,544 1,929,176 - - ----------------------------------------------------------------------------------------------- Net cash used by investing activities (162,546,447) (141,785,176) (114,737,218) - - ----------------------------------------------------------------------------------------------- Financing Activities - - ----------------------------------------------------------------------------------------------- Net increase in deposits 50,555,025 123,379,231 73,126,601 - - ----------------------------------------------------------------------------------------------- Net increase (decrease) in short-term borrowings 44,971,257 (46,866,387) 19,249,945 - - ----------------------------------------------------------------------------------------------- Repayment of long-term borrowings (15,059,249) (7,531,875) (5,456,458) - - ----------------------------------------------------------------------------------------------- Net proceeds from issuance of common stock 8,967,362 32,806,281 3,907,863 - - ----------------------------------------------------------------------------------------------- Repurchase of common stock --- --- (2,688,028) - - ----------------------------------------------------------------------------------------------- Dividends paid (19,014,117) (16,425,910) (14,676,553) - - ----------------------------------------------------------------------------------------------- Net cash provided by financing activities 70,420,278 85,361,340 73,463,370 - - ----------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (41,965,261) (14,153,508) (4,674,589) - - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 246,974,944 261,128,452 265,803,041 - - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $205,009,683 $246,974,944 $261,128,452 =============================================================================================== Supplemental Disclosure of Cash Flow Information - - ----------------------------------------------------------------------------------------------- Cash Paid for: - - ----------------------------------------------------------------------------------------------- Interest (net of amount capitalized) $136,820,342 $163,932,193 $193,803,558 - - ----------------------------------------------------------------------------------------------- Income taxes 19,098,755 17,457,959 7,643,496 - - ----------------------------------------------------------------------------------------------- Supplemental Disclosure of Non-Cash Investing and - - ----------------------------------------------------------------------------------------------- Financing Activities: - - ----------------------------------------------------------------------------------------------- Loans charged off $ 10,679,932 $ 8,752,299 $ 8,822,921 - - ----------------------------------------------------------------------------------------------- Loans transferred to other real estate owned 2,380,632 6,508,518 5,281,610 ===============================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies: Basis of Consolidation The consolidated financial statements include the accounts of Valley Bancorporation (Valley) and subsidiaries. All material intercompany transactions and balances are eliminated in consolidation. Certain amounts in the 1991 consolidated financial statements have been reclassified to conform to the 1992 and 1993 presentation. The accounting and reporting policies of Valley conform to generally accepted accounting principles and to general practice within the banking industry. Investment Securities Until the end of the third quarter of 1992, all of Valley's investment securities were carried at amortized cost. In December of 1992, Valley evaluated the conditions under which it might sell any of its investment securities. As a result, Valley decided that certain types of investment securities might be sold in the future as part of Valley's efforts to manage interest rate risk or in response to changes in interest rates or other economic factors. Based upon this decision, Valley has classified these selected investments as Investment Securities Available for Sale. While Valley has no current intention of selling these securities, they may not beheld to maturity. In December of 1993, Valley, in anticipation of adopting SFAS 115 on January 1, 1994, conducted a review of its investment portfolio. This review resulted in reclassifications of Investment Securities Available for Sale and Investment Securities Held to Maturity. Investment Securities Held to Maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts. Investment Securities Available for Sale are carried at the lower of amortized cost or market. Short-term investments acquired as trading securities are carried at market value. Securities, when purchased, are designated as Trading, Investment Securities Held to Maturity, or Investment Securities Available for Sale and remain in that category until they are sold or mature. The specific identification method is used in determining the cost of securities sold. Valley has no mortgage derivatives. Mortgages Held for Sale Mortgage loans held for sale to investors are carried at the lower of cost or market, in the aggregate, based on outstanding firm commitments received for such loans or on current market prices. Reserve for Loan Losses The reserve for loan losses is an estimated amount based on an analysis of the loan portfolios and current economic conditions and, in management's judgment, represents an amount adequate to provide for potential losses. Ultimate losses may vary from the current estimates and, as adjustments become necessary, the reserve for loan losses is adjusted in the periods in which estimates are revised or losses become known. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily on a straight-line basis and is charged to operating expense over the estimated useful life of each type of asset. Interest expense is capitalized on major construction projects using the subsidiaries' cost of funds. Interest capitalized in 1993 and in 1992 was not material. Interest capitalized in 1991 was $621,174. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and securities purchased under resale agreements. Capitalized Conversion Costs Capitalized conversion costs associated with Valley's system conversion project completed in July 1991 are amortized on a straight line basis over five to ten year periods. Approximately $2.247 million, $2.368 million, and $1.469 million were amortized in 1993, 1992, and 1991 respectively. The unamortized balances of $11.686 million and $13.933 million in 1993 and 1992 respectively are included in premises and equipment in the Consolidated Statements of Financial Position. Intangibles Intangibles, primarily goodwill and customer deposit base, from acquisitions accounted for as purchase transactions are amortized on a straight-line basis over periods of 10 to 25 years. Valley has applied push- down accounting for all purchase accounting transactions consummated after December 31, 1988. As of December 31, 1993, Valley had approximately $35.3 million of intangible assets which have arisen primarily from purchase transactions. Amortization of approximately $3.506 million, $3.499 million, and $3.389 million is included in the 1993, 1992 and 1991 results of operations. Valley also has approximately $14.0 million of negative goodwill included in other liabilities as of December 31, 1993, the majority of which arose from the 1992 acquisition of United Savings and Loan Association (United) which is being accreted on a straight-line base over a period of 10 years. Accretion of approximately $1.576 million and $.807 million is included in the 1993 and 1992 results of operations, respectively. Interest and Fees on Loans Interest on loans is recognized as income based on loan principal outstanding. Fees and certain incremental direct costs of originating loans are deferred and amortized over the contractual term of the loans as an adjustment to yield. Unamortized net fees and costs are reported as part of the loan balance outstanding. There is no accrual of interest income on loans where collection is doubtful. Net Income Per Share Net income per share was computed based on the weighted average number of common shares outstanding (20,325,524 in 1993, 19,243,509 in 1992, and 18,335,847 in 1991 post-split basis). A three for two stock split, effected in the form of a 50% stock dividend, was declared July 20, 1993, payable August 27, 1993 to shareholders of record August 6, 1993. The common stock per share and average share information for years 1992 and prior have been retroactively restated for the stock split. The effect of outstanding stock options on net income per share is not material. 2. Business Combinations In January 1991, Valley acquired Exchange State Bank, La Crosse, a $55 million-asset bank. In April 1991, Valley completed the stock acquisitions of the $90 million-asset Western Federal Savings & Loan Association, Sparta (Western) and the $180 million-asset Great American Savings Bank, F.S.B., Milwaukee (Great American). Valley issued and sold 83,235 (124,853 post- split basis) and 91,039 (136,559 post-split basis) common shares, respectively, in connection with its acquisitions of Western and Great American. An initial contribution to capital, which included the proceeds from the sale of this stock, of $4.9 million was made to Western and $8.4 million to Great American. In 1991, additional contributions were made to capital at Western and Great American in the amounts of $200,000 and $4.7 million, respectively. On July 1, 1992, Valley completed the acquisition of the $320 million- asset United, headquartered in Sheboygan, Wisconsin. In this transaction, United converted from a mutual to a stock institution and concurrently issued 1,000 shares of its stock to Valley, thereby becoming a wholly-owned subsidiary of Valley. As part of the transaction, Valley sold to United's account holders, certain other eligible subscribers and the general public, 1,002,225 (1,503,338 post-split basis) shares of its common stock at a price of $32.75 ($21.83 post-split basis) per share, receiving $29.865 million in net proceeds, of which $18.0 million was infused into United, with the remainder of the proceeds to be used for general corporate purposes. On November 6, 1993, Valley completed the acquisition of Pierce County Bank and Trust Company (Pierce County). Pierce County, with December 31, 1993 assets of $112 million, serves western Wisconsin markets through seven branch offices. These transactions were accounted for as purchases, and therefore are not included in Valley's results of operations or statements of financial position prior to their dates of acquisition. The following table shows the fair value of assets acquired, fair value of liabilities assumed and net cash paid or received for purchase transactions consummated in 1993, 1992 and 1991, respectively: For the Year Ended December 31, ----------------------------------------- 1993 1992 1991 - - ---------------------------------------------------------------------------- Fair value of assets acquired $112,101,418 $298,502,421 $323,621,521 - - ---------------------------------------------------------------------------- Fair value of liabilities assumed (97,423,633) (298,502,421) (317,735,492) - - ---------------------------------------------------------------------------- Cash paid for acquisitions 14,677,735 --- 5,886,029 - - ---------------------------------------------------------------------------- Cash received in acquisitions (3,541,551) (6,124,766) (25,144,521) - - ---------------------------------------------------------------------------- Net cash paid (received) $11,136,184 $ (6,124,766) $(19,258,492) ============================================================================ The pro forma impact on Valley's results of operations for the period ended December 31, 1992, had the United transaction described above been consummated as of January 1, 1992, is as follows: For the year ended December 31, (Unaudited) ------------ (dollars in thousands) 1992 ------------------------------------------------- Net interest income $173,685 ------------------------------------------------- Provision for loan losses 13,487 ------------------------------------------------- Net Income 38,292 ------------------------------------------------- Net Income per share $ 2.87 ================================================= Valley and Marshall & Ilsley Corporation (M&I) have entered into an Agreement and Plan of Merger, dated as of September 19, 1993 (the "Merger Agreement"), which provides for the combination of the two companies through a merger of Valley into M&I (the "Merger"). Under the Merger Agreement, each share of Valley common stock, par value $.50 per share ("Valley Common Stock"), outstanding at the time the Merger is consummated (other than any shares owned by M&I for its own account) will be converted into the right to receive 1.72 (the "Exchange Rate") shares of M&I common stock, par value $1.00 per share ("M&I Common Stock"), in a tax-free reorganization to be accounted for as a pooling of interests. Resulting fractional share interests will be paid in cash in lieu of issuing fractional shares. Then outstanding Valley employee and director stock options will be converted at the Exchange Rate into options to acquire M&I Common Stock. The consummation of the Merger, which is currently expected to occur in the second quarter of 1994, is subject to various conditions set forth in the Merger Agreement, including approval by the shareholders of both companies and all requisite regulatory approvals. In connection with the Merger Agreement, the parties entered into a Stock Option Agreement, dated as of September 19, 1993 (the "Stock Option Agreement"), by which Valley granted M&I an option (the "Option") to purchase up to 4,045,795 newly issued shares of Valley Common Stock (19.9% of the number of shares outstanding and subject to adjustment to maintain that percentage) at an exercise price of $35.75 per share, exercisable upon the occurrence of certain events and subject to certain conditions set forth in the Stock Option Agreement. The Stock Option Agreement also provides M&I the right to receive a termination fee to the extent that the Option has not been exercised after the occurrence of an event which makes the Option exercisable. The following unaudited pro forma data combines the results of operations for the M&I and Valley, giving effect to the merger as if it had been consummated at December 31, 1990. For the Year Ended December 31, ----------------------------------------- (dollars in thousands) 1993 1992 1991 - - ---------------------------------------------------------------------------- Net interest income $484,588 $474,345 $430,573 - - ---------------------------------------------------------------------------- Income before cumulative effects of changes in accounting principles (operating income) 171,487 156,270 130,013 - - ---------------------------------------------------------------------------- Net income 171,487 147,266 130,013 - - ---------------------------------------------------------------------------- Income per common share - - ---------------------------------------------------------------------------- Primary - - ---------------------------------------------------------------------------- Operating income 1.67 1.55 1.33 - - ---------------------------------------------------------------------------- Net income 1.67 1.46 1.33 - - ---------------------------------------------------------------------------- Fully diluted - - ---------------------------------------------------------------------------- Operating income 1.60 1.48 1.27 - - ---------------------------------------------------------------------------- Net income 1.60 1.40 1.27 ============================================================================ Certain divestitures by M&I and Valley will be required in order to obtain regulatory approvals. M&I has filed applications with such authorities proposing the divestiture of certain bank branches in the State of Wisconsin with total deposits of approximately $300 million. It is anticipated that federal regulators will require M&I to obtain commitments for the divestitures prior to consummation of the Merger and complete the divestitures within six months of the consummation of the Merger. Valley does not anticipate that such divestitures will have a material impact on the consolidated financial statements. Estimates of employee severance and contract costs, write-downs and write-offs of duplicative facilities, equipment and data processing software associated with the Merger will result in an estimated one-time charge of approximately $80 million ($48 million net of tax) in 1994. Since the estimated charge is nonrecurring, it has not been reflected in the pro forma data set forth above. 3. Shareholder Rights Plan On October 21, 1988, Valley declared a distribution of one preferred share purchase right (a "Right") for each outstanding share of Valley Common Stock. As a result of the three for two stock split on August 27, 1993, each outstanding share of Valley Common Stock now evidences two-thirds of a Right. Detailed provisions of the Rights are set forth in a Rights Agreement, dated as of October 21, 1988, between Valley and The First National Bank of Boston, and this Note summarizes, in general terms, only certain of the more significant provisions. The Rights will not become exercisable until after a person or group acquires or has the right to acquire beneficial ownership of 20% or more of the outstanding Valley Common Stock, or after commencement of a tender or exchange offer, the consummation of which would result in a person or group becoming the beneficial owner of 30% or more of the outstanding Valley Common Stock. If the Rights become exercisable, initially they will entitle the holder of each Right to purchase from Valley one one-hundredth (1/100) of a share of Valley Series A Preferred Stock, par value $1.00 per share ("Series A Preferred"), at a price of $60 per one one-hundredth of a share, subject to adjustment. If, after the Rights become exercisable, (a) Valley is involved in any of certain types of transactions with an Acquiring Person or any person becomes the beneficial owner of more than 25% of the outstanding Valley Common Stock, one Right will permit each holder other than an Acquiring Person to receive, upon exercise, Valley Common Stock or, in certain circumstances, cash, property or other securities of Valley, having a value equal to two times the exercise price of the Right; or (b) Valley or 50% or more of its assets or earning power is acquired in any of certain types of transactions, provisions shall be made so that each holder other than an Acquiring Person will receive, upon exercising one Right, common shares of the acquiring company having a value equal to two times the exercise price of the Right. In certain events, Valley may exchange shares of Valley Common Stock or Series A Preferred for outstanding and exercisable Rights, other than those held by an Acquiring Person, at the ratio of one share of Valley Common Stock, or one one-hundredth (1/100) of a share of Series A Preferred, per Right. The Rights, which expire on October 21, 1998, are nonvoting and may be redeemed by Valley at $.05 per Right at any time prior to the occurrence of certain events. In connection with the Rights Agreement, the Board of Directors has designated 200,000 shares of Valley's authorized preferred stock as Series A Preferred, and has reserved such shares for issuance upon exercise of the Rights. The Rights Agreement may be amended by the Valley Board of Directors with the concurrence of a majority of the Board's independent directors. As required by the Merger Agreement, the Rights Agreement has been amended by Amendment No. 1 thereto, dated as of September 19, 1993, to provide that (a) neither M&I nor any affiliate of M&I shall be deemed an Acquiring Person, and (b) the execution, delivery and performance of the Merger Agreement and the Stock Option Agreement does not and will not result in a Shares Acquisition Date or Distribution Date (as such terms are defined in the Rights Agreement), provided that M&I and its affiliates acquire Valley Common Stock only in the manner specified. Under the Merger Agreement, the shares of M&I Common Stock into which the outstanding shares of Valley Common Stock will be converted in the Merger will be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Valley Common Stock, including the Rights. 4. Cash and Due From Banks: Cash and amounts due from banks totalling $46,274,000 were restricted at December 31, 1993 to meet the reserve requirements of the Federal Reserve System. 5. Investment Securities: The book and market values of investment securities are as follows:
Book Gross Unrealized Market December 31, 1993 Value Gains (Losses) Value - - ----------------------------------------------------------------------------------------------------- Investment securities available for sale: - - ----------------------------------------------------------------------------------------------------- U.S. Government $393,612,520 $ 4,686,876 $ (249,727) $398,049,669 - - ----------------------------------------------------------------------------------------------------- CMOs 198,796,311 903,837 (1,051,806) 198,648,342 - - ----------------------------------------------------------------------------------------------------- Federal agencies 101,771,854 814,500 (69,509) 102,516,845 - - ----------------------------------------------------------------------------------------------------- Other 39,622,664 1,291,714 (1,973) 40,912,405 - - ----------------------------------------------------------------------------------------------------- Mortgage pass-throughs 29,117,145 481,010 (38,435) 29,559,720 - - ----------------------------------------------------------------------------------------------------- Corporates 2,905,487 4,067 (15,561) 2,893,993 - - ----------------------------------------------------------------------------------------------------- Total investment securities available for sale 765,825,981 8,182,004 (1,427,011) 772,580,974 - - ----------------------------------------------------------------------------------------------------- Investment securities held to maturity: - - ----------------------------------------------------------------------------------------------------- State and political subdivisions 206,376,848 3,374,798 (675,208) 209,076,438 - - ----------------------------------------------------------------------------------------------------- Total investment securities held to maturity 206,376,848 3,374,798 (675,208) 209,076,438 - - ----------------------------------------------------------------------------------------------------- Total investments $972,202,829 $11,556,802 $(2,102,219) $981,657,412 ===================================================================================================== Book Gross Unrealized Market December 31, 1992 Value Gains (Losses) Value - - ----------------------------------------------------------------------------------------------------- Investment securities available for sale: - - ----------------------------------------------------------------------------------------------------- Mortgage pass-throughs $ 27,063,294 $ 938,094 $ (11,064) $ 27,990,324 - - ----------------------------------------------------------------------------------------------------- Corporates 11,278,053 90,779 (1,880) 11,366,952 - - ----------------------------------------------------------------------------------------------------- Total investment securities available for sale 38,341,347 1,028,873 (12,944) 39,357,276 - - ----------------------------------------------------------------------------------------------------- Investment securities held to maturity: - - ----------------------------------------------------------------------------------------------------- U.S. Government 297,896,504 4,145,732 (162,624) 301,879,612 - - ----------------------------------------------------------------------------------------------------- CMOs 239,841,618 1,209,075 1,649,288) 239,401,405 - - ----------------------------------------------------------------------------------------------------- Federal agencies 117,915,839 984,505 (108,262) 118,792,082 - - ----------------------------------------------------------------------------------------------------- Other 24,848,157 954,304 (894) 25,801,567 - - ----------------------------------------------------------------------------------------------------- State and political subdivisions 196,486,743 4,701,744 (82,430) 201,106,057 - - ----------------------------------------------------------------------------------------------------- Total investments held to maturity 876,988,861 11,995,360 2,003,498) 886,980,723 - - ----------------------------------------------------------------------------------------------------- Total investments $915,330,208 $13,024,233 $(2,016,442) $926,337,999 =====================================================================================================
The book and market values of investment securities at December 31, 1993, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Investment securities available for sale ------------------------------------------ Book Market December 31, 1993 Value Value - - ---------------------------------------------------------------------------------------- Due in 1 year or less $199,631,264 $202,502,841 - - ---------------------------------------------------------------------------------------- Due after 1 through 5 years 334,099,095 337,119,401 - - ---------------------------------------------------------------------------------------- Due after 5 through 10 years 16,766,313 17,447,402 - - ---------------------------------------------------------------------------------------- Due after 10 years 16,532,998 16,862,988 - - ---------------------------------------------------------------------------------------- Total excluding CMOs 567,029,670 573,932,632 - - ---------------------------------------------------------------------------------------- CMOs 198,796,311 198,648,342 - - ---------------------------------------------------------------------------------------- Total $765,825,981 $772,580,974 ======================================================================================== Investment securities held to maturity ------------------------------------------ Book Market December 31, 1993 Value Value - - ---------------------------------------------------------------------------------------- Due in 1 year or less $ 60,514,823 $ 60,689,781 - - ---------------------------------------------------------------------------------------- Due after 1 through 5 years 95,771,028 97,822,352 - - ---------------------------------------------------------------------------------------- Due after 5 through 10 years 40,010,161 40,188,663 - - ---------------------------------------------------------------------------------------- Due after 10 years 10,080,836 10,375,642 - - ---------------------------------------------------------------------------------------- Total excluding CMOs 206,376,848 209,076,438 - - ---------------------------------------------------------------------------------------- CMOs --- --- - - ---------------------------------------------------------------------------------------- Total $206,376,848 $209,076,438 ========================================================================================
Investment securities with an approximate par value of $150,864,000 were pledged at December 31, 1993, to qualify for fiduciary powers, to secure public deposits and short-term borrowings and for other purposes required by law. Proceeds from sale of investments in 1993 and 1992 were $11,243,616 and $40,701,125, respectively. Gross gains of $654,830 in 1993 and $962,500 in 1992 and gross losses of $157,628 in 1993 and $99,003 in 1992 were realized on those sales. In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115). SFAS 115 requires, among other things, that securities classified as available for sale be carried at market value; however, market value adjustments and the related income tax effects are excluded from earnings and reported separately as a component of shareholders' equity. This new standard was adopted by Valley on January 1, 1994. If this new standard had been adopted by Valley at December 31, 1993, the result would have increased shareholders' equity by the net unrealized gain of $4,390,745, after tax. 6. Loans: In the ordinary course of business, loans are made to directors, officers and other employees of Valley and to companies and persons affiliated with directors and officers. These loans are made on substantially the same terms and conditions as loans to nonaffiliated parties except for certain employee loans, which are at rates slightly below those prevailing for comparable transactions. The aggregate amount of loans to executive officers and directors of the parent company and its five largest bank subsidiaries, Madison, Appleton, Green Bay, Milwaukee, and Sheboygan and their related interests are shown below: Balance Balance 12/31/92 Additions Reductions 12/31/93 - - ----------------------------------------------------------------------------- $55,285,360 $141,058,143 $(145,118,651) $51,224,852 ============================================================================= Valley has pledged approximately $21.1 million of loans to secure certain short-term borrowings. 7. Reserve for Loan Losses: An analysis of the reserve for loan losses is as follows:
1993 1992 1991 - - ------------------------------------------------------------------------------------------ Balance, beginning of year $37,920,674 $31,240,521 $25,421,852 - - ------------------------------------------------------------------------------------------ Provision charged to expense 8,969,600 8,394,670 8,368,810 - - ------------------------------------------------------------------------------------------ Recoveries 3,033,612 2,753,544 1,929,176 - - ------------------------------------------------------------------------------------------ Loans charged off (10,679,932) (8,752,299) (8,822,921) - - ------------------------------------------------------------------------------------------ Net loans charged off (7,646,320) (5,998,755) (6,893,745) - - ------------------------------------------------------------------------------------------ Reserve at date of acquisition of banks acquired accounted for as purchases 1,166,953 4,284,238 4,343,604 - - ------------------------------------------------------------------------------------------ Balance, end of year $40,410,907 $37,920,674 $31,240,521 ==========================================================================================
Substantially all of Valley's loans are made to borrowers in Wisconsin. Valley's largest banks are primarily located in the largest metropolitan areas of Wisconsin. While Valley has a significant presence in these markets, the economic diversity of the markets would not indicate an undue concentration of risk. Several of its other banks have a significant market share in smaller communities in Wisconsin. As a community lender, Valley extends all forms of credit to individuals and businesses in the community and its surroundings. Those communities are often dependent on a small number of large employers or on the agricultural economy. Agricultural loans at Valley approximated $205 million, or 6.4% of total loans, at December 31, 1993 and $185 million, or 6.1% of total loans at December 31, 1992. Valley believes its agricultural portfolio is well collateralized. Valley also finances real estate development, for properties typically not occupied by the owners, which is dependent upon the successful sale or rental of the related properties. These loans totalled approximately $485 million, or 15.2% of total loans at December 31, 1993 and $238 million, or 7.9% of total loans at December 31, 1992. The majority of the loans are located in Valley's market area. Valley closely monitors these credits. As of December 31, 1993 and 1992, nonaccrual loans and real estate acquired in foreclosures were less than 1.0% of total assets. The effect of nonaccrual loans on net income in 1993, 1992 and 1991 was not significant. In May 1993, the FASB also issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," (SFAS 114). SFAS 114 requires that a loan's value be measured when it has been determined that the loan is impaired and loss is probable. Write-downs which result from the measurement process are to be expensed. This new standard must be adopted by the first quarter of 1995. Based upon the current status of the Corporation's loan portfolio, it is not anticipated that this pronouncement will have a material impact on the Consolidated Financial Statements. 8. Short-Term borrowings: Short-term borrowings at December 31, consisted of the following: 1993 1992 - - ---------------------------------------------------------------------------- Security repurchase agreements $ 73,048,347 $70,737,472 - - ---------------------------------------------------------------------------- U.S. Treasury demand notes 7,605,724 14,806,882 - - ---------------------------------------------------------------------------- Lines of credit 50,000,000 --- - - ---------------------------------------------------------------------------- Other 1,350,000 1,350,000 - - ---------------------------------------------------------------------------- Total $132,004,071 $86,894,354 ============================================================================ Valley has in place with M&I, a $50 million line and with another correspondent bank, a $15 million revolving line of credit, at prime. At December 31, 1993 and 1992, there were $50 million and no outstanding borrowings, respectively, on these lines. The average rates paid on these funds were 2.81%, 3.41%, and 5.12% for the years ended December 31, 1993, 1992 and 1991, respectively. The demand notes payable to the U.S. Treasury accrue interest at .25% below the weekly federal funds rate and are fully collateralized by subsidiary banks' investment securities. Securities sold under repurchase agreements are periodically borrowed on a short-term basis by subsidiary banks at prevailing rates for these funds. The following information relates to securities sold under repurchase agreements for the year indicated: 1993 1992 - - ----------------------------------------------------------------------------- End of year: - - ----------------------------------------------------------------------------- Weighted average rate 2.90% 2.88% - - ----------------------------------------------------------------------------- For the year: - - ----------------------------------------------------------------------------- Maximum amount outstanding $157,680,163 $168,932,394 - - ----------------------------------------------------------------------------- Average amount outstanding $ 87,315,827 $111,173,532 - - ----------------------------------------------------------------------------- Weighted average rate 2.70% 3.39% ============================================================================= 9. Long-Term Borrowings: Long-term borrowings at December 31, consisted of the following: 1993 1992 - - ----------------------------------------------------------------------------- Senior Unsecured Notes, Series A 9.86%, due in 1994 $23,000,000 $23,000,000 - - ----------------------------------------------------------------------------- Senior Unsecured Notes, Series B 9.97%, due in 1995 30,000,000 30,000,000 - - ----------------------------------------------------------------------------- Senior Unsecured Notes, 11.25%, due in annual installments in 1991 to 1995 --- 15,000,000 - - ----------------------------------------------------------------------------- Mortgages at varying rates and terms 251,185 310,434 - - ----------------------------------------------------------------------------- Total $53,251,185 $68,310,434 ============================================================================= Certain provisions of the agreements covering the Series A and Series B Notes and the revolving line of credit with a correspondent bank, (a) place limitations on additional funded debt and other indebtedness which may be incurred or guaranteed by Valley, and (b) impose restrictions on the payment of cash dividends and the purchase or redemption of Valley stock. Under the most restrictive terms of the agreements, at December 31, 1993, Valley would be permitted to incur additional funded debt and other indebtedness of $112,265,248. Also, in connection with the Merger Agreement with M&I (see Note 2), Valley has agreed that it will not, without the prior written consent of M&I, declare or pay any dividend other than regular quarterly cash dividends on Valley Common Stock not in excess of $.24 per share. Under the terms of the Series A and Series B Notes issued in 1990, Valley has consolidated retained earnings of $152,144,732 which were unrestricted as to the payment of dividends and the purchase and redemption of Valley stock. Restrictions as to the payment of dividends and purchase and redemption of stock amount to $7,975,942 under an existing line of credit with a correspondent bank; however at December 31, 1993 Valley had no borrowings on this line and that restriction therefore is not presently operative. In 1991, Valley repurchased 100,400 (150,600 post-split basis) shares of its common stock for $2,688,028. Valley had obtained the consent of its lender to exempt the repurchases from its loan covenant which restricted payments of cash and dividends and the repurchase or redemption of Valley stock. Valley did not repurchase additional shares in 1992 or 1993. Subsidiary bank dividends, which are the principal source of funds for dividend payments by Valley, are restricted by statutory and regulatory limitations. At December 31, 1993, the aggregate amount of subsidiary banks' retained earnings available for payment of dividends under regulatory guidelines was $85,491,416. In January 1990, Valley adopted an internal bank dividend policy which restricts a banks' tangible equity from being reduced below 7% of tangible assets. Asset growth, profitability, funds availability and asset quality are factored into this policy. This internal policy effectively restricts, to a substantially lesser amount, the amount which could be distributed by the banks. 10. Stock Options: Under terms of existing option plans, shares of unissued common stock are reserved for options to outside directors, officers and key employees of Valley at prices not less than the fair market value of the shares at the date of grant. Options expire no later than approximately 10 years from the date of grant. The information presented below has been restated for the three for two stock split effected in the form of a 50% stock dividend declared July 20, 1993, payable August 27, 1993 to shareholders of record August 6, 1993. At December 31, 1993, options outstanding and the extent to which they are exercisable were as follows: Number of Shares -------------------------------- Option Price Outstanding Exercisable Per Share - - ---------------------------------------------------------------------- 5,417 5,417 $ 6.93 - - ---------------------------------------------------------------------- 2,167 2,167 9.23 - - ---------------------------------------------------------------------- 11,916 11,916 11.54 - - ---------------------------------------------------------------------- 146,750 146,750 13.21 - - ---------------------------------------------------------------------- 72,450 72,450 13.33 - - ---------------------------------------------------------------------- 81,075 81,075 13.71 - - ---------------------------------------------------------------------- 125,100 125,100 14.27 - - ---------------------------------------------------------------------- 15,000 15,000 14.85 - - ---------------------------------------------------------------------- 67,500 67,500 21.33 - - ---------------------------------------------------------------------- 70,381 70,381 22.33 - - ---------------------------------------------------------------------- 254,750 254,750 25.25 - - ---------------------------------------------------------------------- 42,000 42,000 26.46 - - ---------------------------------------------------------------------- TOTAL 894,506 894,506 ====================================================================== For the years ended December 31, 1993, 1992, and 1991, option shares exercised were as follows: Year Shares Price Range at Exercised Exercised Which Exercised -------------------------------------------------------------- 1993 534,532 $5.77 - $25.25 -------------------------------------------------------------- 1992 250,838 $4.61 - $14.27 -------------------------------------------------------------- 1991 155,874 $4.38 - $14.27 ============================================================== For the years ended December 31, 1993, 1992, and 1991, option shares granted and expired were as follows: Shares Shares Granted Expired -------------------------------------------------------------- 1993 42,000 --- -------------------------------------------------------------- 1992 523,895 14,013 -------------------------------------------------------------- 1991 15,000 13,200 ============================================================== Common stock reserved for future grants under option plans approved by the shareholders amounted to 477,017 shares at December 31, 1993. 11. Income Taxes: On January 1, 1993, Valley adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". The effect of adoption of this new standard is not material to the consolidated financial statements. This policy calls for reflecting tax assets/liabilities at amounts estimated to be realizable/payable based on current tax law and Valley's tax status. Accordingly, tax expense can be impacted by future changes in rates and return limitations. The income tax provision for each of the years ended December 31, is as follows: 1993 1992 1991 - - ------------------------------------------------------------------------------ Federal $18,364,365 $14,909,468 $8,452,356 - - ------------------------------------------------------------------------------ State 3,753,534 2,646,479 1,138,108 - - ------------------------------------------------------------------------------ Total $22,117,899 $17,555,947 $9,590,464 - - ------------------------------------------------------------------------------ Current $20,037,163 $17,959,857 $8,975,211 - - ------------------------------------------------------------------------------ Deferred 2,080,736 (403,910) 615,253 - - ------------------------------------------------------------------------------ Total $22,117,899 $17,555,947 $9,590,464 ============================================================================== The income tax provision (benefit) applicable to net securities transactions was $174,021, $293,589, and $246,442 in 1993, 1992 and 1991, respectively. Deferred taxes result from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of these differences and the tax effects of each are: Years ended December 31, --------------------------------- 1992 1991 - - -------------------------------------------------------------------------- Differences between book and tax provision for loan losses $(818,480) $(653,989) - - -------------------------------------------------------------------------- Excess of tax over book depreciation 437,344 141,300 - - -------------------------------------------------------------------------- Cash basis reporting for tax purposes (409,783) 878,021 - - -------------------------------------------------------------------------- Deferred gain on sale/leaseback of bank premises 75,828 78,130 - - -------------------------------------------------------------------------- Net accretion of purchase accounting adjustments 441,897 69,919 - - -------------------------------------------------------------------------- Other, net (130,716) 101,872 - - -------------------------------------------------------------------------- Total $(403,910) $ 615,253 ========================================================================== The following is a reconciliation between the provision for income taxes and the tax computed by applying the statutory Federal income tax rate: Years ended December 31, -------------------------------------- 1993 1992 1991 - - ------------------------------------------------------------------------------- Income tax computed at statutory rates $23,807,233 $19,494,026 $13,687,219 - - ------------------------------------------------------------------------------- State income tax, net of Federal income tax benefit 2,285,797 1,746,676 751,151 - - ------------------------------------------------------------------------------- Tax-exempt state and municipal income (3,136,220) (4,254,279) (5,537,240) - - ------------------------------------------------------------------------------- Other, net (838,911) 569,524 689,334 - - ------------------------------------------------------------------------------- Provision for income taxes $22,117,899 $17,555,947 $ 9,590,464 =============================================================================== The tax effects of temporary differences that give rise to significant elements of deferred tax assets and deferred tax (liabilities) at December 31, are as follows: 1993 - - -------------------------------------------------------------------------- Difference between book and tax reserve for loan losses $6,722,061 - - -------------------------------------------------------------------------- Excess of tax over book depreciation (4,778,791) - - -------------------------------------------------------------------------- Cash basis reporting for tax purposes (842,399) - - -------------------------------------------------------------------------- Net accretion of purchase accounting adjustments 1,046,046 - - -------------------------------------------------------------------------- Deferred gain on sale/leaseback of bank premises (4,484) - - -------------------------------------------------------------------------- Other, net (239,512) - - -------------------------------------------------------------------------- Total net deferred tax assets $1,902,921 ========================================================================== 12. Employee Benefit Plans: Substantially all employees are covered by a trusteed defined benefit retirement plan. The benefits are based on years of service and the employee's highest consecutive five-year average salary. Valley's funding policy is to contribute annually the maximum amount that can be deducted for federal tax purposes. Contributions are intended to fund benefits attributed to service to date, and benefits expected to be earned in the future. Plan assets are primarily invested in short to intermediate fixed-rate securities, equity securities, commingled equity real estate funds and short- term investment vehicles. The following table sets forth the plan's funded status and amounts recognized in Valley's consolidated financial statements at December 31: Actuarial present value of benefit obligations: 1993 1992 - - ------------------------------------------------------------------------------ Vested benefit obligation $(38,326,434) $(26,310,676) - - ------------------------------------------------------------------------------ Nonvested benefit obligation (1,819,776) (1,283,493) - - ------------------------------------------------------------------------------ Accumulated benefit obligation (40,146,210) (27,594,169) - - ------------------------------------------------------------------------------ Effect of projected future compensation levels (19,910,487) (13,856,811) - - ------------------------------------------------------------------------------ Projected benefit obligation (60,056,697) (41,450,980) - - ------------------------------------------------------------------------------ Plan assets at fair value 43,425,521 37,163,361 - - ------------------------------------------------------------------------------ Plan assets less than projected benefit obligation (16,631,176) (4,287,619) - - ------------------------------------------------------------------------------ Unrecognized net loss 23,147,830 9,969,974 - - ------------------------------------------------------------------------------ Unrecognized prior service cost 2,401,159 2,641,953 - - ------------------------------------------------------------------------------ Unrecognized net asset (being amortized evenly over 16 years) (1,672,366) (1,810,772) - - ------------------------------------------------------------------------------ Prepaid pension cost $ 7,245,447 $ 6,513,536 ============================================================================== The net pension cost for 1993, 1992 and 1991, included the following components: 1993 1992 1991 - - ------------------------------------------------------------------------------ Service cost $3,360,706 $2,347,974 $1,897,838 - - ------------------------------------------------------------------------------ Interest cost 3,282,761 2,501,787 2,243,744 - - ------------------------------------------------------------------------------ Actual return on plan assets (2,885,008) (1,851,602) (3,422,891) - - ------------------------------------------------------------------------------ Net amortization and deferral (415,668) (882,575) 1,306,597 - - ------------------------------------------------------------------------------ Net periodic pension cost $3,342,791 $2,115,584 $2,025,288 ============================================================================== The following assumptions were used in determining the projected benefit obligation: 1993 1992 - - -------------------------------------------------------------------- Discount rate 6.75% 8.00% - - -------------------------------------------------------------------- Rate of increase in compensation levels 5.00% 5.00% - - -------------------------------------------------------------------- Expected long-term rate of return on assets 0.00% 10.00% ==================================================================== The majority of employees participate in a Thrift and Sharing Plan. Employee contributions to the plan are matched based on the ratio of Valley's consolidated net income to average shareholders' equity. The expense of the plan for the years ended December 31, 1993, 1992 and 1991 was approximately $1.457 million, $4.191 million and $2.827 million, respectively. At December 31, 1993, the plan held 2,465,632 shares of Valley common stock. Valley currently offers post retirement health care benefits to retired employees over the age of 54 who have rendered at least 10 years of service to Valley. These benefits are subject to deductibles, copayment provisions and other limitations. Only those employees retiring on or before December 31, 1994 will be eligible for such benefits. On January 1, 1993, Valley adopted Statement of Financial Accounting Standards (SFAS) No. 106 "Employers Accounting for Post Retirement Benefits Other Than Pensions". This statement requires that the cost of post retirement benefits expected to be provided to current and future retirees be accrued over those employees' service periods. In addition to recognizing the cost of benefits for the current period, SFAS No. 106 requires recognition of the cost of benefits earned in prior service periods (the transition obligation). Prior to 1993, post retirement benefits were accounted for on a cash basis. As of January 1, 1993, Valley's accumulated post retirement benefit obligation (also its transition obligation) totalled $2.854 million. Valley has elected to amortize the transition obligation as a charge to income over a twenty year period on a straight line basis. The following table sets forth the plan's status and amounts recognized in Valley's consolidated financial statements. December 31, 1993 - - ------------------------------------------------------------------------ Accumulated post retirement benefit obligation: - - ------------------------------------------------------------------------ Retirees $(2,357,668) - - ------------------------------------------------------------------------ Fully eligible actives (271,089) - - ------------------------------------------------------------------------ Other actives (11,844) - - ------------------------------------------------------------------------ Total accumulated post retirement benefit obligation (2,640,601) - - ------------------------------------------------------------------------ Unrecognized prior net gain (285,435) - - ------------------------------------------------------------------------ Unrecognized prior service costs 0 - - ------------------------------------------------------------------------ Unrecognized transition obligation 2,711,815 - - ------------------------------------------------------------------------ Accrued post retirement benefit cost $ (214,221) ======================================================================== Year ended December 31, 1993 - - ------------------------------------------------------------------------ Service cost $ 2,732 - - ------------------------------------------------------------------------ Interest cost 220,031 - - ------------------------------------------------------------------------ Actual return on plan assets 0 - - ------------------------------------------------------------------------ Amortization of transition obligation 142,727 - - ------------------------------------------------------------------------ Net of other amortization and deferrals 0 - - ------------------------------------------------------------------------ Net periodic post retirement cost $ 365,490 ======================================================================== The following actuarial assumptions were used in the determination of the accumulated post retirement benefit obligation: 1993 - - ------------------------------------------------------------------------ Expected long-term rate of return on assets N/A - - ------------------------------------------------------------------------ Weighted average discount rate 6.75% - - ------------------------------------------------------------------------ Medical care cost trend rates 12.5% - 6.0% ======================================================================== Shown below is the impact of a 1% increase in the medical care cost trend rates (i.e., 13.5% for 1993 grading down to 7.0% in 2013). This information is required disclosure under SFAS No. 106. Current Trend % Trend + 1.% Change - - -------------------------------------------------------------------------- Aggregate of the service and interest components of net periodic post retirement health care benefit costs $ 222,763 $ 243,797 +9.4% - - -------------------------------------------------------------------------- Accumulated post retirement benefit obligation for health care benefits 2,640,601 2,889,287 +9.4% ========================================================================== In 1992 the Financial Accounting Standards Board issued SFAS No. 112 "Employers' Accounting for Post Employment Benefits." This statement requires accrual accounting for the estimated cost of benefits provided to former employees after employment, but before retirement. Valley is required to adopt the new standard no later than 1994. Valley currently accrues for severance benefits when identified and therefore, has determined that adoption of the new standard will not have a material impact. 13. Financial Instruments With Off-Balance Sheet Risk: Valley utilizes various financial instruments which have off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk. The following table shows the contract or notional amounts of these financial instruments at December 31, were as follows: (dollars in thousands) 1993 1992 - - ------------------------------------------------------------------------- Standby and commercial letters of credit $ 69,979 $ 69,501 - - ------------------------------------------------------------------------- Commitments to extend credit 1,013,726 866,112 - - ------------------------------------------------------------------------- Interest rate swaps 105,000 50,000 ========================================================================= Standby letters of credit and commercial letters of credit are conditional commitments issued by Valley to support the financial obligation of a customer to a third party. Those commitments are primarily issued to support public and private borrowing arrangements including commercial paper issuances, bond financings, and other similar transactions. Valley's exposure to credit loss in the event of nonperformance by the counterparty is the contractual amount of the standby letter of credit, an exposure similar to that involved in extending loans. Since the conditions under which Valley is required to fund standby letters of credit may not materialize, the liquidity requirements of standby letters of credit are expected to be less than the total outstanding commitments. Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. Valley's exposure to credit loss on commitments to extend credit, in the event of nonperformance by the counterparty, is represented by the contractual amount of the commitments. Valley monitors its credit risk for commitments as it does for loans and by obtaining collateral to secure commitments based on management's credit assessment of the counterparty. Since many commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent Valley's future liquidity requirements. In addition, Valley also offers various consumer credit line products (credit card lines, overdraft protection, and home equity lines) to its customers, some of which are cancelable upon notification. Such credit lines are included in the amount disclosed above. An interest rate swap is an agreement in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed upon notional principal amount with at least one stream based on a floating rate index. Periodic payments between counterparties are typically settled on a net basis over the life of the swap. 14. Quarterly Financial Data (Unaudited): (dollars in thousands First Second Third Fourth except per share amounts)* Quarter Quarter Quarter Quarter - - ----------------------------------------------------------------------------- 1993 - - ----------------------------------------------------------------------------- Interest income $77,771 $77,781 $77,577 $78,129 - - ----------------------------------------------------------------------------- Interest expense (35,115) (34,027) (33,699) (33,006) - - ----------------------------------------------------------------------------- Provision for loan losses (2,165) (2,158) (2,155) (2,492) - - ----------------------------------------------------------------------------- Other income and expense, net (24,696) (24,771) (24,004) (24,949) - - ----------------------------------------------------------------------------- Income taxes (4,901) (5,340) (6,138) (5,739) - - ----------------------------------------------------------------------------- Net income $10,894 $11,485 $11,581 $11,943 ============================================================================= Per share: - - ----------------------------------------------------------------------------- Net income $ .54 $ .57 $ .57 $ .58 ============================================================================= 1992 - - ----------------------------------------------------------------------------- Interest income $79,390 $77,769 $83,303 $81,166 - - ----------------------------------------------------------------------------- Interest expense (41,121) (38,266) (38,831) (36,870) - - ----------------------------------------------------------------------------- Provision for loan losses (2,275) (2,309) (1,877) (1,934) - - ----------------------------------------------------------------------------- Other income and expense, net (24,533) (23,999) (25,994) (26,284) - - ----------------------------------------------------------------------------- Income taxes (3,236) (3,943) (5,343) (5,034) - - ----------------------------------------------------------------------------- Net income $ 8,225 $ 9,252 $11,258 $11,044 ============================================================================= Per share: - - ----------------------------------------------------------------------------- Net income $ .45 $ .50 $ .57 $ .55 ============================================================================= 1991 - - ----------------------------------------------------------------------------- Interest income $79,017 $84,533 $85,366 $82,843 - - ----------------------------------------------------------------------------- Interest expense (46,033) (48,893) (48,995) (46,233) - - ----------------------------------------------------------------------------- Provision for loans losses (2,014) (2,122) (1,998) (2,235) - - ----------------------------------------------------------------------------- Other income and expense, net (22,405) (23,211) (23,769) (23,596) - - ----------------------------------------------------------------------------- Income taxes (1,798) (2,581) (2,625) (2,585) - - ----------------------------------------------------------------------------- Net income $ 6,767 $ 7,726 $ 7,979 $ 8,194 ============================================================================= Per share: - - ----------------------------------------------------------------------------- Net income $ .37 $ .42 $ .43 $ .45 ============================================================================= *Per share data has been restated for the three for two stock split, effected in the form of a 50% stock dividend, distributed on August 27, 1993. 15. Valley Bancorporation (Parent Company Only) Condensed Financial Statements: Statements of Financial Position
December 31, ------------------------------------ Assets 1993 1992 - - ----------------------------------------------------------------------------------- Cash and cash equivalents $ 127,786 $ 15,978,700 - - ----------------------------------------------------------------------------------- Intercompany advances and notes receivable 79,231,173 24,000,000 - - ----------------------------------------------------------------------------------- Investment in common stock of subsidiaries 367,663,433 338,932,696 - - ----------------------------------------------------------------------------------- Premium paid for net assets acquired 18,875,323 19,321,825 - - ----------------------------------------------------------------------------------- Other assets 8,739,516 7,539,308 - - ----------------------------------------------------------------------------------- Total assets $474,637,231 $405,772,529 =================================================================================== Liabilities and Shareholders' Equity - - ----------------------------------------------------------------------------------- Short-term borrowings $ 50,000,000 --- - - ----------------------------------------------------------------------------------- Long-term borrowings 53,000,000 68,000,000 - - ----------------------------------------------------------------------------------- Other liabilities 5,729,378 10,996,593 - - ----------------------------------------------------------------------------------- Total liabilities 108,729,378 78,996,593 - - ----------------------------------------------------------------------------------- Shareholders' equity 365,907,853 326,775,936 - - ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity $474,637,231 $405,772,529 ===================================================================================
Statements of Income
Years ended December 31, ------------------------------------------ 1993 1992 1991 - - ----------------------------------------------------------------------------------- Income - - ----------------------------------------------------------------------------------- Dividends paid by subsidiaries $38,319,445 $25,488,488 $38,451,824 - - ----------------------------------------------------------------------------------- Service fees from subsidiary banks 6,462,084 5,296,536 5,454,081 - - ----------------------------------------------------------------------------------- Interest on intercompany advances and notes receivable 3,424,640 2,791,780 2,451,614 - - ----------------------------------------------------------------------------------- Other 1,475,331 1,597,384 1,347,926 - - ----------------------------------------------------------------------------------- Total income 49,681,500 35,174,188 47,705,445 - - ----------------------------------------------------------------------------------- Expense - - ----------------------------------------------------------------------------------- Interest 7,445,318 7,597,939 8,249,469 - - ----------------------------------------------------------------------------------- Administrative and general 10,916,054 14,986,924 10,783,203 - - ----------------------------------------------------------------------------------- Total expense 18,361,372 22,584,863 19,032,672 - - ----------------------------------------------------------------------------------- Income before income taxes and equity in undistributed net income of subsidiaries 31,320,128 12,589,325 28,672,773 - - ----------------------------------------------------------------------------------- Benefit for income taxes 1,493,821 3,821,940 2,748,529 - - ----------------------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 32,813,949 16,411,265 31,421,302 - - ----------------------------------------------------------------------------------- Equity in undistributed net income of subsidiaries 13,088,817 23,368,160 (755,239) - - ----------------------------------------------------------------------------------- Net Income $45,902,766 $39,779,425 $30,666,063 ===================================================================================
Statements of Cash Flows
Years ended December 31, ------------------------------------------ 1993 1992 1991 - - ----------------------------------------------------------------------------------- Operating Activities - - ----------------------------------------------------------------------------------- Net income $45,902,766 $39,779,425 $30,666,063 - - ----------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided from operating activities: - - ----------------------------------------------------------------------------------- Equity in undistributed net income of subsidiaries (13,088,817) (23,368,160) 755,239 - - ----------------------------------------------------------------------------------- Depreciation 402,737 458,808 428,613 - - ----------------------------------------------------------------------------------- Amortization of intangible assets 2,033,820 1,834,716 1,834,716 - - ----------------------------------------------------------------------------------- Accretion of valuation adjustments (147,127) (37,028) (331,414) - - ----------------------------------------------------------------------------------- Decrease (Increase) in other assets 320,910 (3,794,709) 5,377,253 - - ----------------------------------------------------------------------------------- Increase (Decrease) in other liabilities (5,695,987) 3,062,309 (1,006,784) - - ----------------------------------------------------------------------------------- Net cash provided by operating activities 29,728,302 17,935,361 37,723,686 - - ----------------------------------------------------------------------------------- Investing Activities - - ----------------------------------------------------------------------------------- Purchases of premises and equipment (260,945) (402,773) (414,298) - - ----------------------------------------------------------------------------------- Sale of commercial paper investments --- --- 20,417,667 - - ----------------------------------------------------------------------------------- Investment in common stock of subsidiaries (15,040,343) (20,000,000) (27,086,029) - - ----------------------------------------------------------------------------------- Net increase in intercompany advances (55,231,173) (589,020) (996,457) - - ----------------------------------------------------------------------------------- Net cash used by investing activities (70,532,461) (20,991,793) (8,079,117) - - ----------------------------------------------------------------------------------- Financing Activities - - ----------------------------------------------------------------------------------- Net decrease in commercial paper notes payable --- (374,214) (4,249,590) - - ----------------------------------------------------------------------------------- Net increase in short-term borrowings 50,000,000 --- --- - - ----------------------------------------------------------------------------------- Repayment of long-term borrowings (15,000,000) (5,000,000) (5,000,000) - - ----------------------------------------------------------------------------------- Proceeds from issuance of common stock 8,967,362 32,806,281 3,907,863 - - ----------------------------------------------------------------------------------- Repurchase of common stock --- --- (2,688,028) - - ----------------------------------------------------------------------------------- Dividends paid (19,014,117) (16,425,910) (14,676,553) - - ----------------------------------------------------------------------------------- Net cash provided by (used by) financing activities 24,953,245 11,006,157 (22,706,308) - - ----------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (15,850,914) 7,949,725 6,938,261 - - ----------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 15,978,700 8,028,975 1,090,714 - - ----------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 127,786 $15,978,700 $ 8,028,975 ===================================================================================
For the years ended December 31, 1993, 1992, and 1991, interest of $7,952,561, $7,785,443, and $8,436,973 was paid respectively. 16. Fair Value of Financial Instruments: Fair value disclosures of financial instruments are made to comply with SFAS No. 107 "Disclosures About Fair Value of Financial Instruments" (SFAS 107). In accordance with the requirements of SFAS 107, fair values are based on estimates using present value and other valuation techniques where quoted market prices are not available. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. As such, the derived fair value estimates cannot be substantiated by comparison to independent markets and, further,may not be realizable in an immediate settlement of the instruments. SFAS 107 also excludes certain items from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent, and should not be construed to represent, the underlying value of Valley. The following methods and assumptions were used by Valley in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the Consolidated Statements of Financial Position for cash and cash equivalents approximate those assets' fair value. Investment securities: Fair values for investment 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. Interest-bearing deposits with other banks: Fair values for interest- bearing deposits with other banks are based on quoted market prices. Mortgages held for sale: Fair values of mortgages held for sale are based on quoted market prices. Loans: The fair value of loans is estimated using discounted cash flow analyses, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, adjusted for creditworthiness. The carrying amount of accrued interest approximates fair value. Deposit liabilities: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date. Fair values of time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar maturities to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings approximate their fair values. Long-term borrowings: The fair value of long-term borrowings is estimated based on the quoted market prices for the same or similar issues or on the current rates offered for debt of the same remaining maturities. Off-balance sheet instruments: The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair value of the interest rate swap is based on pricing models using current assumptions. The carrying amount of accrued interest receivable and payable approximates fair value. The carrying amount and estimated fair value of financial instruments at December 31, 1993 and December 31, 1992 were as follows:
December 31, ---------------------------------------------------- 1993 1992 ---------------------------------------------------- Carrying Estimated Carrying Estimated (dollars in thousands) Amount Fair Value Amount Fair Value - - ---------------------------------------------------------------------------------- Cash and cash equivalents $ 205,010 $ 205,010 $ 246,975 $ 246,975 - - ---------------------------------------------------------------------------------- Interest-bearing deposits with other banks 756 756 3,950 3,950 - - ---------------------------------------------------------------------------------- Investment securities 972,203 981,657 915,330 926,338 - - ---------------------------------------------------------------------------------- Mortgages held for sale 60,421 60,946 38,430 38,908 - - ---------------------------------------------------------------------------------- Net loans 3,150,075 3,192,570 2,979,417 3,019,029 - - ---------------------------------------------------------------------------------- Deposits: - - ---------------------------------------------------------------------------------- Noninterest-bearing 571,751 571,751 537,845 537,845 - - ---------------------------------------------------------------------------------- Interest-bearing 3,406,358 3,423,444 3,294,779 3,312,803 - - ---------------------------------------------------------------------------------- Total deposits 3,978,109 3,995,195 3,832,624 3,850,648 - - ---------------------------------------------------------------------------------- Short-term borrowings 132,004 132,004 86,894 86,894 - - ---------------------------------------------------------------------------------- Long-term borrowings 53,251 55,943 68,310 72,215 - - ---------------------------------------------------------------------------------- Off-balance sheet instruments: - - ---------------------------------------------------------------------------------- Standby and commercial letters of credit $ 996 $ 956 - - ---------------------------------------------------------------------------------- Commitments to extend credit 8,409 5,897 - - ---------------------------------------------------------------------------------- Interest rate swap 76 28 - - ----------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The following table sets forth certain information with respect to the current directors of Valley. Because of the pending Merger of Valley with and into M&I, no annual meeting of the Valley stockholders will be held. Consequently, the persons listed below will continue to serve as directors of Valley until the earlier of consummation of the Merger or the election and qualification of their successors. Shares of Valley Common Stock Beneficially Owned on February 25, 1994 ----------------------- Name, Age and Principal Occupation Director Number Percent of During Past Five Years Since (1)(2)(3) Class - - ------------------------------------------------------------------------------- OSCAR C. BOLDT, 69, Chairman and Chief 1980 52,584 .253% Executive Officer, The Boldt Group, Inc. (subsidiaries in general contracting, development and related businesses), Appleton, Wisconsin. ALFRED P. DIOTTE, 68, President, DOTT 1973(4) 13,939 .067 Associates (management consultants), Janesville, Wisconsin. CARL FARAH, 61, President, Farah Bros. 1976(4) 40,341 .194 Investment Corp. and DF Investments Inc., Green Bay, Wisconsin. EDWARD J. FELTEN, 55, Vice Chairman, 1977(4) 36,616 .176 Wisconsin Supply Corporation (plumbing and heating wholesaler), Madison, Wisconsin. WILLIAM F. GEHRKE, 65, Senior Vice President/ 1962(4) 31,807 .153 Lakeshore Region, Valley Bancorporation since July 1992; Chairman and Chief Executive Officer, Valley United Bank, S.S.B., Sheboygan, Wisconsin, which became a subsidiary of Valley Bancorporation in July 1992.(5) REYNOLDS K. HONOLD, 58, Retired as President, 1982(4) 6,022 .029 Aldag/Honold Mechanical, Inc. (mechanical contractor), Sheboygan Wisconsin in December 1992. Prior to 1991, Mr. Honold was President of R.P. Honold Co., Inc. (mechanical and electrical engineering contractor), Sheboygan, Wisconsin.(5) Shares of Valley Common Stock Beneficially Owned on February 25, 1994 ----------------------- Name, Age and Principal Occupation Director Number Percent of During Past Five Years Since (1)(2)(3) Class - - ------------------------------------------------------------------------------- JOHN W. JOHNSON, 62, Senior Vice 1982(4) 199,687 .963% President/West Region, Valley Bancorporation; President and Chief Executive Officer, Valley Bank, Southwest, Spring Green, Wisconsin. RICHARD H. JONES, 55, Executive Vice 1987 77,385 .373 President/Northern Division, Valley Bancorporation since January 1991 (previously Senior Vice President); President and Chief Executive Officer, Valley Bank, Appleton, Wisconsin. THOMAS L. LYON, 53, President, Cooperative 1984 10,220 .049 Resources International (formerly known as 21st Century Genetics)(animal agriculture cooperative), Shawano, Wisconsin. JOHN F. MACK, 58, Executive Vice 1977(4) 52,788 .255 President/Southern Division, Valley Bancorporation since January 1991 (previously Senior Vice President); Chairman and Chief Executive Officer, Valley Bank, Madison, Wisconsin since January 1991. Prior to 1991, Mr. Mack was President and Chief Executive Officer of Valley Bank, Madison. NEAL E. MADISEN, 67, President, Mequon 1982 14,988 .072 Distributors, Inc. (retailer and wholesaler of lumber and building materials), Thiensville, Wisconsin. In 1992, Mr. Madisen retired as a partner of the Quarles & Brady law firm, Milwaukee, Wisconsin, which performs legal services for Valley and certain of its subsidiaries. ROWLAND J. McCLELLAN, 65, Retired as Senior 1970(4) 85,789 .414 Vice President, Valley Bancorporation and Chairman and Chief Executive Officer, Valley Bank, Janesville, Wisconsin in December 1993. EDWARD L. MEYER, JR., 56, President, Anamax 1977(4) 9,629 .046 Corporation (processor of hides, manufacturer of tallow), Green Bay, Wisconsin. Shares of Valley Common Stock Beneficially Owned on February 25, 1994 ----------------------- Name, Age and Principal Occupation Director Number Percent of During Past Five Years Since (1)(2)(3) Class - - ------------------------------------------------------------------------------- ROBERT C. O'MALLEY, 69, Retired as Chairman, 1967(4) 23,734 .114% Valley Bank, Madison, Wisconsin in January 1989. Prior to 1989, Mr. O'Malley was Chief Executive Officer of Valley Bank, Madison. JOHN PETERSEN,III, 52, President, Inland 1980(4) 62,477 .301 Investment Co., Inc., Madison, Wisconsin. PETER M. PLATTEN, III, 54, President and 1971(4) 226,987 1.094 Chief Executive Officer, Valley Bancorporation; Chairman, Valley Bank, Northeast, Green Bay, Wisconsin. Prior to January 1993, Mr. Platten was Chairman and Chief Executive Officer of Valley Bank, Northeast. Prior to January 1989, Mr. Platten was Chief Operating Officer of Valley Bancorporation. HENRY PREDOLIN, 69, Chairman, HPT, Inc. (an 1977(4) 386,504 1.863 investment company), Madison, Wisconsin. JAMES D. REIGLE, 67, Chairman, Regal Ware, 1974 18,147 .087 Inc. (manufacturer of cookware and small appliances), Kewaskum, Wisconsin since April 1991. Prior to April 1991, Mr. Reigle was President of Regal Ware, Inc. DONALD P. RYAN, 63, Retired as Chairman 1977(4) 23,792 .115 Emeritus, Ryan Incorporated Central (heavy and highway contractor), Janesville, Wisconsin in December 1993. Prior to November 1991, Mr. Ryan was President and Vice Chairman of Ryan Incorporated Central. GUS A. ZUEHLKE, 72, Chairman, Valley 1962 93,994 .453 Bancorporation; Chairman, Valley Bank, Appleton, Wisconsin. All Directors and Executive Officers as a 1,756,112 8.336% Group (23 persons) _______________________ (1) As reported to Valley by the directors as of the date stated. Includes shares held in the name of spouses, children, trusts, estates and certain affiliated companies as to which beneficial ownership may be disclaimed. The beneficial ownership information is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as required for purposes of this Report, and is not necessarily to be construed as an admission of beneficial ownership for other purposes. (2) Includes the following number of shares which the indicated persons have the right to acquire pursuant to stock options exercisable at or within 60 days of the date stated: Mr. Boldt, 7,500; Mr. Diotte, 7,500; Mr. Farah, 7,500; Mr. Felten, 7,500; Mr. Honold, 3,000; Mr. Lyon; 7,500; Mr. Madisen, 7,500; Mr. Meyer, 7,500; Mr. O'Malley, 7,500; Mr. Petersen, 7,500; Mr. Predolin, 7,500; Mr. Reigle, 7,500; Mr. Ryan, 7,500; Mr. Zuehlke, 7,500; and all directors and executive officers as a group, 324,975. (3) Includes the following number of shares, as of December 31, 1993, for which the indicated persons have an indirect beneficial interest as participants in Valley's Thrift and Sharing Plan: Mr. Johnson, 4,659; Mr. Jones, 20,311; Mr. Mack, 23,933; Mr. McClellan, 41,351; Mr. Platten, 12,827; Mr. Zuehlke, 26,295; and all directors and executive officers as a group, 168,972. Such interests have subsequently increased by amounts which are not material. (4) Indicates the year in which the director became a director of United Bankshares, Inc. ("Bankshares"), BANCWIS Corporation ("BANCWIS"), United Banks of Wisconsin, Inc. ("United Banks"), Spring Green Bankshares, Inc. ("Spring Green"), Community Banks, Inc. ("Community") or United Savings and Loan Association ("United Savings"), which were combined with or acquired by Valley in 1982, 1985, 1985, 1986, 1987 and 1992, respectively. Messrs. Farah, Meyer and Platten, formerly directors of Bankshares, became directors of Valley in 1982. Messrs. Diotte, McClellan and Ryan, formerly directors of BANCWIS, and Messrs. O'Malley, Petersen and Predolin, formerly directors of United Banks, became directors of Valley in 1985. Mr. Johnson, formerly a director of Spring Green, became a director of Valley in 1986. Messrs. Felten and Mack, formerly directors of Community, became directors of Valley in 1987. Messrs. Gehrke and Honold, formerly directors of United Savings and currently directors of its successor, Valley United Bank, S.S.B. ("Valley United"), became directors of Valley in 1992. (5) In connection with Valley's acquisition of United Savings, Valley agreed to appoint Mr. Gehrke as Valley's Senior Vice President/Lakeshore Region and to expand Valley's Board of Directors by appointing Messrs. Gehrke and Honold as additional directors of Valley. (6) Includes 18,321 shares in which Mr. Gehrke has an indirect beneficial interest as a participant in Valley's Management Recognition Plan, established in connection with the acquisition of United Savings. (7) Includes 30,169 shares held by a corporation of which Mr. Platten holds 10% of the voting shares. Executive Officers Certain information as to each of the executive officers of Valley is set forth in the following table. The persons listed below will continue to serve as executive officers of Valley until the earlier of consummation of the Merger or the election of their successors. Officer Name Age Since Positions(1) - - ------------------------------------------------------------------------------ Gus A. Zuehlke 72 1963 Chairman, Director and Member of Executive and Compensation Committees; Chairman, Valley Bank, Appleton, Wisconsin Peter M. Platten, III 54 1982 President and Chief Executive Officer, Director and Member of Executive Committee; Chairman, Valley Bank, Northeast, Green Bay, Wisconsin Richard H. Jones 55 1982 Executive Vice President/Northern Division and Director; President and Chief Executive Officer, Valley Bank, Appleton, Wisconsin John F. Mack 58 1987 Executive Vice President/Southern Division, Director and Member of Executive Committee; Chairman and Chief Executive Officer, Valley Bank, Madison, Wisconsin Gary A. Lichtenberg 50 1970 Senior Vice President/Chief Financial Officer and Secretary Charles H. Sauter 52 1977 Senior Vice President/Chief Administrative Officer William F. Gehrke 65 1992 Senior Vice President/Lakeshore Region and Director; Chairman and Chief Executive Officer, Valley United, Sheboygan, Wisconsin John W. Johnson 62 1987 Senior Vice President/West Region and Director; President and Chief Executive Officer, Valley Bank, Southwest, Spring Green, Wisconsin Mark L. Miller 50 1982 Senior Vice President/Financial Services; President, Valley Trust Company - - ---------------- (1) Certain executive officers hold offices in one or more subsidiaries of Valley in addition to their positions listed in the table. The principal occupation of each officer during the last five years was his present occupation stated above, except: Mr. Platten was Chief Operating Officer of Valley until he succeeded Mr. Zuehlke as Chief Executive Officer in January 1989 and was Chairman and Chief Executive Officer of Valley Bank, Northeast prior to January 1993. Messrs. Jones and Mack, who were Senior Vice Presidents previously, were elected Executive Vice Presidents of Valley in January 1991. Mr. Mack was President and Chief Executive Officer of Valley Bank, Madison prior to becoming Chairman in January 1991. Mr. Sauter was Senior Vice President/Administration prior to January 1991. Mr. Gehrke was President and Chief Executive Officer of United Savings prior to its combination with Valley in July 1992. Compliance with Section 16(a) of the Exchange Act Under the securities laws of the United States, Valley's directors, its executive officers, and any person holding more than 10% of Valley Common Stock are required to report their initial ownership of Valley Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission ("SEC"). Specific due dates for these reports have been established and Valley is required to disclose in this Report any failure to file such reports by these dates during 1993. Based solely on a review of copies of such reports furnished to Valley, or written representations that no reports were required, Valley believes that during 1993 all filing requirements applicable to its directors and executive officers were satisfied except that William F. Gehrke inadvertently failed to file on a timely basis one report relating to one transaction for a nominal number of Valley shares. The filing delinquency was cured promptly after Mr. Gehrke became aware of it. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table summarizes certain information for each of the last three fiscal years concerning the compensation awarded or paid to or earned by Valley's Chief Executive Officer and each of Valley's four other most highly compensated executive officers who were serving as executive officers at the end of fiscal 1993 (the "Named Executives"):
Long-Term Compensation Annual -------------------- Compensation (1) Awards ------------------- -------------------- Secur- ities Under- All lying Other Stock Options Compen- Name and Principal Bonus Award(s) Stock/SARs sation Position Year Salary($) ($)(2) ($) (#)(4) ($)(5) - - -------------------------------------------------------------------------------------------- Peter M. Platten, III 1993 373,000 74,600 0 0 55,742 President & Chief 1992 373.000 135,772 0 48,000 61,298 Executive Officer 1991 360,000 93,060 0 0 45,888 William F. Gehrke 1993 316,969 0 0 0 15,744 Senior Vice 1992 150,938 0 507,601(3) 0 45,217 President/ Lakeshore Region (6) Richard H. Jones 1993 234,000 46,800 0 0 35,008 Executive Vice 1992 234,000 90,090 0 19,500 34,098 President/ 1991 225,000 70,400 0 0 24,611 Northern Division John F. Mack 1993 234,000 46,800 0 0 35,032 Executive Vice 1992 234,000 87,492 0 19,500 34,234 President/ 1991 225,000 58,096 0 0 25,288 Southern Division Mark L. Miller 1993 177,000 35,400 0 0 25,601 Senior Vice 1992 177,000 61,843 0 15,000 23,601 President/ 1991 170,000 51,000 0 0 16,495 Financial Services
(1) While each of the Named Executives received perquisites or other personal benefits in the years shown, in accordance with SEC regulations, the values of these benefits are not indicated since they did not exceed, in the aggregate, the lesser of $50,000 or 10% of the individual's salary and bonus in any year. Because no other qualifying compensation was awarded or paid to or earned by the Named Executives, the "Other Annual Compensation" column has been omitted. (2) Bonus amounts for 1993 were earned during the year and paid at the end of the year. Bonus amounts for 1992 and 1991 were earned and accrued during those years and paid at the beginning of the next calendar year. (3) Represents the product of the closing market price of Valley Common Stock on the date of grant ($22.166) and the number of shares awarded to Mr. Gehrke (22,900) under the Valley Management Recognition Plan. The number and market value at the end of the last fiscal year of Mr. Gehrke's restricted common stock holdings, based on a fiscal year-end closing price of $39.50 per share, were 18,321 shares and $723,680, respectively. These valuations do not take into account the diminution in value attributable to the restrictions applicable to the shares. The restricted stock vests at the rate of 20% of the aggregate number of shares covered by the award at the end of each full twelve months of Mr. Gehrke's consecutive service with Valley United after the date of grant. If Mr. Gehrke's service is terminated for any reason (other than due to death, disability, retirement or change in control) prior to the fifth anniversary of the date of grant of the restricted stock award, Mr. Gehrke will forfeit the right to earn any such shares which have not theretofore vested. Dividends on the restricted stock are accrued at the same rate as on unrestricted shares and paid at the time of vesting. (4) Consists entirely of stock options. (5) Amounts shown for fiscal 1993 consist of Thrift and Sharing Plan contributions of $6,116 for each individual and the following additional components: (i) Non-Qualified Thrift and Sharing Plan accruals--Mr. Platten, $17,226; Mr. Jones, $8,361; Mr. Mack, $8,236; and Mr. Miller, $4,269; and (ii) life insurance premiums--Mr. Platten, $32,400; Mr. Gehrke, $9,628; Mr. Jones, $20,531; Mr. Mack, $20,680; and Mr. Miller, $15,216. The Non-Qualified Thrift and Sharing Plan was terminated effective December 31, 1993. (6) Effective July 1, 1992, Mr. Gehrke became Senior Vice President/Lakeshore Region of Valley in connection with Valley's acquisition of United Savings. Mr. Gehrke's fiscal 1992 compensation includes only amounts earned and accrued or paid by Valley during the period from July 1, 1992 through December 31, 1992. Option/SAR Grants in Last Fiscal Year No option/SAR grants were made to the Named Executives during fiscal 1993. Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values The following table sets forth certain information regarding individual exercises of stock options during fiscal 1993 and the number and value of options outstanding at the end of the last fiscal year for each of the Named Executives. No SARs were outstanding during fiscal 1993.
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs at FY-End (#) at FY-End ($)(1) Shares Acquired Value ------------------------- ----------------------------- Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisaableble - - --------------------------------------------------------------------------------------------------------------- Peter M. Platten, III 151,537 2,863,136 0/0 0/0 - - --------------------------------------------------------------------------------------------------------------- William F. Gehrke 0 0 0/0 0/0 - - --------------------------------------------------------------------------------------------------------------- Richard H. Jones 93,037 1,839,197 0/0 0/0 - - --------------------------------------------------------------------------------------------------------------- John F. Mack 73,799 1,467,289 0/0 0/0 - - --------------------------------------------------------------------------------------------------------------- Mark L. Miller 0 0 63,000/0 1,450,691/0 - - ---------------------------------------------------------------------------------------------------------------
(1) Based on the $39.50 closing price of Valley Common Stock at the end of the last fiscal year. Employment Agreements Each of the Named Executives has an employment agreement with Valley containing termination of employment and change-in-control provisions. The agreements with Messrs. Platten, Jones, Mack and Miller, entered into on July 31, 1992, replace previous employment agreements with such Named Executives. Mr. Gehrke's employment agreement was entered into on July 1, 1992 in connection with Valley's acquisition of United Savings. Except as to Messrs. Mack and Gehrke, each agreement provides for the continued employment of the executive in his respective position for a term of three years commencing January 1, 1992, with an automatic extension for an additional year on each January 1 (a rolling three-year term) unless Valley or the executive informs the other at least 30 days prior to such anniversary date that such party does not wish to extend the term. Mr. Mack's agreement is for a five-year term commencing January 1, 1992 and ending December 31, 1996, with a similar one-year extension that commences on January 1, 1995, resulting in a rolling three-year term. Mr. Gehrke's agreement is for a three-year term commencing July 1, 1992, and may be extended as of any annual anniversary date during the term upon the mutual agreement of Valley United, Valley and Mr. Gehrke by adding one additional year to the remaining term of employment, creating a rolling three-year term. Except as to Mr. Gehrke, as compensation for services to be provided under the agreements, the executives are entitled to receive annual cash compensation at a rate not less than that which they were receiving at the time the agreements were entered into, or such greater amount as may be approved by the Board of Directors. For his services, Mr. Gehrke receives an annual base salary in such amount as may from time to time be approved by the respective Boards of Directors of Valley United and Valley, provided that such annual base salary must at all times be at least equal to $301,875. Mr. Gehrke's base salary is subject to annual review and a cost of living increase each January 1 of not less than 5%. The Named Executives are entitled to other benefits of employment generally made available to Valley's executive or key management personnel having similar levels of responsibility and salary ("Executive Benefits") except that Mr. Gehrke is not entitled to participate in any stock purchase, stock option or stock appreciation right plans or programs of any type involving shares of Valley Common Stock or in any incentive bonus plans made available to executive officers of Valley United or Valley. Mr. Gehrke was awarded 22,900 shares of restricted Valley stock pursuant to his employment agreement under the Valley Management Recognition Plan. The restricted stock vests over a five-year period at the rate of 20% of such shares each year. In addition to the retirement benefits to which Mr. Gehrke is entitled under Valley's defined benefit plan, Mr. Gehrke's employment agreement provides that he will also be entitled to participate in Valley's excess benefit plan. Mr. Gehrke received credit under both plans for his past years of service to United Savings. Upon Mr. Gehrke's retirement, Valley United must provide to Mr. Gehrke and his surviving spouse health benefits equivalent to those provided under health insurance programs maintained by such institution immediately prior to his retirement, and Valley United will also continue to pay the premiums on a $250,000 life insurance policy insuring Mr. Gehrke's life. The employment agreement also provides that, should Mr. Gehrke pre-decease his spouse, Valley will pay a death benefit to her for the remainder of her life. That benefit will be in the form of a decreasing lump sum, payable as an annuity, in an amount sufficient to assure that, when aggregated with the benefits she will otherwise receive under Valley's defined benefit plan, excess benefit plan and Management Recognition Plan, she receives total annual benefits through the fifth anniversary of the employment agreement at least equal to Mr. Gehrke's base salary at retirement (assuming normal retirement at age 65), and at least equal to one-half of that amount after such fifth anniversary. Valley has no obligation to fund or otherwise secure the payment of this death benefit. If Messrs. Platten, Jones, Mack or Miller's employment is terminated by Valley (or its successor) for any reason other than death, disability or cause, the executive is entitled to (i) severance pay, in the amount (including bonus) and form of payment for his services as was in effect at the time of termination, continuing for the unexpired portion of the term of the agreement ("Employment Term"); (ii) continued Executive Benefits for the unexpired portion of the Employment Term; and (iii) retirement benefits in the amount to which the executive would have been entitled had he continued in the employ of Valley for the entire Employment Term, or until normal retirement age if his termination occurred after he reached age 55. Subject to non-competition restrictions, the terminated executive has the duty to take reasonable steps to obtain employment elsewhere (unless the termination occurs in connection with a change-in-control), whereby the amount of compensation payable by Valley will be partially reduced by any earnings from another employer for whom the executive works during the remainder of the Employment Term. Messrs. Platten, Jones, Mack and Miller's employment agreements provide for an increase in the amounts payable to offset fully on an after- tax basis the amount of any excise tax which may be levied upon an executive in the event portions of any payments under the agreements constitute "excess golden parachute payments" as defined in the Internal Revenue Code of 1986, as amended (the "Code"). If Mr. Gehrke's employment is terminated by Valley United or Valley for any reason other than death, disability, retirement or cause, Mr. Gehrke is entitled to receive severance pay in the form of payments continuing for the then remaining unexpired portion of the term of employment (including annual cost of living increases of not less than five percent). Mr. Gehrke could elect to receive such severance pay in one lump sum. The amount of such severance payments to Mr. Gehrke may not be less than two years compensation. In addition, retirement benefits which Mr. Gehrke would be entitled to receive under the tax qualified retirement plans maintained by Valley United and Valley in which he is eligible to participate would be determined as if he were fully vested and had accumulated the additional years of credit service that he would have received had his employment continued to the expiration of the then-remaining Employment Term at the highest annual rate of base salary in effect during the twelve months immediately preceding the termination. Mr. Gehrke's employment agreement provides that, under no circumstances may the aggregate amount of all such severance payments and termination benefits, computed on a present value basis, exceed an amount which would cause any portion of the payments to be characterized as "excess golden parachute payments" as defined in the Code. In the event of a change-in-control of Valley, Messrs. Platten, Jones, Mack and Miller may terminate their employment with Valley upon at least 90 days' notice at any time within 12 months following the change-in-control. If the executive so terminates his employment, or if his employment is terminated by Valley (or its successor) in contemplation of a change-in- control or within 12 months following a change-in-control, the executive is entitled, for a period of three years, to the same severance pay (via installments or a lump sum payment) and Executive Benefits described above for a termination by Valley of his employment agreement for any reason other than death, disability or cause. In addition, the executive will be entitled to receive, commencing the later of (i) three years after the change-in- control, or (ii) the date at which the executive reaches the age of 50, a supplemental pension benefit equal to the total pension amount otherwise payable to the executive calculated as if the executive were age 65 and had continued in the employ of Valley until that age. This supplemental pension benefit will be paid in the form of a monthly pension for the remainder of the executive's lifetime, but will be reduced accordingly when the executive begins to receive his regular pension benefits from Valley. Mr. Gehrke may terminate his employment for "good reason" upon at least 90 days' notice at any time within 18 months following a change-in-control of Valley United or Valley or at any time "for cause." If Mr. Gehrke so terminates his employment, he is entitled to the same severance payments and benefits described above for termination by Valley of his employment agreement for reason other than death, disability, retirement or cause. "Good reason" is defined to include a good faith determination by Mr. Gehrke that the nature of his position and the nature and quantity of his responsibilities, duties and work load are not consistent with his reasonable expectations based on representations and covenants made by the acquiror or a good faith determination by Mr. Gehrke that the overall objectives and benefits anticipated to Valley United as a result of the change-in-control transaction have not been, and are not soon likely to be, realized. Among other things, "for cause" is defined to include the occurrence of the following events without Mr. Gehrke's express written consent: (i) his assignment to any positions, duties or responsibilities that are substantially less significant than those held by him prior to any change-in- control; (ii) he is removed from, or is not re-appointed or re-elected to, his position with Valley United or Valley other than in connection with termination of his employment by Valley United or Valley for cause, disability or retirement, or, following a change-in-control, Mr. Gehrke is not appointed or elected to comparable positions with the survivor or the survivor does not agree to be bound by the terms of the employment agreement or both; or (iii) Mr. Gehrke's base salary is reduced or he is otherwise denied benefits provided to him under the employment agreement. In July 1992, Valley and Valley United also entered into a consulting and non-competition agreement with Mr. Gehrke, pursuant to which Mr. Gehrke agreed to provide consulting services to Valley and Valley United for a period of five years following his retirement. Mr. Gehrke has further agreed not to manage, operate, control, be employed by, participate in or be connected in any manner with the operation, ownership, management or control of any financial institution which is a significant competitor of Valley, Valley United or any of Valley's other affiliates, at any time during the five-year term of the consulting and non-competition agreement. Under this agreement, Mr. Gehrke must make himself available to Valley United and Valley to consult and otherwise assist on matters and issues pertaining to their savings and loan business generally on an as-needed and as-requested basis. Mr. Gehrke may not be required to provide more than 65 hours of such consulting services during any calendar month or more than 660 hours of such consulting services during any calendar year. In consideration for making himself available to provide and for providing such services, Mr. Gehrke will receive a monthly consulting fee in the amount of $2,325. Also, in consideration for his covenant not to compete with Valley and Valley United during the five-year consulting period, Mr. Gehrke will receive additional compensation in the amount of $1,000 per month throughout this period. The consulting and non-competition agreement will terminate immediately upon the death of Mr. Gehrke, or upon termination of his employment agreement by Valley or Valley United for cause, and may be terminated by Valley and Valley United upon a breach by Mr. Gehrke of his covenant not to compete or of his non-disclosure obligations thereunder, in either case without further obligation on the part of Valley or Valley United. In connection with the Merger, M&I has entered into letter agreements with Messrs. Platten and Miller in which it has agreed that, notwithstanding the contemplated continued employment of such individuals by M&I, each of such executives may at his election be treated as if a change-in-control termination occurred as a result of the Merger under his existing Valley employment agreement and the date of such election shall be deemed the termination date for purposes of such employment agreement. Mr. Miller has agreed with M&I, subject to certain conditions, that he shall be considered to have made such an election on the date of the Merger. Mr. Platten, Valley and M&I have agreed that Mr. Platten's election is considered to have been made, subject to certain conditions, as of the date immediately preceding the Merger. Messrs. Jones and Mack have entered into similar letter agreements with M&I providing that on the date of the Merger, their termination of employment will be treated as a change-in-control termination under their respective Valley employment agreements. The approximate aggregate amount payable to the four executives who have entered into letter agreements under their existing Valley employment agreements, discounted (where appropriate) at a 6% interest rate, compounded annually, and under the Valley Executive Life Insurance Plan, discussed below, are approximately as follows: Mr. Platten -- $3.3 million; Mr. Jones -- $2.3 million; Mr. Mack -- $1.5 million and Mr. Miller -- $1.9 million. The above amounts do not reflect the gross- up for the golden parachute excise tax, which depends on factors which are not quantifiable at this time. For a discussion of certain employment and change-in-control agreements to be entered into by certain Named Executives and M&I upon consummation of the Merger, see "Certain Related Transactions--Employment Agreements and Related Matters--New Employment Agreements and Related Matters" in M&I's and Valley's Joint Proxy Statement dated December 30, 1993. Under the Valley Executive Life Insurance Plan, each of the Named Executives (except Mr. Gehrke) is entitled to receive a paid-up life insurance policy providing life insurance coverage for the executive's life time equal to 2.5 times base compensation pre-retirement and one times base compensation post-retirement assuming retirement at age 65 with salary increases at 6% to age 65. The premium to purchase the policy must be paid no later than 60 days after the Merger. Furthermore, if the payment of the premium would result in taxable income to the executive, the executive will receive a payment to offset fully, on an after-tax basis, any federal and state income taxes owing in connection with the premium payment. It is a condition to the Merger that Messrs. Platten, Jones, Mack and Miller agree to limit the life insurance coverage provided under the Valley Executive Life Insurance Plan to one times base compensation for 1993 for both pre- and post-retirement. Each of these executives has entered into an agreement with Valley and M&I which amends the obligation of Valley to pay the executive an amount equal to the additional premium required to provide life insurance coverage for the executive's lifetime in an amount equal to one times 1993 base compensation, plus a specific amount to offset for any federal and state income taxes arising by reason of such payment. The value of the additional premium to purchase such a policy and the federal and state income tax gross- up, assuming the existing cash surrender value of the policy and the additional premium will be taxable income to the executive, is included in the amounts stated above for payments to the executives upon a change-in-control under the terms of their respective employment agreements. Pension Plan Table The following table sets forth the estimated annual benefits payable upon normal retirement at age 65 for the specified amounts of remuneration and years of service indicated under Valley's defined benefit plan.
Years of Service ------------------------------------------------------------------------------ Remuneration 5 10 15 20 25 30 35 - - ----------------------------------------------------------------------------------------------- $100,000 $9,190 $18,380 $27,570 $36,760 $45,950 $55,140 $64,330 150,000 14,565 29,130 43,695 58,260 72,825 87,390 101,955 200,000 19,940 39,880 59,820 79,760 99,700 119,640 139,580 250,000 25,315 50,630 75,945 101,260 126,575 151,890 177,205 300,000 30,690 61,380 92,070 122,760 153,450 184,140 214,830 350,000 36,065 72,130 108,195 144,260 180,325 216,390 252,455 400,000 41,440 82,880 124,320 165,760 207,200 248,640 290,080 450,000 46,815 93,630 140,445 187,260 234,075 280,890 327,705 500,000 52,190 104,380 156,570 208,760 260,950 313,140 365,330 550,000 57,565 115,130 172,695 230,260 287,825 345,390 402,955 600,000 62,940 125,880 188,820 251,760 314,700 377,640 440,580 650,000 68,315 136,630 204,945 273,260 341,575 409,890 478,205
Remuneration covered by the defined benefit plan includes the amounts shown in the "Salary" and "Bonus" columns of the Summary Compensation Table, except that bonuses are recognized for plan remuneration purposes in the year paid instead of the year accrued. The years of service credited for each of the Named Executives are: Mr. Platten, 13; Mr. Gehrke, 39; Mr. Jones, 22; Mr. Mack, 6; and Mr. Miller, 16. Benefits under the plan are payable as a straight life annuity. Such benefits are not subject to any deduction for social security or other offset amounts. The maximum annual benefit currently allowable under the Code from a tax-qualified defined benefit plan on a life annuity basis to an individual age 65 is $118,800. To the extent that the benefits of an individual under the plan are reduced because of the Code limitation, the reduction is made up to the individual under a non-qualified and unfunded excess benefit plan. The qualified plan is not permitted to recognize compensation for a year in excess of the compensation limit determined by law ($150,000 in 1994). The excess plan also will make up any reduction caused by the application of the compensation ceiling. A participant's historic compensation for purposes of calculating the benefits available under the excess plan may include certain deferred compensation and awards of Valley Common Stock made to a participant during the relevant years pursuant to Valley's Management Recognition Plan. The benefits included in the table above represent the amounts that would be provided through the combination of the defined benefit plan and the excess benefit plan. Pursuant to the Merger Agreement, at the effective time of the Merger participation in Valley's defined benefit plan and excess benefit plan shall be frozen and accruals for purposes of determining benefit and eligibility service under the plans shall cease. Service with M&I after the effective time of the Merger shall be credited, however, for purposes of determining vesting service under the plans. Director Fees and Arrangements Directors who are not full-time employees of Valley or its subsidiaries were paid an annual retainer at the rate of $6,000 and received $750 for each meeting of the Board and its committees attended in 1993. Such fees are unchanged for 1994. Directors may elect to defer such amounts in full but not in part. Interest is credited on deferred amounts under a formula based upon current rates paid by Valley on six month certificates of deposit. Directors who are full-time employees of Valley or a subsidiary do not receive separate remuneration in connection with their service on the Board or Board committees. In connection with Mr. Zuehlke's retirement as Chief Executive Officer of Valley in January 1989, Valley entered into an oral arrangement with Mr. Zuehlke whereby, for his continuing services as an officer of Valley, he would be paid an annual sum of $50,000. Pursuant to this arrangement, Mr. Zuehlke received $50,000 for his services as Chairman in fiscal 1993. Outside Directors' Stock Option Plan The Valley 1992 Outside Directors' Stock Option Plan (the "Directors' Plan") was adopted by shareholders on April 21, 1992 to provide an incentive for directors of Valley who are not active full-time employees of Valley or a subsidiary ("Outside Directors") to improve corporate performance on a long- term basis. The Directors' Plan has 180,000 shares of Valley Common Stock reserved for issuance, provides for the granting of non-qualified stock options and expires on December 31, 1995. The Directors' Plan is administered by the Compensation Committee of the Board of Directors, but the Committee has no discretion as to the amount, price or timing of any option to be granted, which are fixed by the terms of the Directors' Plan. Each year during the term of the Directors' Plan, upon the first meeting of Valley's Board of Directors following the annual meeting of shareholders, each person then serving Valley as an Outside Director is automatically granted an option to purchase the number of shares designated by the Directors' Plan. The exercise price at which shares may be purchased under each option is 100% of the fair market value of Valley Common Stock on the date the option is granted. On April 27, 1993, the Outside Directors were each granted an option for 3,000 shares of Valley Common Stock at an exercise price of $26.46 per share. The Directors' Plan provides that options granted thereunder will become exercisable six months from the date of grant. All rights to exercise an option will terminate upon the earlier of ten years from the date of grant or two years from the date the grantee ceases to be a director of Valley. At February 25, 1994, options for 4,500 shares had been exercised under the Directors' Plan, options for a total of 109,500 shares were outstanding and 66,000 shares were available for future grants under the Directors' Plan. However, under the Merger Agreement with M&I, Valley has agreed not to grant any additional stock options under the Directors' Plan, or otherwise, from the September 19, 1993 date of the Merger Agreement to the effective time of the Merger. Pursuant to the terms of the Merger Agreement, M&I will assume the Directors' Plan and Valley's obligations thereunder. At the effective time of the Merger, each outstanding option issued pursuant to the Directors' Plan shall be deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such option, a number of shares of M&I Common Stock equal to the product of the Exchange Rate and the number of shares subject to such option, at a price per share equal to the aggregate exercise price for the shares subject to such option divided by the number of shares of M&I Common Stock purchasable pursuant to such option. Compensation Committee Interlocks and Insider Participation Mr. Zuehlke, who serves as a member of the Compensation Committee of Valley's Board of Directors with Messrs. Boldt, Meyer and Reigle, was the Chief Executive Officer of Valley prior to January 1989 and continues to serve as the Chairman of Valley and one of its subsidiaries, Valley Bank, Appleton. Valley leases its principal executive office space from a partnership with which Oscar C. Boldt is affiliated. The current lease relates to approximately 20,000 square feet of office space in Appleton and calls for minimum rent payments totalling approximately $849,160, plus operating expense increases, over the remaining three-year term ending April 30, 1997. Rent paid in 1993 totalled $282,000. Valley has three leases for approximately 17,000 square feet of office space with an entity of which Valley and a corporation affiliated with Mr. Boldt are shareholders. Messrs. Platten, Boldt and two other persons associated with Mr. Boldt, who are also directors of Valley Bank, Appleton, are currently serving as directors of such entity. The total amount of rent paid under the three leases in 1993 was approximately $109,000, plus operating expenses. In the opinion of management, the terms of such leases and transactions are as favorable to Valley as those obtainable from other unrelated firms. Since January 1, 1993, three members of Valley's Compensation Committee, or their associates or firms for which they serve as officers or directors, have been indebted to subsidiary banks of Valley for loans made in the ordinary course of business. Such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable features. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Rule 13d-3 under the Exchange Act provides that a beneficial owner of a security includes any person who directly or indirectly has or shares voting or investment power over such security. A beneficial owner under this definition need not enjoy the economic benefit of such security. The following table sets forth information as of February 25, 1994 with respect to any person known to Valley to be the beneficial owner of more than 5% of the outstanding shares of Valley Common Stock. Number of Shares and Nature of Beneficial Percent Name and Address Ownership(1) of Class - - ------------------------------------------------------------------------------- Marshall & Ilsley Corporation 4,072,045(2) 16.428%(2) 770 North Water Street Milwaukee, WI 53202 _______________ (1) The specified person has sole voting and dispositive power as to the shares indicated. (2) Of such shares, 4,045,795 are shares which M&I would have the right to acquire under the Stock Option Agreement entered into by Valley with M&I in connection with the Merger Agreement. M&I disclaims beneficial ownership of the shares subject to the Option until the events allowing exercise of the Option occur. See Item 1 "Business--Pending Merger With Marshall & Ilsley Corporation." The Stock Option Agreement provides that the number of shares subject to the Option shall be adjusted to reflect the issuance of any additional shares of Valley Common Stock after the date of the Stock Option Agreement so that the Option equals 19.9% of the number of shares then issued and outstanding. At February 25, 1994, Valley Trust Company ("Valley Trust"), a subsidiary of Valley, acted in a fiduciary capacity with respect to 3,473,369 shares of Valley Common Stock. Of such shares, 2,483,747 were held in its capacity as trustee of Valley's Thrift and Sharing Plan, 18,321 were held in its capacity as trustee of Valley's Management Recognition Plan and 971,301 were held in its capacity as trustee, co-trustee or custodian of 231 other trusts and custodial accounts. Because shares of Valley Common Stock held in the Plans are allocated to the individual accounts of participants, and since Valley Trust is instructed by such participants as to the voting of such shares and is limited as to the disposition of Valley Common Stock by the terms of the Plans, Valley Trust disclaims beneficial ownership of Valley Common Stock held by the Plans. With respect to Valley Common Stock held in the other trusts and custodial accounts administered by Valley Trust, since Valley Trust does not vote any such shares without written direction from the beneficiary, and because Valley Trust's policy is to acquire, hold and dispose of Valley Common Stock only upon the direction of the account beneficiary, Valley Trust disclaims beneficial ownership of the majority of Valley shares held by such trusts and custodial accounts. The mailing address of Valley Trust Company is Valley Bank Plaza, P.O. Box 1056, Appleton, Wisconsin 54911. For information with respect to the beneficial ownership of Valley Common Stock by its directors, see "Item 10. Directors and Officers of the Registrant--Directors" which is incorporated herein by reference. The following table sets forth certain information at February 25, 1994 regarding the beneficial ownership of Valley Common Stock by Mr. Miller, the only Named Executive who is not also a director of Valley. Number of Shares and Name of Nature of Beneficial Percent Executive Officer Ownership(1) of Class - - ------------------------------------------------------------------------------ Mark L. Miller 71,841(2)(3) .345% _______________ (1) As reported to Valley by the executive officer as of the date stated. The beneficial ownership information is not necessarily to be construed as an admission of beneficial ownership for other purposes. (2) Includes 63,000 shares which Mr. Miller has the right to acquire pursuant to stock options exercisable at or within 60 days of the date stated. (3) Includes 8,382 shares, as of December 31, 1993, for which Mr. Miller has an indirect beneficial interest as a participant in Valley's Thrift and Sharing Plan. Such interests have subsequently increased by amounts which are not material. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Customers of Valley's subsidiary banks include the directors and officers of Valley and its subsidiaries, as well as their associates and firms for which they serve as officers or directors. Since January 1, 1993, certain of such persons and firms have been indebted to the subsidiary banks for loans made in the ordinary course of business. Such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable features. See "Item 11. Executive Compensation--Compensation Committee Interlocks and Insider Participation," incorporated by reference herein, for information concerning certain other relationships and transactions. Valley has a $50 million line of credit with M&I Marshall & Ilsley Bank, a subsidiary of M&I. In connection with such line of credit, Valley has made a promissory note, payable on demand, to M&I Marshall & Ilsley Bank in the amount of up to $50 million at the prime rate of interest. In the opinion of management, the terms of such line of credit are as favorable to Valley as those obtainable from other unrelated financial institutions. Valley, M&I and their subsidiaries have certain other relationships in the ordinary course of their businesses. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed: 1 and 2. Financial Statements and Financial Statement Schedules. The following financial statements of Valley Bancorporation and subsidiaries are filed as a part of this report under Item 8. "Financial Statements and Supplementary Data." Report of Independent Public Accountants Consolidated Statements of Financial Position as of December 31, 1993 and 1992 Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements All financial statement schedules have been omitted as not applicable or because the information is included in the financial statements or notes thereto. 3. Exhibits. See Exhibit Index as last part of this report, which is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALLEY BANCORPORATION (Registrant) By: GARY A. LICHTENBERG March 30, 1994 ------------------------------------------- Gary A. Lichtenberg, Senior Vice President/ Chief Financial Officer ______________________ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter M. Platten, III and Gary A. Lichtenberg, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and any other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. _____________________ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.* PETER M. PLATTEN, III THOMAS L. LYON -------------------------------------- ----------------------------------- Peter M. Platten, III, President Thomas L. Lyon, Director Chief Executive Officer and Director GARY A. LICHTENBERG JOHN F. MACK -------------------------------------- ----------------------------------- Gary A. Lichtenberg, Senior Vice John F. Mack, Director President/Chief Financial Officer (also principal accounting officer) GUS A. ZUEHLKE NEAL E. MADISEN -------------------------------------- ----------------------------------- Gus A. Zuehlke, Director Neal E. Madisen, Director (Chairman of the Board) OSCAR C. BOLDT ROWLAND J. McCLELLAN -------------------------------------- ----------------------------------- Oscar C. Boldt, Director Rowland J. McClellan, Director ALFRED P. DIOTTE -------------------------------------- ----------------------------------- Alfred P. Diotte, Director Edward L. Meyer, Jr., Director CARL FARAH ROBERT C. O'MALLEY -------------------------------------- ----------------------------------- Carl Farah, Director Robert C. O'Malley, Director EDWARD J. FELTEN JOHN PETERSEN, III -------------------------------------- ----------------------------------- Edward J. Felten, Director John Petersen, III, Director WILLIAM F. GEHRKE HENRY PREDOLIN -------------------------------------- ----------------------------------- William F. Gehrke, Director Henry Predolin, Director REYNOLDS K. HONOLD JAMES D. REIGLE -------------------------------------- ----------------------------------- Reynolds K. Honold, Director James D. Reigle, Director JOHN W. JOHNSON DONALD P. RYAN -------------------------------------- ----------------------------------- John W. Johnson, Director Donald P. Ryan, Director RICHARD H. JONES -------------------------------------- Richard H. Jones, Director *Each of the above signatures is affixed as of March 30, 1994. VALLEY BANCORPORATION (the "Registrant") (Commission File No. 0-2453) EXHIBIT INDEX TO 1993 ANNUAL REPORT ON FORM 10-K Incorporated Exhibit Herein by Filed Number Description Reference to Herewith 2.1 (a) Agreement and Plan of Exhibit 2.1(a) to Merger, dated as of Registrant's Current September 19, 1993, between Report on Form 8-K Valley Bancorporation and dated September 19, Marshall & Ilsley 1993 ("9/19/93 8-K") Corporation (1) 2.1 (b) Stock Option Agreement, Exhibit 2.1(b) to dated as of September 19, 9/19/93 8-K 1993, between Valley Bancorporation and Marshall & Ilsley Corporation 3.1 (a) Composite Amended and Exhibit 19.1(b) to Restated Articles of Registrant's 10-Q for Incorporation, as last quarter ended 3/31/89 amended April 21, 1989 (excluding Certificate of Designations in respect to Series A Preferred Stock) (b) Certificate of Designations Exhibit 3.1 and 4.1 in respect of Series A to Registrant's 10-Q Preferred Stock, dated for quarter ended October 28, 1988, and 9/30/88 related resolution of Board of Directors (constituting an amendment to the Amended and Restated Articles of Incorporation) 3.2 Bylaws (as last amended Exhibit 3.2 to January 22, 1991) Registrant's 10-K for year ended 12/31/90 ("1990 10-K") _______________________ (1) The Registrant agrees to furnish supplementally any omitted schedule to the Commission upon request. Incorporated Exhibit Herein by Filed Number Description Reference to Herewith 4(2) 4.1 (a) Note Agreement, dated August Exhibit 4.1 to 30, 1985, relating to Registrant's 10-Q for $25,000,000 of 11.25% Senior quarter ended 9/30/85 Notes due August 31, 1995 (b) July 1990 Amendment Exhibit 19.2 to Registrant's 10-Q for quarter ended 9/30/90 4.2 (a) Articles III, IV, and VI of See Exhibit 3.1(a) Registrant's Amended and above Restated Articles of Incorporation (b) Certificate of Designations See Exhibit 3.1(b) in respect of Series A above Preferred Stock 4.3 (a) Amended and Restated Credit Exhibit 4.1 to Agreement, dated as of Registrant's 10-Q for September 30, 1989, between quarter ended 9/30/89 Registrants and Continental Bank, N.A. (the "Credit Agreement") (b) August 13, 1991 letter Exhibit 19.1 to agreement amending the Registrant's 10-Q for Credit Agreement quarter ended 9/30/91 ("9/30/91 10-Q") (c) December 15, 1993 letter X agreement extending "Revolving Termination Date" under Credit Agreement to March 31, 1994 ______________________ (2) Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant agrees to furnish to the Commission upon request a copy of any unfiled instruments defining the rights of security holders. Incorporated Exhibit Herein by Filed Number Description Reference to Herewith 4.4 (a) Rights Agreement, dated as Exhibit 1 to of October 21, 1988, between Registrant's 8-K Valley Bancorporation and dated October 21, The First National Bank of 1988 and to Boston, as Rights Agent (the Registrant's "Rights Agreement"), and Registration Exhibit A (Form of Statement on Form 8-A Certificate of Designations filed on November 8, specifying the terms of the 1988 Series A Preferred Stock), Exhibit B (Form of Right Certificate) and Exhibit C (Summary of Rights) thereto (b) Amendment No. 1, dated as of Exhibit 4.4(b) to September 19, 1993, to 9/19/93 8-K Rights Agreement 4.5 Note Agreement, dated December Exhibit 4.5 to 1990 19, 1990, relating to $23,000,000 10-K 9.86% Senior Notes due December 20, 1994 and $30,000,000 9.97% Senior Notes due December 20, 1995 10.1* 1993 Incentive Pay Plan and Exhibit 10.1 to Management Incentive Plan B Registrant's 10-K for year ended 12/31/92 ("1992 10-K") 10.2* 1992 Incentive Pay Plan and Exhibit 10.2 to Management Incentive Plan B Registrant's 10-K for year ended 12/31/91 ("1991 10-K") 10.3* (a) 1984 Incentive Stock Option Exhibit 10.07 to Plan (approved by Registrant's 10-K for shareholders 4/24/84) year ended 12/31/83 _____________________ * Management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. Incorporated Exhibit Herein by Filed Number Description Reference to Herewith (b) Amendment adopted by Board Exhibit 10.4(b) to of Directors on October 23, 1990 10-K 1990 10.4 *Employment Agreements, dated Exhibits 19.2(a)-(g) as of July 31, 1992, between to Registrant's 10-Q Valley Bancorporation and for quarter ended each of the following 9/30/92 ("9/30/92 executive officers: 10-Q") (a) Peter M. Platten, III (b) Richard H. Jones (c) John F. Mack (d) Gary A. Lichtenberg (e) Charles H. Sauter (f) John W. Johnson (g) Mark L. Miller 10.5* Valley Bancorporation Exhibit 10.5 to 1992 Executive Life Insurance Plan 10-K 10.6* Deferred Compensation Exhibit 10B to Agreement between BANCWIS BANCWIS Corporation Corporation and Rowland 10-K for year ended J. McClellan, dated July 12/31/83 10, 1979 10.7* Modification of Employment Exhibit 10.15 to and Benefit Arrangements for Registrant's 10-K for Robert C. O'Malley, effective year ended 12/31/87 as of December 31, 1987, among Mr. O'Malley, Registrant and Valley Bank, Madison, amending and reinstating, as so amended, Salary Continuation Plan Agreement dated August 12, 1985 between Mr. O'Malley and Valley Bank, Madison 10.8* Valley Bancorporation 1986 Exhibit A to Amended and Restated Stock Registrant's 1987 Option Plan (approved by Annual Meeting Proxy shareholders 4/28/87) Statement dated 3/30/87 _____________________ * Management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. Incorporated Exhibit Herein by Filed Number Description Reference to Herewith 10.9* (a) Valley Bancorporation Exhibit 19.3(a) to Assumption of Stock Options, Registrant's 10-Q for dated August 28, 1987, quarter ended 9/30/87 assuming obligations under ("9/30/87 10-Q") the stock options outstanding under the following stock option plans of Community Banks, Inc.: (i) 1983 Incentive Stock Option Plan (ii) 1984 Incentive Stock Option Plan (iii) 1986 Incentive Stock Option (b) July 31, 1987 Amendment to Exhibit 19.3(b) to Plans 9/30/87 10-Q 10.10* Valley Bancorporation 1988 Exhibit A to Nonqualified Stock Option Plan Registrant's 1988 (approved by shareholders on Annual Meeting Proxy 4/19/88) Statement dated 3/22/88 10.11* (a) Valley Bancorporation Excess Exhibit 10.16 to Benefits Pension Plan Registrant's 10-K for (effective January 1, 1989 year ended 12/31/89 and restated as of September ("1989 10-K") 12, 1989) (b) Amendment adopted by Board Exhibit 10.12(b) to of Directors on January 21, 1991 10-K 1992 10.12* Valley Bancorporation Non- Exhibit 10.19 to 1989 Qualified Thrift and Sharing Plan 10-K (effective January 1, 1987) 10.13* Valley Bancorporation 1992 Exhibit A to Incentive Stock Plan (approved by Registrant's 1992 shareholders on 4/21/92) Annual Meeting Proxy Statement dated 3/25/92 _____________________ * Management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. Incorporated Exhibit Herein by Filed Number Description Reference to Herewith 10.14* Valley Bancorporation 1992 Exhibit B to Outside Directors' Stock Option Registrant's 1992 Plan (approved by shareholders on Annual Meeting Proxy 4/21/92) Statement dated 3/25/92 10.15 (a) Lease of Office Space Exhibit 10.17(a) to between Valley BankService 1991 10-K Corporation and NAC Corp. dated January 15, 1992 (b) Lease of Office Space Exhibit 10.17(b) to between Valley Securities, 1991 10-K Inc. and NAC Corp. dated January 15, 1992 (c) Lease of Retail Space Exhibit 10.17(c) to between Valley Bank, 1991 10-K [Appleton] and NAC Corp. dated January 15, 1992 10.16 Office Lease, commencing May 1, Exhibit 10.13(c) to 1989 (as amended by First Registrant's 10-K for Amendment thereto), between year ended 12/31/88 Registrant and Appleton Center Associates replacing previous Office Leases 10.17* Employment Agreement, dated as of Exhibit 10.17 to 1992 July 1, 1992, between Valley 10-K (3) United Bank, S.S.B., Valley Bancorporation and William F. Gehrke 10.18* Consulting and Non-Competition Exhibit 10.18 to 1992 Agreement, dated as of July 1, 10-K (3) 1992, between Valley United Bank, S.S.B., Valley Bancorporation and William F. Gehrke 10.19* Valley Bancorporation Management Exhibit 10.19 to 1992 Recognition Plan dated June 1, 10-K (3) 1992 _____________________ * Management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. (3) Filed with Amendment No. 1 to 1992 10-K. Incorporated Exhibit Herein by Filed Number Description Reference to Herewith 11.1 Computation of Net Income per X Common Share 21.1 List of Subsidiaries of X Registrant 23.1 Consent of Arthur Andersen & Co. X 24.1 Powers of Attorney Signature Page of this Report Exhibit 4.3(c) (1993 10-K) [Continental Bank Letterhead] 231 South LaSalle Street Chicago, Illinois 60697 312 828 4682 FAX: 312 967 6982 Continential Bank Jennings F. Werner Vice President Financial Institutions December 15, 1993 Mr. Gary A. Lichtenberg SVP & CFO Valley Bancorporation 100 W. Lawrence Street Appleton, WI 54912 RE: Credit Agreement dated September 30, 1989 between VALLEY BANCORPORATION and CONTINENTAL BANK, N.A. Dear Gary: Pursuant to the terms of the above captioned Credit Agreement, the undersigned hereby approves and agrees to an extension of the "REVOLVING TERMINATION DATE" from December 31, 1993, to March 31, 1994. Please acknowledge your Agreement of the new "REVOLVING TERMINATION DATE" by signing and returning a copy of this letter. Regards, /s/ Jennings F. Werner APPROVED & AGREED ---------------------------- BY: /s/ GARY A. LICHTENBERG ---------------------------- PRINT: GARY A. LICHTENBERG ---------------------------- TITLE: SVP - CFO ---------------------------- DATE: 12/15/93 ---------------------------- Exhibit 11.1 (1993 10-K) VALLEY BANCORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE - - ------------------------------------------------------------------------------- Year ended December 31, --------------------------------------- 1993 1992 1991 --------------------------------------- PRIMARY: Weighted average common shares outstanding during each period 20,325,524 19,243,509 18,335,847 Incremental shares relating to: Dilutive stock options outstanding at end of each period (1) 387,000 236,717 170,531 --------------------------------------- 20,712,524 19,480,226 18,506,378 --------------------------------------- FULLY DILUTED: Weighted average common shares outstanding during each period 20,325,524 19,243,509 18,335,847 Incremental shares relating to: Dilutive stock options outstanding at end of each period (2) 556,408 372,103 300,248 --------------------------------------- 20,881,932 19,615,612 18,636,095 --------------------------------------- NET INCOME FOR EACH PERIOD $45,902,766 $39,779,425 $30,666,063 PER COMMON SHARE AMOUNTS: Primary $2.21 $2.04 $1.66 Fully diluted $2.19 $2.03 $1.65 As presented in statement of income based on weighted average common shares outstanding $2.26 $2.07 $1.67 Notes: (1) Based on treasury stock method using average market price. (2) Based on treasury stock method using period-end market price, if higher than average market price. - - ------------------------------------------------------------------------------ The effect of stock options on primary earnings per share and on fully diluted earnings per share for each of the years is less than 3%, and therefore, is not considered materially dilutive in computing earnings per share as presented in the Consolidated Statements of Income. Exhibit 21.1 (1993 10-K) SUBSIDIARIES OF VALLEY BANCORPORATION* Jurisdiction of Subsidiary Banks(1) Incorporation ------------------ --------------- Valley Bank [Madison] Wisconsin Valley Bank [Appleton] Wisconsin Valley Bank, Northeast [Green Bay] Wisconsin Valley Bank [Milwaukee] Wisconsin Valley Bank, Janesville Wisconsin Valley United Bank, S.S.B. [Sheboygan] Wisconsin Valley Bank Southwest [Spring Green] Wisconsin Valley Bank [Chippewa] Wisconsin Valley Bank East Central [Kewaskum] Wisconsin Valley Bank (National Association) [Watertown] U.S.A. Valley Bank of Oshkosh Wisconsin Valley Bank of Shawano, N.A. U.S.A. Valley First National Bank [Rhinelander] U.S.A. Pierce County Bank and Trust Company [Ellsworth] Wisconsin Valley Bank Western, FSB [Sparta] U.S.A. Valley First National Bank [Ripon] U.S.A. Valley Bank [La Crosse] Wisconsin Financial Service Subsidiaries ------------------------------ Valley Trust Company Wisconsin Insurance Services, Inc. Wisconsin Valley Bancard, Inc. Wisconsin Valley Securities, Inc. Wisconsin Community Life Insurance Company Arizona Valley BankService Corporation Wisconsin Valley Real Estate Services Corporation Wisconsin _______________________________ * Includes directly and indirectly owned significant subsidiaries; omits certain insignificant non-bank subsidiaries (1) Generally, each commercial bank has a related 100% owned investment subsidiary incorporated in Nevada. Exhibit 23.1 (1993 10-K) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, included in this Form 10-K, into the registrant's previously filed Registration Statements on Form S-8, File Nos. 33-1201, 33-11458, 33-13883, 33-18147, 33-23066, 33-53504 and 33-53506. ARTHUR ANDERSEN & CO. Milwaukee, Wisconsin, March 30, 1994. EX-99 8 EXHIBIT 99.1/PRO FORMA COMBINED BALANCE SHEET/10-Q - 03/31/94
PRO FORMA COMBINED CONDENSED BALANCE SHEETS Exhibit MARCH 31, 1994 99.1 (In thousands) Pro Forma Adjustments --------------------- Pro Forma ASSETS M&I Valley Combined Ref Amount Combined ----------- ----------- ------------ ---------- ---------- ------------ Cash & cash equivalents: Cash and due from banks ..................... $445,106 $143,617 $588,723 $588,723 Other cash equivalents ...................... 269,426 7,885 277,311 (4)(5) (54,769) 222,542 ----------- ----------- ------------ ---------- ------------ Cash & cash equivalents ....................... 714,532 151,502 866,034 (54,769) 811,265 Other short-term investments .................. 51,101 765 51,866 (5) 50 51,916 Investment securities held to maturity ................................. 157,076 206,779 363,855 363,855 Investment securities available for sale .................................... 1,452,898 758,398 2,211,296 (5) (30,281) 2,181,015 Loans: Commercial loans and leases ................. 2,191,680 723,062 2,914,742 (4) (14,000) 2,900,742 Real estate ................................. 2,517,526 1,801,994 4,319,520 4,319,520 Personal .................................... 717,754 644,105 1,361,859 1,361,859 ----------- ----------- ------------ ---------- ------------ 5,426,960 3,169,161 8,596,121 (14,000) 8,582,121 Less: Allowance for loan losses ............. 94,871 42,303 137,174 137,174 ----------- ----------- ------------ ---------- ------------ Net loans ..................................... 5,332,089 3,126,858 8,458,947 (14,000) 8,444,947 Premises and equipment, net ................... 197,512 101,232 298,744 298,744 Accrued interest and other assets ............. 200,778 98,036 298,814 (3) 1,108 299,922 ----------- ----------- ------------ ---------- ------------ Total Assets ..................................$8,105,986 $4,443,570 $12,549,556 ($97,892) $12,451,664 =========== =========== ============ ========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing .........................$1,558,428 $497,662 $2,056,090 $2,056,090 Interest bearing ............................ 4,420,907 3,280,344 7,701,251 7,701,251 ----------- ----------- ------------ ---------- ------------ Total deposits ................................ 5,979,335 3,778,006 9,757,341 0 9,757,341 Short-term borrowings ......................... 1,013,919 182,973 1,196,892 (4)(5) (76,000) 1,120,892 Long-term borrowings .......................... 197,534 53,236 250,770 (5) (23,000) 227,770 Accrued expenses and other liabilities ........ 163,801 64,172 227,973 (2)(3) 50,855 278,828 ----------- ----------- ------------ ---------- ------------ Total Liabilities ............................. 7,354,589 4,078,387 11,432,976 (48,145) 11,384,831 Shareholders' Equity Preferred stock ............................. 185 - 185 185 Common stock ................................ 66,425 10,377 76,802 (1) 25,319 102,121 Additional paid-in capital .................. 49,190 213,812 263,002 (1) (25,319) 237,683 Retained Earnings ........................... 775,997 147,675 923,672 (2)(3) (49,747) 873,925 Less: Treasury common stock, at cost ............ 136,379 - 136,379 136,379 Deferred Compensation ..................... 1,690 - 1,690 1,690 Net unrealized losses on securities available for sale, net of taxes .................. 2,331 6,681 9,012 9,012 ----------- ----------- ------------ ---------- ------------ Total Shareholders' Equity .................... 751,397 365,183 1,116,580 (49,747) 1,066,833 ----------- ----------- ------------ ---------- ------------ Total Liabilities and Shareholders' Equity ....$8,105,986 $4,443,570 $12,549,556 ($97,892) $12,451,664 =========== =========== ============ ========== ============
SEE NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEETS NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEETS MARCH 31, 1994 (In thousands) The unaudited Pro Forma Combined Condensed Balance Sheets for M&I and its consolidated subsidiaries and Valley and its consolidated subsidiaries as of March 31, 1994 assumes the Merger had been consummated on March 31, 1994 and accounted for as a pooling-of-interests. No adjustment for divestitures which are required in connection with the Merger have been included in the unaudited Pro Forma Combined Condensed Balance Sheets. The Pro Forma Combined Condensed Balance Sheets should be read in conjunction with and is qualified in its entirety by the consolidated financial statements and accompanying notes of M&I and Valley in their respective Annual Reports on Form 10-K. The Pro Forma Combined Condensed Balance Sheets are intended for informational purposes and are not necessarily indicative of the future financial position or of the financial position that would have actually occurred had the Merger been in effect as of the date presented. (1) The Pro Forma Combined Condensed Balance Sheets reflect the issuance of 1.72 common shares of Marshall & Ilsley Corporation's (M&I) common stock for each outstanding common share of Valley Bancorporation (Valley). (2) Pro forma shareholders' equity includes the effect of the estimated one-time merger related and restructuring charge of approximately $80 million, $48 million net of tax effect. (3) Pro forma shareholders' equity includes the estimated effect of conforming Valley's transition methodology in adopting Financial Accounting Standard No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions"(FAS 106) with that elected by M&I. M&I elected immediate recognition of the accumulated postretirement benefit obligation at January 1, 1992, through a one-time charge to earnings. During the first quarter of 1993 Valley adopted FAS 106 on a prospective basis and elected to amortize the unfunded accumulated postretirement obligation over twenty years. (4) For purposes of the Pro Forma Combined Condensed Balance Sheets, significant transactions and balances between M&I and Valley have been eliminated. (5) Certain balances in Valley's consolidated balance sheet have been reclassified to conform with M&I's presentation. EX-99 9 EXHIBIT 99.2/PRO FORMA COMBINED INCOME STATEMENTS/10-Q - 03/31/94
PRO FORMA COMBINED CONDENSED INCOME STATEMENTS Exhibit FOR THE THREE MONTHS ENDED MARCH 31, 1994 99.2 (In thousands, except per share data) Pro Forma Adjustments --------------------- Pro Forma M&I Valley Combined Ref Amount Combined Interest income: ------------ ------------ ------------ -------- ------------ ------------ Loans..................................... $96,746 $63,874 $160,620 (2)(4) ($1,061) $159,559 Investment securities:.................... Taxable................................. 17,152 9,467 26,619 (4) (128) 26,491 Exempt from Federal income taxes........ 2,214 2,444 4,658 0 4,658 Trading securities........................ 39 0 39 (4) 5 44 Short-term investments.................... 1,599 56 1,655 (4) (390) 1,265 ------------ ------------ ------------ ------------ ------------ Total interest income....................... 117,750 75,841 193,591 (1,574) 192,017 Interest expense: Deposits.................................. 32,607 28,915 61,522 0 61,522 Short-term borrowings..................... 6,464 1,460 7,924 (2)(4) (778) 7,146 Long-term borrowings...................... 4,383 1,354 5,737 0 5,737 ------------ ------------ ------------ ------------ ------------ Total interest expense...................... 43,454 31,729 75,183 (778) 74,405 ------------ ------------ ------------ ------------ ------------ Net interest income......................... 74,296 44,112 118,408 (796) 117,612 Provision for loan losses................... 1,771 2,181 3,952 0 3,952 ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses........................... 72,525 41,931 114,456 (796) 113,660 Other income: Data processing services.................. 38,308 0 38,308 (2)(4) (671) 37,637 Trust services............................ 12,477 3,093 15,570 0 15,570 Other customer services................... 19,962 7,222 27,184 (4) 1,710 28,894 Net securities gains...................... 839 (22) 817 0 817 Other..................................... 4,981 5,336 10,317 (4) (1,087) 9,230 ------------ ------------ ------------ ------------ ------------ Total other income.......................... 76,567 15,629 92,196 (48) 92,148 Other expense: Salaries and employee benefits............ 61,076 24,036 85,112 (4) (997) 84,115 Net occupancy............................. 6,488 3,612 10,100 0 10,100 Equipment................................. 11,915 4,257 16,172 (4) 27 16,199 Other..................................... 24,867 10,390 35,257 (2)(4) 126 35,383 ------------ ------------ ------------ ------------ ------------ Total other expense......................... 104,346 42,295 146,641 (844) 145,797 ------------ ------------ ------------ ------------ ------------ Income before income taxes.................. 44,746 15,265 60,011 0 60,011 Provision for income taxes.................. 16,572 4,926 21,498 0 21,498 ------------ ------------ ------------ ------------ ------------ Net income.................................. $28,174 $10,339 $38,513 $0 $38,513 ============ ============ ============ ============ ============ Per Common Share(1)(3): Primary................................... $0.44 $0.50 $0.39 Fully diluted............................. 0.42 0.50 0.37 Dividends Paid............................ 0.14 0.24 0.14 Average common shares outstanding(1)(3): Primary................................... 63,514 20,740 99,682 Fully diluted............................. 69,228 20,740 105,398
SEE NOTES TO PRO FORMA COMBINED CONDENSED INCOME STATEMENTS
PRO FORMA COMBINED CONDENSED INCOME STATEMENTS Exhibit FOR THE THREE MONTHS ENDED MARCH 31, 1993 99.2 (In thousands, except per share data) Pro Forma Adjustments --------------------- Pro Forma M&I Valley Combined Ref Amount Combined Interest income: ------------ ------------ ------------ -------- ------------ ------------ Loans..................................... $93,979 $64,984 $158,963 (2)(4) ($422) $158,541 Investment securities:.................... Taxable 23,135 10,033 33,168 (4) (101) 33,067 Exempt from Federal income taxes 3,864 2,626 6,490 0 6,490 Trading securities........................ 39 0 39 (4) 4 43 Short-term investments.................... 1,823 128 1,951 (4) (67) 1,884 ------------ ------------ ------------ ------------ ------------ Total interest income....................... 122,840 77,771 200,611 (586) 200,025 Interest expense: Deposits.................................. 38,313 32,630 70,943 0 70,943 Short-term borrowings..................... 4,489 705 5,194 (2)(4) (169) 5,025 Long-term borrowings...................... 3,464 1,780 5,244 0 5,244 ------------ ------------ ------------ ------------ ------------ Total interest expense...................... 46,266 35,115 81,381 (169) 81,212 ------------ ------------ ------------ ------------ ------------ Net interest income......................... 76,574 42,656 119,230 (417) 118,813 Provision for loan losses................... 2,146 2,165 4,311 0 4,311 ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses........................... 74,428 40,491 114,919 (417) 114,502 Other income: Data processing services.................. 30,971 0 30,971 (2)(4) (163) 30,808 Trust services............................ 12,137 3,346 15,483 0 15,483 Other customer services................... 19,579 6,998 26,577 (4) 1,187 27,764 Net securities gains...................... 1,861 148 2,009 0 2,009 Other..................................... 5,972 5,263 11,235 (4) (978) 10,257 ------------ ------------ ------------ ------------ ------------ Total other income.......................... 70,520 15,755 86,275 46 86,321 Other expense: Salaries and employee benefits............ 56,107 22,952 79,059 (4) (1,172) 77,887 Net occupancy............................. 6,168 3,326 9,494 0 9,494 Equipment................................. 10,199 4,170 14,369 (4) 35 14,404 Other..................................... 24,905 10,002 34,907 (2)(4) 766 35,673 ------------ ------------ ------------ ------------ ------------ Total other expense......................... 97,379 40,450 137,829 (371) 137,458 ------------ ------------ ------------ ------------ ------------ Income before income taxes.................. 47,569 15,796 63,365 0 63,365 Provision for income taxes.................. 16,534 4,902 21,436 0 21,436 ------------ ------------ ------------ ------------ ------------ Net income.................................. $31,035 $10,894 $41,929 $0 $41,929 ============ ============ ============ ============ ============ Per Common Share(1)(3): Primary................................... $0.46 $0.54 $0.41 Fully diluted............................. 0.43 0.54 0.39 Dividends Paid............................ 0.12 0.23 0.12 Average common shares outstanding(1)(3): Primary................................... 68,128 20,161 103,260 Fully diluted............................. 74,101 20,161 109,426
SEE NOTES TO PRO FORMA COMBINED CONDENSED INCOME STATEMENTS
PRO FORMA COMBINED CONDENSED INCOME STATEMENTS Exhibit FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1993 99.2 (In thousands, except per share data) Pro Forma Adjustments --------------------- Pro Forma M&I Valley Combined Ref Amount Combined Interest income: ------------ ------------ ------------ -------- ------------ ------------ Loans..................................... $383,560 $262,263 $645,823 (2)(4) ($4,518) $641,305 Investment securities:.................... Taxable 85,201 38,525 123,726 (4) (395) 123,331 Exempt from Federal income taxes 12,851 10,211 23,062 0 23,062 Trading securities........................ 167 0 167 (4) 19 186 Short-term investments.................... 5,757 258 6,015 (4) (413) 5,602 ------------ ------------ ------------ ------------ ------------ Total interest income....................... 487,536 311,257 798,793 (5,307) 793,486 Interest expense: Deposits.................................. 145,717 126,027 271,744 0 271,744 Short-term borrowings..................... 16,714 3,097 19,811 (2)(4) (1,232) 18,579 Long-term borrowings...................... 15,927 6,723 22,650 0 22,650 ------------ ------------ ------------ ------------ ------------ Total interest expense...................... 178,358 135,847 314,205 (1,232) 312,973 ------------ ------------ ------------ ------------ ------------ Net interest income......................... 309,178 175,410 484,588 (4,075) 480,513 Provision for loan losses................... 9,065 8,969 18,034 0 18,034 ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses........................... 300,113 166,441 466,554 (4,075) 462,479 Other income: Data processing services.................. 136,044 0 136,044 (2)(4) (849) 135,195 Trust services............................ 48,595 12,631 61,226 0 61,226 Other customer services................... 82,415 29,006 111,421 (4) 8,393 119,814 Net securities gains...................... 7,837 497 8,334 0 8,334 Other..................................... 24,981 23,927 48,908 (4) (5,246) 43,662 ------------ ------------ ------------ ------------ ------------ Total other income.......................... 299,872 66,061 365,933 2,298 368,231 Other expense: Salaries and employee benefits............ 233,564 92,606 326,170 (4) (5,191) 320,979 Net occupancy............................. 23,560 12,816 36,376 0 36,376 Equipment................................. 42,538 16,615 59,153 (4) 150 59,303 Other..................................... 103,760 42,444 146,204 (2)(4) 3,264 149,468 ------------ ------------ ------------ ------------ ------------ Total other expense......................... 403,422 164,481 567,903 (1,777) 566,126 ------------ ------------ ------------ ------------ ------------ Income before income taxes.................. 196,563 68,021 264,584 0 264,584 Provision for income taxes.................. 71,072 22,118 93,190 0 93,190 ------------ ------------ ------------ ------------ ------------ Net income.................................. $125,491 $45,903 $171,394 $0 $171,394 ============ ============ ============ ============ ============ Per Common Share(1)(3): Primary................................... $1.87 $2.26 $1.67 Fully diluted............................. 1.76 2.26 1.60 Dividends Paid............................ 0.54 0.94 0.54 Average common shares outstanding(1)(3): Primary................................... 67,047 20,326 102,672 Fully diluted............................. 72,958 20,326 108,875
SEE NOTES TO PRO FORMA COMBINED CONDENSED INCOME STATEMENTS NOTES TO PRO FORMA COMBINED CONDENSED INCOME STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993 AND THE TWELVE MONTHS ENDED DECEMBER 31, 1993 (In thousands) The unaudited Pro Forma Combined Condensed Income Statements for M&I and its consolidated subsidiaries and Valley and its consolidated subsidiaries for the three months ended March 31, 1994 and 1993 and for the year ended December 31, 1993, give effect to the Merger as if it had been consummated on January 1, 1993 and accounted for as a pooling-of-interests. No adjustment for divestitures which are required in connection with the Merger have been included in the unaudited Pro Forma Combined Condensed Income Statements. The Pro Forma Combined Condensed Income Statements should be read in conjunction with and is qualified in its entirety by the consolidated financial statements and accompanying notes of M&I and Valley in their respective Annual Reports on Form 10-K. The Pro Forma Combined Condensed Income Statements are intended for informational purposes and are not necessarily indicative of the future results of operations of the combined company or the results of operstions of the combined company that would have actually occurred had the Merger been in effect for the periods presented. (1) The Pro Forma Combined Condensed Income Statements reflect the issuance of 1.72 common shares of Marshall & Ilsley Corporation's (M&I) common stock for each outstanding common share of Valley Bancorporation (Valley). (2) For purposes of the Pro Forma Combined Condensed Income Statements, significant transactions and balances between M&I and Valley have been eliminated. (3) As permitted by accounting standards, Valley's historical average shares outstanding used in the computation of earnings per share did not include the dilutive effect of stock options outstanding as such effect was not material. The computation of pro forma primary and fully dilutive earnings per share includes the effects of Valley's stock options outstanding. (4) Certain balances in Valley's consolidated income statement have been reclassified to conform with M&I's presentation. (5) The Pro Forma Combined Condensed Income Statements do not include the effect of the estimated one-time merger related and restructuring charges of approximately $80 million, $48 million net of tax effect, since the estimated charge is non-recurring. Potential loan loss provisions may be recorded at or near the consummation of the Merger. While the amounts have not been quantified, an additional provision may be necessary to conform Valley's loan valuation policies with those of M&I. M&I does not anticipate that the amount of such provision will be material to the combined entity. -----END PRIVACY-ENHANCED MESSAGE-----