-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BkVu92ypWIhmsH8CmEwCQyVBt04wodg2gQSg4VpFQoBoQwIKFQdUr1l3ohNAtRXn TuS/u2PDKOMoqnl+iNrF/A== 0000950131-97-003770.txt : 19970604 0000950131-97-003770.hdr.sgml : 19970604 ACCESSION NUMBER: 0000950131-97-003770 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970603 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARSHALL & ILSLEY CORP/WI/ CENTRAL INDEX KEY: 0000062741 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 390968604 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-01220 FILM NUMBER: 97618231 BUSINESS ADDRESS: STREET 1: 770 N WATER ST CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4147657801 MAIL ADDRESS: STREET 1: 770 NORTH WATER ST CITY: MILWAUKEE STATE: WI ZIP: 53202 10-K/A 1 AMENDMENT #1 TO FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K/A ---------------- AMENDMENT NO. 1 TO [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 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 Identification No.) incorporation or organization) 770 North Water Street 53202 Milwaukee, Wisconsin (zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (414) 765-7801 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock--$1.00 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [_] The aggregate market value of the voting stock held by nonaffiliates of the registrant is $3,512,387,000 as of February 28, 1997. The number of shares of common stock outstanding as of February 28, 1997 is 88,921,199. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the Proxy Statement for the registrant's Annual Meeting of Shareholders to be held on April 22, 1997. PART I ITEM 1. BUSINESS GENERAL Marshall & Ilsley Corporation ("M&I" or the "Corporation"), incorporated in Wisconsin in 1959, is a registered bank holding company under the Bank Holding Company Act of 1956 (the "BHCA"). As of December 31, 1996, M&I had consolidated total assets of approximately $14.8 billion and consolidated total deposits of approximately $11.0 billion, making M&I the second largest bank holding company headquartered in Wisconsin. The executive offices of M&I are located at 770 North Water Street, Milwaukee, Wisconsin 53202 (telephone number (414) 765- 7801). M&I's principal assets are the stock of its bank and nonbank subsidiaries and the assets of its Data Services Division ("M&I Data Services"). M&I's subsidiaries include 29 commercial banks, one savings association and a number of companies engaged in businesses that the Federal Reserve Board (the "FRB") has determined to be closely-related or incidental to the business of banking. M&I provides its subsidiaries with financial and managerial assistance in such areas as budgeting, tax planning, compliance assistance, asset and liability management, investment administration and portfolio planning, business development, advertising and human resources management. M&I's bank and savings association subsidiaries provide a full range of banking services to individuals, businesses and governments throughout Wisconsin and the Phoenix, Arizona metropolitan area. These subsidiaries offer retail, institutional, international, business and correspondent banking, investment and trust services through the operation of 226 banking offices in Wisconsin and 12 offices in Arizona. M&I Marshall & Ilsley Bank ("M&I Bank") is M&I's largest bank subsidiary, with consolidated assets as of December 31, 1996 of approximately $4.8 billion. M&I Data Services and three other nonbank subsidiaries are major suppliers of financial and data processing services and software to banking, financial and related organizations. M&I Data Services provides services and software to over 600 financial institution customers in the United States, as well as institutions in numerous foreign countries. On August 7, 1996, M&I acquired EastPoint Technology, Inc., a software development company located in Bedford, New Hampshire which specializes in client/server technology, for approximately $25.5 million in cash. M&I's nonbank subsidiaries operate a variety of bank- related businesses, including those providing investment management services, insurance services, trust services, equipment lease financing, commercial and residential mortgage banking, venture capital, brokerage services and financial advisory services. M&I Investment Management Corp. offers a full range of asset management services to M&I's trust company subsidiaries, the Marshall Funds and other individual, business and institutional customers. M&I's trust company subsidiaries provide trust and employee benefit plan services to customers in Wisconsin, Arizona and Florida. M&I First National Leasing Corp. leases a variety of equipment and machinery to large and small businesses. M&I Mortgage Corp. originates, purchases, sells and services residential mortgages. The Richter-Schroeder Company originates and services long-term commercial real estate loans for institutional investors. M&I Capital Markets Group, Inc. provides venture capital, financial advisory and strategic planning services to customers, including assistance in connection with the private placement of securities, raising funds for expansion, leveraged buy-outs, divestitures, mergers and acquisitions and small business investment company transactions. M&I Brokerage Services, Inc., a broker-dealer registered with the National Association of Securities Dealers and the Securities and Exchange Commission, provides brokerage and other investment related services to a variety of retail and commercial customers. PRINCIPAL SOURCES OF REVENUE The table below shows the amount and percentages of M&I's total consolidated operating income resulting from interest and fees on loans, interest on investment securities and fees for data processing services for each of the last three years:
INTEREST AND INTEREST ON FEES FOR DATA FEES ON LOANS INVESTMENT SECURITIES PROCESSING SERVICES ------------------ ------------------------ ---------------------- PERCENT PERCENT OF PERCENT OF OF TOTAL TOTAL TOTAL TOTAL YEAR ENDED OPERATING OPERATING OPERATING OPERATING DECEMBER 31, AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME INCOME - ------------ -------- --------- ------------ ----------- ----------- ---------- ---------- ($000'S) ($000'S) ($000'S) ($000'S) 1996.................... $758,955 51.5% $ 202,255 13.7% $ 268,526 18.2% $1,474,756 1995.................... 774,256 57.4 136,980 10.2 213,914 15.9 1,348,842 1994.................... 681,085 57.8 127,587 10.8 159,418 13.5 1,178,787
M&I business segment information is contained in Note 19 of the Notes to the Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data. COMPETITION M&I and its subsidiaries face substantial competition from hundreds of competitors in the markets they serve, some of which are larger and have greater resources than M&I. M&I's bank subsidiaries compete for deposits and other sources of funds and for credit relationships with other banks, savings associations, credit unions, finance companies, mutual funds, life insurance companies (and other long-term lenders) and other financial and non-financial companies located both within and outside M&I's primary market area, many of which offer products functionally equivalent to bank products. M&I's non-bank operations compete with numerous banks, finance companies, data servicing companies, leasing companies, mortgage bankers, brokerage firms, financial advisors, trust companies, mutual funds and investment bankers in Wisconsin and throughout the United States. The market for the banking technology services offered by M&I Data Services is national in scope. In any given geographic area, M&I Data Services' competitors vary in size and include national, regional and local operations. While historically the bank data processing industry has been highly decentralized, there is an accelerating trend toward consolidation in the industry, resulting in fewer companies competing over larger geographic regions. As consolidation continues, successful companies in this business are likely to increase substantially in size as the scale of activity necessary to compete increases. EMPLOYEES As of December 31, 1996, M&I and its subsidiaries employed in the aggregate approximately 8,995 full and part-time employees. M&I considers employee relations to be excellent. None of the employees of M&I and its subsidiaries are represented by a collective bargaining group. SUPERVISION AND REGULATION As a registered bank holding company, M&I is subject to regulation and examination by the FRB under the BHCA. M&I's state bank subsidiaries and savings association are subject to regulation and examination by the Wisconsin Department of Financial Institutions, or in the case of M&I Thunderbird Bank, the Arizona State Banking Department, and the FRB (for state banks). M&I's national bank subsidiary is subject to regulation and 2 examination by the Office of the Comptroller of the Currency. In addition, all of M&I's bank subsidiaries are subject to examination by the FDIC. Under FRB policy, M&I is expected to act as a source of financial strength to each of its bank subsidiaries and to commit resources to support each bank subsidiary in circumstances when it might not do so absent such requirements. In addition, there are numerous federal and state laws and regulations which regulate the activities of M&I and its bank subsidiaries, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuances of securities, dividend payments, inter-affiliate liabilities, extensions of credit and branch banking. Information regarding capital requirements for bank holding companies and tables reflecting M&I's regulatory capital position at December 31, 1996 can be found in Note 13 of the Notes to the Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data. The federal regulatory agencies have broad power to take prompt corrective action if a depository institution fails to maintain certain capital levels. In addition, a bank holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of, or any FDIC-assisted transaction involving, an affiliated insured bank or savings association. Current federal law provides that adequately capitalized and managed bank holding companies from any state may acquire banks and bank holding companies located in any other state, subject to certain conditions. Beginning on June 1, 1997, banks may create interstate branching networks in states that do not "opt out" of interstate branching. Prior to this date, banks may create interstate branching networks in states that "opt in" to interstate branching early. Under recent legislation, M&I made a one-time payment of $2.7 million in connection with the recapitalization of the Savings Association Insurance Fund. The laws and regulations to which M&I are subject are constantly under review by Congress, regulatory agencies and state legislatures. These laws and regulations may be changed dramatically in the future, which could affect the ability of bank holding companies to engage in certain activities such as nationwide banking, securities underwriting and insurance, the amount of capital that banks and bank holding companies must maintain, premiums paid for deposit insurance and other matters directly affecting earnings. It is not certain which changes will occur, if any, or the effect such changes will have on the profitability of M&I, its ability to compete effectively or the composition of the financial services industry. The earnings and business of M&I and its bank subsidiaries also are affected by the general economic and political conditions in the United States and abroad and by the monetary and fiscal policies of various federal agencies. The FRB impacts the competitive conditions under which M&I operates by determining the cost of funds obtained from money market sources for lending and investing and by exerting influence on interest rates and credit conditions. In addition, legislative and economic factors can be expected to have an ongoing impact on the competitive environment within the financial services industry. The impact of fluctuating economic conditions and federal regulatory policies on the future profitability of M&I and its subsidiaries cannot be predicted with certainty. SELECTED STATISTICAL INFORMATION Statistical information relating to M&I and its subsidiaries on a consolidated basis is set forth as follows: (1) Average Balance Sheets and Analysis of Net Interest Income for each of the last three years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations. (2) Analysis of Changes in Interest Income and Interest Expense for each of the last two years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations. (3) Nonaccrual, Past Due and Restructured Loans for each of the last five years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations. (4) Summary of Loan Loss Experience for each of the last five years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations. 3 (5) Return on Average Shareholders' Equity, Return on Average Assets and other statistical ratios for each of the last five years can be found in Item 6, Selected Financial Data. The following tables set forth certain statistical information relating to M&I and its subsidiaries on a consolidated basis. INVESTMENT SECURITIES The amortized cost of M&I's consolidated investment securities at December 31 of each year are:
1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS) U.S. Treasury and government agencies......... $2,832,067 $2,330,577 $1,970,556 States and political subdivisions............. 770,456 446,998 290,483 Other......................................... 193,057 98,380 86,533 ---------- ---------- ---------- $3,795,580 $2,875,955 $2,347,572 ========== ========== ==========
The maturities, at amortized cost, and weighted average yields (for tax- exempt obligations on a fully taxable basis assuming a 35% tax rate) of investment securities at December 31, 1996 are (in thousands):
AFTER ONE BUT AFTER FIVE BUT WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL ----------------- -------------------------------------- ------------------ ---------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD --------- ------- ----------- ------------------ ------- ---------- ------- ---------- ----- U.S. Treasury and government agencies............... $ 435,197 6.10% $ 1,947,114 6.88% $ 368,357 6.77% $ 81,399 6.61% $2,832,067 6.74% States and political subdivisions. 67,208 6.86 191,444 7.03 397,254 7.33 114,550 8.19 770,456 7.34 Other................... 7,043 7.78 51,393 7.05 13,909 8.22 120,712 8.15 193,057 7.85 --------- ----- ----------- ----- ---------- ------ ---------- ------ ---------- ---- $ 509,448 6.22% $ 2,189,951 6.90% $ 779,520 7.08% $ 316,661 7.77% $3,795,580 6.92% ========= ===== =========== ===== ========== ====== ========== ====== ========== ====
TYPES OF LOANS M&I's consolidated loans, classified by type, at December 31 of each year are:
1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Commercial, financial and agricultural....... $2,885,152 $2,903,920 $2,644,928 $2,538,830 $2,471,150 Industrial development revenue bonds.......... 32,241 29,358 31,796 45,889 58,388 Real estate: Construction........... 323,420 303,345 378,316 333,609 273,556 Mortgage: Residential........... 2,176,224 2,002,023 2,240,287 2,223,857 2,160,116 Commercial............ 2,379,156 2,189,449 2,062,022 2,000,052 1,718,452 ---------- ---------- ---------- ---------- ---------- Total mortgage....... 4,555,380 4,191,472 4,302,309 4,223,909 3,878,568 Personal................ 1,174,186 1,163,127 1,178,453 1,217,513 1,056,901 Lease financing......... 331,505 277,680 256,690 257,622 242,282 ---------- ---------- ---------- ---------- ---------- 9,301,884 8,868,902 8,792,492 8,617,372 7,980,845 Less: Allowance for loan losses................ 155,895 161,430 153,961 133,600 123,805 ---------- ---------- ---------- ---------- ---------- Net loans............... $9,145,989 $8,707,472 $8,638,531 $8,483,772 $7,857,040 ========== ========== ========== ========== ==========
4 LOAN BALANCES AND MATURITIES DECEMBER 31, 1996 DOLLAR AMOUNTS IN THOUSANDS The analysis of loan maturities at December 31, 1996, and the rate structure for the categories indicated are:
RATE STRUCTURE OF LOANS MATURITY DUE AFTER ONE YEAR -------------------------------------------- ------------------------------ OVER ONE WITH PRE- WITH ONE YEAR YEAR THROUGH OVER FIVE DETERMINED FLOATING OR LESS FIVE YEARS YEARS TOTAL RATE RATE TOTAL ---------- ------------ --------- ---------- ---------- -------- ---------- Commercial, financial and agricultural....... $2,062,606 $ 755,214 $67,332 $2,885,152 $ 723,742 $ 98,804 $ 822,546 Industrial development revenue bonds.......... 6,674 9,841 15,726 32,241 14,850 10,717 25,567 Real estate-- construction........... 221,384 101,604 432 323,420 85,838 16,198 102,036 Lease financing......... 98,241 221,082 12,182 331,505 233,264 -- 233,264 ---------- ---------- ------- ---------- ---------- -------- ---------- $2,388,905 $1,087,741 $95,672 $3,572,318 $1,057,694 $125,719 $1,183,413 ========== ========== ======= ========== ========== ======== ==========
- -------- Notes: (1) Scheduled repayments are reported in the maturity category in which the payments are due based on the terms of the loan agreements. Demand loans, loans having no stated schedule of repayments and no stated maturity, and over-drafts are reported as due in one year or less. (2) Amounts shown for the rate structure of loans due after one year include the estimated effect arising from the use of interest rate swaps. NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS Generally, a loan is placed on nonaccrual if payment of interest is more than 60 days delinquent and the loan has been determined by management to be a "problem" loan. In addition, loans which are past due 90 days or more as to interest or principal are also placed on nonaccrual. Exceptions to these rules are generally only for loans fully collateralized by readily marketable securities or other relatively risk free collateral. The gross interest income which would have been recorded under the original terms of nonaccrual and restructured loans in 1996 was $9,809. Interest income recorded during 1996 on nonaccrual and restructured loans amounted to $6,482. POTENTIAL PROBLEM LOANS At December 31, 1996, the Corporation had $17.2 million of loans for which payments are presently current, but the borrowers are experiencing serious financial problems. These loans are subject to constant management attention and their classification is reviewed on a quarterly basis. OTHER INTEREST BEARING ASSETS At December 31, 1996, the Corporation's commercial finance subsidiary had $0.2 million of corporate debt investment securities on nonaccrual status. The effect on interest income in 1996 was not material. 5 DEPOSITS The average amount of and the average rate paid on selected deposit categories for each of the years ended December 31 is as follows:
1996 1995 1994 ---------------- --------------- --------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ----------- ---- ---------- ---- ---------- ---- (IN THOUSANDS) Noninterest bearing demand deposits................. $ 2,090,292 $1,980,035 $2,051,864 Interest bearing demand deposits................. 940,739 1.81% 959,234 1.85% 1,084,552 1.65% Savings deposits.......... 3,322,332 3.68% 3,006,002 3.61% 2,869,618 2.54% Time deposits............. 3,860,533 5.74% 3,664,144 5.61% 3,664,063 4.51% ----------- ---------- ---------- Total deposits.......... $10,213,896 $9,609,415 $9,670,097 =========== ========== ==========
The maturity distribution of time deposits issued in amounts of $100,000 and over and outstanding at December 31, 1996 (in thousands) is: Three months or less............................................. $ 332,319 Over three and through six months................................ 200,428 Over six and through twelve months............................... 239,161 Over twelve months............................................... 251,830 ---------- $1,023,738 ==========
At December 31, 1996, time deposits issued by foreign offices totaled $137,949. SHORT-TERM BORROWINGS Information related to M&I's funds purchased and security repurchase agreements for the last three years is as follows (in thousands):
1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS) Amount outstanding at year end......... $1,337,940 $ 517,576 $ 944,843 Average amount outstanding during the year.................................. 1,061,105 739,191 835,472 Maximum amount outstanding at any month's end........................... 1,537,551 1,094,314 1,011,509 Weighted average interest rate at year end................................... 5.69% 4.99% 5.17% Weighted average interest rate during the year.............................. 5.26% 5.70% 4.09%
SUMMARY OF LOAN LOSS EXPERIENCE The following should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations. The Corporation's evaluation of the adequacy of the allowance for loan losses consists of two levels of analysis. The first level focuses primarily on assessments of specific credits, as described more fully below. The second more general level of analysis focuses on categories of similar type loans and portfolio segments (e.g., commercial/individual; real estate/non-real estate; geographical regions related to the locations of affiliate banks). These methodologies include multiple analytical approaches which are viewed together to assess overall reserve and provision levels. The analyses consider, among other factors, historical loss experience, current and anticipated economic conditions, loan portfolio trends, portfolio composition by segment, assigned credit grades, and estimates of potential loss exposures. 6 The loan portfolios of the Corporation's affiliate banks and leasing subsidiary are subject to continual management oversight and formal quarterly analyses. Management's analyses are based on the Corporation's credit grading system which classifies loans in a manner similar to that of bank regulatory examiners, with estimates of probable and potential losses derived. Management's assigned credit grades and quarterly portfolio analyses are subject to independent monitoring by the Corporation's credit review group, which also performs periodic portfolio reviews at each affiliate. The credit review group prepares reports on the results of its evaluations of affiliate loan portfolios, which together with quarterly analyses of credit exposure provided by affiliate management, serve as the basis for determining the adequacy of the allowance for loan losses. Management utilizes the above-described reserve analysis approaches to determine the overall adequacy of the allowance for loan losses. Management's overall assessment is based on its view of the loan portfolio as consisting of commercial business loans, real estate loans, personal loans, and direct financing leases. Industrial development revenue bonds are viewed as commercial real estate loans. During 1996, consolidated net charge-offs increased to $20.3 million, representing $28.4 million of charge-offs, offset by $8.1 million of recoveries. The 1996 gross and net charge-off level exceeded the previous four years. Net charge-offs in 1996 include one larger commercial loan ($12.0 million) and one larger lease receivable ($1.9 million) that accounted for $13.9 million of total net charge-offs in 1996. Gross charge-offs declined from 1992 through 1994, with a slight increase in 1995. Recovery levels in 1993, 1994 and 1996 were relatively consistent, and contrast to a higher level of recoveries in 1992 and a lower level of recoveries in 1995. The increase in 1996 charge-offs does not reflect general economic deterioration and the overall positive net charge-off levels reflect the relative strength of the Wisconsin economy and the stabilization in the Arizona economy and real estate values. The Corporation's Arizona-based loan portfolio represents approximately 4% of the total portfolio. The Corporation's 1996 provision for loan losses of $15.2 million is consistent with the 1995 and 1994 general provisions of $16.2 million and $16.0 million, not including an $8.9 million special provision taken in 1994. The special provision, which was charged to expense, was utilized to conform Valley's loan valuation policies with those of the Corporation, after consummation of the merger. The 1994, 1995, and 1996 general provision levels are lower than the previous two years. The resulting 1996 year-end reserve level is $156 million, or 1.68% of total loans, which compares to the year-end 1995 reserve level of 1.82%. The decrease in 1996 reserve levels reflects the impact of the large commercial loan charge-off and the increase in 1996 loan volumes. The year-end 1996 reserve level is considered adequate based on the analyses of specific credits, portfolio and economic trends, and other factors described above. The Corporation's charge-off and recovery levels across portfolio sectors has been relatively consistent, with the exception of 1996 commercial loan and lease financing charge-offs. The 1996 charge-off level for commercial loans was above the previous four years. During the 1992-1995 period, commercial loan recoveries generally declined, with 1996 commercial recoveries increasing to approximate 1993 and 1994 levels. The higher 1992 recovery and the abnormally low 1994 gross charge-offs, resulted in small net commercial loan recoveries in 1992 and 1994. The charge-offs and recoveries for real estate construction loans continue to be relatively immaterial. The 1996 charge-offs for real estate mortgages increased from the lowest level in five years, and were offset by increased recoveries, resulting in net real estate mortgage charge-offs which do not vary significantly from the relatively low 1993 and 1994 levels. The 1996 charge-off and recovery levels for personal loans increased from the previous three years, resulting in personal loan net charge-offs which are increasing, but which do not vary significantly from historic levels. The 1996 charge-offs for the Corporation's lease financing portfolio increased from the previous four years, primarily due to one write- off. Nominal offsetting recoveries resulted in 1996 lease net charge-offs which were above the five-year average. The Corporation's charge-off and provision levels for 1997 are expected to continue to be largely dependent on economic conditions in the Corporation's primary service areas. While general economic conditions continue to be relatively stable, should national or regional conditions deteriorate, the Corporation's Wisconsin and Arizona markets may be adversely affected. Absent deterioration in these conditions, total charge-offs for 1997 7 are expected to decrease from the increased 1996 levels, but are not expected to vary significantly from our average net charge-offs from 1992 through 1995. Offsetting recoveries are currently expected to decrease slightly from 1996 levels. At the present time, there are no material loans which are known or believed to be in imminent danger of deteriorating or defaulting which would give rise to material charge-offs; however, loss levels can be significantly impacted by a few large loans which could deteriorate unexpectedly or be adversely impacted by economic conditions. Based on current conditions, commercial loan losses for 1997 are expected to approximate normal historic levels. Commercial real estate loans continue to be highly vulnerable to regional economic conditions and real estate values; however, based on current conditions, real estate and construction loan losses for 1997 are not expected to vary significantly from historic levels. Based on the current portfolio size, composition and experience, personal loan losses for 1997 are expected to approximate normal historic levels. However, the Corporation is not immune to the potential impacts of national trends in retail credit delinquencies and collections. At the present time, direct lease financing losses for 1997 are expected to approximate historic levels and decrease from the higher 1996 levels; however, actual losses could be impacted by portfolio growth, fraud, or unanticipated weaknesses in industry segments within the portfolio. ITEM 2. PROPERTIES M&I and M&I Bank occupy offices on all or portions of 16 floors of a 21- story building located at 770 North Water Street, Milwaukee, Wisconsin. A subsidiary of M&I Bank owns the building and its adjacent 10-story parking lot and leases the remaining floors to a professional tenant. In addition, various subsidiaries of M&I lease commercial office space in downtown Milwaukee office buildings near the 770 North Water Street facility. M&I Bank also owns or leases various branch offices located in Milwaukee and in surrounding suburban communities. M&I has 28 subsidiary banks and one savings association located in cities throughout Wisconsin. M&I Thunderbird Bank, a wholly-owned bank subsidiary of M&I, is located in Phoenix, Arizona and has 12 offices in Phoenix and the surrounding Maricopa County communities. The subsidiary banks and savings association occupy modern facilities which are owned or leased. M&I owns a data processing facility located in Brown Deer, a suburb of Milwaukee, from which M&I Data Services conducts data processing activities. Properties leased by M&I for M&I Data Services also include commercial office space in Brown Deer, a data processing site in Oak Creek, Wisconsin, and processing centers and sales offices in various cities throughout the United States. ITEM 3. LEGAL PROCEEDINGS M&I is not currently involved in any material pending legal proceedings other than litigation of a routine nature and various legal matters which are being defended and handled in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME OF OFFICER OFFICE --------------- ------ J.B. Wigdale Chairman of the Board since December, 1992, Chief Executive Age 60 Officer since October, 1992, Director since December, 1988, Vice Chairman of the Board, December, 1988 to December, 1992, Marshall & Ilsley Corporation; Chairman of the Board since January, 1989, Chief Executive Officer since 1987, Director since 1981, M&I Marshall & Ilsley Bank; President and Director M&I Financial Corp., M&I Building Corp. and Loujo Company; Director M&I First National Leasing Corp., M&I Mortgage Corp., Richter-Schroeder Company, Inc., M&I Data Services, M&I Capital Markets Group, Inc. and Marshall & Ilsley Trust Company.
8
NAME OF OFFICER OFFICE --------------- ------ D.J. Kuester Director since February, 1994, President since 1987, Age 55 Marshall & Ilsley Corporation; President and Director since January, 1989, M&I Marshall & Ilsley Bank; Chairman of the Board, Chief Executive Officer and Director, M&I Data Services; Director--M&I Financial Corp., M&I Building Corp. and M&I Support Services Corp.; Director and President--M&I Insurance Company of Arizona, Inc. P.M. Platten, III Vice Chairman of the Board and a Director since May 1994, Age 57 Marshall & Ilsley Corporation; Chairman of the Board, January, 1993 to May, 1994, President and Chief Executive Officer, January 1989 to May 1994, Valley Bancorporation. G.H. Gunnlaugsson Director since February, 1994, Executive Vice President and Age 52 Chief Financial Officer since 1987, Marshall & Ilsley Corporation; Vice President of M&I Marshall & Ilsley Bank since 1976; Vice President and Director--M&I Insurance Company of Arizona, Inc. and Loujo Company; Director--M&I Mortgage Corp., M&I Data Services, M&I Insurance Services, Inc. and M&I Brokerage Services, Inc. G.D. Strelow Senior Vice President and Human Resources Director of Age 62 Marshall & Ilsley Corporation since 1993; Vice President and Human Resources Director of M&I Marshall & Ilsley Bank since 1980. M.A. Hatfield Senior Vice President since 1993, Secretary since 1981 and Age 51 Treasurer from 1986 to May, 1995, Marshall & Ilsley Corporation; Vice President and Secretary, M&I Marshall & Ilsley Bank; Secretary--M&I First National Leasing Corp., M&I Capital Markets Group, Inc., Marshall & Ilsley Trust Company, M&I Investment Management Corp., Marshall & Ilsley Trust Company of Florida, M&I Ventures Corporation and M&I Brokerage Services, Inc.; Secretary, Treasurer and Director--M&I Financial Corp. and M&I Building Corp.; Secretary and Director--M&I Insurance Company of Arizona, Inc., M&I Data Services and Loujo Company; Secretary, M&I Insurance Services, Inc.; Secretary and Treasurer, M&I Mortgage Corp.; Director, Richter-Schroeder Company, Inc. P.R. Justiliano Senior Vice President since 1994 and Corporate Controller Age 46 since April, 1989, Vice President, 1986 to 1994, Marshall & Ilsley Corporation; Treasurer and Director, M&I Insurance Company of Arizona, Inc. J.L. Delgadillo Senior Vice President of Marshall & Ilsley Corporation since Age 44 1993; Director of M&I Data Services since 1994; President and Chief Operating Officer of M&I Data Services since 1993; Senior Vice President of M&I Data Services since 1989. D.W. Layden, Jr. Senior Vice President since October, 1994, Marshall & Ilsley Age 39 Corporation; Director--Marshall & Ilsley Trust Company and M&I Investment Management Corp. since February, 1995; Executive Vice President and Chief Financial Officer from January, 1994 to October, 1994, Senior Vice President and Legal Counsel from March, 1992 to October, 1994, M&I Data Services. D.R. Jones Senior Vice President since December, 1993, Vice President Age 51 and North and South Regional Manager since May, 1993, Vice- President and South Regional Manager from March, 1989 to May, 1993, Marshall & Ilsley Corporation; Director--M&I Support Services Corp.
9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS STOCK LISTING M&I's common stock is traded under the symbol "MRIS" on the Nasdaq National Market, and quotations are supplied by the National Association of Securities Dealers. Common dividends declared and the price range for M&I's common stock for each of the last five years can be found in Item 8, Consolidated Financial Statements, Quarterly Financial Information. A discussion of the regulatory restrictions on the payment of dividends can be found under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in Note 13 to Item 8, Consolidated Financial Statements. HOLDERS OF COMMON EQUITY At December 31, 1996, M&I had approximately 18,460 record holders of its Common Stock. RECENT SALES OF UNREGISTERED SECURITIES On December 9, 1996 M&I Capital Trust A, a Delaware business trust formed by M&I, sold $200,000,000 liquidation amount of 7.65% Capital Trust Pass-through Securities (the "Capital Securities"). Salomon Brothers Inc, Goldman, Sachs & Co. and Robert W. Baird & Co., Incorporated (the "Initial Purchasers") were the purchasers of the Capital Securities and resold the Capital Securities to certain "qualified institutional buyers," as defined in Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). The aggregate cash offering price of the Capital Securities was $200,000,000 and the aggregate underwriting commissions related to the sale were $2,000,000. With respect to the sale, M&I relied upon an exemption from registration under section 4(2) of the Securities Act as a transaction not involving a public offering. Subsequent resales of the Capital Securities were limited to qualified institutional buyers in accordance with Rule 144A of the Securities Act. 10 ITEM 6. SELECTED FINANCIAL DATA CONSOLIDATED SUMMARY OF EARNINGS YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Interest Income: Loans........................... $758,955 $774,256 $681,085 $643,679 $665,634 Investment Securities: Taxable........................ 171,537 118,868 110,894 123,207 139,302 Tax Exempt..................... 30,718 18,112 16,693 20,692 31,946 Short-term Investments.......... 10,226 13,424 8,634 5,899 14,157 -------- -------- -------- -------- -------- Total Interest Income......... 971,436 924,660 817,306 793,477 851,039 Interest Expense: Deposits........................ 360,838 331,734 255,861 272,100 334,443 Short-term Borrowings........... 62,071 47,740 39,681 18,010 17,606 Long-term Borrowings............ 42,808 53,709 30,537 23,088 26,439 -------- -------- -------- -------- -------- Total Interest Expense........ 465,717 433,183 326,079 313,198 378,488 -------- -------- -------- -------- -------- Net Interest Income.............. 505,719 491,477 491,227 480,279 472,551 Provision for Loan Losses........ 15,194 16,158 24,907 18,034 23,546 -------- -------- -------- -------- -------- Net Interest Income After Provision for Loan Losses....... 490,525 475,319 466,320 462,245 449,005 Other Income: Data Processing Services........ 268,526 213,914 159,418 135,041 112,056 Trust Services.................. 70,190 64,176 59,720 61,226 58,050 Other........................... 164,604 146,092 142,343 175,659 158,305 -------- -------- -------- -------- -------- Total Other Income............ 503,320 424,182 361,481 371,926 328,411 Other Expense: Salaries and Benefits........... 382,430 343,650 323,904 320,717 299,540 Other........................... 298,274 255,972 260,866 248,870 246,084 Merger/Restructuring............ -- -- 75,228 -- -- -------- -------- -------- -------- -------- Total Other Expense........... 680,704 599,622 659,998 569,587 545,624 -------- -------- -------- -------- -------- Income Before Taxes.............. 313,141 299,879 167,803 264,584 231,792 Provision for Income Taxes....... 109,711 106,580 73,405 93,190 75,391 -------- -------- -------- -------- -------- Income Before Accounting Changes and Extraordinary Items......... 203,430 193,299 94,398 171,394 156,401 Extraordinary Items and Accounting Changes.............. -- -- 11,542 -- (9,134) -------- -------- -------- -------- -------- Net Income.................... $203,430 $193,299 $105,940 $171,394 $147,267 ======== ======== ======== ======== ======== Per Share: Primary Net Income Before Extraordinary Items and Accounting Changes............. $2.07 $1.96 $0.95 $1.67 $1.55 Primary Net Income After Extraordinary Items and Accounting Changes............. 2.07 1.96 1.07 1.67 1.46 Fully Diluted Net Income Before Extraordinary Items and Accounting Changes............. 2.02 1.90 0.93 1.60 1.48
11 CONSOLIDATED SUMMARY OF EARNINGS--CONTINUED YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
1996 1995 1994 1993 1992 ------- ------ ------ ------ ------ Fully Diluted Net Income After Extraordinary Items and Accounting Changes.................. $ 2.02 $ 1.90 $ 1.04 $ 1.60 $ 1.40 Fully Diluted Net Income (Historical)*....................... 2.02 1.90 1.04 1.76 1.52 Common Dividend Declared............. 0.720 0.645 0.59 0.54 0.47 Other Significant Data: Year-End Common Stock Price.......... $34.625 $26.00 $19.00 $23.63 $21.17 Return on Average Shareholders' Equity Before Extraordinary Items and Accounting Changes.................. 15.88% 16.41% 8.60% 15.29% 15.48% Return on Average Shareholders' Equity After Extraordinary Items and Accounting Changes.................. 15.88 16.41 9.65 15.29 14.57 Return on Average Assets Before Extraordinary Items and Accounting Changes.................. 1.49 1.52 0.76 1.42 1.36 Return on Average Assets After Extraordinary Items and Accounting Changes.................. 1.49 1.52 0.85 1.42 1.28 Dividend Payout Ratio................ 35.64 33.95 56.73 33.75 34.20 Average Equity to Average Assets Ratio............................... 9.38 9.26 8.83 9.31 8.77 Ratio of Earnings to Fixed Charges** Excluding Interest on Deposits...... 3.76x 3.76x 3.18x 6.52x 5.57x Including Interest on Deposits...... 1.66x 1.68x 1.50x 1.83x 1.60x Stock Splits......................... 3 FOR 1
- -------- * Not restated for acquisitions accounted for as a pooling of interests. ** See Exhibit 12 for detailed computation of these ratios. 12 CONSOLIDATED AVERAGE BALANCE SHEETS YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Assets: Cash and Due from Banks................. $ 573,957 $ 576,943 $ 613,053 $ 616,761 $ 572,132 Short-term Investments........... 170,546 222,779 196,653 180,143 366,132 Trading Securities..... 25,264 10,346 4,528 4,860 6,049 Investment Securities: Taxable............... 2,722,582 2,026,859 2,116,856 2,236,805 1,950,155 Tax Exempt............ 668,913 374,014 351,026 400,135 523,551 Loans: Commercial............ 2,935,617 2,832,228 2,680,735 2,572,967 2,643,726 Real Estate........... 4,607,844 4,773,214 4,572,496 4,248,970 3,798,180 Personal.............. 1,141,364 1,159,957 1,201,131 1,109,701 1,017,625 Lease Financing....... 293,448 262,566 256,344 248,654 234,566 ----------- ----------- ----------- ----------- ----------- Total Loans and Leases................ 8,978,273 9,027,965 8,710,706 8,180,292 7,694,097 Allowance for Loan Losses................ 161,311 160,797 144,917 129,972 114,046 ----------- ----------- ----------- ----------- ----------- Net Loans and Leases... 8,816,962 8,867,168 8,565,789 8,050,320 7,580,051 Other Assets........... 677,333 647,402 584,556 550,444 527,339 ----------- ----------- ----------- ----------- ----------- Total Assets.......... $13,655,557 $12,725,511 $12,432,461 $12,039,468 $11,525,409 =========== =========== =========== =========== =========== Liabilities and Shareholders' Equity: Noninterest Bearing Deposits.............. $ 2,090,292 $ 1,980,035 $ 2,051,864 $ 1,997,781 $ 1,799,072 Interest Bearing Deposits: Savings and NOW Accounts.............. 1,812,287 1,981,804 2,426,502 2,339,754 2,086,065 Money Market Savings... 2,450,784 1,983,432 1,527,668 1,534,799 1,560,913 CDs of $100 or more.... 816,712 567,373 436,268 440,573 416,555 Other.................. 3,043,821 3,096,771 3,227,795 3,461,825 3,589,990 ----------- ----------- ----------- ----------- ----------- Total Deposits......... 10,213,896 9,609,415 9,670,097 9,774,732 9,452,595 Short-term Borrowings.. 1,180,593 835,230 964,850 641,836 529,528 Long-term Borrowings... 656,786 801,176 447,254 272,041 284,333 Accrued Expenses and Other Liabilities..... 323,441 301,865 252,297 229,545 248,286 Shareholders' Equity... 1,280,841 1,177,825 1,097,963 1,121,314 1,010,667 ----------- ----------- ----------- ----------- ----------- Total Liabilities and Shareholders' Equity............... $13,655,557 $12,725,511 $12,432,461 $12,039,468 $11,525,409 =========== =========== =========== =========== =========== Other Significant Data: Book Value Per Share at Year End***........... $ 13.37 $ 12.92 $ 11.01 $ 11.35 $ 10.76 Average Common Shares Outstanding***........ 91,874,886 93,697,513 94,850,595 98,497,435 96,958,290 Shareholders of Record at Year End*.......... 18,460 18,659 18,919 10,374 9,381 Employees at Year End*.................. 8,995 9,079 8,634 6,611 6,315 Historically Reported Credit Quality Ratios:* Net Loan Charge-offs to Average Loans......... 0.23% 0.10% 0.05% 0.03% 0.07% Total Nonperforming Loans** & OREO to End of Period Loans & OREO.................. 0.81 0.79 0.80 0.86 1.14 Allowance for Loan Losses to End of Period Loans.......... 1.68 1.82 1.75 1.74 1.76 Allowance for Loan Losses to Total Nonperforming Loans**............... 225 261 265 261 213
- -------- * Not restated for acquisitions accounted for as pooling of interests. ** Nonaccrual loans, restructured loans, and loans past due 90 days or more. *** Restated for 3 for 1 stock split. 13 YIELD & COST ANALYSIS (TAX EQUIVALENT BASIS) YEARS ENDED DECEMBER 31
1996 1995 1994 1993 1992 ---- ---- ----- ---- ---- Average Rates Earned: Loans & Securitized ARMs........................ 8.40% 8.58% 7.84% 7.89% 8.68% Investment Securities--Taxable.................. 6.11 5.82 5.24 5.51 7.14 Investment Securities--Tax Exempt............... 6.44 6.85 6.86 7.91 9.02 Trading Securities.............................. 4.82 4.98 5.39 4.26 4.69 Short-term Investments.......................... 5.29 5.81 4.28 3.17 3.80 Average Rates Paid: Interest Bearing Deposits....................... 4.44% 4.35% 3.36% 3.50% 4.37% Short-term Borrowings........................... 5.26 5.72 4.11 2.81 3.32 Long-term Borrowings............................ 6.52 6.70 6.83 8.49 9.30 M&I Marshall & Ilsley Bank Average Prime Rate..................................... 8.27 8.83 7.15 6.00 6.25 Summary Yield and Cost Analysis: (As a % of Average Assets) Average Yield................................... 7.22% 7.34% 6.65% 6.70% 7.53% Average Cost.................................... 3.41 3.40 2.62 2.60 3.28 ---- ---- ----- ---- ---- Net Interest Income............................. 3.81 3.94 4.03 4.10 4.25 Provision for Loan Losses....................... 0.11 0.13 0.20 0.15 0.20 ---- ---- ----- ---- ---- Net Interest Income After Provision for Loan Losses...................... 3.70 3.81 3.83 3.95 4.05 Net Securities Gains (Losses)................... 0.11 0.04 (0.05) 0.07 0.08 Other Income.................................... 3.58 3.30 2.95 3.02 2.77 Other Expense................................... 4.99 4.72 5.30 4.74 4.74 ---- ---- ----- ---- ---- Income Before Income Taxes...................... 2.40 2.43 1.43 2.30 2.16 Provision for Income Taxes...................... 0.91 0.91 0.67 0.88 0.80 ---- ---- ----- ---- ---- Income Before Cumulative Effect of Accounting Changes and Extraordinary Items....................... 1.49% 1.52% 0.76% 1.42% 1.36% ==== ==== ===== ==== ==== Net Income.................................... 1.49% 1.52% 0.85% 1.42% 1.28% ==== ==== ===== ==== ====
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Net income in 1996 amounted to $203.4 million or $2.02 per share on a fully diluted basis. The return on average assets and return on average equity were 1.49% and 15.88%, respectively. By comparison, 1995 net income was $193.3 million, fully diluted earnings per share was $1.90, the return on average assets was 1.52% and the return on average equity was 16.41%. For the year ended December 31, 1994 net income was $105.9 million or $1.04 per share fully diluted and the returns on average assets and average equity were 0.85% and 9.65%, respectively. Net income for 1996 includes special one-time charges relating to the 65.7 basis point assessment associated with the Savings Association Insurance Fund (SAIF) recapitalization which was enacted into law in September, 1996 and the write-off of in-process research and development costs acquired in conjunction with the purchase of EastPoint Technology, Inc. Net income for 1994 included charges and extraordinary items related to the Corporation's merger with Valley Bancorporation (Valley). The following table summarizes the unusual items reported in 1996 and 1994 and the comparative operating incomes, earnings per share and return on average equity based on operating income for 1996, 1995 and 1994.
$ IN MILLIONS, EXCEPT PER SHARE DATA PRE-TAX IMPACT 1996 1995 1994 ------- ------- ------- ------- Net Income.................................. -- $203.4 $193.3 $105.9 Special Charges Merger/Restructuring....................... $75.2 -- -- 58.9 Additional Loan Loss Provisions............ 8.9 -- -- 5.8 Other Merger-Related Charges............... 8.5 -- -- 6.2 Merger-Related Securities Losses........... 7.3 -- -- 4.6 Net Extraordinary Gains.................... (20.6) -- -- (11.5) SAIF Assessment............................ 2.7 1.7 -- -- Acquired In-Process Research and Development............................... 12.1 7.9 -- -- ----- ------- ------- ------- Total Special Charges....................... 9.6 -- 64.0 ------- ------- ------- Operating Income............................ $213.0 $193.3 $169.9 ======= ======= ======= Operating Income Per Share Primary.................................... $ 2.16 $ 1.96 $ 1.71 Fully Diluted.............................. $ 2.12 $ 1.90 $ 1.65 Operating Income to Average Equity.......... 16.63% 16.41% 14.94%
15 OPERATING INCOME STATEMENT COMPONENTS AS A PERCENT OF AVERAGE TOTAL ASSETS The following table presents a summary of the major elements of the consolidated operating income statements for the years ended December 31, 1996, 1995 and 1994. Each of the elements is stated as a percent of consolidated average total assets outstanding for the respective year and, where appropriate, is converted to a fully taxable equivalent basis (FTE). The results exclude the special charges in 1996 and 1994 as previously discussed.
1996 1995 1994 ----- ----- ----- Interest Income............................................ 7.22% 7.34% 6.65% Interest Expense........................................... (3.41) (3.40) (2.62) ----- ----- ----- Net Interest Income........................................ 3.81 3.94 4.03 Provision for Loan Losses.................................. (0.11) (0.13) (0.13) Net Securities Gains....................................... 0.11 0.04 0.01 Other Income............................................... 3.58 3.30 2.95 Other Expense.............................................. (4.89) (4.72) (4.64) ----- ----- ----- Income Before Income Taxes................................. 2.50 2.43 2.22 Income Taxes............................................... (0.94) (0.91) (0.85) ----- ----- ----- Operating Income to Average Assets......................... 1.56% 1.52% 1.37% ===== ===== =====
NET INTEREST INCOME Net interest income in 1996 amounted to $505.7 million, an increase of $14.2 million or 2.9% compared with net interest income of $491.5 million in 1995. The benefit from the increase in earning assets, use of derivative financial instruments, the stable cost of interest bearing liabilities and the increase in noninterest bearing deposits were offset, in part, by a decline in the yield on earning assets. Average earning assets in 1996 amounted to $12.6 billion compared to $11.7 billion in 1995, an increase of $903.6 million or 7.7%. Average loans, excluding the effect of securitizing adjustable rate mortgage loans (ARMs) increased $355.8 million or 3.9%. The remaining growth in average earning assets was primarily attributable to investment securities which reflects the Corporation's intent to increase the portfolio size with higher yielding and longer-term securities to adjust the rate sensitivity and leverage of the consolidated balance sheet. Average interest bearing liabilities increased $695.2 million or 7.5% in 1996 compared to 1995. Average interest bearing deposits increased $494.2 million or 6.5%. Average short-term borrowings increased $345.4 million while average long-term borrowings decreased $144.4 million. Average noninterest bearing deposits increased $110.3 million or 5.6% in 1996 compared to the prior year. During the second quarter of 1996, the holder of the Corporation's 8.5% convertible subordinated notes converted approximately $16.8 million of the notes to Series A convertible preferred stock. During 1996, approximately $309.0 million of the Corporation's banking subsidiaries' Bank Notes matured and were refinanced primarily with short-term borrowings and brokered certificates of deposit. The growth and composition of the Corporation's average loan portfolio for the current year and prior two years are reflected in the following table. The securitized ARM loans that are classified as investment securities available for sale are included to provide a more meaningful comparison ($ in millions): 16
PERCENT GROWTH ----------------- 1996 1995 VS. VS. 1996 1995 1994 1995 1994 -------- -------- -------- ------- ------- Commercial Loans................. $2,935.6 $2,832.2 $2,680.7 3.7 % 5.7% Real Estate Loans Construction.................... 290.0 341.8 262.7 (15.2) 30.1 Commercial Mortgages............ 2,269.6 2,129.8 2,098.6 6.6 1.5 Residential Mortgages........... 2,048.3 2,301.6 2,211.2 (11.0) 4.1 Securitized ARM Loans........... 483.5 78.0 -- n.m. n.m. -------- -------- -------- ------- ------ Total Real Estate Loans & ARMs... 5,091.4 4,851.2 4,572.5 4.9 6.1 Personal Loans Student Loans................... 289.0 288.0 264.4 0.4 8.9 Other Personal Loans............ 852.4 872.0 936.7 (2.2) (6.9) -------- -------- -------- ------- ------ Total Personal Loans............. 1,141.4 1,160.0 1,201.1 (1.6) (3.4) Lease Financing Receivables...... 293.4 262.6 256.4 11.8 2.4 -------- -------- -------- ------- ------ Total Consolidated Average Loans & ARMs.......................... $9,461.8 $9,106.0 $8,710.7 3.9 % 4.5% ======== ======== ======== ======= ====== Total Consolidated Average Loans........................... $8,978.3 $9,028.0 $8,710.7 (0.6)% 3.6% ======== ======== ======== ======= ======
- -------- n.m. --not meaningful Beginning in the third quarter of 1995, the Corporation began converting ARM loans into government guaranteed agency pool securities to enhance liquidity. Approximately $224 million of such loans were securitized in 1996 and approximately $455 million ARM loans were securitized in 1995. A fee is required to guarantee the securities which has an adverse impact on the interest margin. Including the securitized ARMs, average residential mortgages grew by approximately $152 million or 6.4% in 1996 compared to 1995. Approximately $55.6 million of this growth is attributable to home equity loans and lines of credit. Lease financing receivables increased $30.8 million or 11.8% in 1996 compared to 1995 of which approximately $27.1 million is due to growth in automobile leasing. The growth and composition of the Corporation's consolidated average deposits for the current year and prior two years are reflected below ($ in millions):
PERCENT GROWTH -------------- 1996 1995 VS. VS. 1996 1995 1994 1995 1994 --------- -------- -------- ------- ------- Noninterest Bearing Commercial...................... $ 1,353.5 $1,289.7 $1,302.7 5.0% (1.0)% Personal........................ 389.6 409.2 428.7 (4.8) (4.5) Other........................... 347.2 281.1 320.5 23.5 (12.3) --------- -------- -------- ------ ------- Total Noninterest Bearing Deposits.................... 2,090.3 1,980.0 2,051.9 5.6 (3.5) Interest Bearing Savings & NOW................... 1,812.3 1,981.8 2,426.4 (8.6) (18.3) Money Market.................... 2,450.8 1,983.4 1,527.7 23.6 29.8 Other CDs & Time................ 3,043.8 3,095.6 3,227.8 (1.7) (4.1) CDs Greater than $100,000....... 630.2 553.8 436.3 13.8 26.9 Brokered CDs.................... 186.5 14.8 -- n.m. n.m. --------- -------- -------- ------ ------- Total Interest Bearing Deposits.................... 8,123.6 7,629.4 7,618.2 6.5 0.1 --------- -------- -------- ------ ------- Total Consolidated Average Deposits........................ $10,213.9 $9,609.4 $9,670.1 6.3% (0.6)% ========= ======== ======== ====== =======
- -------- n.m.--not meaningful 17 The money market index account, which was offered beginning in the third quarter of 1994, continues to attract new customers and maintain deposit relationships via disintermediation from the Corporation's other deposit products. Money market index accounts averaged $1.6 billion in 1996 compared to $1.0 billion in 1995. The Corporation has a brokered CD program to acquire longer-term CDs with maturities of one year or more in order to provide a stable source of funds that over time is less costly than Bank Notes. In conjunction with the Valley merger, approximately $300 million of deposits and $200 million of loans were divested of during the second half of 1994. In 1995, purchase acquisitions in February and July contributed approximately $232 million in deposits and $186 million in loans. As part of the Corporation's banking initiatives certain bank branches were voluntarily divested of during the second half of 1996. Such branches disposed of in 1996 had combined deposits and loans of $26 million and $14 million, respectively. The net interest margin (FTE) as a percent of average earning assets was 4.14% in 1996 compared to 4.30% in 1995, a decrease of 16 basis points. The yield on earning assets decreased 17 basis points from 8.01% in 1995 to 7.84% in 1996 while the cost of interest bearing liabilities remained at 4.68% in both 1995 and 1996. The yield on loans and securitized ARMs decreased 18 basis points in 1996 compared to 1995. Loan growth and the positive effect of interest rate swaps offset the yield decline and contributed approximately $13.6 million or 27% of the increase in interest on earning assets. At December 31, 1996, the Corporation had $370 million in notional amount of standard receive fixed/pay floating interest rate swaps and $25 million in notional amount of interest rate floors designated as a hedge against the interest rate volatility associated with variable rate loans. The impact on net interest income in 1996 was a positive $1.12 million. The yield on loans and securitized ARMs without these derivative financial instruments would have been 8.39% or one basis point lower than the 8.40% reported for 1996. The remaining increase in interest on earning assets is attributable to investment securities. The total yield on the investment security portfolio, excluding securitized ARMs, increased by approximately 20 basis points in 1996 compared to 1995 and the average balance of such investment securities increased $585.2 million or 25%. At December 31, 1996, The Corporation had $25 million in notional amount of interest rate floors designated as a hedge against the convexity risk associated with investments in collateralized mortgage obligations. The impact on net interest income was negligible. The increase in the volume and cost of interest bearing deposits accounted for $29.1 million or 89% of the increase in interest paid on interest bearing liabilities in 1996. The decrease in cost and volume of long-term borrowings benefited the interest margin by approximately $10.9 million which reflects the maturity and conversion of higher cost debt. The average cost of short- term borrowings decreased 46 basis points in 1996 compared to 1995 which reflects in part, the Corporation's banking affiliates expanded use of the treasury tax and loan note option programs and other vehicles which provide lower cost sources of funds. As more fully described in Note 12 to the Consolidated Financial Statements contained in Item 8 herein, in December, 1996 the Corporation formed a Trust and issued $200 million of 7.65% cumulative preferred capital securities. The Trust invested the proceeds in 7.65% junior subordinated deferrable interest debentures issued by the Corporation which is the sole asset of the Trust. The proceeds will be used by the Corporation for general corporate purposes including the repurchase of its common shares and the purchase of other preferred securities. For financial statement purposes, the capital securities are classified as long-term borrowings and the distributions as interest expense which will have a more pronounced negative impact on net interest income in future periods. Net interest income for 1995 was $491.5 million compared to $491.2 million in 1994. The benefit from the increase in rates earned and the slight increase in the volume of average earning assets, primarily loans, was offset by the increase in rates paid on interest bearing liabilities and the negative impact of the change in the liability mix. 18 Average earning assets increased $282.2 million in 1995 compared to 1994. Average loan and securitized ARM growth of $395.3 million or 4.5% was somewhat offset by the decline in other average earning assets, primarily investment securities. Average interest bearing liabilities increased $235.4 million or 2.6% in 1995 compared to 1994. Average interest bearing deposits increased $11.1 million while average short-term borrowings decreased $129.6 million or 13.4% from the prior year. The decrease in average short-term borrowings together with the decrease in noninterest bearing deposits of $71.8 million or 3.5%, resulted in an increase in average long-term borrowings from $447.3 million in 1994 to $801.2 million in 1995, an increase of $353.9 million or 79.1%. The net interest margin as a percent of average earning assets declined 10 basis points from 4.40% in 1994 to 4.30% in 1995. The yield on interest earning assets increased 74 basis points while the cost of interest bearing liabilities increased 107 basis points. Loan growth and the increase in yield on average loans and securitized ARMs of 74 basis points account for 92% of the increase in interest income on earning assets in 1995 compared to 1994. The increase in the average cost of deposits and short-term borrowings represent 83% of the 1995 versus 1994 increase in interest paid on interest bearing liabilities. The increase in the volume of long-term borrowings, offset by a 13 basis point decline in the average cost of this category contributed approximately $23.2 million of the increase in interest paid on interest bearing liabilities. During the second quarter of 1994, the Corporation's banking subsidiaries began offering Bank Notes. The Bank Notes were issued for two year terms at floating interest rates indexed to LIBOR and provide an additional funding source to the banking affiliates. In 1995, the average amount and average cost of the notes were $415 million and 6.20% compared to $138.4 million and 5.21% in 1994. Throughout 1995 and 1994, the Corporation was not involved in derivative activity that would impact net interest margins or interest rate sensitivity or risk. 19 AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME The Corporation's consolidated average balance sheets, interest earned and interest paid, and the average interest rates earned and paid for each of the last three years are presented in the following table. Securitized ARM loans that are classified as investment securities available for sale are included with loans to provide a more meaningful comparison ($ in thousands):
1996 1995 1994 ----------------------------- ----------------------------- ----------------------------- INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/ BALANCE PAID COST BALANCE PAID COST BALANCE PAID COST ----------- -------- ------- ----------- -------- ------- ----------- -------- ------- Loans and securitized ARMs(1,2).............. $ 9,461,780 $795,197 8.40% $ 9,106,012 $781,631 8.58% $ 8,710,706 $683,265 7.84% Investment securities: Taxable................ 2,239,075 136,848 6.11 1,948,812 113,517 5.82 2,116,856 110,894 5.24 Tax exempt(1).......... 668,913 43,061 6.44 374,014 25,621 6.85 351,026 24,065 6.86 Interest bearing deposits in other banks.................. 91,484 4,626 5.06 144,135 7,956 5.52 93,504 3,752 4.01 Funds sold and security resale agreements...... 57,991 3,195 5.51 65,820 4,195 6.37 91,090 4,147 4.55 Trading securities(1)... 25,264 1,217 4.82 10,346 515 4.98 4,528 244 5.39 Other short-term investments............ 21,071 1,203 5.71 12,824 790 6.16 12,059 517 4.29 ----------- -------- ---- ----------- -------- ---- ----------- -------- ---- Total interest earning assets................ $12,565,578 $985,347 7.84% $11,661,963 $934,225 8.01% $11,379,769 $826,884 7.27% Cash and demand deposits due from banks......... 573,957 576,943 613,053 Premises and equipment, net.................... 304,544 295,970 289,300 Other assets............ 372,789 351,432 295,256 Allowance for loan losses................. (161,311) (160,797) (144,917) ----------- ----------- ----------- Total assets......... $13,655,557 $12,725,511 $12,432,461 =========== =========== =========== Savings and interest bearing demand deposits............... $ 4,263,071 $139,186 3.26% $ 3,965,236 $126,196 3.18% $ 3,954,170 $ 90,788 2.30% Other time deposits..... 3,860,533 221,652 5.74 3,664,144 205,538 5.61 3,664,063 165,073 4.51 Short-term borrowings... 1,180,593 62,071 5.26 835,230 47,740 5.72 964,850 39,681 4.11 Long-term borrowings.... 656,786 42,808 6.52 801,176 53,709 6.70 447,254 30,537 6.83 ----------- -------- ---- ----------- -------- ---- ----------- -------- ---- Total interest bearing liabilities........... $ 9,960,983 $465,717 4.68% $ 9,265,786 $433,183 4.68% $ 9,030,337 $326,079 3.61% Noninterest bearing deposits............... 2,090,292 1,980,035 2,051,864 Other liabilities....... 323,441 301,865 252,297 Shareholders' equity.... 1,280,841 1,177,825 1,097,963 ----------- ----------- ----------- Total liabilities and shareholders' equity................ $13,655,557 $12,725,511 $12,432,461 =========== =========== =========== Net interest income.... $519,630 $501,042 $500,805 ======== ======== ======== Net yield on interest earning assets........ 4.14% 4.30% 4.40% ==== ==== ====
- -------- Notes: (1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35%, and excluding disallowed interest expense. (2) Loans on a nonaccrual status have been included in the computation of average balances. 20 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE The effect on interest income and interest expense due to volume and rate changes in 1996 and 1995 are outlined in the following table. Changes not due solely to either volume or rate are allocated to rate ($ in thousands):
1996 VS. 1995 1995 VS. 1994 --------------------------------- -------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGE IN DUE TO CHANGE IN --------------------- -------------------- AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) --------- ---------- ---------- --------- --------- ---------- Interest on earning assets: Loans and Securitized ARMs(1)............... $ 30,538 ($16,972) $13,566 $ 31,008 $ 67,358 $ 98,366 Investment securities: Taxable............... 16,908 6,423 23,331 (8,803) 11,426 2,623 Tax-exempt(1)......... 20,201 (2,761) 17,440 1,576 (20) 1,556 Interest bearing deposits in other banks................. (2,906) (424) (3,330) 2,032 2,172 4,204 Funds sold and security resale agreements..... (499) (501) (1,000) (1,150) 1,198 48 Trading securities(1).. 743 (41) 702 314 (43) 271 Other short-term investments........... 508 (95) 413 33 240 273 --------- ---------- ------- --------- --------- -------- Total interest income change............... $ 65,493 ($14,371) $51,122 $ 25,010 $ 82,331 $107,341 ========= ========== ======= ========= ========= ======== Expense on interest bearing liabilities: Savings and interest bearing demand deposits.............. $ 9,479 $ 3,511 $12,990 $ 254 $ 35,154 $ 35,408 Other time deposits.... 11,016 5,098 16,114 4 40,461 40,465 Short-term borrowings.. 19,740 (5,409) 14,331 (5,331) 13,390 8,059 Long-term borrowings... (9,680) (1,221) (10,901) 24,165 (993) 23,172 --------- ---------- ------- --------- --------- -------- Total interest expense change............... $ 30,555 $ 1,979 $32,534 $ 19,092 $ 88,012 $107,104 ========= ========== ======= ========= ========= ========
- -------- Notes: (1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35% for all years presented, and excluding disallowed interest expense. PROVISION FOR LOAN LOSSES AND CREDIT QUALITY The provision for loan losses amounted to $15.2 million in 1996, $16.2 million in 1995 and $24.9 million in 1994. The 1994 provision included an additional loan loss provision of $8.9 million which was recorded in conjunction with the Valley merger to conform Valley's loan valuation policies with those of the Corporation. Nonperforming assets at December 31, 1996 were $75.0 million compared to $70.5 million at December 31, 1995, an increase of $4.5 million or 6.3%. Nonaccrual loans, the largest component of nonperforming assets increased $9.6 million since year-end 1995 and decreased $5.2 million since September 30, 1996. Renegotiated loans at December 31, 1996 were $1.8 million compared to $3.1 million at December 31, 1995 and $1.9 million at September 30, 1996. Loans past due 90 days or more were $7.4 million at the end of 1996 compared to $8.3 million at the end of the third quarter in 1996 and $8.2 million at year-end 1995. Other real estate owned amounted to $5.6 million at December 31, 1996 compared to $6.4 million at September 30, 1996 and $8.6 million at December 31, 1995. At December 31, 1996 approximately $2.2 million of other real estate consisted of closed branch facilities. The increase in nonaccrual loans compared to the prior year was generally experienced across all types of loans. Nonaccrual commercial loans increased $2.7 million, nonaccrual commercial mortgages increased $3.1 21 million, nonaccrual residential real estate increased $2.6 million, nonaccrual personal loans increased $0.7 million and nonaccrual lease receivables increased $0.4 million. Net charge-offs in 1996 amounted to $20.3 million or 0.23% of average loans compared to $9.3 million or 0.10% of average loans in 1995. Net charge-offs in 1996 include one larger commercial loan and one larger lease receivable that accounted for $13.9 million of the total net charge-offs in 1996. Approximately $0.4 million in 1996 and $2.3 million in 1995 of loan loss reserve balances were transferred to a specific investment reserve in conjunction with the ARM loan securitizations previously discussed. The Corporation has agreed to guarantee the first 4% of the loan pools securitized through government agencies against loss. Since inception of the program there have not been any losses incurred. CONSOLIDATED CREDIT QUALITY INFORMATION DECEMBER 31, ($000'S)
1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- NONPERFORMING ASSETS BY TYPE Loans: Nonaccrual.............. $ 60,176 $ 50,598 $ 44,766 $ 44,186 $ 52,811 Renegotiated............ 1,819 3,087 4,172 4,263 6,325 Past Due 90 Days or More................... 7,366 8,184 9,093 7,906 7,097 -------- -------- -------- -------- -------- --- Total Nonperforming Loans.................. 69,361 61,869 58,031 56,355 66,233 Other Real Estate Owned.. 5,629 8,648 12,114 12,928 19,286 -------- -------- -------- -------- -------- --- Total Nonperforming Assets.................. $ 74,990 $ 70,517 $ 70,145 $ 69,283 $ 85,519 ======== ======== ======== ======== ======== === Allowance for Loan Losses.................. $155,895 $161,430 $153,961 $133,600 $123,805 ======== ======== ======== ======== ======== === CONSOLIDATED STATISTICS Net Charge-offs to Average Loans........... 0.23% 0.10% 0.05% 0.11% 0.12% Total Nonperforming Loans to Total Loans.......... 0.75 0.70 0.66 0.65 0.83 Total Nonperforming Assets to Total Loans and Other Real Estate Owned................... 0.81 0.79 0.80 0.80 1.07 Allowance for Loan Losses to Total Loans.......... 1.68 1.82 1.75 1.55 1.55 Allowance for Loan Losses to Nonperforming Loans..... 225 261 265 237 187
22 MAJOR CATEGORIES OF NONACCRUAL LOANS ($000'S)
1996 1995 --------------------------- --------------------------- % OF % OF LOAN % OF LOAN % OF NONACCRUAL TYPE NONACCRUAL NONACCRUAL TYPE NONACCRUAL ---------- ---- ---------- ---------- ---- ---------- COMMERCIAL Commercial.............. $16,257 0.6% 27.0% $13,527 0.5% 26.7% Lease Financing Receivables............ 1,624 0.5 2.7 1,244 0.4 2.5 ------- --- ----- ------- --- ----- Total Commercial..... 17,881 0.6 29.7 14,771 0.5 29.2 REAL ESTATE Construction and Land Development............ 731 0.2 1.2 618 0.2 1.2 Commercial Real Estate.. 19,760 0.8 32.8 16,653 0.8 32.9 Residential Real Estate................. 18,284 0.8 30.4 15,701 0.7 31.0 ------- --- ----- ------- --- ----- Total Real Estate.... 38,775 0.8 64.4 32,972 0.7 65.1 PERSONAL................ 3,520 0.3 5.9 2,855 0.2 5.7 ------- --- ----- ------- --- ----- Total................ $60,176 0.6% 100.0% $50,598 0.6% 100.0% ======= === ===== ======= === =====
RECONCILIATION OF CONSOLIDATED ALLOWANCE FOR LOAN LOSSES ($000'S)
1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Allowance for Loan Losses at Beginning of Year...... $161,430 $153,961 $133,600 $123,805 $105,156 Provision for Loan Losses(1)................. 15,194 16,158 24,907 18,034 23,546 Allowance of Banks Acquired.................. -- 2,843 -- 1,167 4,284 Allowance Transfer for Loan Securitizations........... (440) (2,275) -- -- -- Loans Charged-off Commercial................ 16,290 5,130 3,301 8,810 8,863 Real Estate-Construction.. 13 407 737 79 513 Real Estate-Mortgage...... 3,320 2,444 3,241 2,729 4,655 Personal.................. 6,388 5,759 4,375 5,033 6,887 Leases.................... 2,397 875 907 815 1,426 -------- -------- -------- -------- -------- Total Charge-offs.......... 28,408 14,615 12,561 17,466 22,344 Recoveries on Loans Commercial................ 3,222 2,117 3,675 3,431 9,149 Real Estate-Construction.. 9 39 6 49 92 Real Estate-Mortgage...... 2,443 1,021 2,468 2,208 1,493 Personal.................. 2,333 2,158 1,789 2,156 2,306 Leases.................... 112 23 77 216 123 -------- -------- -------- -------- -------- Total Recoveries........... 8,119 5,358 8,015 8,060 13,163 -------- -------- -------- -------- -------- Net Loans Charged-off...... 20,289 9,257 4,546 9,406 9,181 -------- -------- -------- -------- -------- Allowance for Loan Losses at End of Year............ $155,895 $161,430 $153,961 $133,600 $123,805 ======== ======== ======== ======== ========
- -------- Note: (1) The amount of the provision for loan losses charged to operating expense for the year ended December 31, 1996, is the amount necessary to bring the allowance for loan losses at December 31, 1996, to a level believed adequate by management to absorb current estimated potential losses in the loan portfolio. 23 Management's determination of the adequacy of the allowance is based on a continual review of the loan portfolio, loan loss experience, economic conditions, growth and composition of the portfolio, and other relevant factors. As a result of management's continual review, the allowance is adjusted through provisions for loan losses charged against income. OTHER INCOME Total noninterest income amounted to $503.3 million in 1996 compared to $424.2 million in 1995, an increase of $79.1 million or 18.7%. Fees from data processing services increased $54.6 million or 25.5% from $213.9 million in 1995 to $268.5 million in 1996. Processing fees increased $31.8 million or 21.4%. Conversion revenue increased $1.9 million or 15.2% and amounted to $14.1 million in 1996. Fees from unique services such as contract programming and consulting increased $16.6 million and amounted to $23.7 million in 1996 compared to $7.1 million in 1995. Software revenue increased $3.5 million or 9.3% while buyout fees, which vary from year to year, were relatively unchanged. Fees from trust services were $70.2 million in 1996 compared to $64.2 million in 1995, an increase of $6.0 million or 9.4%. Personal trust fees increased $3.1 million and Corporate trust fees increased $0.8 million. Revenue from outsourcing and securities lending increased $1.2 million. Fees from other customer services increased $6.5 million or 5.9%. Service charges on deposits increased $1.2 million and amounted to $52.2 million in 1996. Credit card and ATM fees increased $2.0 million and discount brokerage fees increased $2.3 million. Corporate finance and management fees increased $0.5 million. Net securities gains in 1996 amounted to $14.9 million compared to $4.6 million in 1995. During 1996 the Corporation's Capital Markets Group realized securities gains of $22.2 million offset in part by realized and unrealized securities losses of $1.9 million. Also during the fourth quarter of 1996, the Corporation's banking affiliates had securities losses of $5.4 million from the sale of approximately $560 million of available for sale investment securities which reflects the Corporation's intent to adjust the rate sensitivity of the consolidated balance sheet. Other miscellaneous income amounted to $32.5 million in 1996 compared to $30.8 million in 1995, an increase of $1.7 million. During 1996, the Corporation disposed of three bank branches with deposits of approximately $26 million and realized net deposit premium gains of $1.5 million. Total noninterest income was $424.2 million for the year ended December 31, 1995 compared to $361.5 million earned in the prior year. The Corporation's nonbank affiliates were the major contributors to the increase. Fees from data processing services amounted to $213.9 million in 1995 compared to $159.4 million in 1994, an increase of $54.5 million or 34.2%. Processing and conversion revenue increased $30.0 million or 23.4% while buy out fees related to terminated contracts (which can vary from year to year) increased $4.3 million and amounted to $6.3 million in 1995. Software related revenue increased $18.5 million. Approximately 60% of the increase is attributable to the December 1994 acquisition of Software Alliance. Trust fees amounted to $64.2 million, an increase of $4.5 million or 7.5% compared to $59.7 million in 1994. An increase in the overall market value of trust assets along with increased revenue from outsourcing services more than offset the revenue decline due to pricing compression. Other customer services declined $6.3 million in 1995 compared to 1994. Fees on loans declined $1.3 million or 6.5% while other commissions and fees declined $2.2 million or 4.9% in 1995 compared to the prior year. Service charges on deposits declined $2.9 million and amounted to $51.0 million in 1995. 24 Net securities gains amounted to $4.6 million in 1995 compared to net securities losses of $5.8 million in 1994. During 1995, the Corporation's Capital Markets Group realized securities gains of $7.2 million offset in part by $4.0 million of realized and unrealized securities losses as compared to securities gains of $2.3 million and securities losses of $0.3 million in 1994. The Corporation also sold certain equity securities and realized a net gain of $1.3 million in 1995 and $0.9 million in 1994. Excluding the $7.3 million of securities losses taken at the time of the Valley merger, 1994 net securities gains amounted to $1.5 million. Other miscellaneous income amounted to $30.8 million in 1995, slightly lower than that reported in the prior year. The Corporation adopted the new accounting standard on mortgage servicing rights in the third quarter of 1995 which resulted in a $2.4 million increase in other income. This increase was offset by lower gains from the sale of other real estate owned and lower insurance revenue. Revenue from property and casualty insurance commissions declined $2.8 million due to the sale of that line of business in the later part of 1994. OTHER EXPENSE Total other expense amounted to $680.7 million in 1996, an increase of $81.1 million or 13.5% from that reported in 1995. As previously discussed, two special charges were recognized in 1996. Excluding these special charges, total other expense for 1996 amounted to $665.9 million , an increase of 11% or $66.3 million, when compared to the prior year. The increase in expenses is primarily attributable to the Corporation's nonbanking businesses, particularly its data processing business segment (Data Services). Data Services expense growth of $57.1 million or 23.2% in 1996 compared to the prior year reflects the acquisition of EastPoint Technology, Inc., the cost of adding processing capacity and other related costs associated with increased revenue growth. Also included in 1996 were increased expenses associated with the development of new products and services. Data warehouse, which was piloted in 1996, provides customers the ability to easily access data on their operations and customer base that will provide valuable information for managing their businesses. New product development such as Internet and PC Banking also contributed to the 1996 expense growth. During the current year Data Services developed its plan to address the Year 2000 issue. It is estimated that the net cost to change existing computer programs for both internal and external software will be approximately $25 million. Data Services incurred approximately $2 million of expense in 1996 related to this issue. It is anticipated that a substantial portion of the total cost will be incurred over the next two years and will be expensed as incurred. The majority of our customer contracts do not provide for additional reimbursement over and above the previously contracted maintenance amounts. Future data processing revenue is critically dependent upon the successful implementation of the necessary changes. Expenses of the Corporation's banking business in 1996 include the cost of implementing certain initiatives in the areas of retail and small business lending, loan and deposit operational support consolidation and product and service distribution networks. These initiatives will enable more competitive pricing and achieve improved cost efficiencies. Excluding the SAIF charge of $2.7 million reported in the third quarter of 1996, the expenses of the banking affiliates and support services increased $7.0 million or 1.9% when compared to the prior year. Lower payments to regulatory agencies of $10.6 million were somewhat offset by severance, branch closures and disposals, equipment write-downs and disposals and other related costs associated with the initiatives. In 1996 these banking initiative expenses amounted to $4.7 million. Total salaries and benefits expense amounted to $382.4 million for 1996 compared to $343.7 million in 1995, an increase of $38.7 million or 11.3%. Our data processing business contributed approximately $32.4 million of the increase. As of December 31, l996 Data Services had approximately 2,800 employees, an increase of approximately 200 full time employees since the end of the prior year. The addition of EastPoint, normal growth and new product development were the primary causes for the increase. The increased use of contract programmers, whom are not considered full time employees, resulted in an increase in salaries and benefits expense of $5.1 million in 1996 compared to 1995. 25 Net occupancy expense increased $3.5 million in 1996 when compared to 1995 and amounted to $39.2 million while equipment expense amounted to $77.3 million, an increase of $11.8 million when compared to $65.5 million incurred in the prior year. Data Services activity resulted in approximately 60% of the 1996 increase in occupancy costs and the majority of the increase in equipment expense. Software expense amounted to $15.2 million compared to $12.4 million in 1995, an increase of $2.8 million or 23%. This increase is primarily related to Data Services growth and its new initiatives such as Year 2000 changes and home banking. Payments to regulatory agencies amounted to $4.8 million in 1996 compared to $12.7 million in 1995. As previously discussed, the Corporation paid $2.7 million in SAIF assessments in 1996. Excluding the one-time assessment, payments to regulatory agencies declined $10.6 million. This decrease in expense is related to the reduction in FDIC insurance rates. Professional services expense declined $1.2 million in 1996 when compared to the prior year. Approximately $1.1 million of the decline represents costs associated with the ARM securitization program which began in the later half of 1995. Also, professional services expense incurred by Data Services declined by approximately $3.0 million which was the result of lower fees paid for technological assistance in software development. These declines were offset somewhat by higher fees paid to operational and branch efficiency consultants. Other expenses amounted to $109.3 million in 1996 compared to $76.8 million in the prior year, an increase of $32.5 million or 42.3%. Excluding the $12.1 million write-off of acquired in-process technology attributable to the EastPoint acquisition, other expenses increased $20.4 million in 1996 when compared to the prior year. Promotional and advertising expense increased $4.0 million in 1996 compared to the prior year. Also contributing to the increase was credit card expense which increased $3.1 million in 1996. This increase is associated with higher data processing revenue growth. Lease buyouts and real estate writedowns associated with branch closures resulted in an increase to other expense in 1996 of approximately $2.0 million. This category of expense is also affected by the capitalization of costs, net of amortization, associated with software development and customer data processing conversions. The amount of capitalized software development costs , net of amortization , declined $2.0 million in 1996 compared to the prior year and is consistent with the decline in professional services expense previously discussed. The impact of capitalized customer conversion activity, net of amortization, also declined $2.0 million as more customers paid for the conversion process upfront. Capitalized software costs are amortized over their estimated useful lives. Despite the Corporation's monitoring of its ability to recover its investment in software, the ever increasing change in technology increases the possibility of obsolescence and may necessitate impairment writedowns in the future. Total other expense amounted to $599.6 million in 1995 compared to $660.0 million in 1994. Total other expense in 1994 included a merger/restructuring charge of $75.2 million and other miscellaneous charges of $8.5 million related to the Valley merger. Total other expense for 1994, excluding these items would have been $576.3 million. Salaries and employee benefits expense amounted to $343.7 million, an increase of $19.7 million or 6.1% in 1995 compared to the prior year. The increase was primarily due to Data Services. At December 31, 1995, Data Services had approximately 2,600 employees compared to 2,200 employees at December 31, 1994. A portion of the increase was due to the acquisition of Software Alliance and a New England data center. The banking affiliates experienced a decline in salaries and benefits expense. In conjunction with the merger Valley's pension plan was curtailed in 1994 and in 1995 was terminated. The 1994 curtailment expense of $2.3 million was included in the merger/restructuring expense while the pension termination expense of $1.8 million was included with salaries and employee benefits in 1995. 26 Net occupancy expense in 1995 declined $0.9 million due primarily to the branch divestitures which occurred during 1994. This benefit was somewhat offset by increased costs incurred by Data Services through its New England data center acquisition and a full year of operating a secondary processing site. Equipment expense amounted to $65.5 million in 1995 compared to $59.6 million in 1994. The 1995 data center acquisition, a secondary processing site which became operational late in 1994 and CPU and other equipment upgrades by Data Services were the primary reasons for the increase. Software expenses increased $3.2 million or 34.6% in 1995 compared to 1994. The increase was primarily attributable to Data Services. The decline in payments to regulatory agencies of $10.6 million in 1995 when compared to 1994 is due to the reduction in FDIC insurance premiums on June 1, 1995. Supplies and printing expense which amounted to $15.7 million in 1995 increased $1.3 million when compared to the prior year. This increase was the result of higher data processing revenue experienced in 1995. Professional services expense amounted to $18.7 million in 1995 compared to $12.5 million in the prior year. Approximately $4.7 million of the increase was due to costs incurred for technological assistance in software development such as Data Service's data warehouse project. Approximately $1.1 million of the remaining increase represents costs incurred in connection with the ARM loan securitization program previously discussed. Other miscellaneous expense amounted to $76.8 million in 1995 compared to $86.9 million in 1994. Excluding $7.4 million of charges taken in conjunction with the Valley merger, other miscellaneous expense for 1994 amounted to $79.5 million. Amortization expense associated with intangibles increased $3.7 million in 1995 compared to 1994 due to Data Service's acquisitions. This category of expense is also affected by the capitalization of costs, net of amortization, associated with software development and data processing conversions. Including the professional services expense increase of $4.7 million, the amount of software development costs, net of amortization, in 1995 was $8.0 million higher than the amount reported in 1994. The impact of conversion activity, net of amortization, was to increase miscellaneous expense by $1.0 million in 1995 compared to the prior year. INCOME TAX PROVISION The provision for income taxes was $109.7 million in 1996, $106.6 million in 1995 and $73.4 million in 1994. The effective tax rate in 1996 was 35.0% compared to 35.5% in 1995 and 43.7% in 1994. Increased Federal tax-exempt income lowered the effective tax rate in 1996 compared to 1995. During 1995, the Corporation recognized a research and experimentation tax credit related to software development of $2.3 million. The 1994 provision was impacted by certain nondeductible expenses associated with the Valley merger. ASSET/LIABILITY MANAGEMENT
The following table presents the Corporation's consolidated static GAP position at December 31, 1996: Asset/Liability Management ($ in millions) 181-270 271-360 Subtotal ------- ------- -------- 1-90 days 91-180 days days days (less than 1 yr) --------- ----------- ---- ---- ---------------- Net Loans $ 3,901 $ 624 $ 498 $ 463 $ 5,486 Securities Taxable 299 268 213 172 952 Tax-exempt 8 13 25 21 67 Trading Account 40 40 Other Interest Bearing Assets Int. bearing deposits in other banks 29 29 Fed Funds Sold & Security Resale Agreements 124 124 Money Market Funds 64 64 Other Short Term Investments 16 16 Other Assets - -------------------------------------------------------------------- Total Assets $ 4,481 $ 905 $ 736 $ 656 $ 6,778 ==================================================================== Savings and Now $ 2,288 $ 2,288 Non-Int Bearing Demand Dep Other time deposits 845 673 503 452 2,473 Short-term borrowings 1,835 1,835 Long-term borrowings Other liabilities and Equity -------------------------------------------------------------------- Total Liabilities $ 4,968 $ 673 $ 503 $ 452 $ 6,596 ==================================================================== Gap $ (487) $ 232 $ 233 $ 204 $ 182 Cumulative Gap (487) (255) (22) 182 Cumulative Gap as a percent of Total Assets -3.30% -1.73% -0.15% 1.23% Off-Balance Sheet (a) Interest Rate swaps $ (370) $ - $ - $ - $ (370) Gap (857) 232 233 204 (166) Cumulative Gap (857) (625) (392) (188) Cumulative Gap as a percent of Total Assets -5.81% -4.23% -2.65% -1.27% Non-rate -------- 1 yr-5 yrs greater than 5 yrs sensitive Total ---------- ------------------ --------- ----- Net Loans $ 3,195 $ 465 $ 9,146 Securities Taxable 1,734 383 3,069 Tax-exempt 191 512 770 Trading Account 40 Other Interest Bearing Assets Int. bearing deposits in other banks 29 Fed Funds Sold & Security Resale Agreements $ 124 Money Market Funds $ 63 Other Short Term Investments $ 16 Other Assets 1,505 1,505 ------------------------------------------------------------- Total Assets $ 5,120 $ 1,360 $ 1,505 $ 14,763 ============================================================= Savings and Now $ 442 $ 1,942 $ 4,400 Non-Int Bearing Demand Dep 2,471 2,471 Other time deposits 1,332 4 4,081 Short-term borrowings 1,835 Long-term borrowings 33 303 336 Other liabilities and Equity 1,640 1,640 ------------------------------------------------------------- Total Liabilities $ 1,807 $ 2,249 $ 4,111 $ 14,763 ============================================================= Gap $ 3,313 $ (889) $ (2,606) $ (0) Cumulative Gap 3,495 2,606 Cumulative Gap as a percent of Total Assets Off-Balance Sheet (a) Interest Rate swaps $ 370 Gap 3,683 $ (889) Cumulative Gap 3,495 2,606 Cumulative Gap as a percent of Total Assets
- --------------------------------- (a) Does not include $50 million in notional amounts of interest rate floors. Asset/Liability Management involves the measurement and control of the exposure of the Corporation's short- and long-term earnings to changes in interest rates, and the maintenance of adequate levels of liquidity to meet unexpected cash needs with minimal disruption to the ongoing business of the Corporation. Financial institutions, by their nature, bear interest rate and liquidity risk as a necessary part of the business of managing financial assets and liabilities. Asset/Liability strategy is designed to confine these risks within prudent parameters and indentify appropriate risk/reward tradeoffs in the financial structure of the balance sheet. The Corporation uses financial modeling techniques to indentify potential changes in income under a variety of possible interest rate scenarios. The financial models indentify the specific cash flows, repricing timing and embedded option characteristics across the array of assets and liabilities held by the Corporation. Policies are in place to assure that neither the earnings nor the value at risk exceed appropriate limits. The use of a limited array of derivative financial instruments has allowed the Corporation to achieve the desired balance sheet repricing structure while simultaneously meeting the desired objectives of both its borrowing and depositing customers. An important component of managing the interest rate risk of the Corporation involves accurately identifying the repricing characteristics of non-maturity deposit products (e.g. savings, NOW, MMDA and demand deposit accounts). While these depositors have the legal capacity, under most circumstances, to withdraw their funds immediately, the historical experience of the Corporation indicates that these aggregate balances remain steady or even climb through various interest rate cycles, despite quite limited changes in the rates paid on the accounts. Therefore, the Corporation has determined that a majority of these balances can be considered insensitive to rate movements when measuring the interest rate risk of the balance sheet. Periodically, structural changes in the competitive marketplace causes a re-evaluation of the rate sensitivity of these non-maturity deposit balances. The recent introduction and growth of the indexed Money Market Account (IMMA) offered those deposit customers wishing greater investment characteristics for a portion of their balances and alternative to non-bank products. As a result, in addition to new balances garnered, some balances were transferred from other existing traditional savings products within the banks. Therefore, balances remaining in these traditional "core deposit" products are now considered to be proportionately more long-term in repricing character than they were prior to the introduction of the IMMA. For purposes of this presentation, non-interest bearing demand deposits are shown to be non-rate sensitive. Historical trends in commercial and retail demand deposit balances have been reviewed, and a portion of commercial accounts determined to be potentially more sensitive than other commercial accounts or than retail DDA balances. The derivative transactions taken to date have been exclusively for the purpose of managing the interest rate position of the balance sheet, rather than for trading or synthetic investment purposes. Therefore the risks and rewards of the transactions should be viewed within the context of the risks and rewards existant elsewhere in the Corporation. Transactions undertaken during 1996 functionally lengthened the repricing characteristics of a portion of the Corporation's floating rate loan portfolio or offset some of the non-linear price risk in a portion of the mortgage-related investment portfolio. While the derivatives themselves are currently yielding positive spread income on a stand-alone basis, this may not always be the case. Rather, the combination of the derivatives with the matched balance sheet items allows the Corporation to achieve the asset/liability position described above without the need to artificially incent customers to change their desired product selection. 27 CAPITAL RESOURCES Shareholders' equity was $1.26 billion or 8.54% of total consolidated assets at December 31, 1996 compared to $1.26 billion or 9.43% of total consolidated assets at December 31, 1995. Earnings retention, stock option exercises and increase in unrealized gains on investment securities available for sale were offset by treasury stock acquisitions. The Corporation and its affiliates continue to have a strong capital base and the Corporation's regulatory capital ratios continue to be significantly above the defined minimum regulatory ratios. At December 31, 1996, the Corporation's Tier 1 Capital, Total Capital and Leverage Ratios were 12.71%, 14.90% and 9.61%, respectively, compared to 11.71%, 14.04% and 9.07% at December 31, 1995. As more fully described in Note 12 to the Consolidated Financial Statements contained in Item 8 herein, in December 1996 the Corporation formed a Trust and issued $200 million of 7.65% cumulative preferred capital securities. The proceeds were invested in 7.65% junior subordinated deferrable interest debentures issued by the Corporation which is the sole asset of the Trust. The proceeds will be used by the Corporation for general corporate purposes including the repurchase of its common shares. The cumulative preferred capital securities qualify as Tier 1 capital, subject to certain limitations, for regulatory capital purposes and substantially contributed to the increase in regulatory capital at year end 1996 compared to 1995. The Corporation's subsidiaries, primarily its banking subsidiaries, are restricted by regulations from making distributions above prescribed amounts. In addition, banking subsidiaries are limited in making loans and 28 advances to the Corporation. At December 31, 1996, approximately $59 million and $63 million were available for distribution without regulatory approval from the Corporation's banking and nonbanking subsidiaries, respectively. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each subsidiary bank in circumstances when it might not do so absent such policy. In April 1996, $16,818 of 8.5% convertible subordinated notes were converted into 1,922,114 shares of common stock. As provided for in the note agreement, the noteholder subsequent to conversion, exchanged the common shares acquired by conversion of the debt for 168,185 shares of the Corporation's Series A preferred stock. The $16,819 remaining amount of such 8.5% convertible debt will mature or be converted in 1997. The Corporation has a Stock Repurchase Program. Under the most recent provisions approved by the Corporation's Board of Directors, up to 6 million shares may be repurchased annually. The shares are being acquired in anticipation of the remaining conversion of the Corporation's 8.5% convertible subordinated notes, to fund the on-going program to deliver or have available shares of common stock for stock option and other employee benefit plans and other corporate needs. During 1996, the Corporation purchased 5.9 million shares and has cumulatively purchased 18.4 million shares at an aggregate cost of approximately $450.7 million or $24.43 per share on a weighted average basis. The Corporation has filed registration statements with the Securities & Exchange Commission to issue medium term unsecured and subordinated series notes. These issues may have maturities which range from 9 months to 30 years at a fixed or floating rate and allows the Corporation to maintain ready access to funding sources for general corporate purposes which include, but are not limited to refinancing existing corporate debt as it matures, and other corporate purposes. The Corporation and the previously discussed Trust have also filed a registration statement with the Securities & Exchange Commission to register cumulative preferred capital securities and register junior subordinated deferrable interest debentures that will be offered in exchange for the existing privately placed capital securities and subordinated debt. 29 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 CONSOLIDATED BALANCE SHEETS DECEMBER 31 ($000'S EXCEPT SHARE DATA)
1996 1995 ----------- ----------- ASSETS Cash and Cash Equivalents: Cash and Due from Banks.............................. $ 780,562 $ 745,911 Funds Sold and Security Resale Agreements............ 123,880 66,618 Money Market Funds................................... 63,482 84,960 ----------- ----------- Total Cash and Cash Equivalents........................ 967,924 897,489 Trading Securities, at Market Value.................... 39,671 38,601 Other Short-term Investments, at Cost which Approximates Market Value............................. 45,711 95,635 Investment Securities Available for Sale, at Market Value................................................. 3,065,048 2,458,600 Investment Securities Held to Maturity, Market Value $776,750 ($453,240 in 1995)............. 773,804 450,457 Loans, Net of Unearned Income of $58,849 ($46,571 in 1995)................................................. 9,301,884 8,868,902 Less: Allowance for Loan Losses........................ 155,895 161,430 ----------- ----------- Net Loans.............................................. 9,145,989 8,707,472 Premises and Equipment................................. 313,381 306,988 Accrued Interest and Other Assets...................... 411,785 387,855 ----------- ----------- Total Assets....................................... $14,763,313 $13,343,097 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest Bearing................................... $ 2,470,882 $ 2,363,194 Interest Bearing...................................... 8,481,476 7,917,583 ----------- ----------- Total Deposits......................................... 10,952,358 10,280,777 Short-term Borrowings.................................. 1,834,549 1,015,022 Accrued Expenses and Other Liabilities................. 379,100 367,131 Long-term Borrowings................................... 336,096 422,550 ----------- ----------- Total Liabilities.................................. 13,502,103 12,085,480 Shareholders' Equity: Series A Convertible Preferred Stock, $1.00 par value, 2,000,000 Shares Authorized; 517,129 Shares Issued (348,944 in 1995); Liquidation Preference $51,713 ($34,894 in 1995).................................... 517 349 Common Stock, $1.00 par value, 160,000,000 Shares Authorized; 99,494,335 Shares Issued................. 99,494 99,494 Additional Paid-in Capital............................ 204,135 190,287 Retained Earnings..................................... 1,209,167 1,075,789 Less: Treasury Stock, at Cost, 10,910,798 Shares (5,968,631 in 1995).................................. 279,143 128,459 Deferred Compensation.............................. 825 1,090 Net Unrealized Securities Gains Net of Taxes......................................... 27,865 21,247 ----------- ----------- Total Shareholders' Equity.......................... 1,261,210 1,257,617 ----------- ----------- Total Liabilities and Shareholders' Equity.......... $14,763,313 $13,343,097 =========== ===========
The accompanying notes are an integral part of the Consolidated Financial Statements. 30 CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
1996 1995 1994 -------- -------- -------- INTEREST INCOME Loans............................................. $758,955 $774,256 $681,085 Investment Securities: Taxable.......................................... 171,537 118,868 110,894 Exempt from Federal Income Taxes................. 30,718 18,112 16,693 Trading Securities................................ 1,202 483 218 Other Short-term Investments...................... 9,024 12,941 8,416 -------- -------- -------- Total Interest Income......................... 971,436 924,660 817,306 INTEREST EXPENSE Deposits.......................................... 360,838 331,734 255,861 Short-term Borrowings............................. 62,071 47,740 39,681 Long-term Borrowings.............................. 42,808 53,709 30,537 -------- -------- -------- Total Interest Expense........................ 465,717 433,183 326,079 -------- -------- -------- Net Interest Income............................... 505,719 491,477 491,227 Provision for Loan Losses......................... 15,194 16,158 24,907 -------- -------- -------- Net Interest Income After Provision for Loan Losses........................................... 490,525 475,319 466,320 OTHER INCOME Data Processing Services.......................... 268,526 213,914 159,418 Trust Services.................................... 70,190 64,176 59,720 Other Customer Services........................... 117,263 110,779 117,089 Net Securities Gains (Losses)..................... 14,876 4,555 (5,752) Other............................................. 32,465 30,758 31,006 -------- -------- -------- Total Other Income............................ 503,320 424,182 361,481 OTHER EXPENSE Salaries and Employee Benefits.................... 382,430 343,650 323,904 Net Occupancy..................................... 39,215 35,717 36,579 Equipment......................................... 77,250 65,534 59,569 Software Expenses................................. 15,222 12,376 9,197 Payments to Regulatory Agencies................... 4,791 12,715 23,359 Processing Charges................................ 19,069 18,480 18,293 Supplies and Printing............................. 16,015 15,711 14,416 Professional Services............................. 17,441 18,675 12,504 Merger/Restructuring.............................. -- -- 75,228 Other............................................. 109,271 76,764 86,949 -------- -------- -------- Total Other Expense........................... 680,704 599,622 659,998 -------- -------- -------- Income Before Income Taxes and Extraordinary Items............................................ 313,141 299,879 167,803 Provision for Income Taxes........................ 109,711 106,580 73,405 -------- -------- -------- Income Before Extraordinary Items................. 203,430 193,299 94,398 Extraordinary Items, Net of Income Taxes.......... -- -- 11,542 -------- -------- -------- Net Income........................................ $203,430 $193,299 $105,940 ======== ======== ======== NET INCOME PER COMMON SHARE Primary: Income Before Extraordinary Items................ $ 2.07 $ 1.96 $ 0.95 Extraordinary Items.............................. -- -- 0.12 -------- -------- -------- Net Income.................................... $ 2.07 $ 1.96 $ 1.07 ======== ======== ======== Fully Diluted: Income Before Extraordinary Items................ $ 2.02 $ 1.90 $ 0.93 Extraordinary Items.............................. -- -- 0.11 -------- -------- -------- Net Income.................................... $ 2.02 $ 1.90 $ 1.04 ======== ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. 31 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 ($000'S)
1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income.............................. $ 203,430 $ 193,299 $ 105,940 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization......... 53,612 47,167 71,957 Provision for Loan Losses............. 15,194 16,158 24,907 Gains on Sales of Assets.............. (31,843) (20,448) (2,434) Proceeds from Sales of Trading Securities and Loans Held for Resale................ 4,028,069 3,506,767 3,657,575 Purchases of Trading Securities and Loans Held for Resale................ (4,052,894) (3,514,512) (3,547,732) Other................................. 19,521 (727) (2,765) ----------- ----------- ----------- Total Adjustments................... 31,659 34,405 201,508 ----------- ----------- ----------- Net Cash Provided by Operating Activities............................. 235,089 227,704 307,448 CASH FLOWS FROM INVESTING ACTIVITIES Net (Increase) Decrease in Shorter Term Securities............................. 52,250 (49,980) 7,676 Proceeds from Maturities of Longer Term Securities............................. 846,169 668,708 861,428 Proceeds from Sales of Securities Available for Sale..................... 796,447 133,340 595,476 Purchases of Longer Term Securities..... (2,325,623) (791,172) (1,254,651) Decrease in Loans Due to Divestitures... 13,729 -- 199,455 Net Increase in Loans................... (627,790) (332,649) (497,075) Purchases of Assets to be Leased........ (171,395) (132,299) (88,826) Principal Payments on Lease Receivables............................ 145,095 139,155 113,976 Purchases of Premises and Equipment, Net.................................... (50,672) (39,881) (28,995) Other................................... (18,099) 26,603 (29,829) ----------- ----------- ----------- Net Cash Used in Investing Activities... (1,339,889) (378,175) (121,365) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in Deposits Due to Divestitures........................... (25,874) -- (300,736) Net Increase (Decrease) in Deposits..... 697,454 550,261 (371,993) Proceeds from Issuance of Commercial Paper.................................. 641,754 1,406,388 1,578,618 Principal Payments on Commercial Paper.. (669,091) (1,439,343) (1,604,384) Net Increase (Decrease) in Other Short- term Borrowings........................ 954,013 (434,429) 440,501 Proceeds from Issuance of Long-term Debt................................... 248,335 216,872 497,560 Payment of Long-term Debt............... (442,189) (104,676) (96,299) Dividends Paid.......................... (69,878) (62,985) (57,575) Purchase of Common Stock................ (172,023) (61,104) (101,887) Proceeds from the Issuance of Common Stock.................................. 12,908 9,079 11,682 Other................................... (174) 6 1,687 ----------- ----------- ----------- Net Cash Provided by (Used in) Financing Activities............................. 1,175,235 80,069 (2,826) ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents............................ 70,435 (70,402) 183,257 Cash and Cash Equivalents, Beginning of Year................................... 897,489 967,891 784,634 ----------- ----------- ----------- Cash and Cash Equivalents, End of Year.. $ 967,924 $ 897,489 $ 967,891 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash Paid During the Year for: Interest.............................. $ 462,213 $ 406,383 $ 319,398 Income Taxes.......................... 100,401 107,672 91,797
The accompanying notes are an integral part of the Consolidated Financial Statements. 32 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000'S EXCEPT SHARE DATA)
NET UNREALIZED SECURITIES ADDITIONAL TREASURY DEFERRED GAINS (LOSSES) PREFERRED COMMON PAID-IN RETAINED COMMON COMPEN- NET OF STOCK STOCK CAPITAL EARNINGS STOCK SATION TAXES --------- -------- ---------- -------- -------- -------- -------------- Balance, December 31, 1993................... $185 $102,073 $238,130 $897,123 $121,106 $1,892 $ -- Net Income.............. -- -- -- 105,940 -- -- -- Adoption of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities"..... -- -- -- -- -- -- 13,858 Issuance of 2,653,689 Treasury Common Shares in the 1994 Business Combination............ -- (2,654) (52,569) -- (55,223) -- -- Transactions by Affiliates Prior to Combination............ -- -- -- (9,963) -- -- -- Issuance of 1,870,057 Treasury Common Shares on Conversion of Convertible Notes...... -- -- (22,365) -- (38,916) -- -- Issuance of 163,630 Preferred Shares on Conversion of 1,870,057 Common Shares.......... 164 -- 38,752 -- 38,916 -- -- Issuance of 1,154,218 Treasury Common Shares Under Stock Option and Restricted Stock Plans.................. -- 78 (10,628) -- (22,294) -- -- Acquisition of 4,827,637 Common Shares.......... -- -- -- -- 99,271 -- -- Dividends Declared on Preferred Stock--$6.43 Per Share.............. -- -- -- (2,000) -- -- -- Dividends Declared on Common Stock--$0.59 Per Share.................. -- -- -- (45,612) -- -- -- Net Change in Deferred Compensation........... -- -- -- -- -- (689) -- Net Change in Unrealized Securities Gains (Losses) Net of Taxes ....................... -- -- -- -- -- -- (47,930) Other................... -- (3) 3,377 (19) 578 -- -- ---- -------- -------- -------- -------- ------ -------- Balance, December 31, 1994................... $349 $ 99,494 $194,697 $945,469 $143,438 $1,203 ($34,072) ==== ======== ======== ======== ======== ====== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. 33 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000'S EXCEPT SHARE DATA)
NET UNREALIZED SECURITIES ADDITIONAL TREASURY DEFERRED GAINS (LOSSES) PREFERRED COMMON PAID-IN RETAINED COMMON COMPEN- NET OF STOCK STOCK CAPITAL EARNINGS STOCK SATION TAXES --------- ------- ---------- ---------- -------- -------- -------------- Balance, December 31, 1994................... $349 $99,494 $194,697 $ 945,469 $143,438 $1,203 ($34,072) Net Income.............. -- -- -- 193,299 -- -- -- Issuance of 2,844,144 Treasury Common Shares in Acquisitions Accounted for as Purchases.............. -- -- 904 -- (58,791) -- -- Issuance of 884,087 Treasury Common Shares Under Stock Option and Restricted Stock Plans.................. -- -- (8,730) -- (18,427) -- -- Acquisition of 2,731,942 Common Shares.......... -- -- 1 -- 62,239 -- -- Dividends Declared on Preferred Stock--$7.085 Per Share.............. -- -- -- (2,472) -- -- -- Dividends Declared on Common Stock--$0.645 Per Share.............. -- -- -- (60,513) -- -- -- Net Change in Deferred Compensation........... -- -- -- -- -- (113) -- Net Change in Unrealized Securities Gains (Losses) Net of Taxes.. -- -- -- -- -- -- 55,319 Other................... -- -- 3,415 6 -- -- -- ---- ------- -------- ---------- -------- ------ --------- Balance, December 31, 1995................... $349 $99,494 $190,287 $1,075,789 $128,459 $1,090 $ 21,247 ==== ======= ======== ========== ======== ====== =========
The accompanying notes are an integral part of the Consolidated Financial Statements. 34 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000'S EXCEPT SHARE DATA)
NET UNREALIZED SECURITIES ADDITIONAL TREASURY DEFERRED GAINS (LOSSES) PREFERRED COMMON PAID-IN RETAINED COMMON COMPEN- NET OF STOCK STOCK CAPITAL EARNINGS STOCK SATION TAXES --------- ------- ---------- ---------- -------- -------- -------------- Balance, December 31, 1995................... $349 $99,494 $190,287 $1,075,789 $128,459 $1,090 $21,247 Net Income.............. -- -- -- 203,430 -- -- -- Issuance of 1,922,114 Treasury Common Shares on Conversion of Convertible Notes...... -- -- (25,660) -- (42,517) -- -- Issuance of 168,185 Preferred Shares On Conversion of 1,922,114 Common Shares.......... 168 -- 42,349 -- 42,517 -- -- Issuance of 982,434 Treasury Common Shares Under Stock Option and Restricted Stock Plans.................. -- -- (9,285) -- (22,422) -- -- Acquisition of 5,924,601 Common Shares.......... -- -- 77 -- 173,106 -- -- Dividends Declared on Preferred Stock--$7.99 Per Share.............. -- -- -- (3,827) -- -- -- Dividends Declared on Common Stock--$0.72 Per Share.................. -- -- -- (66,051) -- -- -- Net Change in Deferred Compensation........... -- -- -- -- -- (265) -- Net Change in Unrealized Securities Gains (Losses) Net of Taxes.. -- -- -- -- -- -- 6,618 Other................... -- -- 6,367 (174) -- -- -- ---- ------- -------- ---------- -------- ------ ------- Balance, December 31, 1996................... $517 $99,494 $204,135 $1,209,167 $279,143 $ 825 $27,865 ==== ======= ======== ========== ======== ====== =======
The accompanying notes are an integral part of the Consolidated Financial Statements. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) Marshall & Ilsley Corporation ("M&I" or the "Corporation") is a bank and savings and loan holding company that provides financial services to a wide variety of corporate, institutional, government and individual customers through 28 banks and one savings association located in Wisconsin and one bank in Arizona. Based on total revenues, banking is M&I's largest business and includes personal property lease financing; investment management and advisory services; commercial and residential mortgage banking; venture capital and financial advisory services; trust services to residents of Wisconsin, Arizona and Florida; and brokerage services. M&I also provides financial and data processing services and software sales through the Data Services Division of the Corporation and three other nonbank subsidiaries. M&I's largest affiliates and principal operations are in Wisconsin however, it has activities in other markets, particularly in certain neighboring midwestern states, and in Arizona and Florida. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Consolidation principles--The Consolidated Financial Statements include the accounts of Marshall & Ilsley Corporation and all subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. Certain amounts in the 1995 and 1994 Consolidated Financial Statements have been reclassified to conform with the 1996 presentation. Cash and cash equivalents--For purposes of the Consolidated Financial Statements, the Corporation defines cash equivalents as short-term investments which have an original maturity of three months or less and are readily convertible into cash. Securities--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. 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 fair value with fair value adjustments and the related income tax effects reported as a separate component of shareholders' equity as prescribed by Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Short-term Investments, other than Trading Securities, are carried at cost, which approximates market value. Trading Securities are carried at fair value, with adjustments to the carrying value reflected in the Consolidated Statements of Income. Loans--Interest on loans, other than direct financing leases, is recognized as income based on the loan principal outstanding during the period. Unearned income on direct financing leases is recognized over the lease term on a basis that results in an approximate level rate of return on the lease investment. Loans are generally placed on nonaccrual status when they are past due 90 days as to either interest or principal. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged to interest income on loans. A nonaccrual loan may be restored to an accrual basis when interest and principal payments are brought current and collectibility of future payments is not in doubt. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) The Corporation defers and amortizes fees and certain incremental direct costs, primarily salary and employee benefit expenses, over the contractual term of the loan or lease as an adjustment to the yield. The unamortized net fees and costs are reported as part of the loan balance outstanding. Allowance for loan losses--The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on a continual review of the loan portfolio, loan loss experience, economic conditions, growth and composition of the portfolio, and other relevant factors. As a result of management's continual review, the allowance is adjusted through provisions for loan losses charged against income. Premises and equipment--Premises and equipment are recorded at cost and depreciated principally on the straight-line method with annual rates varying from 2% to 10% for buildings and 10% to 35% for equipment. Long-lived assets which are considered impaired are carried at fair value and long-lived assets to be disposed of are carried at the lower of the carrying amount or fair value less cost to sell. Maintenance and repairs are charged to expense and betterments are capitalized. Other real estate owned--Other real estate owned includes assets that have been acquired in satisfaction of debts and bank branch premises held for sale. Other real estate is recorded at the lower of cost or fair value, less estimated selling costs, at the date of transfer. Valuation adjustments required at the date of transfer for assets acquired in satisfaction of debts are charged to the allowance for loan losses, whereas any valuation adjustments on premises are reported in other expense. Subsequent to transfer, other real estate owned is carried at the lower of cost or fair market value, less estimated selling costs, based upon periodic evaluations. Rental income from properties and gains on sales are included in other income, and property expenses, which include carrying costs, required valuation adjustments and losses on sales, are recorded in other expense. Mortgage servicing--Fees related to the servicing of mortgage loans are recorded as income when payments are received from mortgagors. Mortgage loans held for sale to investors are carried at the lower of cost or market, determined on an aggregate basis, based on outstanding firm commitments received for such loans or on current market prices. Data processing services--Direct costs associated with the production of computer software which will be marketed or used in data processing operations are capitalized and amortized on the straight-line method over the estimated economic life of the product, generally four years. Direct costs associated with customer system conversions to the data services operations are capitalized and amortized on the straight-line method over the terms, generally five to seven years, of the related servicing contract. Routine maintenance of software products including maintenance required for the year 2000, design costs and research and development costs incurred prior to establishment of a product's technological feasibility for software to be sold are expensed as incurred. Research and development costs expensed in 1996, 1995 and 1994 were approximately $14.0 million, $2.8 million and $2.1 million, respectively. The 1996 amount includes the $12.1 million expensed in connection with the acquisition discussed in Note 2. Net unamortized costs at December 31 were:
1996 1995 ------- ------- Software.............................. $28,695 $19,343 Conversions........................... 16,474 15,641 ------- ------- Total................................. $45,169 $34,984 ======= =======
Software amortization expense was $4,987. $3,143 and $3,831 for 1996, 1995, and 1994, respectively. Conversion amortization expense was $4,864, $3,979 and $3,129 for 1996, 1995 and 1994, respectively. Intangibles--Unamortized intangibles resulting from acquisitions, primarily goodwill, core deposit premiums, purchased data processing contract rights and mortgage servicing rights were $77,296 at December 31, 1996 and $77,376 at December 31, 1995. The Corporation recognizes as separate assets rights to service 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) mortgage loans when purchased or originated and sold with servicing retained. Mortgage servicing rights are amortized over the periods during which the corresponding mortgage servicing revenues are anticipated to be generated. Purchased data processing contract rights represent the costs to acquire the rights to data processing and software distribution. Such costs are generally amortized over the average contract lives, which range from 5 to 8 years. The other intangibles are amortized principally on the straight-line method over periods ranging from 6 to 25 years. Total amortization expense was $11,121, $10,708 and $9,176 for 1996, 1995 and 1994, respectively. The Corporation continually evaluates whether later events and circumstances have occurred to indicate that intangibles should be evaluated for possible impairment and utilizes estimates of undiscounted net income over the remaining life to measure recoverability. The Corporation also has negative goodwill included in other liabilities, the majority of which, arose from an acquisition in 1992. Negative goodwill amounted to $9,056 and $10,811 at December 31, 1996 and 1995, respectively. The negative goodwill is being accreted on a straight-line basis over a period of 10 years and amounted to $1,568 in 1996 and $1,576 in 1995 and 1994. Long-term borrowings--The guaranteed preferred beneficial interest of the Corporation's special purpose finance subsidiary which holds as its sole asset, junior subordinated deferrable interest debentures issued by the Corporation, is classified as long-term borrowings and shown net of its related discount. The distributions, including the related accretion of discount, are classified as interest expense for purposes of the Consolidated Financial Statements. Interest risk management instruments--As part of its asset/liability management activities, the Corporation may enter into interest rate futures, forwards, swaps, floors and option contracts. These derivative financial instruments are carried at fair value unless the instrument qualifies for hedge accounting treatment. Fair value adjustments on risk management instruments carried at fair value are reflected in other operating income. Gains and losses realized on futures and forward contracts qualifying as hedges are deferred and amortized over the terms of the related assets or liabilities and are included as adjustments to interest income or expense. Settlement on interest rate swaps and option contracts are recognized over the lives of the agreements as adjustments to interest income or expense. Interest rate contracts used in management of the securities portfolio that are designated as available for sale are carried at fair value with gains and losses, net of applicable deferred income taxes, reported as a separate component of shareholders' equity, consistent with the reporting of unrealized gains and losses on such securities. Foreign exchange contracts--Foreign exchange contracts include such commitments as foreign currency spot, forward, future and, to a much lessor extent, option contracts. Foreign exchange contracts and the premiums on options written or sold are carried at market value, with realized and unrealized gains and losses included in other income. Net income per share--Primary net income per share is computed using the weighted average number of common shares outstanding plus common equivalent shares issuable upon the assumed conversion of the preferred stock outstanding and shares issuable under outstanding stock option plans. The average number of common and common equivalent shares used in computing primary net income per share was 98,482,425 in 1996, 98,757,047 in 1995, and 99,420,070 in 1994. Fully diluted net income per share also includes dilution resulting from the assumed conversion of the convertible notes. The average number of shares used in the computation of fully diluted net income per share was 101,197,081 in 1996, 102,954,823 in 1995, and 104,051,365 in 1994. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) New accounting pronouncement--Effective January 1, 1997, the Corporation must adopt Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities such as accounting for transfers of partial interests, servicing of financial assets, securitizations, transfers of certain lease receivables, repurchase agreements and loan syndications and participations. The Corporation does not anticipate that SFAS 125 will have a material impact on the Consolidated Financial Statements. 2. Its results of operations, Liquidity or Capital resources. The Corporation has consummated the following business combinations:
CONSIDERATION ------------------ DATE COMMON METHOD OF ORGANIZATION CONSUMMATED CASH STOCK ACCOUNTING - ------------ ----------------- ------- ---------- ---------- Valley Bancorporation......... May 31, 1994 -- 35,681,156 Pooling Software Alliance Corp........ December 30, 1994 $15,700 -- Purchase Bank of Burlington............ February 1, 1995 -- 1,491,600 Purchase Mutual Services, Inc. ........ June 27, 1995 5,333 -- Purchase Citizens Bancorp of Delavan, Inc.......................... July 1, 1995 -- 1,132,544 Purchase Sharon State Bank............. July 2, 1995 -- 220,000 Purchase EastPoint Technology, Inc. ... August 7, 1996 25,508 -- Purchase
EastPoint Technology, Inc. is a software development company specializing in client/server technology. The allocation of the purchase price to the various classes of assets was determined on the basis of an opinion expressed by a nationally recognized independent appraisal firm. The value determined for in- process research and development, where technological feasibility had not yet been established or was not believed to have an alternative future use, was immediately expensed while the values of completed technology and other assets, including the resulting goodwill, are being amortized over their estimated useful lives. Acquired in-process research and development expensed during 1996 amounted to $12.1 million and is included in other miscellaneous expense in the Consolidated Statements of Income. The results of operations for the acquired companies accounted for as purchases are included in the Consolidated Financial Statements from the dates of acquisition. The pro forma impact on net income from acquisitions is not material. 3. MERGER/RESTRUCTURING Certain one-time expenses associated with the 1994 merger with Valley Bancorporation ("Valley") are shown in the Consolidated Statements of Income as Merger/Restructuring and consist of the following:
Executive contracts................................................ $26,371 Employee severance costs........................................... 14,775 Duplicative computer and software write-offs....................... 12,741 System conversion and standardization costs........................ 2,888 Investment advisor fees............................................ 3,420 Legal, accounting and other professional fees...................... 3,826 Lease terminations and equipment disposals......................... 4,232 Net gain on sale of duplicative facilities and voluntary divestitures...................................................... (1,334) Other.............................................................. 8,309 ------- Total merger/restructuring......................................... $75,228 =======
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) 5. CASH AND DUE FROM BANKS At December 31, 1996, $131,378 of cash and due from banks was restricted, primarily due to requirements of the Federal Reserve system to maintain certain reserve balances. 6. OTHER SHORT-TERM INVESTMENTS Other short-term investments at December 31 were:
1996 1995 ------- ------- Commercial paper............................................ $13,000 $65,250 Interest bearing deposits in other banks.................... 29,214 28,812 U.S. Treasury bills......................................... 3,497 1,573 ------- ------- Total other short-term investments.......................... $45,711 $95,635 ======= =======
7. SECURITIES The book and market values of securities at December 31 were:
1996 1995 --------------------- --------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies........................ $2,832,067 $2,856,625 $2,330,577 $2,346,866 States and political subdivisions.................... 708 719 885 894 Mortgage backed securities....... 34,209 34,248 5,210 5,220 Other............................ 154,792 173,456 88,826 105,620 ---------- ---------- ---------- ---------- Total........................... $3,021,776 $3,065,048 $2,425,498 $2,458,600 ========== ========== ========== ========== Investment Securities Held to Maturity: States and political subdivisions.................... $ 769,748 $ 772,694 $ 446,113 $ 448,896 Other............................ 4,056 4,056 4,344 4,344 ---------- ---------- ---------- ---------- Total........................... $ 773,804 $ 776,750 $ 450,457 $ 453,240 ========== ========== ========== ========== The unrealized gains and losses of securities at December 31 were: 1996 1995 --------------------- --------------------- UNREALIZED UNREALIZED UNREALIZED UNREALIZED GAINS LOSSES GAINS LOSSES ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies........................ $ 30,061 $ 5,503 $ 23,964 $ 7,675 States and political subdivisions.................... 11 -- 9 -- Mortgage backed securities....... 121 82 33 23 Other............................ 18,955 291 17,237 443 ---------- ---------- ---------- ---------- Total........................... $ 49,148 $ 5,876 $ 41,243 $ 8,141 ========== ========== ========== ========== Investment Securities Held to Maturity: States and political subdivisions.................... $ 6,622 $ 3,676 $ 4,473 $ 1,690 Other............................ -- -- -- -- ---------- ---------- ---------- ---------- Total........................... $ 6,622 $ 3,676 $ 4,473 $ 1,690 ========== ========== ========== ==========
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) 5. CASH AND DUE FROM BANKS At December 31, 1996, $131,378 of cash and due from banks was restricted, primarily due to requirements of the Federal Reserve system to maintain certain reserve balances. 6. OTHER SHORT-TERM INVESTMENTS Other short-term investments at December 31 were:
1996 1995 ------- ------- Commercial paper............................................ $13,000 $65,250 Interest bearing deposits in other banks.................... 29,214 28,812 U.S. Treasury bills......................................... 3,497 1,573 ------- ------- Total other short-term investments.......................... $45,711 $95,635 ======= =======
7. SECURITIES The book and market values of securities at December 31 were:
1996 1995 --------------------- --------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies........................ $2,832,067 $2,856,625 $2,330,577 $2,346,866 States and political subdivisions.................... 708 719 885 894 Mortgage backed securities....... 34,209 34,248 5,210 5,220 Other............................ 154,792 173,456 88,826 105,620 ---------- ---------- ---------- ---------- Total........................... $3,021,776 $3,065,048 $2,425,498 $2,458,600 ========== ========== ========== ========== Investment Securities Held to Maturity: States and political subdivisions.................... $ 769,748 $ 772,694 $ 446,113 $ 448,896 Other............................ 4,056 4,056 4,344 4,344 ---------- ---------- ---------- ---------- Total........................... $ 773,804 $ 776,750 $ 450,457 $ 453,240 ========== ========== ========== ========== The unrealized gains and losses of securities at December 31 were: 1996 1995 --------------------- --------------------- UNREALIZED UNREALIZED UNREALIZED UNREALIZED GAINS LOSSES GAINS LOSSES ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies........................ $ 30,061 $ 5,503 $ 23,964 $ 7,675 States and political subdivisions.................... 11 -- 9 -- Mortgage backed securities....... 121 82 33 23 Other............................ 18,955 291 17,237 443 ---------- ---------- ---------- ---------- Total........................... $ 49,148 $ 5,876 $ 41,243 $ 8,141 ========== ========== ========== ========== Investment Securities Held to Maturity: States and political subdivisions.................... $ 6,622 $ 3,676 $ 4,473 $ 1,690 Other............................ -- -- -- -- ---------- ---------- ---------- ---------- Total........................... $ 6,622 $ 3,676 $ 4,473 $ 1,690 ========== ========== ========== ==========
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) The book value and market value of securities by contractual maturity at December 31, 1996 were:
INVESTMENT SECURITIES INVESTMENT SECURITIES AVAILABLE FOR SALE HELD TO MATURITY --------------------- ---------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---------- ---------- ---------------------- Within one year................ $ 442,313 $ 445,386 $ 67,135 $ 67,356 From one through five years.... 1,996,837 2,013,818 193,114 194,269 From five through ten years.... 380,566 384,366 398,954 399,753 After ten years................ 202,060 221,478 114,601 115,372 ---------- ---------- ---------- ---------- Total.......................... $3,021,776 $3,065,048 $ 773,804 $ 776,750 ========== ========== ========== ==========
The gross realized gains and losses, all of which resulted from sales of Investment Securities Available for Sale, amounted to $22,450 and $7,574 in 1996, $8,821 and $4,266 in 1995, and $3,499 and $9,251 in 1994, respectively. The change in the unrealized holding gain or loss on trading securities was not material. At December 31, 1996, securities with a value of approximately $799,866 were pledged to secure public deposits, short-term borrowings, and for other purposes required by law. During 1996 and 1995, approximately $224 and $455 million, respectively, of adjustable rate mortgage loans were securitized and transferred to investment securities available for sale. Approximately $440 of the allowance for loan losses was transferred to a specific investment reserve in 1996 and $2,275 in 1995, to cover estimated losses based on the Corporation's experience with these types of financial instruments. The Corporation has agreed to guarantee the first 4% of the loan pools securitized through government agencies against potential loss. Since inception of the program in 1995 no losses have been incurred. These are noncash transactions for purposes of the Consolidated Statements of Cash Flows. On December 1, 1995 the Corporation transferred and reclassified approximately $182.8 million of investment securities previously classified as held to maturity to available for sale after reassessing the appropriateness of the classification of all investment securities held at that time in accordance with SFAS 115 and the Financial Accounting Standards Board's, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The unrealized gain at the date of transfer was $2.1 million. 8. LOANS Loans at December 31 were:
1996 1995 ---------- ---------- Commercial, financial, and agricultural............... $2,885,152 $2,903,920 Industrial development revenue bonds.................. 32,241 29,358 Real estate: Construction......................................... 323,420 303,345 Residential mortgage................................. 2,176,224 2,002,023 Commercial mortgage.................................. 2,379,156 2,189,449 Personal.............................................. 1,174,186 1,163,127 Lease financing....................................... 331,505 277,680 ---------- ---------- Total loans........................................... $9,301,884 $8,868,902 ========== ==========
42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) The Corporation's lending activities are concentrated primarily in the Midwest. Approximately 4% of its portfolio consists of loans granted to customers located in Arizona. The Corporation had $4,031 in foreign credits at December 31, 1996. The Corporation's loan portfolio consists of business loans extending across many industry types, as well as loans to individuals. As of December 31, 1996, total loans to any group of customers engaged in similar activities and having similar economic characteristics, as defined by standard industrial classifications, did not exceed 10% of total loans. The Corporation evaluates the credit risk of each customer on an individual basis and, where deemed appropriate, collateral is obtained. Collateral varies by individual loan customer but may include accounts receivable, inventory, real estate, equipment, deposits, personal and government guaranties, and general security agreements. Access to collateral is dependent upon the type of collateral obtained. On an on-going basis, the Corporation monitors its collateral and the collateral value related to the loan balance outstanding. An analysis of loans outstanding to directors and officers, including their related interests, of the Corporation and its significant subsidiaries for 1996 is presented below. All of these loans were made in the ordinary course of business with normal credit terms, including interest rates and collateral. The beginning balance has been adjusted to reflect the activity of newly- appointed directors and executive officers. Loans to Directors & Executive Officers:
Balance, beginning of year.......................................... $168,662 New loans........................................................... 176,484 Repayments.......................................................... (202,465) -------- Balance, end of year................................................ $142,681 ========
9. ALLOWANCE FOR LOAN LOSSES An analysis of the allowance for loan losses follows:
1996 1995 1994 -------- -------- -------- Balance, beginning of year..................... $161,430 $153,961 $133,600 Allowance of banks acquired.................... -- 2,843 -- Provision charged to expense................... 15,194 16,158 24,907 Loan securitization transfer................... (440) (2,275) -- Charge-offs.................................... (28,408) (14,615) (12,561) Recoveries..................................... 8,119 5,358 8,015 -------- -------- -------- Balance, end of year........................... $155,895 $161,430 $153,961 ======== ======== ========
As of December 31, 1996, and 1995, nonaccrual loans totalled $60,176 and $50,598, respectively. During 1994, a loan loss provision of $8,950 was charged to expense, after consummation of the merger with Valley, to conform Valley's loan valuation policies with those of the Corporation. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) At December 31, 1996 and 1995 the Corporation's recorded investment in impaired loans and the related valuation allowance are as follows:
1996 1995 -------------------- -------------------- RECORDED VALUATION RECORDED VALUATION INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE ---------- --------- ---------- --------- Total Impaired Loans and Leases (Nonaccrual and Renegotiated)...... $61,995 $53,685 Loans and Leases Excluded from Evaluation under SFAS 114.......... (25,247) (22,887) ------- ------- $36,748 $30,798 ======= ======= Valuation Allowance Required........ $ 6,071 $1,462 $ 8,643 $2,336 No Valuation Allowance Required..... 30,677 -- 22,155 -- ------- ------ ------- ------ Impaired Loans Evaluated............ $36,748 $1,462 $30,798 $2,336 ======= ====== ======= ======
The recorded investment in impaired loans for which no allowance is required is net of applications of cash interest payments and net of previous direct writedowns of $16,697 in 1996 and $4,325 in 1995 against the loan balance outstanding. The required valuation allowance is included in the allowance for loan losses in the Consolidated Balance Sheets. The average recorded investment in total impaired loans and leases for the year ended December 31, 1996 and 1995 amounted to $71,255 and $52,827, respectively. Interest payments received on impaired loans and leases are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions of principal. Interest income recognized on total impaired loans amounted to $6,482 in 1996 and $3,594 in 1995. The gross income that would have been recognized had such loans and leases been performing in accordance with their original terms would have been $9,809 in 1996 and $8,430 in 1995. 10. PREMISES AND EQUIPMENT The composition of premises and equipment at December 31 was:
1996 1995 -------- -------- Land...................................................... $ 38,566 $ 37,006 Buildings and leasehold improvements...................... 259,352 250,607 Furniture and equipment................................... 327,088 315,961 -------- -------- 625,006 603,574 Less accumulated depreciation............................. 311,625 296,586 -------- -------- Total premises and equipment.............................. $313,381 $306,988 ======== ========
Depreciation expense was $52,561 in 1996, $45,153 in 1995, and $43,006 in 1994. The Corporation leases certain of its facilities and equipment. Rent expense under such operating leases was $25,908 in 1996, $21,702 in 1995, and $20,567 in 1994, respectively. The future minimum lease payments under operating leases that have initial or remaining noncancellable lease terms in excess of one year for 1997 through 2001 are $10,295, $9,690, $8,372, $6,107 and $5,023, respectively. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) 11. SHORT-TERM BORROWINGS Short-term borrowings at December 31 were:
1996 1995 ---------- ---------- Funds purchased and security repurchase agreements... $1,337,940 $ 517,576 U.S. Treasury demand notes........................... 146,398 17,585 Commercial paper..................................... 14,234 41,571 Current maturities of long-term borrowings........... 284,023 398,688 Other................................................ 51,954 39,602 ---------- ---------- Total short-term borrowings........................ $1,834,549 $1,015,022 ========== ==========
Unused lines of credit primarily to support commercial paper borrowings were $40,000 at December 31, 1996 and 1995. 12. LONG-TERM BORROWINGS Long-term borrowings at December 31 were:
1996 1995 -------- -------- CORPORATION: 8.5% convertible subordinated notes due in 1997.......... $ 16,819 $ 33,637 6.375% subordinated notes due in 2003.................... 99,531 99,475 Medium-term Series B and C notes......................... 106,050 170,200 7.65% cumulative company-obligated mandatorily redeemable capital trust pass-through securities................... 199,031 -- Other.................................................... 20,619 20,958 SUBSIDIARIES: Bank notes............................................... 129,991 438,823 Nonrecourse notes........................................ 28,825 32,533 9.75% obligation under capital lease due through 2006.... 4,436 4,699 Other.................................................... 14,817 20,913 -------- -------- 620,119 821,238 Less current maturities.................................. 284,023 398,688 -------- -------- Total long-term borrowings............................ $336,096 $422,550 ======== ========
The 8.5% convertible subordinated notes (the "Notes") require semi-annual interest payments and are convertible at the option of the holder into common stock at a conversion price of $8.75. The holder has the right to exchange common stock, acquired by conversion of the Notes or otherwise, for series A convertible preferred stock ("Series A"). The holder may own up to 24.9% (computed as the percentage of common shares owned directly or indirectly through conversion privileges) of the Corporation's outstanding common stock and convertible securities, but may not own directly more than 5% of the Corporation's outstanding common stock. Except under limited circumstances, the holder may not sell, transfer or otherwise dispose of the Notes or common stock acquired by conversion, and then, only under prescribed conditions and subject to the Corporation's right of first refusal. A portion of the Notes qualify as equity contract notes as defined by the applicable guidelines of the Board of Governors of the Federal Reserve System. The Notes require the holder to take common stock (or other equity securities) in lieu of cash in satisfaction of the claim for principal repayment, unless the Corporation sells new 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) common stock (or certain other equity securities) and dedicates the proceeds thereof to the redemption or retirement of the Notes. During 1996, $16,818 of the Notes were converted by the holder into 1,922,114 shares of the Corporation's common stock. The common stock acquired by conversion of the Notes was exchanged for 168,185 shares of the Corporation's Series A convertible preferred stock. These are noncash transactions for purposes of the Consolidated Statements of Cash Flows. The 6.375% subordinated notes are not redeemable prior to maturity and qualify as "Tier 2" or supplementary capital for regulatory capital purposes. Interest is payable semiannually. The Corporation has filed registration statements with the Securities and Exchange Commission to issue medium-term unsecured and unsubordinated series notes. These issues may have maturities which range from 9 months to 30 years from the date of issue, at a fixed or floating rate. At December 31, 1996, medium-term Series B notes outstanding amounted to $20,050. Such notes mature in 1997 and 1998 and have fixed interest rates of 6.65% to 7.30%. No additional borrowings may occur under the Series B notes. There were $86,000 of medium-term Series C notes outstanding at December 31, 1996. The medium-term Series C notes have fixed interest rates of 6.95% to 7.65% and mature in 1997 and 1998. Approximately $27,130 of unissued Series C notes are remaining and available to be issued in the future. There have been no issuances of the $150 million Series D notes. In December 1996, the Corporation formed M&I Capital Trust A (the "Trust") and issued $200 million in liquidation or principal amount of cumulative preferred capital securities to certain accredited institutional investors. Holders of the capital securities are entitled to receive cumulative cash distributions at an annual rate of 7.65% payable semiannually. Concurrently with the issuance of the capital securities the Trust invested the proceeds, together with the consideration paid by the Corporation for the common interest in the Trust, in junior subordinated deferrable interest debentures ("subordinated debt") issued by the Corporation. The subordinated debt, which represents the sole asset of the Trust, bears interest at an annual rate of 7.65% payable semiannually and matures on December 1, 2026. The proceeds will be used for general corporate purposes including the repurchase of its common shares. The subordinated debt is junior in right of payment to all present and future senior indebtedness of the Corporation. The Corporation may redeem the subordinated debt in whole or in part at any time on or after December 1, 2006 at specified call premiums and at par on or after December 1, 2016. In addition, in certain circumstances the subordinated debt may be redeemed at par upon the occurrence of certain events. The Corporation's right to redeem the subordinated debt is subject to regulatory approval. The Corporation has the right subject to certain conditions, to defer payments of interest on the subordinated debt for extension periods, each period not exceeding ten consecutive semiannual periods. As a consequence of the Corporation's extension of the interest payment period, distributions on the capital securities would be deferred. In the event the Corporation exercises its right to extend an interest payment period, the Corporation is prohibited from making dividend or any other equity distributions during such extension period. The payment of distributions, liquidation of the Trust or payment upon the redemption of the capital securities are guaranteed by the Corporation. The Corporation, as owner of the common interest in the Trust, has the right at any time to terminate the Trust, subject to certain conditions. In circumstances other than maturity or redemption of the subordinated debt, 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) the subordinated debt would be distributed to the holders of the Trust securities on a pro rata basis in liquidation of the holders' interests in the Trust. The capital securities qualify as "Tier 1" capital for regulatory capital purposes. The Corporation and the Trust have filed a Registration Statement with the Securities and Exchange Commission to register capital securities and register junior subordinated deferrable interest debentures that will be offered in exchange for the existing privately placed capital securities and subordinated debt. The bank notes represent unsecured general obligations of the Corporation's banking subsidiaries ("Issuing Banks"). 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 up to a maximum of $1.0 billion aggregate principal amount outstanding at any time. The bank notes are offered through certain designated agents and are offered and sold only to institutional investors. The bank notes are sole obligations of the respective Issuing Banks and are not obligations of or guaranteed by the Corporation. The amount outstanding at December 31, 1996 represents the aggregate borrowings of 5 banking subsidiaries and mature at various times in 1997. Each bank note outstanding has a floating rate which is based on LIBOR plus 1/16 which ranged from 5.81% to 6.00% at December 31, 1996. Interest is payable and the interest rate is reset monthly. The nonrecourse notes are reported net of prepaid interest and represent borrowings by the leasing subsidiary from banks and other financial institutions. These notes have a weighted average interest rate of 8.74% at December 31, 1996 and are due in installments over varying periods through 2002. Lease financing receivables at least equal to the amount of the notes are pledged as collateral. Scheduled maturities of long-term borrowings are: $18,282, $10,439, $2,923 and $1,106 for 1998 through 2001, respectively. 13. SHAREHOLDERS' EQUITY The Corporation has 5,000,000 shares of preferred stock authorized, of which the Board of Directors has designated 2,000,000 shares as Series A convertible, with a $100 value per share for conversion purposes. Series A is nonvoting preferred stock. The same cash dividends will be paid on Series A as would have been paid on the common stock exchanged for Series A. Series A has the same restrictions on sale as are applicable to the 8.5% convertible subordinated notes. The holder of the convertible subordinated notes has the option through 1997 to exchange common stock of the Corporation for Series A. If the common stock is acquired by the holder in conversion of the Notes, the exchange ratio is one share of Series A for 11.43 shares of common stock. If acquired otherwise, the exchange ratio is one share of Series A, valued at $100, to the holder's weighted average purchase price per common share. Also, the holder has the option to convert series A into common stock at the same ratio that the common stock was exchanged for Series A. The Corporation has issued 517,129 shares of its Series A convertible preferred stock in exchange for 5,755,071 shares of common stock. The preferred stock is treated as a common stock equivalent in all per share calculations. The Corporation has a Stock Repurchase Program. Under the most recent provisions approved by the Corporation's Board of Directors, up to 6 million shares may be purchased annually. The shares are being acquired in anticipation of the conversion of the Corporation's 8.5% convertible subordinated notes, to fund the on-going program to deliver or have available shares of common stock for stock option and other employee benefit plans and other corporate needs. In conjunction with the Corporation's Repurchase Program, the 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) Corporation entered into a forward contract and purchased 2.0 million shares of its common stock in December, 1996. The contract provides that in June, 1997, a settlement price, based on the weighted average price of transactions in the Corporation's Common Stock over the six month period, will be computed resulting in an adjustment amount. Such adjustment amount, whether positive or negative, may be settled in the Corporation's common stock or cash at the Corporation's option. Including the transaction described above, the Corporation purchased 5.9 million shares in 1996 and has cumulatively purchased 18.4 million shares since inception of the program. Federal banking regulatory agencies have established capital adequacy rules which take into account risk attributable to balance sheet assets and off- balance sheet activities. All banks and bank holding companies must meet a minimum total risk-based capital ratio of 8%. Of the 8% required, at least half must be comprised of core capital elements defined as Tier 1 capital. The federal banking agencies also have adopted leverage capital guidelines which banking organizations must meet. Under these guidelines, the most highly rated banking organizations must meet a minimum leverage ratio of at least 3% Tier 1 capital to total assets, while lower rated banking organizations must maintain a ratio of at least 4% to 5%. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. At December 31, 1996, the most recent notification from the Federal Reserve Board categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Corporation's category. To be well capitalized under the regulatory framework, the Tier 1 capital ratio must meet or exceed 6%, the Total capital ratio must meet or exceed 10% and the Leverage ratio must meet or exceed 5%. The Corporation's risk-based capital and Leverage ratios are as follows ($ in millions)
RISK-BASED CAPITAL RATIOS --------------------------------------------------- AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995 ------------------------- ------------------------- AMOUNT RATIO AMOUNT RATIO ------------- ----------- ------------- ----------- Tier 1 capital............ $ 1,361.9 12.71% $1,167.5 11.71% Tier 1 capital minimum requirement.............. 428.5 4.00 398.7 4.00 ------------- ---------- ------------- ---------- Excess.................... $ 933.4 8.71% $ 768.8 7.71% ============= ========== ============= ========== Total capital............. $ 1,596.4 14.90% $1,399.3 14.04% Total capital minimum requirement.............. 857.1 8.00 797.3 8.00 ------------- ---------- ------------- ---------- Excess.................... $ 739.3 6.90% $ 602.0 6.04% ============= ========== ============= ========== Risk-adjusted assets...... $10,713.4 $9,965.8 ============= ============= LEVERAGE RATIO --------------------------------------------------- AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995 ------------------------- ------------------------- AMOUNT RATIO AMOUNT RATIO ------------- ----------- ------------- ----------- Tier 1 capital to adjusted total assets............. $ 1,361.9 9.61% $ 1,167.5 9.07% Minimum leverage requirement.............. 425.3-708.8 3.00-5.00 386.3-643.8 3.00-5.00 ------------- ---------- ------------- ---------- Excess.................... $ 936.6-653.1 6.61-4.61% $ 781.2-523.7 6.07-4.07% ============= ========== ============= ========== Adjusted average total assets................... $ 14,175.4 $ 12,875.3 ============= =============
All of the Corporation's banking subsidiaries' risk-based capital and leverage ratios meet or exceed the defined minimum requirements, and have been deemed well capitalized as of December 31, 1996 and 1995. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) Banking subsidiaries are restricted by banking regulations from making dividend distributions above prescribed amounts and are limited in making loans and advances to the Corporation. At December 31, 1996, the retained earnings of subsidiaries available for distribution as dividends without regulatory approval was approximately $122,169. 14. INCOME TAXES Total income tax expense for the years ended December 31, 1996, 1995 and 1994 was allocated as follows:
1996 1995 1994 -------- -------- ------- Income before extraordinary items............. $109,711 $106,580 $73,405 Extraordinary items........................... -- -- 9,008 Shareholders' Equity: Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.......................... (6,367) (3,415) (3,442) Unrealized gains (losses) on investment securities available for sale.................................... 3,552 30,752 (18,897) -------- -------- ------- $106,896 $133,917 $60,074 ======== ======== =======
The current and deferred portions of the provision for income taxes were:
1996 1995 1994 -------- -------- ------- Current: Federal........................................ $ 95,811 $ 91,233 $80,758 State.......................................... 13,192 13,900 12,686 -------- -------- ------- 109,003 105,133 93,444 Deferred: Federal........................................ (167) 1,826 (21,075) State.......................................... 875 (379) 1,036 -------- -------- ------- 708 1,447 (20,039) -------- -------- ------- Total provision for income taxes............ $109,711 $106,580 $73,405 ======== ======== =======
The following is a reconciliation between the amount of the provision for income taxes and the amount of tax computed by applying the statutory Federal income tax rate (35%) :
1996 1995 1994 -------- -------- ------- Tax computed at statutory rates............... $109,599 $104,958 $58,731 Increase (decrease) in taxes resulting from: Federal tax-exempt income.................... (9,547) (5,972) (5,972) State income taxes, net of Federal tax benefit..................................... 9,272 9,891 10,605 Merger/Restructuring......................... -- -- 7,191 Other........................................ 387 (2,297) 2,850 -------- -------- ------- Total provision for income taxes.......... $109,711 $106,580 $73,405 ======== ======== =======
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) The tax effects of temporary differences that give rise to significant elements of the deferred tax assets and deferred tax liabilities at December 31, are as follows:
1996 1995 ------- ------- Deferred tax assets: Deferred compensation................................. $11,656 $ 9,396 Allowance for loan losses............................. 47,110 48,523 Accrued postretirement benefits....................... 18,973 16,384 Other................................................. 30,049 25,512 ------- ------- Total deferred tax assets.......................... 107,788 99,815 Deferred tax liabilities: Lease revenue reporting............................... 25,101 19,988 Deferred expense, net of unearned income.............. 13,446 9,724 Premises and equipment, principally due to depreciation......................................... 19,691 18,720 Pension funding versus expense........................ -- 1,067 Purchase accounting adjustments....................... 2,800 3,303 Unrealized gains and losses........................... 15,407 11,855 Other................................................. 8,654 8,209 ------- ------- Total deferred tax liabilities..................... 85,099 72,866 ------- ------- Net deferred tax assets............................ $22,689 $26,949 ======= =======
The amount of income tax expense (benefit) related to net securities gains or losses amounted to $6,233, $1,762, and ($2,171), in 1996, 1995, and 1994, respectively. 15. STOCK OPTION AND RESTRICTED STOCK PLANS The Corporation has Executive Stock Option and Restricted Stock Plans which provide for the grant of nonqualified and incentive stock options, stock appreciation rights and rights to purchase restricted shares to key employees at prices ranging from not less than the par value of the common shares to the market value of the shares at the date of grant. The nonqualified and incentive stock option plans generally provide for the grant of options to purchase shares of the Corporation's common stock for a period of ten years from the date of grant. Options granted generally become exercisable over a period of two years from the date of grant however, options granted to Directors of the Corporation vest immediately and options granted in 1996 provide a six month vesting period for grants to individuals who meet certain age and years of service criteria at the date of grant. Activity relating to nonqualified and incentive stock options was:
WEIGHTED AVERAGE NUMBER OPTION PRICE EXERCISE OF SHARES PER SHARE PRICE ---------- ------------ -------- Shares under option at December 31, 1993........... 6,371,935 $4.02--23.25 $13.26 Options granted.............. 1,115,800 19.25--21.75 19.95 Options lapsed or surrendered................. (29,889) 5.39--22.75 15.43 Options exercised............ (1,151,218) 4.02--19.50 10.15 ---------- ------------ ------ Shares under option at December 31, 1994........... 6,306,628 $4.02--23.25 $15.00 Options granted.............. 741,700 20.25--26.19 25.54 Options lapsed or surrendered................. (32,775) 8.54--22.75 20.82 Options exercised............ (858,087) 4.02--22.75 10.66 ---------- ------------ ------ Shares under option at December 31, 1995........... 6,157,466 $6.71--26.19 $16.84 ========== ============ ======
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
WEIGHTED AVERAGE NUMBER OPTION PRICE EXERCISE OF SHARES PER SHARE PRICE --------- ------------ -------- Shares under option at December 31, 1995...................... 6,157,466 $6.71--26.19 $16.84 Options granted................ 836,300 25.63--31.88 31.59 Options lapsed or surrendered.. (71,038) 8.54--26.19 19.00 Options exercised.............. (973,434) 6.71--26.19 13.33 --------- ------------ ------ Shares under option at December 31, 1996...................... 5,949,294 $7.68--31.88 $19.46 ========= ============ ======
The range of options outstanding at December 31, 1996 were:
WEIGHTED AVERAGE WEIGHTED-AVERAGE REMAINING NUMBER OF SHARES EXERCISE PRICE CONTRACTUAL PRICE ----------------------- ----------------------- LIFE RANGE OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE (IN YEARS) -------- ----------- ----------- ----------- ----------- ----------- $ 7--12 1,320,781 1,320,781 $10.12 $10.12 1.9 13--18 1,268,771 1,268,771 15.85 15.85 5.1 19--25 1,888,342 1,880,842 20.79 20.79 7.2 Over $25 1,471,400 362,550 29.26 26.29 9.5 --------- --------- ------ ------ --- 5,949,294 4,832,944 $19.46 $16.99 6.2 ========= ========= ====== ====== ===
Options exercisable at December 31, 1995 and 1994 were 5,024,041 and 4,825,678, respectively. The weighted average exercise price for options exercisable was $12.52 at December 31, 1995 and $10.15 at December 31, 1994. In October, 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock- Based Compensation." This standard establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 defines a fair value based method of accounting for employee stock option or similar equity instruments. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, expected dividends and the risk-free interest rate over the expected life of the option. The resulting compensation cost is recognized over the service period, which is usually the vesting period. Compensation cost can also be measured and accounted for using the intrinsic value based method of accounting prescribed in Accounting Principles Board Opinion No. 25 (APBO 25), "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount paid to acquire the stock. The largest difference between SFAS 123 and APBO 25 as it relates to the Corporation is the amount of compensation cost attributable to the Corporation's fixed stock option plans. Under APBO 25 no compensation cost is recognized for fixed stock option plans because the exercise price is equal to the quoted market price at the date of grant and therefore there is no intrinsic value. SFAS 123 compensation cost would equal the calculated fair value of the options granted. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) As permitted by SFAS 123, the Corporation continues to measure compensation cost for such plans using the accounting method prescribed by APBO 25. Had compensation cost for the Corporation's options granted after January 1, 1995 been determined consistent with SFAS 123, the Corporation's net income and earnings per share would have been reduced to the following pro forma amounts:
1996 1995 -------- -------- Net income As reported............................................. $203,430 $193,299 Pro forma............................................... 200,933 192,855 Primary earnings per share As reported............................................. $2.07 $1.96 Pro forma............................................... 2.04 1.95 Fully diluted earnings per share As reported............................................. $2.02 $1.90 Pro forma............................................... 2.00 1.89
The fair value of each option grant was estimated as of the date of grant using the Black--Scholes option pricing model. The resulting compensation cost was amortized over the vesting period. The grant date fair values and assumptions used to determine such value are as follows:
OPTIONS GRANTED DURING 1996 1995 ---------------------- ----------- ----------- Weighted-average grant date fair value............. $8.14 $6.50 Assumptions: Risk-free interest rates......................... 5.48-6.51% 5.66-6.91% Expected volatility.............................. 19.30-20.36% 19.99-20.50% Expected term (in years)......................... 6.0 6.0 Expected dividend yield.......................... 2.25% 2.19%
Activity relating to the Corporation's Restricted Purchase Rights was:
DECEMBER 31, ----------------------- 1996 1995 1994 ------ ------- ------ Restricted stock purchase rights outstanding-- Beginning of Year.................................. 5,000 13,000 0 Restricted stock purchase rights granted............ 19,000 18,000 16,000 Restricted stock purchase rights exercised.......... (9,000) (26,000) (3,000) ------ ------- ------ Restricted stock purchase rights outstanding-- End of Year........................................ 15,000 5,000 13,000 Weighted-average grant date market value............ $30.08 $24.05 $19.69 Aggregate compensation expense...................... $444 $611 $747
Restrictions on stock issued pursuant to the exercise of stock purchase rights lapse within a seven year period. Accordingly, the compensation related to issuance of the rights is deferred and amortized over the vesting period. Unamortized deferred compensation is reflected as a reduction of shareholders' equity. Shares reserved for the granting of options and stock purchase rights at December 31, 1996 were 1,249,699. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) The Corporation also has a Long-term Incentive Plan (the "plan"). Under the plan, performance units may be awarded from time to time. The maximum number of units which can be awarded in the plan are 600,000. Once awarded, additional performance units will be credited to each participant based on dividends paid by the Corporation on its common stock. At the end of a designated vesting period, participants will receive an amount, either in cash, common stock or some combination thereof, equal to some percent (0%-275%) of the initial performance units credited plus those additional units credited as dividends based on the established performance criteria. During 1996, 88,650 units and in 1995, 91,700 units and in 1994, 57,500 units were awarded to certain executives of the Corporation. The market value per share of the Corporation's Common Stock at the time of the award was $23.75 in 1994, $18.38 in 1995 and $25.63 in 1996. The vesting period is three years from the date the performance units were awarded. Based on the performance criteria, without regard to the vesting, approximately $4,430 would be due to the participants at December 31, 1996. Total compensation expense for 1996, 1995 and 1994 recorded under the plan was $2,282, $1,271 and $422, respectively. 16. EMPLOYEE RETIREMENT AND HEALTH PLANS The Corporation has a defined contribution retirement plan and an incentive savings plan for substantially all employees. The retirement plan provides for a guaranteed contribution to eligible participants equal to 2% of compensation. At the Corporation's option, a profit sharing amount may also be contributed and may vary from year to year up to a maximum of 6% of eligible compensation. Under the incentive savings plan, employee contributions up to 6% of eligible compensation are matched up to 50% by the Corporation based on the Corporation's return on equity as defined by the plan. Total expense relating to these plans was $24,410, $23,883 and $21,631 in 1996, 1995 and 1994, respectively. The Corporation also has supplemental retirement plans to provide retirement benefits to certain of its key executives. Total expense relating to these plans amounted to $1,456 in 1996, $1,023 in 1995, and $910 in 1994. Valley maintained a trusteed defined benefit retirement plan which covered substantially all its employees. Upon consummation of the merger in 1994 the plan was curtailed and in 1995 was fully terminated through cash distributions and/or purchases of annuities. The net pension cost for 1994 included the following components: Service cost......................................................... $2,011 Interest cost........................................................ 3,393 Actual return on plan assets......................................... (777) Net amortization and deferral........................................ (2,279) ------ Net periodic pension cost before curtailment......................... 2,348 Curtailment.......................................................... 2,301 ------ Total expense........................................................ $4,649 ======
During 1995 expense of $1,789 was recorded in conjunction with the termination of the Valley plan. The expense associated with the curtailment is classified as Merger/Restructuring and the termination expense is included in salaries and employee benefits in the Consolidated Statements of Income. The Corporation sponsors a defined benefit health plan that provides health care benefits to all eligible current and retired employees. The plan is contributory, with contributions adjusted periodically such that participants contribute approximately 40% of the cost of health care benefits. The plan also contains other cost-sharing features such as deductibles and coinsurance. Retiree eligibility is dependent upon age, years of service, and participation in the health plan during active service. The plan is not funded. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) The components of the accumulated postretirement benefit obligation (APBO) for retiree health benefits reconciled with the amount recognized in the Corporation's Consolidated Balance Sheets at December 31, were:
1996 1995 ------- ------- Accumulated postretirement benefit obligation: Retirees................................................. $19,770 $16,022 Fully eligible active plan participants.................. 7,474 9,424 Active plan participants................................. 16,251 19,434 ------- ------- 43,495 44,880 Unrecognized gain (loss).................................. 1,323 (6,152) ------- ------- Accrued postretirement benefit cost....................... $44,818 $38,728 ======= ======= Weighted average discount rate used in determining APBO... 7.50% 7.50% ======= =======
Net periodic postretirement benefit cost for the years ended December 31, 1996, 1995 and 1994 includes the following components:
1996 1995 1994 ------ ------ ------ Service cost......................................... $3,553 $2,130 $2,510 Interest on APBO..................................... 3,322 3,236 2,950 Net amortization and deferral........................ 146 127 617 ------ ------ ------ $7,021 $5,493 $6,077 ====== ====== ====== Assumed health care cost trend....................... 9.0% 11.0% 12.0% Ultimate trend....................................... 5.0% 5.5% 6.5% Ultimate year........................................ 2016 2022 2016
The health care cost trend rate assumption has a significant effect on the amounts reported. An increase in the assumed health care cost trend rate of one percentage point would increase the APBO at December 31, 1996 by $7,280 and increase 1996 postretirement benefit expense by $916. 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Financial instruments with off-balance sheet risk at December 31 were:
1996 1995 ---------- ---------- Financial instruments whose amounts represent credit risk: Commitments to extend credit: To commercial customers............................ $4,054,140 $3,912,442 To individuals..................................... 937,556 818,888 Standby letters of credit, net of participations.... 309,435 280,750 Commercial letters of credit........................ 14,773 17,342 Mortgage loans sold with recourse................... 4,199 4,926 Financial instruments whose amounts exceed the amount of credit risk: Foreign exchange contracts: Commitments to purchase foreign exchange........... 130,718 133,236 Commitments to deliver foreign exchange............ 136,314 136,373 Options written/purchased.......................... 1,000 1,504 Interest risk management instruments: Interest rate swaps................................. 370,000 -- Interest rate floors................................ 50,000 --
54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. The majority of the Corporation's commitments to extend credit generally provide for the interest rate to be determined at the time the commitment is utilized. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's credit worthiness on an individual basis. Collateral obtained, if any, upon extension of credit, is based upon management's credit evaluation of the customer. Collateral requirements and the ability to access collateral is generally similar to that required on loans outstanding as discussed in Note 8. Standby and commercial letters of credit are contingent commitments issued by the Corporation to support the financial obligations of a customer to a third party. Standby letters of credit are issued to support public and private financing, and other financial or performance obligations of customers. Commercial letters of credit are issued to support payment obligations of a customer as buyer in a commercial contract for the purchase of goods. Letters of credit have maturities which generally reflect the maturities of the underlying obligations. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers. If deemed necessary, the Corporation holds various forms of collateral to support letters of credit. Mortgage loans sold with recourse are pools of residential mortgage loans sold to government agencies subject to certain underwriting requirements. If the loans do not meet the underwriting requirements of the government agencies, the Corporation may be required to reacquire the loans. Foreign exchange contracts are commitments to purchase or deliver foreign currency at a specified exchange rate. The Corporation enters into foreign exchange contracts primarily in connection with trading activities to enable customers involved in international trade to hedge their exposure to foreign currency fluctuations and to minimize the Corporation's own exposure to foreign currency fluctuations resulting from the above. Foreign exchange contracts include such commitments as foreign currency spot, forward, future and, to a much lesser extent, option contracts. The risks in these transactions arise from the ability of the counterparties to perform under the terms of the contracts and the risk of trading in a volatile commodity. The Corporation actively monitors all transactions and positions against predetermined limits established on traders and types of currency to ensure reasonable risk taking. The Corporation's market risk from unfavorable movements in currency exchange rates is minimized by essentially matching commitments to deliver foreign currencies with commitments to purchase foreign currencies. At December 31, 1996, the Corporation's foreign currency positions resulting from foreign exchange contracts by major currency was as follows ($000's US):
COMMITMENTS COMMITMENTS TO DELIVER TO PURCHASE FOREIGN FOREIGN EXCHANGE EXCHANGE ----------- ----------- CURRENCY Deutsche Mark...................................... $ 51,339 $ 50,981 French Franc....................................... 13,798 13,465 English Pound Sterling............................. 21,243 20,928 Japanese Yen....................................... 16,009 12,155 Canadian Dollar.................................... 15,582 15,291 Singapore Dollar................................... 5,581 5,576 Swiss Franc........................................ 3,424 3,342 Australian Dollar.................................. 3,307 3,308 Spanish Peseta..................................... 3,200 3,111 All Other.......................................... 2,831 2,561 -------- -------- Total............................................ $136,314 $130,718 ======== ======== Average Amount of Contracts To Deliver/Purchase Foreign Exchange.................................. $215,206 $210,370 ======== ========
55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) These amounts do not represent the actual credit or market exposure. Interest rate swaps are contractual agreements between counterparties to exchange interest streams based on notional principal amounts over a set period of time. Swap agreements normally involve the exchange of fixed and floating rate payment obligations without the exchange of the underlying principal amounts. All of the Corporation's interest rate swaps are receive fixed/pay floating standard swaps that are utilized to manage the interest volatility associated with variable rate loans at the Corporation's affiliate banks. At December 31, 1996 the Corporation's interest rate swap portfolio consisted of the following ($ in millions):
REMAINING MATURITY IN YEARS --------------------------------------------------- OVER 0-1 YRS 1-2 YRS 2-3 YRS 3-4 YRS 4-5 YRS 5 YRS TOTAL ------- ------- ------- ------- ------- ----- ----- Notional value............ -- $75 $175 -- $120 -- $370 Weighted average receive rate..................... -- 6.03% 6.25% -- 6.63% -- 6.33% Weighted average pay rate (variable)............... -- 5.50% 5.57% -- 5.54% -- 5.55%
The impact on net interest income in 1996 was a positive $1.12 million. Interest floors are contracts with notional principal amounts that require the seller, in exchange for a fee, to make payments to the purchaser if a specified market rate falls below the fixed floor or index rate on specified future dates. The Corporation uses standard interest rate floors to manage the interest volatility associated with variable rate loans and the convexity risk associated with investments in collateralized mortgage obligations. At December 31, 1996, the Corporation was party to two interest rate floor contracts which are summarized as follows ($ in millions):
WEIGHTED--AVERAGE ---------------------------------------------------- NOTIONAL STRIKE REMAINING UNAMORTIZED AMOUNT RATE INDEX TERM (YEARS) PREMIUM -------- ------ ----- ------------ ----------- $50.0 5.125% 5.547% 4.8 $0.4
No payments were received in 1996 and the effect of amortization of the fee premium was not material. The market risk due to potential fluctuations in interest rates is inherent in swap and floor agreements. Credit risk arises from the potential failure of counterparties to perform in accordance with the terms of the contracts. The Corporation maintains risk management policies that define parameters of acceptable market risk within the framework of its overall asset/liability management strategies and monitor and limit exposure to credit risk. The Corporation believes its credit and settlement procedures serve to minimize its exposure to credit risk. Credit exposure resulting from swaps and floors is represented by their fair value amounts, increased by an estimate of potential adverse position exposure arising from changes over time in interest rates, maturities and other relevant factors. At December 31, 1996 the estimated credit exposure arising from swaps and floors was approximately $4.8 million. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The book values and estimated fair values for on and off-balance sheet financial instruments as of December 31, 1996 and 1995 are reflected below: BALANCE SHEET FINANCIAL INSTRUMENTS ($ IN MILLIONS)
1996 1995 ----------------- ----------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE -------- -------- -------- -------- Financial Assets: Cash and short-term investments.......... $1,013.6 $1,013.6 $ 993.1 $ 993.1 Trading securities....................... 39.7 39.7 38.6 38.6 Investment securities available for sale.................................... 3,065.0 3,065.0 2,458.6 2,458.6 Investment securities held to maturity... 773.8 776.8 450.5 453.2 Net loans................................ 9,146.0 9,330.2 8,707.5 8,930.0 Interest receivable...................... 99.1 99.1 96.8 96.8 Financial Liabilities: Deposits................................. 10,952.4 11,019.3 10,280.8 10,355.3 Short-term borrowings.................... 1,550.5 1,550.5 616.3 616.3 Long-term borrowings: Convertible debt....................... 16.8 66.6 33.6 100.0 Other long-term borrowings............. 603.3 603.4 787.6 796.9 Interest payable......................... 75.6 75.6 72.1 72.1
Where readily available, quoted market prices were utilized by the Corporation. If quoted market prices were not available, fair values were based on estimates using present value or other valuation techniques. These techniques were significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The calculated fair value estimates, therefore, cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The applicable accounting standard excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used in estimating the fair value for financial instruments. Cash and Short-term Investments The carrying amounts reported for cash and short-term investments approximates the fair values for those assets. Trading and Investment Securities Fair value is based on quoted market prices or dealer quotes. See Note 7, Securities, for additional information. Loans Loans that reprice or mature within three months of December 31 were assigned fair values based on their book value. Market values were used on performing loans where available. Most remaining loan balances were 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) assigned fair values based on a discounted cash flow analysis. The discount rate was based on the treasury yield curve, with rate adjustments for credit quality, cost and profit factors. Deposits The fair value for demand deposits or any interest bearing deposits with no fixed maturity date was considered to be equal to the carrying value. Time deposits with defined maturity dates were considered to have a fair value equal to the book value if the maturity date was within three months of December 31. The remaining time deposits were assigned fair values based on a discounted cash flow analysis using discount rates which approximate interest rates currently being offered on time deposits with comparable maturities. Borrowings Short-term borrowings are carried at cost which approximates fair value. The Corporation has convertible debt (see Note 12) for which fair value was considered to be the current market value of the shares that would be issued in a full conversion. Other long-term debt was generally valued using a discounted cash flow analysis with a discount rate based on current incremental borrowing rates for similar types of arrangements or, if not readily available, based on a build up approach similar to that used for loans and deposits. Long-term borrowings include their related current maturities. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS ($ IN MILLIONS) Fair values of loan commitments and letters of credit have been estimated based on the equivalent fees, net of expenses, that would be charged for similar contracts and customers at December 31.
1996 1995 ---- ---- Loan commitments................................................... $1.7 $1.5 Letters of credit.................................................. 2.4 2.2
Foreign exchange contracts are carried at market value (U.S. dollar equivalent of the underlying contract). The fair value of options written/purchased are based on the market value of the premium paid as of the reporting date.
1996 1995 ------ ------ Commitments to purchase foreign exchange...................... $130.7 $133.2 Commitments to deliver foreign exchange....................... 136.3 136.4 Options written/purchased..................................... 0.0 0.0
Interest rate swaps and floors are assigned a value based on a discounted cash flow analysis utilizing the forward yield curve.
1996 ---- Interest rate swaps..................................................... $2.2 Interest rate floors.................................................... 0.4
See Note 17 for additional information on off-balance sheet financial instruments. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) 19. BUSINESS SEGMENTS The following table reflects certain information regarding our banking and data processing businesses:
ADJUSTMENTS DATA AND BANKING PROCESSING ELIMINATIONS CONSOLIDATION ----------- ---------- ------------ ------------- 1996 Revenue from: Unaffiliated customers.... $ 1,206,230 $268,526 -- $ 1,474,756 Affiliated customers...... 7,945 77,100 ($85,045) -- ----------- -------- -------- ----------- Total revenue.............. $ 1,214,175 $345,626 ($85,045) $ 1,474,756 =========== ======== ======== =========== Operating profit........... $ 286,006 $ 27,135 -- $ 313,141 =========== ======== ======== =========== Identifiable assets........ $14,537,602 $274,926 ($49,215) $14,763,313 =========== ======== ======== =========== Net capital expenditures... $ 11,850 $ 38,822 -- $ 50,672 =========== ======== ======== =========== 1995 Revenue from: Unaffiliated customers.... $ 1,134,928 $213,914 -- $ 1,348,842 Affiliated customers...... 8,388 70,946 ($79,334) -- ----------- -------- -------- ----------- Total revenue.............. $ 1,143,316 $284,860 ($79,334) $ 1,348,842 =========== ======== ======== =========== Operating profit........... $ 264,996 $ 34,883 -- $ 299,879 =========== ======== ======== =========== Identifiable assets........ $13,166,362 $242,695 ($65,960) $13,343,097 =========== ======== ======== =========== Net capital expenditures... $ 6,859 $ 33,022 -- $ 39,881 =========== ======== ======== =========== 1994 Revenue from: Unaffiliated customers.... $ 1,019,369 $159,418 -- $ 1,178,787 Affiliated customers...... 6,815 72,068 ($78,883) -- ----------- -------- -------- ----------- Total revenue.............. $ 1,026,184 $231,486 ($78,883) $ 1,178,787 =========== ======== ======== =========== Operating profit before Merger/Restructuring...... $ 211,897 $ 31,134 -- $ 243,031 =========== ======== ======== =========== Operating profit........... $ 150,352 $ 17,451 -- $ 167,803 =========== ======== ======== =========== Identifiable assets........ $12,463,178 $208,216 $(58,445) $12,612,949 =========== ======== ======== =========== Net capital expenditures... $ (3,184) $ 32,179 -- $ 28,995 =========== ======== ======== ===========
Our banking operations provide traditional banking products along with trust, mortgage banking, leasing, and venture capital services. M&I Data Services, a division of the Parent Corporation, along with three other nonbank subsidiaries, (collectively "Data Services"), provides data processing, software, and other related services to both affiliated and unaffiliated customers. In addition, a Valley affiliate provided similar services and other operational support to affiliated customers and merged with M&I Data Services upon consummation of the merger. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) Revenues from affiliated customers are charged at rates available to and transacted with unaffiliated customers. Operating profit is pretax net income. The 1996 operating profit for the banking services include the $2.7 million special assessment associated with SAIF deposits enacted into law in September, 1996. The 1996 operating profit of Data Services include the $12.1 million expense for acquired in-process research and development as discussed in Note 2. Depreciation and amortization expense for the banking services business amounted to $3,411, $8,189, and $40,733 in 1996, 1995, and 1994, respectively, and for data services amounted to $50,201 in 1996, $38,978 in 1995, and $31,224 in 1994. 20. CONDENSED FINANCIAL INFORMATION--PARENT CORPORATION ONLY CONDENSED BALANCE SHEETS DECEMBER 31
1996 1995 ---------- ---------- ASSETS Cash and cash equivalents............................. $ 74,432 $ 36,689 Data processing services receivables.................. 65,838 60,034 Indebtedness of affiliates: Banks................................................ -- 5,000 Nonbanks............................................. 184,050 173,690 Investments in affiliates: Banks................................................ 1,025,127 1,075,011 Nonbanks............................................. 220,993 164,860 Premises and equipment, net........................... 120,826 115,627 Other assets.......................................... 177,340 116,136 ---------- ---------- Total assets...................................... $1,868,606 $1,747,047 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Commercial paper issued............................... $ 14,234 $ 41,571 Other liabilities..................................... 144,926 123,589 Long-term borrowings: 7.65% Junior Subordinated Deferrable Interest Debentures due to M&I Capital Trust A................ 205,217 -- Other................................................ 243,019 324,270 ---------- ---------- Total long-term borrowings........................ 448,236 324,270 ---------- ---------- Total liabilities................................. 607,396 489,430 Shareholders' equity.................................. 1,261,210 1,257,617 ---------- ---------- Total liabilities and shareholders' equity........ $1,868,606 $1,747,047 ========== ==========
Scheduled maturities of long-term borrowings are $128,594 in 1997, $9,490 in 1998, $4,348 in 1999, $575 in 2000 and $202 in 2001. See Note 12 for a description of the junior subordinated debt due to M&I Capital Trust A. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31
1996 1995 1994 -------- -------- -------- INCOME Cash dividends: Bank affiliates.................................. $217,050 $141,928 $ 94,812 Nonbank affiliates............................... 11,687 11,624 14,690 Interest from affiliates.......................... 12,959 10,491 12,172 Data processing income............................ 335,127 284,141 230,518 Service fees and other............................ 36,988 37,322 33,068 -------- -------- -------- Total income................................... 613,811 485,506 385,260 EXPENSE Interest.......................................... 23,016 26,851 23,214 Salaries and employee benefits.................... 180,574 151,519 126,171 Administrative and general........................ 151,380 122,276 155,297 -------- -------- -------- Total expense.................................. 354,970 300,646 304,682 Income before income taxes, extraordinary items and equity in undistributed net income of affiliates....................................... 258,841 184,860 80,578 Provision for income taxes........................ 11,101 9,549 475 -------- -------- -------- Income before extraordinary items and equity in undistributed net income of affiliates........... 247,740 175,311 80,103 Extraordinary items, net of income taxes.......... -- -- (610) -------- -------- -------- Income before equity in undistributed net income of affiliates.................................... 247,740 175,311 79,493 Equity in undistributed net income of affiliates, net of dividends paid: Banks............................................ (58,481) 5,755 29,430 Nonbanks......................................... 14,171 12,233 (2,983) -------- -------- -------- Net income..................................... $203,430 $193,299 $105,940 ======== ======== ========
61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31
1996 1995 1994 --------- ----------- ----------- Cash Flows From Operating Activities: Net income............................... $ 203,430 $ 193,299 $ 105,940 Noncash items included in income: Equity in undistributed net income of affiliates............................. 44,310 (17,988) (26,447) Depreciation and amortization........... 51,407 42,264 40,596 Other................................... 14,058 10,372 (20,661) --------- ----------- ----------- Net cash provided by operating activities............................. 313,205 227,947 99,428 Cash Flows From Investing Activities: Increases in indebtedness of affiliates............................. (140,684) (256,220) (28,136) Decreases in indebtedness of affiliates............................. 135,324 228,251 155,658 Increases in investments in affiliates.. (27,756) (215) (20,300) Net capital expenditures................ (36,897) (33,755) (33,069) Other................................... (74,519) (11,298) 3,279 --------- ----------- ----------- Net cash provided by (used in) investing activities............................. (144,532) (73,237) 77,432 Cash Flows From Financing Activities: Dividends paid.......................... (69,878) (62,985) (57,575) Proceeds from issuance of commercial paper.................................. 641,754 1,406,388 1,578,618 Principal payments on commercial paper.. (669,091) (1,439,343) (1,604,384) Proceeds from issuance of long-term debt................................... 197,628 -- 158,563 Payments on long-term debt.............. (72,417) (17,619) (67,229) Decrease in other short-term borrowings............................. -- -- (50,000) Purchase of common stock................ (172,023) (61,104) (101,887) Proceeds from exercise of stock options................................ 12,908 9,079 11,682 Other................................... 189 406 (1,043) --------- ----------- ----------- Net cash used in financing activities... (130,930) (165,178) (133,255) --------- ----------- ----------- Net increase (decrease) in cash and cash equivalents............................. 37,743 (10,468) 43,605 Cash and cash equivalents, beginning of year.................................... 36,689 47,157 3,552 --------- ----------- ----------- Cash and cash equivalents, end of year... $ 74,432 $ 36,689 $ 47,157 ========= =========== ===========
62 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) ($000'S EXCEPT SHARE DATA) Following is unaudited financial information for each of the calendar quarters during the years ended December 31, 1996 and 1995.
QUARTER ENDED ----------------------------------- DEC. 31 SEPT. 30 JUNE 30 MARCH 31 -------- -------- -------- -------- 1996 Total Interest Income...................... $255,355 $246,625 $236,027 $233,429 Net Interest Income........................ 132,898 126,251 123,933 122,637 Provision for Loan Losses.................. 4,086 3,983 3,548 3,577 Income before Income Taxes................. 96,459 67,298 76,800 72,584 Net Income................................. 61,869 45,038 50,368 46,155 Net Income Per Share:* Primary: Net Income............................... 0.63 0.46 0.51 0.47 Fully Diluted: Net Income............................... 0.62 0.45 0.50 0.46 1995 Total Interest Income...................... $236,598 $235,587 $230,792 $221,683 Net Interest Income........................ 125,366 122,884 122,283 120,944 Provision for Loan Losses.................. 4,100 4,070 4,005 3,983 Income before Income Taxes................. 80,003 76,863 71,034 71,979 Net Income................................. 52,348 48,579 46,237 46,135 Net Income Per Share:* Primary: Net Income............................... 0.53 0.49 0.47 0.47 Fully Diluted: Net Income............................... 0.51 0.48 0.46 0.46
1996 1995 1994 1993 1992 ------ ------ ----- ----- ----- COMMON DIVIDENDS DECLARED First Quarter.................................. $0.165 $0.150 $0.14 $0.12 $0.11 Second Quarter................................. 0.185 0.165 0.15 0.14 0.12 Third Quarter.................................. 0.185 0.165 0.15 0.14 0.12 Fourth Quarter................................. 0.185 0.165 0.15 0.14 0.12 ------ ------ ----- ----- ----- $0.720 $0.645 $0.59 $0.54 $0.47 ====== ====== ===== ===== =====
- -------- * May not add due to rounding PRICE RANGE OF STOCK (LOW AND HIGH BID)
1996 1995 1994 1993 1992 ------- ------- -------- --------- --------- First Quarter Low............................... $24 5/8 $18 1/8 $20 $21 1/6 $17 1/4 High.............................. 26 1/4 21 3/4 23 3/4 23 5/16 18 1/4 Second Quarter Low............................... 24 7/8 19 7/8 19 1/4 22 15/16 16 15/16 High.............................. 28 1/8 22 3/4 22 1/4 25 3/4 20 9/16 Third Quarter Low............................... 25 1/2 22 1/8 19 5/8 21 1/4 19 3/16 High.............................. 30 1/8 26 1/4 21 3/4 25 21 13/16 Fourth Quarter Low............................... 30 24 18 21 3/4 20 1/16 High.............................. 35 3/8 26 3/8 20 9/16 24 1/4 22 1/16
63 Notes to Consolidated Financial Statements-(Continued) December 31, 1996, 1995 and 1994 ($000's except share data) 21. DEPOSITS The composition of deposits at December 31, 1996 and 1995 was as follows: 1996 1995 ----------- ----------- Noninterest bearing demand $ 2,470,882 $ 2,363,194 Savings and NOW 4,400,594 4,224,055 Other time deposits $100 and over 1,059,066 660,277 Other time deposits under $100 3,021,816 3,033,251 ----------- ----------- $10,952,358 $10,280,777 =========== =========== At December 31, 1996, the scheduled maturities for other time deposits are as follows: 1997 $2,744,823 1998 992,618 1999 222,607 2000 64,648 2001 and thereafter 56,186 ---------- $4,080,882 ========== 64 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of Marshall & Ilsley Corporation: We have audited the accompanying consolidated balance sheets of Marshall & Ilsley Corporation (a Wisconsin corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994. 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 Marshall & Ilsley Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. As discussed in note one to the consolidated financial statements, effective January 1, 1994, the Corporation changed its method of accounting for certain investments in debt and equity securities. /s/ Arthur Andersen LLP Milwaukee, Wisconsin, January 31, 1997 65 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 Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 1997, except for information as to executive officers which is set forth in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Consolidated Financial Statements: Balance Sheets--December 31, 1996 and 1995 Statements of Income--years ended December 31, 1996, 1995, and 1994 Statements of Cash Flows--years ended December 31, 1996, 1995, and 1994 Statements of Shareholders' Equity--years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Report of Independent Public Accountants 2. Financial Statement Schedules All schedules are omitted because they are not required, not applicable or the required information is contained elsewhere. 3. Exhibits See Index to Exhibits of this Form 10-K. (b) Reports on Form 8-K On December 13, 1996, M&I filed a Current Report on Form 8-K, reporting on Item 5 the announcement of the sale of $200 million of Trust Preferred Stock through M&I Capital Trust A in an institutional private placement. 66 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 as amended to be signed on its behalf by the undersigned, thereunto duly authorized. MARSHALL & ILSLEY CORPORATION /s/ J. B. Wigdale By: _________________________________ J. B. WIGDALE CHAIRMAN OF THE BOARD Date: June 2, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ J. B. Wigdale Chairman of the June 2, 1997 - ------------------------------------- Board and a J. B. WIGDALE Director (Chief Executive Officer) /s/ G. H. Gunnlaugsson Executive Vice June 2, 1997 - ------------------------------------- President and a G. H. GUNNLAUGSSON Director (Chief Financial Officer) /s/ P. R. Justiliano Senior Vice June 2, 1997 - ------------------------------------- President and P. R. JUSTILIANO Corporate Controller (Principal Accounting Officer) Directors: Richard A. Abdoo, Oscar C. Boldt, Wendell F. Busche, Jon F. Chait, Glenn A. Francke, G. H. Gunnlaugsson, Burleigh E. Jacobs, Jack F. Kellner, D. J. Kuester, Edward L Meyer, Jr., Don R. O'Hare, San W. Orr, Jr., Peter M. Platten III, Stuart W. Tisdale, J. B. Wigdale, James O. Wright and Gus A. Zuehlke. /s/ M. A. Hatfield By___________________________________ M. A. HATFIELD AS ATTORNEY-IN-FACT* Date: June 2, 1997 - -------- * Pursuant to authority granted by powers of attorney. 67 MARSHALL & ILSLEY CORPORATION INDEX TO EXHIBITS (ITEM 14(A)3) ITEM (2) Agreement and Plan of Merger dated as of September 19, 1993, between M&I and Valley Bancorporation, incorporated by reference to M&I's Current Report on Form 8-K dated September 19, 1993 (as amended by M&I's Current Report on Form 8-K/A dated September 19, 1993), SEC File No. 0-1220 (3) (a) Restated Articles of Incorporation, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, SEC File No. 0-1220 (b) By-laws, as amended, incorporated by reference to M&I's Annual Report on form 10-K for the year ended December 31, 1995, SEC File No. 0-1220 (4) (a) Indenture between M&I and Chemical Bank (as successor to Manufacturers Hanover Trust Company) dated as of November 15, 1985 ("Senior Indenture"), incorporated by reference to M&I's Registration Statement on Form S-3 (Registration No. 33-21377), as supplemented by the First Supplemental Indenture to the Senior Indenture dated as of May 31, 1990, incorporated by reference to M&I's Current Report on Form 8-K dated May 31, 1990, and as supplemented by the Second Supplemental Indenture to the Senior Indenture dated as of July 15, 1993, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, SEC File No. 0-1220 (b) Form of Medium Term Notes, Series B, issued pursuant to the Senior Indenture, incorporated by reference to M&I's Current Report on Form 8-K dated May 31, 1990, SEC File No. 0-1220 (c) Form of Medium Term Notes, Series C, and Series D issued pursuant to the Senior Indenture, included in Exhibit 4(a) (d) Indenture between M&I and Chemical Bank dated as of July 15, 1993 ("Subordinated Indenture"), incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, SEC File No. 0-1220 (e) Form of Subordinated Note issued pursuant to the Subordinated Indenture, included in Exhibit 4(d) (f) Investment Agreement between M&I and The Northwestern Mutual Life Insurance Company dated August 30, 1985, incorporated by reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0- 1220 (g) Subordinated Convertible Note Agreement between The Northwestern Mutual Life Insurance Company dated December 31, 1985, incorporated by reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-1220 (h) Form of Convertible Subordinated Note, incorporated by reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0- 1220 (i) Designation of Rights and Preferences of holders of Series A Preferred Stock, incorporated by reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-1220 (j) Amended and Restated Declaration of Trust dated as of December 9, 1996 among Marshall & Ilsley Corporation, as Sponsor, The Chase Manhattan Bank, as Institutional Trustee, Chase Manhattan Bank Delaware, as Delaware Trustee, the Regular Trustees identified therein, and the holders from time to time of undivided interests in the assets of the Trust, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 333-19809) (k) Indenture, dated as of December 9, 1996, between Marshall & Ilsley Corporation and The Chase Manhattan Bank, as Indenture Trustee, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 333-19809) 68 (l) First Supplemental Indenture, dated as of December 9, 1996, between Marshall & Ilsley Corporation and The Chase Manhattan Bank, as Indenture Trustee, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 333-19809) (m) Form of Capital Security Certificate for M&I Capital Trust A, included as Exhibit A-2 to Exhibit 4(k) (n) Capital Securities Guarantee Agreement, dated as of December 9, 1996, between Marshall & Ilsley Corporation and The Chase Manhattan Bank, as Guarantee Trustee, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 333-19809) (o) Registration Rights Agreement dated December 2, 1996, by and among Marshall & Ilsley Corporation, M&I Capital Trust A and Salomon Brothers Inc, as Representative of the Initial Purchasers, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 333-19809) (p) Form of Subordinated Debt Security, included as part of Exhibit 4(m) (10) (a) 1983 Executive Stock Option and Restricted Stock Plan, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, SEC File No. 0-1220* (b) 1985 Executive Stock Option and Restricted Stock Plan, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, SEC File No. 0-1220* (c) M&I Marshall & Ilsley Bank Supplementary Retirement Benefits Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1983, SEC File No. 0-1220* (d) Directors Deferred Compensation Plan, adopted on February 14, 1985, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1984, SEC File No. 0-1220* (e) Consulting Agreement and Supplemental Retirement Plan dated as of October 1, 1986 between M&I and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, SEC File No. 0-1220* (f) Amendment to Consulting Agreement and Supplemental Retirement Plan dated as of August 13, 1992, between M&I and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, SEC File No. 0-1220* (g) Deferred Compensation Trust between Marshall & Ilsley Corporation and Bessemer Trust Company dated April 28, 1987, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, SEC File No. 0-1220* (h) 1986 Non-Qualified Stock Option Plan of M&I and related Stock Option Agreement between M&I and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, SEC File No. 0-1220* (i) Form of employment agreements, dated November 5, 1990, between M&I and Messrs. Gunnlaugsson, Kuester, Strelow and Wigdale incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, SEC File No. 0-1220* (j) Employment agreement, dated November 5, 1990, between M&I and Mr. Michael A. Hatfield incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, SEC File No. 0-1220* 69 (k) Employment agreement, dated as of November 5, 1990, between M&I and Mr. Delgadillo, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, SEC File No. 0- 1220* (l) Restricted Stock Plan of Marshall & Ilsley Corporation, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, SEC File No. 0-1220* (m) 1989 Executive Stock Option and Restricted Stock Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, as amended by M&I's Annual Report on Form 10- K for the fiscal year ended December 31, 1990, SEC File No. 0-1220* (n) Marshall & Ilsley Corporation Nonqualified Retirement Benefit Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, SEC File No. 0-1220* (o) Marshall & Ilsley Corporation Supplemental Retirement Benefits Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, SEC File No. 0-1220* (p) Marshall & Ilsley Trust Company Supplemental Retirement Benefits Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, SEC File No. 0-1220* (q) Supplemental Retirement Agreement dated December 10, 1992, between M&I and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, SEC File No. 0-1220* (r) Amendment to Supplemental Retirement Agreement dated December 16, 1993, between M&I and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, SEC File No. 0-1220* (s) Marshall & Ilsley Corporation 1993 Executive Stock Option Plan, as amended, incorporated by reference to M&I's Registration Statement on Form S-8 (Reg. No. 33-53155)* (t) Marshall & Ilsley Corporation 1994 Long-Term Incentive Plan for Executives, incorporated by reference to M&I's Proxy Statement for the 1994 Annual Meeting of Shareholders, SEC File No. 0-1220* (u) Marshall & Ilsley Corporation 1995 Directors Stock Option Plan, incorporated by reference to M&I's Proxy Statement for the 1995 Annual Meeting of Shareholders, SEC File No. 0-1220* (v) Marshall & Ilsley Corporation Assumption Agreement dated May 31, 1994 assuming rights, obligations and interests of Valley Bancorporation under various stock option plans, incorporated by reference to M&I's Registration Statement on Form S-8 (Reg. No. 33-53897)* (w) Valley Bancorporation 1992 Incentive Stock Plan, incorporated by reference to Valley Bancorporation's Proxy Statement for the 1992 Annual Meeting of Shareholders (the "Valley 1992 Proxy Statement")* (x) Valley Bancorporation 1992 Outside Directors' Stock Option Plan, incorporated by reference to the Valley 1992 Proxy Statement* (y) Valley Bancorporation 1988 Nonqualified Stock Option Plan, incorporated by reference to Valley Bancorporation's Proxy Statement for the 1988 Annual Meeting of Shareholders* (z) Valley Bancorporation 1986 Amended and Restated Stock Option Plan, incorporated by reference to Valley Bancorporation's Proxy Statement for the 1987 Annual Meeting of Shareholders* (aa) Employment agreement between M&I and Mr. Peter M. Platten, III, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 33-51753)* 70 (bb) Letter agreement dated January 25, 1994 between Valley Bancorporation and Mr. Peter M. Platten, III incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, SEC File No. 0-1220* (cc) Employment agreement, dated as of December 14, 1995, between M&I and Ms. Patricia R. Justiliano incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, SEC File No. 0-1220* (dd) Marshall & Ilsley Corporation 1997 Executive Stock Option and Restricted Stock Plan, incorporated by reference to the 1997 Proxy Statement* (ee) Marshall & Ilsley Corporation Executive Deferred Compensation Plan incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220* (ff) Deferred Compensation Trust II between Marshall & Ilsley Corporation and Marshall & Ilsley Trust Company incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220* (gg) Marshall & Ilsley Corporation Annual Executive Incentive Compensation Plan, incorporated by reference to the 1997 Proxy Statement* (hh) Amended and Restated Marshall & Ilsley Corporation Supplementary Retirement Benefits Plan incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220* (11) Computation of Net Income Per Common Share incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220 (12) Computation of Ratio of Earnings to Fixed Charges incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220 (21) Subsidiaries incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220 (23) Consent of Arthur Andersen LLP (24) Powers of Attorney incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220 (27) Financial Data Schedule incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220 M&I will provide a copy of any instrument defining the rights of holders of long-term debt to the Commission upon request. -------- * Management contract or compensatory plan or arrangement. 71 EX-23 2 CONSENT OF ARTHUR ANDERSEN Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the inclusion in this Form 10-K/A for the year ended December 31, 1996, of our report dated January 31, 1997. It should be noted that we have not audited any financial statements of Marshall & Ilsley Corporation and subsidiaries subsequent to December 31, 1996, or performed any audit procedures subsequent to the date of our report. We also consent to the incorporation by reference of such report in the following Registration Statements of Marshall & Ilsley Corporation ("M&I"): No. 2-89605 (Form S-8) pertaining to the M&I 1983 Executive Stock Option and Restricted Stock Plan, No. 33-2642 (Form S-8) pertaining to the M&I 1985 Executive Stock Option and Restricted Stock Plan, No. 33-3415 (Form S-8) pertaining to the M&I Retirement Growth Plan, No. 33-33090 (Form S-8) pertaining to the M&I 1988 Restricted Stock Plan, No. 33-33153 (Form S-8) pertaining to the M&I 1989 Executive Stock Option and Restricted Stock Plan, No. 33-53155 (Form S-8) pertaining to the M&I 1993 Executive Stock Option Plan, No. 33-53897 (Form S-8) pertaining to the stock option plans of Valley Bancorporation assumed by M&I, No. 33-55317 (Form S-8) pertaining to the M&I 1994 Long-Term Incentive Plan for Executives, No. 33-58787 (Form S-8) pertaining to the M&I 1995 Directors Stock Option Plan, No. 333-02017 (Form S-8) pertaining to the M&I 1986 Non-qualified Stock Option Plan, No. 2-80293 (Form S-3) pertaining to shares of M&I held by those persons named in such Registration Statement, No. 33-21377 (Form S-3) pertaining to the issuance by M&I of Debt Securities, No. 33-64054 (Form S-3) pertaining to the issuance by M&I of Debt Securities, and No. 33-64425 (Form S-3) pertaining to the issuance by M&I of Debt Securities. Milwaukee, Wisconsin, ARTHUR ANDERSEN LLP June 2, 1997 -----END PRIVACY-ENHANCED MESSAGE-----