Item 1. Business.
THE CORPORATION
Marshall & Ilsley Corporation ("M&I" or the "Corporation") is a Wisconsin corporation incorporated in 1959 as a registered bank holding company under the Bank Holding Company Act of 1956, as amended. M&I's principal assets are the stock of its subsidiaries. M&I presently owns substantially all the capital stock of 36 banks with a total of 129 offices in Wisconsin and 12 offices in Arizona. M&I also owns all of the stock of a number of companies engaged in businesses that the Federal Reserve Board (the "Board") has determined to be closely-related to banking, including the businesses of investment management, trust, insurance agency, equipment leasing, mortgage banking, venture capital, brokerage services, financial advisory services, and data processing. As a bank holding company, M&I provides financial and managerial assistance and services to its subsidiaries. At December 31, 1993, M&I had consolidated total assets of approximately $8.0 billion and consolidated total deposits of approximately $6.2 billion. Based on consolidated assets as of December 31, 1993, M&I was the second largest bank holding company headquartered in the State of Wisconsin.
The executive offices of M&I are located at 770 North Water Street, Milwaukee, Wisconsin 53202 (telephone number: (414) 765-7801).
Pending Merger with Valley Bancorporation
On September 19, 1993, M&I entered into an Agreement and Plan of Merger ("Merger Agreement") with Valley Bancorporation ("Valley") which provided for, among other things, the merger of Valley with and into M&I (the "Merger"). The Merger Agreement provides that each share of Valley common stock outstanding at the effective date of the Merger will be converted into 1.72 shares of M&I common stock. The Merger Agreement was approved by the shareholders of M&I and Valley on February 15, 1994. Completion of the Merger is subject to the conditions set forth in the Merger Agreement, including receipt of all required regulatory approvals. M&I currently expects the Merger to be completed in the second quarter of 1994. The foregoing description of the Merger and the Merger Agreement is qualified in its entirety by reference to M&I's Registration Statement on Form S-4 (Reg. No. 33-51753) and M&I's Form 8-K dated February 23, 1994 as filed with the Securities and Exchange Commission.
Valley is a Wisconsin corporation incorporated in 1962 and a registered bank holding company under the Bank Holding Company Act of 1956, as amended and registered savings and loan holding company under the Home Owners' Loan Act of 1933, as amended. Valley's principal assets are the stock of its subsidiaries. Valley presently owns substantially all of the capital stock of 15 banks and 2 savings associations with a total of 160 offices in Wisconsin. Valley also owns several companies engaged in businesses which are closely related to banking, including the businesses of trust and fiduciary services, credit card products and processing, brokerage services, mortgage banking and insurance agency services. Valley provides financial and managerial assistance and services to its subsidiaries. At December 31, 1993, Valley had consolidated total assets of approximately $4.6 billion, consolidated total deposits of approximately $4.0 billion, and consolidated shareholders' equity of approximately $366 million.
BUSINESS OF M&I
M&I, through its subsidiaries, engages principally in one line of business, that of providing financial services to a wide variety of corporate, institutional, government and individual customers. Activities in which M&I and its subsidiaries are presently engaged or may undertake in the future are subject to certain statutory and regulatory restrictions. In addition,
applicable law and regulations limit the amount of dividends payable to M&I by its bank subsidiaries (which indirectly limits the amount of dividends payable by M&I to its shareholders), the amount of loans made by M&I's bank subsidiaries to any one borrower, the amount of funds transferred by M&I's bank subsidiaries to M&I's other subsidiaries, and the total assets owned by M&I in relation to its capital (which indirectly limits the total income generated by M&I). See "Government Supervision and Regulation."
As a registered bank holding company, M&I owns directly or indirectly all or substantially all of the capital stock of 35 commercial banks in Wisconsin and one commercial bank in Phoenix, Arizona, and all of the capital stock of subsidiaries engaged in the following non-banking businesses approved by the Board for bank holding companies: personal property lease financing; investment management and advisory activities; data processing services and software sales to financial institutions; commercial mortgage banking; residential mortgage banking; venture capital and financial advisory services; trust services to residents of Wisconsin, Arizona and Florida; brokerage services; and general insurance agency activities.
The Bank Holding Company Act and rules promulgated thereunder authorize M&I to engage in activities deemed by the Board to be so closely related to banking as to be a proper incident thereto. Financial services and products which are or may be provided by M&I and its direct and indirect subsidiaries are subject to certain statutory and regulatory restrictions. See "Government Supervision and Regulation."
M&I's principal role is to provide its subsidiaries with financial and managerial assistance. M&I assists its subsidiaries in such areas as budgeting, tax planning and compliance, asset and liability management, investment administration and portfolio planning, business development, advertising, and human resources management. Although the officers and directors of each subsidiary are responsible for conducting the day to day affairs of the subsidiary, M&I establishes lending and accounting policies, budgetary goals and long-range plans and assures compliance therewith through its centralized audit and accounting systems and loan examinations.
M&I derives substantially all its income from investments in, advances to and service fees from its subsidiaries. Dividends and interest from subsidiaries are M&I's major sources of cash. Dividend payments from subsidiaries are determined on an individual basis and generally in relation to the earnings, credit quality and capital position of each subsidiary. M&I increases the capital of its banking subsidiaries primarily through the retention of earnings and, if necessary, the purchase of securities by M&I, rather than through direct capital financing by the subsidiary banks. However, the subsidiary banks may issue debt securities directly in order to fund their operations.
BANKING AND BANK-RELATED SUBSIDIARIES
M&I's 36 bank subsidiaries ("M&I bank subsidiaries") are located in communities throughout the State of Wisconsin and the Phoenix, Arizona metropolitan area and provide a full range of banking services to individuals, corporations and local governments in each of the areas they serve. M&I's largest bank subsidiary is M&I Marshall & Ilsley Bank ("M&I Bank"), which was founded in 1847. Based on consolidated assets of approximately $2.8 billion as of December 31, 1993, M&I Bank was the third largest bank and the largest state-chartered bank in the State of Wisconsin. M&I Bank maintains its headquarters in the City of Milwaukee and operates 23 additional branches and divisions in Milwaukee and in surrounding suburban communities, as well as a branch in the Cayman Islands. Banking services provided by M&I Bank and other M&I bank subsidiaries include retail, international and corporate banking, investment, trust and insurance agency activities. In addition, M&I Bank engages in correspondent banking services.
All M&I bank subsidiaries are members of the Federal Deposit Insurance Corporation ("FDIC"). In addition, M&I Bank and M&I's seven national bank subsidiaries are members of the Federal Reserve System (the "System"). All M&I bank subsidiaries operate under names which incorporate the designation "M&I."
Insurance Agencies
M&I offers insurance agency services through M&I Insurance Services, Inc., a subsidiary of a state chartered subsidiary bank with offices located in numerous communities throughout Wisconsin. M&I, through its subsidiaries, offers a full line of annuity, life, health and casualty insurance products.
Investment Management and Trust Services
M&I Investment Management Corp., a subsidiary of M&I, located in Milwaukee, Wisconsin, offers a full range of asset management services to the M&I trust company subsidiaries and to other corporate, institutional and individual customers, including the Marshall Funds, an open-end investment company consisting of six portfolios. As of December 31, 1993, M&I Investment Management Corp. had $5.7 billion in assets under management.
Marshall and Ilsley Trust Company, a subsidiary of M&I ("M&I Trust"), provides a full range of trust services to individual, not-for-profit and corporate customers. The Personal Trust Administrative Group provides trust, estate and agency services for individuals. The Employee Benefits Administrative Group administers pension, profit sharing and other forms of employee benefit plans, including a Keogh Plan for self-employed individuals. In addition to trust services provided by its Milwaukee office, M&I Trust operates six trust service offices located in M&I subsidiary banks in Beloit, Madison, Racine, Stevens Point, Watertown and Wausau, Wisconsin, and another office in Brookfield, Wisconsin (not a trust service office).
M&I also provides trust and investment counseling services through two out-of-state subsidiaries. M&I Marshall and Ilsley Trust Company of Arizona ("M&I Trust Arizona") was organized in 1976, with a primary emphasis on providing trust and investment counseling services to the growing number of Wisconsin natives retired in the Southwest. M&I Trust Arizona has offices in Phoenix and in Sun City serving residents of those areas. The Marshall and Ilsley Trust Company of Florida, located in Naples, was organized in 1984 to provide trust and investment counseling services to residents of the area, including Wisconsin natives who have retired in Florida. As of December 31, 1993, the market value of assets held in trust by the three trust companies totalled $17.3 billion.
Equipment Leasing
M&I's subsidiary, M&I First National Leasing Corp. ("FNL"), acting as owner and lessor, leases a variety of equipment and machinery, including industrial machinery, computers, hospital and nursing home equipment and construction equipment to both large and small businesses. FNL has its headquarters in Milwaukee, Wisconsin and has offices in numerous other states. Approximately 28% of its business comes from Wisconsin and 72% from other states. At December 31, 1993, FNL held net lease and installment receivables of approximately $236 million. FNL's competitors include other independent leasing companies, banks and other institutions, some of which have larger volume businesses and substantially greater resources.
Mortgage Banking
M&I has two subsidiaries engaged in mortgage banking, one providing commercial financing and the other providing residential financing.
M&I Mortgage Corp. ("M&I Mortgage"), located in Milwaukee, Wisconsin, with offices in Green Bay, La Crosse and Madison, Wisconsin, originates and purchases long-term mortgages on one-to-four family owner-occupied residences for sale in the secondary market. After sale to the secondary market, these mortgages are serviced for the investor by M&I Mortgage. At December 31, 1993, M&I Mortgage had a mortgage servicing portfolio of approximately $1.9 billion. M&I Mortgage serves homeowners throughout the State of Wisconsin and offers financing alternatives beyond those offered through traditional banking institutions. M&I Mortgage also assists M&I bank subsidiaries in originating, selling and servicing residential mortgage loans.
Richter-Schroeder Company ("RSC"), located in Milwaukee, Wisconsin, originates long-term commercial real estate loans for institutional investors such as large life insurance companies. RSC services the mortgages for the purchasing investor. RSC is one of the few mortgage banking firms in Wisconsin that specializes in income property financing, seeking investment opportunities for mortgage lenders in the retail, industrial and office sectors. RSC is one of the largest income property mortgage banking firms in Wisconsin, servicing a portfolio of approximately $235 million for investors.
Venture Capital and Financial Advisory Services
M&I Capital Markets Group, Inc. ("Capital Markets"), a subsidiary of M&I, located in Milwaukee, Wisconsin, provides venture capital and financial advisory services to a variety of customers, primarily in Southeastern Wisconsin and surrounding areas. Capital Markets seeks to invest in businesses that have talented management and technological advantages in their particular field. Capital Markets also provides a broad range of financial advisory and strategic planning services, including assistance in connection with the private placement of securities, raising of funds for expansion, leveraged buy- outs, divestitures and mergers and acquisitions. A subsidiary company of Capital Markets, M&I Ventures Corporation, is licensed as a small business investment company.
Brokerage Services
M&I Brokerage Services, Inc. ("M&I Brokerage"), a subsidiary of M&I Capital Markets Group, Inc., located in Milwaukee, Wisconsin, provides brokerage and other investment related services to a variety of retail and commercial customers. As a broker-dealer firm registered with the National Association of Securities Dealers and the Securities Exchange Commission, M&I Brokerage serves as an introducing broker-dealer. Customer accounts and securities are carried on a "fully disclosed" basis with the Pershing division of Donaldson, Lufkin and Jenrette.
Data Services
M&I Data Services, Inc. ("M&I Data Services"), a subsidiary of M&I, is a major supplier of data processing services and software to financial institutions in the United States, including M&I and the M&I bank subsidiaries. M&I Data Services presently serves over 500 financial institutions in 40 states and the District of Columbia. In addition to data processing services, M&I Data Services develops a comprehensive line of financial services software products. M&I Data Services also sells software to foreign financial institutions, and has contracts with sixteen foreign based institutions, including banks in Canada, Great Britain, India, Indonesia, Italy, Malaysia, Switzerland and Thailand. M&I Data Services' processing systems encompass five major processing functions: Deposits, Loans, Financial Accounting, Customer Information and Trust Accounting.
M&I Data Services' main data processing center and headquarters are located in a 328,000 square foot building on 20 acres of land situated in Brown Deer, a Milwaukee suburb, (the "Brown Deer Operations Center"). A new addition that nearly doubled the size of the Brown Deer Operations Center was completed in 1993. M&I Data Services also leases 50,000 square feet of commercial office space in Brown Deer for the development and sale of software packages, the sale and support of personal computer networks and the development and support of trust processing services. The Brown Deer Operations Center acts as an intermediary in bank-to-bank transactions and provides funds processing services in connection with both incoming deposits and outgoing payments, including transfers by check and by the bank's wire and money transfer systems. M&I Data Services operates eight remote processing centers in Arizona, Illinois, New York, Florida and Wisconsin. All remote processing centers transmit information taken from checks and other documents to the host sites, where the information is processed and printed on reports which are subsequently sent to customers.
During recent years the financial services industry has witnessed an acceleration of both state and federal deregulation, advances in technology, increased consumer awareness and expectations as to banking services, and new
product development. These factors have lessened distinctions between the various types of financial institutions and have increased competition and pressure on operating margins. Accordingly, the financial services industry has emphasized the development of new technology-based products and services in order to reduce operating costs while responding to consumer demands and the need for product differentiation. Software, support operations, and new product development have become more complex and expensive for financial institutions to do on their own, and hence there is an increased need for the services offered by third-parties such as M&I Data Services. Large third-party servicers have the technical ability to respond to the data processing requirements of new products and services and are able to spread development and maintenance costs over a broader customer base, resulting in more efficient service. Some larger financial institutions have ceased providing data processing services to their correspondent banks or have decided to terminate their in-house data processing operations in order to conserve resources and concentrate on core banking business. M&I Data Services is concentrating its sales efforts on the outsourcing opportunities at these larger financial institutions.
The market for banking technology services is national in scope because customers' data can be transmitted to and from, and processed on-line by, a data center in any part of the United States. 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.
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:
M&I business segment information is contained in note 17 of the Notes to the Consolidated Financial Statements contained in Item 8 hereof.
COMPETITION
M&I and its subsidiaries face substantial competition in the financial service markets they serve. M&I's banking subsidiaries compete for deposits and other sources of funds and for credit relationships with other national and state banks, savings and loan associations, credit unions, finance companies, money market funds, life insurance companies (and other long-term lenders) and other financial and non-financial companies, many of which offer products functionally equivalent to bank products and located both within and outside M&I's primary market area. M&I's non-bank subsidiaries compete with numerous banks, finance companies, data servicing companies, leasing companies, mortgage bankers, insurance companies, brokerage firms, financial advisors, trust companies, mutual funds and investment bankers in Wisconsin and throughout the United States. In addition, M&I competes for funds with both financial and
non-financial institutions in a variety of financial markets. Improving the quality and broadening the range of financially related services to customers, easier access to facilities and competitive pricing are among the principal methods of meeting competition in the financial service industry.
EMPLOYEES
As of December 31, 1993, M&I and its subsidiaries employed in the aggregate approximately 6,611 full and part-time employees. M&I and its subsidiaries maintain retirement plans for the benefit of all qualified 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.
GOVERNMENT SUPERVISION AND REGULATION
Governance of Bank Holding Companies
M&I is a bank holding company registered with and subject to regulation by the Board of Governors of the Federal Reserve System (the "Board") under the Bank Holding Company Act of 1956, as amended (the "Act"). The Act requires M&I to file with the Board annual reports and such additional information as the Board may require and authorizes the Board to conduct examinations of M&I and its subsidiaries.
The Act requires every bank holding company to obtain the prior approval of the Board before it may acquire substantially all the assets of any bank, or ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Under existing federal and state laws, the Board generally may not approve the acquisition by M&I of the voting shares of, or substantially all the assets of, any bank located outside the State of Wisconsin, except for the acquisition of certain failing banks, as permitted under Section 13(f) of the Federal Deposit Insurance Act, or as otherwise permitted by state law in compliance with Section 3(d) of the Act. Section 3(d) of the Act provides that interstate acquisitions of banks may be approved by the Board where such acquisition is specifically authorized by the laws of the state in which the acquired bank is located.
A number of states have laws allowing interstate acquisitions within a specified geographic region if one or more other states within the region permit reciprocal acquisitions of banks and bank holding companies located in their states. Wisconsin enacted a regional interstate banking statute in 1987. The law provides for a region comprised of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio and Wisconsin. The law allows an in-state bank and in-state bank holding company (institutions which have their principal office in Wisconsin) to acquire or merge with a regional state bank or bank holding company (institutions which have their principal office in a state within the region) subject to certain filing requirements with the Wisconsin Commissioner of Banking (the "Commissioner"). Similarly, a regional state bank holding company may acquire or merge with an in-state bank or bank holding company if various conditions are met. In addition, M&I may be able to acquire or establish banks outside of the midwest region which are located in numerous states and the District of Columbia which have adopted interstate banking not regionally restricted or subject to the existence of reciprocal legislation, or other states that have "trigger" dates which convert regional interstate legislation into full national, non-reciprocal, interstate legislation.
The Act limits the activities of bank holding companies to managing, controlling, and servicing their subsidiary banks and to engaging in certain non-banking activities determined by the Board to be so "closely related" to banking or to managing or controlling banks as to be a "proper incident" thereto. With the exception of such closely related activities, bank holding companies are prohibited from acquiring direct or indirect ownership of more than 5% of the voting stock of any company which is not a bank. The Board's approval must be obtained prior to M&I's engaging in any such closely-related
activities, or in acquiring more than 5% of the voting shares of any company engaged in such activities, or in some instances expanding the nature of such activities or opening new offices. The Board also has permitted bank holding companies to engage in certain additional activities on a case-by-case basis. The Board has generally followed a restrictive policy in permitting the entry or expansion of bank holding companies and other bank affiliates into domestic and foreign bank and bank-related activities. Neither the Act nor applicable law generally imposes geographic restrictions on the activities of non-bank subsidiaries of bank holding companies.
The Act and the Federal Reserve Act (which applies to M&I's largest subsidiary bank) and other state and Federal laws and regulations promulgated thereunder limit the products and services offered by M&I and its subsidiaries (as discussed above), the amount of loans made to any one borrower, the nature of securities in which M&I may invest, deal in or underwrite, and the total assets owned by M&I relative to its capital (which, in turn, restricts the income generated by M&I). The Act and regulations of the Board also prohibit M&I and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
In addition to the Act, M&I's ability to enter various aspects of the securities business may be limited by the Glass-Steagall Act. (The "Glass- Steagall Act" is the name commonly used to refer to sections 16, 20, 21 and 32 of the Banking Act of 1933, 12 U.S.C. 24 (seventh), 78, 377-78.) The Board has permitted bank holding companies to establish non-bank subsidiaries for the purpose of conducting securities related activities under certain conditions and restrictions.
In 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA created a comprehensive new regulatory structure for banks based on five categories of capitalization. The primary focus of FDICIA was on the regulation of undercapitalized institutions, though the law also placed limitations on the corporate activities of financially strong institutions and their holding companies. Those institutions which qualify as undercapitalized are subject to substantial restrictions on their activities and to strict regulatory oversight. For severely undercapitalized institutions, regulators may limit the institution's ability to conduct transactions with affiliates, prohibit deposits from correspondent institutions, require prior approval for capital distributions by the institution's holding company and require the holding company to divest the institution or any nondepository affiliate of the institution which is in danger of becoming insolvent. Similarly, all depository institutions are subject to capital distribution restrictions if making such distribution would cause the institution to become undercapitalized. FDICIA required banking regulators to propose and adopt regulations addressing a number of subjects, many of which were adopted in 1992 and 1993 and are discussed more fully below. FDICIA and the regulations promulgated thereunder have not materially affected the operations of M&I or the M&I bank subsidiaries and M&I does not believe that any further regulations to be promulgated in the future under FDICIA will have an adverse effect on its operations or those of its subsidiaries.
M&I is a legal entity separate and distinct from its subsidiaries. Accordingly, the right of M&I, and thus the right of M&I's creditors and shareholders, to participate in any distribution of the assets or income of any subsidiary is necessarily subject to the prior claims of creditors of such subsidiary, except to the extent that claims of M&I itself as a creditor may be recognized. Payment of dividends to M&I by M&I bank subsidiaries is subject to various state and federal regulatory limitations. In general, under Wisconsin banking law, the board of directors of a state chartered subsidiary bank may declare and pay a dividend from so much of the bank's undivided profits as the board shall deem expedient, provided the payment of such dividend does not in any way impair or diminish the bank's capital, or reduce the capital level below minimum required levels set by regulatory agencies. Under Federal law, which applies to national banks and state banks which are members of the System, regulatory approval is required for the payment of dividends by any bank in any calendar year in excess of such bank's net income for that year combined with the retained net income of the two preceding years, plus any required transfers to surplus. Under these provisions, at December 31, 1993, the M&I bank subsidiaries would have been permitted to pay dividends to M&I of approximately $109.8 million without prior regulatory approval. At December 31, 1993, the M&I subsidiaries (both bank and non-bank) would have been permitted to pay dividends to M&I of approximately $202 million. The
Federal and state bank regulatory agencies also have authority to prohibit banks and bank holding companies from paying dividends which would constitute an unsafe and unsound banking practice. The Board and the Comptroller of the Currency have indicated that it would generally be an unsafe and unsound banking practice for banks to pay dividends except out of current operating earnings. Dividends paid to M&I by the M&I bank subsidiaries in 1993 totaled $71.2 million. M&I does not expect that the restrictions referred to above will impair M&I's ability to pay normal quarterly dividends to its stockholders.
Commitments to Affiliated Institutions
Under Board 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, any capital loans by M&I to any of its bank subsidiaries would also be subordinate in right of payment to depositors and to certain other indebtedness of such bank.
As a result of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable for any loss incurred by the FDIC in connection with (i) the default of a commonly controlled FDIC insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. All of the M&I bank subsidiaries are FDIC insured depository institutions within the meaning of FIRREA.
Capital Requirements
Information regarding capital requirements for bank holding companies and tables reflecting M&I's regulatory capital position at December 31, 1993 can be found in note 11 of the Notes to the Consolidated Financial Statements contained in Item 8 hereof.
Other Regulation of M&I and its Subsidiaries
Section 23A of the Federal Reserve Act restricts the extent to which M&I's bank subsidiaries may supply funds to M&I, or to M&I's non-bank subsidiaries ("Affiliates") whether through direct extensions of credit, or through purchase of securities, issuance of guaranties and the like. Unless fully secured by obligations of or guaranteed by the U.S. Government or its agencies, or by certain bank deposits, with certain limited exceptions, M&I bank subsidiaries may not: (i) loan money or otherwise extend credit to; (ii) purchase or invest in the stock of securities of; (iii) purchase the assets of; (iv) issue a guarantee, acceptance, or letter of credit on behalf of; or (v) accept as collateral for a loan or extension of credit the stock or securities of, a bank holding company or its non-bank subsidiaries in an amount exceeding 10% of the capital stock and surplus of the bank in the case of any Affiliate and in an amount exceeding 20% of the capital stock and surplus of the bank in the case of all Affiliates in the aggregate. In addition, every such loan, extension of credit, investment, purchase, guarantee, letter of credit or acceptance must be secured to the extent required under the Federal Reserve Act (at a minimum of 100%).
Section 23B of the Federal Reserve Act applies to certain transactions by banks with affiliates that are not covered by Section 23A. Section 23B's basic purpose is to ensure that an insured bank does not subsidize its bank holding company or its sister nonbank subsidiaries by giving them more advantageous terms, whether on loans, or any other contracts with the bank, than they would be able to obtain from an unrelated party.
All of M&I's state chartered bank subsidiaries are members of and subject to regulation and examination by the FDIC. M&I's nationally chartered bank subsidiaries are subject to regulation and examination by the Comptroller of the Currency, and its state chartered bank subsidiaries are subject to further regulation and examination by the Commissioner of Banking for the State of Wisconsin and in the case of M&I Thunderbird Bank, the Arizona State Banking Department. In addition, subsidiary banks that are members of the System are
subject to regulation and examination by the Board. Areas of banking that are regulated by state and federal law include reserve requirements, investments, loans, mergers, issuances of securities, dividend payments and branch banking. The laws of the jurisdictions in which they operate impose restrictions on many of M&I's non-bank subsidiaries in terms of the activities in which they may engage and the amounts of, and interest rates on, credit they provide. Additional restrictions may be imposed by Federal or state regulatory agencies having authority to supervise or regulate specific types of companies or activities conducted by such subsidiaries.
Additionally, the Securities Exchange Act of 1934, as amended (the "1934 Act") imposes regulatory and reporting requirements on various activities conducted by banks, including beneficial ownership of certain securities, dealing in municipal securities, acting as transfer agent, providing certain types of investment management services, and in certain instances, acting as a securities broker. M&I Bank is licensed as a municipal securities broker under the Federal Municipal Securities Rule-Making Act. A subsidiary of M&I, M&I Investment Management Corp., is registered with the Securities and Exchange Commission (the "Commission") under the Investment Advisers Act of 1940. M&I Brokerage Services, Inc., a subsidiary of M&I Capital Markets Group Inc., is registered with the Commission as a broker-dealer and is regulated by the Commission under the 1934 Act. The 1934 Act also requires certain types of investment managers, including M&I Bank, to file reports with the Commission with respect to the holding of certain securities. M&I Bank has also registered with the Commission as a transfer agent and must comply with certain record keeping and reporting requirements. Pursuant to the Government Securities Act of 1986, M&I Bank has filed notice with the Board that it is acting as a government securities broker-dealer.
The activities and operations of banks are subject to a number of other federal and state laws and regulations, including state usury and consumer credit laws, state laws relating to fiduciaries, the federal Truth-In-Lending Act and Regulation Z promulgated thereunder, the federal Equal Credit Opportunity Act and Regulation B, the federal Home Mortgage Disclosure Act and Regulation C, the federal Expedited Funds Availability Act and Regulation CC, the federal Fair Credit Reporting Act, the federal Bank Secrecy Act, the federal Community Reinvestment Act, the federal antitrust laws, insider transactions, changes in Bank ownership, management interlocks between depository institutions and the disclosure of bank records.
Regulations promulgated by Federal banking regulators in 1992 pursuant to FDICIA broadly impacted the operations of financial institutions and their holding companies. These regulations which were intended to strengthen the industry imposed new standards on various activities including real estate secured lending, acceptance of brokered deposits, interbank liabilities and loans to directors and executive officers of financial institutions and their holding companies. Additional regulations resulting from FDICIA bar state chartered banks from engaging as principal in any activity deemed impermissible for a federally chartered bank and from acquiring or maintaining any equity investment not permissible for a national bank. Furthermore, Regulation DD implementing the Truth-in-Savings provisions of FDICIA was issued by the Board in 1992 and became effective in June, 1993. Regulation DD requires banks to make various new disclosures regarding deposit accounts.
Federal bank agencies have comprehensive enforcement authority over banking institutions within their jurisdiction. Pursuant to FDICIA, these agencies possess broad powers over undercapitalized institutions. Actions available to the agencies include the termination of deposit insurance, restrictions on asset growth, denying approval for acquisitions, branching or new lines of business, requiring an institution to recapitalize, requiring divestiture of a financial institution, issuance of temporary and permanent cease and desist orders, imposition of civil money penalties, restrictions on senior officers' compensation, and suspension and removal of directors and officers and the prohibition of other persons from participating in the management of a bank. The agencies frequently use their authority to institute formal enforcement actions to persuade banking organizations on an informal basis to take specified actions designed to insure compliance with applicable laws and regulations. The federal bank agencies are broadly empowered to define "unsafe and unsound" practices.
M&I, as the holder of stock of subsidiary banks, may be subject to assessment to restore impaired capital of its national bank subsidiaries to the extent provided in Section 5205 of the Revised Statutes of the United States (12 U.S.C. 55) and of its state banks to the extent provided in Section 220.07 of the Wisconsin Statutes. At present, there is no such impairment of capital
of any M&I bank subsidiaries. Any such assessment would be applicable only to M&I and not to any M&I shareholder.
Under Section 221.56 of the Wisconsin Statutes, M&I, as a Wisconsin corporation that owns, holds or controls a majority of stock in a state bank or trust company is deemed to be engaged in the banking business and subject to supervision of the Office of the Commissioner, including the requirement that it file reports with and be subject to examination by the Office. The Commissioner is also empowered to issue orders to a bank holding company to remedy any condition or policy that, in the opinion of the Commissioner, endangers the safety of deposits in any subsidiary bank or trust company. In the event of noncompliance with such an order, the Commissioner has power to direct the operations of the bank or trust company and to withhold dividends from the holding company.
The foregoing references to applicable laws, statutes, regulations and legislation are brief summaries thereof which do not purport to be complete and are qualified in their entirety by reference to such statutes, regulations and legislation.
GOVERNMENT POLICIES AND ECONOMIC CONDITIONS
The earnings and business of M&I and the M&I bank subsidiaries are and will be 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, particularly those of the Board. In addition to the functions enumerated under "Government Supervision and Regulation," the Board regulates the supply (and thereby the cost) of funds and bank credit and deals with general economic conditions in the United States and internationally. From time to time, the Board has taken specific steps to curtail domestic inflation, to support the value of U.S. dollars in foreign currency markets and to control the nation's money supply. Policies employed by the Board for these purposes influence the interest rates paid on interest-bearing liabilities, the interest received on earning assets, and the levels of bank loans, investments and deposits.
The economic conditions in which M&I has operated have varied greatly over recent years, ranging from extremely high to low rates of inflation, volatile interest rates, and sharp fluctuations in the value of the U.S. dollar compared to other currencies. Government and Board monetary policies have significantly affected the operating results of commercial banks in the past and are expected to do so in the future. 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.
The cost of funding bank assets has shifted from a reliance on fixed rate sources of funds to funding sources which reflect market rates of interest. This shift was commenced in 1980 pursuant to federal legislation which began a gradual phase out of interest rate ceilings applicable to time and savings deposits at commercial banks and thrift institutions. The only remaining limitation on interest rates payable on transaction deposit accounts, with certain minor exceptions and conditions, is the prohibition on the payment of interest on demand deposits. The legislative and regulatory changes relating to interest rate ceilings have enabled banks to compete more effectively with other unregulated entities for deposits by offering market rates of interest, but have increased the cost of core deposits.
SELECTED STATISTICAL INFORMATION
The following tables set forth certain statistical information relating to M&I and its subsidiaries on a consolidated basis.
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 (dollars in thousands):
Average Balance Sheets and Analysis of Net Interest Income - concluded
Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 34% for the years 1991 and 1992, 35% for 1993, and excluding disallowed interest expense.
(2) Loans on a nonaccrual status have been included in the computation of average balances.
Analysis of Changes in Interest Income and Interest Expense
The effect on interest income and interest expense of volume and rate changes for 1992 and 1993 are outlined below. Changes not due solely to either volume or rate are allocated to rate (in thousands of dollars).
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 34% for the years 1991 and 1992, 35% for 1993, and excluding disallowed interest expense.
Investment Securities
The book value of the Corporation's consolidated investment securities at December 31 of each year are:
The maturities, at book value, and weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 35% tax rate) of investment securities at December 31, 1993, are (in thousands):
Types of Loans
The Corporation's consolidated loans, classified by type, at December 31 of each year are:
Loan Maturity and Interest Rate Sensitivity
The analysis of loan maturities at December 31, 1993, and the rate structure for the categories indicated are:
Nonaccrual, Past Due and Restructured Loans
The Corporation's nonaccrual, past due and restructured loans at December 31, of each year are:
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 non-accrual. Exceptions to these rules are generally only for loans fully collateralized by readily marketable securities or other relatively risk free collateral.
Information with respect to nonaccrual and restructured loans (in thousands) at December 31, 1993, is as follows:
Gross interest income which would have been recorded under original terms . . . . . . . $3,557
Interest income recorded during the period. . . $1,804
Potential Problem Loans
At December 31, 1993, the Corporation had $14,475 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, 1993, the Corporation's commercial finance subsidiary had $2,342 of corporate debt investment securities on nonaccrual status. The gross interest that would have been recorded in 1993 under the original terms amounted to $257. Interest income recorded during 1993, with respect to such debt securities was $35.
Summary of Loan Loss Experience
Information relating to the Corporation's consolidated allowance for loan losses and the amount of loans charged off and recoveries, by type, for each of the years ended December 31 is:
Summary of Loan Loss Experience - continued
(1) The amount of the addition to the allowance charged to operating expense for the year ended December 31, 1993, is the amount necessary to bring the allowance for loan losses at December 31, 1993, to a level believed adequate by management to absorb current 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.
SUMMARY OF LOAN LOSS EXPERIENCE - CONTINUED
The Corporation's evaluation of the adequacy of the allowance for loan losses broadly 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.
The loan portfolios of the Corporation's affiliate banks and leasing subsidiary are subject to continual management oversight and 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 their 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 1993, consolidated net charge-offs decreased to $1.8 million, representing $6.8 million of charge-offs, offset by $5.0 million of recoveries. This decrease follows the lower than normal $3.2 million of losses experienced in 1992. The lower than normal levels experienced in 1992 and 1993 contrast with the higher than historic levels of losses experienced in 1990 and 1991. The $5.0 million of recoveries recognized in 1993 reflect a return to more normal historic levels. The higher $10.4 million of recoveries recognized in 1992 were primarily due to collection of a large commercial loan charge-off recorded in 1990. The reduction in consolidated charge-off levels in 1992 and further reduction in 1993, reflect the relative strength of the Wisconsin economy and 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 1993 provision level of $9.1 million, which is the lowest provision level in the last five years, results in a year-end 1993 loan loss reserve of $93.2 million or 1.74% of total loans, as compared to the year-end 1992 reserve level of 1.76%. The increased reserve levels in 1992 and 1993, reflect the Corporation's favorable net charge-off experience and the inherent cyclical nature of economic conditions and related credit impacts. The year-end 1993 reserve level is considered adequate given uncertainties regarding the economic conditions in the country and the Corporation's primary service areas.
The 1993 charge-off levels for commercial and real estate loans decreased to their lowest level in five years and were offset by nearly equal levels of recoveries. The minimal net charge-offs for commercial loans in 1993 reflect the general stability of the Wisconsin and Arizona economies relative to the less favorable conditions experienced in 1990 and 1991. The minimal net recoveries on real estate loans in 1993, compare to net charge-off levels of $7.1 million, $6.0 million, and $3.1 million experienced in 1990, 1991 and 1992, respectively. This trend reflects the weakness in economic conditions and real estate values which had significantly impacted the Corporation's Arizona-based portfolio, and resulted in the higher than historic levels of losses experienced in 1990 and 1991. Personal loan net charge-offs decreased further in 1993, as compared to 1992 and prior year levels, reflecting, in part, a continued de-emphasis on certain consumer oriented products which had resulted in higher loss levels in 1989 and 1990, and the impact of overall economic conditions. In 1993, the Corporation's lease financing portfolio net charge-offs decreased to the lowest level since 1989 reflecting the favorable impact of economic conditions on this portfolio segment which has experienced growth in recent years.
Disregarding the undetermined impacts of the pending Valley Bancorporation acquisition, the existing Corporation's charge-off and provision levels for 1994 are expected to continue to be largely dependent on economic conditions in the Corporation's primary service areas. While Wisconsin's economy continues to be relatively stable and the Arizona and national economies reflect some continued strengthening, should the country's economic conditions deteriorate, the Corporation's Wisconsin and Arizona markets may be adversely affected. Absent deterioration in these conditions, total charge- offs for 1994 are not currently expected to vary significantly from 1993 levels and offsetting recoveries are currently expected to decrease from 1993 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 are currently expected to 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 1994 are expected to remain below peak 1990 levels, with net charge-offs anticipated to more closely parallel 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 loan losses for 1994 are expected to remain below the higher than normal levels experienced in 1990 and 1991. Based on the existing portfolio size and composition, personal loan losses for 1994 are currently expected to increase somewhat from 1993 levels, but remain below the peak levels experienced in 1990. At the present time, direct lease financing losses for 1994 are expected to increase somewhat from 1993 levels, to more closely parallel historic levels; however, actual losses could be impacted by portfolio growth, fraud, or unanticipated weaknesses in industry segments within the portfolio.
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:
The maturity distribution of time deposits issued in amounts of $100,000 and over and outstanding at December 31, 1993 (in thousands) is:
Three months or less. . . . . . . . . . . . . . . . . . . . . $109,803 Over three and through six months . . . . . . . . . . . . . . 32,732 Over six and through twelve months. . . . . . . . . . . . . . 30,117 Over twelve months. . . . . . . . . . . . . . . . . . . . . . 67,500 $240,152
At December 31, 1993, time deposits issued by foreign offices totalled $29,083.
Return on Equity and Assets
(a) - See Exhibit 12 for detailed computation of these ratios.
Short-Term Borrowings
Information related to the Corporation's funds purchased and security repurchase agreements for the last three years is as follows (in thousands):
Item 2.
Item 2. Properties.
Both M&I and M&I Bank occupy offices on all or portions of 16 floors of a 21-story building, completed in 1969 and 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 unoccupied floors to a professional tenant. Bank facilities at this location include five closed circuit TV drive-in stations and six closed circuit TV walk-in stations. 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 operates 24 branch offices or divisions located in Milwaukee and in surrounding suburban communities. A wholly-owned subsidiary of M&I Bank owns the buildings at four branch sites, located in the western and in the southern sections of downtown Milwaukee, and in Glendale, a Milwaukee suburb. Eight branches, located in Milwaukee suburbs, occupy buildings owned by M&I Bank. The remaining branches occupy leased facilities.
Thirty-four of M&I's other subsidiary banks are located in cities throughout Wisconsin. M&I Thunderbird Bank, a wholly-owned subsidiary of M&I, is located in Phoenix, Arizona and has 12 offices in surrounding Maricopa County communities. Thirty-four subsidiary banks occupy modern facilities owned by the banks or by M&I.
M&I Data Services owns a 328,000 square foot data processing facility located in Brown Deer, a suburb of Milwaukee, from which it conducts data processing activities for M&I, its subsidiaries and other financial institutions throughout the nation. A new addition that nearly doubled the size of the Brown Deer Operations Center was completed in 1993. M&I Data Services leases 50,000 square feet of commercial office space in Brown Deer for the development and marketing of software packages, the sale and support of personal computer networks and the development and support of trust processing services; leases additional processing centers in Elk Grove Village, Illinois; Madison and Wausau, Wisconsin; Tampa and Fort Lauderdale, Florida and Phoenix, Arizona; and leases space for sales offices in Glastonbury, Connecticut; West Palm Beach, Florida; Wayne, Pennsylvania and De Pere, Wisconsin. In addition, M&I Data Services manages a processing center in New York, New York under a facility management contract.
Item 3.
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.
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 57 Officer since October, 1992, Director since December, 1988, Vice Chairman of the Board, December, 1988 to December, 1992, Vice President, 1984 to December, 1988, Marshall & Ilsley Corporation; Chairman of the Board since January, 1989, Chief Executive Officer since 1987, Director since 1981, President, 1981 to January, 1989, M&I Marshall & Ilsley Bank; President and Director - M&I Financial Corp., M&I Insurance Company of Arizona, Inc., M&I Building Corp. and M&I Capital Markets Group, Inc.; Director - M&I First National Leasing Corp., M&I Mortgage Corp., Richter-Schroeder Company, Inc., M&I Data Services, Inc., Loujo Company and Marshall & Ilsley Trust Company.
D.J. Kuester Director since February, 1994, President since 1987, Marshall Age 52 & Ilsley Corporation; President and Director since January, 1989, Vice President, 1979 to January, 1989, M&I Marshall & Ilsley Bank; Chairman of the Board, Chief Executive Officer and Director, M&I Data Services, Inc.; Director - M&I Financial Corp., M&I Building Corp and M&I Insurance Company of Arizona, Inc.
G.H. Director since February, 1994, Executive Vice President and Gunnlaugsson Chief Financial Officer since 1987, Marshall & Ilsley Age 49 Corporation; Vice President of M&I Marshall & Ilsley Bank since 1976; Vice President and Director, M&I Insurance Company of Arizona, Inc.; Director - M&I Mortgage Corp. and M&I Data Services, Inc.; Director - Loujo Company.
G.D. Strelow Senior Vice President and Human Resources Director of Marshall Age 59 & 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, Treasurer since 1986 and Age 49 Secretary since 1981, 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., M&I Building Corp., M&I Insurance Company of Arizona, Inc. and M&I Insurance Services, Inc.; Secretary and Treasurer, M&I Mortgage Corp.; Secretary and Director, M&I Data Services, Inc.; Director - Richter-Schroeder Company, Inc., Loujo Company and M&I Wauwatosa State Bank.
P.R. Vice President and Corporate Controller since April, 1989, Justiliano Vice President, December, 1986 to April, 1989, Marshall & Age 43 Ilsley Corporation.
J.L. Roberts Vice President and Corporate Banking Controller of Marshall Age 41 & Ilsley Corporation since April, 1989; Vice President and Controller of M&I Marshall & Ilsley Bank since 1986.
J.L. Senior Vice President of Marshall & Ilsley Corporation since Delgadillo 1993; Director of M&I Data Services, Inc. since 1994; Age 42 President and Chief Operating Officer of M&I Data Services, Inc. since 1993; Senior Vice President of M&I Data Services, Inc. since 1989.
If M&I completes the Merger with Valley, additional executive officers of M&I will be appointed as described in M&I's Registration Statement on Form S-4 (Reg. No. 33-51753) as filed with the Securities and Exchange Commission.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Stock Listing
Marshall & Ilsley Corporation common stock is traded under the symbol "MRIS" in the "NASDAQ National Market," and quotations are supplied by the National Association of Securities Dealers.
Common Dividends Declared*
1993 1992 ____ _____
First Quarter $.12 $.11 Second Quarter .14 .12 Third Quarter .14 .12 Fourth Quarter .14 .12 ____ _____
$.54 $.48
Price Range of Stock (Low and High Bid)
First Quarter $21.06-23.31 $17.25-18.25 Second Quarter 22.94-25.75 16.94-20.56 Third Quarter 21.25-25.00 19.19-21.81 Fourth Quarter 21.75-24.25 20.06-22.06
* May not add due to rounding. A discussion of the regulatory restrictions on the payment of dividends can be found under Item 1. Business, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation, and in footnote 11 to M&I's Consolidated Financial Statements in Item 8 of this Form 10-K.
Holders of Common Equity
At December 31, 1993 M&I had approximately 10,374 record holders of its Common Stock.
Item 6.
Item 6. Selected Financial Data
CONSOLIDATED SUMMARY OF EARNINGS - continued Years ended December 31 ($000's except share data)
_______________
*Restated for the 3 for 1 stock split effected in the form of a 200% stock dividend distributed to shareholders in May, 1993.
CONSOLIDATED AVERAGE BALANCE SHEETS Years ended December 31 ($000's except share data)
____________ *Not restated for acquisitions accounted for as poolings of interests **Nonaccrual loans, restructured loans, and loans past due 90 days or more ***Restated for 3 for 1 stock split
YIELD & COST ANALYSIS (Tax equivalent basis) Years ended December 31
Item 7.
Item 7. Management's Discussion and Analysis of Financial Position and Results of Operations
Marshall & Ilsley Corporation reported consolidated operating earnings of $125.5 million in 1993, an increase of $8.9 million or 7.6% from the $116.6 million reported in the same period a year ago. Fully diluted earnings per share on the same basis was $1.76 compared to $1.62 for 1992, an increase of 8.6%. The return on average assets and average shareholders' equity was 1.62% and 16.11%, respectively, for the year ended December 31, 1993 and 1.56% and 16.16%, respectively, for 1992. Operating earnings increased $17.3 million or 17.4% in 1992 compared to 1991 while 1992 fully diluted earnings per share increased 15.7% over the prior year.
The increase in 1993 net income was due to higher net interest income, a lower loan loss provision and higher noninterest related revenues.
During 1992, the Corporation adopted two new accounting standards which required the recognition of unrecorded post retirement benefits and that current enacted tax rates be used in determining deferred tax balances. The cumulative effect of the adoption of these accounting standards which was recognized as of January 1, 1992, amounted to an after tax charge of $7.4 million or $.10 per share on a fully diluted basis.
Provision for Loan Losses and Credit Quality
The provision for loan losses amounted to $9.1 million for 1993 a decrease of $6.1 million or 40.2% when compared to $15.2 million in 1992 and $20.6 million in 1991. The decline in the 1993 provision level reflects current favorable trends in nonperforming assets and net charge-offs in relation to the allowance for loan losses.
Nonperforming assets at December 31, 1993 amounted to $46.4 million compared to $55.6 million at December 31, 1992. Nonperforming loans declined by $4.5 million while other real estate owned declined $4.7 million. The largest contributor in the decline in nonperforming loans was nonaccrual loans which declined $3.8 million and amounted to $27.9 million at December 31, 1993. Each major category of nonaccrual loans declined from the prior year. Other real estate owned declined due to the sale of properties across all major affiliate groups.
Net charge-offs amounted to $1.8 million for the year ended December 31, 1993 compared to $3.2 million in the prior year. Loan charge-offs in 1993 were at the lowest level reported for the past five years. Recoveries for the year ended December 31, 1993 amounted to $5.0 million, a decline of $5.4 million from that reported for 1992 when recoveries amounted to $10.4 million. During 1992, a $4.4 million recovery on one large commercial loan, partially charged-off in 1990, was realized by our lead bank (M&I Marshall & Ilsley Bank).
The allowance for loan losses amounted to $93.2 million at December 31, 1993 compared to $85.9 million a year ago, an increase of $7.3 million or 8.5%. While the allowance for loan losses to nonperforming loan coverage ratio increased from 213% at December 31, 1992 to 261% at December 31, 1993, the allowance for loan losses to total loans coverage ratio declined slightly to 1.74% due to the increase in loans outstanding.
Since the third quarter of 1993, nonperforming assets declined $4.8 million or 9.4%. Nonaccrual loans declined by $3.9 million while other real estate owned declined $1.6 million. Net charge-offs for the fourth quarter of 1993 amounted to $1.2 million which were $1.0 million higher than the third quarter of 1993.
CREDIT QUALITY December 31, ($ 000's)
Consolidated Credit Quality Information
Nonperforming Assets by Type
Major Affiliate Group Credit Quality Information
Total Nonperforming Assets by Major Affiliate Group
The table below presents a summary of the major categories of consolidated nonaccrual loans:
INCOME STATEMENT COMPONENTS AS A PERCENT OF AVERAGE TOTAL ASSETS
The table below presents a summary of the major elements of the income statement for 1993, 1992, and 1991. Each of the elements is stated as a percent of average total assets outstanding for the respective year and, where appropriate, is converted to a fully taxable equivalent basis (FTE).
1993 1992 1991 ______ ______ ______
Interest Income 6.41% 7.26% 8.53% Interest Expense (2.31) (3.00) (4.37) ______ ______ ______
Net Interest Income 4.10 4.26 4.16 Provision for Loan Losses (.12) (.20) (.28) Net Securities Gains .10 .11 .06 Other Income 3.78 3.44 3.06 Other Expense (5.22) (5.13) (4.80) ______ ______ ______
Income Before Income Taxes 2.64 2.48 2.20 Income Taxes (1.02) (.92) (.84) ______ ______ ______ Income Before Cumulative Effect of Accounting Changes 1.62% 1.56% 1.36%
Net Income 1.62% 1.46% 1.36%
Net Interest Income
Net interest income was $309.2 million in 1993, a slight increase from $307.8 million earned in 1992. The benefit was a result of a modest increase in average earning assets combined with a shift in the asset and funding mix.
Average earning assets increased $186.5 million or 2.7% in 1993 and amounted to $7.0 billion. Short-term investments declined $160.5 million while long-term investments increased $115.3 million and amounted to $1.78 billion. The tax-exempt portion of our long-term investment portfolio continues to decline as the availability of such securities diminish and therefore are replaced with taxable investments.
Total average loans increased $231.8 million or 4.8% and amounted to $5.04 billion for the year ended December 31, 1993. Average commercial loans grew $63.6 million or 3.6% in 1993 compared to the prior year. Average total real estate loans amounted to $2.34 billion compared to $2.24 billion last year, an increase of 4.6%. Of this increase, commercial real estate increased 9.3% or $91.6 million with business real estate loans contributing $53.4 million of the growth. Residential real estate loans grew a modest 1.0% or $12.1 million and amounted to $1.27 billion in 1993. Personal loans amounted to $641.2 million in 1993, an increase of 9.3% from the prior year. Student loan activity was the largest contributor to the increase. Lease financing grew 4.4% or $9.8 million in 1993 compared to 1992.
As discussed throughout the year, the shift in our funding mix also helped contribute to the slight increase in net interest income. Average noninterest bearing deposits amounted to $1.51 billion for the year ended December 31, 1993, an increase of $143.0 million or 10.5% from that reported in 1992. Total interest bearing deposits amounted to $4.49 billion a decline of $85.0 million or 1.9% compared to 1992. Core interest bearing deposit accounts increased $129.4 million for 1993 compared to the prior year. Regular savings increased $110.0 million or 14.7% while NOW/Super NOW accounts increased $51.5 million or 7.9% in the current year when compared to 1992. Money market accounts declined
$32.1 million or 2.7%. Large dollar certificate of deposit accounts and other certificates of deposit and time accounts decreased $28.8 million or 12.4%, and $185.5 million or 10.5%, respectively, when comparing 1993 to the prior year.
In November 1992, the Corporation redeemed, at par, the $60 million 10 1/2% notes due in 1995. In July 1993, the Corporation issued $100 million of 10 year 6.375% unsecured subordinated notes. The proceeds were used for general corporate purposes which included the financing of the treasury share repurchase program announced in April, 1993.
The net interest margin as a percent of average earning assets declined from 4.68% for the year ended December 31, 1992 to 4.53% in the current year. The average yield on our interest earning assets was 7.08%, a decline of 89 basis points from 1992. Loan yields declined by 73 basis points to 7.65% and our long-term investment securities yielded 5.85%, a decline of 184 basis points from that earned a year ago. The total cost of our interest bearing liabilities amounted to 3.39% for 1993, a decline of 90 basis points when compared to the prior year. The cost of our core interest bearing deposit accounts declined 79 basis points in the current year compared to 1992, while the cost of our other time deposit accounts declined 89 basis points. Due to the above noted realignment of our long-term borrowings, the cost associated with this funding source declined 134 basis points and amounted to 7.63% compared to 8.97% in 1992.
While the spread between interest earning assets and interest bearing liabilities declined by 1 basis point, the value of our noninterest bearing deposit accounts declined by 89 basis points.
Net interest income was $307.8 million in 1992, an increase of $18.8 million or 6.5% from the $289.0 million earned in 1991. The improvement was primarily due to an increase in the interest margin, an increase in average earning assets and a continued favorable shift in the funding mix.
Average earning assets increased $183.4 million or 2.8% in 1992 and grew to $6.8 billion. Total securities increased 7.3% while relatively slower loan growth amounted to 1.2% and was exhibited across all major categories of loans.
The margin continued to benefit from a more favorable mix of funding sources and interest rate environment trends. Noninterest bearing deposits increased $167.0 million or 13.9% in 1992 compared to the prior year. While total average interest bearing deposit balances remained relatively unchanged in 1992, the changes within the individual categories of deposits helped contribute to the margin increase. The interest margin also benefitted from the more recent interest rate environment trends. While the yield on total average interest earning assets declined from 9.38% in 1991 to 7.97% in 1992, a decline of 141 basis points, the rate paid on our interest bearing liabilities declined 174 basis points. These rates resulted in a net interest margin on average earning assets of 4.68% in 1992 compared to 4.57% in the prior year.
The table below shows the composition of net interest income on a FTE basis:
ANALYSIS OF NET INTEREST INCOME ($000's)
Other Income
Total other income amounted to $299.9 million for 1993, an increase of $34.0 million or 12.8% from $265.9 million reported in 1992. The largest contributor was data processing services revenue which increased $23.1 million or 20.4% in 1993, and amounted to $136.0 million. Processing revenue and software related revenue contributed to the increase. Certain contract termination fees were paid by our customers who terminated their processing agreements due to their being acquired by another entity. The amount recorded as contract termination revenue amounted to $5.4 million in 1993 compared to $1.1 million in 1992.
Trust services revenue increased $3.0 million or 6.6% in 1993 compared to the prior year.
Other customer service revenue amounted to $82.4 million for 1993, an increase of $4.3 million or 5.5%, when compared to $78.1 million earned in 1992. Service charges on commercial demand accounts continue to increase and amounted to $21.4 million, an increase of 9.3% or $1.8 million when compared to $19.6 million earned in 1992. Credit card fees increased $1.1 million or 12.9% in 1993 as compared to the prior year. Fees from our brokerage operations
increased $1.3 million or 50.3% and amounted to $3.8 million for 1993. Total loan fees amounted to $16.8 million for 1993 compared to $15.8 million in the prior year. Other miscellaneous income also increased in 1993 and amounted to $25.0 million, an increase of 19.9% or $4.1 million, when compared to $20.8 million earned in 1992. Income from the sale of 15 and 30 year mortgages acquired and sold in the secondary market amounted to $6.7 million compared to $3.4 million in 1992, an increase of $3.3 million.
Net securities gains from Investment Securities Available for Sale amounted to $7.8 million in 1993 compared to $8.3 million in the prior year. The primary sources of this activity were gains realized by the Corporation from the sale of certain equity securities and gains realized by our Capital Markets affiliate. Gains realized by Capital Markets were $3.3 million in 1993 and $6.7 million in 1992.
Other income amounted to $265.9 million in 1992, a $38.3 million or 16.8% increase from $227.6 million reported in 1991. The largest contributor was data processing fees which increased 22% in 1992 and amounted to $113.0 million. This growth was driven by both processing and software revenue growth. Trust services revenue increased 5.7% in 1992 compared to the prior year. Other customer services amounted to $78.1 million in 1992 compared to $66.1 million in 1991. Service charges on deposit accounts, primarily commercial deposit accounts, contributed $3.6 million of the increase in 1992. Fees earned on the origination of real estate loans amounted to $3.9 million in 1992 compared to $2.4 million in 1991. Loan servicing income increased $1.2 million in 1992 and amounted to $4.9 million. Our servicing portfolio grew 48.5% in 1992 and amounted to $1.5 billion at December 31, 1992. Corporate finance fees increased $1.1 million in 1992 while brokerage income increased $1.5 million in 1992 compared to the prior year.
Net securities gains amounted to $8.3 million in 1992 compared to $4.4 million in 1991. During 1992, our Capital Markets affiliate reported net gains of $6.7 million due primarily to the sale of one of its investments, whereas a loss of $.4 million was recognized in the prior year. The Corporation also sold certain equity securities, carried at the lower of cost or market, and realized a gain of $1.2 million in 1992 and $3.6 million in 1991.
Other miscellaneous income amounted to $20.8 million in 1992 compared to $21.4 million in the prior year. Income from the sale of 15 and 30 year mortgages acquired and sold in the secondary market amounted to $3.4 million in 1992 compared to $.4 million in the prior year. During 1991, the Corporation accrued $5 million for recovery of losses arising out of litigation settled in 1990.
Other Expense
Other expense amounted to $403.4 million in 1993 compared to $384.1 million in 1992, an increase of $19.3 million or 5.0%. Salaries and employee benefits expense increased $17.6 million or 8.2% in 1993 compared to the prior year and amounted to $233.6 million. Our data processing subsidiary contributed $16.7 million or 94.5% of the increase which was partially the result of their number of full-time employees increasing from 1600 to 1866. The purchase of a data center in the Southeast resulted in the addition of 144 full-time employees.
Net occupancy expense for 1993 remained relatively unchanged from the prior year. Equipment expense amounted to $42.5 million, an increase of 9.9% or $3.8 million from 1992. Expanded computer capacity, more data storage devices and other related data processing equipment all contributed to the increase in equipment expense.
Processing expense increased 25.2% during 1993 and amounted to $13.2 million compared to $10.5 million in the prior year. Our data processing subsidiary contributed a significant portion of this increase. The outsourcing of certain record retention functions resulted in the increase in processing charges by approximately $1.3 million.
Other miscellaneous expense amounted to $58.6 million, a decrease of $5.0 million or 7.8%, from $63.6 million reported in 1992. This category is affected by the capitalization of costs, net of amortization, associated with software development and data processing conversions. During 1993 the amount of expense
capitalized, net of amortization, exceeded the amount recorded in 1992 by approximately $8.0 million. Of this net increase, $4.9 million related to costs associated with conversion activity while $3.1 million related to increased software development work.
Total other expense in 1992 increased $34.6 million or 9.9% from $349.5 million reported in the prior year. Salaries and benefits expense amounted to $215.9 million in 1992, an increase of 15.2% from that reported in 1991. Our data processing subsidiary contributed $12.4 million of the increase. Contributing to this growth was an increase in the number of full time employees at that subsidiary. This was driven primarily by the revenue growth discussed above. During 1992, the Corporation established supplemental retirement plans for certain key executives. The expense for these plans included $4.0 million which was nonrecurring.
Net occupancy expense increased a modest 1.1% in 1992 as compared to 1991. Equipment expense amounted to $38.7 million for 1992 as compared to $36.0 million in 1991. A substantial portion of this increase was due to increased depreciation charges on equipment used by our data processing subsidiary.
Payments to regulatory agencies amounted to $14.0 million in 1992, an increase of $1.4 million when compared to 1991. The increase was primarily due to higher FDIC insurance costs related to increased deposits in addition to a full year's impact of 1991 insurance rate increases. Processing charges increased $1.3 million or 14.0% in 1992 when compared to the prior year. Approximately 57% of the increase is due to our data processing business.
Income Tax Provision
The provision for income taxes was $71.1 million in 1993 compared to $57.8 million in 1992 and $47.1 million in 1991. The increases in the provision are due to higher pre-tax earnings and declines in tax exempt income along with an increase of $1.2 million in 1993 due to a change in the Federal tax rate.
Asset/Liability Management
Asset/Liability management involves the funding and investment strategies necessary to maintain an appropriate balance between interest sensitive assets and liabilities as well as to assure adequate liquidity. These strategies determine the characteristics and mix of the balance sheet. They affect net interest margins, maturity patterns, interest rate sensitivity and risk, as well as resource allocations.
The Corporation combines the active management of the balance sheet position over interest rate cycles with the limited use of hedging products, to confine interest rate risk within prudent parameters. We position the balance sheet in a manner which will match asset and liability repricing schedules to insulate our net interest margin from cyclical swings in interest rates, while consciously matching or mismatching discretionary asset and liability repricing schedules to take advantage of interest rate swings over short periods of time.
Adequate funding sources are maintained through a full line of deposit and short-term borrowing products, competitively priced to a diversified customer base. Asset diversification provides a proper mix of variable and fixed rate loans, while investment decisions are primarily designed to balance the overall interest rate risk in the balance sheet. Liquidity is provided through marketability and an appropriate schedule of maturing investments.
A portion of demand deposits are considered rate sensitive under the following assumptions. A core amount of demand deposits is calculated at the beginning of each year. This core number is the average of the previous six months actual and upcoming twelve months forecasted balances. The core balance is considered nonrate sensitive and classified as a nonrate sensitive liability in the "1 year +" time frame. Actual demand deposit balances are compared to the core balance monthly. The difference, positive or negative, is considered rate sensitive and classified as a rate sensitive liability. At December 31, 1993, $314 million of demand deposits were classified as rate sensitive in the "1-30 Days" time frame.
ASSET/LIABILITY MANAGEMENT ($ in millions)
Capital Resources
Shareholders' equity was $750.4 million at December 31, 1993 compared to $760.6 million at December 31, 1992. This decrease resulted from the repurchase of treasury shares which amounted to $117.9 million in 1993. The Corporation continues to have a strong capital base and its regulatory capital ratios are significantly above the defined minimum regulatory ratios.
At December 31, 1993, the Corporation had a total risk-based capital ratio of 15.49% and a 12.17% core capital to risk-based asset ratio. Selected leverage capital ratios must also be maintained. The Corporation's leverage ratio at December 31, 1993 was substantially in excess of the minimum 3% to 5% guidelines.
The Corporation's subsidiaries, primarily its banking subsidiaries, are restricted by regulations from making dividend distributions above prescribed amounts. In addition, banking subsidiaries are limited in making loans and advances to the Corporation. At December 31, 1993 approximately $109.8 million and $92.3 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 and to commit resources to support each subsidiary bank in circumstances when it might not do so absent such policy.
In April, 1993 the Board of Directors authorized a common share repurchase program for 5.7 million shares in anticipation of the conversion of its $50 million convertible note. The Corporation also reaffirmed its on-going program
to annually purchase up to 1.5 million shares to fund obligations of its stock option and other benefit plans. During 1993 approximately 5.0 million shares were purchased.
In July, the Corporation issued $100 million of 10 year, 6.375% unsecured subordinated notes. The newly issued notes are considered an element of total capital for risk-based capital purposes. The proceeds were used for general corporate purposes and to help finance the common share repurchase program. The Corporation also filed a shelf registration statement with the Securities and Exchange Commission to issue up to $150 million of medium-term unsecured and unsubordinated Series C notes which will be due from 9 months to 30 years from the date of issue, at a fixed and floating rate.
In December, 1993 the Corporation's Board of Directors approved a proposal to amend the Corporation's Restated Articles of Incorporation, as amended, in order to, among other things, increase the authorized Common Stock of the Corporation from 80 million shares to 160 million shares. The proposal is contingent upon shareholder approval and is to be considered at the special meeting of shareholders which is scheduled to be held in February, 1994.
During 1992 and 1993, the Financial Accounting Standards Board issued numerous standards which affect the accounting and reporting of investment securities, impaired loans and postemployment benefits beginning as early as 1994. As discussed in the Notes to the Consolidated Financial Statements, the Corporation does not anticipate that the pronouncements, taken individually, will have a material impact on the Consolidated Financial Statements.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS December 31 ($000's except share data)
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME Years ended December 31 ($000's except share data)
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 ($000's)
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000's except share data)
The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993, 1992, and 1991 ($000's except share data)
1. Summary of Significant Accounting Policies
Consolidation principles - The Consolidated Financial Statements include the accounts of Marshall & Ilsley Corporation (the "Corporation") and all subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. Certain amounts in the 1992 and 1991 Consolidated Financial Statements have been reclassified to conform with the 1993 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 the lower of amortized cost or market. See Note 6 for changes affecting Investment Securities Available for Sale beginning January 1, 1994. Short-term Investments other than Trading Securities are stated at cost, which approximates market value. Trading Securities are carried at market value. Adjustments to the carrying value of securities are reflected in the consolidated income statements.
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.
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. 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, accounted for as insubstance foreclosures, or 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 or accounted for as
insubstance foreclosures are charged to the allowance for loan losses, whereas any valuation adjustments on bank branch 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 - Normal fees related to the servicing of mortgage loans are recorded as income when payments are received from mortgagors. Gains or losses recognized on the sale of mortgage loans are adjusted to reflect any excess or below market servicing fee generated at the time of sale. 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, design costs and development costs incurred prior to establishment of a product's technological feasibility are expensed as incurred. Net unamortized capitalized costs were $16,979 at December 31, 1993, and $11,189 at December 31, 1992. Amortization expense was $4,668, $5,161, and $6,059, for 1993, 1992, and 1991, respectively.
Intangibles - Unamortized intangibles resulting from acquisitions, primarily goodwill, core deposit premiums and purchased mortgage servicing rights were $23,636 at December 31, 1993, and $22,059 at December 31, 1992. Purchased mortgage servicing rights are amortized primarily over the periods during which the corresponding servicing revenues are anticipated to be generated. Adjustments for portfolio runoff in excess of that originally anticipated are made in the period when the excess runoff appears permanent. The other intangibles are amortized principally on the straight-line method over periods ranging from 6 to 20 years. Amortization expense was $3,698, $3,660, and $4,040, for 1993, 1992, and 1991, respectively.
Foreign exchange contracts - The Corporation enters into foreign exchange contracts primarily to enable customers involved in international trade to hedge their exposure to foreign currency fluctuations. These contracts are carried at market value, with realized and unrealized gains and losses included in other income.
Stock split - Common stock per share and average share information for years 1992 and prior have been retroactively restated for the 3 for 1 stock split effected in the form of a 200% stock dividend which was distributed to shareholders in May 1993.
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 67,046,820 in 1993, 67,522,944 in 1992, and 66,162,405 in 1991.
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 72,957,677 in 1993, 73,673,022 in 1992, and 72,961,527 in 1991.
2. Business Combination
In September 1993, the Corporation entered into an Agreement and Plan of Merger ("Merger Agreement") whereby Valley Bancorporation ("Valley"), a Wisconsin bank holding company located in Appleton, Wisconsin, with
consolidated assets of approximately $4.6 billion, will merge with and into the Corporation ("the Merger"). Under the terms of the Merger Agreement, each share of Valley common stock will be converted into the right to receive 1.72 shares of the Corporation's common stock in a tax-free reorganization which is to be accounted for as a pooling of interests.
The following unaudited pro forma data combines the results of operations for the Corporation and Valley, giving effect to the Merger as if it had been consummated at December 31, 1993.
1993 1992 1991 ________ ________ ________
Net Interest Income $484,588 $474,345 $430,573
Income Before Cumulative Effects of Changes in Accounting Principles (Operating Income) 171,487 156,270 130,013
Net Income 171,487 147,266 130,013
Income Per Common Share
Primary Operating Income 1.67 1.55 1.33 Net Income 1.67 1.46 1.33
Fully Diluted Operating Income 1.60 1.48 1.27 Net Income 1.60 1.40 1.27
The Merger Agreement is to be approved by the shareholders of the Corporation and Valley at their respective special shareholders' meetings which are scheduled for February 1994.
The Merger is also subject to the approval of certain regulatory authorities. Certain divestitures by the Corporation and Valley will be required in order to obtain regulatory approvals. The Corporation has filed applications with such authorities proposing the divestiture of certain bank branches in the State of Wisconsin with total deposits of approximately $300 million. It is anticipated that Federal Regulators will require the Corporation to obtain commitments for the divestitures prior to consummation of the merger and complete the divestitures within six months of the consummation of the merger. The Corporation does not anticipate that such divestitures will have a material impact on the Consolidated Financial Statements. Consummation of the Merger is expected to occur in the second quarter of 1994.
The Corporation estimates that employee severance and contract costs, write-downs and write-offs of duplicative facilities, equipment and data processing software associated with the Merger will result in a one-time restructuring charge of approximately $80 million, $48 million net of tax, in 1994. Also, an additional loan loss provision may be recorded at or near the consummation of the Merger to conform Valley's loan valuation policies with those of the Corporation. While the amounts have not been quantified, it is not anticipated that the amount of such provision will be material to the combined entity.
3. Changes in Method of Accounting
During 1992, the Corporation adopted Financial Accounting Standard No. 106 "Employers' Accounting for Postretirement Benefits, Other than Pensions" (FAS 106). This standard, which applies to the Corporation's employee
health plans, requires that the expected cost of these postretirement benefits be charged to expense in the years the employees render the services necessary to earn their benefits. The Corporation elected immediate recognition of the accumulated postretirement benefit obligation at January 1, 1992.
The Corporation also adopted during 1992, Financial Accounting Standard No. 109 "Accounting for Income Taxes." Statement 109 requires a change from the deferred method of accounting for income taxes to an asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The cumulative effect of the change in accounting for income taxes at January 1, 1992, amounted to a $4.8 million reduction of beginning net deferred tax liabilities.
The following table summarizes the January 1, 1992 effects of these changes in methods of accounting:
Earnings Per Share Net Income Increase (Decrease) Increase (Decrease) Primary Fully Diluted ____________________________________________ Adoption of accounting standard on postretirement benefits, net of income tax benefits of $7,744 $(12,190) $ (.18) $ (.17)
Adoption of accounting standard on income taxes 4,803 .07 .07 ____________________________________________
$ (7,387) $ (.11) $ (.10)
4. Cash and Due from Banks
At December 31, 1993, $136,985 of cash and due from banks was restricted, primarily due to requirements of the Federal Reserve System to maintain certain reserve balances.
5. Other Short-term Investments
Other short-term investments at December 31 were:
1993 1992 ________ ________
Commercial paper $ 22,550 $ 72,600 Interest bearing deposits in other banks 26,815 171,745 ________ ________
Total other short-term investments $ 49,365 $244,345
6. Securities
The book and market values of securities at December 31 were:
1993 1992 ______________________ ________________________
Book Market Book Market Value Value Value Value ______________________ ________________________
Investment Securities Held to Maturity: States and political subdivisions $ 160,238 $ 163,999 $ 280,349 $ 284,878 Mortgage backed securities 58 58 12,014 12,227 Other 9,188 9,205 8,347 8,362 ______________________ ________________________
Total $ 169,484 $ 173,262 $ 300,710 $ 305,467
Investment Securities Available for Sale: U.S. Treasury and government agencies $1,460,009 $1,463,644 $1,545,000 $1,560,183 Other 44,188 57,757 37,061 50,194 ______________________ ________________________
Total $1,504,197 $1,521,401 $1,582,061 $1,610,377
The unrealized gains and losses of securities at December 31 were:
1993 1992 ______________________ ________________________
Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses ______________________ ________________________
Investment Securities Held to Maturity: States and political subdivisions $ 4,307 $ 546 $ 5,954 $ 1,425 Mortgage backed securities -- -- 214 1 Other 23 6 22 7 ______________________ ________________________
Total $ 4,330 $ 552 $ 6,190 $ 1,433
Investment Securities Available for Sale: U.S. Treasury and government agencies $ 5,546 $ 1,911 $ 18,479 $ 3,296 Other 13,570 1 13,133 -- ______________________ ________________________
Total $ 19,116 $ 1,912 $ 31,612 $ 3,296
The book value and market value of securities by contractual maturity at December 31, 1993 were:
Investment Securities Investment Securities Held to Maturity Available for Sale ______________________ ________________________
Book Market Book Market Value Value Value Value ______________________ ________________________
Within one year $ 77,316 $ 77,793 $ 727,126 $ 730,417 From one through five years 64,978 67,481 735,349 735,677 From five through ten years 21,596 22,365 459 474 After ten years 5,594 5,623 41,263 54,833 ______________________ ________________________
Total $169,484 $173,262 $1,504,197 $1,521,401
Securitized assets are included in the maturity table at contractual estimated liquidation dates and not at the scheduled maturity dates of the underlying collateral.
The gross realized gains and losses amounted to $7,897 and $60 in 1993 and $13,781 and $5,438 in 1992, and $6,013 and $1,632 in 1991, respectively.
At December 31, 1993, securities with a book value of approximately $260,111 were pledged to secure public deposits, short-term borrowings, and for other purposes required by law.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," (FAS 115). FAS 115 requires, among other things, that securities classified as available for sale be carried at fair value, however, fair value adjustments and the related income tax effects, are excluded from earnings and reported separately as a component of shareholders' equity. This new standard which must be adopted by the Corporation on January 1, 1994 will not have a material impact on the Consolidated Financial Statements.
7. Loans
Loans at December 31 were:
1993 1992 __________ __________
Commercial, financial, and agricultural $1,861,757 $1,717,874 Industrial development revenue bonds 27,821 37,878 Real estate: Construction 214,369 158,607 Residential mortgage 1,254,748 1,199,407 Commercial mortgage 1,061,635 933,585 Personal 711,194 602,218 Lease financing 239,561 229,155 __________ __________
Total loans $5,371,085 $4,878,724
The Corporation's lending activities are concentrated primarily in the Midwest with approximately 86% of its customers located in Wisconsin. Approximately 4% of its portfolio consists of loans granted to customers located in Arizona. The Corporation had $3,029 in foreign credits at December 31, 1993. The Corporation's loan portfolio consists of business loans extending across many industry types, as well as loans to individuals. As of December 31, 1993, 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 1993 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 and directors and executive officers of subsidiaries previously not considered significant.
Balance, beginning of year $ 79,302 New loans 101,904 Repayments (110,863) __________
Balance, end of year $ 70,343
At December 31, 1993, 85% of these loans were to companies in which directors are principal owners.
An analysis of the allowance for loan losses follows:
1993 1992 1991 ________ ________ ________
Balance, beginning of year $ 85,884 $ 73,915 $ 68,723 Provision charged to expense 9,065 15,151 20,555 Charge-offs (6,786) (13,592) (21,233) Recoveries 5,026 10,410 5,870 ________ ________ ________
Balance, end of year $ 93,189 $ 85,884 $ 73,915
As of December 31, 1993, and 1992, nonaccrual loans totalled $27,880 and $31,630, respectively. The effect of nonaccrual loans on net income in 1993, 1992, and 1991, was not significant.
In May 1993, the FASB also issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," (FAS 114). FAS 114 requires that a loan's value be measured when it has been determined that the loan is impaired and loss is probable. Write-downs which result from the measurement process are to be expensed. This new standard must be adopted by the first quarter of 1995. Based upon the current status of the Corporation's loan portfolio, it is not anticipated that this pronouncement will have a material impact on the Consolidated Financial Statements.
8. Premises and Equipment
The composition of premises and equipment at December 31 was:
1993 1992 _________ _________
Land $ 24,713 $ 24,359 Buildings and leasehold improvements 158,920 141,198 Furniture and equipment 198,254 169,146 381,887 334,703 Less accumulated depreciation 185,357 165,814 _________ _________
Total premises and equipment $196,530 $168,889
Depreciation expense was $29,018 in 1993, $24,430 in 1992, and $21,421 in 1991.
The Corporation leases certain of its facilities and equipment. Rent expense under such operating leases was $15,206 in 1993, $15,071 in 1992, and $15,244 in 1991, respectively. The future minimum lease payments under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1993 are:
1994 $ 4,498 1995 3,783 1996 3,261 1997 2,941 1998 2,224 _______
$16,707
9. Short-term Borrowings
Short-term borrowings at December 31 were:
1993 1992 _________ _________
Funds purchased and security repurchase agreements $454,980 $398,673 U.S. Treasury demand notes 33,977 27,768 Commercial paper 100,292 77,265 Current maturities of long-term borrowings 40,148 42,730 Other 4,271 3,940 _________ _________
Total short-term borrowings $633,668 $550,376
Unused lines of credit to support commercial paper borrowings were $40,000 at December 31, 1993 and 1992.
10. Long-term Borrowings
Long-term borrowings at December 31 were:
1993 1992 _________ _________ Corporation: 8.5% convertible subordinated notes due in 1997 $ 50,000 $ 50,000 6.375% subordinated notes due in 2003 99,373 -- Medium-term Series B notes 38,000 54,000 Other -- 6,194
Subsidiaries: Nonrecourse notes 34,116 32,331 Mortgages 3,945 4,195 9.75% obligation under capital lease due through 2006 5,156 5,353 Other 12,375 20,858 _________ _________
242,965 172,931 Less current maturities 40,148 42,730 _________ _________
Total long-term borrowings $202,817 $130,201
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 common stock (or certain other equity securities) and dedicates the proceeds thereof to the redemption or retirement of the Notes.
In July 1993, the Corporation issued $100 million of unsecured subordinated notes at a price of 99.351%. Interest is payable semiannually in January and July of each year and the notes mature July 15, 2003. The notes are not redeemable prior to maturity and qualify as "Tier 2" or supplementary capital for regulatory capital purposes.
The Corporation has filed registration statements with the Securities and Exchange Commission to issue up to $100 million of medium-term unsecured and unsubordinated Series B and up to $150 million of medium-term unsecured and unsubordinated Series C notes. Both issues have maturities which range from 9 months to 30 years from the date of issue, at a fixed or floating rate.
The Series B notes outstanding at December 31, 1993 mature in 1994 through 1996, and have fixed interest rates of 4.60% to 8.65%. Approximately $35,730 of unissued Series B notes are remaining and available to be issued in the future. At December 31, 1993, there were no Series C notes outstanding.
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 7.77% at December 31, 1993, and are due in installments over varying periods through 2001. Lease financing receivables at least equal to the amount of the notes are pledged as collateral.
The mortgages are secured by land and buildings with a net book value of $8,732 at December 31, 1993.
Scheduled maturities of long-term borrowings are: $35,254, $19,150, $43,578, and $751 for 1995 through 1998, respectively.
11. Shareholders' Equity
The Corporation has 5,000,000 shares of preferred stock authorized, of which the Board of Directors has designated 500,000 shares as Series A convertible, with a $100 value per share for conversion 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 $100, to the holder's weighted average purchase price per common share. Also, the holder has the option to convert Series A into common stock at the same ratio that the common stock was exchanged for Series A. The Corporation has issued 185,314 shares of its Series A convertible preferred stock in exchange for 1,962,900 shares of common stock, which were subsequently retired.
The preferred stock is treated as a common stock equivalent in all per share calculations.
In April 1993, the Corporation's Board of Directors authorized a common share repurchase program for 5.7 million shares in anticipation of the conversion of its 8.5% convertible subordinated notes and reaffirmed the Corporation's on-going program for the repurchase of up to 1.5 million shares annually to fund obligations to deliver or have available shares of common stock for stock option and other employee benefit plans. During 1993, the Corporation purchased 5.0 million common shares.
Federal banking regulatory agencies have established capital adequacy rules which take into account risk attributable to balance sheet assets and off-balance sheet activities. All banks and bank holding companies must meet a minimum total risk-based capital ratio of 8%. Of the 8% required, half must be comprised of core capital elements defined as Tier 1 capital. The federal banking agencies also have adopted leverage capital guidelines which banking organizations must meet. Under these guidelines, the most highly rated banking organizations must meet a minimum leverage ratio of at least 3% Tier 1 capital to total assets, while lower rated banking organizations must maintain a ratio of at least 4% to 5%.
The Corporation's risk-based capital and leverage ratios are as follows:
RISK-BASED CAPITAL RATIOS As of December 31, 1993 ($ in millions)
Amount Ratio _______ ______
Tier 1 capital $ 731 12.17% Tier 1 capital minimum requirement 240 4.00 _______ ______
Excess $ 491 8.17%
Total capital $ 931 15.49% Total capital minimum requirement 481 8.00 _______ ______
Excess $ 450 7.49%
Risk-adjusted assets $ 6,008
LEVERAGE RATIO as of December 31, 1993 ($ in millions) Amount Ratio _________________________ Tier 1 capital to adjusted total assets $ 731 9.29%
Minimum leverage requirement 236 - 394 3.00 - 5.00 _________________________
Excess $495 - 337 6.29 - 4.29%
Adjusted average total assets $ 7,877
All of the Corporation's banking subsidiaries' risk-based capital and leverage ratios meet or exceed the defined minimum requirements.
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, 1993, the retained earnings of subsidiaries available for distribution as dividends without regulatory approval was approximately $202,072.
12. Income Taxes
Total income tax expense for the years ended December 31, 1993 and 1992 was allocated as follows:
1993 1992 _________ _________
Income before Cumulative Changes in Accounting $71,072 $57,835
Cumulative Effect of Change in Accounting for Postretirement Benefits, Other than Pensions and Accounting for Income Taxes -- (12,547)
Shareholders' Equity, for Compensation Expense for Tax Purposes in Excess of Amounts Recognized for Financial Reporting Purposes (4,878) (1,803) _________ _________
$66,194 $43,485
As discussed in Note 3, the Corporation adopted Financial Accounting Standard No. 109 in 1992. This change had no significant effect on net income, excluding the cumulative effect, in 1992. Financial statements for 1991 have not been restated to apply the new standard.
The current and deferred portions of the provision for income taxes were:
1993 1992 1991 _______ _______ _______ Current: Federal $63,783 $56,582 $38,461 State 10,992 10,626 10,858 _______ _______ _______
74,775 67,208 49,319 Deferred: Federal (3,998) (9,141) (1,856) State 295 (232) (328) _______ _______ _______
(3,703) (9,373) (2,184) _______ _______ _______ Total provision for income taxes $71,072 $57,835 $47,135
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% in 1993, 34% in 1992 and 1991, respectively):
1993 1992 1991 _______ _______ _______
Tax computed at statutory rates $68,797 $59,315 $49,804 Increase (decrease) in taxes resulting from: Federal tax-exempt income (4,578) (7,368) (9,785) State income taxes, net of Federal tax benefit 7,546 7,292 7,061 Adjustment to deferred tax assets/liabilities for an enacted change in tax rate (469) -- -- Other (224) (1,404) 55 _______ _______ _______
Total provision for income taxes $71,072 $57,835 $47,135
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:
1993 1992 ________ ________ Deferred tax assets: Deferred compensation $ 6,307 $ 5,212 Allowance for loan losses 27,216 23,945 Accrued postretirement benefits 10,661 9,097 Other 16,531 13,280 ________ ________
Total deferred tax assets $60,715 $51,534
Deferred tax liabilities: Lease revenue reporting $20,805 $15,315 Deferred expense, net of unearned income 7,224 4,491 Fixed assets, principally due to depreciation 13,060 12,219 Other 2,409 6,551 ________ ________
Total deferred tax liabilities 43,498 38,576 ________ ________
Net deferred tax assets $17,217 $12,958
Deferred taxes resulted from timing differences in the recognition of income and expense for tax and financial statement purposes. The sources of these differences and the tax effect of each were:
________
Cash basis reporting $ (925) Loan loss provision (2,056) Other 797 ________
Total deferred taxes $(2,184)
The amount of income tax expense related to net securities gains amounted to $2,929, $3,381, and $1,330, in 1993, 1992, and 1991, respectively.
13. 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 fair market value of the shares at the date of grant.
Activity relating to common stock options, restated for the 3 for 1 stock split, was:
Number Option Price Of Shares Per Share __________ _________________
Shares under option at December 31, 1991 5,655,012 $ 2.17 - 17.21 Options granted 321,150 19.50 - 19.92 Options lapsed or surrendered (19,128) 2.17 - 17.21 Options exercised (696,507) 2.17 - 13.38 __________ _________________
Shares under option at December 31, 1992 5,260,527 $ 4.47 - 19.92 Options granted 766,800 22.75 - 23.25 Options lapsed or surrendered (4,025) 9.42 - 19.50 Options exercised (1,166,420) 5.35 - 19.50 __________ _________________
Shares under option at December 31, 1993 4,856,882 $ 4.47 - 23.25
Options exercisable at December 31, 1993, and 1992, were 4,004,095 and 4,365,666, respectively. Shares reserved for the granting of additional options at December 31, 1993, were 3,039,305.
There were no restricted stock purchase rights outstanding at December 31, 1993, and 1992. In addition, there were no stock purchase rights exercised during 1993 and 85,500 rights exercised in 1992.
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.
Aggregate compensation expense related to stock purchase rights was $1,008, $1,004, and $1,129, in 1993, 1992, and 1991, respectively.
14. Employee Retirement and Health Plans
The Corporation has a defined contribution retirement plan for substantially all employees. The plan provides for a guaranteed contribution for 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. Total retirement plan expense was $12,915, $11,927, and $10,591, in 1993, 1992, and 1991, respectively.
The Corporation also has supplemental retirement plans which were established in 1992 to provide retirement benefits to certain of its key executives. Total expense relating to these plans amounted to $2,280 in 1993 and $4,323 in 1992.
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.
As discussed in Note 3, the Corporation adopted FAS 106, "Employers' Accounting for Postretirement Benefits, Other than Pensions" as of January 1, 1992. The Corporation elected immediate recognition of the accumulated postretirement benefit obligation as of the beginning of the year through a one-time charge to earnings of $19,934 before income taxes. Postretirement benefit costs for 1991 were recorded on the cash basis and amounted to $756.
The components of the accumulated postretirement benefit obligation (APBO) reconciled with the amount recognized in the Corporation's Consolidated Balance Sheets at December 31, were:
1993 1992 ________ ________ Accumulated postretirement benefit obligation: Retirees $ 11,244 $ 8,643 Fully eligible active plan participants 8,748 3,805 Active plan participants 16,667 9,738 ________ ________
36,659 22,186 Unrecognized gain (loss) (11,265) 29 ________ ________
Accrued postretirement benefit cost $ 25,394 $ 22,215
Weighted average discount rate used in determining APBO 7.5% 8.5%
Net periodic postretirement benefit cost for the years ended December 31, 1993 and 1992 includes the following components:
1993 1992 ________ ________
Service cost $ 1,382 $ 1,212 Interest on APBO 1,917 1,668 ________ ________
$ 3,299 $ 2,880
For measurement purposes, the assumed health care cost trend rate was 14% and 13% in 1992 and 1993, respectively, and gradually declines to 6.5% in the year 2021.
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, 1993 by $4,128 and increase 1993 postretirement benefit expense by $680.
In November 1992, the FASB issued Statement of Financial Accounting Standard No. 112 "Employers' Accounting for Postemployment Benefits," (FAS 112). FAS 112 establishes accounting and reporting standards for employers who provide benefits to former or inactive employees after employment but before retirement and must be adopted in the first quarter of 1994. Based on the current types of postemployment benefits provided by the Corporation, it is not anticipated that this new standard will have a material impact on the Consolidated Financial Statements.
15. Financial Instruments with Off-Balance Sheet Risk
Financial instruments with off-balance sheet risk at December 31 were:
1993 1992 __________ __________
Financial instruments whose amounts represent credit risk: Commitments to extend credit: To commercial customers $2,500,465 $2,059,126 To individuals 421,504 331,920 Standby letters of credit, net of participations 226,001 199,944 Commercial letters of credit 16,434 14,350 Mortgage loans sold with recourse 8,408 12,695 Financial instruments whose amounts exceed the amount of credit risk: Foreign exchange contracts: Commitments to purchase foreign exchange 229,061 152,544 Commitments to deliver foreign exchange 231,925 154,287 Options written 24,251 20,263
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. 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 7.
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. These contracts are entered into to hedge the Corporation's own exposure, and to enable customers involved in international trade to hedge their exposure, to foreign currency fluctuations. Generally, the Corporation does not require collateral to support these financial instruments.
The Corporation's market risk from unfavorable movements in currency exchange rates is minimized by essentially matching commitments to deliver foreign exchange with commitments to purchase foreign exchange.
16. Fair Value of Financial Instruments
The book values and estimated fair values for on and off-balance sheet financial instruments as of December 31, 1993 and 1992 are reflected below.
BALANCE SHEET FINANCIAL INSTRUMENTS ($ In Millions)
1993 1992 ______________________ ______________________
Book Value Fair Value Book Value Fair Value ______________________ ______________________
Financial Assets: Cash and short-term investments $ 624.4 $ 624.4 $ 788.4 $ 788.4 Trading securities 2.3 2.3 12.6 12.6 Investment securities held to maturity 169.5 173.3 300.7 305.5 Investment securities available for sale 1,504.2 1,521.4 1,582.1 1,610.4 Net loans 5,277.9 5,434.2 4,792.8 4,933.9 Interest receivable 46.7 46.7 55.4 55.4
Financial Liabilities: Deposits 6,195.9 6,228.1 6,212.1 6,233.1 Short-term borrowings 593.5 593.5 507.6 507.6 Long-term borrowings: Convertible debt 50.0 135.0 50.7 124.8 Other long-term borrowings 193.0 198.4 122.2 128.6 Interest payable 19.3 19.3 18.4 18.4
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. Statement 107 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 6, 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 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 10) 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.
1993 1992 ______ ______
Loan commitments $ 1.4 $ 1.4 Letters of credit 1.8 1.6
Foreign exchange contracts are carried at market value (U.S. dollar equivalent of the underlying contract). 1993 1992 ______ ______
Commitments to purchase foreign exchange $229.1 $152.5 Commitments to deliver foreign exchange 231.9 154.3 Options written .5 2.4
See Note 15 for additional information on financial off-balance sheet instruments.
17. Business Segments
The following table reflects certain information regarding our banking and data processing businesses:
Adjustments Data and Banking Processing Eliminations Consolidation ____________________________________________________________ Revenue from: Unaffiliated customers $ 651,364 $ 136,044 -- $ 787,408 Affiliated customers 5,580 42,300 $ (47,880) -- ____________________________________________________________
Total revenue $ 656,944 $ 178,344 $ (47,880) $ 787,408
Operating profit $ 172,752 $ 23,811 -- $ 196,563
Identifiable assets $ 7,855,255 $ 138,294 $ (23,335) $ 7,970,214
Net capital expenditures $ 11,392 $ 43,737 -- $ 55,129
Revenue from: Unaffiliated customers $ 684,984 $ 112,964 -- $ 797,948 Affiliated customers 4,847 38,630 $ (43,477) -- ____________________________________________________________
Total revenue $ 689,831 $ 151,594 $ (43,477) $ 797,948
Operating profit $ 154,277 $ 20,180 -- $ 174,457
Identifiable assets $ 7,761,678 $ 100,268 $ (11,602) $ 7,850,344
Net capital expenditures $ 14,644 $ 23,697 -- $ 38,341
Revenue from: Unaffiliated customers $ 742,856 $ 92,580 -- $ 835,436 Affiliated customers 5,173 38,022 $ (43,195) -- ____________________________________________________________
Total revenue $ 748,029 $ 130,602 $ (43,195) $ 835,436
Operating profit $ 130,624 $ 15,858 -- $ 146,482
Identifiable assets $ 7,555,205 $ 87,344 $ (14,735) $ 7,627,814
Net capital expenditures $ 9,781 $ 10,567 -- $ 20,348
The Corporation owns 38 banks and 12 nonbank subsidiaries. Each subsidiary is a separate legal and operating entity. Our banking operations provide traditional banking products along with trust, mortgage banking, leasing, insurance agency and venture capital services. M&I Data Services, Inc. (DSI) provides data processing, software, and other related services to
both affiliated and unaffiliated customers. See Item 1 for a complete description of the businesses.
Revenues from affiliated customers are primarily accounted for at rates similar to those charged to unaffiliated customers.
Operating profit is pretax net income. Depreciation and amortization expense for the banking services business amounted to $11,810, $1,171, and $3,765 in 1993, 1992, and 1991, respectively, and for DSI amounted to $22,582 in 1993, $19,171 in 1992, and $16,813 in 1991.
18. Condensed Financial Information - Parent Corporation Only
Condensed Balance Sheets December 31 1993 1992 _____________________________ Assets Cash and cash equivalents $ 1,351 $ 14,441 Indebtedness of affiliates: Banks 5,000 5,000 Nonbanks 264,366 197,837 Investments in affiliates: Banks 619,597 593,967 Nonbanks 155,753 138,393 Other assets 30,323 27,875 _____________________________
Total assets $1,076,390 $977,513
Liabilities and shareholders' equity Commercial paper issued $ 100,292 $ 77,265 Other liabilities 38,373 29,414 Long-term borrowings 187,373 110,194 _____________________________
Total liabilities 326,038 216,873 Shareholders' equity 750,352 760,640 _____________________________
Total liabilities and shareholders' equity $1,076,390 $977,513
Scheduled maturities of long-term borrowings are $22,900 in 1994, $13,500 in 1995, $11,600 in 1996, $40,000 in 1997, and $100,000 in 2003.
Condensed Statements of Income Years Ended December 31 1993 1992 1991 _________ ________ ________ Income Cash dividends: Bank affiliates $ 71,196 $ 64,856 $ 62,511 Nonbank affiliates 13,482 12,452 8,726 Interest from affiliates 10,540 9,601 9,988 Service fees and other 27,889 23,198 30,447 _________ ________ ________
Total income 123,107 110,107 111,672
Expense Interest 12,523 14,475 16,487 Administrative and general 26,749 32,767 26,585 _________ ________ ________
Total expense 39,272 47,242 43,072 Income before income taxes, cumulative effect of changes in accounting principles and equity in undistributed net income of affiliates 83,835 62,865 68,600 Income tax benefit 563 6,258 612
Income before cumulative effect of changes in accounting principles and equity in undistributed net income of affiliates 84,398 69,123 69,212 Cumulative effect of changes in accounting principles, net of income taxes -- (1,327) -- _________ ________ ________
Income before equity in undistributed net income of affiliates 84,398 67,796 69,212 Equity in undistributed net income of affiliates: Banks 25,451 21,083 17,175 Nonbanks 15,642 20,356 12,960 _________ ________ ________
Net income $125,491 $109,235 $99,347
Condensed Statements of Cash Flows Years Ended December 31 1993 1992 1991 _________ ________ ________
Cash Flows From Operating Activities: Net Income $ 125,491 $ 109,235 $ 99,347 Noncash items included in income: Equity in undistributed net income of affiliates (41,093) (41,439) (30,135) Depreciation and amortization 3,803 4,270 5,241 Other (366) 2,109 (6,371) _________ ________ ________ Net cash provided by operating activities 87,835 74,175 68,082
Cash Flows From Investing Activities: Increases in indebtedness of affiliates (502,651) (299,638) (161,300) Decreases in indebtedness of affiliates 436,122 237,390 161,565 Increases in investments in affiliates -- (9,733) (8,200) Other 4,104 3,326 7,144 _________ ________ ________ Net cash used in investing activities (62,425) (68,655) (791)
Cash Flows From Financing Activities: Dividends paid (35,421) (31,634) (27,998) Proceeds from issuance of commercial paper 1,348,661 597,794 607,787 Principal payments on commercial paper (1,325,634) (522,616) (644,483) Proceeds from issuance of long-term debt 99,351 24,598 17,339 Payments on long-term debt (21,677) (74,413) (13,070) Purchase of treasury stock (114,686) (99) (1,588) Proceeds from exercise of stock options 10,920 5,014 4,039 Other (14) (74) (67) _________ ________ ________ Net cash used in financing activities (38,500) (1,430) (58,041)
Net increase (decrease) in cash and cash equivalents (13,090) 4,090 9,250 Cash and cash equivalents, beginning of year 14,441 10,351 1,101 _________ ________ ________ Cash and cash equivalents, end of year $ 1,351 $ 14,441 $ 10,351
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, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1993, 1992 and 1991. 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, 1993 and 1992, and the results of their operations and cash flows for the years ended December 31, 1993, 1992 and 1991, in conformity with generally accepted accounting principles.
As discussed in note three to the consolidated financial statements, effective January 1, 1992, the Corporation changed its method of accounting for postretirement benefits other than pensions and income taxes.
/s/ Arthur Andersen & Co.
Milwaukee, Wisconsin, January 28, 1994.
QUARTERLY FINANCIAL INFORMATION ($000's except share data)
Following is unaudited financial information for each of the calendar quarters during the years ended December 31, 1993 and 1992. All per share information has been restated for the 3 for 1 stock split effected in the form of a 200% stock dividend distributed to shareholders in May, 1993.
Quarter ended Quarter ended Quarter ended Quarter ended December 31 September 30 June 30 March 31 ________________________________________________________ Total Interest Income $120,967 $121,299 $122,430 $122,840 Net Interest Income 77,787 77,109 77,708 76,574 Provision for Loan Losses 2,391 2,246 2,282 2,146 Income Before Income Taxes 50,412 49,158 49,424 47,569 Net Income 31,569 30,954 31,933 31,035 Net Income Per Share: Primary .49 .46 .47 .46 Fully Diluted .46 .44 .44 .43
Total Interest Income $128,721 $130,872 $135,162 $137,317 Net Interest Income 79,297 77,120 76,922 74,466 Provision for Loan Losses 4,266 3,461 3,789 3,635 Income Before Income Taxes and Cumulative Effect of Changes in Accounting Principles 46,061 43,186 43,339 41,871 Income Before Cumulative Effect of Changes in Accounting Principles 31,324 28,590 28,823 27,885 Net Income 31,324 28,590 28,823 20,498 Net Income Per Share: Primary Income Before Cumulative Effect of Changes in Accounting Principles .46 .42 .43 .41 Net Income .46 .42 .43 .31 Fully Diluted Income Before Cumulative Effect of Changes in Accounting Principles .43 .40 .40 .39 Net Income .43 .40 .40 .29
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors of the Registrant
M&I's Restated Articles of Incorporation provide that M&I's Directors are divided into three classes, designated Class I, Class II and Class III. Each director serves a term of three years and until his successor is elected and qualified. The following table sets forth certain information with regard to the Class I, Class II and Class III Directors.
Principal Occupation Name of Director and Directorships
Class I Directors (terms expiring in 1994)
Wendell F. President, Chief Executive Officer and Director, IMC Bueche Fertilizer Group, Inc., February 1993 to present; Chairman Age 63 of the Board and Chief Executive Officer from January 1986 through 1988, President and Chief Executive Officer, January 1984 through 1985, and Director, Allis-Chalmers Corp., a diversified manufacturer of specialized machinery. Also a director of WICOR, Inc. A Director since 1983.
G.H. Executive Vice President and Chief Financial Officer of Gunnlaugsson Marshall & Ilsley Corporation since 1987; Vice President of Age 49 M&I Marshall & Ilsley Bank since 1976; Vice President and Director, M&I Insurance Company of Arizona, Inc.; Director - M&I Mortgage Corp. and M&I Data Services, Inc. A Director since 1994.
Jack F. Chairman from July 1991 to present, President, Chief Kellner Executive Officer and Director until July 1991, Western Age 77 Industries, Inc., a manufacturer of metal stampings and sheet metal fabrication. A Director since 1976.
J.B. Wigdale Chairman of the Board since December, 1992, Chief Executive Age 57 Officer since October, 1992, Director since December, 1988, Vice Chairman of the Board, December, 1988 to December, 1992, Vice President, 1984 to December, 1988, Marshall & Ilsley Corporation; Chairman of the Board since January, 1989, Chief Executive Officer since 1987, Director since 1981, President, 1981 to January, 1989, M&I Marshall & Ilsley Bank.
James O. Chairman of the Board and Director, Badger Meter, Inc., a Wright manufacturer of products using flow measurement technology Age 73 serving utility, industrial and commercial markets. A Director since 1960.
Class II Directors (terms expiring in 1995)
Jon F. Chait Executive Vice President, Secretary and Director, August Age 43 1991 to present, Manpower Inc. and Executive Vice President, September 1989 to present, Manpower International Inc., a provider of temporary employment services; shareholder, January 1982 to September 1989, Godfrey & Kahn, S.C., counsel to the Company. A Director since 1990.
D.J. Kuester President of Marshall & Ilsley Corporation since 1987; Age 52 President and Director since January, 1989, Vice President, 1979 to January, 1989, M&I Marshall & Ilsley Bank; Chairman of the Board, Chief Executive Officer and Director, M&I Data Services, Inc. A Director since 1994.
Don R. O'Hare Consultant to Sundstrand Corporation, August 1991 to Age 71 present; Chairman of the Board, January 1989 to August 1991, Vice Chairman until January 1989 and Director, Sundstrand Corporation, a manufacturer of aerospace, power transmission, fluid and heat transfer components and systems. Also a director of Modine Manufacturing Company and Sauer, Inc. A Director since 1977.
J.A. Puelicher Retired; Chairman of the Board of the Company from April Age 73 1981 to December 1992, Chief Executive Officer of the Company from April 1981 to October 1992, President of the Company from May 1963 to April 1981 and November 1985 to October 1987. Also a director of Modine Manufacturing Company, Sentry Insurance, A Mutual Company, Sundstrand Corporation, and W.R. Grace & Co. A Director since 1959.
Stuart W. Retired; Chairman of the Board and Chief Executive Officer, Tisdale August 1992 to January 1994, President and Chief Executive Age 65 Officer, April 1986 to August 1992, President, April 1984 to April 1986, and Director, WICOR, Inc. A director of Modine Manufacturing Company and Twin Disc, Inc. A Director since 1986.
Class III Directors (terms expiring in 1996)
J.P. Bolduc President and Chief Executive Officer, January 1993 to Age 54 present, President and Chief Operating Officer, August 1990 to January 1993, Vice Chairman, November 1986 to August 1990, Executive Vice President and Chief Financial Officer, February 1986 to November 1986, Senior Vice President 1983 to November 1986, W.R. Grace & Co.; Chief Operating Officer of President Reagan's Private Sector Survey on Cost Control in the Federal Government from 1982 through 1984. Also a director of W.R. Grace & Co., Sundstrand Corporation and Unisys Corporation. A Director since 1987.
Glenn A. Retired; Chairman of the Board, 1971 through January 1987, Francke M&I Northern Bank, a subsidiary of the Company. A Director Age 72 since 1960.
Burleigh E. Chairman of the Board, Chief Executive Officer and Director, Jacobs Grede Foundries, Inc., a manufacturer of grey and ductile Age 74 iron, steel, and alloyed castings. A Director since 1967.
James F. Kress President, Chief Executive Officer and Director, Green Bay Age 64 Packaging, Inc., a manufacturer of corrugated and packaging materials. A Director since 1986.
If M&I completes the Merger with Valley, additional directors will be elected to the M&I Board of Directors as described in M&I's Registration Statement on Form S-4 (Reg. No. 33-51753) as filed with the Securities and Exchange Commission.
Executive Officers of the Registrant
Information with regard to the Executive Officers of the Registrant is found in Part I of this Form 10-K.
No Director or executive officer is an adverse party or has an interest adverse to M&I or any of its subsidiaries in any material pending legal proceeding.
Item 11.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
___________
(1) As of December 31, 1993, the following individuals have unreleased Key Restricted Stock: Mr. Wigdale, 48,000 shares valued at $1,134,000; Mr. Kuester, 36,000 shares valued at $850,500; Mr. Gunnlaugsson, 24,000 shares valued at $567,000; and Mr. Delgadillo, 6,300 shares valued at $148,838. Dividends are paid on restricted stock.
(2) Includes the following amounts paid by M&I under a 401(k) Thrift Plan for the years 1993, 1992 and 1991, respectively: J.B. Wigdale - $4,497, $4,364 and $4,237; D.J. Kuester - $4,497, $4,364 and 4,237; G.H. Gunnlaugsson - $4,497, $4,364 and $4,237; J.L. Delgadillo - $4,459, $4,364 and $4,237; E.I. Van Housen - $4,497, $4,364 and $4,237; and M.J. Revane - $4,497, $4,364 and $4,237. Includes the following amounts paid by M&I under the Retirement Growth Plan for the years 1993, 1992 and 1991, respectively: J.B. Wigdale - $16,509, $16,908 and $17,287; D.J. Kuester - $16,509, $16,908 and $17,287; G.H. Gunnlaugsson - $16,509, $16,908 and $17,287; J.L. Delgadillo - $16,622, $16,908 and $16,705; E.I. Van Housen - $16,509, $16,908 and $16,800; and M.J. Revane - $16,509, $16,908 and $17,287. Includes the following amounts paid by M&I under a Split Dollar Life Insurance Plan for the benefit of the executives for the years 1993, 1992 and 1991, respectively: J.B. Wigdale - $13,842, $13,842 and $13,842; D.J. Kuester - $8,430, $8,657 and $6,241; G.H. Gunnlaugsson - $7,688, $7,867 and $5,777; and M.J. Revane - $15,881, $15,881 and $15,881. Includes the following amounts accrued by M&I under the Supplementary Retirement Benefits Plan for the years 1993, 1992 and 1991, respectively: J.B. Wigdale -$43,166, $59,668 and $21,066; D.J. Kuester - $33,541, $45,668 and $15, 466; G.H. Gunnlaugsson - $21,991, $30,868 and $6,266; J.L. Delgadillo - $6,481, $10,868 and $126; E.I. Van Housen - $6,591, $13,668 and $225; and M.J. Revane - $12,824, $24,468 and $12,266. Also includes the following amounts accrued by M&I under the Nonqualified Supplemental Retirement Plan for the years 1993 and 1992, respectively: J.B. Wigdale - $126,078 and $120,198; D.J. Kuester - $78,216 and $73,948; G.H. Gunnlaugsson - $36,598 and $34,756; and M.J. Revane - $100,585 and $95,612.
(3) Mr. Van Housen died on March 6, 1994.
(4) Mr. Revane retired in November 1993, but is included herein pursuant to the rules of the Securities and Exchange Commission.
The following table provides information on option exercises by the named executive officers during fiscal 1993.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
* For valuation purposes, a December 31, 1993 market price of $23.625 was used.
NONQUALIFIED RETIREMENT PLAN
M&I adopted the Marshall & Ilsley Corporation Nonqualified Retirement Benefit Plan (the "Nonqualified Plan") on December 12, 1991. The goal of the Nonqualified Plan is to provide six of the executive officers of M&I with a monthly supplemental retirement benefit such that the sum of their benefits from the Retirement Growth Plan, Social Security, the Supplementary Retirement Benefits Plan and the Nonqualified Plan will equal 60% of each participant's average salary for his last five years of employment. The monthly benefit under the Nonqualified Plan, starting in most instances when an individual reaches age 65, is fixed based on various actuarial and interest rate assumptions. The annual benefits are $160,000, $180,000, $100,000 and $100,000 for Messrs. Wigdale, Kuester, Revane and Gunnlaugsson, respectively, and a total of $45,000 for two other executive officers. The annual benefit will be adjusted in the event of death before age 62 or early retirement and can be paid for life with a 120-month certain payout or on a joint and survivor basis at the option of the participant. The pay-out option elected will also affect the amount of the annual benefit. If a participant leaves the employ of the Company prior to age 55, he will receive no benefits under the Nonqualified Plan, except that, in the event of a Change in Control (as defined in the Nonqualified Plan), each participant will receive the present value of the benefits to which he is entitled under the Nonqualified Plan within 30 days of such Change in Control regardless of his age at that point.
EMPLOYMENT AGREEMENTS AND RELATED MATTERS
In order to assure management continuity and stability, M&I has entered into substantially similar Employment Agreements (the "Employment Agreements") with Messrs. Wigdale, Kuester, Delgadillo, and Gunnlaugsson, two additional executive officers and 13 officers and other employees of the Company and its subsidiaries (collectively, the "Executives"). The Employment Agreements with Messrs. Wigdale, Kuester and Gunnlaugsson each have a term of three years, and the Employment Agreement with Mr. Delgadillo has a term of two years. The Employment Agreements with the other Executives have terms of two or three years.
The Employment Agreements guarantee the Executives specific payments and benefits upon a termination of employment as a result of a change of control of M&I. If a change of control occurs the contract becomes effective and continues for a two- or three-year employment term. The employment term renews on a daily basis until M&I gives notice to terminate the daily renewal.
The Employment Agreements provide for specified benefits after a change of control if the Executive voluntarily terminates for "good reason" or is involuntarily terminated other than for "cause" (as defined in the Employment Agreements). In addition, in the case of some Employment Agreements, at the end of six months after a change of control, the Executive may terminate employment for any reason and is entitled to receive full benefits. Upon a termination, the Executive is entitled to (a) a lump sum payment equal to two or three times (depending on whether the contract is a two- or three-year contract) the sum of the Executive's current base salary plus the higher of the Executive's bonus for the last year or the Executive's average bonus for the past three years, (b) a proportionate amount of any unpaid bonus deemed earned for the year of termination, (c) a lump sum payment equal to the retirement benefits lost as a result of not having been employed for the remaining contract term, (d) health and other benefits for the remaining contract term, and (e) payments for certain other fringe benefits. In the event of a termination of employment as a result of his death, the Executive's beneficiary is entitled to six months of base salary. No additional benefits are guaranteed under the contract upon an Executive's disability or termination by M&I for cause.
The Employment Agreements provide that upon a change of control most restrictions limiting the exercise, transferability or other incidents of ownership of any outstanding award, restricted stock, options, stock appreciation rights, or other property rights of M&I granted to the Executive shall lapse, and such awards shall become fully vested, except in certain circumstances. Some of the Employment Agreements also provide for "gross-up" payments in the event payments to an Executive under the Employment Agreement are subject to Section 4999 of the Code (the "Excise Tax") or any similar
federal, state or local tax which may be imposed, in an amount such that the net amount retained by the Executive, after deduction of any Excise Tax on the payments and any federal, state and local income tax and Excise Tax upon the gross-up payment, shall be equal to the payments then due.
In connection with Mr. Revane's retirement in November 1993, he entered into an Agreement with M&I ("Retirement Agreement") and a Consulting and Noncompetition Agreement with M&I ("Consulting Agreement"). Pursuant to the Retirement Agreement (1) M&I determined that Mr. Revane's retirement constituted "early retirement" for purposes of applicable benefit plans and, accordingly, all options to acquire M&I Common Stock held by Mr. Revane vested to the extent not already vested and all restrictions applicable to Mr. Revane's Key Restricted Stock lapsed, (2) Mr. Revane will receive 36 monthly payments of $10,278 commencing on January 1, 1996, provided that if Mr. Revane dies prior to December 1, 1998, his estate or designated beneficiary shall receive in lieu of such monthly payments either a lump sum or monthly payment, depending upon the date of death, and (3) Mr. Revane is allowed to participate in M&I's Non-Qualified Retirement Benefit Plan and split-dollar life insurance arrangement while he is engaged as a consultant to M&I. Under the Consulting Agreement, Mr. Revane provides various consulting and advisory services to M&I and is prohibited from participating in certain competing activities. The Consulting Agreement has a term of 25 months and provides for a payment to Mr. Revane, or his estate in the case of his death, of $32,000 per month in exchange for his consulting services and agreement not to compete.
NON-EMPLOYEE DIRECTOR COMPENSATION
Directors of M&I who are not employees are paid a retainer fee of $12,000 per year. In addition, non-employee directors receive a fee of $1,500 for each Board meeting which they attend and $500 for each Committee meeting which they attend. M&I has established a deferred compensation plan for its Directors. Under such plan, all or part of the fees received by a Director may be deferred at the election of the Director. Amounts deferred are credited with an earnings factor based on the Director's allocation among 13-week U.S. Treasury Bills, the Common Stock or any common trust fund offered by the Trust Company. Deferred amounts are payable in not less than 36 nor more than 180 monthly installments, as elected by the participating Director, unless the Board elects to distribute amounts over a shorter period. One Director, Mr. Chait, elected to defer compensation under the plan during 1993. Directors of M&I who are also Directors of subsidiaries of M&I receive compensation from such subsidiaries in varying amounts based on the Director compensation schedule of such subsidiaries.
Mr. Puelicher receives various supplemental retirement benefits from M&I which are not related to or conditioned upon his service as a director of M&I. In 1993, M&I determined to increase Mr. Puelicher's supplemental retirement benefit under his Supplemental Retirement Plan dated December 10, 1992 from $41,667 per month to $58,333 per month. In addition, M&I made a special payment of $200,000 to Mr. Puelicher in December 1993 in recognition of Mr. Puelicher's extraordinary contributions to M&I.
Mr. Puelicher and M&I entered into a Consulting Agreement and Supplemental Retirement Plan in 1986, which was amended in 1992 (the "Consulting/Retirement Agreement"). The Consulting/Retirement Agreement went into effect in January 1993 and provides for Mr. Puelicher to serve as a consultant to M&I for five years. As compensation for his commitment to provide consulting services, Mr. Puelicher receives a retirement benefit of $25,000 per month for his life, and, if Mr. Puelicher predeceases his wife, his wife will receive $12,500 per month for her life. In addition, M&I pays an annual insurance premium for Mr. Puelicher of $112,470 until the earlier of (i) Mr. Puelicher's death, (ii) 19 years from the date of the policy's issue, or (iii) such time as the policy is paid up. M&I will also reimburse Mr. Puelicher for all travel and other expenses incurred in the performance of his duties and will provide him with secretarial services and office space. Mr. Puelicher will continue to participate in M&I's group health insurance (or equivalent plan) while receiving retirement benefits under the Consulting/Retirement Agreement. M&I may terminate the Consulting/Retirement Agreement for "cause" (as defined in the Consulting/Retirement Agreement). The Consulting/Retirement Agreement provides that Mr. Puelicher may not compete with M&I and must maintain the
confidentiality of certain information regarding M&I, its business and customers.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table lists as of February 28, 1994 information regarding the beneficial ownership of shares of Common Stock by each Director and named executive officer of M&I, by each person believed by M&I to be a beneficial owner of more than 5% of the Common Stock, and by all Directors and executive officers of M&I as a group:
Amount and Name and Nature of Address of Beneficial Percent Beneficial Owner Ownership(1) of Class _______________________________________________________________________
The Northwestern Mutual 8,665,374(2) 12.8% Life Insurance Company 720 East Wisconsin Ave. Milwaukee, WI 53202
Marshall & Ilsley 4,830,181(3) 8.0% Trust Company 770 North Water St. Milwaukee, WI 53202
Nicholas Company, Inc. 3,706,550(4) 6.2% 700 North Water St. Milwaukee, WI 53202
J.P. Bolduc -0- *
Glenn A. Francke 190,283 *
Burleigh E. Jacobs 40,500 *
James F. Kress 10,500 *
Wendell F. Bueche 10,500 *
Jack F. Kellner 480,702 *
J.B. Wigdale 610,603(5) 1.0%
James O. Wright 11,620(6) *
Jon F. Chait 17,486 *
Don R. O'Hare 3,600 *
J.A. Puelicher 653,817(7) 1.1%
Stewart W. Tisdale 1,602 *
D.J. Kuester 421,853(8) *
G.H. Gunnlaugsson 274,653(9) *
J.L. Delgadillo 48,000(10) *
All Directors and officers of the Company as a group (27 persons, including the above) own 3,604,642 shares of Common Stock or 6.0% of the total common stock outstanding.(11) _______________
*less than 1%
(1) Except as indicated below, all shares shown in the table are owned with sole voting and investment power.
(2) This information is based on Amendment No. 7 to Form 13-G dated February 7, 1991. Of the shares held, 5,714,286 shares of Common Stock may be acquired upon conversion of the Company's 8.5% Convertible Subordinated Notes Due 1997 (the "Notes") held by The Northwestern Mutual Life Insurance Company ("NML"). NML also holds 988,188 shares of Common Stock and 185,314 shares of Preferred Stock. NML has sole voting and investment power as to all such shares, subject to the terms and conditions of a certain Investment Agreement (the "Investment Agreement") between the Company and NML dated August 30, 1985. NML may exchange shares of Common Stock, regardless of how they were acquired, for shares of Preferred Stock. The Preferred Stock is non-voting and convertible into 1,962,900 shares of Common Stock at the same ratio that the Common Stock was exchanged for the Preferred Stock. The Investment Agreement provides for the purchase by NML of up to 24.9%, on a fully diluted basis, of the Common Stock. Purchases may take the form of Common Stock, Preferred Stock, notes or other securities of the Company (together with the Notes, the "Securities") at such prices as may be agreed upon by the parties from time to time. Pursuant to the Investment Agreement, on December 31, 1985, NML purchased $50 million in principal amount of the Notes. The Notes are convertible into 5,714,286 shares of the Common Stock (which would be approximately 8.6% of the Company's outstanding pro forma Common Stock as of February 28, 1994) at a conversion price of $8.75 per share. The Notes are callable by the Company upon payment of prescribed premiums through 1995 and at par thereafter. The Investment Agreement restricts in certain respects NML's right to transfer, acquire and vote any Securities. Under certain conditions, NML may require the Company to repurchase its stock at not less than prescribed prices after a "Change-in-Control" or upon the occurrence of a "Business Combination" (as such terms are defined in the Investment Agreement).
For further information concerning the Investment Agreement, the Notes and the Preferred Stock, reference is hereby made to the Company's Current Reports on Form 8-K dated May 20, 1985, August 30, 1985 and January 2, 1986.
(3) This information is based on Amendment No. 12 to Form 13-G dated February 9, 1994. Marshall & Ilsley Trust Company (the "Trust Company") owned beneficially 4,830,181 shares (approximately 8.0%) of the outstanding Common Stock. All such shares are owned by the Trust Company as trustee or in other fiduciary capacities. The Trust Company has no economic interest in such shares. Of these shares, the Trust Company has sole voting power as to 1,076,669 shares (approximately 1.8%), and shared voting power as to 249,954 shares (less than .1%); sole investment power as to 3,967,838 shares (approximately 6.6%), shared investment power as to 862,343 shares (approximately 1.4%). The Company owns all of the issued and outstanding capital stock of the Trust Company.
(4) This information is based on Amendment No. 5 to Form 13-G dated February 8, 1994. Nicholas Company, Inc. ("Nicholas") is an investment adviser registered under the Investment Advisers Act of 1940. Nicholas does not
have sole or shared voting power with respect to any of the shares held but sole investment power as to all of such shares.
(5) Includes 11,550 held by Mr. Wigdale's family as to which he disclaims beneficial ownership and 315,000 shares which could be acquired pursuant to exercise of stock options within sixty days of February 28, 1994.
(6) Includes 6,120 shares held in trust for the benefit of Mr. Wright's family and 1,500 shares owned by Badger Meter Foundation as to which he disclaims beneficial ownership.
(7) Includes 41,217 shares as to which Mr. Puelicher exercises sole voting power and 450,000 shares which could be acquired pursuant to exercise of stock options within sixty days of February 28, 1994.
(8) Includes 270,000 shares which could be acquired pursuant to exercise of stock options within sixty days of February 28, 1994.
(9) Includes 2,700 shares held by Mr. Gunnlaugsson's family as to which he disclaims beneficial ownership and 165,000 shares which could be acquired pursuant to exercise of stock options within sixty days of February 28, 1994.
(10) Includes 36,000 shares which could be acquired pursuant to exercise of stock options within sixty days of February 28, 1994.
(11) Includes 147,600 shares of restricted stock as to which the holders exercise sole voting power and 1,596,500 shares which could be acquired pursuant to exercise of stock options with sixty days of February 28, 1994.
Item 13.
Item 13. Certain Relationships and Related Transactions
Customers of the bank subsidiaries of M&I include nominees, directors and officers of M&I and their associates. Since January 1, 1993, such persons and firms have been indebted to M&I's bank subsidiaries for loans made in the ordinary course of business. All such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable features. Loans to directors and executive officers or represented 9.4% of shareholders equity at December 31, 1993. See also Item 11 - Executive Compensation and Item 8 - Consolidated Financial Statements and Supplementary Data, Note 7 to Consolidated Financial Statements.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Consolidated financial statements: Balance sheets - December 31, 1993 and 1992 Statements of income - years ended December 31, 1993, 1992, and Statements of cash flows - years ended December 31, 1993, 1992, and 1991 Statements of shareholders' equity - years ended December 31, 1993, 1992, and 1991 Notes to 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
During the last quarter of 1993, M&I did not file any Current Reports on Form 8-K with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
By /s/ J.B. Wigdale ____________________________ J. B. Wigdale Chairman of the Board
Date: March 28, 1994
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 ________________________________________ J. B. Wigdale Chairman of the Board and a Director (Principal Executive Officer) Date: March 28, 1994
/s/ G.H. Gunnlaugsson ________________________________________ G. H. Gunnlaugsson Executive Vice President (Principal Financial Officer) Date: March 28, 1994
/s/ P.R. Justiliano ________________________________________ P. R. Justiliano Vice President and Corporate Controller (Principal Accounting Officer) Date: March 28, 1994
Directors: J.P. Bolduc, Wendell F. Bueche, Jon F. Chait, Glenn A. Francke, G.H. Gunnlaugsson, Burleigh E. Jacobs, Jack F. Kellner, D.J. Kuester, Don R. O'Hare, J.A. Puelicher, J.B. Wigdale and James O. Wright
By /s/ M.A. Hatfield Date: March 28, 1994 ____________________________________ M. A. Hatfield Attorney-In-Fact*
* Pursuant to authority granted by powers of attorney, copies of which are filed herewith.
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
(b) By-laws, as amended, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, 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, issued pursuant to the Senior Indenture, incorporated by reference to M&I's Registration Statement on Form S-3 (Reg. No. 33-64054)
(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, incorporated by reference to M&I's Registration Statement on Form S-3 (Reg. No. 33-64054)
(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
(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 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.*
(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 J.A. Puelicher and M&I, 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*
(k) Employment agreement, dated as of November 5, 1990, between M&I and Mr. Delgadillo*
(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 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 J.A. Puelicher*
(s) Marshall & Ilsley Corporation 1993 Executive Stock Option Plan, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 33-51753)*
(t) Agreement dated July 1, 1993 between M&I and Mr. Revane*
(u) Consulting and Noncompetition Agreement dated as of December 1, 1993 between M&I and Mr. Revane
(11) Computation of net income per common share
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries
(23) Consent of Arthur Andersen & Co.
(24) Powers of attorney for Messrs. Bolduc, Bueche, Chait, Francke, Gunnlaugsson, Jacobs, Kellner, Kress, Kuester, O'Hare, Puelicher, Tisdale and Wright
_______________
* Management contract or compensatory plan or agreement