Item 1. Business.
THE CORPORATION
Marshall & Ilsley Corporation ("M&I" or the "Corporation") is a Wisconsin corporation incorporated in 1959, a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and a registered savings and loan holding company under the Home Owners' Loan Act of 1933, as amended. M&I's principal assets are the stock of its subsidiaries and the assets of its M&I Data Services Division. M&I presently owns substantially all the capital stock of 35 operating banks and one savings association with a total of 225 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, equipment leasing, mortgage banking, venture capital, brokerage services and financial advisory services. As a bank and savings and loan holding company, M&I provides financial and managerial assistance and services to its subsidiaries. At December 31, 1994, M&I had consolidated total assets of approximately $12.6 billion and consolidated total deposits of approximately $9.5 billion. Based on consolidated assets as of December 31, 1994, M&I was the second largest bank holding company headquartered in the State of Wisconsin.
On May 31, 1994, Valley Bancorporation merged into M&I in a transaction accounted for on a pooling of interests basis. Financial data for periods prior to May 31, 1994 has been restated to reflect the merger with Valley Bancorporation. On February 1, 1995, M&I acquired the Bank of Burlington, Burlington, Wisconsin, which had total assets of approximately $170.4 million at December 31, 1994.
M&I also has pending applications with bank regulators to acquire Citizens Bancorp of Delavan, Inc. and Sharon State Bank. M&I expects these acquisitions to be completed in the first half of 1995. At December 31, 1994, Citizens Bancorp of Delavan, Inc. had assets of approximately $98.6 million, and Sharon State Bank had assets of approximately $19.8 million.
The executive offices of M&I are located at 770 North Water Street, Milwaukee, Wisconsin 53202 (telephone number: (414) 765-7801).
BUSINESS OF M&I
M&I and its subsidiaries engage 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."
M&I owns directly or indirectly all or substantially all of the capital stock of 34 operating commercial banks and one savings association in Wisconsin, 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; commercial mortgage banking; residential mortgage banking; venture capital and financial advisory services; trust services to residents of Wisconsin, Arizona and Florida; and brokerage services.
In addition, M&I provides banking, financial and economic data processing services and software sales through its M&I Data Services Division. The data processing business was previously conducted in a subsidiary which was merged into M&I effective January 1, 1995.
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 provides 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.
In 1994, M&I derived substantially all its income from investments in, advances to and service fees from its subsidiaries. Dividends and interest from subsidiaries were M&I's major sources of cash in 1994. 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. In 1994, M&I established a $1 billion bank note program pursuant to which subsidiary banks may issue debt securities directly in order to fund their operations. At December 31, 1994, subsidiary banks had issued an aggregate of approximately $309 million in principal amount of bank notes under the program.
BANKING AND BANK-RELATED SUBSIDIARIES
M&I's 36 operating bank and savings association 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 $3.9 billion as of December 31, 1994, 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, and trust activities. In addition, M&I Bank engages in correspondent banking services.
All M&I bank subsidiaries are insured by the Federal Deposit Insurance Corporation ("FDIC"). In addition, M&I Bank and M&I's seven operating 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."
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 thirteen portfolios. As of December 31, 1994, M&I Investment Management Corp. had $6.3 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 eight trust service offices located in M&I subsidiary banks in Beloit, Madison, Racine, Stevens Point, Appleton, Green Bay, Janesville 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, Scottsdale 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, 1994, the market value of assets held in trust by M&I's three trust companies totalled $19.8 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 30% of its business comes from Wisconsin and 70% from other states. At December 31, 1994, FNL held net lease and installment receivables of approximately $240 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, 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, 1994, M&I Mortgage had a mortgage servicing portfolio of approximately $2.8 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 $180 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
The M&I Data Services Division of the Corporation ("M&I Data Services") is a major supplier of data processing services and software to the banking, financial, and related industries. 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 institutions and currently has customers in Canada, Great Britain, India, Indonesia, Italy, Malaysia, Switzerland, and Thailand. M&I Data Services' processing systems for financial institutions encompass five major processing functions: Deposits, Loans, Financial Accounting, Customer Information, and Trust Accounting. In 1994, M&I Data Services signed a long- term data processing contract with its first utility customer, Wisconsin Electric Power Company ("WEPCO"). By using a number of current banking software products which share common requirements with the utility industry, M&I Data Services will provide data processing and banking-related services to WEPCO.
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. A second processing site located in Oak Creek, Wisconsin was established in 1994. M&I Data Services also leases 62,000 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 pres- sure 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 19 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, mutual 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 operations compete with numerous banks, finance companies, data servicing companies, leasing companies, mortgage bankers, brokerage firms, financial advisors, trust companies, mutual funds and investment bankers in Wisconsin and throughout the United States. 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, 1994, M&I and its subsidiaries employed in the aggregate approximately 8,600 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"). M&I also is a savings and loan holding company registered with and subject to regulation by the Office of Thrift Supervision ("OTS") under the Home Owner's Loan Act of 1933, as amended ("HOLA"). The Act and HOLA, as the case may be, require M&I to file annual reports and certain other information with the Board and the OTS and authorizes the Board and the OTS to conduct examinations of M&I and its subsidiaries.
The Act requires M&I 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 it would directly or indirectly own or control more than 5% of the voting shares of such bank after the acquisition. The Act currently prohibits the Board from approving an application by M&I to acquire the voting shares of, or substantially all the assets of, any bank located outside the state in which the operations of M&I's banking subsidiaries are principally conducted, except for the acquisition of certain failing banks or as otherwise specifically authorized by the laws of the state in which the bank to be acquired is located.
Under the recently enacted Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"), which became effective on September 29, 1994, the restriction in the Act on interstate acquisitions will be abolished effective September 29, 1995, and thereafter adequately capitalized and managed bank holding companies from any state will be able to acquire banks and bank holding companies located in any other state, subject to certain conditions which include nationwide and state imposed concentration limits. In addition, the Interstate Banking Act amended the Federal Deposit Insurance Act to allow banks to branch across state lines de novo or by acquisition or merger effective no later than June 1, 1997, provided certain conditions are met which include an express provision of applicable state law allowing such interstate branching.
The Act limits the activities of M&I to managing, controlling, and servicing its 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, M&I is prohibited from acquiring direct or indirect ownership of more than 5% of the voting stock of any company which is not a bank. In addition, M&I must obtain Board approval prior to engaging in any 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 generally has 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.
The Act, the Federal Reserve Act (which applies to subsidiary banks of M&I that are members of the Federal Reserve System) 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. 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.
M&I is a legal entity separate and distinct from its subsidiaries. Accordingly, the right of M&I, and therefore 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. The payment of dividends to M&I by M&I's 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 chartered banks which are members of the Federal Reserve System, regulatory approval is required for the payment of dividends by any bank in any calendar year in an amount 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, 1994, M&I's bank subsidiaries would have been permitted to pay dividends to M&I of approximately $165 million without prior regulatory approval. At December 31, 1994, M&I's subsidiaries (both bank and non-bank) would have been permitted to pay dividends to M&I of approximately $259 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 paying dividends out of anything other than current operating earnings generally would be an unsafe and unsound banking practice. Dividends paid to M&I by the M&I bank subsidiaries in 1994 totaled $94.8 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. 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.
Capital Requirements
Information regarding capital requirements for bank holding companies and tables reflecting M&I's regulatory capital position at December 31, 1994 can be found in note 13 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, M&I bank subsidiaries may not, with certain limited exceptions: (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 M&I's bank subsidiaries 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 non-bank 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.
M&I's state chartered bank subsidiaries are subject to regulation and examination by the Commissioner of Banking for the state of Wisconsin, or in the case of M&I Thunderbird Bank the Arizona State Banking Department, and the Board (for state chartered banks which are members of the Federal Reserve System) or the FDIC (for state chartered banks which are not members of the Federal Reserve System). M&I's nationally chartered bank subsidiaries are subject to regulation and examination by the Comptroller of the Currency. M&I's savings association subsidiary is subject to regulation and examination by the Commissioner of Savings and Loans for the state of Wisconsin and the OTS. Federal and state law regulate the activities of M&I's bank subsidiaries in a number of areas,
including reserve requirements, investments, loans, mergers, issuances of securities, dividend payments and branch banking. Federal and state laws also impose restrictions on the ability of M&I's non-bank subsidiaries to conduct certain activities and offer credit.
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 Truth-In-Savings Act and Regulation DD, 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.
Federal bank agencies have comprehensive enforcement authority over banking institutions within their jurisdiction. 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. Section 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 of the Commissioner. The Office of the Commissioner also is empowered to issue orders to bank holding companies to remedy any condition or policy that, in the opinion of the Office of the Commissioner, endangers the safety of deposits in any M&I subsidiary bank or trust company. In the event of noncompliance with such an order, the Office of 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 - continued
Notes: (1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35% for 1994 and 1993, and 34% for 1992, 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 1994 and 1993 are outlined below. Changes not due solely to either volume or rate are allocated to rate (in thousands of dollars).
Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35% for 1994 and 1993, and 34% for 1992, and excluding disallowed interest expense.
Investment Securities
The amortized cost of the Corporation's consolidated investment securities at December 31 of each year are:
The maturities, at amortized cost, and weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 35% tax rate) of investment securities at December 31, 1994, 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, 1994, and the rate structure for the categories indicated are:
Notes: (1) Scheduled repayments are reported in the maturity category in which the payments are due based on the terms of the loan agreements. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
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, 1994, is as follows:
Gross interest income which would have been recorded under original terms . . . . . . . . . . . . . $ 5,759
Interest income recorded during the period. . . . . . . . $ 2,421
Potential Problem Loans
At December 31, 1994, the Corporation had $19,218 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, 1994, the Corporation's commercial finance subsidiary had $1,056 of corporate debt investment securities on nonaccrual status. The gross interest that would have been recorded in 1994 under the original terms amounted to $96. There was no interest income recorded during 1994 with respect to such debt securities.
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, 1994, is the amount necessary to bring the allowance for loan losses at December 31, 1994, 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 its evaluations of affiliate loan portfolios, which together with quarterly analyses of credit exposure provided by affiliate management, serve as the basis for determining the adequacy of the allowance for loan losses.
Management utilizes the above-described reserve analysis approaches to determine the overall adequacy of the allowance for loan losses. Management's overall assessment is based on its view of the loan portfolio as consisting of commercial business loans, real estate loans, personal loans, and direct financing leases. Industrial development revenue bonds are viewed as commercial real estate loans.
During 1994, consolidated net charge-offs decreased to $4.5 million, representing $12.5 million of charge-offs, offset by $8.0 million of recoveries. This decrease follows the lower than normal net charge-off levels experienced in 1992 and 1993, of $9.2 million and $9.4 million, respectively, which contrast with the higher than historic levels of net charge-offs experienced in 1990 and 1991. These contrasting net charge-off levels reflect the steadily declining levels of gross charge-offs over the 1990-1994 period, coupled with relatively consistent recovery levels in each of these years, except 1992. Recoveries in 1992 were abnormally high due to collection of a large commercial loan charge-off recorded in 1990. The reduction in net charge-off levels in 1992 and 1993 and the further reduction in 1994, 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 3.0% of the total portfolio.
The Corporation's 1994 provision level of $24.9 million reflects a $16.0 million general provision, which is based in part on actual and anticipated loan growth, and an $8.9 million special
provision. This special provision was charged to expense, after consummation of the merger with Valley, to conform Valley's loan valuation policies with those of the Corporation. The $16.0 million general provision level for 1994, which is the lowest general provision level in the last five years, together with the $8.9 million special provision, result in a year-end 1994 loan loss reserve of $154 million of 1.75% of total loans, as compared to the year-end 1993 reserve level of 1.55% The increased reserve levels in 1992 through 1994 reflect the Corporation's favorable net charge-off experience and the inherent cyclical nature of economic conditions and related credit impacts. The year-end 1994 reserve level is considered adequate given uncertainties regarding the economic conditions in the country and the Corporation's primary service areas.
The Corporation's 1994 charge-off and recovery levels across portfolio sectors generally reflect the current stability of the Wisconsin and Arizona economies. These conditions contrast with the 1990-1991 period during which conditions were generally less favorable and weaknesses in economic conditions and real estate values significantly impacted the Corporation's Arizona-based portfolio, resulting in higher than historic levels of losses. The 1994 charge-off levels for commercial loans, which decreased to the lowest level in five years, were offset by a near normal level of recoveries, resulting in a small net recovery position similar to that experienced in 1992 when a large recovery occurred relating to a 1990 charge-off. The 1994 charge-off levels for construction real estate loans which were offset by negligible recoveries, increased from the five-year low in 1993, but continue to be relatively immaterial. The 1994 charge-off levels for real estate mortgages, which increased slightly from the 1993 low, were offset by increased recovery levels, resulting in a net charge-off level which was near the five-year low experienced in 1993 and well below 1990-1992 levels. The 1994 charge-off and recovery levels for personal loans decreased to the lowest levels in five years, with resulting net charge-offs also decreasing to a five- year low. The 1994 charge-off levels for the Corporation's lease financing portfolio increased slightly from the 1993 low reflecting, in part, portfolio growth. Lease recoveries were slightly below average, resulting in net charge-offs which were above the 1993 low, but below the 1990-1992 levels.
The Corporation's charge-off and provision levels for 1995 are expected to continue to be largely dependent on economic conditions in the Corporation's primary service areas. While general economic conditions continue to be relatively stable, should national or regional conditions deteriorate, the Corporation's Wisconsin and Arizona markets may be adversely affected. Absent deterioration in these conditions, total charge- offs for 1995 are not currently expected to vary significantly from 1994 levels, with offsetting recoveries currently expected to decrease from 1994 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 1995 are expected to remain below peak 1990 levels, with net charge-offs anticipated to return to more normal historic levels. Commercial real estate loans continue to be highly vulnerable to regional economic conditions and real estate values; however,
based on current conditions, real estate and construction loan losses for 1995 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 1995 are currently expected to increase somewhat from 1994 levels, but remain below the peak levels experienced in 1990. At the present time, direct lease financing losses for 1995 are expected to approximate historic levels; however, actual losses could be impacted by portfolio growth, fraud, or unanticipated weaknesses in industry segments within the portfolio.
In May, 1993 and October, 1994, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, an amendment to SFAS No. 114. These new standards, which must be adopted by the first quarter of 1995, require that a loan's value be measured, and if appropriate a valuation reserve established, when it has been determined that the loan is impaired and loss is probable. Based on the current status of the Corporation's loan portfolio, it is not anticipated that these pronouncements will have a material impact on the allowance or provision for loan losses in 1995.
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, 1994 (in thousands) is:
Three months or less . . . . . . . . . . . . . . . . . . . . . .$265,057 Over three and through six months. . . . . . . . . . . . . . . . 99,440 Over six and through twelve months . . . . . . . . . . . . . . . 94,765 Over twelve months . . . . . . . . . . . . . . . . . . . . . . . 81,996 -------- $541,258 ========
At December 31, 1994, time deposits issued by foreign offices totalled $54,064.
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 23 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.
M&I has 34 subsidiary banks and one savings association 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. The subsidiary banks and savings association occupy modern facilities which are owned or leased.
M&I owns a 328,000 square foot data processing facility located in Brown Deer, a suburb of Milwaukee, from which M&I Data Services conducts data processing activities. Other properties leased by M&I for M&I Data Services include 62,000 square feet of commercial office space in Brown Deer, a data processing site in Oak Creek, Wisconsin, and processing centers and sales offices in various cities throughout the United States.
Item 3.
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, Age 58 Chief Executive Officersince 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, Loujo Company and Marshall & Ilsley Trust Company.
D.J. Kuester Director since February, 1994, President since Age 53 1987, Marshall & 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; Director - M&I Financial Corp., M&I Building Corp and M&I Insurance Company of Arizona, Inc.
P.M. Platten, III Vice Chairman of the Board and a Director Age 55 since May 1994, Marshall & Ilsley Corporation; Chairman of the Board, January 1993 to May 1994, President and Chief Executive Officer, January 1989 to May 1994, and Chief Operating Officer, prior to January 1989, Valley Bancorporation; Chairman and Chief Executive officer, prior to January 1989, Valley Bank, Northeast.
G.H. Gunnlaugsson Director since February, 1994, Age 50 Executive Vice President and Chief Financial Officer since 1987, Marshall & Ilsley Corporation; Vice President of M&I Marshall & Ilsley Bank since 1976; Vice President and Director, M&I Insurance Company of Arizona, Inc.; Director - M&I Mortgage Corp. and M&I Data Services; Director - Loujo Company.
G.D. Strelow Senior Vice President and Human Resources Age 60 Director of Marshall & Ilsley Corporation since 1993; Vice President and Human Resources Director of M&I Marshall & Ilsley Bank since 1980.
M.A. Hatfield Senior Vice President since 1993, Treasurer Age 49 since 1986 and 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; Director - Richter-Schroeder Company, Inc., Loujo Company and M&I Wauwatosa State Bank.
P.R. Justiliano Senior Vice President since 1994 and Age 44 Corporate Controller since April, 1989, Vice President, 1986 to 1994, Marshall & Ilsley Corporation.
G.A. Lichtenberg Senior Vice President and Corporate Age 51 Banking Controller since May 1994, Marshall & Ilsley Corporation; Senior Vice President/Chief Financial Officer and Secretary 1984 to 1994, Valley Bancorporation.
J.L. Delgadillo Senior Vice President of Marshall & Age 42 Ilsley Corporation since 1993; Director of M&I Data Services since 1994; President and Chief Operating Officer of M&I Data Services since 1993; Senior Vice President of M&I Data Services since 1989.
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 System, and quotations are supplied by the National Association of Securities Dealers.
Common Dividends Declared
1994 1993
First Quarter $0.14 $0.12 Second Quarter 0.15 0.14 Third Quarter 0.15 0.14 Fourth Quarter 0.15 0.14 ----- ----- $0.59 $0.54 ===== =====
Price Range of Stock (Low and High Bid)
First Quarter $20 - $23 3/4 $21 1/16 - $23 5/16 Second Quarter 19 1/4 - 22 1/4 22 15/16 - 25 3/4 Third Quarter 19 5/8 - 21 3/4 21 1/4 - 25 Fourth Quarter 18 - 20 9/16 21 3/4 - 24 1/4
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 13 to M&I's Consolidated Financial Statements in Item 8 of this Form 10-K.
Holders of Common Equity
At December 31, 1994 M&I had approximately 18,919 record holders of its Common Stock.
Item 6.
Item 6. Selected Financial Data
CONSOLIDATED SUMMARY OF EARNINGS Years ended December 31 ($000's except share data)
CONSOLIDATED SUMMARY OF EARNINGS - continued Years ended December 31 ($000's except share data)
* Not restated for acquisitions accounted for as a pooling of interests.
CONSOLIDATED AVERAGE BALANCE SHEETS Years ended December 31 ($000's except share data)
* Not restated for acquisitions accounted for as pooling of interests. ** Nonaccrual loans, restructured loans, and loans past due 90 days or more. *** Restated for 3 for 1 stock split.
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
In 1994, Marshall & Ilsley Corporation reported consolidated net income of $105.9 million compared to $171.4 in 1993, a decline of $65.5 million. Fully diluted net income per share in 1994 amounted to $1.04 compared to $1.60 per share for 1993. The return on average assets and average shareholders' equity was 0.85% and 9.65%, respectively, for the year ended December 31, 1994 and 1.42% and 15.29%, respectively, for the prior year. During the second quarter of 1994 the Corporation recorded a one-time merger/restructuring charge and an increase in loan loss provisions associated with the May 31, 1994 acquisition of Valley Bancorporation (Valley). In addition, security losses and other miscellaneous charges were taken at that time.
The following table summarizes the unusual items reported in the second quarter of 1994 adjusted for merger related gains realized in the third and fourth quarter of 1994 and its impact on net income.
After-tax Gain Fully Diluted (Charge) Per Share Increase ($ Millions) (Decrease) ____________ __________________
Income from Operations $169.9 $1.65
Recognition of $75.2 million merger/restructuring charge (58.9) (.56)
Additional loan loss provisions of $8.9 million (5.8) (.06)
Other miscellaneous charges of $8.5 million (6.2) (.06)
Securities losses of $7.3 million (4.6) (.04)
Net extraordinary gain of $20.6 million 11.5 .11 ______ _____
Reported Net Income $105.9 $1.04 ====== =====
Net income for 1994 before unusual items was $169.9 million and fully diluted, net income per share was $1.65. The return on average assets and shareholders' equity was 1.37% and 14.94%, respectively. The decline in income from
operations of $1.5 million in 1994 compared to the prior year was due to lower noninterest income and normal expense growth offset by higher net interest income and the merger/restructuring cost savings achieved during 1994.
The $75.2 million merger/restructuring charge was the result of the acquisition of Valley and reflected the costs associated with executive contracts and the reduction in workforce, the write-off of duplicate computer and software costs, system conversion costs, professional fees and other net costs associated with the merger. See Note 3 to the Consolidated Financial Statements for a more detailed discussion of merger/restructuring charges. As part of the merger/restructuring process the Corporation merged 15 bank charters and 4 financial service affiliates into other M&I affiliates which were providing similar services. The Corporation also closed 49 branch locations which included 19 required branch divestitures. These activities resulted in a reduction of approximately 1,000 employees and lower operating expenses. At the time the merger was announced, it was anticipated that the estimated annual cost savings to be achieved by the combined companies beginning in 1995 was approximately $36 million. While no assurances can be given, management now expects that the cost savings will meet or exceed the original estimate. Management estimates that in excess of 60% of the annual cost savings was achieved during 1994.
The additional loan loss provision of $8.9 million was recorded at the time of the merger to conform Valley's loan valuation policies with those of the Corporation.
The securities losses of $7.3 million were realized in the second quarter of 1994 to reposition our balance sheet in light of current interest rates. Approximately $568 million of securities with a remaining average maturity of one year were sold. The proceeds were reinvested in higher yielding securities with an average maturity of less than two years. The securities sold were classified as available for sale, therefore, the resulting realized loss had no impact on shareholders' equity.
The other miscellaneous charge of $8.5 million included goodwill asset adjustments, other real estate write-downs and other accrual adjustments such as professional fees not resulting from the merger/restructuring.
The Corporation also realized extraordinary gains of $22.1 million resulting from certain required branch divestitures with deposits of $267 million. The Corporation also prepaid $53 million of Valley's long-term debt. The prepayment premium amounted to $1.5 million and is included in the net extraordinary gain for 1994.
Operating earnings amounted to $171.4 million in 1993 compared to $156.4 million in 1992, an increase of $15.0 million or 9.6%. The increase was due to higher net interest income, a lower loan loss provision and higher noninterest related revenue.
During 1992, the Corporation adopted two new accounting standards which required the recognition of unrecorded postretirement benefits and that current enacted
tax rates be used in determining deferred taxes. The cumulative effect of the adoption of these accounting standards amounted to an after-tax charge of $9.1 million or $.08 per share on a fully diluted basis.
PROVISION FOR LOAN LOSSES AND CREDIT QUALITY ____________________________________________
Excluding the previously noted additional provision for certain Valley banks of $8.9 million, the provision for loan losses amounted to $16.0 million in 1994 compared to $18.0 million in 1993 and $23.5 million in 1992. The adjusted 1994 provision level reflects the relatively stable trend in nonperforming assets since year-end 1993 and a decline in net charge-offs.
Nonperforming assets at December 31, 1994 were $70.1 million compared to $69.3 million reported at December 31, 1993. Nonaccrual loans, the largest component of nonperforming assets, were up slightly when compared to December 31, 1993 and loans past due 90 days or more increased $1.2 million. The chart on the next page shows that the categories of nonaccrual loans did not change significantly in 1994 when compared to the prior year. At December 31, 1994, other real estate owned, which is down slightly from the prior year, includes $2.3 million of closed branch facilities.
Net charge-offs in 1994 amounted to $4.5 million or .05% of average loans compared to $9.4 million or .11% for the prior year and .12% for 1992.
The allowance for loan losses amounted to $154.0 million or 1.75% of total loans at December 31, 1994 compared to $133.6 million or 1.55% of total loans at December 31, 1993. The coverage of the allowance for loan losses to nonperforming loans increased from 237% at December 31, 1993 to 265% at the end of the current year. The special second quarter charge contributed to the increased coverage ratio.
Since the third quarter of 1994, nonperforming assets declined $6.8 million or 8.9%. Nonaccrual loans decreased $9.2 million or 17.1%, while other real estate owned increased $2.4 million. Net charge-offs in the fourth quarter amounted to $2.8 million and was $2.3 million higher than the third quarter of 1994.
CREDIT QUALITY December 31, ($ 000's)
Consolidated Credit Quality Information _______________________________________
Nonperforming Assets by Type
1994 1993 1992 1991 1990 _______ _______ _______ _______ _______ Loans: Nonaccrual $44,766 $44,186 $52,811 $78,887 $66,539 Renegotiated 4,172 4,263 6,325 8,026 8,461 Past Due 90 Days or More 9,093 7,906 7,097 9,330 5,963 _______ _______ _______ _______ _______ Total Nonperforming Loans 58,031 56,355 66,233 96,243 80,963
Other Real Estate Owned (OREO) 12,114 12,928 19,286 18,510 16,223 _______ _______ _______ _______ _______ Total Nonperforming Assets $70,145 $69,283 $85,519 $114,753 $97,186 ======= ======= ======= ======== ======= Allowance for Loan Losses $153,961 $133,600 $123,805 $105,156 $94,145 ======== ======== ======== ======== =======
Net Loan Charge-offs
Loan Charge-offs $12,561 $17,466 $22,344 $30,056 $43,563
Loan Recoveries (8,015) (8,060) (13,163) (7,799) (7,410) _______ _______ _______ _______ _______ Total Net Loan Charge-offs $4,546 $ 9,406 $ 9,181 $22,257 $36,153 ======= ======= ======= ======= =======
Consolidated Statistics
Net Charge-offs to Average Loans .05% .11% .12% .30% .52%
Total Nonperforming Loans to Total Loans .66 .65 .83 1.29 1.14
Total Nonperforming Assets to Total Loans and Other Real Estate Owned .80 .80 1.07 1.53 1.37
Allowance for Loan Losses to Total Loans 1.75 1.55 1.55 1.41 1.33
Allowance for Loan Losses to Nonperforming Loans 265 237 187 109 116
Major Categories of Nonaccrual Loans ____________________________________
1994 1993 _________________________________________________________ % of % of Loan % of Loan % of Nonaccrual Type Nonaccrual Nonaccrual Type Nonaccrual ________________ __________ _______________ __________
Commercial
Commercial $ 8,372 .3% 18.7% $10,055 .4% 22.8% Lease Financing Receivables 1,601 .6 3.6 2,868 1.1 6.5 _______ _____ _______ _______ ______ _______
Total Commercial 9,973 .3 22.3 12,923 .5 29.3
Real Estate Construction and Land Development 902 .2 2.0 538 .2 1.2 Commercial Real Estate 19,706 1.0 44.0 18,433 .9 41.7 Residential Real Estate 11,453 .5 25.6 9,631 .4 21.8 _______ _____ _______ _______ ______ _______
Total Real Estate 32,061 .7 71.6 28,602 .6 64.7
Personal 2,732 .2 6.1 2,661 .2 6.0 _______ ______ ________ _______ _______ ________
Total $44,766 .5% 100.0% $44,186 .5% 100.0% ======= ====== ======== ======= ======= ========
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 1994, 1993, and 1992. 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).
1994 1993 1992 _______________________
Interest Income 6.65% 6.70% 7.53%
Interest Expense (2.62) (2.60) (3.28) ______ ______ ______
Net Interest Income 4.03 4.10 4.25
Provision for Loan Losses (.20) (.15) (.20)
Net Securities Gains (Losses) (.05) .07 .08
Other Income 2.95 3.02 2.77
Other Expense (4.69) (4.74) (4.74)
Merger/Restructuring (.61) -- -- ______ ______ ______
Income Before Income Taxes 1.43 2.30 2.16
Income Taxes (.67) (.88) (.80) ______ ______ ______ Income before Cumulative effect of Accounting Changes and Net Extraordinary Credits .76% 1.42% 1.36%
Net Income .85% 1.42% 1.28% ====== ====== ======
NET INTEREST INCOME ___________________
Net interest income was $491.2 million in 1994, an increase of $10.9 million or 2.3% from $480.3 million earned in 1993. The benefit of the increase in average earning assets was partially offset by the slight decline in the average earning asset yield and increased volume of higher cost short-term and long-term borrowings fueled in part by the decline in average deposits.
Average earning assets amounted to $11.4 billion for 1994 compared to $11.0 billion in the prior year, an increase of 3.4%. Long-term taxable securities declined $119.9 million or 5.4% from $2.24 billion reported for 1993. Tax exempt long-term investments declined 12.3% in 1994. Short-term investments were up slightly in 1994 and amounted to $201.2 million. The decline in total investment securities was primarily due to the funding of loan growth.
The growth and composition of the Corporation's average loan portfolio for the last two years is as follows (amounts in thousands): Annual 1994 1993 Growth __________ __________ ______
Commercial Loans $2,680,735 $2,572,967 4.2%
Real Estate Loans Construction 262,707 277,902 (5.5) Commercial Mortgages 2,098,590 1,825,532 15.0 Residential Mortgages 2,211,199 2,145,536 3.1 __________ __________ ______ Total Real Estate Loans 4,572,496 4,248,970 7.6
Personal Loans Personal Loans 936,731 901,036 4.0 Student Loans 264,400 208,665 26.7 __________ __________ ______ Total Personal Loans 1,201,131 1,109,701 8.2
Leasing Financing Receivables 256,344 248,654 3.1 __________ __________ ______ Total Consolidated Average Loans $8,710,706 $8,180,292 6.5% ========== ========== ======
Total real estate loans provided $323.5 million or 61% of the total average loan growth in 1994, of which, commercial real estate loans accounted for $273.1 million of the increase. All other categories of loans also increased over the prior year. Commercial loans increased $107.8 million and personal loans increased $91.4 million. Student loan growth provided more than half of the growth in personal loans in 1994.
The composition of the Corporation's average deposits for the last two years is as follows (amounts in thousands): Annual 1994 1993 Growth __________ __________ ________ Noninterest Bearing Commercial $1,302,692 $1,252,074 4.0% Personal 428,697 404,831 5.9 Other 320,475 340,876 (6.0) __________ __________ ______
Total Noninterest Bearing Deposits 2,051,864 1,997,781 2.7
Interest Bearing Savings & NOW 2,426,502 2,339,754 3.7 Money Market 1,527,668 1,534,799 (.5) Other CDs & Time Deposits 3,227,795 3,461,825 (6.8) CDs Greater than $100,000 436,268 440,573 (1.0) __________ __________ ______ Total Interest Bearing Deposits 7,618,233 7,776,951 (2.0) __________ __________ ______ Total Consolidated Average Deposits $9,670,097 $9,774,732 (1.1%) ========== ========== ======
During 1994, the Corporation experienced a shift in its deposit mix. Noninterest bearing deposit accounts increased $54.1 million or 2.7%, however, the increase did not offset the decline in interest bearing deposits, which declined $158.7 million in 1994. Our core interest bearing deposits increased $79.6 million while certificates of deposit and other time deposits declined $238.3 million.
Average loans and deposits were affected by the branch divestitures that occurred in 1994. During the later part of 1994, $199.5 million of loans and $300.7 of deposits were sold. These transactions will have a more significant impact on the change in average balances in 1995 when compared to 1994.
The net interest margin as a percentage of average earning assets declined from 4.48% for the year ended December 31, 1993 to 4.40% in the current year. The average yield on our interest earning assets was 7.27%, a decline of 6 basis points from 1993. Loan yields declined 5 basis points while our total investment securities yield declined 40 basis points due to the maturity of higher yielding securities. The total cost of our interest bearing liabilities remained relatively unchanged. The cost of our core interest bearing deposit
accounts declined from 2.38% in 1993 to 2.30% in the current year while other time deposit rates declined from 4.61% in 1993 to 4.51% in 1994. While the drop in the cost of deposits helped the net interest margin, the lack of deposit growth caused short-term borrowings to increase $323.0 million. The cost of short-term borrowings increased from 2.81% in 1993 to 4.11% in 1994, an increase of 130 basis points. During the second quarter of 1994, the Corporation's banking subsidiaries began offering Bank Notes. The Bank Notes provide an additional funding source along with those traditionally available to our banking affiliates. As of December 31, 1994, total Bank Notes outstanding amounted to $308.6 million. These notes were issued for a two-year term and have floating interest rates. The average cost for this source of funding was 5.21%. Management has also developed new products such as a money market index account to attract new deposits and has put into place a nationally marketed brokered CD program. The lack of deposit growth to fund earning asset growth in the future may continue to put pressure on the margins.
During the third quarter of 1994, the Corporation prepaid $53 million of Valley's long-term debt consisting of Series A 9.86% and Series B 9.97% senior unsecured notes. The debt was refinanced with the Corporation's medium-term notes which had an average cost of 7.46% in 1994.
In April 1993, the Corporation's Board of Directors approved a common share repurchase program. Since the announcement, the Corporation has cumulatively repurchased 9.8 million common shares at an aggregate cost of approximately $216.5 million through December 31, 1994. The estimated impact of the program in 1994 compared to 1993 was to increase interest expense by approximately $7.5 million.
Net interest income was $480.3 million in 1993, an increase of $7.7 million or 1.6% from that earned in 1992. The improvement was primarily due to an increase in earning assets and a favorable shift in the asset and funding mix.
Average earning assets increased $462.3 million or 4.4% in 1993 compared to the prior year. The growth in average loans of $486.2 million was the primary contributor to average earning asset growth. Total average noninterest bearing deposit accounts increased $198.7 million or 11% and amounted to $2.0 billion at December 31, 1993. Core interest bearing deposit accounts amounted to $3.9 billion at December 31, 1993, an increase of $227.6 million or 6.2%, while higher cost time deposit accounts decreased $104.1 million in 1993 compared to the prior year.
The net interest margin as a percent of average earning assets declined from 4.65% for the year ended December 31, 1992 to 4.48% in 1993. The average yield on our earning assets was 7.33%, a decline of 91 basis points while the average cost of interest-bearing liabilities declined 87 basis points and amounted to 3.60%.
The table below shows the composition of net interest income on a FTE basis:
ANALYSIS OF NET INTEREST INCOME ($ 000's)
1994 1993 ______________________________ ____________________________ Average Average Average Yield or Average Yield or Balance Interest Cost Balance Interest Cost ______________________________ ____________________________
Average Assets
Loans $8,710,706 $683,265 7.84% $8,180,292 $645,434 7.89%
Investment Securities: Taxable 2,116,856 110,894 5.24 2,236,805 123,207 5.51 Tax Exempt 351,026 24,065 6.86 400,135 31,650 7.91
Interest bearing deposits in other banks 93,504 3,752 4.01 98,220 2,915 2.97
Funds sold and security resale agreements 91,090 4,147 4.55 40,401 1,224 3.03
Trading securities 4,528 244 5.39 4,860 207 4.26
Other short-term investments 12,059 517 4.29 41,522 1,574 3.79 __________ ________ _____ __________ ________ _____
Total interest earning assets 11,379,769 826,884 7.27% 11,002,235 806,211 7.33%
Cash and demand deposits due from banks 613,053 616,761
Premises and equipment, net 289,300 281,952
Other assets 295,256 268,492
Allowance for loan losses (144,917) (129,972) ___________ ___________
Total Assets $12,432,461 $12,039,468 =========== ===========
ANALYSIS OF NET INTEREST INCOME - continued ($ 000's) 1994 1993 ______________________________ ____________________________ Average Average Average Yield or Average Yield or Balance Interest Cost Balance Interest Cost ______________________________ ____________________________
Average Liabilities and Shareholders' Equity
Savings and interest bearing demand deposits $3,954,170 $ 90,788 2.30% $3,874,553 $ 92,074 2.38%
Other time deposits 3,664,063 165,073 4.51 3,902,398 180,026 4.61
Short-term borrowings 964,850 39,681 4.11 641,836 18,010 2.81
Long-term borrowings 447,254 30,537 6.83 272,041 23,088 8.49 __________ ________ _____ __________ ________ _____ Total interest bearing liabilities 9,030,337 326,079 3.61% 8,690,828 313,198 3.60%
Noninterest bearing deposits 2,051,864 1,997,781
Other liabilities 252,297 229,545
Shareholders' equity 1,097,963 1,121,314 __________ ___________ Total Liabilities and Shareholders' Equity $12,432,461 $12,039,468 ========== ===========
ANALYSIS OF NET INTEREST INCOME - continued ($ 000's) 1994 1993 ______________________________ ____________________________ Average Average Average Yield or Average Yield or Balance Interest Cost Balance Interest Cost ______________________________ ____________________________
Net interest margin (FTE) as a percent of earning assets 500,805 4.40% 493,013 4.48% ===== =====
Fully taxable equivalent adjustment (9,578) (12,734) ________ ________
Net Interest Income $491,227 $480,279 ======== ========
OTHER INCOME ____________
Total other income was $361.5 million for the year ended December 31, 1994, a decline of $10.4 million when compared to $371.9 million earned in the prior year. Fees from data processing services increased $24.4 million or 18.1% when compared to 1993. This increase was primarily due to processing fees. Trust fees declined $1.5 million or 2.5% in 1994 and amounted to $59.7 million. The primary revenue basis for trust services is based upon market value of assets under management. Revenue from these services has decreased due to the general decline in market values, increased price competition and a slight reduction in assets under management. Other customer service fees amounted to $117.1 million for the year ended December 31, 1994 compared to $124.5 a year ago, a decline of $7.4 million or 6.0%. Service charge on deposit accounts declined $3.1 million or 5.5%, while fees on loans declined $2.3 million or 10.8% in 1994. The decline in service charge on deposit accounts was primarily due to the higher interest rate environment in 1994 causing higher earnings credit to be given on commercial deposit accounts. Other miscellaneous income amounted to $31.0 million, a decline of $11.8 million or 27.6% when compared to $42.8 million earned in 1993. The decline in revenue from the origination and sale of mortgage loans to the secondary market, as was seen throughout all of 1994, accounted for a majority of the decrease in fees on loans and other miscellaneous income. As part of the merger/restructuring that occurred during 1994, the Corporation also sold one insurance agency and other insurance lines of business. These sales resulted in lower commission revenue, which is a component of miscellaneous income. The sale of other real estate owned not associated with merger/restructuring activities resulted in an increase in net gains of approximately $1.0 million in 1994 compared to 1993.
Securities losses in 1994 amounted to $5.8 million compared to a net gain of $8.3 million in 1993. Excluding the securities losses taken in the second quarter of $7.3 million, net securities gains amounted to $1.5 million in 1994. Capital Markets Group realized net gains of $2.0 million in 1994 compared to $3.3 million in 1993. The Corporation also sold certain equity securities and realized a gain of $0.9 million in 1994 and $4.2 million in 1993.
Other income amounted to $371.9 million in 1993, a $43.5 million or 13.3% increase from $328.4 million reported in 1992. Data processing revenue increased $23.0 million. Processing and software related revenue contributed to the increase. Trust services revenue increased $3.2 million in 1993 compared to the prior year. Other customer service revenue increased $10.3 million in 1993 and amounted to $124.5 million for the year ended December 31, 1993. Increases in fees charged on commercial deposit accounts, increased brokerage commissions, and higher loan fees all contributed to the revenue increase. Other miscellaneous income which amounted to $42.8 million in 1993 compared to $34.9 million in 1992, was impacted by the mortgage refinancing activity which increased in 1993. Income from the sale of 15 and 30 year mortgages acquired and sold in the secondary market increased $6.8 million in 1993 compared to 1992.
OTHER EXPENSE _____________
Total other expense amounted to $660.0 million compared to $569.6 million in 1993. As noted earlier, several one-time charges were recorded in the second quarter. The merger/restructuring charge of $75.2 million reflected the costs associated with executive contracts and a reduction in work force, the write-off of duplicate computer and software costs, system conversion costs and losses associated with the elimination of facility leases and equipment. Also taken at that time, were other miscellaneous charges of $8.5 million which represented goodwill and other real estate write-downs and other accrual related adjustments.
Total other expense, excluding the above noted unusual expense items, amounted to $576.3 million, an increase of $6.7 million or 1.2% when compared to the prior year. This nominal expense growth is attributable to the cost savings achieved by the Corporation in 1994 due to the merger. Salary and benefits expense amounted to $323.9 million compared to $320.7 million, an increase of $3.2 million or 1.0%. This slight increase primarily reflects the cost savings associated with the elimination of duplicate job functions that occurred since the May 31 Valley merger. Total salaries and benefit expense for the first quarter of 1994 amounted to $84.2 million while the fourth quarter of 1994 amounted to $77.4 million.
Total net occupancy expense increased $.2 million in 1994 compared to the prior year. The sale of branch facilities during the second half of the year resulted in almost no growth in this expense category. Total equipment expense amounted to $59.6 million for the year ended December 31, 1994 compared to $57.9 million in the prior year, and increase of 2.9%. The increased cost associated with the need for more computer capacity, data storage devices and other data processing equipment by M&I Data Services (DSI), our data processing company, did not totally offset the cost savings associated with the merger. In the fourth quarter of 1994, M&I Data Services opened a second computer facility. The increased cost of this site will be fully reflected in 1995. Processing, supplies and printing expenses were not affected by the merger and were higher in 1994 compared to the prior year due primarily to increased business by DSI. Professional services expense increased in 1994 compared to the prior year due to a $1.1 million accrual adjustment recognized in the second quarter of 1994.
As noted in the past, M&I Data Services has been a large contributor to the Corporation's overall expense growth. As part of the Valley merger, Valley's data processing and operations subsidiary which performed data processing and operational functions for their affiliated companies only, was merged into DSI. While DSI continues to grow and expand, the merger efficiencies have resulted in DSI's expense growth in 1994 to be slower than historically reported.
Other miscellaneous expense amounted to $96.1 million in 1994 compared to $88.9 million in 1993 and included goodwill and other real estate write-downs of $5.3 million taken in the second quarter of 1994. Software expense increased $1.1 million or 13.9% in 1994 compared to the prior year, while postage and delivery expense increased from $12 million in 1993 to $13.3 million in the current year.
Total other expense amounted to $569.6 million in 1993 compared to $545.6 million in 1992, an increase of $24.0 million or 4.4%. Salaries and benefits expense, the largest contributor to other expense, increased $21.2 million in 1993 compared to the prior year.
Our data processing subsidiary continued to be the major factor in the increase. Increased employment which included the purchase of a data center in the Southeast contributed to higher salaries and benefit expense. Equipment expense which increased 8.3% in 1993 compared to 1992 and higher processing expense are also attributable to DSI. An increase in DSI's customer base caused a need for more computer capacity and other related equipment. The outsourcing of certain record retention functions caused processing expense to increase.
Professional fees increased $1.0 million in 1993 compared to the prior year and reflects the costs associated with complying with additional governmental and accounting regulations.
Other miscellaneous expense amounted to $88.9 in 1993 compared to $95.7 million in 1992. During 1993, the amount of expense capitalized for software development and conversions, net of amortization, exceeded the amount recorded in 1992 by approximately $8.0 million. Of the net increase, $4.9 million related to costs associated with conversions of new customers to our data processing systems while $3.1 million related to increased software development work.
INCOME TAX PROVISION ____________________
The provision for income taxes was $73.4 million in 1994 compared to $93.2 million in 1993 and $75.4 million in 1992. The decrease in 1994 when compared to the prior year was due to lower pretax income, offset somewhat by an increase in nondeductible expenses due to the merger/restructuring and a decline in tax exempt income. The provision for income taxes in 1993 compared to the prior year was higher due to higher pretax earnings, a decline in tax exempt income and the increase in the Federal income tax rate from 34% in 1992 to 35% in 1993.
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 to confine interest rate risk within prudent parameters. Financial derivative instruments are used on a limited basis and are generally straightforward and involve little complexity. 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, 1994, $285 million of demand deposits were classified as rate sensitive in the "1-30 Days" time frame. In addition, a percentage of various interest-bearing accounts are classified (rate sensitive or nonrate sensitive) according to assumptions which approximate the extent to which the rates on these accounts are expected to increase (decrease) relative to a change in the general level of interest rates.
ASSET/LIABILITY MANAGEMENT __________________________ ($ in millions)
1-30 31-90 91-180 181-364 1 Days Days Days Days Subtotal Year + Total _____________________________________________________________________________
Loans $3,026 $ 679 $ 588 $ 952 $5,245 $3,394 $8,639 Securities 17 131 203 319 670 1,625 2,295 Other Interest Bearing Assets 346 -- -- -- 346 -- 346 Other Assets -- -- -- -- -- 1,333 1,333 _____________________________________________________________________________ Total Assets $3,389 $ 810 $ 791 $1,271 $6,261 $6,352 $12,613
Rate Sensitive Liabilities $3,719 $ 452 $ 605 $ 940 $5,716 $3,634 $9,350 Nonrate Sensitive Liabilities -- -- -- -- -- 3,263 3,263 _____________________________________________________________________________ Total Liabilities & Equity $3,719 $ 452 $ 605 $ 940 $5,716 $6,897 $12,613
Gap (330) 358 186 331 (545) Cumulative Gap (330) 28 214 545 Cumulative Gap as a % of Total Assets -2.62% 0.22% 1.70% 4.32%
CAPITAL RESOURCES _________________
Shareholders' equity was $1.06 billion at December 31, 1994 compared to $1.11 billion at December 31, 1993. This decrease was partially due to the repurchase of treasury shares which amounted to $99.3 million in 1994. The impact of the adoption of FAS 115 on January 1, 1994 and change in the interest rate environment throughout 1994 also resulted in a decrease in shareholders' equity of $34.1 million at December 31, 1994.
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, 1994, the Corporation had a total risk-based capital ratio of 13.62% and a 11.15% core capital to risk-based asset ratio. Selected leverage capital ratios must also be maintained. The Corporation's leverage ratio at December 31, 1994 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, 1994 approximately $165.2 million and $93.3 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 May of 1994, $16.4 million of 8.5% convertible subordinated notes were converted into 1,870,057 shares of common stock. As provided for in the note agreement, the noteholder, subsequent to conversion, exchanged the common shares acquired by conversion of the debt for 163,630 shares of Series A preferred stock.
The Corporation has a Stock Repurchase Program which was approved by the Corporation's Board of Directors in April, 1993 and reaffirmed in October, 1994. In October 1994, the Board of Directors also authorized an increase in the number of shares to be repurchased through 1995 from 9.0 million shares to 15.1 million shares. The shares are being acquired in anticipation of the remaining conversion of the Corporation's 8.5% convertible subordinated notes, to fund the on-going program to deliver or have available shares of common stock for stock option and other employee benefit plans and other corporate needs. During 1994 the Corporation purchased 4.8 million shares and has cumulatively purchased 9.8 million shares since inception of the program.
It is anticipated that the Corporation will register additional debt securities with the Securities and Exchange Commission in the near future in order to maintain ready access to funding sources for general corporate purposes which include, but are not limited to, refinancing existing Corporate debt as it matures, and other corporate needs.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data For Years Ended December 31, 1994, 1993, and 1992
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
Consolidated Balance Sheets December 31 ($000's except share data)
1994 1993 ---------- ---------- Assets ------ Cash and Cash Equivalents: Cash and Due from Banks $ 685,919 $ 667,114 Funds Sold and Security Resale Agreements 205,248 49,336 Money Market Funds 76,724 68,184 ---------- ---------- Total Cash and Cash Equivalents 967,891 784,634
Trading Securities, at Market Value 20,361 2,852
Other Short-term Investments, at Cost which Approximates Market Value 43,519 50,121
Investment Securities Available for Sale, at Market Value in 1994, Amortized cost in 1993, (Market Value $2,261,117 in 1993) 1,865,147 2,237,158
Investment Securities Held to Maturity, Market Value $419,521 ($341,877 in 1993) 429,456 335,400
Loans, Net of Unearned Income of $39,569 ($41,094 in 1993) 8,792,492 8,617,372 Less: Allowance for Loan Losses 153,961 133,600 ---------- ---------- Net Loans 8,638,531 8,483,772
Premises and Equipment 286,435 299,801 Accrued Interest and Other Assets 361,609 292,199 ------------ ----------- Total Assets $12,612,949 $12,485,937 ============ ===========
Consolidated Balance Sheets December 31 ($000's except share data) - continued
1994 1993 ---------- ---------- Liabilities and Shareholders' Equity ------------------------------------ Deposits: Noninterest Bearing $ 2,199,016 $ 2,290,233 Interest Bearing 7,300,064 7,881,576 ---------- ---------- Total Deposits 9,499,080 10,171,809
Short-term Borrowings 1,111,142 716,716 Accrued Expenses and Other Liabilities 287,654 248,481 Long-term Borrowings 653,777 234,418 ---------- ---------- Total Liabilities 11,551,653 11,371,424
Shareholders' Equity: Series A Convertible Preferred Stock, $1.00 par value, 3,000,000 Shares Authorized, (500,000 in 1993) 348,944 Shares Issued (185,314 in 1993); Liquidation Preference $34,894 ($18,531 in 1993) 349 185 Common Stock, $1.00 par value, 160,000,000 Shares Authorized, 99,494,335 Shares Issued (102,073,005 in 1993) 99,494 102,073 Additional Paid-in Capital 194,697 238,130 Retained Earnings 945,469 897,123
Less: Treasury Stock, at Cost, 6,964,920 Shares (5,821,786 in 1993) 143,438 121,106 Deferred Compensation 1,203 1,892 Net Unrealized Securities Losses Net of Tax 34,072 -- ---------- ---------- Total Shareholders' Equity 1,061,296 1,114,513 ----------- ----------- Total Liabilities and Shareholders' Equity $12,612,949 $12,485,937 =========== ===========
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)
Interest Income 1994 1993 1992 --------------- --------- -------- -------- Loans $ 681,085 $643,679 $665,634 Investment Securities: Taxable 110,894 123,207 139,302 Exempt from Federal Income Taxes 16,693 20,692 31,946 Trading Securities 218 186 260 Other Short-term Investments 8,416 5,713 13,897 --------- -------- -------- Total Interest Income 817,306 793,477 851,039
Interest Expense ---------------- Deposits 255,861 272,100 334,443 Short-term Borrowings 39,681 18,010 17,606 Long-term Borrowings 30,537 23,088 26,439 --------- -------- -------- Total Interest Expense 326,079 313,198 378,488 --------- -------- -------- Net Interest Income 491,227 480,279 472,551 Provision for Loan Losses 24,907 18,034 23,546 --------- -------- -------- Net Interest Income After Provision for Loan Losses 466,320 462,245 449,005
Other Income ------------ Data Processing Services 159,418 135,041 112,056 Trust Services 59,720 61,226 58,050 Other Customer Services 117,089 124,505 114,164 Net Securities Gains (Losses) (5,752) 8,334 9,207 Other 31,006 42,820 34,934 --------- -------- -------- Total Other Income 361,481 371,926 328,411
Other Expense ------------- Salaries and Employee Benefits 323,904 320,717 299,540 Net Occupancy 36,579 36,389 35,415 Equipment 59,569 57,863 53,438 Payments to Regulatory Agencies 23,359 23,142 22,595 Processing Charges 18,293 17,379 15,079 Supplies and Printing 14,416 13,169 12,841 Professional Services 12,504 12,036 11,034 Merger/Restructuring 75,228 -- -- Other 96,146 88,892 95,682 --------- -------- -------- Total Other Expense 659,998 569,587 545,624 --------- -------- --------
Consolidated Statements of Income Years ended December 31 ($000's except share data) - continued
1994 1993 1992 --------- -------- -------- Income Before Income Taxes, Extraordinary Items, and Cumulative Effect of Changes in Accounting Principles 167,803 264,584 231,792
Provision for Income Taxes 73,405 93,190 75,391 --------- -------- -------- Income Before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles 94,398 171,394 156,401
Extraordinary Items, Net of Income Taxes 11,542 -- --
Cumulative Effect of Changes in Accounting Principles, Net of Income Taxes -- -- (9,134)
---------- -------- -------- Net Income $ 105,940 $171,394 $147,267 ========== ======== ======== Net Income Per Common Share --------------------------- Primary:
Income Before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles $ 0.95 $ 1.67 $ 1.55
Extraordinary Items 0.12 -- --
Cumulative Effect of Changes in Accounting Principles -- -- (.09) --------- -------- -------- Net Income $ 1.07 $ 1.67 $ 1.46 ========= ======== ======== Fully Diluted:
Income Before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles $ 0.93 $ 1.60 $ 1.48
Extraordinary Items 0.11 -- --
Cumulative Effect of Changes in Accounting Principles -- -- (.08) --------- ------- ------
Net Income $ 1.04 $ 1.60 $ 1.40 ========= ======= ======
The accompanying notes are an integral part of the Consolidated Financial Statements.
Consolidated Statements of Cash Flows Years ended December 31 ($000's)
1994 1993 1992 ---------- ---------- ---------- Cash Flows From Operating Activities Net Income $ 105,940 $ 171,394 $ 147,267 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 71,957 57,058 41,377 Provision for Loan Losses 24,907 18,034 23,546 Gains on Sales of Assets ( 2,434) (21,487) (19,307) Proceeds from Sales of Trading Securities and Loans Held for Resale 3,657,575 3,192,622 3,330,463 Purchases of Trading Securities and Loans Held for Resale (3,547,732) (3,220,184) (3,394,249) Other (2,765) (6,743) (20,291) ---------- ---------- ---------- Total Adjustments 201,508 19,300 (38,461) ---------- ---------- ---------- Net Cash Provided by Operating Activities 307,448 190,694 108,806
Cash Flows From Investing Activities Net Decrease in Shorter Term Securities 7,676 53,244 59,217 Proceeds from Maturities of Longer Term Securities 861,428 1,742,984 1,400,797 Proceeds from Sales of Securities Available for Sale 595,476 29,892 58,393 Purchases of Longer Term Securities (1,254,651) (1,419,314) (1,843,079) Decrease in Loans Due to Divestitures 199,455 -- -- Net Increase in Loans (497,075) (543,812) (199,223) Purchases of Assets to be Leased (88,826) (94,187) (95,964) Principal Payments on Lease Receivables 113,976 105,352 96,062 Purchases of Premises and Equipment, Net (28,995) (65,731) (48,039) Other (29,829) (10,431) 37,482 ---------- ---------- ---------- Net Cash Used in Investing Activities (121,365) (202,003) (534,354)
Cash Flows From Financing Activities Decrease in Deposits Due to Divestitures (300,736) -- -- Net Increase (Decrease) in Deposits (371,993) 33,124 201,431 Proceeds from Issuance of Commercial Paper 1,578,618 1,348,661 597,794 Principal Payments on Commercial Paper (1,604,384) (1,325,634) (522,616) Net Increase (Decrease) in Other Short-term Borrowings 440,501 53,320 (62,085) Proceeds from Issuance of Long-term Debt 497,560 116,959 53,121 Payment of Long-term Debt (96,299) (63,718) (103,300) Dividends Paid (57,575) (54,435) (48,060) Purchase of Common Stock (101,887) (114,686) (99) Proceeds from the Issuance of Common Stock 11,682 19,887 37,820 Other 1,687 (630) 401 ---------- ---------- ---------- Net Cash Provided by (Used in) Financing Activities (2,826) 12,848 154,407 ---------- ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents 183,257 1,539 (271,141) Cash and Cash Equivalents, Beginning of Year 784,634 783,095 1,054,236 ---------- ---------- ---------- Cash and Cash Equivalents, End of Year $ 967,891 $ 784,634 $ 783,095 ========== ========== ==========
Supplemental Cash Flow Information: Cash Paid During the Year for: Interest $ 319,398 $ 313,073 $ 395,870 Income Taxes 91,797 88,398 84,948
The accompanying notes are an integral part of the Consolidated Financial Statements.
Consolidated Statements of Shareholders' Equity ($000's except share data)
Consolidated Statements of Shareholders' Equity ($000's except share data)
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, 1994, 1993, and 1992 ($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 1993 and 1992 Consolidated Financial Statements have been reclassified to conform with the 1994 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. Beginning in 1994, Investment Securities Available for Sale are carried at fair value with fair value adjustments and the related income tax effects reported as a separate component of shareholders' equity in accordance with Statement of Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity Securities". Previously, Investment Securities Available for Sale were carried at the lower of amortized cost or market. Short-term Investments, other than Trading Securities, are carried at cost, which approximates market value. Trading Securities are carried at market value, with adjustments to the carrying value reflected in the Consolidated Statements of Income.
Loans - Interest on loans, other than direct financing leases, is recognized as income based on the loan principal outstanding during the period. Unearned income on direct financing leases is recognized over the lease term on a basis that results in an approximate level rate of return on the lease investment. Loans are generally placed on nonaccrual status when they are past due 90 days as to either interest or principal. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged to interest income on loans. A nonaccrual loan may be restored to an accrual basis when interest and principal payments are brought current and collectibility of future payments is not in doubt.
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 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 $21,696 at December 31, 1994, and $16,979 at December 31, 1993. Amortization expense was $6,960, $4,668, and $5,161, for 1994, 1993, and 1992, respectively.
Intangibles - Unamortized intangibles resulting from acquisitions, primarily goodwill, core deposit premiums, purchased data processing contract rights and purchased mortgage servicing rights were $64,171 at December 31, 1994 and $58,647 at December 31, 1993. Purchased mortgage servicing rights are amortized
primarily over the periods during which the corresponding mortgage 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. Purchased data processing contract rights represent the costs to acquire the rights to data processing and software distribution. Such costs are generally amortized over the average contract lives, which range from 5 to 8 years. The other intangibles are amortized principally on the straight-line method over periods ranging from 6 to 25 years. Total amortization expense was $9,176, $7,204 and $7,159 for 1994, 1993 and 1992, respectively. The Corporation continually evaluates whether later events and circumstances have occurred to indicate that goodwill should be evaluated for possible impairment and utilizes estimates of undiscounted net income over the remaining life of the goodwill to measure recoverability.
The Corporation also has negative goodwill included in other liabilities, the majority of which, arose from an acquisition in 1992. Negative goodwill amounted to $12,387 and $13,963 at December 31, 1994 and 1993, respectively. The negative goodwill is being accreted on a straight-line basis over a period of 10 years and amounted to $1,576 in 1994 and 1993 and $807 in 1992.
Foreign exchange contracts - Foreign exchange contracts include such commitments as foreign currency spot, forward, future and, to a much lessor extent, option contracts. Foreign exchange contracts and the premiums on options written or sold are carried at market value, with realized and unrealized gains and losses included in other income.
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 99,420,070 in 1994, 102,672,361 in 1993, and 101,028,932 in 1992.
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 104,051,365 in 1994, 108,874,600 in 1993, and 107,411,875 in 1992.
2. Business Combination
On May 31, 1994, Valley Bancorporation ("Valley") merged with and into the Corporation in a tax-free reorganization accounted for as a pooling of
interests. Accordingly, prior year financial statements have been restated to give effect to this transaction. In accordance with the terms of the merger, each share of Valley Common Stock was converted into the right to receive 1.72 shares of the Corporation's Common Stock (approximately 35.7 million shares).
A reconciliation of net interest income and net income of the Corporation as previously reported to the amounts for that period in the accompanying Con- solidated Financial Statements as restated for the 1994 pooling of interests is as follows:
1993 1992 --------- -------- Net Interest Income: Corporation, as previously reported $ 309,178 $ 307,805 Valley Bancorporation 171,101 164,746 Combined $ 480,279 $ 472,551
Net Income: Corporation, as previously reported $ 125,491 $ 109,235 Valley Bancorporation 45,903 38,032 Combined $ 171,394 $ 147,267
The Corporation has also consummated the following business combinations:
Date Method of Organization Consummated Cash Consideration Accounting ------------ ----------- ------------------ ----------
United Savings & Loan Association, S.S.B. July 1, 1992 -- Purchase Pierce County Bank and Trust Company November 6, 1993 $14,678 Purchase Software Alliance Corporation December 30, 1994 $15,700 Purchase
The results of operations for the acquired companies accounted for as purchases are included in the Consolidated Financial Statements from the dates of acquisition.
The Corporation will purchase the Bank of Burlington with assets of approximately $171 million in February, 1995. The Corporation also has pending applications to acquire Citizens Bancorp of Delavan and Sharon State Bank with assets of approximately $95 million and $19 million, respectively. The acquisitions of Citizens Bancorp of Delavan and Sharon State Bank are expected to be completed during the first half of 1995.
3. Merger/Restructuring
Certain one-time expenses associated with the 1994 merger with Valley are shown in the consolidated statements of income as Merger/Restructuring and consist of the following:
Executive contracts $26,371 Employee severance costs 14,775 Duplicative computer and software write-offs 12,741 System conversion and standardization costs 2,888 Investment advisor fees 3,420 Legal, accounting and other professional fees 3,826 Lease terminations and equipment disposals 4,232 Net gain on sale of duplicative facilities and voluntary divestitures (1,334) Other 8,309 ------- Total merger/restructuring $75,228 =======
The executive contracts accrual represents the present value of the amounts due to certain Valley executives under their former employment contracts. During 1994, payments of $10.2 million were made and the remaining liability is expected to be paid beginning in 1997.
Employee severance costs represents the planned general reduction in work force resulting from the on-going merger and restructuring activities which affected all employee groups. Since the merger was announced, the reduction in the combined work force has been approximately 1,000 employees. The remaining number of employees to be terminated in 1995 is not significant. The severance policy, which was distributed to all employees, generally provides for a minimum of 2 weeks of severance payments up to a maximum of 52 weeks depending upon years of service and job classification with certain adjustments if subsequent employment is found during the severance period. The amount expensed represents the costs for all employees who have been formally notified of job loss and the costs associated with other identified employees who have not been notified. Approximately $8.6 million of severance costs were paid in 1994.
Duplicative computer and software write-offs represents the capitalized costs of Valley's own internal data processing center which was closed. System conversion and standardization costs represent the costs associated with the one-time conversion and standardization of Valley's records to the Corporation's data processing systems.
Investment advisors and legal, accounting and other professional fees represent fees paid to consumate the mergers.
Lease terminations and equipment disposals represent the costs to terminate branch office and other corporate facilities leases, equipment leases and the
disposal of equipment that will no longer be used and includes such items as lease buyout fees, write-offs of leasehold improvements and the write-down or loss on disposal of equipment.
Net gain on sale of duplicative facilities and voluntary divestitures represents the gain or loss from the sale of duplicative branch offices and other corporate facilities which were owned. The Corporation voluntarily divested 4 bank branches with deposits of approximately $34 million and certain portions of its insurance agencies. The estimated net gain on the remaining sales of excess facilities, which are not considered significant, will be recorded when realized.
Other charges include the one-time expenses associated with the curtailment of certain Valley defined benefit plans, approximately $3.3 million, costs to eliminate duplicate customer accounts, unusable capitalized inventory and other costs not deemed to be realizable due to the merger.
There have not been any material adjustments to the liabilities subsequent to the initial recognition which occured during the second quarter of 1994.
4. Extraordinary Items
During the third and fourth quarters of 1994, the Corporation realized extraordinary gains from the sale of certain bank branches with deposits of $267 million which were required to be divested in conjunction with the regulatory approvals obtained for the merger with Valley.
During the third quarter of 1994, the Corporation prepaid $ 53 million of Valley's long-term debt consisting of the senior unsecured notes, Series A 9.86% due in 1994 and Series B 9.97% due in 1995. In accordance with the note agreements, a prepayment premium was paid in connection with the early retirement of the debt. The debt was refinanced with the Corporation's medium-term notes.
The following table summarizes these 1994 transactions.
Income Earnings Per Share Gross Tax Net Increase (Decrease) Gain Expense Gain Fully (Loss) (Benefit) (Loss) Primary Diluted ------- ------- ------- ------- ------- Required Divestitures $22,034 $9,527 $12,507 $0.13 $0.12 Debt Prepayment (1,484) (519) (965) (0.01) (0.01) ------- ------- ------- ------- ------- $20,550 $9,008 $11,542 $0.12 $0.11 ======= ======= ======= ======= =======
5. 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 Primary Fully (Decrease) Diluted --------- ------- ------- Adoption of accounting standard on postretirement benefits, net of income tax benefits of $8,852 $(13,937) $ (.14) $ (.13) Adoption of accounting standard on income taxes 4,803 .05 .05 -------- ------- ------ $ (9,134) $ (.09) $ (.08) ======== ======= ======
6. Cash and Due from Banks
At December 31, 1994, $166,500 of cash and due from banks was restricted, primarily due to requirements of the Federal Reserve System to maintain certain reserve balances.
7. Other Short-term Investments
Other short-term investments at December 31 were:
1994 1993 -------- -------- Commercial paper $ 15,270 $ 22,550 Interest bearing deposits in other banks 28,249 27,571 -------- -------- Total other short-term investments $ 43,519 $ 50,121 ======== ========
8. Securities
The book and market values of securities at December 31 were:
1994 1993 --------------------- -------------------- Amortized Market Amortized Market Cost Value Cost Value ---------- -------- --------- --------- Investment Securities Held to Maturity: U.S. Treasury and government agencies $134,080 $129,737 -- -- States and political subdivisions 290,483 284,885 $326,154 $332,614 Mortgage backed securities -- -- 58 58 Other 4,893 4,899 9,188 9,205 ----------- ---------- ---------- ---------- Total $429,456 $419,521 $335,400 $341,877 =========== ========== ========== ==========
Investment Securities Available for Sale: U.S. Treasury and government agencies $1,836,476 $1,772,883 $2,139,866 $2,149,011 Mortgage backed securities 12,099 11,759 -- -- Other 69,541 80,505 97,292 112,106 ----------- ----------- ---------- ---------- Total $1,918,116 $1,865,147 $2,237,158 $2,261,117 =========== =========== ========== ==========
The unrealized gains and losses of securities at December 31 were:
1994 1993 ---------------------- ---------------------- Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses ---------- ---------- ---------- ----------
Investment Securities Held to Maturity: U.S. Treasury and government agencies -- $ 4,343 -- -- States and political subdivisions $ 1,501 7,099 $ 7,681 $ 1,221 Mortgage backed securities -- -- -- -- Other 8 2 23 6 ---------- ---------- ---------- ---------- Total $ 1,509 $ 11,444 $ 7,704 $ 1,227 ========== ========== ========== ==========
Investment Securities Available for Sale: U.S. Treasury and government agencies $ 120 $ 63,713 $ 11,413 $ 2,268 Mortgage backed securities 14 354 -- -- Other 11,003 39 15,885 1,071 ---------- ---------- ----------- --------- Total $ 11,137 $ 64,106 $ 27,298 $ 3,339 ========== ========== =========== =========
The book value and market value of securities by contractual maturity at December 31, 1994 were:
Investment Securities Investment Securities Held to Maturity Available for Sale --------------------- --------------------- Amortized Market Amortized Market Cost Value Cost Value --------- --------- --------- -------- Within one year $100,926 $100,911 $574,837 $568,849 From one through five years 255,254 247,290 1,274,556 1,217,250 From five through ten years 71,531 69,591 15,997 15,321 After ten years 1,745 1,729 52,726 63,727 --------- --------- ---------- ---------- Total $429,456 $419,521 $1,918,116 $1,865,147 ========= ========= ========== ==========
The gross realized gains and losses amounted to $3,499 and $9,251 in 1994 and $8,552 and $218 in 1993, and $14,743 and $5,536 in 1992, respectively.
At December 31, 1994, securities with a value of approximately $348,058 were pledged to secure public deposits, short-term borrowings, and for other purposes required by law.
9. Loans
Loans at December 31 were: 1994 1993 ---------- ---------- Commercial, financial, and agricultural $2,644,928 $2,538,830 Industrial development revenue bonds 31,796 45,889 Real estate: Construction 378,316 333,609 Residential mortgage 2,240,287 2,223,857 Commercial mortgage 2,062,022 2,000,052 Personal 1,178,453 1,217,513 Lease financing 256,690 257,622 ---------- ---------- Total loans $8,792,492 $8,617,372 ========== ==========
The Corporation's lending activities are concentrated primarily in the Midwest. Approximately 3% of its portfolio consists of loans granted to customers located in Arizona. The Corporation had $1,987 in foreign credits at December 31, 1994. The Corporation's loan portfolio consists of business loans extending across many industry types, as well as loans to individuals. As of December 31, 1994, 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 1994 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 $116,776 New loans 257,962 Repayments (227,040) -------- Balance, end of year $147,698 ========
An analysis of the allowance for loan losses follows:
1994 1993 1992 -------- -------- -------- Balance, beginning of year $133,600 $123,805 $105,156 Allowance of banks acquired -- 1,167 4,284 Provision charged to expense 24,907 18,034 23,546 Charge-offs (12,561) (17,466) (22,344) Recoveries 8,015 8,060 13,163 -------- -------- -------- Balance, end of year $153,961 $133,600 $123,805 ======== ======== ========
As of December 31, 1994, and 1993, nonaccrual loans totalled $44,766 and $44,186, respectively. The effect of nonaccrual loans on net income in 1994, 1993, and 1992, was not significant.
During the second quarter of 1994, a loan loss provision of $8,950 was charged to expense, after consummation of the merger with Valley, to conform Valley's loan valuation policies with those of the Corporation.
In May 1993 and October 1994, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, an amendment to SFAS No. 114. These new standards require that a loan's value be measured, and if appropriate a valuation reserve established, when it has been determined that the loan is impaired and loss is probable. These standards 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 these pronouncements will have a material impact on the Consolidated Financial Statements.
10. Premises and Equipment
The composition of premises and equipment at December 31 was:
1994 1993 -------- --------
Land $ 37,894 $ 42,076 Buildings and leasehold improvements 246,679 248,256 Furniture and equipment 288,507 286,311 -------- -------- 573,080 576,643 Less accumulated depreciation 286,645 276,842 -------- -------- Total premises and equipment $286,435 $299,801 ======== ========
Depreciation expense was $43,006 in 1994, $42,417 in 1993, and $37,171 in 1992. The Corporation leases certain of its facilities and equipment. Rent expense under such operating leases was $20,567 in 1994, $20,420 in 1993, and $19,925 in 1992, respectively.
The future minimum lease payments under operating leases that have initial or remaining noncancellable lease terms in excess of one year for 1995 through 1999 are $6,909, $6,153, $5,861, $5,522, and $4,305, respectively.
11. Short-term Borrowings
Short-term borrowings at December 31 were: 1994 1993 -------- -------- Funds purchased and security repurchase agreements $944,843 $515,028 U.S. Treasury demand notes 29,976 33,977 Commercial paper 74,526 100,292 Current maturities of long-term borrowings 37,286 63,148 Other 24,511 4,271 ---------- -------- Total short-term borrowings $1,111,142 $716,716 ========== ========
Unused lines of credit primarily to support commercial paper borrowings were $40,000 at December 31, 1994 and $55,000 at December 31, 1993.
12. Long-term Borrowings
Long-term borrowings at December 31 were:
Corporation: 1994 1993 -------- -------- Senior unsecured notes, Series A 9.86% -- $ 23,000 Senior unsecured notes, Series B 9.97% -- 30,000
8.5% convertible subordinated notes due in 1997 $ 33,637 50,000 6.375% subordinated notes due in 2003 99,422 99,373 Medium-term Series B and C notes 183,700 38,000
Subsidiaries: Bank notes 308,638 -- Nonrecourse notes 33,043 34,116 Mortgages 3,086 4,196 9.75% obligation under capital lease due through 2006 4,939 5,156 Other 24,598 13,725 -------- -------- 691,063 297,566 Less current maturities 37,286 63,148 -------- -------- Total long-term borrowings $653,777 $234,418 ======== ========
During 1994 the Corporation elected to prepay the Senior Series A and B notes. In accordance with the note agreements, the Corporation paid a premium of $1,484 to retire the debt. See Note 4, Extraordinary Items.
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.
During 1994, $16,363 of the Notes were converted by the holder into 1,870,057 shares of the Corporation's common stock. The common stock acquired by conversion of the Notes was exchanged for 163,630 shares of the Corporation's Series A convertible preferred stock. These are noncash transactions for purposes of the Consolidated Statements of Cash Flows.
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.
At December 31, 1994, medium-term Series B notes outstanding amounted to $60,830. Such notes mature in 1995 through 1998 and have fixed interest rates of 4.60% to 8.65%. No additional borrowings may occur under the Series B notes.
There were $122,870 of medium-term Series C notes outstanding at December 31, 1994. The medium-term Series C notes have fixed interest rates of 6.74% to 7.84% and mature in 1996 and 1997. Approximately $27,130 of unissued Series C notes are remaining and available to be issued in the future.
The bank notes represent unsecured general obligations of the Corporation's banking subsidiaries "Issuing Banks". Each of the Corporation's banking subsidiaries is a potential Issuing Bank which may issue bank notes with maturities ranging from 30 days to 15 years at a fixed or floating rate up to a maximum of $1.0 billion aggregate principal amount outstanding at any time. The bank notes are offered through certain designated agents and are offered and sold only to institutional investors. The bank notes are sole obligations of the respective Issuing Banks and are not obligations of or guaranteed by the Corporation. The amount outstanding at December 31, 1994 represents the aggregate borrowings of 12 banking subsidiaries and mature at various times in May through October, 1996. Each bank note outstanding has a floating rate which is based on LIBOR plus 1/16 which ranged from 6.00% to 6.19% at December 31, 1994. Interest is payable and the interest rate is reset monthly.
The nonrecourse notes are reported net of prepaid interest and represent borrowings by the leasing subsidiary from banks and other financial institutions. These notes have a weighted average interest rate of 8.45% at December 31, 1994, 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 $8,748 at December 31, 1994.
Scheduled maturities of long-term borrowings are: $390,135, $150,719, $5,912, and $1,923 for 1996 through 1999, respectively.
13. Shareholders' Equity
The Corporation has 5,000,000 shares of preferred stock authorized, of which the Board of Directors has designated 3,000,000 shares as Series A convertible, with a $100 value per share for conversion purposes. Series A is nonvoting preferred stock. The same cash dividends will be paid on Series A as would have been paid on the common stock exchanged for Series A. Series A has the same restrictions on sale as are applicable to the 8.5% convertible subordinated notes.
The holder of the convertible subordinated notes has the option through 1997 to exchange common stock of the Corporation for Series A. If the common stock is acquired by the holder in conversion of the Notes, the exchange ratio is one share of Series A for 11.43 shares of common stock. If acquired otherwise, the exchange ratio is one share of Series A, valued at $100, to the holder's weighted average purchase price per common share. Also, the holder has the option to convert Series A into common stock at the same ratio that the common stock was exchanged for Series A. The Corporation has issued 348,944 shares of its Series A convertible preferred stock in exchange for 3,832,957 shares of common stock.
The preferred stock is treated as a common stock equivalent in all per share calculations.
The Corporation has a Stock Repurchase Program which was approved by the Corporation's Board of Directors in April, 1993 and reaffirmed in October, 1994. In October 1994, the Board of Directors also authorized an increase in the number of shares to be repurchased through 1995 from 9.0 million shares to 15.1 million shares. The shares are being acquired in anticipation of the conversion of the Corporation's 8.5% convertible subordinated notes, to fund the on-going program to deliver or have available shares of common stock for stock option and other employee benefit plans and other corporate needs. During 1994 the Corporation purchased 4.8 million shares and has cumulatively purchased 9.8 million shares since inception of the program.
Federal banking regulatory agencies have established capital adequacy rules which take into account risk attributable to balance sheet assets and off- balance sheet activities. All banks and bank holding companies must meet a minimum total risk-based capital ratio of 8%. Of the 8% required, 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, 1994 ($ in millions)
Amount Ratio ------ ----- Tier 1 capital $1,040 11.15% Tier 1 capital minimum requirement 373 4.00 ------ ----- Excess $ 667 7.15% ====== =====
Total capital $1,270 13.62% Total capital minimum requirement 746 8.00 ------ ----- Excess $ 524 5.62% ====== =====
Risk-adjusted assets $9,331
LEVERAGE RATIO as of December 31, 1994 ($ in millions) -----------------------------
Amount Ratio -------- ----------- Tier 1 capital to adjusted total assets $ 1,040 8.39%
Minimum leverage requirement 372-620 3.00 - 5.00 -------- -----------
Excess $668-420 5.39 - 3.39% ======== ===========
Adjusted average total assets $ 12,392
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, 1994, the retained earnings of subsidiaries available for distribution as dividends without regulatory approval was approximately $258,509.
14. Income Taxes
Total income tax expense for the years ended December 31, 1994, 1993 and 1992 was allocated as follows: 1994 1993 1992 ------- ------- -------- Income before extraordinary items and cumulative changes in accounting $73,405 $93,190 $75,391
Extraordinary items 9,008 -- --
Cumulative effects of changes in accounting -- -- (13,655)
Shareholders' Equity: Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (3,442) (8,154) (2,571)
Unrealized losses on investment securities available for sale (18,897) -- -- ------- ------- ------- $60,074 $85,036 $59,165 ======= ======= =======
As discussed in Note 5, 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.
The current and deferred portions of the provision for income taxes were:
1994 1993 1992 -------- ------- ------- Current: Federal $ 80,758 $81,561 $71,896 State 12,686 14,746 13,272 -------- ------- ------- 93,444 96,307 85,168 Deferred: Federal (21,075) (3,412) (9,545) State 1,036 295 (232) -------- -------- ------- (20,039) (3,117) (9,777) -------- -------- ------- Total provision for income taxes $73,405 $93,190 $75,391 ======== ======== =======
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 1994 and 1993 and 34% in 1992, respectively):
1994 1993 1992 ------- ------- -------
Tax computed at statutory rates $58,731 $92,604 $78,809 Increase (decrease) in taxes resulting from: Federal tax-exempt income (5,972) (7,714) (11,622) State income taxes, net of Federal tax benefit 10,605 9,832 9,039 Adjustment to deferred tax assets/liabilities for an enacted change in tax rate -- (469) -- Merger/Restructuring 7,191 -- -- Other 2,850 (1,063) (835) ------- ------- ------- Total provision for income taxes $73,405 $93,190 $75,391 ======= ======= =======
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:
1994 1993 ------- --------- Deferred tax assets: Deferred compensation $ 8,170 $ 7,996 Allowance for loan losses 43,537 36,016 Accrued postretirement benefits 14,275 11,769 Purchase accounting adjustments -- 1,046 Unrealized gains and losses 18,897 -- Other 26,504 16,928 ------- --------- Total deferred tax assets 111,383 73,755
Deferred tax liabilities: Lease revenue reporting 20,683 21,015 Deferred expense, net of unearned income 5,563 7,224 Fixed assets, principally due to depreciation 17,683 17,839 Pension funding versus expense 1,833 3,143 Purchase accounting adjustments 336 -- Other 6,122 4,306 ------- --------- Total deferred tax liabilities 52,220 53,527 ------- --------- Net deferred tax assets $59,163 $ 20,228 ======= =========
The amount of income tax expense (benefit) related to net securities gains or losses amounted to ($2,171), $3,103, and $3,675, in 1994, 1993, and 1992, respectively.
15. Stock Option and Restricted Stock Plans
The Corporation has Executive Stock Option and Restricted Stock Plans which provide for the grant of nonqualified and incentive stock options, stock appreciation rights and rights to purchase restricted shares to key employees at prices ranging from not less than the par value of the common shares to the fair market value of the shares at the date of grant.
Activity relating to common stock options was:
Number Option Price Of Shares Per Share --------- --------------- Shares under option at December 31, 1992 7,802,794 $ 3.35 - 19.92 Options granted 839,040 15.38 - 23.25 Options lapsed or surrendered (18,215) 9.34 - 19.50 Options exercised (2,228,186) 3.35 - 19.50 --------- --------------- Shares under option at December 31, 1993 6,395,433 $ 4.02 - 23.25
Options granted 1,096,800 19.25 - 21.75 Options lapsed or surrendered (29,889) 5.39 - 22.75 Options exercised (1,151,218) 4.02 - 19.50 ---------- --------------- Shares under option at December 31, 1994 6,311,126 $ 4.02 - 23.25 ========== ===============
Options exercisable at December 31, 1994, and 1993, were 4,825,426 and 5,542,645, respectively. Shares reserved for the granting of additional options at December 31, 1994, were 1,956,386.
There were 13,000 restricted stock purchase rights outstanding at December 31, 1994 and no restricted stock purchase rights outstanding at December 31, 1993. During 1994, 3,000 stock purchase rights were exercised. No stock purchase rights were exercised in 1993.
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 $747, $1,008, and $1,004, in 1994, 1993, and 1992, respectively.
The Corporation also has a Long-term Incentive Plan (the plan). Under the plan, performance units may be awarded from time to time. Once awarded, additional performance units will be credited to each participant based on dividends paid by the Corporation on its common stock. At the end of a designated vesting period, participants will receive an amount, either in cash, common stock or some combination thereof, equal to some percent (0%-275%) of the initial performance units credited plus those additional units credited as dividends based on the established performance criteria. During 1994, 156,500 units were awarded to certain executives of the Corporation. The vesting period is three
years from the date the performance units were awarded. Based on the performance criteria, without regard to the vesting, no amount would be due to the participants at December 31, 1994.
16. Employee Retirement and Health Plans
The Corporation has a defined contribution retirement plan and an incentive savings plan for substantially all employees, including eligible former Valley employees beginning in June, 1994 after consummation of the merger. The retirement plan provides for a guaranteed contribution to eligible participants equal to 2% of compensation. At the Corporation's option, a profit sharing amount may also be contributed and may vary from year to year up to a maximum of 6% of eligible compensation. Under the incentive savings plan employee contributions, up to 6% of eligible compensation, are matched up to 50% by the Corporation based on the Corporation's return on equity as defined by the plan. Total expense relating to these plans was $21,631, $17,771 and $19,053 in 1994, 1993 and 1992, respectively.
The Corporation also has supplemental retirement plans to provide retirement benefits to certain of its key executives. Total expense relating to these plans amounted to $910 in 1994, $2,703 in 1993, and $4,561 in 1992.
Valley maintained a trusteed defined benefit retirement plan which covered substantially all its employees. Upon consummation of the merger the plan was curtailed. The following table reflects the plan's funded status and amounts recognized in the financial statements at December 31:
1994 1993 -------- -------- Actuarial present value of benefit obligations: Vested benefit obligation $ 34,680 $ 38,326 Nonvested benefit obligation 520 1,820 -------- -------- Accumulated benefit obligation 35,200 40,146 Effect of projected future compensation levels -- 19,911 -------- -------- Projected benefit obligation 35,200 60,057 Plan assets at fair value 43,913 45,159 -------- -------- Plan assets greater (less) than projected benefit obligations 8,713 (14,898) Unrecognized net (gain) loss (2,855) 23,148 Unrecognized prior service cost -- 2,401 Unrecognized net asset (1,534) (1,672) -------- -------- Prepaid pension cost $ 4,324 $ 8,979 ======== ========
The net pension cost for 1994, 1993, and 1992, included the following components:
1994 1993 1992 -------- -------- --------
Service cost $ 2,011 $ 3,361 $ 2,348 Interest cost 3,393 3,283 2,502 Actual return on plan assets (777) (2,885) (1,852) Net amortization and deferral (2,279) (416) (882) -------- -------- -------- Net periodic pension cost before curtailment 2,348 3,343 2,116 Curtailment 2,301 -- -- -------- -------- -------- Total expense $ 4,649 $ 3,343 $ 2,116 ======== ======== ========
The expense associated with the curtailment is classified as Merger/Restructuring in the Consolidated Statements of Income.
The following assumptions were used in determining the projected benefit obligation:
1994 1993 ------ ------
Discount rate 8.25% 6.75% Rate of increase in compensation levels - 5.00% Expected long-term rate of return on assets 7.00% 10.00%
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.
Valley provided postretirement health care benefits to retired employees. These benefits were subject to deductibles, copayment provisions and other limitations. Only those employees retiring on or before December 31, 1994 were eligible for such benefits. As part of the merger, all former Valley employees became eligible to participate in the Corporation's postretirement health plan. The Corporation did not recognize years of service with Valley prior to the merger.
As discussed in Note 5, 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. Valley's results of operations have
been restated to conform their policy to the Corporation's, thereby resulting in a total charge to earnings of $22,789.
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:
1994 1993 -------- --------
Accumulated postretirement benefit obligation: Retirees $ 17,541 $ 13,602 Fully eligible active plan participants 8,187 9,019 Active plan participants 13,890 16,679 -------- -------- 39,618 39,300 Unrecognized loss (5,836) (10,837) -------- -------- Accrued postretirement benefit cost $ 33,782 $ 28,463 ======== ========
Weighted average discount rate used in determining APBO 8.25% 7.50% ======== ========
Net periodic postretirement benefit cost for the years ended December 31, 1994, 1993 and 1992 includes the following components:
1994 1993 1992 -------- -------- --------
Service cost $ 2,510 $ 1,385 $ 1,212 Interest on APBO 2,950 2,279 1,668 Net amortization and deferral 617 -- -- -------- -------- -------- $ 6,077 $ 3,664 $ 2,880 ======== ======== ========
For measurement purposes, the assumed health care cost trend rate was 12% and 13% in 1994 and 1993, respectively, and gradually declines to 6.5% in the year 2016.
The health care cost trend rate assumption has a significant effect on the amounts reported. An increase in the assumed health care cost trend rate of one percentage point would increase the APBO at December 31, 1994 by $7,259 and increase 1994 postretirement benefit expense by $692.
17. Financial Instruments with Off-Balance Sheet Risk
Financial instruments with off-balance sheet risk at December 31 were:
1994 1993 ------- ---------- Financial instruments whose amounts represent credit risk: Commitments to extend credit: To commercial customers $2,585,065 $3,210,573 To individuals 634,350 725,122 Standby letters of credit, net of participations 332,142 295,382 Commercial letters of credit 26,278 17,032 Mortgage loans sold with recourse 6,145 8,408 Financial instruments whose amounts exceed the amount of credit risk: Foreign exchange contracts: Commitments to purchase foreign exchange 148,832 229,061 Commitments to deliver foreign exchange 151,135 231,925 Options written/purchased 6,714 24,251 Interest rate swaps -- 105,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. The majority of the Corporation's commitments to extend credit generally provide for the interest rate to be determined at the time the commitment is utilized. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Corporation evaluates each customer's credit worthiness on an individual basis. Collateral obtained, if any, upon extension of credit, is based upon management's credit evaluation of the customer. Collateral requirements and the ability to access collateral is generally similar to that required on loans outstanding as discussed in Note 9.
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.
Interest rate swaps are agreements to exchange, at specified intervals, interest payment streams calculated on an agreed upon notional principal amount with at least one stream based on a floating rate index. Periodic payments between counterparties are typically settled on a net basis over the life of the swap. Interest rate swaps are subject to the market risk inherent in such agreements and the risk that a counterparty will fail to meet the terms of the agreement.
During 1993 certain former Valley banks entered into interest rate swaps to hedge against the net interest margin exposure arising from existing variable rate loans and fixed rate deposits in a declining interest rate environment. The Valley banks were floating rate payors. Approximately $30 million of notional amount was based on a floating prime rate and the remainder was based on a floating three month LIBOR. Payments under the swap agreements were accounted for as adjustments to the yields on the variable rate loan portfolios. Such agreements had terms of approximately one year and expired prior to consummation of the merger in May, 1994.
Foreign exchange contracts are commitments to purchase or deliver foreign currency at a specified exchange rate. The Corporation enters into foreign exchange contracts primarily in connection with trading activities to enable customers involved in international trade to hedge their exposure to foreign currency fluctuations and to minimize the Corporation's own exposure to foreign currency fluctuations resulting from the above. Foreign exchange contracts include such commitments as foreign currency spot, forward, future and, to a much lessor extent, option contracts. The risks in these transactions arise from the ability of the counterparties to perform under the terms of the contracts and the risk of trading in a volatile commodity. The Corporation actively monitors all transactions and positions against predetermined limits established on traders and types of currency to ensure reasonable risk taking.
The Corporation's market risk from unfavorable movements in currency exchange rates is minimized by essentially matching commitments to deliver foreign exchange with commitments to purchase foreign exchange.
At December 31, 1994, the Corporation's foreign currency positions resulting from foreign exchange contracts by major currency was as follows: ($000's US):
Commitments Commitments To Deliver To Purchase Foreign Foreign Currency Exchange Exchange ----------------------------- ----------- ----------- Japanese Yen $ 34,395 $ 33,980 Deutsche Mark 33,922 33,799 French Franc 32,315 32,362 English Pound Sterling 17,657 17,413 Italian Lire 7,311 7,190 Canadian Dollars 8,031 7,064 All Other 17,504 17,024 ----------- ----------- Total $151,135 $148,832 =========== ===========
Average Amount of Contracts To Deliver/Purchase Foreign Exchange $296,033 $293,945 =========== ===========
These amounts do not represent the actual credit or market exposure.
18. Fair Value of Financial Instruments
The book values and estimated fair values for on and off-balance sheet financial instruments as of December 31, 1994 and 1993 are reflected below.
BALANCE SHEET FINANCIAL INSTRUMENTS ($ In Millions)
1994 1993 ------------------- ------------------- Book Fair Book Fair Value Value Value Value --------- -------- -------- -------- Financial Assets: Cash and short-term investments $ 1,011.4 $1,011.4 $ 834.8 $ 834.8 Trading securities 20.4 20.4 2.9 2.9 Investment securities held to maturity 429.5 419.5 335.4 341.9 Investment securities available for sale 1,865.1 1,865.1 2,237.2 2,261.1 Net loans 8,638.5 8,668.6 8,483.8 8,683.1 Interest receivable 85.9 85.9 77.8 77.8
Financial Liabilities: Deposits 9,499.1 9,494.3 10,171.8 10,221.1 Short-term borrowings 1,073.9 1,073.9 653.6 653.6 Long-term borrowings: Convertible debt 33.6 73.0 50.0 135.0 Other long-term borrowings 657.4 639.6 247.6 255.6 Interest payable 44.7 44.7 39.1 39.1
Where readily available, quoted market prices were utilized by the Corporation. If quoted market prices were not available, fair values were based on estimates using present value or other valuation techniques. These techniques were significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The calculated fair value estimates, therefore, cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 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 8, 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 12) for which fair value was considered to be the current market value of the shares that would be issued in a full conversion. Other long-term debt was generally valued using a discounted cash flow analysis with a discount rate based on current incremental borrowing rates for similar types of arrangements or, if not readily available, based on a build up approach similar to that used for loans and deposits. Long-term borrowings include their related current maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS ($ in millions)
Fair values of loan commitments and letters of credit have been estimated based on the equivalent fees, net of expenses, that would be charged for similar contracts and customers at December 31. The fair value of interest rate swaps are based on pricing models using current assumptions.
1994 1993 ------ ------
Loan commitments $ 1.2 $ 2.2 Letters of credit 2.7 2.3 Interest rate swaps -- .1
Foreign exchange contracts are carried at market value (U.S. dollar equivalent of the underlying contract). The fair value of options written/purchased are based on the market value of the premium paid as of the reporting date.
1994 1993 ------ ------ Commitments to purchase foreign exchange $148.8 $229.1 Commitments to deliver foreign exchange 151.1 231.9 Options written/purchased .8 1.0
See Note 17 for additional information on financial off-balance sheet instruments.
19. Business Segments
The following table reflects certain information regarding our banking and data processing businesses: Adjustments Data and 1994 Banking Processing Eliminations Consolidation ---- ---------- ---------- ------------ ------------- Revenue from: Unaffiliated customers $1,019,369 $ 159,418 -- $ 1,178,787 Affiliated customers 6,815 72,068 $ (78,883) -- --------- ---------- ------------ ------------- Total revenue $1,026,184 $ 231,486 $ (78,883) $ 1,178,787 ========== ========== ============ =============
Operating profit before Merger/Restructuring $ 211,897 $ 31,134 -- $ 243,031 ========== ========== ============ =============
Operating profit $ 150,352 $ 17,451 -- $ 167,803 ========== ========== ============ =============
Identifiable assets $12,463,178 $ 208,216 $ (58,445) $ 12,612,949 ========== ========== ============ ============= Net capital expenditures $ (3,184) $ 32,179 -- $ 28,995 ========== ========== ============ =============
---- Revenue from: Unaffiliated customers $1,030,362 $ 135,041 -- $ 1,165,403 Affiliated customers 7,920 71,775 $ (79,695) -- ---------- ---------- ------------ ------------- Total revenue $1,038,282 $ 206,816 $ (79,695) $ 1,165,403 ========== ========== ============ ============= Operating profit $ 243,285 $ 21,299 -- $ 264,584 ========== ========== ============ ============= Identifiable assets $12,372,154 $ 162,748 $ (48,965) $ 12,485,937 ========== ========== ============ ============= Net capital expenditures $ 20,004 $ 45,727 -- $ 65,731 ========== ========== ============ =============
Adjustments Data and 1992 Banking Processing Eliminations Consolidation ---- ---------- ---------- ------------ ------------- Revenue from: Unaffiliated customers $1,067,394 $ 112,056 -- $ 1,179,450 Affiliated customers 7,619 69,234 $ (76,853) -- ---------- ---------- ------------ ------------- Total revenue $1,075,013 $ 181,290 $ (76,853) $ 1,179,450 ========== ========== ============ ============= Operating profit $ 211,579 $ 20,213 -- $ 231,792 ========== ========== ============ ============= Identifiable assets $12,125,497 $ 125,976 $ (37,002) $ 12,214,471 ========== ========== ============ ============= Net capital expenditures $ 21,630 $ 26,409 -- $ 48,039 ========== ========== ============ =============
The Corporation owns 36 banks, 1 savings association, and numerous nonbank subsidiaries. Each subsidiary is a separate legal and operating entity. Our banking operations provide traditional banking products along with trust, mortgage banking, leasing, and venture capital services. M&I Data Services, Inc. (DSI) provides data processing, software, and other related services to both affiliated and unaffiliated customers. In addition, a Valley affiliate provided similar services and other operational support to affiliated customers and merged with DSI upon consummation of the merger.
Revenues from affiliated customers are charged at rates available to and transacted with unaffiliated customers.
Operating profit is pretax net income. Depreciation and amortization expense for the banking services business amounted to $40,733, $30,378, and $18,975 in 1994, 1993, and 1992, respectively, and for DSI amounted to $31,224 in 1994, $26,680 in 1993, and $22,402 in 1992.
20. Condensed Financial Information - Parent Corporation Only
Condensed Balance Sheets December 31 1994 1993 ---------- ---------- Assets ------ Cash and cash equivalents $ 40,977 $ 1,479 Indebtedness of affiliates: Banks 5,000 5,200 Nonbanks 190,144 343,397 Investments in affiliates: Banks 957,731 966,881 Nonbanks 248,743 193,314 Other assets 72,110 39,090 ---------- ---------- Total assets $1,514,705 $1,549,361 ========== ==========
Liabilities and shareholders' equity ------------------------------------ Commercial paper issued $ 74,526 $ 100,292 Other short-term borrowings -- 50,000 Other liabilities 62,124 44,183
Long-term borrowings 316,759 240,373 ---------- ---------- Total liabilities 453,409 434,848 Shareholders' equity 1,061,296 1,114,513 ---------- ---------- Total liabilities and shareholders' equity $1,514,705 $1,549,361 ========== ==========
Scheduled maturities of long-term borrowings are $13,500 in 1995, $64,150 in 1996, $137,937 in 1997, $1,750 in 1998, and $100,000 in 2003.
Condensed Statements of Income Years Ended December 31 1994 1993 1992 -------- -------- --------
Income ------ Cash dividends: Bank affiliates $94,812 $105,738 $ 90,269 Nonbank affiliates 18,690 17,259 12,527 Interest from affiliates 13,412 14,090 12,626 Service fees and other 35,453 35,701 29,859 -------- -------- -------- Total income 162,367 172,788 145,281
Expense ------- Interest 22,982 19,968 22,073 Administrative and general 72,259 37,665 47,754 -------- -------- -------- Total expense 95,241 57,633 69,827 Income before income taxes, extraordinary items, cummulative effect of changes in accounting principles and equity in undistributed net income of affiliates 67,126 115,155 75,454 Income tax benefit 7,926 2,057 10,080 -------- -------- -------- Income before extraordinary items, cummulative effect of changes in accounting principles and equity in undistributed net income of affiliates 75,052 117,212 85,534 Extraordinary items, net of income taxes (610) -- -- Cumulative effect of changes in accounting principles, net of income taxes -- -- (1,380) -------- -------- -------- Income before equity in undistributed net income of affiliates 74,442 117,212 84,154 Equity in undistributed net income of affiliates: Banks 29,430 36,527 36,715 Nonbanks 2,068 17,655 26,398 -------- -------- -------- Net income $105,940 $171,394 $147,267 ======== ======== ========
Condensed Statements of Cash Flows Years Ended December 31 1994 1993 1992 ---------- --------- ---------- Cash Flows From Operating Activities: Net income $ 105,940 $ 171,394 $ 147,267 Noncash items included in income: Equity in undistributed net income of affiliates (31,498) (54,182) (63,113) Depreciation and amortization 9,372 6,092 6,527 Other (25,619) (5,741) 1,430 --------- --------- ----------
Net cash provided by operating activities 58,195 117,563 92,111
Cash Flows From Investing Activities: Increases in indebtedness of affiliates (519,674) (557,882) (300,227) Decreases in indebtedness of affiliates 622,552 436,122 237,390 Increases in investments in affiliates (20,300) (15,040) (29,733) Other 30,824 3,843 2,924 --------- --------- ----------
Net cash provided by (used in) investing activities 113,402 (132,957) (89,646)
Cash Flows From Financing Activities: Dividends paid (57,575) (54,435) (48,060) Proceeds from issuance of commercial paper 1,578,618 1,348,661 597,794 Principal payments on commercial paper (1,604,384) (1,325,634) (522,990) Proceeds from issuance of long-term debt 158,563 99,351 24,598 Payments on long-term debt (65,900) (36,677) (79,413) Increase (decrease) in other short- term borrowings (50,000) 50,000 (374) Purchase of common stock (101,887) (114,686) (99) Proceeds from exercise of stock options 11,682 19,887 5,014 Proceeds from the issuance of common stock -- -- 32,806 Other (1,216) (14) (74) ---------- --------- ----------
Net cash provided by (used in) financing activities (132,099) (13,547) 9,202 ---------- --------- ----------
Condensed Statements of Cash Flows Years Ended December 31 - continued 1994 1993 1992 ---------- --------- ---------- Net increase (decrease) in cash and cash equivalents 39,498 (28,941) 11,667 Cash and cash equivalents, beginning of year 1,479 30,420 18,753 ---------- --------- ----------
Cash and cash equivalents, end of year $ 40,977 $ 1,479 $ 30,420 ========== ========= ==========
Quarterly Financial Information (Unaudited) ($000's except share data)
Following is unaudited financial information for each of the calendar quarters during the years ended December 31, 1994 and 1993. 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 ----------------------------------------- Dec. 31 Sept. 30 June 30 March 31 -------- -------- -------- --------
---- Total Interest Income $216,323 $210,480 $198,539 $191,964 Net Interest Income 126,816 126,165 120,711 117,535 Provision for Loan Losses 4,299 3,655 13,001 3,952 Income (loss) before Income Taxes and Extraordinary Items 76,090 71,338 (39,636) 60,011 Income (loss) before Extraordinary Items 48,054 44,892 (37,061) 38,513 Net Income (loss) 58,473 46,015 (37,061) 38,513
Net Income (Loss) Per Share: Primary: Income (Loss) before Extraordinary Items 0.49 0.45 (0.39) 0.39 Net Income (Loss) 0.60 0.46 (0.39) 0.39
Fully Diluted: Income (Loss) before Extraordinary Items 0.48 0.44 (0.39) 0.37 Net Income (Loss) 0.58 0.45 (0.39) 0.37
---- Total Interest Income $197,155 $197,439 $198,856 $200,027 Net Interest Income 121,554 119,705 120,260 118,760 Provision for Loan Losses 4,883 4,400 4,440 4,311 Income before Income Taxes 68,093 66,878 66,248 63,365 Net Income 43,513 42,535 43,417 41,929 Net Income Per Share: Primary 0.43 0.42 0.42 0.41 Fully Diluted 0.41 0.40 0.40 0.39
Common Dividends Declared* 1994 1993 1992 1991 1990 --------------------------------------------------------------------------- First Quarter $0.14 $0.12 $0.11 $0.10 $0.09 Second Quarter 0.15 0.14 0.12 0.11 0.10 Third Quarter 0.15 0.14 0.12 0.11 0.10 Fourth Quarter 0.15 0.14 0.12 0.11 0.10 -------------------------------------------------- $0.59 $0.54 $0.48 $0.43 $0.39 ==================================================
* May not add due to rounding
Price Range of Stock (Low and High Bid) 1994 1993 1992 1991 1990 ------------------------------------------------------------------------ First Quarter Low $20 $21 1/6 $17 1/4 $8 15/16 $10 5/8 High 23 3/4 23 5/16 18 1/4 11 3/16 11 13/16
Second Quarter Low 19 1/4 22 15/16 16 15/16 10 9/16 10 1/4 High 22 1/4 25 3/4 20 9/16 13 11/16 11
Third Quarter Low 19 5/8 21 1/4 19 3/16 12 3/4 8 1/2 High 21 3/4 25 21 13/16 15 1/16 10 9/16
Fourth Quarter Low 18 21 3/4 20 1/16 14 3/16 7 3/4 High 20 9/16 24 1/4 22 1/16 18 9/16 9 11/16
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, 1994 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1994, 1993 and 1992. 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, 1994 and 1993, and the results of their operations and cash flows for the years ended December 31, 1994, 1993 and 1992, in conformity with generally accepted accounting principles.
As discussed in note one to the consolidated financial statements, effective January 1, 1994, the Corporation changed its method of accounting for certain investments in debt and equity securities. Effective January 1, 1992, the Corporation changed its method of accounting for postretirement benefits other than pensions and income taxes as described in note five to the consolidated financial statements.
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin, January 27, 1995.
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
Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 25, 1995, except for information as to executive officers which is set forth in Part I of this report.
Item 11.
Item 11. Executive Compensation
Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 25, 1995.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 25, 1995.
Item 13.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 25, 1995.
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, 1994 and 1993 Statements of Income - years ended December 31, 1994, 1993, and 1992 Statements of Cash Flows - years ended December 31, 1994, 1993, and 1992 Statements of Shareholders' Equity - years ended December 31, 1994, 1993, and 1992 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 1994, 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 22, 1995
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 (Chief Executive Officer) Date: March 22, 1995
/s/ G.H. Gunnlaugsson ----------------------------------------------- G. H. Gunnlaugsson Executive Vice President and a Director (Chief Financial Officer) Date: March 22, 1995
/s/ P.R. Justiliano ----------------------------------------------- P. R. Justiliano Senior Vice President and Corporate Controller (Principal Accounting Officer) Date: March 22, 1995
Directors: Richard A. Abdoo, Oscar C. Boldt, J.P. Bolduc, Wendell F. Bueche, Jon F. Chait, Burleigh E. Jacobs, Jack F. Kellner, D.J. Kuester, Edward L. Meyer, Jr., Don R. O'Hare, San W. Orr, Jr., Peter M. Platten III, Stuart W. Tisdale, James O. Wright and Gus A. Zuehlke.
By /s/ M.A. Hatfield Date: March 22, 1995 ----------------------------------------------- M. A. Hatfield As 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, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, SEC File No. 0-1220
(b) By-laws, as amended, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, 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 Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, SEC File No. 0-1220*
(f) Amendment to Consulting Agreement and Supplemental Retirement Plan dated as of August 13, 1992, between M&I and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, SEC File No. 0-1220*
(g) Deferred Compensation Trust between Marshall & Ilsley Corporation and Bessemer Trust Company dated April 28, 1987, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, SEC File No. 0-1220*
(h) 1986 Non-Qualified Stock Option Plan of M&I and related Stock Option Agreement between M&I and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, SEC File No. 0-1220*
(i) Form of employment agreements, dated November 5, 1990, between M&I and Messrs. Gunnlaugsson, Kuester, Strelow and Wigdale incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, SEC File No. 0-1220*
(j) Employment agreement, dated November 5, 1990, between M&I and Mr. Michael A. Hatfield incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, SEC File No. 0-1220*
(k) Employment agreement, dated as of November 5, 1990, between M&I and Mr. Delgadillo, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, SEC File No. 0-1220*
(l) Restricted Stock Plan of Marshall & Ilsley Corporation, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, SEC File No. 0-1220*
(m) 1989 Executive Stock Option and Restricted Stock Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, as amended by M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, SEC File No. 0-1220*
(n) Marshall & Ilsley Corporation Nonqualified Retirement Benefit Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, SEC File No. 0-1220*
(o) Marshall & Ilsley Corporation Supplemental Retirement Benefits Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, SEC File No. 0-1220*
(p) Marshall & Ilsley Trust Company Supplemental Retirement Benefits Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, SEC File No. 0-1220*
(q) Supplemental Retirement Agreement dated December 10, 1992, between M&I and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, SEC File No. 0-1220*
(r) Amendment to Supplemental Retirement Agreement dated December 16, 1993, between M&I and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, SEC File No. 0-1220*
(s) Marshall & Ilsley Corporation 1993 Executive Stock Option Plan, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 33-51753)*
(t) Marshall & Ilsley Corporation 1994 Long-Term Incentive Plan for Executives, incorporated by reference to M&I's Proxy Statement for the 1994 Annual Meeting of Shareholders, SEC File No. 0-1220*
(u) Marshall & Ilsley Corporation 1995 Directors Stock Option Plan, incorporated by reference to M&I's Proxy Statement for the 1995 Annual Meeting of Shareholders, SEC File No. 0-1220*
(v) Marshall & Ilsley Corporation Assumption Agreement dated May 31, 1994 assuming rights, obligations and interests of Valley Bancorporation under various stock option plans, incorporated by reference to M&I's Registration Statement on Form S-8 (Reg. No. 33-53897)*
(w) Valley Bancorporation 1992 Incentive Stock Plan, incorporated by reference to Valley Bancorporation's Proxy Statement for the 1992 Annual Meeting of Shareholders (the "Valley 1992 Proxy Statement")*
(x) Valley Bancorporation 1992 Outside Directors' Stock Option Plan, incorporated by reference to the Valley 1992 Proxy Statement*
(y) Valley Bancorporation 1988 Nonqualified Stock Option Plan, incorporated by reference to Valley Bancorporation's Proxy Statement for the 1988 Annual Meeting of Shareholders*
(z) Valley Bancorporation 1986 Amended and Restated Stock Option Plan, incorporated by reference to Valley Bancorporation's Proxy Statement for the 1987 Annual Meeting of Shareholders*
(aa) Employment agreement between M&I and Mr. Peter M. Platten, III, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 33-51753)*
(bb) Letter agreement dated January 25, 1994 between Valley Bancorporation and Mr. Peter M. Platten, III*
(cc) Employment agreement between M&I and Mr. Gary A. Lichtenberg, incorporated by reference herein to M&I's Registration Statement on Form S-4 (Reg. No. 33-51753)*
(dd) Letter agreement dated January 25, 1994 between M&I and Mr. Gary A. Lichtenberg*
(11) Computation of Net Income Per Common Share
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries
(23) Consent of Arthur Andersen LLP
(24) Powers of attorney for Messrs. Abdoo, Boldt, Bolduc, Bueche, Chait, Jacobs, Kellner, Kuester, Meyer, O'Hare, Orr, Platten, Tisdale, Wright, and Zuehlke
(27) Financial Data Schedule.
The Company will provide a copy of any instrument defining the rights of holders of long-term debt to the Commission upon request. _________________________
*Management contract or compensatory plan or arrangement.