<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K/A
----------------
AMENDMENT NO. 1 TO
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-1220
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
770 North Water Street 53202
Milwaukee, Wisconsin (zip code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (414) 765-7801
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock--$1.00 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant is $3,512,387,000 as of February 28, 1997. The number of shares of
common stock outstanding as of February 28, 1997 is 88,921,199.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Proxy Statement for
the registrant's Annual Meeting of Shareholders to be held on April 22, 1997.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Marshall & Ilsley Corporation ("M&I" or the "Corporation"), incorporated in
Wisconsin in 1959, is a registered bank holding company under the Bank Holding
Company Act of 1956 (the "BHCA"). As of December 31, 1996, M&I had consolidated
total assets of approximately $14.8 billion and consolidated total deposits of
approximately $11.0 billion, making M&I the second largest bank holding company
headquartered in Wisconsin. The executive offices of M&I are located at 770
North Water Street, Milwaukee, Wisconsin 53202 (telephone number (414) 765-
7801).
M&I's principal assets are the stock of its bank and nonbank subsidiaries and
the assets of its Data Services Division ("M&I Data Services"). M&I's
subsidiaries include 29 commercial banks, one savings association and a number
of companies engaged in businesses that the Federal Reserve Board (the "FRB")
has determined to be closely-related or incidental to the business of banking.
M&I provides its subsidiaries with financial and managerial assistance in such
areas as budgeting, tax planning, compliance assistance, asset and liability
management, investment administration and portfolio planning, business
development, advertising and human resources management.
M&I's bank and savings association subsidiaries provide a full range of
banking services to individuals, businesses and governments throughout
Wisconsin and the Phoenix, Arizona metropolitan area. These subsidiaries offer
retail, institutional, international, business and correspondent banking,
investment and trust services through the operation of 226 banking offices in
Wisconsin and 12 offices in Arizona. M&I Marshall & Ilsley Bank ("M&I Bank") is
M&I's largest bank subsidiary, with consolidated assets as of December 31, 1996
of approximately $4.8 billion.
M&I Data Services and three other nonbank subsidiaries are major suppliers of
financial and data processing services and software to banking, financial and
related organizations. M&I Data Services provides services and software to over
600 financial institution customers in the United States, as well as
institutions in numerous foreign countries. On August 7, 1996, M&I acquired
EastPoint Technology, Inc., a software development company located in Bedford,
New Hampshire which specializes in client/server technology, for approximately
$25.5 million in cash. M&I's nonbank subsidiaries operate a variety of bank-
related businesses, including those providing investment management services,
insurance services, trust services, equipment lease financing, commercial and
residential mortgage banking, venture capital, brokerage services and financial
advisory services. M&I Investment Management Corp. offers a full range of asset
management services to M&I's trust company subsidiaries, the Marshall Funds and
other individual, business and institutional customers. M&I's trust company
subsidiaries provide trust and employee benefit plan services to customers in
Wisconsin, Arizona and Florida. M&I First National Leasing Corp. leases a
variety of equipment and machinery to large and small businesses. M&I Mortgage
Corp. originates, purchases, sells and services residential mortgages. The
Richter-Schroeder Company originates and services long-term commercial real
estate loans for institutional investors. M&I Capital Markets Group, Inc.
provides venture capital, financial advisory and strategic planning services to
customers, including assistance in connection with the private placement of
securities, raising funds for expansion, leveraged buy-outs, divestitures,
mergers and acquisitions and small business investment company transactions.
M&I Brokerage Services, Inc., a broker-dealer registered with the National
Association of Securities Dealers and the Securities and Exchange Commission,
provides brokerage and other investment related services to a variety of retail
and commercial customers.
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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:
<TABLE>
<CAPTION>
INTEREST AND INTEREST ON FEES FOR DATA
FEES ON LOANS INVESTMENT SECURITIES PROCESSING SERVICES
------------------ ------------------------ ----------------------
PERCENT PERCENT OF PERCENT OF
OF TOTAL TOTAL TOTAL TOTAL
YEAR ENDED OPERATING OPERATING OPERATING OPERATING
DECEMBER 31, AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME INCOME
- ------------ -------- --------- ------------ ----------- ----------- ---------- ----------
($000'S) ($000'S) ($000'S) ($000'S)
<S> <C> <C> <C> <C> <C> <C> <C>
1996.................... $758,955 51.5% $ 202,255 13.7% $ 268,526 18.2% $1,474,756
1995.................... 774,256 57.4 136,980 10.2 213,914 15.9 1,348,842
1994.................... 681,085 57.8 127,587 10.8 159,418 13.5 1,178,787
</TABLE>
M&I business segment information is contained in Note 19 of the Notes to the
Consolidated Financial Statements contained in Item 8, Consolidated Financial
Statements and Supplementary Data.
COMPETITION
M&I and its subsidiaries face substantial competition from hundreds of
competitors in the markets they serve, some of which are larger and have
greater resources than M&I. M&I's bank subsidiaries compete for deposits and
other sources of funds and for credit relationships with other banks, savings
associations, credit unions, finance companies, mutual funds, life insurance
companies (and other long-term lenders) and other financial and non-financial
companies located both within and outside M&I's primary market area, many of
which offer products functionally equivalent to bank products. M&I's non-bank
operations compete with numerous banks, finance companies, data servicing
companies, leasing companies, mortgage bankers, brokerage firms, financial
advisors, trust companies, mutual funds and investment bankers in Wisconsin
and throughout the United States.
The market for the banking technology services offered by M&I Data Services
is national in scope. In any given geographic area, M&I Data Services'
competitors vary in size and include national, regional and local operations.
While historically the bank data processing industry has been highly
decentralized, there is an accelerating trend toward consolidation in the
industry, resulting in fewer companies competing over larger geographic
regions. As consolidation continues, successful companies in this business are
likely to increase substantially in size as the scale of activity necessary to
compete increases.
EMPLOYEES
As of December 31, 1996, M&I and its subsidiaries employed in the aggregate
approximately 8,995 full and part-time employees. M&I considers employee
relations to be excellent. None of the employees of M&I and its subsidiaries
are represented by a collective bargaining group.
SUPERVISION AND REGULATION
As a registered bank holding company, M&I is subject to regulation and
examination by the FRB under the BHCA. M&I's state bank subsidiaries and
savings association are subject to regulation and examination by the Wisconsin
Department of Financial Institutions, or in the case of M&I Thunderbird Bank,
the Arizona State Banking Department, and the FRB (for state banks). M&I's
national bank subsidiary is subject to regulation and
2
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examination by the Office of the Comptroller of the Currency. In addition, all
of M&I's bank subsidiaries are subject to examination by the FDIC.
Under FRB policy, M&I is expected to act as a source of financial strength
to each of its bank subsidiaries and to commit resources to support each bank
subsidiary in circumstances when it might not do so absent such requirements.
In addition, there are numerous federal and state laws and regulations which
regulate the activities of M&I and its bank subsidiaries, including
requirements and limitations relating to capital and reserve requirements,
permissible investments and lines of business, transactions with affiliates,
loan limits, mergers and acquisitions, issuances of securities, dividend
payments, inter-affiliate liabilities, extensions of credit and branch
banking. Information regarding capital requirements for bank holding companies
and tables reflecting M&I's regulatory capital position at December 31, 1996
can be found in Note 13 of the Notes to the Consolidated Financial Statements
contained in Item 8, Consolidated Financial Statements and Supplementary Data.
The federal regulatory agencies have broad power to take prompt corrective
action if a depository institution fails to maintain certain capital levels.
In addition, a bank holding company's controlled insured depository
institutions are liable for any loss incurred by the FDIC in connection with
the default of, or any FDIC-assisted transaction involving, an affiliated
insured bank or savings association. Current federal law provides that
adequately capitalized and managed bank holding companies from any state may
acquire banks and bank holding companies located in any other state, subject
to certain conditions. Beginning on June 1, 1997, banks may create interstate
branching networks in states that do not "opt out" of interstate branching.
Prior to this date, banks may create interstate branching networks in states
that "opt in" to interstate branching early. Under recent legislation, M&I
made a one-time payment of $2.7 million in connection with the
recapitalization of the Savings Association Insurance Fund.
The laws and regulations to which M&I are subject are constantly under
review by Congress, regulatory agencies and state legislatures. These laws and
regulations may be changed dramatically in the future, which could affect the
ability of bank holding companies to engage in certain activities such as
nationwide banking, securities underwriting and insurance, the amount of
capital that banks and bank holding companies must maintain, premiums paid for
deposit insurance and other matters directly affecting earnings. It is not
certain which changes will occur, if any, or the effect such changes will have
on the profitability of M&I, its ability to compete effectively or the
composition of the financial services industry. The earnings and business of
M&I and its bank subsidiaries also are affected by the general economic and
political conditions in the United States and abroad and by the monetary and
fiscal policies of various federal agencies. The FRB impacts the competitive
conditions under which M&I operates by determining the cost of funds obtained
from money market sources for lending and investing and by exerting influence
on interest rates and credit conditions. In addition, legislative and economic
factors can be expected to have an ongoing impact on the competitive
environment within the financial services industry. The impact of fluctuating
economic conditions and federal regulatory policies on the future
profitability of M&I and its subsidiaries cannot be predicted with certainty.
SELECTED STATISTICAL INFORMATION
Statistical information relating to M&I and its subsidiaries on a
consolidated basis is set forth as follows:
(1) Average Balance Sheets and Analysis of Net Interest Income for each of
the last three years is included in Item 7, Management's Discussion and
Analysis of Financial Position and Results of Operations.
(2) Analysis of Changes in Interest Income and Interest Expense for each of
the last two years is included in Item 7, Management's Discussion and
Analysis of Financial Position and Results of Operations.
(3) Nonaccrual, Past Due and Restructured Loans for each of the last five
years is included in Item 7, Management's Discussion and Analysis of
Financial Position and Results of Operations.
(4) Summary of Loan Loss Experience for each of the last five years is
included in Item 7, Management's Discussion and Analysis of Financial
Position and Results of Operations.
3
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(5) Return on Average Shareholders' Equity, Return on Average Assets and
other statistical ratios for each of the last five years can be found
in Item 6, Selected Financial Data.
The following tables set forth certain statistical information relating to
M&I and its subsidiaries on a consolidated basis.
INVESTMENT SECURITIES
The amortized cost of M&I's consolidated investment securities at December
31 of each year are:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury and government agencies......... $2,832,067 $2,330,577 $1,970,556
States and political subdivisions............. 770,456 446,998 290,483
Other......................................... 193,057 98,380 86,533
---------- ---------- ----------
$3,795,580 $2,875,955 $2,347,572
========== ========== ==========
</TABLE>
The maturities, at amortized cost, and weighted average yields (for tax-
exempt obligations on a fully taxable basis assuming a 35% tax rate) of
investment securities at December 31, 1996 are (in thousands):
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL
----------------- -------------------------------------- ------------------ ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ------- ----------- ------------------ ------- ---------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
and government
agencies............... $ 435,197 6.10% $ 1,947,114 6.88% $ 368,357 6.77% $ 81,399 6.61% $2,832,067 6.74%
States and political
subdivisions. 67,208 6.86 191,444 7.03 397,254 7.33 114,550 8.19 770,456 7.34
Other................... 7,043 7.78 51,393 7.05 13,909 8.22 120,712 8.15 193,057 7.85
--------- ----- ----------- ----- ---------- ------ ---------- ------ ---------- ----
$ 509,448 6.22% $ 2,189,951 6.90% $ 779,520 7.08% $ 316,661 7.77% $3,795,580 6.92%
========= ===== =========== ===== ========== ====== ========== ====== ========== ====
</TABLE>
TYPES OF LOANS
M&I's consolidated loans, classified by type, at December 31 of each year
are:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural....... $2,885,152 $2,903,920 $2,644,928 $2,538,830 $2,471,150
Industrial development
revenue bonds.......... 32,241 29,358 31,796 45,889 58,388
Real estate:
Construction........... 323,420 303,345 378,316 333,609 273,556
Mortgage:
Residential........... 2,176,224 2,002,023 2,240,287 2,223,857 2,160,116
Commercial............ 2,379,156 2,189,449 2,062,022 2,000,052 1,718,452
---------- ---------- ---------- ---------- ----------
Total mortgage....... 4,555,380 4,191,472 4,302,309 4,223,909 3,878,568
Personal................ 1,174,186 1,163,127 1,178,453 1,217,513 1,056,901
Lease financing......... 331,505 277,680 256,690 257,622 242,282
---------- ---------- ---------- ---------- ----------
9,301,884 8,868,902 8,792,492 8,617,372 7,980,845
Less:
Allowance for loan
losses................ 155,895 161,430 153,961 133,600 123,805
---------- ---------- ---------- ---------- ----------
Net loans............... $9,145,989 $8,707,472 $8,638,531 $8,483,772 $7,857,040
========== ========== ========== ========== ==========
</TABLE>
4
<PAGE>
LOAN BALANCES AND MATURITIES
DECEMBER 31, 1996
DOLLAR AMOUNTS IN THOUSANDS
The analysis of loan maturities at December 31, 1996, and the rate structure
for the categories indicated are:
<TABLE>
<CAPTION>
RATE STRUCTURE OF LOANS
MATURITY DUE AFTER ONE YEAR
-------------------------------------------- ------------------------------
OVER ONE WITH PRE- WITH
ONE YEAR YEAR THROUGH OVER FIVE DETERMINED FLOATING
OR LESS FIVE YEARS YEARS TOTAL RATE RATE TOTAL
---------- ------------ --------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural....... $2,062,606 $ 755,214 $67,332 $2,885,152 $ 723,742 $ 98,804 $ 822,546
Industrial development
revenue bonds.......... 6,674 9,841 15,726 32,241 14,850 10,717 25,567
Real estate--
construction........... 221,384 101,604 432 323,420 85,838 16,198 102,036
Lease financing......... 98,241 221,082 12,182 331,505 233,264 -- 233,264
---------- ---------- ------- ---------- ---------- -------- ----------
$2,388,905 $1,087,741 $95,672 $3,572,318 $1,057,694 $125,719 $1,183,413
========== ========== ======= ========== ========== ======== ==========
</TABLE>
- --------
Notes:
(1) Scheduled repayments are reported in the maturity category in which the
payments are due based on the terms of the loan agreements. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
over-drafts are reported as due in one year or less.
(2) Amounts shown for the rate structure of loans due after one year include
the estimated effect arising from the use of interest rate swaps.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
Generally, a loan is placed on nonaccrual if payment of interest is more
than 60 days delinquent and the loan has been determined by management to be a
"problem" loan. In addition, loans which are past due 90 days or more as to
interest or principal are also placed on nonaccrual. Exceptions to these rules
are generally only for loans fully collateralized by readily marketable
securities or other relatively risk free collateral. The gross interest income
which would have been recorded under the original terms of nonaccrual and
restructured loans in 1996 was $9,809. Interest income recorded during 1996 on
nonaccrual and restructured loans amounted to $6,482.
POTENTIAL PROBLEM LOANS
At December 31, 1996, the Corporation had $17.2 million of loans for which
payments are presently current, but the borrowers are experiencing serious
financial problems. These loans are subject to constant management attention
and their classification is reviewed on a quarterly basis.
OTHER INTEREST BEARING ASSETS
At December 31, 1996, the Corporation's commercial finance subsidiary had
$0.2 million of corporate debt investment securities on nonaccrual status. The
effect on interest income in 1996 was not material.
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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:
<TABLE>
<CAPTION>
1996 1995 1994
---------------- --------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ---- ---------- ---- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand
deposits................. $ 2,090,292 $1,980,035 $2,051,864
Interest bearing demand
deposits................. 940,739 1.81% 959,234 1.85% 1,084,552 1.65%
Savings deposits.......... 3,322,332 3.68% 3,006,002 3.61% 2,869,618 2.54%
Time deposits............. 3,860,533 5.74% 3,664,144 5.61% 3,664,063 4.51%
----------- ---------- ----------
Total deposits.......... $10,213,896 $9,609,415 $9,670,097
=========== ========== ==========
</TABLE>
The maturity distribution of time deposits issued in amounts of $100,000 and
over and outstanding at December 31, 1996 (in thousands) is:
<TABLE>
<S> <C>
Three months or less............................................. $ 332,319
Over three and through six months................................ 200,428
Over six and through twelve months............................... 239,161
Over twelve months............................................... 251,830
----------
$1,023,738
==========
</TABLE>
At December 31, 1996, time deposits issued by foreign offices totaled
$137,949.
SHORT-TERM BORROWINGS
Information related to M&I's funds purchased and security repurchase
agreements for the last three years is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at year end......... $1,337,940 $ 517,576 $ 944,843
Average amount outstanding during the
year.................................. 1,061,105 739,191 835,472
Maximum amount outstanding at any
month's end........................... 1,537,551 1,094,314 1,011,509
Weighted average interest rate at year
end................................... 5.69% 4.99% 5.17%
Weighted average interest rate during
the year.............................. 5.26% 5.70% 4.09%
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following should be read in conjunction with Item 7, Management's
Discussion and Analysis of Financial Position and Results of Operations.
The Corporation's evaluation of the adequacy of the allowance for loan
losses consists of two levels of analysis. The first level focuses primarily
on assessments of specific credits, as described more fully below. The second
more general level of analysis focuses on categories of similar type loans and
portfolio segments (e.g., commercial/individual; real estate/non-real estate;
geographical regions related to the locations of affiliate banks). These
methodologies include multiple analytical approaches which are viewed together
to assess overall reserve and provision levels. The analyses consider, among
other factors, historical loss experience, current and anticipated economic
conditions, loan portfolio trends, portfolio composition by segment, assigned
credit grades, and estimates of potential loss exposures.
6
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The loan portfolios of the Corporation's affiliate banks and leasing
subsidiary are subject to continual management oversight and formal quarterly
analyses. Management's analyses are based on the Corporation's credit grading
system which classifies loans in a manner similar to that of bank regulatory
examiners, with estimates of probable and potential losses derived.
Management's assigned credit grades and quarterly portfolio analyses are
subject to independent monitoring by the Corporation's credit review group,
which also performs periodic portfolio reviews at each affiliate. The credit
review group prepares reports on the results of its evaluations of affiliate
loan portfolios, which together with quarterly analyses of credit exposure
provided by affiliate management, serve as the basis for determining the
adequacy of the allowance for loan losses.
Management utilizes the above-described reserve analysis approaches to
determine the overall adequacy of the allowance for loan losses. Management's
overall assessment is based on its view of the loan portfolio as consisting of
commercial business loans, real estate loans, personal loans, and direct
financing leases. Industrial development revenue bonds are viewed as
commercial real estate loans.
During 1996, consolidated net charge-offs increased to $20.3 million,
representing $28.4 million of charge-offs, offset by $8.1 million of
recoveries. The 1996 gross and net charge-off level exceeded the previous four
years. Net charge-offs in 1996 include one larger commercial loan ($12.0
million) and one larger lease receivable ($1.9 million) that accounted for
$13.9 million of total net charge-offs in 1996. Gross charge-offs declined
from 1992 through 1994, with a slight increase in 1995. Recovery levels in
1993, 1994 and 1996 were relatively consistent, and contrast to a higher level
of recoveries in 1992 and a lower level of recoveries in 1995. The increase in
1996 charge-offs does not reflect general economic deterioration and the
overall positive net charge-off levels reflect the relative strength of the
Wisconsin economy and the stabilization in the Arizona economy and real estate
values. The Corporation's Arizona-based loan portfolio represents
approximately 4% of the total portfolio.
The Corporation's 1996 provision for loan losses of $15.2 million is
consistent with the 1995 and 1994 general provisions of $16.2 million and
$16.0 million, not including an $8.9 million special provision taken in 1994.
The special provision, which was charged to expense, was utilized to conform
Valley's loan valuation policies with those of the Corporation, after
consummation of the merger. The 1994, 1995, and 1996 general provision levels
are lower than the previous two years. The resulting 1996 year-end reserve
level is $156 million, or 1.68% of total loans, which compares to the year-end
1995 reserve level of 1.82%. The decrease in 1996 reserve levels reflects the
impact of the large commercial loan charge-off and the increase in 1996 loan
volumes. The year-end 1996 reserve level is considered adequate based on the
analyses of specific credits, portfolio and economic trends, and other factors
described above.
The Corporation's charge-off and recovery levels across portfolio sectors
has been relatively consistent, with the exception of 1996 commercial loan and
lease financing charge-offs. The 1996 charge-off level for commercial loans
was above the previous four years. During the 1992-1995 period, commercial
loan recoveries generally declined, with 1996 commercial recoveries increasing
to approximate 1993 and 1994 levels. The higher 1992 recovery and the
abnormally low 1994 gross charge-offs, resulted in small net commercial loan
recoveries in 1992 and 1994. The charge-offs and recoveries for real estate
construction loans continue to be relatively immaterial. The 1996 charge-offs
for real estate mortgages increased from the lowest level in five years, and
were offset by increased recoveries, resulting in net real estate mortgage
charge-offs which do not vary significantly from the relatively low 1993 and
1994 levels. The 1996 charge-off and recovery levels for personal loans
increased from the previous three years, resulting in personal loan net
charge-offs which are increasing, but which do not vary significantly from
historic levels. The 1996 charge-offs for the Corporation's lease financing
portfolio increased from the previous four years, primarily due to one write-
off. Nominal offsetting recoveries resulted in 1996 lease net charge-offs
which were above the five-year average.
The Corporation's charge-off and provision levels for 1997 are expected to
continue to be largely dependent on economic conditions in the Corporation's
primary service areas. While general economic conditions continue to be
relatively stable, should national or regional conditions deteriorate, the
Corporation's Wisconsin and Arizona markets may be adversely affected. Absent
deterioration in these conditions, total charge-offs for 1997
7
<PAGE>
are expected to decrease from the increased 1996 levels, but are not expected
to vary significantly from our average net charge-offs from 1992 through 1995.
Offsetting recoveries are currently expected to decrease slightly from 1996
levels. At the present time, there are no material loans which are known or
believed to be in imminent danger of deteriorating or defaulting which would
give rise to material charge-offs; however, loss levels can be significantly
impacted by a few large loans which could deteriorate unexpectedly or be
adversely impacted by economic conditions.
Based on current conditions, commercial loan losses for 1997 are expected to
approximate normal historic levels. Commercial real estate loans continue to
be highly vulnerable to regional economic conditions and real estate values;
however, based on current conditions, real estate and construction loan losses
for 1997 are not expected to vary significantly from historic levels. Based on
the current portfolio size, composition and experience, personal loan losses
for 1997 are expected to approximate normal historic levels. However, the
Corporation is not immune to the potential impacts of national trends in
retail credit delinquencies and collections. At the present time, direct lease
financing losses for 1997 are expected to approximate historic levels and
decrease from the higher 1996 levels; however, actual losses could be impacted
by portfolio growth, fraud, or unanticipated weaknesses in industry segments
within the portfolio.
ITEM 2. PROPERTIES
M&I and M&I Bank occupy offices on all or portions of 16 floors of a 21-
story building located at 770 North Water Street, Milwaukee, Wisconsin. A
subsidiary of M&I Bank owns the building and its adjacent 10-story parking lot
and leases the remaining floors to a professional tenant. In addition, various
subsidiaries of M&I lease commercial office space in downtown Milwaukee office
buildings near the 770 North Water Street facility. M&I Bank also owns or
leases various branch offices located in Milwaukee and in surrounding suburban
communities. M&I has 28 subsidiary banks and one savings association located
in cities throughout Wisconsin. M&I Thunderbird Bank, a wholly-owned bank
subsidiary of M&I, is located in Phoenix, Arizona and has 12 offices in
Phoenix and the surrounding Maricopa County communities. The subsidiary banks
and savings association occupy modern facilities which are owned or leased.
M&I owns a data processing facility located in Brown Deer, a suburb of
Milwaukee, from which M&I Data Services conducts data processing activities.
Properties leased by M&I for M&I Data Services also include commercial office
space in Brown Deer, a data processing site in Oak Creek, Wisconsin, and
processing centers and sales offices in various cities throughout the United
States.
ITEM 3. LEGAL PROCEEDINGS
M&I is not currently involved in any material pending legal proceedings
other than litigation of a routine nature and various legal matters which are
being defended and handled in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF OFFICER OFFICE
--------------- ------
<C> <S>
J.B. Wigdale Chairman of the Board since December, 1992, Chief Executive
Age 60 Officer since October, 1992, Director since December, 1988,
Vice Chairman of the Board, December, 1988 to December, 1992,
Marshall & Ilsley Corporation; Chairman of the Board since
January, 1989, Chief Executive Officer since 1987, Director
since 1981, M&I Marshall & Ilsley Bank; President and Director
M&I Financial Corp., M&I Building Corp. and Loujo Company;
Director M&I First National Leasing Corp., M&I Mortgage Corp.,
Richter-Schroeder Company, Inc., M&I Data Services, M&I
Capital Markets Group, Inc. and Marshall & Ilsley Trust
Company.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NAME OF OFFICER OFFICE
--------------- ------
<C> <S>
D.J. Kuester Director since February, 1994, President since 1987,
Age 55 Marshall & Ilsley Corporation; President and Director since
January, 1989, M&I Marshall & Ilsley Bank; Chairman of the
Board, Chief Executive Officer and Director, M&I Data
Services; Director--M&I Financial Corp., M&I Building Corp.
and M&I Support Services Corp.; Director and President--M&I
Insurance Company of Arizona, Inc.
P.M. Platten, III Vice Chairman of the Board and a Director since May 1994,
Age 57 Marshall & Ilsley Corporation; Chairman of the Board,
January, 1993 to May, 1994, President and Chief Executive
Officer, January 1989 to May 1994, Valley Bancorporation.
G.H. Gunnlaugsson Director since February, 1994, Executive Vice President and
Age 52 Chief Financial Officer since 1987, Marshall & Ilsley
Corporation; Vice President of M&I Marshall & Ilsley Bank
since 1976; Vice President and Director--M&I Insurance
Company of Arizona, Inc. and Loujo Company; Director--M&I
Mortgage Corp., M&I Data Services, M&I Insurance Services,
Inc. and M&I Brokerage Services, Inc.
G.D. Strelow Senior Vice President and Human Resources Director of
Age 62 Marshall & Ilsley Corporation since 1993; Vice President and
Human Resources Director of M&I Marshall & Ilsley Bank since
1980.
M.A. Hatfield Senior Vice President since 1993, Secretary since 1981 and
Age 51 Treasurer from 1986 to May, 1995, Marshall & Ilsley
Corporation; Vice President and Secretary, M&I Marshall &
Ilsley Bank; Secretary--M&I First National Leasing Corp.,
M&I Capital Markets Group, Inc., Marshall & Ilsley Trust
Company, M&I Investment Management Corp., Marshall & Ilsley
Trust Company of Florida, M&I Ventures Corporation and M&I
Brokerage Services, Inc.; Secretary, Treasurer and
Director--M&I Financial Corp. and M&I Building Corp.;
Secretary and Director--M&I Insurance Company of Arizona,
Inc., M&I Data Services and Loujo Company; Secretary, M&I
Insurance Services, Inc.; Secretary and Treasurer, M&I
Mortgage Corp.; Director, Richter-Schroeder Company, Inc.
P.R. Justiliano Senior Vice President since 1994 and Corporate Controller
Age 46 since April, 1989, Vice President, 1986 to 1994, Marshall &
Ilsley Corporation; Treasurer and Director, M&I Insurance
Company of Arizona, Inc.
J.L. Delgadillo Senior Vice President of Marshall & Ilsley Corporation since
Age 44 1993; Director of M&I Data Services since 1994; President
and Chief Operating Officer of M&I Data Services since 1993;
Senior Vice President of M&I Data Services since 1989.
D.W. Layden, Jr. Senior Vice President since October, 1994, Marshall & Ilsley
Age 39 Corporation; Director--Marshall & Ilsley Trust Company and
M&I Investment Management Corp. since February, 1995;
Executive Vice President and Chief Financial Officer from
January, 1994 to October, 1994, Senior Vice President and
Legal Counsel from March, 1992 to October, 1994, M&I Data
Services.
D.R. Jones Senior Vice President since December, 1993, Vice President
Age 51 and North and South Regional Manager since May, 1993, Vice-
President and South Regional Manager from March, 1989 to
May, 1993, Marshall & Ilsley Corporation; Director--M&I
Support Services Corp.
</TABLE>
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
STOCK LISTING
M&I's common stock is traded under the symbol "MRIS" on the Nasdaq National
Market, and quotations are supplied by the National Association of Securities
Dealers. Common dividends declared and the price range for M&I's common stock
for each of the last five years can be found in Item 8, Consolidated Financial
Statements, Quarterly Financial Information.
A discussion of the regulatory restrictions on the payment of dividends can
be found under Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and in Note 13 to Item 8, Consolidated
Financial Statements.
HOLDERS OF COMMON EQUITY
At December 31, 1996, M&I had approximately 18,460 record holders of its
Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
On December 9, 1996 M&I Capital Trust A, a Delaware business trust formed by
M&I, sold $200,000,000 liquidation amount of 7.65% Capital Trust Pass-through
Securities (the "Capital Securities"). Salomon Brothers Inc, Goldman, Sachs &
Co. and Robert W. Baird & Co., Incorporated (the "Initial Purchasers") were
the purchasers of the Capital Securities and resold the Capital Securities to
certain "qualified institutional buyers," as defined in Rule 144A of the
Securities Act of 1933, as amended (the "Securities Act"). The aggregate cash
offering price of the Capital Securities was $200,000,000 and the aggregate
underwriting commissions related to the sale were $2,000,000. With respect to
the sale, M&I relied upon an exemption from registration under section 4(2) of
the Securities Act as a transaction not involving a public offering.
Subsequent resales of the Capital Securities were limited to qualified
institutional buyers in accordance with Rule 144A of the Securities Act.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED SUMMARY OF EARNINGS
YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest Income:
Loans........................... $758,955 $774,256 $681,085 $643,679 $665,634
Investment Securities:
Taxable........................ 171,537 118,868 110,894 123,207 139,302
Tax Exempt..................... 30,718 18,112 16,693 20,692 31,946
Short-term Investments.......... 10,226 13,424 8,634 5,899 14,157
-------- -------- -------- -------- --------
Total Interest Income......... 971,436 924,660 817,306 793,477 851,039
Interest Expense:
Deposits........................ 360,838 331,734 255,861 272,100 334,443
Short-term Borrowings........... 62,071 47,740 39,681 18,010 17,606
Long-term Borrowings............ 42,808 53,709 30,537 23,088 26,439
-------- -------- -------- -------- --------
Total Interest Expense........ 465,717 433,183 326,079 313,198 378,488
-------- -------- -------- -------- --------
Net Interest Income.............. 505,719 491,477 491,227 480,279 472,551
Provision for Loan Losses........ 15,194 16,158 24,907 18,034 23,546
-------- -------- -------- -------- --------
Net Interest Income After
Provision for Loan Losses....... 490,525 475,319 466,320 462,245 449,005
Other Income:
Data Processing Services........ 268,526 213,914 159,418 135,041 112,056
Trust Services.................. 70,190 64,176 59,720 61,226 58,050
Other........................... 164,604 146,092 142,343 175,659 158,305
-------- -------- -------- -------- --------
Total Other Income............ 503,320 424,182 361,481 371,926 328,411
Other Expense:
Salaries and Benefits........... 382,430 343,650 323,904 320,717 299,540
Other........................... 298,274 255,972 260,866 248,870 246,084
Merger/Restructuring............ -- -- 75,228 -- --
-------- -------- -------- -------- --------
Total Other Expense........... 680,704 599,622 659,998 569,587 545,624
-------- -------- -------- -------- --------
Income Before Taxes.............. 313,141 299,879 167,803 264,584 231,792
Provision for Income Taxes....... 109,711 106,580 73,405 93,190 75,391
-------- -------- -------- -------- --------
Income Before Accounting Changes
and Extraordinary Items......... 203,430 193,299 94,398 171,394 156,401
Extraordinary Items and
Accounting Changes.............. -- -- 11,542 -- (9,134)
-------- -------- -------- -------- --------
Net Income.................... $203,430 $193,299 $105,940 $171,394 $147,267
======== ======== ======== ======== ========
Per Share:
Primary Net Income Before
Extraordinary Items and
Accounting Changes............. $2.07 $1.96 $0.95 $1.67 $1.55
Primary Net Income After
Extraordinary Items and
Accounting Changes............. 2.07 1.96 1.07 1.67 1.46
Fully Diluted Net Income Before
Extraordinary Items and
Accounting Changes............. 2.02 1.90 0.93 1.60 1.48
</TABLE>
11
<PAGE>
CONSOLIDATED SUMMARY OF EARNINGS--CONTINUED
YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Fully Diluted Net Income
After Extraordinary Items and
Accounting Changes.................. $ 2.02 $ 1.90 $ 1.04 $ 1.60 $ 1.40
Fully Diluted Net Income
(Historical)*....................... 2.02 1.90 1.04 1.76 1.52
Common Dividend Declared............. 0.720 0.645 0.59 0.54 0.47
Other Significant Data:
Year-End Common Stock Price.......... $34.625 $26.00 $19.00 $23.63 $21.17
Return on Average Shareholders'
Equity
Before Extraordinary Items and
Accounting Changes.................. 15.88% 16.41% 8.60% 15.29% 15.48%
Return on Average Shareholders'
Equity
After Extraordinary Items and
Accounting Changes.................. 15.88 16.41 9.65 15.29 14.57
Return on Average Assets
Before Extraordinary Items and
Accounting Changes.................. 1.49 1.52 0.76 1.42 1.36
Return on Average Assets
After Extraordinary Items and
Accounting Changes.................. 1.49 1.52 0.85 1.42 1.28
Dividend Payout Ratio................ 35.64 33.95 56.73 33.75 34.20
Average Equity to Average Assets
Ratio............................... 9.38 9.26 8.83 9.31 8.77
Ratio of Earnings to Fixed Charges**
Excluding Interest on Deposits...... 3.76x 3.76x 3.18x 6.52x 5.57x
Including Interest on Deposits...... 1.66x 1.68x 1.50x 1.83x 1.60x
Stock Splits......................... 3 FOR 1
</TABLE>
- --------
* Not restated for acquisitions accounted for as a pooling of interests.
** See Exhibit 12 for detailed computation of these ratios.
12
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS
YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and Due from
Banks................. $ 573,957 $ 576,943 $ 613,053 $ 616,761 $ 572,132
Short-term
Investments........... 170,546 222,779 196,653 180,143 366,132
Trading Securities..... 25,264 10,346 4,528 4,860 6,049
Investment Securities:
Taxable............... 2,722,582 2,026,859 2,116,856 2,236,805 1,950,155
Tax Exempt............ 668,913 374,014 351,026 400,135 523,551
Loans:
Commercial............ 2,935,617 2,832,228 2,680,735 2,572,967 2,643,726
Real Estate........... 4,607,844 4,773,214 4,572,496 4,248,970 3,798,180
Personal.............. 1,141,364 1,159,957 1,201,131 1,109,701 1,017,625
Lease Financing....... 293,448 262,566 256,344 248,654 234,566
----------- ----------- ----------- ----------- -----------
Total Loans and
Leases................ 8,978,273 9,027,965 8,710,706 8,180,292 7,694,097
Allowance for Loan
Losses................ 161,311 160,797 144,917 129,972 114,046
----------- ----------- ----------- ----------- -----------
Net Loans and Leases... 8,816,962 8,867,168 8,565,789 8,050,320 7,580,051
Other Assets........... 677,333 647,402 584,556 550,444 527,339
----------- ----------- ----------- ----------- -----------
Total Assets.......... $13,655,557 $12,725,511 $12,432,461 $12,039,468 $11,525,409
=========== =========== =========== =========== ===========
Liabilities and
Shareholders' Equity:
Noninterest Bearing
Deposits.............. $ 2,090,292 $ 1,980,035 $ 2,051,864 $ 1,997,781 $ 1,799,072
Interest Bearing
Deposits:
Savings and NOW
Accounts.............. 1,812,287 1,981,804 2,426,502 2,339,754 2,086,065
Money Market Savings... 2,450,784 1,983,432 1,527,668 1,534,799 1,560,913
CDs of $100 or more.... 816,712 567,373 436,268 440,573 416,555
Other.................. 3,043,821 3,096,771 3,227,795 3,461,825 3,589,990
----------- ----------- ----------- ----------- -----------
Total Deposits......... 10,213,896 9,609,415 9,670,097 9,774,732 9,452,595
Short-term Borrowings.. 1,180,593 835,230 964,850 641,836 529,528
Long-term Borrowings... 656,786 801,176 447,254 272,041 284,333
Accrued Expenses and
Other Liabilities..... 323,441 301,865 252,297 229,545 248,286
Shareholders' Equity... 1,280,841 1,177,825 1,097,963 1,121,314 1,010,667
----------- ----------- ----------- ----------- -----------
Total Liabilities and
Shareholders'
Equity............... $13,655,557 $12,725,511 $12,432,461 $12,039,468 $11,525,409
=========== =========== =========== =========== ===========
Other Significant Data:
Book Value Per Share at
Year End***........... $ 13.37 $ 12.92 $ 11.01 $ 11.35 $ 10.76
Average Common Shares
Outstanding***........ 91,874,886 93,697,513 94,850,595 98,497,435 96,958,290
Shareholders of Record
at Year End*.......... 18,460 18,659 18,919 10,374 9,381
Employees at Year
End*.................. 8,995 9,079 8,634 6,611 6,315
Historically Reported
Credit Quality Ratios:*
Net Loan Charge-offs to
Average Loans......... 0.23% 0.10% 0.05% 0.03% 0.07%
Total Nonperforming
Loans** & OREO to End
of Period Loans &
OREO.................. 0.81 0.79 0.80 0.86 1.14
Allowance for Loan
Losses to End of
Period Loans.......... 1.68 1.82 1.75 1.74 1.76
Allowance for Loan
Losses to Total
Nonperforming
Loans**............... 225 261 265 261 213
</TABLE>
- --------
* Not restated for acquisitions accounted for as pooling of interests.
** Nonaccrual loans, restructured loans, and loans past due 90 days or more.
*** Restated for 3 for 1 stock split.
13
<PAGE>
YIELD & COST ANALYSIS
(TAX EQUIVALENT BASIS) YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Average Rates Earned:
Loans & Securitized ARMs........................ 8.40% 8.58% 7.84% 7.89% 8.68%
Investment Securities--Taxable.................. 6.11 5.82 5.24 5.51 7.14
Investment Securities--Tax Exempt............... 6.44 6.85 6.86 7.91 9.02
Trading Securities.............................. 4.82 4.98 5.39 4.26 4.69
Short-term Investments.......................... 5.29 5.81 4.28 3.17 3.80
Average Rates Paid:
Interest Bearing Deposits....................... 4.44% 4.35% 3.36% 3.50% 4.37%
Short-term Borrowings........................... 5.26 5.72 4.11 2.81 3.32
Long-term Borrowings............................ 6.52 6.70 6.83 8.49 9.30
M&I Marshall & Ilsley Bank Average
Prime Rate..................................... 8.27 8.83 7.15 6.00 6.25
Summary Yield and Cost Analysis:
(As a % of Average Assets)
Average Yield................................... 7.22% 7.34% 6.65% 6.70% 7.53%
Average Cost.................................... 3.41 3.40 2.62 2.60 3.28
---- ---- ----- ---- ----
Net Interest Income............................. 3.81 3.94 4.03 4.10 4.25
Provision for Loan Losses....................... 0.11 0.13 0.20 0.15 0.20
---- ---- ----- ---- ----
Net Interest Income After
Provision for Loan Losses...................... 3.70 3.81 3.83 3.95 4.05
Net Securities Gains (Losses)................... 0.11 0.04 (0.05) 0.07 0.08
Other Income.................................... 3.58 3.30 2.95 3.02 2.77
Other Expense................................... 4.99 4.72 5.30 4.74 4.74
---- ---- ----- ---- ----
Income Before Income Taxes...................... 2.40 2.43 1.43 2.30 2.16
Provision for Income Taxes...................... 0.91 0.91 0.67 0.88 0.80
---- ---- ----- ---- ----
Income Before Cumulative
Effect of Accounting Changes
and Extraordinary Items....................... 1.49% 1.52% 0.76% 1.42% 1.36%
==== ==== ===== ==== ====
Net Income.................................... 1.49% 1.52% 0.85% 1.42% 1.28%
==== ==== ===== ==== ====
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
Net income in 1996 amounted to $203.4 million or $2.02 per share on a fully
diluted basis. The return on average assets and return on average equity were
1.49% and 15.88%, respectively. By comparison, 1995 net income was $193.3
million, fully diluted earnings per share was $1.90, the return on average
assets was 1.52% and the return on average equity was 16.41%. For the year
ended December 31, 1994 net income was $105.9 million or $1.04 per share fully
diluted and the returns on average assets and average equity were 0.85% and
9.65%, respectively.
Net income for 1996 includes special one-time charges relating to the 65.7
basis point assessment associated with the Savings Association Insurance Fund
(SAIF) recapitalization which was enacted into law in September, 1996 and the
write-off of in-process research and development costs acquired in conjunction
with the purchase of EastPoint Technology, Inc.
Net income for 1994 included charges and extraordinary items related to the
Corporation's merger with Valley Bancorporation (Valley).
The following table summarizes the unusual items reported in 1996 and 1994
and the comparative operating incomes, earnings per share and return on
average equity based on operating income for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
$ IN MILLIONS, EXCEPT PER SHARE
DATA
PRE-TAX
IMPACT 1996 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income.................................. -- $203.4 $193.3 $105.9
Special Charges
Merger/Restructuring....................... $75.2 -- -- 58.9
Additional Loan Loss Provisions............ 8.9 -- -- 5.8
Other Merger-Related Charges............... 8.5 -- -- 6.2
Merger-Related Securities Losses........... 7.3 -- -- 4.6
Net Extraordinary Gains.................... (20.6) -- -- (11.5)
SAIF Assessment............................ 2.7 1.7 -- --
Acquired In-Process Research and
Development............................... 12.1 7.9 -- --
----- ------- ------- -------
Total Special Charges....................... 9.6 -- 64.0
------- ------- -------
Operating Income............................ $213.0 $193.3 $169.9
======= ======= =======
Operating Income Per Share
Primary.................................... $ 2.16 $ 1.96 $ 1.71
Fully Diluted.............................. $ 2.12 $ 1.90 $ 1.65
Operating Income to Average Equity.......... 16.63% 16.41% 14.94%
</TABLE>
15
<PAGE>
OPERATING INCOME STATEMENT COMPONENTS AS A PERCENT OF AVERAGE TOTAL ASSETS
The following table presents a summary of the major elements of the
consolidated operating income statements for the years ended December 31,
1996, 1995 and 1994. Each of the elements is stated as a percent of
consolidated average total assets outstanding for the respective year and,
where appropriate, is converted to a fully taxable equivalent basis (FTE). The
results exclude the special charges in 1996 and 1994 as previously discussed.
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Interest Income............................................ 7.22% 7.34% 6.65%
Interest Expense........................................... (3.41) (3.40) (2.62)
----- ----- -----
Net Interest Income........................................ 3.81 3.94 4.03
Provision for Loan Losses.................................. (0.11) (0.13) (0.13)
Net Securities Gains....................................... 0.11 0.04 0.01
Other Income............................................... 3.58 3.30 2.95
Other Expense.............................................. (4.89) (4.72) (4.64)
----- ----- -----
Income Before Income Taxes................................. 2.50 2.43 2.22
Income Taxes............................................... (0.94) (0.91) (0.85)
----- ----- -----
Operating Income to Average Assets......................... 1.56% 1.52% 1.37%
===== ===== =====
</TABLE>
NET INTEREST INCOME
Net interest income in 1996 amounted to $505.7 million, an increase of $14.2
million or 2.9% compared with net interest income of $491.5 million in 1995.
The benefit from the increase in earning assets, use of derivative financial
instruments, the stable cost of interest bearing liabilities and the increase
in noninterest bearing deposits were offset, in part, by a decline in the
yield on earning assets.
Average earning assets in 1996 amounted to $12.6 billion compared to $11.7
billion in 1995, an increase of $903.6 million or 7.7%. Average loans,
excluding the effect of securitizing adjustable rate mortgage loans (ARMs)
increased $355.8 million or 3.9%. The remaining growth in average earning
assets was primarily attributable to investment securities which reflects the
Corporation's intent to increase the portfolio size with higher yielding and
longer-term securities to adjust the rate sensitivity and leverage of the
consolidated balance sheet.
Average interest bearing liabilities increased $695.2 million or 7.5% in
1996 compared to 1995. Average interest bearing deposits increased $494.2
million or 6.5%. Average short-term borrowings increased $345.4 million while
average long-term borrowings decreased $144.4 million. Average noninterest
bearing deposits increased $110.3 million or 5.6% in 1996 compared to the
prior year.
During the second quarter of 1996, the holder of the Corporation's 8.5%
convertible subordinated notes converted approximately $16.8 million of the
notes to Series A convertible preferred stock. During 1996, approximately
$309.0 million of the Corporation's banking subsidiaries' Bank Notes matured
and were refinanced primarily with short-term borrowings and brokered
certificates of deposit.
The growth and composition of the Corporation's average loan portfolio for
the current year and prior two years are reflected in the following table. The
securitized ARM loans that are classified as investment securities available
for sale are included to provide a more meaningful comparison ($ in millions):
16
<PAGE>
<TABLE>
<CAPTION>
PERCENT GROWTH
-----------------
1996 1995
VS. VS.
1996 1995 1994 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Commercial Loans................. $2,935.6 $2,832.2 $2,680.7 3.7 % 5.7%
Real Estate Loans
Construction.................... 290.0 341.8 262.7 (15.2) 30.1
Commercial Mortgages............ 2,269.6 2,129.8 2,098.6 6.6 1.5
Residential Mortgages........... 2,048.3 2,301.6 2,211.2 (11.0) 4.1
Securitized ARM Loans........... 483.5 78.0 -- n.m. n.m.
-------- -------- -------- ------- ------
Total Real Estate Loans & ARMs... 5,091.4 4,851.2 4,572.5 4.9 6.1
Personal Loans
Student Loans................... 289.0 288.0 264.4 0.4 8.9
Other Personal Loans............ 852.4 872.0 936.7 (2.2) (6.9)
-------- -------- -------- ------- ------
Total Personal Loans............. 1,141.4 1,160.0 1,201.1 (1.6) (3.4)
Lease Financing Receivables...... 293.4 262.6 256.4 11.8 2.4
-------- -------- -------- ------- ------
Total Consolidated Average Loans
& ARMs.......................... $9,461.8 $9,106.0 $8,710.7 3.9 % 4.5%
======== ======== ======== ======= ======
Total Consolidated Average
Loans........................... $8,978.3 $9,028.0 $8,710.7 (0.6)% 3.6%
======== ======== ======== ======= ======
</TABLE>
- --------
n.m. --not meaningful
Beginning in the third quarter of 1995, the Corporation began converting ARM
loans into government guaranteed agency pool securities to enhance liquidity.
Approximately $224 million of such loans were securitized in 1996 and
approximately $455 million ARM loans were securitized in 1995. A fee is
required to guarantee the securities which has an adverse impact on the
interest margin. Including the securitized ARMs, average residential mortgages
grew by approximately $152 million or 6.4% in 1996 compared to 1995.
Approximately $55.6 million of this growth is attributable to home equity
loans and lines of credit.
Lease financing receivables increased $30.8 million or 11.8% in 1996
compared to 1995 of which approximately $27.1 million is due to growth in
automobile leasing.
The growth and composition of the Corporation's consolidated average
deposits for the current year and prior two years are reflected below ($ in
millions):
<TABLE>
<CAPTION>
PERCENT GROWTH
--------------
1996 1995
VS. VS.
1996 1995 1994 1995 1994
--------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Noninterest Bearing
Commercial...................... $ 1,353.5 $1,289.7 $1,302.7 5.0% (1.0)%
Personal........................ 389.6 409.2 428.7 (4.8) (4.5)
Other........................... 347.2 281.1 320.5 23.5 (12.3)
--------- -------- -------- ------ -------
Total Noninterest Bearing
Deposits.................... 2,090.3 1,980.0 2,051.9 5.6 (3.5)
Interest Bearing
Savings & NOW................... 1,812.3 1,981.8 2,426.4 (8.6) (18.3)
Money Market.................... 2,450.8 1,983.4 1,527.7 23.6 29.8
Other CDs & Time................ 3,043.8 3,095.6 3,227.8 (1.7) (4.1)
CDs Greater than $100,000....... 630.2 553.8 436.3 13.8 26.9
Brokered CDs.................... 186.5 14.8 -- n.m. n.m.
--------- -------- -------- ------ -------
Total Interest Bearing
Deposits.................... 8,123.6 7,629.4 7,618.2 6.5 0.1
--------- -------- -------- ------ -------
Total Consolidated Average
Deposits........................ $10,213.9 $9,609.4 $9,670.1 6.3% (0.6)%
========= ======== ======== ====== =======
</TABLE>
- --------
n.m.--not meaningful
17
<PAGE>
The money market index account, which was offered beginning in the third
quarter of 1994, continues to attract new customers and maintain deposit
relationships via disintermediation from the Corporation's other deposit
products. Money market index accounts averaged $1.6 billion in 1996 compared
to $1.0 billion in 1995.
The Corporation has a brokered CD program to acquire longer-term CDs with
maturities of one year or more in order to provide a stable source of funds
that over time is less costly than Bank Notes.
In conjunction with the Valley merger, approximately $300 million of
deposits and $200 million of loans were divested of during the second half of
1994. In 1995, purchase acquisitions in February and July contributed
approximately $232 million in deposits and $186 million in loans. As part of
the Corporation's banking initiatives certain bank branches were voluntarily
divested of during the second half of 1996. Such branches disposed of in 1996
had combined deposits and loans of $26 million and $14 million, respectively.
The net interest margin (FTE) as a percent of average earning assets was
4.14% in 1996 compared to 4.30% in 1995, a decrease of 16 basis points. The
yield on earning assets decreased 17 basis points from 8.01% in 1995 to 7.84%
in 1996 while the cost of interest bearing liabilities remained at 4.68% in
both 1995 and 1996.
The yield on loans and securitized ARMs decreased 18 basis points in 1996
compared to 1995. Loan growth and the positive effect of interest rate swaps
offset the yield decline and contributed approximately $13.6 million or 27% of
the increase in interest on earning assets.
At December 31, 1996, the Corporation had $370 million in notional amount of
standard receive fixed/pay floating interest rate swaps and $25 million in
notional amount of interest rate floors designated as a hedge against the
interest rate volatility associated with variable rate loans. The impact on
net interest income in 1996 was a positive $1.12 million. The yield on loans
and securitized ARMs without these derivative financial instruments would have
been 8.39% or one basis point lower than the 8.40% reported for 1996.
The remaining increase in interest on earning assets is attributable to
investment securities. The total yield on the investment security portfolio,
excluding securitized ARMs, increased by approximately 20 basis points in 1996
compared to 1995 and the average balance of such investment securities
increased $585.2 million or 25%. At December 31, 1996, The Corporation had $25
million in notional amount of interest rate floors designated as a hedge
against the convexity risk associated with investments in collateralized
mortgage obligations. The impact on net interest income was negligible.
The increase in the volume and cost of interest bearing deposits accounted
for $29.1 million or 89% of the increase in interest paid on interest bearing
liabilities in 1996. The decrease in cost and volume of long-term borrowings
benefited the interest margin by approximately $10.9 million which reflects
the maturity and conversion of higher cost debt. The average cost of short-
term borrowings decreased 46 basis points in 1996 compared to 1995 which
reflects in part, the Corporation's banking affiliates expanded use of the
treasury tax and loan note option programs and other vehicles which provide
lower cost sources of funds.
As more fully described in Note 12 to the Consolidated Financial Statements
contained in Item 8 herein, in December, 1996 the Corporation formed a Trust
and issued $200 million of 7.65% cumulative preferred capital securities. The
Trust invested the proceeds in 7.65% junior subordinated deferrable interest
debentures issued by the Corporation which is the sole asset of the Trust. The
proceeds will be used by the Corporation for general corporate purposes
including the repurchase of its common shares and the purchase of other
preferred securities. For financial statement purposes, the capital securities
are classified as long-term borrowings and the distributions as interest
expense which will have a more pronounced negative impact on net interest
income in future periods.
Net interest income for 1995 was $491.5 million compared to $491.2 million
in 1994. The benefit from the increase in rates earned and the slight increase
in the volume of average earning assets, primarily loans, was offset by the
increase in rates paid on interest bearing liabilities and the negative impact
of the change in the liability mix.
18
<PAGE>
Average earning assets increased $282.2 million in 1995 compared to 1994.
Average loan and securitized ARM growth of $395.3 million or 4.5% was somewhat
offset by the decline in other average earning assets, primarily investment
securities.
Average interest bearing liabilities increased $235.4 million or 2.6% in
1995 compared to 1994. Average interest bearing deposits increased $11.1
million while average short-term borrowings decreased $129.6 million or 13.4%
from the prior year. The decrease in average short-term borrowings together
with the decrease in noninterest bearing deposits of $71.8 million or 3.5%,
resulted in an increase in average long-term borrowings from $447.3 million in
1994 to $801.2 million in 1995, an increase of $353.9 million or 79.1%.
The net interest margin as a percent of average earning assets declined 10
basis points from 4.40% in 1994 to 4.30% in 1995. The yield on interest
earning assets increased 74 basis points while the cost of interest bearing
liabilities increased 107 basis points.
Loan growth and the increase in yield on average loans and securitized ARMs
of 74 basis points account for 92% of the increase in interest income on
earning assets in 1995 compared to 1994.
The increase in the average cost of deposits and short-term borrowings
represent 83% of the 1995 versus 1994 increase in interest paid on interest
bearing liabilities. The increase in the volume of long-term borrowings,
offset by a 13 basis point decline in the average cost of this category
contributed approximately $23.2 million of the increase in interest paid on
interest bearing liabilities.
During the second quarter of 1994, the Corporation's banking subsidiaries
began offering Bank Notes. The Bank Notes were issued for two year terms at
floating interest rates indexed to LIBOR and provide an additional funding
source to the banking affiliates. In 1995, the average amount and average cost
of the notes were $415 million and 6.20% compared to $138.4 million and 5.21%
in 1994.
Throughout 1995 and 1994, the Corporation was not involved in derivative
activity that would impact net interest margins or interest rate sensitivity
or risk.
19
<PAGE>
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
The Corporation's consolidated average balance sheets, interest earned and
interest paid, and the average interest rates earned and paid for each of the
last three years are presented in the following table. Securitized ARM loans
that are classified as investment securities available for sale are included
with loans to provide a more meaningful comparison ($ in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID COST BALANCE PAID COST BALANCE PAID COST
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and securitized
ARMs(1,2).............. $ 9,461,780 $795,197 8.40% $ 9,106,012 $781,631 8.58% $ 8,710,706 $683,265 7.84%
Investment securities:
Taxable................ 2,239,075 136,848 6.11 1,948,812 113,517 5.82 2,116,856 110,894 5.24
Tax exempt(1).......... 668,913 43,061 6.44 374,014 25,621 6.85 351,026 24,065 6.86
Interest bearing
deposits in other
banks.................. 91,484 4,626 5.06 144,135 7,956 5.52 93,504 3,752 4.01
Funds sold and security
resale agreements...... 57,991 3,195 5.51 65,820 4,195 6.37 91,090 4,147 4.55
Trading securities(1)... 25,264 1,217 4.82 10,346 515 4.98 4,528 244 5.39
Other short-term
investments............ 21,071 1,203 5.71 12,824 790 6.16 12,059 517 4.29
----------- -------- ---- ----------- -------- ---- ----------- -------- ----
Total interest earning
assets................ $12,565,578 $985,347 7.84% $11,661,963 $934,225 8.01% $11,379,769 $826,884 7.27%
Cash and demand deposits
due from banks......... 573,957 576,943 613,053
Premises and equipment,
net.................... 304,544 295,970 289,300
Other assets............ 372,789 351,432 295,256
Allowance for loan
losses................. (161,311) (160,797) (144,917)
----------- ----------- -----------
Total assets......... $13,655,557 $12,725,511 $12,432,461
=========== =========== ===========
Savings and interest
bearing demand
deposits............... $ 4,263,071 $139,186 3.26% $ 3,965,236 $126,196 3.18% $ 3,954,170 $ 90,788 2.30%
Other time deposits..... 3,860,533 221,652 5.74 3,664,144 205,538 5.61 3,664,063 165,073 4.51
Short-term borrowings... 1,180,593 62,071 5.26 835,230 47,740 5.72 964,850 39,681 4.11
Long-term borrowings.... 656,786 42,808 6.52 801,176 53,709 6.70 447,254 30,537 6.83
----------- -------- ---- ----------- -------- ---- ----------- -------- ----
Total interest bearing
liabilities........... $ 9,960,983 $465,717 4.68% $ 9,265,786 $433,183 4.68% $ 9,030,337 $326,079 3.61%
Noninterest bearing
deposits............... 2,090,292 1,980,035 2,051,864
Other liabilities....... 323,441 301,865 252,297
Shareholders' equity.... 1,280,841 1,177,825 1,097,963
----------- ----------- -----------
Total liabilities and
shareholders'
equity................ $13,655,557 $12,725,511 $12,432,461
=========== =========== ===========
Net interest income.... $519,630 $501,042 $500,805
======== ======== ========
Net yield on interest
earning assets........ 4.14% 4.30% 4.40%
==== ==== ====
</TABLE>
- --------
Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35%,
and excluding disallowed interest expense.
(2) Loans on a nonaccrual status have been included in the computation of
average balances.
20
<PAGE>
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The effect on interest income and interest expense due to volume and rate
changes in 1996 and 1995 are outlined in the following table. Changes not due
solely to either volume or rate are allocated to rate ($ in thousands):
<TABLE>
<CAPTION>
1996 VS. 1995 1995 VS. 1994
--------------------------------- --------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
--------------------- --------------------
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
--------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest on earning
assets:
Loans and Securitized
ARMs(1)............... $ 30,538 ($16,972) $13,566 $ 31,008 $ 67,358 $ 98,366
Investment securities:
Taxable............... 16,908 6,423 23,331 (8,803) 11,426 2,623
Tax-exempt(1)......... 20,201 (2,761) 17,440 1,576 (20) 1,556
Interest bearing
deposits in other
banks................. (2,906) (424) (3,330) 2,032 2,172 4,204
Funds sold and security
resale agreements..... (499) (501) (1,000) (1,150) 1,198 48
Trading securities(1).. 743 (41) 702 314 (43) 271
Other short-term
investments........... 508 (95) 413 33 240 273
--------- ---------- ------- --------- --------- --------
Total interest income
change............... $ 65,493 ($14,371) $51,122 $ 25,010 $ 82,331 $107,341
========= ========== ======= ========= ========= ========
Expense on interest
bearing liabilities:
Savings and interest
bearing demand
deposits.............. $ 9,479 $ 3,511 $12,990 $ 254 $ 35,154 $ 35,408
Other time deposits.... 11,016 5,098 16,114 4 40,461 40,465
Short-term borrowings.. 19,740 (5,409) 14,331 (5,331) 13,390 8,059
Long-term borrowings... (9,680) (1,221) (10,901) 24,165 (993) 23,172
--------- ---------- ------- --------- --------- --------
Total interest expense
change............... $ 30,555 $ 1,979 $32,534 $ 19,092 $ 88,012 $107,104
========= ========== ======= ========= ========= ========
</TABLE>
- --------
Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35%
for all years presented, and excluding disallowed interest expense.
PROVISION FOR LOAN LOSSES AND CREDIT QUALITY
The provision for loan losses amounted to $15.2 million in 1996, $16.2
million in 1995 and $24.9 million in 1994. The 1994 provision included an
additional loan loss provision of $8.9 million which was recorded in
conjunction with the Valley merger to conform Valley's loan valuation policies
with those of the Corporation.
Nonperforming assets at December 31, 1996 were $75.0 million compared to
$70.5 million at December 31, 1995, an increase of $4.5 million or 6.3%.
Nonaccrual loans, the largest component of nonperforming assets increased $9.6
million since year-end 1995 and decreased $5.2 million since September 30,
1996. Renegotiated loans at December 31, 1996 were $1.8 million compared to
$3.1 million at December 31, 1995 and $1.9 million at September 30, 1996.
Loans past due 90 days or more were $7.4 million at the end of 1996 compared
to $8.3 million at the end of the third quarter in 1996 and $8.2 million at
year-end 1995. Other real estate owned amounted to $5.6 million at December
31, 1996 compared to $6.4 million at September 30, 1996 and $8.6 million at
December 31, 1995. At December 31, 1996 approximately $2.2 million of other
real estate consisted of closed branch facilities.
The increase in nonaccrual loans compared to the prior year was generally
experienced across all types of loans. Nonaccrual commercial loans increased
$2.7 million, nonaccrual commercial mortgages increased $3.1
21
<PAGE>
million, nonaccrual residential real estate increased $2.6 million, nonaccrual
personal loans increased $0.7 million and nonaccrual lease receivables
increased $0.4 million.
Net charge-offs in 1996 amounted to $20.3 million or 0.23% of average loans
compared to $9.3 million or 0.10% of average loans in 1995. Net charge-offs in
1996 include one larger commercial loan and one larger lease receivable that
accounted for $13.9 million of the total net charge-offs in 1996.
Approximately $0.4 million in 1996 and $2.3 million in 1995 of loan loss
reserve balances were transferred to a specific investment reserve in
conjunction with the ARM loan securitizations previously discussed. The
Corporation has agreed to guarantee the first 4% of the loan pools securitized
through government agencies against loss. Since inception of the program there
have not been any losses incurred.
CONSOLIDATED CREDIT QUALITY INFORMATION
DECEMBER 31, ($000'S)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS BY
TYPE
Loans:
Nonaccrual.............. $ 60,176 $ 50,598 $ 44,766 $ 44,186 $ 52,811
Renegotiated............ 1,819 3,087 4,172 4,263 6,325
Past Due 90 Days or
More................... 7,366 8,184 9,093 7,906 7,097
-------- -------- -------- -------- -------- ---
Total Nonperforming
Loans.................. 69,361 61,869 58,031 56,355 66,233
Other Real Estate Owned.. 5,629 8,648 12,114 12,928 19,286
-------- -------- -------- -------- -------- ---
Total Nonperforming
Assets.................. $ 74,990 $ 70,517 $ 70,145 $ 69,283 $ 85,519
======== ======== ======== ======== ======== ===
Allowance for Loan
Losses.................. $155,895 $161,430 $153,961 $133,600 $123,805
======== ======== ======== ======== ======== ===
CONSOLIDATED STATISTICS
Net Charge-offs to
Average Loans........... 0.23% 0.10% 0.05% 0.11% 0.12%
Total Nonperforming Loans
to Total Loans.......... 0.75 0.70 0.66 0.65 0.83
Total Nonperforming
Assets to Total Loans
and Other Real Estate
Owned................... 0.81 0.79 0.80 0.80 1.07
Allowance for Loan Losses
to Total Loans.......... 1.68 1.82 1.75 1.55 1.55
Allowance for Loan Losses
to
Nonperforming Loans..... 225 261 265 237 187
</TABLE>
22
<PAGE>
MAJOR CATEGORIES OF NONACCRUAL LOANS ($000'S)
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
% OF % OF
LOAN % OF LOAN % OF
NONACCRUAL TYPE NONACCRUAL NONACCRUAL TYPE NONACCRUAL
---------- ---- ---------- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL
Commercial.............. $16,257 0.6% 27.0% $13,527 0.5% 26.7%
Lease Financing
Receivables............ 1,624 0.5 2.7 1,244 0.4 2.5
------- --- ----- ------- --- -----
Total Commercial..... 17,881 0.6 29.7 14,771 0.5 29.2
REAL ESTATE
Construction and Land
Development............ 731 0.2 1.2 618 0.2 1.2
Commercial Real Estate.. 19,760 0.8 32.8 16,653 0.8 32.9
Residential Real
Estate................. 18,284 0.8 30.4 15,701 0.7 31.0
------- --- ----- ------- --- -----
Total Real Estate.... 38,775 0.8 64.4 32,972 0.7 65.1
PERSONAL................ 3,520 0.3 5.9 2,855 0.2 5.7
------- --- ----- ------- --- -----
Total................ $60,176 0.6% 100.0% $50,598 0.6% 100.0%
======= === ===== ======= === =====
</TABLE>
RECONCILIATION OF CONSOLIDATED ALLOWANCE FOR LOAN LOSSES ($000'S)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses
at Beginning of Year...... $161,430 $153,961 $133,600 $123,805 $105,156
Provision for Loan
Losses(1)................. 15,194 16,158 24,907 18,034 23,546
Allowance of Banks
Acquired.................. -- 2,843 -- 1,167 4,284
Allowance Transfer for Loan
Securitizations........... (440) (2,275) -- -- --
Loans Charged-off
Commercial................ 16,290 5,130 3,301 8,810 8,863
Real Estate-Construction.. 13 407 737 79 513
Real Estate-Mortgage...... 3,320 2,444 3,241 2,729 4,655
Personal.................. 6,388 5,759 4,375 5,033 6,887
Leases.................... 2,397 875 907 815 1,426
-------- -------- -------- -------- --------
Total Charge-offs.......... 28,408 14,615 12,561 17,466 22,344
Recoveries on Loans
Commercial................ 3,222 2,117 3,675 3,431 9,149
Real Estate-Construction.. 9 39 6 49 92
Real Estate-Mortgage...... 2,443 1,021 2,468 2,208 1,493
Personal.................. 2,333 2,158 1,789 2,156 2,306
Leases.................... 112 23 77 216 123
-------- -------- -------- -------- --------
Total Recoveries........... 8,119 5,358 8,015 8,060 13,163
-------- -------- -------- -------- --------
Net Loans Charged-off...... 20,289 9,257 4,546 9,406 9,181
-------- -------- -------- -------- --------
Allowance for Loan Losses
at End of Year............ $155,895 $161,430 $153,961 $133,600 $123,805
======== ======== ======== ======== ========
</TABLE>
- --------
Note:
(1) The amount of the provision for loan losses charged to operating expense
for the year ended December 31, 1996, is the amount necessary to bring the
allowance for loan losses at December 31, 1996, to a level believed
adequate by management to absorb current estimated potential losses in the
loan portfolio.
23
<PAGE>
Management's determination of the adequacy of the allowance is based on a
continual review of the loan portfolio, loan loss experience, economic
conditions, growth and composition of the portfolio, and other relevant factors.
As a result of management's continual review, the allowance is adjusted through
provisions for loan losses charged against income.
OTHER INCOME
Total noninterest income amounted to $503.3 million in 1996 compared to
$424.2 million in 1995, an increase of $79.1 million or 18.7%.
Fees from data processing services increased $54.6 million or 25.5% from
$213.9 million in 1995 to $268.5 million in 1996. Processing fees increased
$31.8 million or 21.4%. Conversion revenue increased $1.9 million or 15.2% and
amounted to $14.1 million in 1996. Fees from unique services such as contract
programming and consulting increased $16.6 million and amounted to $23.7
million in 1996 compared to $7.1 million in 1995. Software revenue increased
$3.5 million or 9.3% while buyout fees, which vary from year to year, were
relatively unchanged.
Fees from trust services were $70.2 million in 1996 compared to $64.2
million in 1995, an increase of $6.0 million or 9.4%. Personal trust fees
increased $3.1 million and Corporate trust fees increased $0.8 million.
Revenue from outsourcing and securities lending increased $1.2 million.
Fees from other customer services increased $6.5 million or 5.9%. Service
charges on deposits increased $1.2 million and amounted to $52.2 million in
1996. Credit card and ATM fees increased $2.0 million and discount brokerage
fees increased $2.3 million. Corporate finance and management fees increased
$0.5 million.
Net securities gains in 1996 amounted to $14.9 million compared to $4.6
million in 1995. During 1996 the Corporation's Capital Markets Group realized
securities gains of $22.2 million offset in part by realized and unrealized
securities losses of $1.9 million. Also during the fourth quarter of 1996, the
Corporation's banking affiliates had securities losses of $5.4 million from
the sale of approximately $560 million of available for sale investment
securities which reflects the Corporation's intent to adjust the rate
sensitivity of the consolidated balance sheet.
Other miscellaneous income amounted to $32.5 million in 1996 compared to
$30.8 million in 1995, an increase of $1.7 million. During 1996, the
Corporation disposed of three bank branches with deposits of approximately $26
million and realized net deposit premium gains of $1.5 million.
Total noninterest income was $424.2 million for the year ended December 31,
1995 compared to $361.5 million earned in the prior year. The Corporation's
nonbank affiliates were the major contributors to the increase.
Fees from data processing services amounted to $213.9 million in 1995
compared to $159.4 million in 1994, an increase of $54.5 million or 34.2%.
Processing and conversion revenue increased $30.0 million or 23.4% while buy
out fees related to terminated contracts (which can vary from year to year)
increased $4.3 million and amounted to $6.3 million in 1995. Software related
revenue increased $18.5 million. Approximately 60% of the increase is
attributable to the December 1994 acquisition of Software Alliance.
Trust fees amounted to $64.2 million, an increase of $4.5 million or 7.5%
compared to $59.7 million in 1994. An increase in the overall market value of
trust assets along with increased revenue from outsourcing services more than
offset the revenue decline due to pricing compression.
Other customer services declined $6.3 million in 1995 compared to 1994. Fees
on loans declined $1.3 million or 6.5% while other commissions and fees
declined $2.2 million or 4.9% in 1995 compared to the prior year. Service
charges on deposits declined $2.9 million and amounted to $51.0 million in
1995.
24
<PAGE>
Net securities gains amounted to $4.6 million in 1995 compared to net
securities losses of $5.8 million in 1994. During 1995, the Corporation's
Capital Markets Group realized securities gains of $7.2 million offset in part
by $4.0 million of realized and unrealized securities losses as compared to
securities gains of $2.3 million and securities losses of $0.3 million in
1994. The Corporation also sold certain equity securities and realized a net
gain of $1.3 million in 1995 and $0.9 million in 1994. Excluding the $7.3
million of securities losses taken at the time of the Valley merger, 1994 net
securities gains amounted to $1.5 million.
Other miscellaneous income amounted to $30.8 million in 1995, slightly lower
than that reported in the prior year. The Corporation adopted the new
accounting standard on mortgage servicing rights in the third quarter of 1995
which resulted in a $2.4 million increase in other income. This increase was
offset by lower gains from the sale of other real estate owned and lower
insurance revenue. Revenue from property and casualty insurance commissions
declined $2.8 million due to the sale of that line of business in the later
part of 1994.
OTHER EXPENSE
Total other expense amounted to $680.7 million in 1996, an increase of $81.1
million or 13.5% from that reported in 1995. As previously discussed, two
special charges were recognized in 1996. Excluding these special charges,
total other expense for 1996 amounted to $665.9 million , an increase of 11%
or $66.3 million, when compared to the prior year.
The increase in expenses is primarily attributable to the Corporation's
nonbanking businesses, particularly its data processing business segment (Data
Services). Data Services expense growth of $57.1 million or 23.2% in 1996
compared to the prior year reflects the acquisition of EastPoint Technology,
Inc., the cost of adding processing capacity and other related costs
associated with increased revenue growth. Also included in 1996 were increased
expenses associated with the development of new products and services. Data
warehouse, which was piloted in 1996, provides customers the ability to easily
access data on their operations and customer base that will provide valuable
information for managing their businesses. New product development such as
Internet and PC Banking also contributed to the 1996 expense growth. During
the current year Data Services developed its plan to address the Year 2000
issue. It is estimated that the net cost to change existing computer programs
for both internal and external software will be approximately $25 million.
Data Services incurred approximately $2 million of expense in 1996 related to
this issue. It is anticipated that a substantial portion of the total cost
will be incurred over the next two years and will be expensed as incurred. The
majority of our customer contracts do not provide for additional reimbursement
over and above the previously contracted maintenance amounts. Future data
processing revenue is critically dependent upon the successful implementation
of the necessary changes.
Expenses of the Corporation's banking business in 1996 include the cost of
implementing certain initiatives in the areas of retail and small business
lending, loan and deposit operational support consolidation and product and
service distribution networks. These initiatives will enable more competitive
pricing and achieve improved cost efficiencies. Excluding the SAIF charge of
$2.7 million reported in the third quarter of 1996, the expenses of the
banking affiliates and support services increased $7.0 million or 1.9% when
compared to the prior year. Lower payments to regulatory agencies of $10.6
million were somewhat offset by severance, branch closures and disposals,
equipment write-downs and disposals and other related costs associated with
the initiatives. In 1996 these banking initiative expenses amounted to $4.7
million.
Total salaries and benefits expense amounted to $382.4 million for 1996
compared to $343.7 million in 1995, an increase of $38.7 million or 11.3%. Our
data processing business contributed approximately $32.4 million of the
increase. As of December 31, l996 Data Services had approximately 2,800
employees, an increase of approximately 200 full time employees since the end
of the prior year. The addition of EastPoint, normal growth and new product
development were the primary causes for the increase. The increased use of
contract programmers, whom are not considered full time employees, resulted in
an increase in salaries and benefits expense of $5.1 million in 1996 compared
to 1995.
25
<PAGE>
Net occupancy expense increased $3.5 million in 1996 when compared to 1995
and amounted to $39.2 million while equipment expense amounted to $77.3
million, an increase of $11.8 million when compared to $65.5 million incurred
in the prior year. Data Services activity resulted in approximately 60% of the
1996 increase in occupancy costs and the majority of the increase in equipment
expense.
Software expense amounted to $15.2 million compared to $12.4 million in
1995, an increase of $2.8 million or 23%. This increase is primarily related
to Data Services growth and its new initiatives such as Year 2000 changes and
home banking.
Payments to regulatory agencies amounted to $4.8 million in 1996 compared to
$12.7 million in 1995. As previously discussed, the Corporation paid $2.7
million in SAIF assessments in 1996. Excluding the one-time assessment,
payments to regulatory agencies declined $10.6 million. This decrease in
expense is related to the reduction in FDIC insurance rates.
Professional services expense declined $1.2 million in 1996 when compared to
the prior year. Approximately $1.1 million of the decline represents costs
associated with the ARM securitization program which began in the later half
of 1995. Also, professional services expense incurred by Data Services
declined by approximately $3.0 million which was the result of lower fees paid
for technological assistance in software development. These declines were
offset somewhat by higher fees paid to operational and branch efficiency
consultants.
Other expenses amounted to $109.3 million in 1996 compared to $76.8 million
in the prior year, an increase of $32.5 million or 42.3%. Excluding the $12.1
million write-off of acquired in-process technology attributable to the
EastPoint acquisition, other expenses increased $20.4 million in 1996 when
compared to the prior year. Promotional and advertising expense increased $4.0
million in 1996 compared to the prior year. Also contributing to the increase
was credit card expense which increased $3.1 million in 1996. This increase is
associated with higher data processing revenue growth. Lease buyouts and real
estate writedowns associated with branch closures resulted in an increase to
other expense in 1996 of approximately $2.0 million. This category of expense
is also affected by the capitalization of costs, net of amortization,
associated with software development and customer data processing conversions.
The amount of capitalized software development costs , net of amortization ,
declined $2.0 million in 1996 compared to the prior year and is consistent
with the decline in professional services expense previously discussed. The
impact of capitalized customer conversion activity, net of amortization, also
declined $2.0 million as more customers paid for the conversion process
upfront. Capitalized software costs are amortized over their estimated useful
lives. Despite the Corporation's monitoring of its ability to recover its
investment in software, the ever increasing change in technology increases the
possibility of obsolescence and may necessitate impairment writedowns in the
future.
Total other expense amounted to $599.6 million in 1995 compared to $660.0
million in 1994. Total other expense in 1994 included a merger/restructuring
charge of $75.2 million and other miscellaneous charges of $8.5 million
related to the Valley merger. Total other expense for 1994, excluding these
items would have been $576.3 million.
Salaries and employee benefits expense amounted to $343.7 million, an
increase of $19.7 million or 6.1% in 1995 compared to the prior year. The
increase was primarily due to Data Services.
At December 31, 1995, Data Services had approximately 2,600 employees
compared to 2,200 employees at December 31, 1994. A portion of the increase
was due to the acquisition of Software Alliance and a New England data center.
The banking affiliates experienced a decline in salaries and benefits expense.
In conjunction with the merger Valley's pension plan was curtailed in 1994
and in 1995 was terminated. The 1994 curtailment expense of $2.3 million was
included in the merger/restructuring expense while the pension termination
expense of $1.8 million was included with salaries and employee benefits in
1995.
26
<PAGE>
Net occupancy expense in 1995 declined $0.9 million due primarily to the
branch divestitures which occurred during 1994. This benefit was somewhat
offset by increased costs incurred by Data Services through its New England
data center acquisition and a full year of operating a secondary processing
site.
Equipment expense amounted to $65.5 million in 1995 compared to $59.6
million in 1994. The 1995 data center acquisition, a secondary processing site
which became operational late in 1994 and CPU and other equipment upgrades by
Data Services were the primary reasons for the increase.
Software expenses increased $3.2 million or 34.6% in 1995 compared to 1994.
The increase was primarily attributable to Data Services.
The decline in payments to regulatory agencies of $10.6 million in 1995 when
compared to 1994 is due to the reduction in FDIC insurance premiums on June 1,
1995.
Supplies and printing expense which amounted to $15.7 million in 1995
increased $1.3 million when compared to the prior year. This increase was the
result of higher data processing revenue experienced in 1995.
Professional services expense amounted to $18.7 million in 1995 compared to
$12.5 million in the prior year. Approximately $4.7 million of the increase
was due to costs incurred for technological assistance in software development
such as Data Service's data warehouse project. Approximately $1.1 million of
the remaining increase represents costs incurred in connection with the ARM
loan securitization program previously discussed.
Other miscellaneous expense amounted to $76.8 million in 1995 compared to
$86.9 million in 1994. Excluding $7.4 million of charges taken in conjunction
with the Valley merger, other miscellaneous expense for 1994 amounted to $79.5
million. Amortization expense associated with intangibles increased $3.7
million in 1995 compared to 1994 due to Data Service's acquisitions. This
category of expense is also affected by the capitalization of costs, net of
amortization, associated with software development and data processing
conversions. Including the professional services expense increase of $4.7
million, the amount of software development costs, net of amortization, in
1995 was $8.0 million higher than the amount reported in 1994. The impact of
conversion activity, net of amortization, was to increase miscellaneous
expense by $1.0 million in 1995 compared to the prior year.
INCOME TAX PROVISION
The provision for income taxes was $109.7 million in 1996, $106.6 million in
1995 and $73.4 million in 1994. The effective tax rate in 1996 was 35.0%
compared to 35.5% in 1995 and 43.7% in 1994. Increased Federal tax-exempt
income lowered the effective tax rate in 1996 compared to 1995. During 1995,
the Corporation recognized a research and experimentation tax credit related
to software development of $2.3 million. The 1994 provision was impacted by
certain nondeductible expenses associated with the Valley merger.
ASSET/LIABILITY MANAGEMENT
<TABLE>
<CAPTION>
The following table presents the Corporation's consolidated static GAP position
at December 31, 1996:
Asset/Liability Management ($ in millions)
181-270 271-360 Subtotal
------- ------- --------
1-90 days 91-180 days days days (less than 1 yr)
--------- ----------- ---- ---- ----------------
<S> <C> <C> <C> <C> <C>
Net Loans $ 3,901 $ 624 $ 498 $ 463 $ 5,486
Securities
Taxable 299 268 213 172 952
Tax-exempt 8 13 25 21 67
Trading Account 40 40
Other Interest Bearing Assets
Int. bearing deposits in other
banks 29 29
Fed Funds Sold & Security
Resale Agreements 124 124
Money Market Funds 64 64
Other Short Term Investments 16 16
Other Assets -
--------------------------------------------------------------------
Total Assets $ 4,481 $ 905 $ 736 $ 656 $ 6,778
====================================================================
Savings and Now $ 2,288 $ 2,288
Non-Int Bearing Demand Dep
Other time deposits 845 673 503 452 2,473
Short-term borrowings 1,835 1,835
Long-term borrowings
Other liabilities and Equity
--------------------------------------------------------------------
Total Liabilities $ 4,968 $ 673 $ 503 $ 452 $ 6,596
====================================================================
Gap $ (487) $ 232 $ 233 $ 204 $ 182
Cumulative Gap (487) (255) (22) 182
Cumulative Gap as a percent of
Total Assets -3.30% -1.73% -0.15% 1.23%
Off-Balance Sheet (a)
Interest Rate swaps $ (370) $ - $ - $ - $ (370)
Gap (857) 232 233 204 (166)
Cumulative Gap (857) (625) (392) (188)
Cumulative Gap as a percent of
Total Assets -5.81% -4.23% -2.65% -1.27%
<CAPTION>
Non-rate
--------
1 yr-5 yrs greater than 5 yrs sensitive Total
---------- ------------------ --------- -----
<S> <C> <C> <C> <C>
Net Loans $ 3,195 $ 465 $ 9,146
Securities
Taxable 1,734 383 3,069
Tax-exempt 191 512 770
Trading Account 40
Other Interest Bearing Assets
Int. bearing deposits in other
banks 29
Fed Funds Sold & Security
Resale Agreements $ 124
Money Market Funds $ 63
Other Short Term Investments $ 16
Other Assets 1,505 1,505
-------------------------------------------------------------
Total Assets $ 5,120 $ 1,360 $ 1,505 $ 14,763
=============================================================
Savings and Now $ 442 $ 1,942 $ 4,400
Non-Int Bearing Demand Dep 2,471 2,471
Other time deposits 1,332 4 4,081
Short-term borrowings 1,835
Long-term borrowings 33 303 336
Other liabilities and Equity 1,640 1,640
-------------------------------------------------------------
Total Liabilities $ 1,807 $ 2,249 $ 4,111 $ 14,763
=============================================================
Gap $ 3,313 $ (889) $ (2,606) $ (0)
Cumulative Gap 3,495 2,606
Cumulative Gap as a percent of
Total Assets
Off-Balance Sheet (a)
Interest Rate swaps $ 370
Gap 3,683 $ (889)
Cumulative Gap 3,495 2,606
Cumulative Gap as a percent of
Total Assets
</TABLE>
- ---------------------------------
(a) Does not include $50 million in notional amounts of interest rate
floors.
Asset/Liability Management involves the measurement and control of the
exposure of the Corporation's short- and long-term earnings to changes in
interest rates, and the maintenance of adequate levels of liquidity to meet
unexpected cash needs with minimal disruption to the ongoing business of the
Corporation. Financial institutions, by their nature, bear interest rate and
liquidity risk as a necessary part of the business of managing financial assets
and liabilities. Asset/Liability strategy is designed to confine these risks
within prudent parameters and indentify appropriate risk/reward tradeoffs in the
financial structure of the balance sheet.
The Corporation uses financial modeling techniques to indentify potential
changes in income under a variety of possible interest rate scenarios. The
financial models indentify the specific cash flows, repricing timing and
embedded option characteristics across the array of assets and liabilities held
by the Corporation. Policies are in place to assure that neither the earnings
nor the value at risk exceed appropriate limits. The use of a limited array of
derivative financial instruments has allowed the Corporation to achieve the
desired balance sheet repricing structure while simultaneously meeting the
desired objectives of both its borrowing and depositing customers.
An important component of managing the interest rate risk of the
Corporation involves accurately identifying the repricing characteristics of
non-maturity deposit products (e.g. savings, NOW, MMDA and demand deposit
accounts). While these depositors have the legal capacity, under most
circumstances, to withdraw their funds immediately, the historical experience
of the Corporation indicates that these aggregate balances remain steady or even
climb through various interest rate cycles, despite quite limited changes in the
rates paid on the accounts. Therefore, the Corporation has determined that a
majority of these balances can be considered insensitive to rate movements when
measuring the interest rate risk of the balance sheet.
Periodically, structural changes in the competitive marketplace causes a
re-evaluation of the rate sensitivity of these non-maturity deposit balances.
The recent introduction and growth of the indexed Money Market Account (IMMA)
offered those deposit customers wishing greater investment characteristics for a
portion of their balances and alternative to non-bank products. As a result, in
addition to new balances garnered, some balances were transferred from other
existing traditional savings products within the banks. Therefore, balances
remaining in these traditional "core deposit" products are now considered to be
proportionately more long-term in repricing character than they were prior to
the introduction of the IMMA.
For purposes of this presentation, non-interest bearing demand deposits are
shown to be non-rate sensitive. Historical trends in commercial and retail
demand deposit balances have been reviewed, and a portion of commercial accounts
determined to be potentially more sensitive than other commercial accounts or
than retail DDA balances.
The derivative transactions taken to date have been exclusively for the
purpose of managing the interest rate position of the balance sheet, rather than
for trading or synthetic investment purposes. Therefore the risks and rewards of
the transactions should be viewed within the context of the risks and rewards
existant elsewhere in the Corporation. Transactions undertaken during 1996
functionally lengthened the repricing characteristics of a portion of the
Corporation's floating rate loan portfolio or offset some of the non-linear
price risk in a portion of the mortgage-related investment portfolio. While the
derivatives themselves are currently yielding positive spread income on a
stand-alone basis, this may not always be the case. Rather, the combination of
the derivatives with the matched balance sheet items allows the Corporation to
achieve the asset/liability position described above without the need to
artificially incent customers to change their desired product selection.
27
<PAGE>
CAPITAL RESOURCES
Shareholders' equity was $1.26 billion or 8.54% of total consolidated assets
at December 31, 1996 compared to $1.26 billion or 9.43% of total consolidated
assets at December 31, 1995. Earnings retention, stock option exercises and
increase in unrealized gains on investment securities available for sale were
offset by treasury stock acquisitions.
The Corporation and its affiliates continue to have a strong capital base
and the Corporation's regulatory capital ratios continue to be significantly
above the defined minimum regulatory ratios. At December 31, 1996, the
Corporation's Tier 1 Capital, Total Capital and Leverage Ratios were 12.71%,
14.90% and 9.61%, respectively, compared to 11.71%, 14.04% and 9.07% at
December 31, 1995.
As more fully described in Note 12 to the Consolidated Financial Statements
contained in Item 8 herein, in December 1996 the Corporation formed a Trust
and issued $200 million of 7.65% cumulative preferred capital securities. The
proceeds were invested in 7.65% junior subordinated deferrable interest
debentures issued by the Corporation which is the sole asset of the Trust. The
proceeds will be used by the Corporation for general corporate purposes
including the repurchase of its common shares. The cumulative preferred
capital securities qualify as Tier 1 capital, subject to certain limitations,
for regulatory capital purposes and substantially contributed to the increase
in regulatory capital at year end 1996 compared to 1995.
The Corporation's subsidiaries, primarily its banking subsidiaries, are
restricted by regulations from making distributions above prescribed amounts.
In addition, banking subsidiaries are limited in making loans and
28
<PAGE>
advances to the Corporation. At December 31, 1996, approximately $59 million
and $63 million were available for distribution without regulatory approval
from the Corporation's banking and nonbanking subsidiaries, respectively.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to each subsidiary bank in circumstances when it
might not do so absent such policy.
In April 1996, $16,818 of 8.5% convertible subordinated notes were converted
into 1,922,114 shares of common stock. As provided for in the note agreement,
the noteholder subsequent to conversion, exchanged the common shares acquired
by conversion of the debt for 168,185 shares of the Corporation's Series A
preferred stock. The $16,819 remaining amount of such 8.5% convertible debt
will mature or be converted in 1997.
The Corporation has a Stock Repurchase Program. Under the most recent
provisions approved by the Corporation's Board of Directors, up to 6 million
shares may be repurchased annually. The shares are being acquired in
anticipation of the remaining conversion of the Corporation's 8.5% convertible
subordinated notes, to fund the on-going program to deliver or have available
shares of common stock for stock option and other employee benefit plans and
other corporate needs. During 1996, the Corporation purchased 5.9 million
shares and has cumulatively purchased 18.4 million shares at an aggregate cost
of approximately $450.7 million or $24.43 per share on a weighted average
basis.
The Corporation has filed registration statements with the Securities &
Exchange Commission to issue medium term unsecured and subordinated series
notes. These issues may have maturities which range from 9 months to 30 years
at a fixed or floating rate and allows the Corporation to maintain ready
access to funding sources for general corporate purposes which include, but
are not limited to refinancing existing corporate debt as it matures, and
other corporate purposes.
The Corporation and the previously discussed Trust have also filed a
registration statement with the Securities & Exchange Commission to register
cumulative preferred capital securities and register junior subordinated
deferrable interest debentures that will be offered in exchange for the
existing privately placed capital securities and subordinated debt.
29
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR YEARS
ENDED DECEMBER 31, 1996, 1995, AND 1994
CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ($000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks.............................. $ 780,562 $ 745,911
Funds Sold and Security Resale Agreements............ 123,880 66,618
Money Market Funds................................... 63,482 84,960
----------- -----------
Total Cash and Cash Equivalents........................ 967,924 897,489
Trading Securities, at Market Value.................... 39,671 38,601
Other Short-term Investments, at Cost which
Approximates Market Value............................. 45,711 95,635
Investment Securities Available for Sale, at Market
Value................................................. 3,065,048 2,458,600
Investment Securities Held to Maturity,
Market Value $776,750 ($453,240 in 1995)............. 773,804 450,457
Loans, Net of Unearned Income of $58,849 ($46,571 in
1995)................................................. 9,301,884 8,868,902
Less: Allowance for Loan Losses........................ 155,895 161,430
----------- -----------
Net Loans.............................................. 9,145,989 8,707,472
Premises and Equipment................................. 313,381 306,988
Accrued Interest and Other Assets...................... 411,785 387,855
----------- -----------
Total Assets....................................... $14,763,313 $13,343,097
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest Bearing................................... $ 2,470,882 $ 2,363,194
Interest Bearing...................................... 8,481,476 7,917,583
----------- -----------
Total Deposits......................................... 10,952,358 10,280,777
Short-term Borrowings.................................. 1,834,549 1,015,022
Accrued Expenses and Other Liabilities................. 379,100 367,131
Long-term Borrowings................................... 336,096 422,550
----------- -----------
Total Liabilities.................................. 13,502,103 12,085,480
Shareholders' Equity:
Series A Convertible Preferred Stock, $1.00 par value,
2,000,000 Shares Authorized; 517,129 Shares Issued
(348,944 in 1995); Liquidation Preference $51,713
($34,894 in 1995).................................... 517 349
Common Stock, $1.00 par value, 160,000,000 Shares
Authorized; 99,494,335 Shares Issued................. 99,494 99,494
Additional Paid-in Capital............................ 204,135 190,287
Retained Earnings..................................... 1,209,167 1,075,789
Less: Treasury Stock, at Cost, 10,910,798 Shares
(5,968,631 in 1995).................................. 279,143 128,459
Deferred Compensation.............................. 825 1,090
Net Unrealized Securities Gains
Net of Taxes......................................... 27,865 21,247
----------- -----------
Total Shareholders' Equity.......................... 1,261,210 1,257,617
----------- -----------
Total Liabilities and Shareholders' Equity.......... $14,763,313 $13,343,097
=========== ===========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Loans............................................. $758,955 $774,256 $681,085
Investment Securities:
Taxable.......................................... 171,537 118,868 110,894
Exempt from Federal Income Taxes................. 30,718 18,112 16,693
Trading Securities................................ 1,202 483 218
Other Short-term Investments...................... 9,024 12,941 8,416
-------- -------- --------
Total Interest Income......................... 971,436 924,660 817,306
INTEREST EXPENSE
Deposits.......................................... 360,838 331,734 255,861
Short-term Borrowings............................. 62,071 47,740 39,681
Long-term Borrowings.............................. 42,808 53,709 30,537
-------- -------- --------
Total Interest Expense........................ 465,717 433,183 326,079
-------- -------- --------
Net Interest Income............................... 505,719 491,477 491,227
Provision for Loan Losses......................... 15,194 16,158 24,907
-------- -------- --------
Net Interest Income After Provision for Loan
Losses........................................... 490,525 475,319 466,320
OTHER INCOME
Data Processing Services.......................... 268,526 213,914 159,418
Trust Services.................................... 70,190 64,176 59,720
Other Customer Services........................... 117,263 110,779 117,089
Net Securities Gains (Losses)..................... 14,876 4,555 (5,752)
Other............................................. 32,465 30,758 31,006
-------- -------- --------
Total Other Income............................ 503,320 424,182 361,481
OTHER EXPENSE
Salaries and Employee Benefits.................... 382,430 343,650 323,904
Net Occupancy..................................... 39,215 35,717 36,579
Equipment......................................... 77,250 65,534 59,569
Software Expenses................................. 15,222 12,376 9,197
Payments to Regulatory Agencies................... 4,791 12,715 23,359
Processing Charges................................ 19,069 18,480 18,293
Supplies and Printing............................. 16,015 15,711 14,416
Professional Services............................. 17,441 18,675 12,504
Merger/Restructuring.............................. -- -- 75,228
Other............................................. 109,271 76,764 86,949
-------- -------- --------
Total Other Expense........................... 680,704 599,622 659,998
-------- -------- --------
Income Before Income Taxes and Extraordinary
Items............................................ 313,141 299,879 167,803
Provision for Income Taxes........................ 109,711 106,580 73,405
-------- -------- --------
Income Before Extraordinary Items................. 203,430 193,299 94,398
Extraordinary Items, Net of Income Taxes.......... -- -- 11,542
-------- -------- --------
Net Income........................................ $203,430 $193,299 $105,940
======== ======== ========
NET INCOME PER COMMON SHARE
Primary:
Income Before Extraordinary Items................ $ 2.07 $ 1.96 $ 0.95
Extraordinary Items.............................. -- -- 0.12
-------- -------- --------
Net Income.................................... $ 2.07 $ 1.96 $ 1.07
======== ======== ========
Fully Diluted:
Income Before Extraordinary Items................ $ 2.02 $ 1.90 $ 0.93
Extraordinary Items.............................. -- -- 0.11
-------- -------- --------
Net Income.................................... $ 2.02 $ 1.90 $ 1.04
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ($000'S)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.............................. $ 203,430 $ 193,299 $ 105,940
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Depreciation and Amortization......... 53,612 47,167 71,957
Provision for Loan Losses............. 15,194 16,158 24,907
Gains on Sales of Assets.............. (31,843) (20,448) (2,434)
Proceeds from Sales of Trading
Securities and
Loans Held for Resale................ 4,028,069 3,506,767 3,657,575
Purchases of Trading Securities and
Loans Held for Resale................ (4,052,894) (3,514,512) (3,547,732)
Other................................. 19,521 (727) (2,765)
----------- ----------- -----------
Total Adjustments................... 31,659 34,405 201,508
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. 235,089 227,704 307,448
CASH FLOWS FROM INVESTING ACTIVITIES
Net (Increase) Decrease in Shorter Term
Securities............................. 52,250 (49,980) 7,676
Proceeds from Maturities of Longer Term
Securities............................. 846,169 668,708 861,428
Proceeds from Sales of Securities
Available for Sale..................... 796,447 133,340 595,476
Purchases of Longer Term Securities..... (2,325,623) (791,172) (1,254,651)
Decrease in Loans Due to Divestitures... 13,729 -- 199,455
Net Increase in Loans................... (627,790) (332,649) (497,075)
Purchases of Assets to be Leased........ (171,395) (132,299) (88,826)
Principal Payments on Lease
Receivables............................ 145,095 139,155 113,976
Purchases of Premises and Equipment,
Net.................................... (50,672) (39,881) (28,995)
Other................................... (18,099) 26,603 (29,829)
----------- ----------- -----------
Net Cash Used in Investing Activities... (1,339,889) (378,175) (121,365)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Deposits Due to
Divestitures........................... (25,874) -- (300,736)
Net Increase (Decrease) in Deposits..... 697,454 550,261 (371,993)
Proceeds from Issuance of Commercial
Paper.................................. 641,754 1,406,388 1,578,618
Principal Payments on Commercial Paper.. (669,091) (1,439,343) (1,604,384)
Net Increase (Decrease) in Other Short-
term Borrowings........................ 954,013 (434,429) 440,501
Proceeds from Issuance of Long-term
Debt................................... 248,335 216,872 497,560
Payment of Long-term Debt............... (442,189) (104,676) (96,299)
Dividends Paid.......................... (69,878) (62,985) (57,575)
Purchase of Common Stock................ (172,023) (61,104) (101,887)
Proceeds from the Issuance of Common
Stock.................................. 12,908 9,079 11,682
Other................................... (174) 6 1,687
----------- ----------- -----------
Net Cash Provided by (Used in) Financing
Activities............................. 1,175,235 80,069 (2,826)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 70,435 (70,402) 183,257
Cash and Cash Equivalents, Beginning of
Year................................... 897,489 967,891 784,634
----------- ----------- -----------
Cash and Cash Equivalents, End of Year.. $ 967,924 $ 897,489 $ 967,891
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid During the Year for:
Interest.............................. $ 462,213 $ 406,383 $ 319,398
Income Taxes.......................... 100,401 107,672 91,797
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
32
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
SECURITIES
ADDITIONAL TREASURY DEFERRED GAINS (LOSSES)
PREFERRED COMMON PAID-IN RETAINED COMMON COMPEN- NET OF
STOCK STOCK CAPITAL EARNINGS STOCK SATION TAXES
--------- -------- ---------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... $185 $102,073 $238,130 $897,123 $121,106 $1,892 $ --
Net Income.............. -- -- -- 105,940 -- -- --
Adoption of Statement of
Financial Accounting
Standards No. 115,
"Accounting for Certain
Investments in Debt and
Equity Securities"..... -- -- -- -- -- -- 13,858
Issuance of 2,653,689
Treasury Common Shares
in the 1994 Business
Combination............ -- (2,654) (52,569) -- (55,223) -- --
Transactions by
Affiliates Prior to
Combination............ -- -- -- (9,963) -- -- --
Issuance of 1,870,057
Treasury Common Shares
on Conversion of
Convertible Notes...... -- -- (22,365) -- (38,916) -- --
Issuance of 163,630
Preferred Shares on
Conversion of 1,870,057
Common Shares.......... 164 -- 38,752 -- 38,916 -- --
Issuance of 1,154,218
Treasury Common Shares
Under Stock Option and
Restricted Stock
Plans.................. -- 78 (10,628) -- (22,294) -- --
Acquisition of 4,827,637
Common Shares.......... -- -- -- -- 99,271 -- --
Dividends Declared on
Preferred Stock--$6.43
Per Share.............. -- -- -- (2,000) -- -- --
Dividends Declared on
Common Stock--$0.59 Per
Share.................. -- -- -- (45,612) -- -- --
Net Change in Deferred
Compensation........... -- -- -- -- -- (689) --
Net Change in Unrealized
Securities Gains
(Losses) Net of Taxes
....................... -- -- -- -- -- -- (47,930)
Other................... -- (3) 3,377 (19) 578 -- --
---- -------- -------- -------- -------- ------ --------
Balance, December 31,
1994................... $349 $ 99,494 $194,697 $945,469 $143,438 $1,203 ($34,072)
==== ======== ======== ======== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
SECURITIES
ADDITIONAL TREASURY DEFERRED GAINS (LOSSES)
PREFERRED COMMON PAID-IN RETAINED COMMON COMPEN- NET OF
STOCK STOCK CAPITAL EARNINGS STOCK SATION TAXES
--------- ------- ---------- ---------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $349 $99,494 $194,697 $ 945,469 $143,438 $1,203 ($34,072)
Net Income.............. -- -- -- 193,299 -- -- --
Issuance of 2,844,144
Treasury Common Shares
in Acquisitions
Accounted for as
Purchases.............. -- -- 904 -- (58,791) -- --
Issuance of 884,087
Treasury Common Shares
Under Stock Option and
Restricted Stock
Plans.................. -- -- (8,730) -- (18,427) -- --
Acquisition of 2,731,942
Common Shares.......... -- -- 1 -- 62,239 -- --
Dividends Declared on
Preferred Stock--$7.085
Per Share.............. -- -- -- (2,472) -- -- --
Dividends Declared on
Common Stock--$0.645
Per Share.............. -- -- -- (60,513) -- -- --
Net Change in Deferred
Compensation........... -- -- -- -- -- (113) --
Net Change in Unrealized
Securities Gains
(Losses) Net of Taxes.. -- -- -- -- -- -- 55,319
Other................... -- -- 3,415 6 -- -- --
---- ------- -------- ---------- -------- ------ ---------
Balance, December 31,
1995................... $349 $99,494 $190,287 $1,075,789 $128,459 $1,090 $ 21,247
==== ======= ======== ========== ======== ====== =========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
34
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
SECURITIES
ADDITIONAL TREASURY DEFERRED GAINS (LOSSES)
PREFERRED COMMON PAID-IN RETAINED COMMON COMPEN- NET OF
STOCK STOCK CAPITAL EARNINGS STOCK SATION TAXES
--------- ------- ---------- ---------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $349 $99,494 $190,287 $1,075,789 $128,459 $1,090 $21,247
Net Income.............. -- -- -- 203,430 -- -- --
Issuance of 1,922,114
Treasury Common Shares
on Conversion of
Convertible Notes...... -- -- (25,660) -- (42,517) -- --
Issuance of 168,185
Preferred Shares On
Conversion of 1,922,114
Common Shares.......... 168 -- 42,349 -- 42,517 -- --
Issuance of 982,434
Treasury Common Shares
Under Stock Option and
Restricted Stock
Plans.................. -- -- (9,285) -- (22,422) -- --
Acquisition of 5,924,601
Common Shares.......... -- -- 77 -- 173,106 -- --
Dividends Declared on
Preferred Stock--$7.99
Per Share.............. -- -- -- (3,827) -- -- --
Dividends Declared on
Common Stock--$0.72 Per
Share.................. -- -- -- (66,051) -- -- --
Net Change in Deferred
Compensation........... -- -- -- -- -- (265) --
Net Change in Unrealized
Securities Gains
(Losses) Net of Taxes.. -- -- -- -- -- -- 6,618
Other................... -- -- 6,367 (174) -- -- --
---- ------- -------- ---------- -------- ------ -------
Balance, December 31,
1996................... $517 $99,494 $204,135 $1,209,167 $279,143 $ 825 $27,865
==== ======= ======== ========== ======== ====== =======
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
Marshall & Ilsley Corporation ("M&I" or the "Corporation") is a bank and
savings and loan holding company that provides financial services to a wide
variety of corporate, institutional, government and individual customers
through 28 banks and one savings association located in Wisconsin and one bank
in Arizona. Based on total revenues, banking is M&I's largest business and
includes personal property lease financing; investment management and advisory
services; commercial and residential mortgage banking; venture capital and
financial advisory services; trust services to residents of Wisconsin, Arizona
and Florida; and brokerage services. M&I also provides financial and data
processing services and software sales through the Data Services Division of
the Corporation and three other nonbank subsidiaries. M&I's largest affiliates
and principal operations are in Wisconsin however, it has activities in other
markets, particularly in certain neighboring midwestern states, and in Arizona
and Florida.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those estimates.
Consolidation principles--The Consolidated Financial Statements include the
accounts of Marshall & Ilsley Corporation and all subsidiaries. All
significant intercompany balances and transactions are eliminated in
consolidation. Certain amounts in the 1995 and 1994 Consolidated Financial
Statements have been reclassified to conform with the 1996 presentation.
Cash and cash equivalents--For purposes of the Consolidated Financial
Statements, the Corporation defines cash equivalents as short-term investments
which have an original maturity of three months or less and are readily
convertible into cash.
Securities--Securities, when purchased, are designated as Trading,
Investment Securities Held to Maturity, or Investment Securities Available for
Sale and remain in that category until they are sold or mature. The specific
identification method is used in determining the cost of securities sold.
Investment Securities Held to Maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts. Investment Securities
Available for Sale are carried at fair value with fair value adjustments and
the related income tax effects reported as a separate component of
shareholders' equity as prescribed by Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Short-term Investments, other than Trading Securities, are
carried at cost, which approximates market value. Trading Securities are
carried at fair value, with adjustments to the carrying value reflected in the
Consolidated Statements of Income.
Loans--Interest on loans, other than direct financing leases, is recognized
as income based on the loan principal outstanding during the period. Unearned
income on direct financing leases is recognized over the lease term on a basis
that results in an approximate level rate of return on the lease investment.
Loans are generally placed on nonaccrual status when they are past due 90 days
as to either interest or principal. When a loan is placed on nonaccrual
status, previously accrued and uncollected interest is charged to interest
income on loans. A nonaccrual loan may be restored to an accrual basis when
interest and principal payments are brought current and collectibility of
future payments is not in doubt.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
The Corporation defers and amortizes fees and certain incremental direct
costs, primarily salary and employee benefit expenses, over the contractual
term of the loan or lease as an adjustment to the yield. The unamortized net
fees and costs are reported as part of the loan balance outstanding.
Allowance for loan losses--The allowance for loan losses is maintained at a
level believed adequate by management to absorb estimated potential losses in
the loan portfolio. Management's determination of the adequacy of the
allowance is based on a continual review of the loan portfolio, loan loss
experience, economic conditions, growth and composition of the portfolio, and
other relevant factors. As a result of management's continual review, the
allowance is adjusted through provisions for loan losses charged against
income.
Premises and equipment--Premises and equipment are recorded at cost and
depreciated principally on the straight-line method with annual rates varying
from 2% to 10% for buildings and 10% to 35% for equipment. Long-lived assets
which are considered impaired are carried at fair value and long-lived assets
to be disposed of are carried at the lower of the carrying amount or fair
value less cost to sell. Maintenance and repairs are charged to expense and
betterments are capitalized.
Other real estate owned--Other real estate owned includes assets that have
been acquired in satisfaction of debts and bank branch premises held for sale.
Other real estate is recorded at the lower of cost or fair value, less
estimated selling costs, at the date of transfer. Valuation adjustments
required at the date of transfer for assets acquired in satisfaction of debts
are charged to the allowance for loan losses, whereas any valuation
adjustments on premises are reported in other expense. Subsequent to transfer,
other real estate owned is carried at the lower of cost or fair market value,
less estimated selling costs, based upon periodic evaluations. Rental income
from properties and gains on sales are included in other income, and property
expenses, which include carrying costs, required valuation adjustments and
losses on sales, are recorded in other expense.
Mortgage servicing--Fees related to the servicing of mortgage loans are
recorded as income when payments are received from mortgagors. Mortgage loans
held for sale to investors are carried at the lower of cost or market,
determined on an aggregate basis, based on outstanding firm commitments
received for such loans or on current market prices.
Data processing services--Direct costs associated with the production of
computer software which will be marketed or used in data processing operations
are capitalized and amortized on the straight-line method over the estimated
economic life of the product, generally four years. Direct costs associated
with customer system conversions to the data services operations are
capitalized and amortized on the straight-line method over the terms,
generally five to seven years, of the related servicing contract. Routine
maintenance of software products including maintenance required for the year
2000, design costs and research and development costs incurred prior to
establishment of a product's technological feasibility for software to be sold
are expensed as incurred. Research and development costs expensed in 1996, 1995
and 1994 were approximately $14.0 million, $2.8 million and $2.1 million,
respectively. The 1996 amount includes the $12.1 million expensed in connection
with the acquisition discussed in Note 2.
Net unamortized costs at December 31 were:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Software.............................. $28,695 $19,343
Conversions........................... 16,474 15,641
------- -------
Total................................. $45,169 $34,984
======= =======
</TABLE>
Software amortization expense was $4,987. $3,143 and $3,831 for 1996, 1995,
and 1994, respectively. Conversion amortization expense was $4,864, $3,979 and
$3,129 for 1996, 1995 and 1994, respectively.
Intangibles--Unamortized intangibles resulting from acquisitions, primarily
goodwill, core deposit premiums, purchased data processing contract rights and
mortgage servicing rights were $77,296 at December 31, 1996 and $77,376 at
December 31, 1995. The Corporation recognizes as separate assets rights to
service
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
mortgage loans when purchased or originated and sold with servicing retained.
Mortgage servicing rights are amortized over the periods during which the
corresponding mortgage servicing revenues are anticipated to be generated.
Purchased data processing contract rights represent the costs to acquire the
rights to data processing and software distribution. Such costs are generally
amortized over the average contract lives, which range from 5 to 8 years. The
other intangibles are amortized principally on the straight-line method over
periods ranging from 6 to 25 years. Total amortization expense was $11,121,
$10,708 and $9,176 for 1996, 1995 and 1994, respectively. The Corporation
continually evaluates whether later events and circumstances have occurred to
indicate that intangibles should be evaluated for possible impairment and
utilizes estimates of undiscounted net income over the remaining life to
measure recoverability.
The Corporation also has negative goodwill included in other liabilities,
the majority of which, arose from an acquisition in 1992. Negative goodwill
amounted to $9,056 and $10,811 at December 31, 1996 and 1995, respectively.
The negative goodwill is being accreted on a straight-line basis over a period
of 10 years and amounted to $1,568 in 1996 and $1,576 in 1995 and 1994.
Long-term borrowings--The guaranteed preferred beneficial interest of the
Corporation's special purpose finance subsidiary which holds as its sole
asset, junior subordinated deferrable interest debentures issued by the
Corporation, is classified as long-term borrowings and shown net of its
related discount. The distributions, including the related accretion of
discount, are classified as interest expense for purposes of the Consolidated
Financial Statements.
Interest risk management instruments--As part of its asset/liability
management activities, the Corporation may enter into interest rate futures,
forwards, swaps, floors and option contracts. These derivative financial
instruments are carried at fair value unless the instrument qualifies for
hedge accounting treatment. Fair value adjustments on risk management
instruments carried at fair value are reflected in other operating income.
Gains and losses realized on futures and forward contracts qualifying as
hedges are deferred and amortized over the terms of the related assets or
liabilities and are included as adjustments to interest income or expense.
Settlement on interest rate swaps and option contracts are recognized over the
lives of the agreements as adjustments to interest income or expense.
Interest rate contracts used in management of the securities portfolio that
are designated as available for sale are carried at fair value with gains and
losses, net of applicable deferred income taxes, reported as a separate
component of shareholders' equity, consistent with the reporting of unrealized
gains and losses on such securities.
Foreign exchange contracts--Foreign exchange contracts include such
commitments as foreign currency spot, forward, future and, to a much lessor
extent, option contracts. Foreign exchange contracts and the premiums on
options written or sold are carried at market value, with realized and
unrealized gains and losses included in other income.
Net income per share--Primary net income per share is computed using the
weighted average number of common shares outstanding plus common equivalent
shares issuable upon the assumed conversion of the preferred stock outstanding
and shares issuable under outstanding stock option plans. The average number
of common and common equivalent shares used in computing primary net income
per share was 98,482,425 in 1996, 98,757,047 in 1995, and 99,420,070 in 1994.
Fully diluted net income per share also includes dilution resulting from the
assumed conversion of the convertible notes. The average number of shares used
in the computation of fully diluted net income per share was 101,197,081 in
1996, 102,954,823 in 1995, and 104,051,365 in 1994.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
New accounting pronouncement--Effective January 1, 1997, the Corporation
must adopt Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities such as accounting for transfers of partial interests, servicing
of financial assets, securitizations, transfers of certain lease receivables,
repurchase agreements and loan syndications and participations. The
Corporation does not anticipate that SFAS 125 will have a material impact on
the Consolidated Financial Statements.
2. Its results of operations, Liquidity or Capital resources.
The Corporation has consummated the following business combinations:
<TABLE>
<CAPTION>
CONSIDERATION
------------------
DATE COMMON METHOD OF
ORGANIZATION CONSUMMATED CASH STOCK ACCOUNTING
- ------------ ----------------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Valley Bancorporation......... May 31, 1994 -- 35,681,156 Pooling
Software Alliance Corp........ December 30, 1994 $15,700 -- Purchase
Bank of Burlington............ February 1, 1995 -- 1,491,600 Purchase
Mutual Services, Inc. ........ June 27, 1995 5,333 -- Purchase
Citizens Bancorp of Delavan,
Inc.......................... July 1, 1995 -- 1,132,544 Purchase
Sharon State Bank............. July 2, 1995 -- 220,000 Purchase
EastPoint Technology, Inc. ... August 7, 1996 25,508 -- Purchase
</TABLE>
EastPoint Technology, Inc. is a software development company specializing in
client/server technology. The allocation of the purchase price to the various
classes of assets was determined on the basis of an opinion expressed by a
nationally recognized independent appraisal firm. The value determined for in-
process research and development, where technological feasibility had not yet
been established or was not believed to have an alternative future use, was
immediately expensed while the values of completed technology and other
assets, including the resulting goodwill, are being amortized over their
estimated useful lives.
Acquired in-process research and development expensed during 1996 amounted
to $12.1 million and is included in other miscellaneous expense in the
Consolidated Statements of Income.
The results of operations for the acquired companies accounted for as
purchases are included in the Consolidated Financial Statements from the dates
of acquisition. The pro forma impact on net income from acquisitions is not
material.
3. MERGER/RESTRUCTURING
Certain one-time expenses associated with the 1994 merger with Valley
Bancorporation ("Valley") are shown in the Consolidated Statements of Income
as Merger/Restructuring and consist of the following:
<TABLE>
<CAPTION>
<S> <C>
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
=======
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
5. CASH AND DUE FROM BANKS
At December 31, 1996, $131,378 of cash and due from banks was restricted,
primarily due to requirements of the Federal Reserve system to maintain
certain reserve balances.
6. OTHER SHORT-TERM INVESTMENTS
Other short-term investments at December 31 were:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Commercial paper............................................ $13,000 $65,250
Interest bearing deposits in other banks.................... 29,214 28,812
U.S. Treasury bills......................................... 3,497 1,573
------- -------
Total other short-term investments.......................... $45,711 $95,635
======= =======
</TABLE>
7. SECURITIES
The book and market values of securities at December 31 were:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment Securities Available
for Sale:
U.S. Treasury and government
agencies........................ $2,832,067 $2,856,625 $2,330,577 $2,346,866
States and political
subdivisions.................... 708 719 885 894
Mortgage backed securities....... 34,209 34,248 5,210 5,220
Other............................ 154,792 173,456 88,826 105,620
---------- ---------- ---------- ----------
Total........................... $3,021,776 $3,065,048 $2,425,498 $2,458,600
========== ========== ========== ==========
Investment Securities Held to
Maturity:
States and political
subdivisions.................... $ 769,748 $ 772,694 $ 446,113 $ 448,896
Other............................ 4,056 4,056 4,344 4,344
---------- ---------- ---------- ----------
Total........................... $ 773,804 $ 776,750 $ 450,457 $ 453,240
========== ========== ========== ==========
The unrealized gains and losses of securities at December 31 were:
<CAPTION>
1996 1995
--------------------- ---------------------
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment Securities Available
for Sale:
U.S. Treasury and government
agencies........................ $ 30,061 $ 5,503 $ 23,964 $ 7,675
States and political
subdivisions.................... 11 -- 9 --
Mortgage backed securities....... 121 82 33 23
Other............................ 18,955 291 17,237 443
---------- ---------- ---------- ----------
Total........................... $ 49,148 $ 5,876 $ 41,243 $ 8,141
========== ========== ========== ==========
Investment Securities Held to
Maturity:
States and political
subdivisions.................... $ 6,622 $ 3,676 $ 4,473 $ 1,690
Other............................ -- -- -- --
---------- ---------- ---------- ----------
Total........................... $ 6,622 $ 3,676 $ 4,473 $ 1,690
========== ========== ========== ==========
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
5. CASH AND DUE FROM BANKS
At December 31, 1996, $131,378 of cash and due from banks was restricted,
primarily due to requirements of the Federal Reserve system to maintain
certain reserve balances.
6. OTHER SHORT-TERM INVESTMENTS
Other short-term investments at December 31 were:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Commercial paper............................................ $13,000 $65,250
Interest bearing deposits in other banks.................... 29,214 28,812
U.S. Treasury bills......................................... 3,497 1,573
------- -------
Total other short-term investments.......................... $45,711 $95,635
======= =======
</TABLE>
7. SECURITIES
The book and market values of securities at December 31 were:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment Securities Available
for Sale:
U.S. Treasury and government
agencies........................ $2,832,067 $2,856,625 $2,330,577 $2,346,866
States and political
subdivisions.................... 708 719 885 894
Mortgage backed securities....... 34,209 34,248 5,210 5,220
Other............................ 154,792 173,456 88,826 105,620
---------- ---------- ---------- ----------
Total........................... $3,021,776 $3,065,048 $2,425,498 $2,458,600
========== ========== ========== ==========
Investment Securities Held to
Maturity:
States and political
subdivisions.................... $ 769,748 $ 772,694 $ 446,113 $ 448,896
Other............................ 4,056 4,056 4,344 4,344
---------- ---------- ---------- ----------
Total........................... $ 773,804 $ 776,750 $ 450,457 $ 453,240
========== ========== ========== ==========
The unrealized gains and losses of securities at December 31 were:
<CAPTION>
1996 1995
--------------------- ---------------------
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment Securities Available
for Sale:
U.S. Treasury and government
agencies........................ $ 30,061 $ 5,503 $ 23,964 $ 7,675
States and political
subdivisions.................... 11 -- 9 --
Mortgage backed securities....... 121 82 33 23
Other............................ 18,955 291 17,237 443
---------- ---------- ---------- ----------
Total........................... $ 49,148 $ 5,876 $ 41,243 $ 8,141
========== ========== ========== ==========
Investment Securities Held to
Maturity:
States and political
subdivisions.................... $ 6,622 $ 3,676 $ 4,473 $ 1,690
Other............................ -- -- -- --
---------- ---------- ---------- ----------
Total........................... $ 6,622 $ 3,676 $ 4,473 $ 1,690
========== ========== ========== ==========
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
The book value and market value of securities by contractual maturity at
December 31, 1996 were:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES INVESTMENT SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
--------------------- ----------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- ----------------------
<S> <C> <C> <C> <C>
Within one year................ $ 442,313 $ 445,386 $ 67,135 $ 67,356
From one through five years.... 1,996,837 2,013,818 193,114 194,269
From five through ten years.... 380,566 384,366 398,954 399,753
After ten years................ 202,060 221,478 114,601 115,372
---------- ---------- ---------- ----------
Total.......................... $3,021,776 $3,065,048 $ 773,804 $ 776,750
========== ========== ========== ==========
</TABLE>
The gross realized gains and losses, all of which resulted from sales of
Investment Securities Available for Sale, amounted to $22,450 and $7,574 in
1996, $8,821 and $4,266 in 1995, and $3,499 and $9,251 in 1994, respectively.
The change in the unrealized holding gain or loss on trading securities was not
material.
At December 31, 1996, securities with a value of approximately $799,866 were
pledged to secure public deposits, short-term borrowings, and for other
purposes required by law.
During 1996 and 1995, approximately $224 and $455 million, respectively, of
adjustable rate mortgage loans were securitized and transferred to investment
securities available for sale. Approximately $440 of the allowance for loan
losses was transferred to a specific investment reserve in 1996 and $2,275 in
1995, to cover estimated losses based on the Corporation's experience with
these types of financial instruments. The Corporation has agreed to guarantee
the first 4% of the loan pools securitized through government agencies against
potential loss. Since inception of the program in 1995 no losses have been
incurred. These are noncash transactions for purposes of the Consolidated
Statements of Cash Flows.
On December 1, 1995 the Corporation transferred and reclassified
approximately $182.8 million of investment securities previously classified as
held to maturity to available for sale after reassessing the appropriateness
of the classification of all investment securities held at that time in
accordance with SFAS 115 and the Financial Accounting Standards Board's, "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities." The unrealized gain at the date of transfer was
$2.1 million.
8. LOANS
Loans at December 31 were:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Commercial, financial, and agricultural............... $2,885,152 $2,903,920
Industrial development revenue bonds.................. 32,241 29,358
Real estate:
Construction......................................... 323,420 303,345
Residential mortgage................................. 2,176,224 2,002,023
Commercial mortgage.................................. 2,379,156 2,189,449
Personal.............................................. 1,174,186 1,163,127
Lease financing....................................... 331,505 277,680
---------- ----------
Total loans........................................... $9,301,884 $8,868,902
========== ==========
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
The Corporation's lending activities are concentrated primarily in the
Midwest. Approximately 4% of its portfolio consists of loans granted to
customers located in Arizona. The Corporation had $4,031 in foreign credits at
December 31, 1996. The Corporation's loan portfolio consists of business loans
extending across many industry types, as well as loans to individuals. As of
December 31, 1996, total loans to any group of customers engaged in similar
activities and having similar economic characteristics, as defined by standard
industrial classifications, did not exceed 10% of total loans.
The Corporation evaluates the credit risk of each customer on an individual
basis and, where deemed appropriate, collateral is obtained. Collateral varies
by individual loan customer but may include accounts receivable, inventory,
real estate, equipment, deposits, personal and government guaranties, and
general security agreements. Access to collateral is dependent upon the type
of collateral obtained. On an on-going basis, the Corporation monitors its
collateral and the collateral value related to the loan balance outstanding.
An analysis of loans outstanding to directors and officers, including their
related interests, of the Corporation and its significant subsidiaries for
1996 is presented below. All of these loans were made in the ordinary course
of business with normal credit terms, including interest rates and collateral.
The beginning balance has been adjusted to reflect the activity of newly-
appointed directors and executive officers.
Loans to Directors & Executive Officers:
<TABLE>
<CAPTION>
<S> <C>
Balance, beginning of year.......................................... $168,662
New loans........................................................... 176,484
Repayments.......................................................... (202,465)
--------
Balance, end of year................................................ $142,681
========
</TABLE>
9. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year..................... $161,430 $153,961 $133,600
Allowance of banks acquired.................... -- 2,843 --
Provision charged to expense................... 15,194 16,158 24,907
Loan securitization transfer................... (440) (2,275) --
Charge-offs.................................... (28,408) (14,615) (12,561)
Recoveries..................................... 8,119 5,358 8,015
-------- -------- --------
Balance, end of year........................... $155,895 $161,430 $153,961
======== ======== ========
</TABLE>
As of December 31, 1996, and 1995, nonaccrual loans totalled $60,176 and
$50,598, respectively.
During 1994, a loan loss provision of $8,950 was charged to expense, after
consummation of the merger with Valley, to conform Valley's loan valuation
policies with those of the Corporation.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
At December 31, 1996 and 1995 the Corporation's recorded investment in
impaired loans and the related valuation allowance are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
RECORDED VALUATION RECORDED VALUATION
INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Total Impaired Loans and Leases
(Nonaccrual and Renegotiated)...... $61,995 $53,685
Loans and Leases Excluded from
Evaluation under SFAS 114.......... (25,247) (22,887)
------- -------
$36,748 $30,798
======= =======
Valuation Allowance Required........ $ 6,071 $1,462 $ 8,643 $2,336
No Valuation Allowance Required..... 30,677 -- 22,155 --
------- ------ ------- ------
Impaired Loans Evaluated............ $36,748 $1,462 $30,798 $2,336
======= ====== ======= ======
</TABLE>
The recorded investment in impaired loans for which no allowance is required
is net of applications of cash interest payments and net of previous direct
writedowns of $16,697 in 1996 and $4,325 in 1995 against the loan balance
outstanding. The required valuation allowance is included in the allowance for
loan losses in the Consolidated Balance Sheets.
The average recorded investment in total impaired loans and leases for the
year ended December 31, 1996 and 1995 amounted to $71,255 and $52,827,
respectively.
Interest payments received on impaired loans and leases are recorded as
interest income unless collection of the remaining recorded investment is
doubtful at which time payments received are recorded as reductions of
principal. Interest income recognized on total impaired loans amounted to
$6,482 in 1996 and $3,594 in 1995. The gross income that would have been
recognized had such loans and leases been performing in accordance with their
original terms would have been $9,809 in 1996 and $8,430 in 1995.
10. PREMISES AND EQUIPMENT
The composition of premises and equipment at December 31 was:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land...................................................... $ 38,566 $ 37,006
Buildings and leasehold improvements...................... 259,352 250,607
Furniture and equipment................................... 327,088 315,961
-------- --------
625,006 603,574
Less accumulated depreciation............................. 311,625 296,586
-------- --------
Total premises and equipment.............................. $313,381 $306,988
======== ========
</TABLE>
Depreciation expense was $52,561 in 1996, $45,153 in 1995, and $43,006 in
1994.
The Corporation leases certain of its facilities and equipment. Rent expense
under such operating leases was $25,908 in 1996, $21,702 in 1995, and $20,567
in 1994, respectively.
The future minimum lease payments under operating leases that have initial
or remaining noncancellable lease terms in excess of one year for 1997 through
2001 are $10,295, $9,690, $8,372, $6,107 and $5,023, respectively.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
11. SHORT-TERM BORROWINGS
Short-term borrowings at December 31 were:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Funds purchased and security repurchase agreements... $1,337,940 $ 517,576
U.S. Treasury demand notes........................... 146,398 17,585
Commercial paper..................................... 14,234 41,571
Current maturities of long-term borrowings........... 284,023 398,688
Other................................................ 51,954 39,602
---------- ----------
Total short-term borrowings........................ $1,834,549 $1,015,022
========== ==========
</TABLE>
Unused lines of credit primarily to support commercial paper borrowings were
$40,000 at December 31, 1996 and 1995.
12. LONG-TERM BORROWINGS
Long-term borrowings at December 31 were:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CORPORATION:
8.5% convertible subordinated notes due in 1997.......... $ 16,819 $ 33,637
6.375% subordinated notes due in 2003.................... 99,531 99,475
Medium-term Series B and C notes......................... 106,050 170,200
7.65% cumulative company-obligated mandatorily redeemable
capital trust pass-through securities................... 199,031 --
Other.................................................... 20,619 20,958
SUBSIDIARIES:
Bank notes............................................... 129,991 438,823
Nonrecourse notes........................................ 28,825 32,533
9.75% obligation under capital lease due through 2006.... 4,436 4,699
Other.................................................... 14,817 20,913
-------- --------
620,119 821,238
Less current maturities.................................. 284,023 398,688
-------- --------
Total long-term borrowings............................ $336,096 $422,550
======== ========
</TABLE>
The 8.5% convertible subordinated notes (the "Notes") require semi-annual
interest payments and are convertible at the option of the holder into common
stock at a conversion price of $8.75. The holder has the right to exchange
common stock, acquired by conversion of the Notes or otherwise, for series A
convertible preferred stock ("Series A"). The holder may own up to 24.9%
(computed as the percentage of common shares owned directly or indirectly
through conversion privileges) of the Corporation's outstanding common stock
and convertible securities, but may not own directly more than 5% of the
Corporation's outstanding common stock. Except under limited circumstances,
the holder may not sell, transfer or otherwise dispose of the Notes or common
stock acquired by conversion, and then, only under prescribed conditions and
subject to the Corporation's right of first refusal.
A portion of the Notes qualify as equity contract notes as defined by the
applicable guidelines of the Board of Governors of the Federal Reserve System.
The Notes require the holder to take common stock (or other equity securities)
in lieu of cash in satisfaction of the claim for principal repayment, unless
the Corporation sells new
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
common stock (or certain other equity securities) and dedicates the proceeds
thereof to the redemption or retirement of the Notes.
During 1996, $16,818 of the Notes were converted by the holder into
1,922,114 shares of the Corporation's common stock. The common stock acquired
by conversion of the Notes was exchanged for 168,185 shares of the
Corporation's Series A convertible preferred stock. These are noncash
transactions for purposes of the Consolidated Statements of Cash Flows.
The 6.375% subordinated notes are not redeemable prior to maturity and
qualify as "Tier 2" or supplementary capital for regulatory capital purposes.
Interest is payable semiannually.
The Corporation has filed registration statements with the Securities and
Exchange Commission to issue medium-term unsecured and unsubordinated series
notes. These issues may have maturities which range from 9 months to 30 years
from the date of issue, at a fixed or floating rate.
At December 31, 1996, medium-term Series B notes outstanding amounted to
$20,050. Such notes mature in 1997 and 1998 and have fixed interest rates of
6.65% to 7.30%. No additional borrowings may occur under the Series B notes.
There were $86,000 of medium-term Series C notes outstanding at December 31,
1996. The medium-term Series C notes have fixed interest rates of 6.95% to
7.65% and mature in 1997 and 1998. Approximately $27,130 of unissued Series C
notes are remaining and available to be issued in the future. There have been
no issuances of the $150 million Series D notes.
In December 1996, the Corporation formed M&I Capital Trust A (the "Trust")
and issued $200 million in liquidation or principal amount of cumulative
preferred capital securities to certain accredited institutional investors.
Holders of the capital securities are entitled to receive cumulative cash
distributions at an annual rate of 7.65% payable semiannually.
Concurrently with the issuance of the capital securities the Trust invested
the proceeds, together with the consideration paid by the Corporation for the
common interest in the Trust, in junior subordinated deferrable interest
debentures ("subordinated debt") issued by the Corporation. The subordinated
debt, which represents the sole asset of the Trust, bears interest at an
annual rate of 7.65% payable semiannually and matures on December 1, 2026. The
proceeds will be used for general corporate purposes including the repurchase
of its common shares.
The subordinated debt is junior in right of payment to all present and
future senior indebtedness of the Corporation. The Corporation may redeem the
subordinated debt in whole or in part at any time on or after December 1, 2006
at specified call premiums and at par on or after December 1, 2016. In
addition, in certain circumstances the subordinated debt may be redeemed at
par upon the occurrence of certain events. The Corporation's right to redeem
the subordinated debt is subject to regulatory approval.
The Corporation has the right subject to certain conditions, to defer
payments of interest on the subordinated debt for extension periods, each
period not exceeding ten consecutive semiannual periods. As a consequence of
the Corporation's extension of the interest payment period, distributions on
the capital securities would be deferred. In the event the Corporation
exercises its right to extend an interest payment period, the Corporation is
prohibited from making dividend or any other equity distributions during such
extension period.
The payment of distributions, liquidation of the Trust or payment upon the
redemption of the capital securities are guaranteed by the Corporation.
The Corporation, as owner of the common interest in the Trust, has the right
at any time to terminate the Trust, subject to certain conditions. In
circumstances other than maturity or redemption of the subordinated debt,
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
the subordinated debt would be distributed to the holders of the Trust
securities on a pro rata basis in liquidation of the holders' interests in the
Trust.
The capital securities qualify as "Tier 1" capital for regulatory capital
purposes.
The Corporation and the Trust have filed a Registration Statement with the
Securities and Exchange Commission to register capital securities and register
junior subordinated deferrable interest debentures that will be offered in
exchange for the existing privately placed capital securities and subordinated
debt.
The bank notes represent unsecured general obligations of the Corporation's
banking subsidiaries ("Issuing Banks"). Each of the Corporation's banking
subsidiaries is a potential Issuing Bank which may issue bank notes with
maturities ranging from 30 days to 15 years at a fixed or floating rate up to
a maximum of $1.0 billion aggregate principal amount outstanding at any time.
The bank notes are offered through certain designated agents and are offered
and sold only to institutional investors. The bank notes are sole obligations
of the respective Issuing Banks and are not obligations of or guaranteed by
the Corporation. The amount outstanding at December 31, 1996 represents the
aggregate borrowings of 5 banking subsidiaries and mature at various times in
1997. Each bank note outstanding has a floating rate which is based on LIBOR
plus 1/16 which ranged from 5.81% to 6.00% at December 31, 1996. Interest is
payable and the interest rate is reset monthly.
The nonrecourse notes are reported net of prepaid interest and represent
borrowings by the leasing subsidiary from banks and other financial
institutions. These notes have a weighted average interest rate of 8.74% at
December 31, 1996 and are due in installments over varying periods through
2002. Lease financing receivables at least equal to the amount of the notes
are pledged as collateral.
Scheduled maturities of long-term borrowings are: $18,282, $10,439, $2,923
and $1,106 for 1998 through 2001, respectively.
13. SHAREHOLDERS' EQUITY
The Corporation has 5,000,000 shares of preferred stock authorized, of which
the Board of Directors has designated 2,000,000 shares as Series A
convertible, with a $100 value per share for conversion purposes. Series A is
nonvoting preferred stock. The same cash dividends will be paid on Series A as
would have been paid on the common stock exchanged for Series A. Series A has
the same restrictions on sale as are applicable to the 8.5% convertible
subordinated notes.
The holder of the convertible subordinated notes has the option through 1997
to exchange common stock of the Corporation for Series A. If the common stock
is acquired by the holder in conversion of the Notes, the exchange ratio is
one share of Series A for 11.43 shares of common stock. If acquired otherwise,
the exchange ratio is one share of Series A, valued at $100, to the holder's
weighted average purchase price per common share. Also, the holder has the
option to convert series A into common stock at the same ratio that the common
stock was exchanged for Series A. The Corporation has issued 517,129 shares of
its Series A convertible preferred stock in exchange for 5,755,071 shares of
common stock.
The preferred stock is treated as a common stock equivalent in all per share
calculations.
The Corporation has a Stock Repurchase Program. Under the most recent
provisions approved by the Corporation's Board of Directors, up to 6 million
shares may be purchased annually. The shares are being acquired in
anticipation of the conversion of the Corporation's 8.5% convertible
subordinated notes, to fund the on-going program to deliver or have available
shares of common stock for stock option and other employee benefit plans and
other corporate needs. In conjunction with the Corporation's Repurchase
Program, the
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
Corporation entered into a forward contract and purchased 2.0 million shares
of its common stock in December, 1996. The contract provides that in June, 1997,
a settlement price, based on the weighted average price of transactions in the
Corporation's Common Stock over the six month period, will be computed resulting
in an adjustment amount. Such adjustment amount, whether positive or negative,
may be settled in the Corporation's common stock or cash at the Corporation's
option. Including the transaction described above, the Corporation purchased 5.9
million shares in 1996 and has cumulatively purchased 18.4 million shares since
inception of the program.
Federal banking regulatory agencies have established capital adequacy rules
which take into account risk attributable to balance sheet assets and off-
balance sheet activities. All banks and bank holding companies must meet a
minimum total risk-based capital ratio of 8%. Of the 8% required, at least
half must be comprised of core capital elements defined as Tier 1 capital. The
federal banking agencies also have adopted leverage capital guidelines which
banking organizations must meet. Under these guidelines, the most highly rated
banking organizations must meet a minimum leverage ratio of at least 3% Tier 1
capital to total assets, while lower rated banking organizations must maintain
a ratio of at least 4% to 5%. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Consolidated Financial Statements.
At December 31, 1996, the most recent notification from the Federal Reserve
Board categorized the Corporation as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the
Corporation's category.
To be well capitalized under the regulatory framework, the Tier 1 capital
ratio must meet or exceed 6%, the Total capital ratio must meet or exceed 10%
and the Leverage ratio must meet or exceed 5%.
The Corporation's risk-based capital and Leverage ratios are as follows ($
in millions)
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
---------------------------------------------------
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Tier 1 capital............ $ 1,361.9 12.71% $1,167.5 11.71%
Tier 1 capital minimum
requirement.............. 428.5 4.00 398.7 4.00
------------- ---------- ------------- ----------
Excess.................... $ 933.4 8.71% $ 768.8 7.71%
============= ========== ============= ==========
Total capital............. $ 1,596.4 14.90% $1,399.3 14.04%
Total capital minimum
requirement.............. 857.1 8.00 797.3 8.00
------------- ---------- ------------- ----------
Excess.................... $ 739.3 6.90% $ 602.0 6.04%
============= ========== ============= ==========
Risk-adjusted assets...... $10,713.4 $9,965.8
============= =============
<CAPTION>
LEVERAGE RATIO
---------------------------------------------------
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Tier 1 capital to adjusted
total assets............. $ 1,361.9 9.61% $ 1,167.5 9.07%
Minimum leverage
requirement.............. 425.3-708.8 3.00-5.00 386.3-643.8 3.00-5.00
------------- ---------- ------------- ----------
Excess.................... $ 936.6-653.1 6.61-4.61% $ 781.2-523.7 6.07-4.07%
============= ========== ============= ==========
Adjusted average total
assets................... $ 14,175.4 $ 12,875.3
============= =============
</TABLE>
All of the Corporation's banking subsidiaries' risk-based capital and
leverage ratios meet or exceed the defined minimum requirements, and have been
deemed well capitalized as of December 31, 1996 and 1995.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
Banking subsidiaries are restricted by banking regulations from making
dividend distributions above prescribed amounts and are limited in making
loans and advances to the Corporation. At December 31, 1996, the retained
earnings of subsidiaries available for distribution as dividends without
regulatory approval was approximately $122,169.
14. INCOME TAXES
Total income tax expense for the years ended December 31, 1996, 1995 and
1994 was allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Income before extraordinary items............. $109,711 $106,580 $73,405
Extraordinary items........................... -- -- 9,008
Shareholders' Equity:
Compensation expense for tax purposes in
excess of amounts recognized for financial
reporting purposes.......................... (6,367) (3,415) (3,442)
Unrealized gains (losses) on investment
securities available
for sale.................................... 3,552 30,752 (18,897)
-------- -------- -------
$106,896 $133,917 $60,074
======== ======== =======
</TABLE>
The current and deferred portions of the provision for income taxes were:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal........................................ $ 95,811 $ 91,233 $80,758
State.......................................... 13,192 13,900 12,686
-------- -------- -------
109,003 105,133 93,444
Deferred:
Federal........................................ (167) 1,826 (21,075)
State.......................................... 875 (379) 1,036
-------- -------- -------
708 1,447 (20,039)
-------- -------- -------
Total provision for income taxes............ $109,711 $106,580 $73,405
======== ======== =======
</TABLE>
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%) :
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Tax computed at statutory rates............... $109,599 $104,958 $58,731
Increase (decrease) in taxes resulting from:
Federal tax-exempt income.................... (9,547) (5,972) (5,972)
State income taxes, net of Federal tax
benefit..................................... 9,272 9,891 10,605
Merger/Restructuring......................... -- -- 7,191
Other........................................ 387 (2,297) 2,850
-------- -------- -------
Total provision for income taxes.......... $109,711 $106,580 $73,405
======== ======== =======
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
The tax effects of temporary differences that give rise to significant
elements of the deferred tax assets and deferred tax liabilities at December
31, are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred compensation................................. $11,656 $ 9,396
Allowance for loan losses............................. 47,110 48,523
Accrued postretirement benefits....................... 18,973 16,384
Other................................................. 30,049 25,512
------- -------
Total deferred tax assets.......................... 107,788 99,815
Deferred tax liabilities:
Lease revenue reporting............................... 25,101 19,988
Deferred expense, net of unearned income.............. 13,446 9,724
Premises and equipment, principally due to
depreciation......................................... 19,691 18,720
Pension funding versus expense........................ -- 1,067
Purchase accounting adjustments....................... 2,800 3,303
Unrealized gains and losses........................... 15,407 11,855
Other................................................. 8,654 8,209
------- -------
Total deferred tax liabilities..................... 85,099 72,866
------- -------
Net deferred tax assets............................ $22,689 $26,949
======= =======
</TABLE>
The amount of income tax expense (benefit) related to net securities gains
or losses amounted to $6,233, $1,762, and ($2,171), in 1996, 1995, and 1994,
respectively.
15. STOCK OPTION AND RESTRICTED STOCK PLANS
The Corporation has Executive Stock Option and Restricted Stock Plans which
provide for the grant of nonqualified and incentive stock options, stock
appreciation rights and rights to purchase restricted shares to key employees
at prices ranging from not less than the par value of the common shares to the
market value of the shares at the date of grant.
The nonqualified and incentive stock option plans generally provide for the
grant of options to purchase shares of the Corporation's common stock for a
period of ten years from the date of grant. Options granted generally become
exercisable over a period of two years from the date of grant however, options
granted to Directors of the Corporation vest immediately and options granted
in 1996 provide a six month vesting period for grants to individuals who meet
certain age and years of service criteria at the date of grant.
Activity relating to nonqualified and incentive stock options was:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OPTION PRICE EXERCISE
OF SHARES PER SHARE PRICE
---------- ------------ --------
<S> <C> <C> <C>
Shares under option at
December 31, 1993........... 6,371,935 $4.02--23.25 $13.26
Options granted.............. 1,115,800 19.25--21.75 19.95
Options lapsed or
surrendered................. (29,889) 5.39--22.75 15.43
Options exercised............ (1,151,218) 4.02--19.50 10.15
---------- ------------ ------
Shares under option at
December 31, 1994........... 6,306,628 $4.02--23.25 $15.00
Options granted.............. 741,700 20.25--26.19 25.54
Options lapsed or
surrendered................. (32,775) 8.54--22.75 20.82
Options exercised............ (858,087) 4.02--22.75 10.66
---------- ------------ ------
Shares under option at
December 31, 1995........... 6,157,466 $6.71--26.19 $16.84
========== ============ ======
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OPTION PRICE EXERCISE
OF SHARES PER SHARE PRICE
--------- ------------ --------
<S> <C> <C> <C>
Shares under option at December
31, 1995...................... 6,157,466 $6.71--26.19 $16.84
Options granted................ 836,300 25.63--31.88 31.59
Options lapsed or surrendered.. (71,038) 8.54--26.19 19.00
Options exercised.............. (973,434) 6.71--26.19 13.33
--------- ------------ ------
Shares under option at December
31, 1996...................... 5,949,294 $7.68--31.88 $19.46
========= ============ ======
</TABLE>
The range of options outstanding at December 31, 1996 were:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED-AVERAGE REMAINING
NUMBER OF SHARES EXERCISE PRICE CONTRACTUAL
PRICE ----------------------- ----------------------- LIFE
RANGE OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE (IN YEARS)
-------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 7--12 1,320,781 1,320,781 $10.12 $10.12 1.9
13--18 1,268,771 1,268,771 15.85 15.85 5.1
19--25 1,888,342 1,880,842 20.79 20.79 7.2
Over $25 1,471,400 362,550 29.26 26.29 9.5
--------- --------- ------ ------ ---
5,949,294 4,832,944 $19.46 $16.99 6.2
========= ========= ====== ====== ===
</TABLE>
Options exercisable at December 31, 1995 and 1994 were 5,024,041 and
4,825,678, respectively. The weighted average exercise price for options
exercisable was $12.52 at December 31, 1995 and $10.15 at December 31, 1994.
In October, 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation." This standard establishes financial accounting and
reporting standards for stock-based employee compensation plans.
SFAS 123 defines a fair value based method of accounting for employee stock
option or similar equity instruments. Under the fair value based method,
compensation cost is measured at the grant date based on the fair value of the
award using an option-pricing model that takes into account the stock price at
the grant date, the exercise price, the expected life of the option, the
volatility of the underlying stock, expected dividends and the risk-free
interest rate over the expected life of the option. The resulting compensation
cost is recognized over the service period, which is usually the vesting
period.
Compensation cost can also be measured and accounted for using the intrinsic
value based method of accounting prescribed in Accounting Principles Board
Opinion No. 25 (APBO 25), "Accounting for Stock Issued to Employees." Under
the intrinsic value based method, compensation cost is the excess, if any, of
the quoted market price of the stock at grant date or other measurement date
over the amount paid to acquire the stock.
The largest difference between SFAS 123 and APBO 25 as it relates to the
Corporation is the amount of compensation cost attributable to the
Corporation's fixed stock option plans. Under APBO 25 no compensation cost is
recognized for fixed stock option plans because the exercise price is equal to
the quoted market price at the date of grant and therefore there is no
intrinsic value. SFAS 123 compensation cost would equal the calculated fair
value of the options granted.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
As permitted by SFAS 123, the Corporation continues to measure compensation
cost for such plans using the accounting method prescribed by APBO 25.
Had compensation cost for the Corporation's options granted after January 1,
1995 been determined consistent with SFAS 123, the Corporation's net income
and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net income
As reported............................................. $203,430 $193,299
Pro forma............................................... 200,933 192,855
Primary earnings per share
As reported............................................. $2.07 $1.96
Pro forma............................................... 2.04 1.95
Fully diluted earnings per share
As reported............................................. $2.02 $1.90
Pro forma............................................... 2.00 1.89
</TABLE>
The fair value of each option grant was estimated as of the date of grant
using the Black--Scholes option pricing model. The resulting compensation cost
was amortized over the vesting period.
The grant date fair values and assumptions used to determine such value are
as follows:
<TABLE>
<CAPTION>
OPTIONS GRANTED DURING 1996 1995
---------------------- ----------- -----------
<S> <C> <C>
Weighted-average grant date fair value............. $8.14 $6.50
Assumptions:
Risk-free interest rates......................... 5.48-6.51% 5.66-6.91%
Expected volatility.............................. 19.30-20.36% 19.99-20.50%
Expected term (in years)......................... 6.0 6.0
Expected dividend yield.......................... 2.25% 2.19%
</TABLE>
Activity relating to the Corporation's Restricted Purchase Rights was:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Restricted stock purchase rights outstanding--
Beginning of Year.................................. 5,000 13,000 0
Restricted stock purchase rights granted............ 19,000 18,000 16,000
Restricted stock purchase rights exercised.......... (9,000) (26,000) (3,000)
------ ------- ------
Restricted stock purchase rights outstanding--
End of Year........................................ 15,000 5,000 13,000
Weighted-average grant date market value............ $30.08 $24.05 $19.69
Aggregate compensation expense...................... $444 $611 $747
</TABLE>
Restrictions on stock issued pursuant to the exercise of stock purchase
rights lapse within a seven year period. Accordingly, the compensation related
to issuance of the rights is deferred and amortized over the vesting period.
Unamortized deferred compensation is reflected as a reduction of shareholders'
equity.
Shares reserved for the granting of options and stock purchase rights at
December 31, 1996 were 1,249,699.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
The Corporation also has a Long-term Incentive Plan (the "plan"). Under the
plan, performance units may be awarded from time to time. The maximum number of
units which can be awarded in the plan are 600,000. Once awarded, additional
performance units will be credited to each participant based on dividends paid
by the Corporation on its common stock. At the end of a designated vesting
period, participants will receive an amount, either in cash, common stock or
some combination thereof, equal to some percent (0%-275%) of the initial
performance units credited plus those additional units credited as dividends
based on the established performance criteria. During 1996, 88,650 units and in
1995, 91,700 units and in 1994, 57,500 units were awarded to certain executives
of the Corporation. The market value per share of the Corporation's Common Stock
at the time of the award was $23.75 in 1994, $18.38 in 1995 and $25.63 in 1996.
The vesting period is three years from the date the performance units were
awarded. Based on the performance criteria, without regard to the vesting,
approximately $4,430 would be due to the participants at December 31, 1996.
Total compensation expense for 1996, 1995 and 1994 recorded under the plan was
$2,282, $1,271 and $422, respectively.
16. EMPLOYEE RETIREMENT AND HEALTH PLANS
The Corporation has a defined contribution retirement plan and an incentive
savings plan for substantially all employees. The retirement plan provides for
a guaranteed contribution to eligible participants equal to 2% of
compensation. At the Corporation's option, a profit sharing amount may also be
contributed and may vary from year to year up to a maximum of 6% of eligible
compensation. Under the incentive savings plan, employee contributions up to
6% of eligible compensation are matched up to 50% by the Corporation based on
the Corporation's return on equity as defined by the plan. Total expense
relating to these plans was $24,410, $23,883 and $21,631 in 1996, 1995 and
1994, respectively.
The Corporation also has supplemental retirement plans to provide retirement
benefits to certain of its key executives. Total expense relating to these
plans amounted to $1,456 in 1996, $1,023 in 1995, and $910 in 1994.
Valley maintained a trusteed defined benefit retirement plan which covered
substantially all its employees. Upon consummation of the merger in 1994 the
plan was curtailed and in 1995 was fully terminated through cash distributions
and/or purchases of annuities.
The net pension cost for 1994 included the following components:
<TABLE>
<S> <C>
Service cost......................................................... $2,011
Interest cost........................................................ 3,393
Actual return on plan assets......................................... (777)
Net amortization and deferral........................................ (2,279)
------
Net periodic pension cost before curtailment......................... 2,348
Curtailment.......................................................... 2,301
------
Total expense........................................................ $4,649
======
</TABLE>
During 1995 expense of $1,789 was recorded in conjunction with the
termination of the Valley plan.
The expense associated with the curtailment is classified as
Merger/Restructuring and the termination expense is included in salaries and
employee benefits in the Consolidated Statements of Income.
The Corporation sponsors a defined benefit health plan that provides health
care benefits to all eligible current and retired employees. The plan is
contributory, with contributions adjusted periodically such that participants
contribute approximately 40% of the cost of health care benefits. The plan
also contains other cost-sharing features such as deductibles and coinsurance.
Retiree eligibility is dependent upon age, years of service, and participation
in the health plan during active service. The plan is not funded.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
The components of the accumulated postretirement benefit obligation (APBO)
for retiree health benefits reconciled with the amount recognized in the
Corporation's Consolidated Balance Sheets at December 31, were:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $19,770 $16,022
Fully eligible active plan participants.................. 7,474 9,424
Active plan participants................................. 16,251 19,434
------- -------
43,495 44,880
Unrecognized gain (loss).................................. 1,323 (6,152)
------- -------
Accrued postretirement benefit cost....................... $44,818 $38,728
======= =======
Weighted average discount rate used in determining APBO... 7.50% 7.50%
======= =======
</TABLE>
Net periodic postretirement benefit cost for the years ended December 31,
1996, 1995 and 1994 includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost......................................... $3,553 $2,130 $2,510
Interest on APBO..................................... 3,322 3,236 2,950
Net amortization and deferral........................ 146 127 617
------ ------ ------
$7,021 $5,493 $6,077
====== ====== ======
Assumed health care cost trend....................... 9.0% 11.0% 12.0%
Ultimate trend....................................... 5.0% 5.5% 6.5%
Ultimate year........................................ 2016 2022 2016
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amounts reported. An increase in the assumed health care cost trend rate of
one percentage point would increase the APBO at December 31, 1996 by $7,280
and increase 1996 postretirement benefit expense by $916.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Financial instruments with off-balance sheet risk at December 31 were:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Financial instruments whose amounts represent credit
risk:
Commitments to extend credit:
To commercial customers............................ $4,054,140 $3,912,442
To individuals..................................... 937,556 818,888
Standby letters of credit, net of participations.... 309,435 280,750
Commercial letters of credit........................ 14,773 17,342
Mortgage loans sold with recourse................... 4,199 4,926
Financial instruments whose amounts exceed the amount
of credit risk:
Foreign exchange contracts:
Commitments to purchase foreign exchange........... 130,718 133,236
Commitments to deliver foreign exchange............ 136,314 136,373
Options written/purchased.......................... 1,000 1,504
Interest risk management instruments:
Interest rate swaps................................. 370,000 --
Interest rate floors................................ 50,000 --
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates and may require payment of a
fee. The majority of the Corporation's commitments to extend credit generally
provide for the interest rate to be determined at the time the commitment is
utilized. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
The Corporation evaluates each customer's credit worthiness on an individual
basis. Collateral obtained, if any, upon extension of credit, is based upon
management's credit evaluation of the customer. Collateral requirements and
the ability to access collateral is generally similar to that required on
loans outstanding as discussed in Note 8.
Standby and commercial letters of credit are contingent commitments issued
by the Corporation to support the financial obligations of a customer to a
third party. Standby letters of credit are issued to support public and
private financing, and other financial or performance obligations of
customers. Commercial letters of credit are issued to support payment
obligations of a customer as buyer in a commercial contract for the purchase
of goods. Letters of credit have maturities which generally reflect the
maturities of the underlying obligations. The credit risk involved in issuing
letters of credit is the same as that involved in extending loans to
customers. If deemed necessary, the Corporation holds various forms of
collateral to support letters of credit.
Mortgage loans sold with recourse are pools of residential mortgage loans
sold to government agencies subject to certain underwriting requirements. If
the loans do not meet the underwriting requirements of the government
agencies, the Corporation may be required to reacquire the loans.
Foreign exchange contracts are commitments to purchase or deliver foreign
currency at a specified exchange rate. The Corporation enters into foreign
exchange contracts primarily in connection with trading activities to enable
customers involved in international trade to hedge their exposure to foreign
currency fluctuations and to minimize the Corporation's own exposure to
foreign currency fluctuations resulting from the above. Foreign exchange
contracts include such commitments as foreign currency spot, forward, future
and, to a much lesser extent, option contracts. The risks in these
transactions arise from the ability of the counterparties to perform under the
terms of the contracts and the risk of trading in a volatile commodity. The
Corporation actively monitors all transactions and positions against
predetermined limits established on traders and types of currency to ensure
reasonable risk taking.
The Corporation's market risk from unfavorable movements in currency
exchange rates is minimized by essentially matching commitments to deliver
foreign currencies with commitments to purchase foreign currencies.
At December 31, 1996, the Corporation's foreign currency positions resulting
from foreign exchange contracts by major currency was as follows ($000's US):
<TABLE>
<CAPTION>
COMMITMENTS COMMITMENTS
TO DELIVER TO PURCHASE
FOREIGN FOREIGN
EXCHANGE EXCHANGE
----------- -----------
<S> <C> <C>
CURRENCY
Deutsche Mark...................................... $ 51,339 $ 50,981
French Franc....................................... 13,798 13,465
English Pound Sterling............................. 21,243 20,928
Japanese Yen....................................... 16,009 12,155
Canadian Dollar.................................... 15,582 15,291
Singapore Dollar................................... 5,581 5,576
Swiss Franc........................................ 3,424 3,342
Australian Dollar.................................. 3,307 3,308
Spanish Peseta..................................... 3,200 3,111
All Other.......................................... 2,831 2,561
-------- --------
Total............................................ $136,314 $130,718
======== ========
Average Amount of Contracts To Deliver/Purchase
Foreign Exchange.................................. $215,206 $210,370
======== ========
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
These amounts do not represent the actual credit or market exposure.
Interest rate swaps are contractual agreements between counterparties to
exchange interest streams based on notional principal amounts over a set
period of time. Swap agreements normally involve the exchange of fixed and
floating rate payment obligations without the exchange of the underlying
principal amounts.
All of the Corporation's interest rate swaps are receive fixed/pay floating
standard swaps that are utilized to manage the interest volatility associated
with variable rate loans at the Corporation's affiliate banks. At December 31,
1996 the Corporation's interest rate swap portfolio consisted of the following
($ in millions):
<TABLE>
<CAPTION>
REMAINING MATURITY IN YEARS
---------------------------------------------------
OVER
0-1 YRS 1-2 YRS 2-3 YRS 3-4 YRS 4-5 YRS 5 YRS TOTAL
------- ------- ------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Notional value............ -- $75 $175 -- $120 -- $370
Weighted average receive
rate..................... -- 6.03% 6.25% -- 6.63% -- 6.33%
Weighted average pay rate
(variable)............... -- 5.50% 5.57% -- 5.54% -- 5.55%
</TABLE>
The impact on net interest income in 1996 was a positive $1.12 million.
Interest floors are contracts with notional principal amounts that require
the seller, in exchange for a fee, to make payments to the purchaser if a
specified market rate falls below the fixed floor or index rate on specified
future dates.
The Corporation uses standard interest rate floors to manage the interest
volatility associated with variable rate loans and the convexity risk
associated with investments in collateralized mortgage obligations. At
December 31, 1996, the Corporation was party to two interest rate floor
contracts which are summarized as follows ($ in millions):
<TABLE>
<CAPTION>
WEIGHTED--AVERAGE
----------------------------------------------------
NOTIONAL STRIKE REMAINING UNAMORTIZED
AMOUNT RATE INDEX TERM (YEARS) PREMIUM
-------- ------ ----- ------------ -----------
<S> <C> <C> <C> <C>
$50.0 5.125% 5.547% 4.8 $0.4
</TABLE>
No payments were received in 1996 and the effect of amortization of the fee
premium was not material.
The market risk due to potential fluctuations in interest rates is inherent
in swap and floor agreements. Credit risk arises from the potential failure of
counterparties to perform in accordance with the terms of the contracts. The
Corporation maintains risk management policies that define parameters of
acceptable market risk within the framework of its overall asset/liability
management strategies and monitor and limit exposure to credit risk. The
Corporation believes its credit and settlement procedures serve to minimize
its exposure to credit risk. Credit exposure resulting from swaps and floors
is represented by their fair value amounts, increased by an estimate of
potential adverse position exposure arising from changes over time in interest
rates, maturities and other relevant factors. At December 31, 1996 the
estimated credit exposure arising from swaps and floors was approximately $4.8
million.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values and estimated fair values for on and off-balance sheet
financial instruments as of December 31, 1996 and 1995 are reflected below:
BALANCE SHEET FINANCIAL INSTRUMENTS
($ IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments.......... $1,013.6 $1,013.6 $ 993.1 $ 993.1
Trading securities....................... 39.7 39.7 38.6 38.6
Investment securities available for
sale.................................... 3,065.0 3,065.0 2,458.6 2,458.6
Investment securities held to maturity... 773.8 776.8 450.5 453.2
Net loans................................ 9,146.0 9,330.2 8,707.5 8,930.0
Interest receivable...................... 99.1 99.1 96.8 96.8
Financial Liabilities:
Deposits................................. 10,952.4 11,019.3 10,280.8 10,355.3
Short-term borrowings.................... 1,550.5 1,550.5 616.3 616.3
Long-term borrowings:
Convertible debt....................... 16.8 66.6 33.6 100.0
Other long-term borrowings............. 603.3 603.4 787.6 796.9
Interest payable......................... 75.6 75.6 72.1 72.1
</TABLE>
Where readily available, quoted market prices were utilized by the
Corporation. If quoted market prices were not available, fair values were
based on estimates using present value or other valuation techniques. These
techniques were significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The calculated fair value
estimates, therefore, cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. The applicable accounting standard excludes certain financial
instruments and all nonfinancial assets and liabilities from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
The following methods and assumptions were used in estimating the fair value
for financial instruments.
Cash and Short-term Investments
The carrying amounts reported for cash and short-term investments
approximates the fair values for those assets.
Trading and Investment Securities
Fair value is based on quoted market prices or dealer quotes. See Note 7,
Securities, for additional information.
Loans
Loans that reprice or mature within three months of December 31 were
assigned fair values based on their book value. Market values were used on
performing loans where available. Most remaining loan balances were
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
assigned fair values based on a discounted cash flow analysis. The discount
rate was based on the treasury yield curve, with rate adjustments for credit
quality, cost and profit factors.
Deposits
The fair value for demand deposits or any interest bearing deposits with no
fixed maturity date was considered to be equal to the carrying value. Time
deposits with defined maturity dates were considered to have a fair value
equal to the book value if the maturity date was within three months of
December 31. The remaining time deposits were assigned fair values based on a
discounted cash flow analysis using discount rates which approximate interest
rates currently being offered on time deposits with comparable maturities.
Borrowings
Short-term borrowings are carried at cost which approximates fair value. The
Corporation has convertible debt (see Note 12) for which fair value was
considered to be the current market value of the shares that would be issued
in a full conversion. Other long-term debt was generally valued using a
discounted cash flow analysis with a discount rate based on current
incremental borrowing rates for similar types of arrangements or, if not
readily available, based on a build up approach similar to that used for loans
and deposits. Long-term borrowings include their related current maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
($ IN MILLIONS)
Fair values of loan commitments and letters of credit have been estimated
based on the equivalent fees, net of expenses, that would be charged for
similar contracts and customers at December 31.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loan commitments................................................... $1.7 $1.5
Letters of credit.................................................. 2.4 2.2
</TABLE>
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.
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Commitments to purchase foreign exchange...................... $130.7 $133.2
Commitments to deliver foreign exchange....................... 136.3 136.4
Options written/purchased..................................... 0.0 0.0
</TABLE>
Interest rate swaps and floors are assigned a value based on a discounted
cash flow analysis utilizing the forward yield curve.
<TABLE>
<CAPTION>
1996
----
<S> <C>
Interest rate swaps..................................................... $2.2
Interest rate floors.................................................... 0.4
</TABLE>
See Note 17 for additional information on off-balance sheet financial
instruments.
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
19. BUSINESS SEGMENTS
The following table reflects certain information regarding our banking and
data processing businesses:
<TABLE>
<CAPTION>
ADJUSTMENTS
DATA AND
BANKING PROCESSING ELIMINATIONS CONSOLIDATION
----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
1996
Revenue from:
Unaffiliated customers.... $ 1,206,230 $268,526 -- $ 1,474,756
Affiliated customers...... 7,945 77,100 ($85,045) --
----------- -------- -------- -----------
Total revenue.............. $ 1,214,175 $345,626 ($85,045) $ 1,474,756
=========== ======== ======== ===========
Operating profit........... $ 286,006 $ 27,135 -- $ 313,141
=========== ======== ======== ===========
Identifiable assets........ $14,537,602 $274,926 ($49,215) $14,763,313
=========== ======== ======== ===========
Net capital expenditures... $ 11,850 $ 38,822 -- $ 50,672
=========== ======== ======== ===========
1995
Revenue from:
Unaffiliated customers.... $ 1,134,928 $213,914 -- $ 1,348,842
Affiliated customers...... 8,388 70,946 ($79,334) --
----------- -------- -------- -----------
Total revenue.............. $ 1,143,316 $284,860 ($79,334) $ 1,348,842
=========== ======== ======== ===========
Operating profit........... $ 264,996 $ 34,883 -- $ 299,879
=========== ======== ======== ===========
Identifiable assets........ $13,166,362 $242,695 ($65,960) $13,343,097
=========== ======== ======== ===========
Net capital expenditures... $ 6,859 $ 33,022 -- $ 39,881
=========== ======== ======== ===========
1994
Revenue from:
Unaffiliated customers.... $ 1,019,369 $159,418 -- $ 1,178,787
Affiliated customers...... 6,815 72,068 ($78,883) --
----------- -------- -------- -----------
Total revenue.............. $ 1,026,184 $231,486 ($78,883) $ 1,178,787
=========== ======== ======== ===========
Operating profit before
Merger/Restructuring...... $ 211,897 $ 31,134 -- $ 243,031
=========== ======== ======== ===========
Operating profit........... $ 150,352 $ 17,451 -- $ 167,803
=========== ======== ======== ===========
Identifiable assets........ $12,463,178 $208,216 $(58,445) $12,612,949
=========== ======== ======== ===========
Net capital expenditures... $ (3,184) $ 32,179 -- $ 28,995
=========== ======== ======== ===========
</TABLE>
Our banking operations provide traditional banking products along with
trust, mortgage banking, leasing, and venture capital services. M&I Data
Services, a division of the Parent Corporation, along with three other nonbank
subsidiaries, (collectively "Data Services"), provides data processing,
software, and other related services to both affiliated and unaffiliated
customers. In addition, a Valley affiliate provided similar services and other
operational support to affiliated customers and merged with M&I Data Services
upon consummation of the merger.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
Revenues from affiliated customers are charged at rates available to and
transacted with unaffiliated customers.
Operating profit is pretax net income. The 1996 operating profit for the
banking services include the $2.7 million special assessment associated with
SAIF deposits enacted into law in September, 1996. The 1996 operating profit
of Data Services include the $12.1 million expense for acquired in-process
research and development as discussed in Note 2. Depreciation and amortization
expense for the banking services business amounted to $3,411, $8,189, and
$40,733 in 1996, 1995, and 1994, respectively, and for data services amounted
to $50,201 in 1996, $38,978 in 1995, and $31,224 in 1994.
20. CONDENSED FINANCIAL INFORMATION--PARENT CORPORATION ONLY
CONDENSED BALANCE SHEETS
DECEMBER 31
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 74,432 $ 36,689
Data processing services receivables.................. 65,838 60,034
Indebtedness of affiliates:
Banks................................................ -- 5,000
Nonbanks............................................. 184,050 173,690
Investments in affiliates:
Banks................................................ 1,025,127 1,075,011
Nonbanks............................................. 220,993 164,860
Premises and equipment, net........................... 120,826 115,627
Other assets.......................................... 177,340 116,136
---------- ----------
Total assets...................................... $1,868,606 $1,747,047
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper issued............................... $ 14,234 $ 41,571
Other liabilities..................................... 144,926 123,589
Long-term borrowings:
7.65% Junior Subordinated Deferrable Interest
Debentures due to M&I Capital Trust A................ 205,217 --
Other................................................ 243,019 324,270
---------- ----------
Total long-term borrowings........................ 448,236 324,270
---------- ----------
Total liabilities................................. 607,396 489,430
Shareholders' equity.................................. 1,261,210 1,257,617
---------- ----------
Total liabilities and shareholders' equity........ $1,868,606 $1,747,047
========== ==========
</TABLE>
Scheduled maturities of long-term borrowings are $128,594 in 1997, $9,490 in
1998, $4,348 in 1999, $575 in 2000 and $202 in 2001. See Note 12 for a
description of the junior subordinated debt due to M&I Capital Trust A.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INCOME
Cash dividends:
Bank affiliates.................................. $217,050 $141,928 $ 94,812
Nonbank affiliates............................... 11,687 11,624 14,690
Interest from affiliates.......................... 12,959 10,491 12,172
Data processing income............................ 335,127 284,141 230,518
Service fees and other............................ 36,988 37,322 33,068
-------- -------- --------
Total income................................... 613,811 485,506 385,260
EXPENSE
Interest.......................................... 23,016 26,851 23,214
Salaries and employee benefits.................... 180,574 151,519 126,171
Administrative and general........................ 151,380 122,276 155,297
-------- -------- --------
Total expense.................................. 354,970 300,646 304,682
Income before income taxes, extraordinary items
and equity in undistributed net income of
affiliates....................................... 258,841 184,860 80,578
Provision for income taxes........................ 11,101 9,549 475
-------- -------- --------
Income before extraordinary items and equity in
undistributed net income of affiliates........... 247,740 175,311 80,103
Extraordinary items, net of income taxes.......... -- -- (610)
-------- -------- --------
Income before equity in undistributed net income
of affiliates.................................... 247,740 175,311 79,493
Equity in undistributed net income of affiliates,
net of dividends paid:
Banks............................................ (58,481) 5,755 29,430
Nonbanks......................................... 14,171 12,233 (2,983)
-------- -------- --------
Net income..................................... $203,430 $193,299 $105,940
======== ======== ========
</TABLE>
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
--------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income............................... $ 203,430 $ 193,299 $ 105,940
Noncash items included in income:
Equity in undistributed net income of
affiliates............................. 44,310 (17,988) (26,447)
Depreciation and amortization........... 51,407 42,264 40,596
Other................................... 14,058 10,372 (20,661)
--------- ----------- -----------
Net cash provided by operating
activities............................. 313,205 227,947 99,428
Cash Flows From Investing Activities:
Increases in indebtedness of
affiliates............................. (140,684) (256,220) (28,136)
Decreases in indebtedness of
affiliates............................. 135,324 228,251 155,658
Increases in investments in affiliates.. (27,756) (215) (20,300)
Net capital expenditures................ (36,897) (33,755) (33,069)
Other................................... (74,519) (11,298) 3,279
--------- ----------- -----------
Net cash provided by (used in) investing
activities............................. (144,532) (73,237) 77,432
Cash Flows From Financing Activities:
Dividends paid.......................... (69,878) (62,985) (57,575)
Proceeds from issuance of commercial
paper.................................. 641,754 1,406,388 1,578,618
Principal payments on commercial paper.. (669,091) (1,439,343) (1,604,384)
Proceeds from issuance of long-term
debt................................... 197,628 -- 158,563
Payments on long-term debt.............. (72,417) (17,619) (67,229)
Decrease in other short-term
borrowings............................. -- -- (50,000)
Purchase of common stock................ (172,023) (61,104) (101,887)
Proceeds from exercise of stock
options................................ 12,908 9,079 11,682
Other................................... 189 406 (1,043)
--------- ----------- -----------
Net cash used in financing activities... (130,930) (165,178) (133,255)
--------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. 37,743 (10,468) 43,605
Cash and cash equivalents, beginning of
year.................................... 36,689 47,157 3,552
--------- ----------- -----------
Cash and cash equivalents, end of year... $ 74,432 $ 36,689 $ 47,157
========= =========== ===========
</TABLE>
62
<PAGE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
($000'S EXCEPT SHARE DATA)
Following is unaudited financial information for each of the calendar
quarters during the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Total Interest Income...................... $255,355 $246,625 $236,027 $233,429
Net Interest Income........................ 132,898 126,251 123,933 122,637
Provision for Loan Losses.................. 4,086 3,983 3,548 3,577
Income before Income Taxes................. 96,459 67,298 76,800 72,584
Net Income................................. 61,869 45,038 50,368 46,155
Net Income Per Share:*
Primary:
Net Income............................... 0.63 0.46 0.51 0.47
Fully Diluted:
Net Income............................... 0.62 0.45 0.50 0.46
1995
Total Interest Income...................... $236,598 $235,587 $230,792 $221,683
Net Interest Income........................ 125,366 122,884 122,283 120,944
Provision for Loan Losses.................. 4,100 4,070 4,005 3,983
Income before Income Taxes................. 80,003 76,863 71,034 71,979
Net Income................................. 52,348 48,579 46,237 46,135
Net Income Per Share:*
Primary:
Net Income............................... 0.53 0.49 0.47 0.47
Fully Diluted:
Net Income............................... 0.51 0.48 0.46 0.46
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
COMMON DIVIDENDS DECLARED
First Quarter.................................. $0.165 $0.150 $0.14 $0.12 $0.11
Second Quarter................................. 0.185 0.165 0.15 0.14 0.12
Third Quarter.................................. 0.185 0.165 0.15 0.14 0.12
Fourth Quarter................................. 0.185 0.165 0.15 0.14 0.12
------ ------ ----- ----- -----
$0.720 $0.645 $0.59 $0.54 $0.47
====== ====== ===== ===== =====
</TABLE>
- --------
* May not add due to rounding
PRICE RANGE OF STOCK
(LOW AND HIGH BID)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
First Quarter
Low............................... $24 5/8 $18 1/8 $20 $21 1/6 $17 1/4
High.............................. 26 1/4 21 3/4 23 3/4 23 5/16 18 1/4
Second Quarter
Low............................... 24 7/8 19 7/8 19 1/4 22 15/16 16 15/16
High.............................. 28 1/8 22 3/4 22 1/4 25 3/4 20 9/16
Third Quarter
Low............................... 25 1/2 22 1/8 19 5/8 21 1/4 19 3/16
High.............................. 30 1/8 26 1/4 21 3/4 25 21 13/16
Fourth Quarter
Low............................... 30 24 18 21 3/4 20 1/16
High.............................. 35 3/8 26 3/8 20 9/16 24 1/4 22 1/16
</TABLE>
63
<PAGE>
Notes to Consolidated Financial Statements-(Continued)
December 31, 1996, 1995 and 1994 ($000's except share data)
21. DEPOSITS
The composition of deposits at December 31, 1996 and 1995 was as follows:
1996 1995
----------- -----------
Noninterest bearing demand $ 2,470,882 $ 2,363,194
Savings and NOW 4,400,594 4,224,055
Other time deposits $100 and over 1,059,066 660,277
Other time deposits under $100 3,021,816 3,033,251
----------- -----------
$10,952,358 $10,280,777
=========== ===========
At December 31, 1996, the scheduled maturities for other time deposits are
as follows:
1997 $2,744,823
1998 992,618
1999 222,607
2000 64,648
2001 and thereafter 56,186
----------
$4,080,882
==========
64
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of Marshall & Ilsley
Corporation:
We have audited the accompanying consolidated balance sheets of Marshall &
Ilsley Corporation (a Wisconsin corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31, 1996,
1995 and 1994. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Marshall &
Ilsley Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years ended December
31, 1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
As discussed in note one to the consolidated financial statements, effective
January 1, 1994, the Corporation changed its method of accounting for certain
investments in debt and equity securities.
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin,
January 31, 1997
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to M&I's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 22, 1997, except for
information as to executive officers which is set forth in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to M&I's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 22, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to M&I's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 22, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to M&I's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 22, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Consolidated Financial Statements:
Balance Sheets--December 31, 1996 and 1995
Statements of Income--years ended December 31, 1996, 1995, and 1994
Statements of Cash Flows--years ended December 31, 1996, 1995, and
1994
Statements of Shareholders' Equity--years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
All schedules are omitted because they are not required, not applicable
or the required information is contained elsewhere.
3. Exhibits
See Index to Exhibits of this Form 10-K.
(b) Reports on Form 8-K
On December 13, 1996, M&I filed a Current Report on Form 8-K, reporting
on Item 5 the announcement of the sale of $200 million of Trust
Preferred Stock through M&I Capital Trust A in an institutional private
placement.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report as amended to
be signed on its behalf by the undersigned, thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
/s/ J. B. Wigdale
By: _________________________________
J. B. WIGDALE
CHAIRMAN OF THE BOARD
Date: June 2, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ J. B. Wigdale Chairman of the June 2, 1997
- ------------------------------------- Board and a
J. B. WIGDALE Director (Chief
Executive Officer)
/s/ G. H. Gunnlaugsson Executive Vice June 2, 1997
- ------------------------------------- President and a
G. H. GUNNLAUGSSON Director (Chief
Financial Officer)
/s/ P. R. Justiliano Senior Vice June 2, 1997
- ------------------------------------- President and
P. R. JUSTILIANO Corporate
Controller
(Principal
Accounting Officer)
Directors: Richard A. Abdoo, Oscar C. Boldt, Wendell F. Busche, Jon F. Chait,
Glenn A. Francke, G. H. Gunnlaugsson, Burleigh E. Jacobs, Jack F.
Kellner, D. J. Kuester, Edward L Meyer, Jr., Don R. O'Hare, San W.
Orr, Jr., Peter M. Platten III, Stuart W. Tisdale, J. B. Wigdale,
James O. Wright and Gus A. Zuehlke.
/s/ M. A. Hatfield
By___________________________________
M. A. HATFIELD
AS ATTORNEY-IN-FACT*
Date: June 2, 1997
- --------
* Pursuant to authority granted by powers of attorney.
67
<PAGE>
MARSHALL & ILSLEY CORPORATION
INDEX TO EXHIBITS
(ITEM 14(A)3)
ITEM
(2) Agreement and Plan of Merger dated as of September 19, 1993, between M&I
and Valley Bancorporation, incorporated by reference to M&I's Current
Report on Form 8-K dated September 19, 1993 (as amended by M&I's Current
Report on Form 8-K/A dated September 19, 1993), SEC File No. 0-1220
(3) (a) Restated Articles of Incorporation, incorporated by reference to M&I's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, SEC
File No. 0-1220
(b) By-laws, as amended, incorporated by reference to M&I's Annual Report
on form 10-K for the year ended December 31, 1995, SEC File No. 0-1220
(4) (a) Indenture between M&I and Chemical Bank (as successor to Manufacturers
Hanover Trust Company) dated as of November 15, 1985 ("Senior
Indenture"), incorporated by reference to M&I's Registration Statement
on Form S-3 (Registration No. 33-21377), as supplemented by the First
Supplemental Indenture to the Senior Indenture dated as of May 31,
1990, incorporated by reference to M&I's Current Report on Form 8-K
dated May 31, 1990, and as supplemented by the Second Supplemental
Indenture to the Senior Indenture dated as of July 15, 1993,
incorporated by reference to M&I's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993, SEC File No. 0-1220
(b) Form of Medium Term Notes, Series B, issued pursuant to the Senior
Indenture, incorporated by reference to M&I's Current Report on Form
8-K dated May 31, 1990, SEC File No. 0-1220
(c) Form of Medium Term Notes, Series C, and Series D issued pursuant to
the Senior Indenture, included in Exhibit 4(a)
(d) Indenture between M&I and Chemical Bank dated as of July 15, 1993
("Subordinated Indenture"), incorporated by reference to M&I's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, SEC
File No. 0-1220
(e) Form of Subordinated Note issued pursuant to the Subordinated
Indenture, included in Exhibit 4(d)
(f) Investment Agreement between M&I and The Northwestern Mutual Life
Insurance Company dated August 30, 1985, incorporated by reference to
M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-
1220
(g) Subordinated Convertible Note Agreement between The Northwestern
Mutual Life Insurance Company dated December 31, 1985, incorporated by
reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC
File No. 0-1220
(h) Form of Convertible Subordinated Note, incorporated by reference to
M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-
1220
(i) Designation of Rights and Preferences of holders of Series A Preferred
Stock, incorporated by reference to M&I's Current Report on Form 8-K
dated May 20, 1985, SEC File No. 0-1220
(j) Amended and Restated Declaration of Trust dated as of December 9, 1996
among Marshall & Ilsley Corporation, as Sponsor, The Chase Manhattan
Bank, as Institutional Trustee, Chase Manhattan Bank Delaware, as
Delaware Trustee, the Regular Trustees identified therein, and the
holders from time to time of undivided interests in the assets of the
Trust, incorporated by reference to M&I's Registration Statement on
Form S-4 (Reg. No. 333-19809)
(k) Indenture, dated as of December 9, 1996, between Marshall & Ilsley
Corporation and The Chase Manhattan Bank, as Indenture Trustee,
incorporated by reference to M&I's Registration Statement on Form S-4
(Reg. No. 333-19809)
68
<PAGE>
(l) First Supplemental Indenture, dated as of December 9, 1996, between
Marshall & Ilsley Corporation and The Chase Manhattan Bank, as
Indenture Trustee, incorporated by reference to M&I's Registration
Statement on Form S-4 (Reg. No. 333-19809)
(m) Form of Capital Security Certificate for M&I Capital Trust A,
included as Exhibit A-2 to Exhibit 4(k)
(n) Capital Securities Guarantee Agreement, dated as of December 9, 1996,
between Marshall & Ilsley Corporation and The Chase Manhattan Bank,
as Guarantee Trustee, incorporated by reference to M&I's Registration
Statement on Form S-4 (Reg. No. 333-19809)
(o) Registration Rights Agreement dated December 2, 1996, by and among
Marshall & Ilsley Corporation, M&I Capital Trust A and Salomon
Brothers Inc, as Representative of the Initial Purchasers,
incorporated by reference to M&I's Registration Statement on Form S-4
(Reg. No. 333-19809)
(p) Form of Subordinated Debt Security, included as part of Exhibit 4(m)
(10) (a) 1983 Executive Stock Option and Restricted Stock Plan, as amended,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, SEC File No. 0-1220*
(b) 1985 Executive Stock Option and Restricted Stock Plan, as amended,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, SEC File No. 0-1220*
(c) M&I Marshall & Ilsley Bank Supplementary Retirement Benefits Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1983, SEC File No. 0-1220*
(d) Directors Deferred Compensation Plan, adopted on February 14, 1985,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1984, SEC File No. 0-1220*
(e) Consulting Agreement and Supplemental Retirement Plan dated as of
October 1, 1986 between M&I and Mr. J.A. Puelicher, incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1986, SEC File No. 0-1220*
(f) Amendment to Consulting Agreement and Supplemental Retirement Plan
dated as of August 13, 1992, between M&I and Mr. J.A. Puelicher,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, SEC File No. 0-1220*
(g) Deferred Compensation Trust between Marshall & Ilsley Corporation and
Bessemer Trust Company dated April 28, 1987, as amended, incorporated
by reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, SEC File No. 0-1220*
(h) 1986 Non-Qualified Stock Option Plan of M&I and related Stock Option
Agreement between M&I and Mr. J.A. Puelicher, incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1986, SEC File No. 0-1220*
(i) Form of employment agreements, dated November 5, 1990, between M&I
and Messrs. Gunnlaugsson, Kuester, Strelow and Wigdale incorporated
by reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, SEC File No. 0-1220*
(j) Employment agreement, dated November 5, 1990, between M&I and Mr.
Michael A. Hatfield incorporated by reference to M&I's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990, SEC File
No. 0-1220*
69
<PAGE>
(k) Employment agreement, dated as of November 5, 1990, between M&I and
Mr. Delgadillo, incorporated by reference to M&I's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, SEC File No. 0-
1220*
(l) Restricted Stock Plan of Marshall & Ilsley Corporation, incorporated
by reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, SEC File No. 0-1220*
(m) 1989 Executive Stock Option and Restricted Stock Plan, incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, as amended by M&I's Annual Report on Form 10-
K for the fiscal year ended December 31, 1990, SEC File No. 0-1220*
(n) Marshall & Ilsley Corporation Nonqualified Retirement Benefit Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, SEC File No. 0-1220*
(o) Marshall & Ilsley Corporation Supplemental Retirement Benefits Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, SEC File No. 0-1220*
(p) Marshall & Ilsley Trust Company Supplemental Retirement Benefits Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, SEC File No. 0-1220*
(q) Supplemental Retirement Agreement dated December 10, 1992, between M&I
and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992, SEC
File No. 0-1220*
(r) Amendment to Supplemental Retirement Agreement dated December 16,
1993, between M&I and Mr. J.A. Puelicher, incorporated by reference to
M&I's Annual Report on Form 10-K for the fiscal year ended December
31, 1993, SEC File No. 0-1220*
(s) Marshall & Ilsley Corporation 1993 Executive Stock Option Plan, as
amended, incorporated by reference to M&I's Registration Statement on
Form S-8 (Reg. No. 33-53155)*
(t) Marshall & Ilsley Corporation 1994 Long-Term Incentive Plan for
Executives, incorporated by reference to M&I's Proxy Statement for the
1994 Annual Meeting of Shareholders, SEC File No. 0-1220*
(u) Marshall & Ilsley Corporation 1995 Directors Stock Option Plan,
incorporated by reference to M&I's Proxy Statement for the 1995 Annual
Meeting of Shareholders, SEC File No. 0-1220*
(v) Marshall & Ilsley Corporation Assumption Agreement dated May 31, 1994
assuming rights, obligations and interests of Valley Bancorporation
under various stock option plans, incorporated by reference to M&I's
Registration Statement on Form S-8 (Reg. No. 33-53897)*
(w) Valley Bancorporation 1992 Incentive Stock Plan, incorporated by
reference to Valley Bancorporation's Proxy Statement for the 1992
Annual Meeting of Shareholders (the "Valley 1992 Proxy Statement")*
(x) Valley Bancorporation 1992 Outside Directors' Stock Option Plan,
incorporated by reference to the Valley 1992 Proxy Statement*
(y) Valley Bancorporation 1988 Nonqualified Stock Option Plan,
incorporated by reference to Valley Bancorporation's Proxy Statement
for the 1988 Annual Meeting of Shareholders*
(z) Valley Bancorporation 1986 Amended and Restated Stock Option Plan,
incorporated by reference to Valley Bancorporation's Proxy Statement
for the 1987 Annual Meeting of Shareholders*
(aa) Employment agreement between M&I and Mr. Peter M. Platten, III,
incorporated by reference to M&I's Registration Statement on Form S-4
(Reg. No. 33-51753)*
70
<PAGE>
(bb) Letter agreement dated January 25, 1994 between Valley
Bancorporation and Mr. Peter M. Platten, III incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, SEC File No. 0-1220*
(cc) Employment agreement, dated as of December 14, 1995, between M&I and
Ms. Patricia R. Justiliano incorporated by reference to M&I's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, SEC
File No. 0-1220*
(dd) Marshall & Ilsley Corporation 1997 Executive Stock Option and
Restricted Stock Plan, incorporated by reference to the 1997 Proxy
Statement*
(ee) Marshall & Ilsley Corporation Executive Deferred Compensation Plan
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, SEC File No. 0-1220*
(ff) Deferred Compensation Trust II between Marshall & Ilsley Corporation
and Marshall & Ilsley Trust Company incorporated by reference to
M&I's Annual Report on Form 10-K for the fiscal year ended December
31, 1996, SEC File No. 0-1220*
(gg) Marshall & Ilsley Corporation Annual Executive Incentive Compensation
Plan, incorporated by reference to the 1997 Proxy Statement*
(hh) Amended and Restated Marshall & Ilsley Corporation Supplementary
Retirement Benefits Plan incorporated by reference to M&I's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, SEC
File No. 0-1220*
(11) Computation of Net Income Per Common Share incorporated by reference to
M&I's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, SEC File No. 0-1220
(12) Computation of Ratio of Earnings to Fixed Charges incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, SEC File No. 0-1220
(21) Subsidiaries incorporated by reference to M&I's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, SEC File No. 0-1220
(23) Consent of Arthur Andersen LLP
(24) Powers of Attorney incorporated by reference to M&I's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220
(27) Financial Data Schedule incorporated by reference to M&I's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, SEC File No.
0-1220
M&I will provide a copy of any instrument defining the rights of holders of
long-term debt to the Commission upon request.
--------
* Management contract or compensatory plan or arrangement.
71
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the inclusion in this
Form 10-K/A for the year ended December 31, 1996, of our report dated
January 31, 1997. It should be noted that we have not audited any financial
statements of Marshall & Ilsley Corporation and subsidiaries subsequent to
December 31, 1996, or performed any audit procedures subsequent to the date of
our report.
We also consent to the incorporation by reference of such report in the
following Registration Statements of Marshall & Ilsley Corporation ("M&I"):
No. 2-89605 (Form S-8) pertaining to the M&I 1983 Executive Stock Option
and Restricted Stock Plan,
No. 33-2642 (Form S-8) pertaining to the M&I 1985 Executive Stock Option
and Restricted Stock Plan,
No. 33-3415 (Form S-8) pertaining to the M&I Retirement Growth Plan,
No. 33-33090 (Form S-8) pertaining to the M&I 1988 Restricted Stock Plan,
No. 33-33153 (Form S-8) pertaining to the M&I 1989 Executive Stock Option
and Restricted Stock Plan,
No. 33-53155 (Form S-8) pertaining to the M&I 1993 Executive Stock Option
Plan,
No. 33-53897 (Form S-8) pertaining to the stock option plans of Valley
Bancorporation assumed by M&I,
No. 33-55317 (Form S-8) pertaining to the M&I 1994 Long-Term Incentive Plan
for Executives,
No. 33-58787 (Form S-8) pertaining to the M&I 1995 Directors Stock Option
Plan,
No. 333-02017 (Form S-8) pertaining to the M&I 1986 Non-qualified Stock
Option Plan,
No. 2-80293 (Form S-3) pertaining to shares of M&I held by those persons
named in such Registration Statement,
No. 33-21377 (Form S-3) pertaining to the issuance by M&I of Debt
Securities,
No. 33-64054 (Form S-3) pertaining to the issuance by M&I of Debt
Securities, and
No. 33-64425 (Form S-3) pertaining to the issuance by M&I of Debt
Securities.
Milwaukee, Wisconsin, ARTHUR ANDERSEN LLP
June 2, 1997
