ITEM 1. BUSINESS
GENERAL
Marshall & Ilsley Corporation ("M&I" or the "Corporation"), incorporated in Wisconsin in 1959, is a registered bank holding company under the Bank Holding Company Act of 1956 (the "BHCA"). As of December 31, 1996, M&I had consolidated total assets of approximately $14.8 billion and consolidated total deposits of approximately $11.0 billion, making M&I the second largest bank holding company headquartered in Wisconsin. The executive offices of M&I are located at 770 North Water Street, Milwaukee, Wisconsin 53202 (telephone number (414) 765-7801).
M&I's principal assets are the stock of its bank and nonbank subsidiaries and the assets of its Data Services Division ("M&I Data Services"). M&I's subsidiaries include 29 commercial banks, one savings association and a number of companies engaged in businesses that the Federal Reserve Board (the "FRB") has determined to be closely-related or incidental to the business of banking. M&I provides its subsidiaries with financial and managerial assistance in such areas as budgeting, tax planning, compliance assistance, asset and liability management, investment administration and portfolio planning, business development, advertising and human resources management.
M&I's bank and savings association subsidiaries provide a full range of banking services to individuals, businesses and governments throughout Wisconsin and the Phoenix, Arizona metropolitan area. These subsidiaries offer retail, institutional, international, business and correspondent banking, investment and trust services through the operation of 226 banking offices in Wisconsin and 12 offices in Arizona. M&I Marshall & Ilsley Bank ("M&I Bank") is M&I's largest bank subsidiary, with consolidated assets as of December 31, 1996 of approximately $4.8 billion.
M&I Data Services and three other nonbank subsidiaries are major suppliers of financial and data processing services and software to banking, financial and related organizations. M&I Data Services provides services and software to over 600 financial institution customers in the United States, as well as institutions in numerous foreign countries. On August 7, 1996, M&I acquired EastPoint Technology, Inc., a software development company located in Bedford, New Hampshire which specializes in client/server technology, for approximately $25.5 million in cash. M&I's nonbank subsidiaries operate a variety of bank- related businesses, including those providing investment management services, insurance services, trust services, equipment lease financing, commercial and residential mortgage banking, venture capital, brokerage services and financial advisory services. M&I Investment Management Corp. offers a full range of asset management services to M&I's trust company subsidiaries, the Marshall Funds and other individual, business and institutional customers. M&I's trust company subsidiaries provide trust and employee benefit plan services to customers in Wisconsin, Arizona and Florida. M&I First National Leasing Corp. leases a variety of equipment and machinery to large and small businesses. M&I Mortgage Corp. originates, purchases, sells and services residential mortgages. The Richter-Schroeder Company originates and services long-term commercial real estate loans for institutional investors. M&I Capital Markets Group, Inc. provides venture capital, financial advisory and strategic planning services to customers, including assistance in connection with the private placement of securities, raising funds for expansion, leveraged buy-outs, divestitures, mergers and acquisitions and small business investment company transactions. M&I Brokerage Services, Inc., a broker-dealer registered with the National Association of Securities Dealers and the Securities and Exchange Commission, provides brokerage and other investment related services to a variety of retail and commercial customers.
PRINCIPAL SOURCES OF REVENUE
The table below shows the amount and percentages of M&I's total consolidated operating income resulting from interest and fees on loans, interest on investment securities and fees for data processing services for each of the last three years:
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
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.
(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:
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):
TYPES OF LOANS
M&I's consolidated loans, classified by type, at December 31 of each year are:
LOAN BALANCES AND MATURITIES DECEMBER 31, 1996DOLLAR AMOUNTS IN THOUSANDS
The analysis of loan maturities at December 31, 1996, and the rate structure for the categories indicated are:
- -------- Notes: (1) Scheduled repayments are reported in the maturity category in which the payments are due based on the terms of the loan agreements. Demand loans, loans having no stated schedule of repayments and no stated maturity, and 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.
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.
DEPOSITS
The average amount of and the average rate paid on selected deposit categories for each of the years ended December 31 is as follows:
The maturity distribution of time deposits issued in amounts of $100,000 and over and outstanding at December 31, 1996 (in thousands) is:
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):
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.
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
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.
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.
ITEM 3. LEGAL PROCEEDINGS
M&I is not currently involved in any material pending legal proceedings other than litigation of a routine nature and various legal matters which are being defended and handled in the ordinary course of business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED SUMMARY OF EARNINGS YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
CONSOLIDATED SUMMARY OF EARNINGS--CONTINUED YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
- -------- * Not restated for acquisitions accounted for as a pooling of interests. ** See Exhibit 12 for detailed computation of these ratios.
CONSOLIDATED AVERAGE BALANCE SHEETS YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
- -------- * Not restated for acquisitions accounted for as pooling of interests. ** Nonaccrual loans, restructured loans, and loans past due 90 days or more. *** Restated for 3 for 1 stock split.
YIELD & COST ANALYSIS (TAX EQUIVALENT BASIS) YEARS ENDED DECEMBER 31
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
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.
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.
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):
- -------- 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):
- -------- n.m.--not meaningful
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
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)
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 ($000'S)
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000'S EXCEPT SHARE DATA)
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000'S EXCEPT SHARE DATA)
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000'S EXCEPT SHARE DATA)
The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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.
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 development costs incurred prior to establishment of a product's technological feasibility for software to be sold are expensed as incurred.
Net unamortized costs at December 31 were:
Amortization expense was $9,851, $7,122 and $6,960, 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
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.
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. BUSINESS COMBINATIONS
The Corporation has consummated the following business combinations:
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
The executive contracts accrual was the present value of the amounts contractually due to certain Valley executives under their former employment contracts. Payments of $0.2 million were made in 1996 and 1995.
Employee severance costs represented the planned general reduction in work force resulting from the merger and restructuring activities which affected all employee groups. Approximately $8.6 million of severance costs were paid in 1994 and the remainder was substantially paid in 1995.
Duplicative computer and software write-offs were the capitalized costs of Valley's own internal data processing center which was closed. System conversion and standardization costs represent the costs associated with the one-time conversion and standardization of Valley's records to the Corporation's data processing systems.
Investment advisors and legal, accounting and other professional fees represent fees paid to consummate the mergers.
Lease terminations and equipment disposals represent the costs to terminate branch office and other corporate facilities leases, equipment leases and the disposal of equipment.
Net gain on sale of duplicative facilities and voluntary divestitures represents the gain or loss from the sale of duplicative branch offices and other corporate facilities which were owned. The Corporation voluntarily divested four bank branches with deposits of approximately $34 million and certain portions of its insurance agencies.
Other charges include the one-time expenses associated with the curtailment of certain Valley defined benefit plans, approximately $3.3 million, costs to eliminate duplicate customer accounts, unusable capitalized inventory, and other costs not deemed to be realizable due to the merger.
4. EXTRAORDINARY ITEMS
During 1994, the Corporation realized extraordinary gains from the sale of certain bank branches with deposits of $267 million which were required to be divested in conjunction with the regulatory approvals obtained for the merger with Valley.
Also in 1994, the Corporation prepaid $53 million of Valley's long-term debt consisting of the senior unsecured notes, Series A 9.86% due in 1994 and Series B 9.97% due in 1995. In accordance with the note agreements, a prepayment premium was paid in connection with the early retirement of the debt. The debt was refinanced with the Corporation's medium-term notes.
The following table summarizes these 1994 transactions:
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:
7. SECURITIES
The book and market values of securities at December 31 were:
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:
The gross realized gains and losses 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.
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."
8. LOANS
Loans at December 31 were:
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:
9. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
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.
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:
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:
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.
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:
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:
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
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,
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
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. The contract provides that in June, 1997, a settlement price 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)
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.
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:
The current and deferred portions of the provision for income taxes were:
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%) :
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:
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994 ($000'S EXCEPT SHARE DATA)
The range of options outstanding at December 31, 1996 were:
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.
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:
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:
Activity relating to the Corporation's Restricted Purchase Rights was:
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.
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. 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 were awarded to certain executives of the Corporation. The vesting period is three years from the date the performance units were awarded. Based on the performance criteria, without regard to the vesting, approximately $4,430 would be due to the participants at December 31, 1996.
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:
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.
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:
Net periodic postretirement benefit cost for the years ended December 31, 1996, 1995 and 1994 includes the following components:
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:
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):
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):
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):
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.
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)
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
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.
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.
Interest rate swaps and floors are assigned a value based on a discounted cash flow analysis utilizing the forward yield curve.
See Note 17 for additional information on off-balance sheet financial instruments.
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:
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.
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
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.
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
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
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.
- -------- * May not add due to rounding
PRICE RANGE OF STOCK (LOW AND HIGH BID)
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
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 1997, except for information as to executive officers which is set forth in Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 1997.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Consolidated Financial Statements: Balance Sheets--December 31, 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 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
/s/ J. B. Wigdale By: _________________________________ J. B. WIGDALE CHAIRMAN OF THE BOARD
Date: March 3, 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 March 3, 1997 - ------------------------------------- Board and a J. B. WIGDALE Director (Chief Executive Officer)
/s/ G. H. Gunnlaugsson Executive Vice March 3, 1997 - ------------------------------------- President and a G. H. GUNNLAUGSSON Director (Chief Financial Officer)
/s/ P. R. Justiliano Senior Vice March 3, 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: March 3, 1997
- -------- * Pursuant to authority granted by powers of attorney, copies of which are filed herewith.
MARSHALL & ILSLEY CORPORATION
INDEX TO EXHIBITS (ITEM 14(A)3)
ITEM
(2) Agreement and Plan of Merger dated as of September 19, 1993, between M&I and Valley Bancorporation, incorporated by reference to M&I's Current Report on Form 8-K dated September 19, 1993 (as amended by M&I's Current Report on Form 8-K/A dated September 19, 1993), SEC File No. 0-1220 (3) (a) Restated Articles of Incorporation, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, SEC File No. 0-1220 (b) By-laws, as amended, incorporated by reference to M&I's 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- (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- (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)
(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*
(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)*
(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* (ff) Deferred Compensation Trust II between Marshall & Ilsley Corporation and Marshall & Ilsley Trust Company* (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* (11) Computation of Net Income Per Common Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries (23) Consent of Arthur Andersen LLP (24) Powers of Attorney (27) Financial Data Schedule
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.