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, as amended (the "BHCA"), and a registered savings and loan holding company under the Home Owners' Loan Act of 1933, as amended ("HOLA"). As of December 31, 1995, M&I had consolidated total assets of approximately $13.3 billion and consolidated total deposits of approximately $10.3 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 236 banking offices in Wisconsin and 12 offices in Arizona. M&I Marshall & Ilsley Bank ("M&I Bank"), M&I's largest bank subsidiary with consolidated assets as of December 31, 1995 of approximately $4.0 billion, is the third largest bank in Wisconsin.
M&I Data Services is a major supplier of financial and data processing services and software to banking, financial and related organizations. M&I Data Services provides services and software to over 500 financial institution customers in the United States, as well as institutions in numerous foreign countries. 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.
On February 1, 1995, M&I acquired the Bank of Burlington, Burlington, Wisconsin, which had total assets of approximately $180 million at the acquisition date. On July 1, 1995, M&I acquired Citizens Bancorp of Delavan, Inc., Delavan, Wisconsin, and on July 2, 1995, M&I acquired Sharon State Bank, Sharon, Wisconsin, which were merged and became the M&I Bank of Delavan with combined assets of $123 million at the merger date.
PRINCIPAL SOURCES OF REVENUE
The table below shows the amount and percentages of M&I's total consolidated operating income resulting from interest and fees on loans, interest on investment securities and fees for data processing services for each of the last three years:
M&I business segment information is contained in Note 19 of the Notes to the Consolidated Financial Statements contained in Item 8 hereof.
COMPETITION
M&I and its subsidiaries face substantial competition 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, 1995, M&I and its subsidiaries employed in the aggregate approximately 9,079 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 and savings and loan holding company, M&I is subject to regulation and examination by the FRB under the BHCA and the Office of Thrift Supervision ("OTS") under HOLA. M&I's state bank subsidiaries are subject to regulation and examination by the Wisconsin Office of the Commissioner of Banking, or in the case of M&I Thunderbird Bank, the Arizona State Banking Department, and the FRB (for state banks which are members of the Federal Reserve System) or the Federal Deposit Insurance Corporation ("FDIC") (for state banks which are not members of the Federal Reserve System). M&I's national bank subsidiary is subject to regulation and examination by the Office of the Comptroller of the Currency. M&I's savings association subsidiary is subject to regulation and examination by
the Wisconsin Office of the Commissioner of Savings and Loans and the OTS. In addition, all of M&I's bank subsidiaries are subject to examination by the FDIC and other federal agencies.
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, extensions of credit and branch banking. The federal regulatory agencies have implemented provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 by creating standards for when they will take prompt corrective action if a depository institution fails to maintain a certain capital level within specified categories ranging from "critically undercapitalized" to "well capitalized." Information regarding capital requirements for bank holding companies and tables reflecting M&I's regulatory capital position at December 31, 1995 can be found in Note 13 of the Notes to the Consolidated Financial Statements contained in Item 8 hereof.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the restrictions on interstate acquisitions have been abolished effective September 29, 1995. Now, 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. In addition, banks may create interstate branching networks on or after June 1, 1997 in states that do not opt out of the legislation, or prior to such date in states that opt into the legislation early. The Financial Reform, Recovery and Enforcement Act of 1989 provides that 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.
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, as well as 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 the M&I bank subsidiaries 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.
The foregoing references to applicable laws, statutes, regulations and legislation are brief summaries thereof which do not purport to be complete and are qualified in their entirety by reference to such statutes, regulations and legislation.
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, 1995 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, 1995 DOLLAR AMOUNTS IN THOUSANDS
The analysis of loan maturities at December 31, 1995, and the rate structure for the categories indicated are:
Notes: (1) Scheduled repayments are reported in the maturity category in which the payments are due based on the terms of the loan agreements. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
Generally, a loan is placed on nonaccrual if payment of interest is more than 60 days delinquent and the loan has been determined by management to be a "problem" loan. In addition, loans which are past due 90 days or more as to interest or principal are also placed on non-accrual. Exceptions to these rules are generally only for loans fully collateralized by readily marketable securities or other relatively risk free collateral.
POTENTIAL PROBLEM LOANS
At December 31, 1995, the Corporation had $23,623 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, 1995, the Corporation's commercial finance subsidiary had $4,093 of corporate debt investment securities on nonaccrual status. The gross interest that would have been recorded in 1995 under the original terms amounted to $413. There was no interest income recorded during 1995 with respect to such debt securities.
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, 1995 (in thousands) is:
At December 31, 1995, time deposits issued by foreign offices totalled $44,847.
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 broadly consists of two levels of analysis. The first level focuses primarily on assessments of specific credits, as described more fully below. The second more general level of analysis focuses on categories of similar type loans and portfolio segments (e.g., commercial/individual; real estate/non-real estate; geographical regions related to the locations of affiliate banks). These methodologies include multiple analytical approaches which are viewed together to assess overall reserve and provision levels. The analyses consider, among other factors, historical loss experience, current and anticipated economic conditions, loan portfolio trends, portfolio composition by segment, assigned credit grades, and estimates of potential loss exposures.
The loan portfolios of the Corporation's affiliate banks and leasing subsidiary are subject to continual management oversight and quarterly analyses. Management's analyses are based on the Corporation's credit grading system which classifies loans in a manner similar to that of bank regulatory examiners, with estimates of probable and potential losses derived. Management's assigned credit grades and quarterly portfolio analyses are subject to independent monitoring by the Corporation's credit review group, which also performs periodic portfolio reviews at each affiliate. The credit review group prepares reports on the results of its evaluations of affiliate loan portfolios, which together with quarterly analyses of credit exposure provided by affiliate management, serve as the basis for determining the adequacy of the allowance for loan losses.
Management utilizes the above-described reserve analysis approaches to determine the overall adequacy of the allowance for loan losses. Management's overall assessment is based on its view of the loan portfolio as consisting of commercial business loans, real estate loans, personal loans, and direct financing leases. Industrial development revenue bonds are viewed as commercial real estate loans.
During 1995, consolidated net charge-offs increased to $9.3 million, representing $14.6 million of charge-offs, offset by $5.3 million of recoveries. The 1995 net charge-off level closely parallels the levels of 1992 and 1993, which were above the unusually low 1994 level of $4.6 million, but below the higher than historic net charge-off level experienced in 1991. Gross charge-off levels declined from 1991 through 1994 and although 1995 levels increased, they remained at the second lowest level during the five-year period. Recovery levels in 1991, 1993 and 1994 were relatively consistent, and contrast to a higher level of recoveries in 1992 and a lower level of recoveries in 1995. Recoveries in 1992 were unusually high due to the collection of a large commercial loan charge-off recorded in 1990. The generally positive net charge-off levels experienced during the post-1991 period reflect the relative strength of the Wisconsin economy and stabilization in the Arizona economy and real estate levels. The Corporation's Arizona-based loan portfolio represents approximately 3% of the total portfolio.
The Corporation's 1995 provision level of $16.2 million is consistent with the 1994 general provision level of $16.0 million, not including the $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 and 1995 general provision levels are lower than the previous three years. The resulting 1995 year-end reserve level is $161 million, or 1.82% of total loans, which compares to the year-end 1994 reserve level of 1.75%. The increasing reserve levels in 1991 through 1995 reflect the Corporation's favorable net charge-off experience and the inherent cyclical nature of economic conditions and related credit impacts. In addition, the 1995 reserve level of 1.82% reflects a reduction in loan volume due to the securitization of mortgage loans and related transfer of a portion of the loan loss reserve to a recourse reserve. The year-end 1995 reserve level is considered adequate given uncertainties regarding the economic conditions in the country and the Corporation's primary service areas.
The Corporation's 1995 charge-off and recovery levels across portfolio sectors generally reflect the current stability of the Wisconsin and Arizona economies. These conditions contrast with 1990 and 1991 when conditions were generally less favorable and weaknesses in economic conditions and real estate values significantly impacted the Corporation's Arizona-based portfolio, resulting in higher than historic levels of
losses. The 1995 charge-off level for commercial loans was above the abnormally low 1994 level, but below 1991-1993 levels. During the 1991-1995 period, commercial loan recoveries generally declined, with the exception of 1992 when a large recovery occurred relating to a 1990 charge-off. The higher 1992 recovery and the abnormally low 1994 gross charge-offs, resulted in small net commercial loan recoveries in 1992 and 1994. The 1995 charge-off for construction real estate loans, decreased from the 1994 peak. The losses were offset by negligible recoveries and continue to be relatively immaterial. The 1995 charge-offs for real estate mortgages, which decreased to the lowest level in five years, were offset by lower than normal recoveries. Resulting net charge-offs increased from 1993 and 1994 levels, but remained below 1991 and 1992 levels. The 1995 charge- off and recovery levels for personal loans increased above 1993 and 1994 levels, but remained below 1991 and 1992 levels. The 1995 charge-offs for the Corporation's lease financing portfolio approximated 1993 and 1994 levels, remaining below 1991 and 1992 levels. Offsetting recoveries continued to decrease from their 1993 peak, resulting in 1995 net charge-offs which were slightly below the five-year average.
The Corporation's charge-off and provision levels for 1996 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 1996 are not currently expected to vary significantly from 1995 levels. Offsetting recoveries are currently expected to decrease slightly from 1995 levels as a result of the general decline in gross charge-offs in recent years. At the present time, there are no material loans which are known or believed to be in imminent danger of deteriorating or defaulting which are currently expected to give rise to material charge-offs; however, loss levels can be significantly impacted by a few large loans which could deteriorate unexpectedly or be adversely impacted by economic conditions. Based on current conditions, commercial loan losses for 1996 are expected to approximate normal historic levels, remaining below peak 1990 and 1991 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 1996 are not currently expected to vary significantly from 1995 levels. Based on the current portfolio size, composition and experience, personal loan losses for 1996 are expected to approximate normal historic levels, remaining below the peak level experienced in 1991. 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 1996 are expected to approximate historic levels; however, actual losses could be impacted by portfolio growth, fraud, or unanticipated weaknesses in industry segments within the portfolio.
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" in the NASDAQ National Market System, 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, 1995, M&I had approximately 18,659 record holders of its Common Stock.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED SUMMARY OF EARNINGS YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
CONSOLIDATED SUMMARY OF EARNINGS -- CONTINUED YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
- --------------- * Not restated for acquisitions accounted for as a pooling of interests.
** 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
- --------------- * Not restated for acquisitions accounted for as pooling of interests.
** Nonaccrual loans, restructured loans, and loans past due 90 days or more.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
For 1995, the Corporation reported net income of $193.3 million compared to $105.9 million in 1994. Fully diluted net income per share in 1995 was $1.90 compared to $1.04 in the prior year. The return on average assets and average equity in 1995 was 1.52% and 16.41%, respectively, and 0.85% and 9.65%, respectively, for the year ended December 31, 1994.
Net income for 1994 included $64.0 million of charges and extraordinary items related to the Corporation's merger with Valley Bancorporation (Valley), which occurred during the second quarter of 1994.
Excluding the above noted merger related charges, net operating income and fully diluted earnings per share for 1994 would have been $169.9 million and $1.65, respectively.
The following table summarizes the unusual items reported in the second quarter of 1994 adjusted for merger related gains realized in the third and fourth quarter of 1994 and its impact on net income.
INCOME STATEMENT COMPONENTS AS A PERCENT OF AVERAGE TOTAL ASSETS
The table below presents a summary of the major elements of the income statement for 1995, 1994, and 1993. Each of the elements is stated as a percent of average total assets outstanding for the respective year and, where appropriate, is converted to a fully taxable equivalent basis (FTE). The results exclude the after-tax merger related charges reported in 1994.
NET INTEREST INCOME
Net interest income for 1995 was $491.5 million compared to $491.2 million in 1994, an increase of $0.3 million. The benefit from the increase in rates earned and the slight increase in the volume of average earning assets, primarily loans, was offset by the increase in rates paid on interest bearing liabilities and the negative impact of the change in liability mix.
Average earning assets increased $282.2 million or 2.5% in 1995 compared to the same period last year. Average loan growth of $317.3 million or 3.6% was somewhat offset by the decline in average other earning assets, primarily investment securities, of $35.1 million.
Average interest bearing liabilities increased $235.4 million or 2.6% in 1995 compared to 1994. Average interest bearing deposits increased $11.1 million while average short-term borrowings decreased $129.6 million or 13.4% since last year. The decrease in average short-term borrowings together with the decrease in noninterest bearing deposits of $71.8 million or 3.5%, resulted in an increase in average long-term borrowings from $447.3 million in 1994 to $801.2 million in 1995, an increase of $353.9 million or 79.1%.
In conjunction with the Valley merger in 1994, the Corporation completed certain required and voluntary branch divestitures. During the third and fourth quarters of 1994, approximately $300 million of deposits and $200 million of loans were sold. The effect of these divestitures was somewhat mitigated by 1995 acquisitions which were accounted for as purchases. The Bank of Burlington, with deposits of $149 million and loans of $113 million, was acquired on February 1, 1995. In July 1995, Citizens Bancorp of Delavan, Inc. and Sharon State Bank were acquired, which had combined deposits of $82.6 million and combined loans of $72.5 million.
The growth and composition of the Corporation's average loan portfolio for the current year and prior two years are reflected below:
During the third quarter of 1995, the Corporation began converting adjustable rate mortgage loans (ARMs) into Federal National Mortgage Association (FNMA) ARM pool securities to enhance liquidity. Approximately $455 million of ARM loans were securitized and transferred to investment securities available for sale in 1995. A fee of 7.5 basis points is required to guarantee the securities which had and will have a negative impact on net interest income. The Corporation estimates that approximately $100 million of ARM loans may be securitized in 1996. Average residential real estate loan growth and average total consolidated loan growth for 1995 versus 1994 would have been 7.6% and 4.5% before the securitizations.
The growth and composition of the Corporation's average deposits for the current year and prior two years are reflected below:
During the third quarter of 1994, the Corporation began offering a money market index account to attract new deposits. The average balance of the money market index account was approximately $956 million in 1995. Since inception, this product has generated approximately $668 million of new deposits. The remaining balances were the result of disintermediation from the Corporation's other deposit accounts. The average rate paid on the index account was approximately 200 basis points higher than the tier equivalent nonindexed money market account in 1995.
The net interest margin as a percent of average earning assets declined 10 basis points from 4.40% in 1994 to 4.30% in 1995. The yield on interest earning assets increased 74 basis points while the cost of interest bearing liabilities increased 107 basis points.
Loan growth and the increase in loan yields of 76 basis points account for 87% of the increase in interest on earning assets in 1995 compared to 1994. The remainder of the increase was primarily attributable to higher yields in other earning assets, particularly taxable investment securities.
The increase in average cost of deposits and short-term borrowings represent 83% of the 1995 versus 1994 increase in interest paid on interest bearing liabilities. The average cost of savings and interest bearing demand deposits increased 88 basis points and the average cost of other time deposits increased 110 basis points in 1995 compared to the prior year. The average cost of short-term borrowings increased 161 basis points. The increase in the volume of long-term borrowings, offset by a 13 basis point decline in the average cost of this category, contributed approximately $23.2 million of the increase in interest paid on interest bearing liabilities.
During the second quarter of 1994, the Corporation's banking subsidiaries began offering Bank Notes. The Bank Notes, issued for a two-year term at floating interest rates indexed to LIBOR, provide an additional funding source along with those traditionally available to our banking affiliates. In 1995, the average amount and average cost of these notes were $415 million and 6.20% compared to $138.4 million and 5.21% in 1994.
Throughout 1995 and 1994, the Corporation was not involved in derivative activity that would impact net interest margins or interest rate sensitivity or risk. Financial derivative instruments which are straightforward and involve little complexity may be used on a limited basis in the future.
The possible continuing lack of deposit and earning asset growth, and shift of deposit mix into higher cost categories, may continue to put pressure on the interest margin.
Net interest income was $491.2 million in 1994, an increase of $10.9 million or 2.3% from $480.3 million earned in 1993. The benefit of the increase in average earning assets was partially offset by the slight decline in the yield on average earning assets and increased volume of higher cost short-term and long-term borrowings fueled in part by the decline in average deposits.
Average earning assets increased $377.5 million or 3.4% in 1994 compared to the prior year. Average loans increased $530.4 million or 6.5% and was the primary contributor to average earning asset growth. The decline in other earning assets, primarily investment securities, was due to the funding of loan growth.
During 1994, the Corporation experienced a shift in its deposit mix. Noninterest bearing deposits increased $54.1 million or 2.7%, however, this increase did not offset the decline in interest bearing deposits, which declined $158.7 million in 1994. Core interest bearing deposits increased $79.6 million while certificates of deposit and other time deposits declined $238.3 million.
During the third quarter of 1994, the Corporation prepaid $53 million of Valley's long-term Series A 9.86% and Series B 9.97% senior unsecured notes and refinanced the notes with the Corporation's medium-term notes which had an average cost of 7.46% in 1994.
The net interest margin as a percentage of average earning assets declined from 4.48% in 1993 to 4.40% in 1994. The average yield on interest earning assets was 7.27% in 1994, a decrease of 6 basis points compared to 1993. The total investment yield declined 40 basis points due to the maturity of higher yielding securities. The total cost of interest bearing liabilities remained relatively unchanged. While the decline in the cost of deposits had a favorable impact on the net interest margin, the lack of deposit growth resulted in the use of higher cost short-term and long-term borrowings to meet funding needs. Average short-term borrowings increased $323.0 million and the average cost of such borrowings increased 130 basis points in 1994 compared to the prior year. The increase in the average volume of long-term borrowings, primarily Bank Notes, negatively impacted the net interest margin despite the 166 basis point decline in the cost of such borrowings.
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
The Corporation's consolidated average balance sheets, interest earned and interest paid, and the average interest rates earned and paid for each of the last three years are presented below (dollars in thousands):
- --------------- Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35%, and excluding disallowed interest expense.
(2) Loans on a nonaccrual status have been included in the computation of average balances.
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The effect on interest income and interest expense due to volume and rate changes in 1995 and 1994 are outlined below. Changes not due solely to either volume or rate are allocated to rate (dollars in thousands):
- --------------- Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35%, and excluding disallowed interest expense.
PROVISION FOR LOAN LOSSES AND CREDIT QUALITY
The provision for loan losses in 1995 amounted to $16.2 million compared to $24.9 million in 1994. The 1994 provision included an additional loan loss provision of $8.9 million which was recorded at the time of the Valley merger to conform Valley's loan valuation policies with those of the Corporation.
Nonperforming assets at December 31, 1995 were $70.5 million compared to $70.1 million reported at December 31, 1994. Nonaccrual loans, the largest component of nonperforming assets, increased $5.8 million when compared to December 31, 1994 while loans past due 90 days or more and renegotiated loans decreased $1.1 million and $0.9 million, respectively. Nonaccrual commercial loans and leases increased $4.8 million or 48.1% while nonaccrual commercial real estate loans declined $3.1 million or 15.5% at December 31, 1995 when compared to last year. Nonaccrual residential real estate continued its upward trend and amounted to $15.7 million, an increase of $4.2 million since December 31, 1994. At December 31, 1995, other real estate owned, which is down $3.5 million from the prior year, includes approximately $2.4 million of closed branch facilities.
Net charge-offs in 1995 amounted to $9.3 million or .10% of average loans compared to $4.5 million or .05% for the prior year.
The allowance for loan losses amounted to $161.4 million or 1.82% of total loans at December 31, 1995 compared to $154.0 million or 1.75% of total loans at December 31, 1994. The coverage of the allowance for loan losses to nonperforming loans decreased slightly from 265% at December 31, 1994 to 261% at the end of the current year.
As part of the ARM loan securitization previously discussed, approximately $2.3 million of loan loss reserve balances were transferred to a specific investment reserve to cover estimated losses based on the Corporation's experience with these types of loans. The Corporation has agreed to guarantee the first 4% of the loan pools securitized through FNMA against loss.
Since the third quarter of 1995, nonperforming assets increased $0.9 million which was primarily due to an increase of $1.1 million in loans past due 90 days or more. Also affecting total nonperforming assets were net charge-offs in the fourth quarter which amounted to $5.3 million and was $4.6 million higher than the third quarter of 1995. The increased net charge-offs were primarily related to commercial loans.
CONSOLIDATED CREDIT QUALITY INFORMATION
DECEMBER 31 ($000'S)
MAJOR CATEGORIES OF NONACCRUAL LOANS ($000'S)
RECONCILIATION OF CONSOLIDATED ALLOWANCE FOR LOAN LOSSES ($000'S)
- --------------- (1) The amount of the provision for loan losses charged to operating expense for the year ended December 31, 1995, is the amount necessary to bring the allowance for loan losses at December 31, 1995, to a level believed adequate by management to absorb current estimated potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on a continual review of the loan portfolio, loan loss experience, economic conditions, growth and composition of the portfolio, and other relevant factors. As a result of management's continual review, the allowance is adjusted through provisions for loan losses charged against income.
OTHER INCOME
Total other income was $424.2 million for the year ended December 31, 1995 compared to $361.5 million earned in the prior year. Our financial services affiliates were the major contributors to the increase.
M&I Data Services (Data Services), the Corporation's data processing division, reported data processing revenue of $213.9 million compared to $159.4 million for the year ended December 31, 1994, an increase of $54.5 million or 34.2%. Processing and conversion revenue increased $30.0 million or 23.4% while buy out fees related to terminated contracts (which can vary from year to year) increased $4.3 million and amounted to $6.3 million for the year ended December 31, 1995. Software related revenue increased $18.5 million. Approximately 60% of the increase is attributable to the December, 1994 acquisition of Software Alliance.
Trust fees amounted to $64.2 million, an increase of $4.5 million or 7.5% compared to $59.7 million earned in 1994. An increase in the overall market value of trust assets along with increased revenue from outsourcing services more than offset the revenue decline due to pricing compressions.
Other customer services declined $6.3 million in 1995 compared to the prior year. Fees on loans declined $1.3 million or 6.5% while other commission and fees declined $2.2 million or 4.9% in the current year when compared to 1994. Service charges on deposit accounts declined $2.9 million and amounted to $51.0 million for the year ended December 31, 1995.
Net securities gains amounted to $4.6 million for the year ended December 31, 1995 compared to net securities losses of $5.8 million for the year ended December 31, 1994. During 1995, Capital Markets Group realized securities gains of $7.2 million offset in part by $4.0 million of realized and unrealized securities losses as compared to securities gains of $2.3 million in 1994 and securities losses of $0.3 million. The Corporation also sold certain equity securities carried in the available for sale category and realized a net gain of $1.3 million in 1995 and $0.9 million in 1994. Excluding the $7.3 million of securities losses taken at the time of the Valley merger, 1994 net securities gains amounted to $1.5 million.
Other miscellaneous income amounted to $30.8 million for the year ended December 31, 1995, slightly lower than that reported in the prior year. The Corporation adopted the new accounting standard on mortgage servicing rights in the third quarter of 1995 which resulted in a $2.4 million increase in other income. This increase was offset by lower gains on the sale of other real estate owned and lower insurance commissions revenue. Revenue from property and casualty insurance commissions declined $2.8 million due to the sale of that line of business in the later part of 1994.
Total other income amounted to $361.5 million in 1994, a decline of $10.4 million when compared to $371.9 million reported in 1993. Excluding the $7.3 million of securities losses taken as part of the Valley acquisition, other income declined $3.1 million in 1994 compared to the prior year. Data processing revenue increased $24.4 million or 18.1% in 1994 while trust revenues declined $1.5 million for the same period. Other customer service revenue declined $7.4 million in 1994 compared to 1993 primarily due to lower service charges on deposit accounts. The higher interest rate environment in 1994 caused higher earnings credits to be given to commercial deposit accounts. The decline in revenue from the origination and sale of mortgage loans in 1994 accounted for a majority of the decrease in fees on loans and other miscellaneous income.
Securities losses in 1994 amounted to $5.8 million compared to a net gain of $8.3 million in 1993. Excluding the securities losses taken at the time of the Valley acquisition, net securities gains amounted to $1.5 million in 1994. Capital Markets Group realized net gains of $2.0 million in 1994 compared to $3.3 million in 1993. The Corporation also sold certain equity securities and realized a gain of $0.9 million in 1994 and $4.2 million in 1993.
OTHER EXPENSE
Total other expense amounted to $599.6 million in 1995 compared to $660.0 million in 1994. As noted earlier, several one time charges were recorded in 1994. A merger/restructuring charge of $75.2 million reflected the costs associated with executive contracts, a reduction in work force, and other items related to the merger. Also taken at that time were other miscellaneous charges of $8.5 million which represented goodwill
and other real estate write downs and other accrual related adjustments. Total other expense for 1994, excluding the above noted items, would have been $576.3 million.
Salaries and benefits expense amounted to $343.7 million, an increase of $19.7 million or 6.1%, in 1995 compared to the prior year. The increase was due primarily to Data Services.
At December 31, 1995, Data Services had approximately 2,600 employees compared to 2,200 employees at December 31, 1994. A portion of the increase was due to Data Service's acquisition of Software Alliance and a New England data center. Our banking affiliates experienced a decline in salaries and benefits expense.
Upon consummation of the merger in 1994, the Valley pension plan was curtailed and in 1995, the plan was fully terminated through cash distributions and/or purchases of annuities. The 1994 curtailment expense of $2.3 million is classified as a merger/restructuring cost while the pension termination expense of $1.8 million is included in salaries and benefits expense for 1995.
Net occupancy expense in 1995 declined $0.9 million due primarily to the branch divestitures which occurred during 1994. This benefit was somewhat offset by increased occupancy costs incurred by Data Services through its New England data center acquisition and a full year of operating a secondary processing site.
Equipment expense amounted to $65.5 million in 1995 compared to $59.6 million for 1994. The 1995 acquisition of the New England data center, a secondary processing site which became operational late in the fourth quarter of 1994, and CPU and other equipment upgrades by Data Services were the primary reasons for the increase.
The decline in payments to regulatory agencies of $10.6 million in 1995 when compared to 1994 is due to the reduction in FDIC insurance premium rates which declined from $.23 per $1,000 of insured deposits to $.04 on June 1, 1995.
Supplies and printing expense which amounted to $15.7 million in 1995 increased $1.3 million when compared to the prior year. This increase is the result of higher data processing revenue experienced in 1995.
Professional services expense amounted to $18.7 million for the year ended December 31, 1995 compared to $12.5 million in the prior year. Approximately $4.7 million of the increase was due to costs incurred for technological assistance in software development, such as Data Service's data warehouse project. Approximately $1.1 million of the remaining increase represents costs incurred in connection with the ARM loan securitization program previously discussed.
Other miscellaneous expense amounted to $89.1 million in 1995 compared to $96.1 million in 1994. Excluding $7.4 million of charges taken in conjunction with the Valley merger, other miscellaneous expense for 1994 amounted to $88.7 million. Travel and software costs for Data Services increased $4.8 million over the prior year. In addition, the acquisitions of Software Alliance and the New England data center resulted in an increase in intangibles amortization expense of $3.7 million in 1995 compared to 1994. This category of expense is also affected by the capitalization of costs, net of amortization, associated with software development and data processing conversions. Including the professional services expense increase of $4.7 million, the amount of software development costs, net of amortization, in 1995 was $8.0 million higher than the amount reported in 1994. The impact of conversion activity, net of amortization, was to increase miscellaneous expense by $1.0 million in 1995 compared to the prior year.
Total other expense amounted to $660.0 million in 1994 compared to $569.6 million in 1993. Excluding the one-time merger related items of $83.7 million, 1994 total other expenses amounted to $576.3 million, an increase of $6.7 million or 1.2% when compared to 1993. The minimal expense growth is attributable to the cost savings achieved by the Corporation in 1994 due to the merger. Salaries and Benefits expense increased only 1.0% due primarily to the elimination of duplicate job functions at the time of the Valley merger. Occupancy expense increased $0.2 million in 1994 compared to 1993 due to the sale of branch facilities in the second half of 1994. Equipment expense, which increased 2.9% in 1994 when compared to the prior year, was associated with Data Services need for more computer capacity, data storage devices, and other processing
equipment. This increased cost did not totally offset the cost savings associated with the merger. The other miscellaneous category of expense was affected by the $7.4 million of merger related charges in 1994.
INCOME TAX PROVISION
The provision for income taxes was $106.6 million in 1995 compared to $73.4 million in 1994 and $93.2 million in 1993. The increase in the 1995 provision levels is due to higher taxable income offset in part by a $2.3 million research and experimental tax credit related to software development. The 1994 provision for taxes was impacted by certain nondeductible expenses associated with the Valley combination. The effective tax rate was 35.54% in 1995, 43.74% in 1994, and 35.22% in 1993.
ASSET/LIABILITY MANAGEMENT
Asset/Liability management involves the funding and investment strategies necessary to maintain an appropriate balance between interest sensitive assets and liabilities as well as to assure adequate liquidity. These strategies determine the characteristics and mix of the balance sheet. They affect net interest margins, maturity patterns, interest rate sensitivity and risk, as well as resource allocations.
The Corporation combines the active management of the balance sheet position over interest rate cycles to confine interest rate risk within prudent parameters. Financial derivative instruments may be used on a limited basis and are generally straightforward and involve little complexity. We position the balance sheet in a manner which will match asset and liability repricing schedules to insulate our net interest margin from cyclical swings in interest rates, while consciously matching or mismatching discretionary asset and liability repricing schedules to take advantage of interest rate swings over short periods of time.
Adequate funding sources are maintained through a full line of deposit and short-term borrowing products, competitively priced to a diversified customer base. Asset diversification provides a proper mix of variable and fixed rate loans, while investment decisions are primarily designed to balance the overall interest rate risk in the balance sheet. Liquidity is provided through marketability and an appropriate schedule of maturing investments.
A portion of demand deposits are considered rate sensitive under the following assumptions. A core amount of demand deposits is calculated at the beginning of each year. This core number is the average of the previous six months actual and upcoming twelve months forecasted balances. The core balance is considered nonrate sensitive and classified as a nonrate sensitive liability in the "1 year +" time frame. Actual demand deposit balances are compared to the core balance monthly. The difference, positive or negative, is considered rate sensitive and classified as a rate sensitive liability. At December 31, 1995, $261 million of demand deposits were classified as rate sensitive in the "1-30 Days" time frame. In addition, a percentage of various interest-bearing accounts are classified (rate sensitive or nonrate sensitive) according to assumptions which approximate the extent to which the rates on these accounts are expected to increase (decrease) relative to a change in the general level of interest rates.
ASSET/LIABILITY MANAGEMENT ($ IN MILLIONS)
CAPITAL RESOURCES
Shareholders' equity was $1.26 billion at December 31, 1995 compared to $1.06 billion at December 31, 1994. This increase was primarily due to retained net income, the issuance of 2.8 million common shares for the acquisition of three banking affiliates and a $55.3 million increase in the net unrealized gain on investment securities available for sale.
The Corporation and its affiliates continue to have a strong capital base and the Corporation's regulatory capital ratios are significantly above the defined minimum regulatory ratios. At December 31, 1995, the Corporation had a total risk-based capital ratio of 14.04% and an 11.71% core capital to risk-based asset ratio. Selected leverage capital ratios must also be maintained. The Corporation's leverage ratio at December 31, 1995 of 9.07% was substantially in excess of the minimum guidelines.
The Corporation's subsidiaries, primarily its banking subsidiaries, are restricted by regulations from making dividend distributions above prescribed amounts. In addition, banking subsidiaries are limited in making loans and advances to the Corporation. At December 31, 1995, approximately $87 million and $45 million were available for distribution without regulatory approval from the Corporation's banking and nonbanking subsidiaries, respectively.
Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each subsidiary bank in circumstances when it might not do so absent such policy.
In May of 1994, $16.4 million of 8.5% convertible subordinated notes were converted into 1,870,057 shares of common stock. As provided for in the note agreement, the noteholder, subsequent to conversion, exchanged the common shares acquired by conversion of the debt for 163,630 shares of Series A preferred stock.
The Corporation has a Stock Repurchase Program which was approved by the Corporation's Board of Directors in April 1993 and reaffirmed in October 1994. In October 1994, the Board of Directors also authorized an increase in the number of shares to be repurchased from 9.0 million shares to 15.1 million shares. The shares are being acquired in anticipation of the remaining conversion of the Corporation's 8.5% convertible subordinated notes, to fund the on-going program to deliver or have available shares of common stock for stock option and other employee benefit plans and other corporate needs. During 1995, the Corporation purchased 2.7 million shares and has cumulatively purchased 12.5 million shares since inception of the program.
The Corporation has filed registration statements with the Securities & Exchange Commission to issue medium term unsecured and subordinated series notes. These issues may have maturities which range from nine (9) months to 30 years from the date of issue at a fixed or floating rate. As of December 31, 1995, approximately $177 million of medium term notes and approximately $560 million of bank notes can be issued. This allows the Corporation to maintain ready access to funding sources for general corporate purposes which include, but are not limited to, refinancing existing corporate and bank debt as it matures, and other corporate needs.
ITEM 8.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
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, 1995, 1994, AND 1993 ($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. 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 1994 and 1993 Consolidated Financial Statements have been reclassified to conform with the 1995 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 market value, with adjustments to the carrying value reflected in the Consolidated Statements of Income.
Loans -- Interest on loans, other than direct financing leases, is recognized as income based on the loan principal outstanding during the period. Unearned income on direct financing leases is recognized over the lease term on a basis that results in an approximate level rate of return on the lease investment. Loans are generally placed on nonaccrual status when they are past due 90 days as to either interest or principal. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged to interest income on loans. A nonaccrual loan may be restored to an accrual basis when interest and principal payments are brought current and collectibility of future payments is not in doubt.
The Corporation defers and amortizes fees and certain incremental direct costs, primarily salary and employee benefit expenses, over the contractual term of the loan or lease as an adjustment to the yield. The unamortized net fees and costs are reported as part of the loan balance outstanding.
Allowance for loan losses -- The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated potential losses in the loan portfolio. Management's determination of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
adequacy of the allowance is based on a continual review of the loan portfolio, loan loss experience, economic conditions, growth and composition of the portfolio, and other relevant factors. As a result of management's continual review, the allowance is adjusted through provisions for loan losses charged against income.
Premises and equipment -- Premises and equipment are recorded at cost and depreciated principally on the straight-line method with annual rates varying from 2% to 10% for buildings and 10% to 35% for equipment. Maintenance and repairs are charged to expense and betterments are capitalized.
Other real estate owned -- Other real estate owned includes assets that have been acquired in satisfaction of debts or bank branch premises held for sale. Other real estate is recorded at the lower of cost or fair value, less estimated selling costs, at the date of transfer. Valuation adjustments required at the date of transfer for assets acquired in satisfaction of debts are charged to the allowance for loan losses, whereas any valuation adjustments on premises are reported in other expense. Subsequent to transfer, other real estate owned is carried at the lower of cost or fair market value, less estimated selling costs, based upon periodic evaluations. Rental income from properties and gains on sales are included in other income, and property expenses, which include carrying costs, required valuation adjustments and losses on sales, are recorded in other expense.
Mortgage servicing -- Normal fees related to the servicing of mortgage loans are recorded as income when payments are received from mortgagors. Mortgage loans held for sale to investors are carried at the lower of cost or market, determined on an aggregate basis, based on outstanding firm commitments received for such loans or on current market prices.
Data processing services -- Direct costs associated with the production of computer software which will be marketed or used in data processing operations are capitalized and amortized on the straight-line method over the estimated economic life of the product, generally four years. Direct costs associated with customer system conversions to the data services operations are capitalized and amortized on the straight-line method over the terms, generally five to seven years, of the related servicing contract. Routine maintenance of software products, design costs and development costs incurred prior to establishment of a product's technological feasibility are expensed as incurred. Net unamortized capitalized costs were $34,984 at December 31, 1995, and $21,696 at December 31, 1994. Amortization expense was $7,122, $6,960, and $4,668, for 1995, 1994, and 1993, respectively.
Intangibles -- Unamortized intangibles resulting from acquisitions, primarily goodwill, core deposit premiums, purchased data processing contract rights and mortgage servicing rights were $77,376 at December 31, 1995 and $64,171 at December 31, 1994. The Corporation recognizes as separate assets rights to service mortgage loans when purchased or originated and sold with servicing retained in accordance with Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122) which was adopted by the Corporation in 1995. The Corporation allocates the cost of mortgage loans to the mortgage servicing rights and the loans based on their estimated relative fair values. Mortgage servicing rights are amortized over the periods during which the corresponding mortgage servicing revenues are anticipated to be generated. The Corporation periodically evaluates and measures impairment of capitalized mortgage servicing rights and recognizes impairment, if required, through a valuation allowance. For purposes of evaluating and measuring impairment, the Corporation stratifies the mortgage servicing rights based on loan term which the Corporation considers the predominant risk characteristic of the underlying loans. The impact of adopting SFAS 122 was not material and no valuation allowance was required for any individual stratum at December 31, 1995. 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 $10,708, $9,176 and $7,204 for 1995, 1994 and 1993, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
The Corporation also has negative goodwill included in other liabilities, the majority of which, arose from an acquisition in 1992. Negative goodwill amounted to $10,811 and $12,387 at December 31, 1995 and 1994, respectively. The negative goodwill is being accreted on a straight-line basis over a period of 10 years and amounted to $1,576 in 1995, 1994 and 1993.
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 98,757,047 in 1995, 99,420,070 in 1994, and 102,672,361 in 1993.
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 102,954,823 in 1995, 104,051,365 in 1994, and 108,874,600 in 1993.
2. BUSINESS COMBINATIONS
On May 31, 1994, Valley Bancorporation ("Valley") merged with and into the Corporation in a tax-free reorganization accounted for as a pooling of interests. Accordingly, prior year financial statements have been restated to give effect to this transaction. In accordance with the terms of the merger, each share of Valley Common Stock was converted into the right to receive 1.72 shares of the Corporation's Common Stock (approximately 35.7 million shares).
A reconciliation of net interest income and net income of the Corporation as previously reported to the amounts for that period in the accompanying Consolidated Financial Statements as restated for the 1994 pooling of interests is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
The Corporation has also consummated the following business combinations:
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 are shown in the Consolidated Statements of Income as Merger/Restructuring and consist of the following:
The executive contracts accrual was the present value of the amounts contractually due to certain Valley executives under their former employment contracts. During 1995 and 1994, payments of $0.2 million and $10.2 million respectively, were made.
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 merger.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
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.
There have not been any material adjustments to the liabilities subsequent to the initial recognition which occurred during the second quarter of 1994.
4. EXTRAORDINARY ITEMS
During the third and fourth quarters of 1994, the Corporation realized extraordinary gains from the sale of certain bank branches with deposits of $267 million which were required to be divested in conjunction with the regulatory approvals obtained for the merger with Valley.
During the third quarter of 1994, the Corporation prepaid $53 million of Valley's long-term debt consisting of the senior unsecured notes, Series A 9.86% due in 1994 and Series B 9.97% due in 1995. In accordance with the note agreements, a prepayment premium was paid in connection with the early retirement of the debt. The debt was refinanced with the Corporation's medium-term notes.
The following table summarizes these 1994 transactions:
5. CASH AND DUE FROM BANKS
At December 31, 1995, $133,652 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
7. SECURITIES
The book and market values of securities at December 31 were:
The unrealized gains and losses of securities at December 31 were:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
The book value and market value of securities by contractual maturity at December 31, 1995 were:
The gross realized gains and losses amounted to $8,821 and $4,266 in 1995, $3,499 and $9,251 in 1994, and $8,552 and $218 in 1993, respectively.
At December 31, 1995, securities with a value of approximately $364,340 were pledged to secure public deposits, short-term borrowings, and for other purposes required by law.
During 1995, approximately $455 million of adjustable rate mortgage loans were securitized and transferred to investment securities available for sale. Approximately $2,275 of the allowance for loan losses was transferred to a specific investment reserve 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 a government agency against potential loss. 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:
The Corporation's lending activities are concentrated primarily in the Midwest. Approximately 3% of its portfolio consists of loans granted to customers located in Arizona. The Corporation had $3,103 in foreign credits at December 31, 1995. The Corporation's loan portfolio consists of business loans extending across many industry types, as well as loans to individuals. As of December 31, 1995, total loans to any group of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
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 1995 is presented below. All of these loans were made in the ordinary course of business with normal credit terms, including interest rates and collateral. The beginning balance has been adjusted to reflect the activity of newly-appointed directors and executive officers and directors and executive officers of subsidiaries previously not considered significant.
Loans to Directors & Executive Officers:
9. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
As of December 31, 1995, and 1994, nonaccrual loans totalled $50,598 and $44,766, respectively.
During the second quarter of 1994, a loan loss provision of $8,950 was charged to expense, after consummation of the merger with Valley, to conform Valley's loan valuation policies with those of the Corporation.
In May 1993 and October 1994, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, an amendment to SFAS No. 114 (collectively "SFAS 114"). These new standards require that a loan's value be measured, and if appropriate, a valuation reserve established, when it has been determined that
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
the loan is impaired and loss is probable. At December 31, 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 $4,325 against the loan balance outstanding. The required valuation allowance is included in the allowance for loan losses in the consolidated balance sheet at December 31, 1995.
The average recorded investment in total impaired loans and leases for the year ended December 31, 1995 amounted to $52,827.
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. During 1995, interest income recognized on total impaired loans amounted to $3,594. The gross income that would have been recognized had such loans and leases been performing in accordance with their original terms would have been $8,430 for the same period.
10. PREMISES AND EQUIPMENT
The composition of premises and equipment at December 31 was:
Depreciation expense was $45,153 in 1995, $43,006 in 1994, and $42,417 in 1993.
The Corporation leases certain of its facilities and equipment. Rent expense under such operating leases was $21,702 in 1995, $20,567 in 1994, and $20,420 in 1993, respectively.
The future minimum lease payments under operating leases that have initial or remaining noncancellable lease terms in excess of one year for 1996 through 2000 are $9,124, $8,770, $8,146 $7,132 and $4,884, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard, which must be adopted in 1996, requires long-lived impaired assets
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
to be carried at fair value and all long-lived assets to be disposed of to be reported at the lower of carrying amount or fair value less cost to sell.
SFAS 121 prescribes a cash flow test for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of SFAS 121, assets include certain identifiable intangibles and goodwill if the asset tested for recoverability was acquired in a business combination accounted for using the purchase method.
The Corporation does not anticipate that SFAS 121 will have a material impact on the consolidated financial statements.
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, 1995 and 1994.
12. LONG-TERM BORROWINGS
Long-term borrowings at December 31 were:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
The 8.5% convertible subordinated notes (the "Notes") require semi-annual interest payments and are convertible at the option of the holder into common stock at a conversion price of $8.75. The holder has the right to exchange common stock, acquired by conversion of the Notes or otherwise, for Series A convertible preferred stock ("Series A"). The holder may own up to 24.9% (computed as the percentage of common shares owned directly or indirectly through conversion privileges) of the Corporation's outstanding common stock and convertible securities, but may not own directly more than 5% of the Corporation's outstanding common stock. Except under limited circumstances, the holder may not sell, transfer or otherwise dispose of the Notes or common stock acquired by conversion, and then, only under prescribed conditions and subject to the Corporation's right of first refusal.
A portion of the Notes qualify as equity contract notes as defined by the applicable guidelines of the Board of Governors of the Federal Reserve System. The Notes require the holder to take common stock (or other equity securities) in lieu of cash in satisfaction of the claim for principal repayment, unless the Corporation sells new common stock (or certain other equity securities) and dedicates the proceeds thereof to the redemption or retirement of the Notes.
During 1994, $16,363 of the Notes were converted by the holder into 1,870,057 shares of the Corporation's common stock. The common stock acquired by conversion of the Notes was exchanged for 163,630 shares of the Corporation's Series A convertible preferred stock. These are noncash transactions for purposes of the Consolidated Statements of Cash Flows.
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, 1995, medium-term Series B notes outstanding amounted to $47,330. Such notes mature in 1996 through 1998 and have fixed interest rates of 6.05% to 8.65%. No additional borrowings may occur under the Series B notes. There were $122,870 of medium-term Series C notes outstanding at December 31, 1995. The medium-term Series C notes have fixed interest rates of 6.74% to 7.84% and mature in 1996 and 1997. Approximately $27,130 of unissued Series C notes are remaining and available to be issued in the future. There have been no issuances of the $150 million Series D notes.
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, 1995 represents the aggregate borrowings of 14 banking subsidiaries and mature at various times in 1996 and 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, 1995. 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 8.65% at December 31, 1995 and are due in installments over varying periods through 2001. Lease financing receivables at least equal to the amount of the notes are pledged as collateral.
The mortgages are secured by land and buildings with a net book value of $8,650 at December 31, 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
Scheduled maturities of long-term borrowings are: $296,756, $14,116, $6,273 and $975 for 1997 through 2000, respectively.
13. SHAREHOLDERS' EQUITY
The Corporation has 5,000,000 shares of preferred stock authorized, of which the Board of Directors has designated 3,000,000 shares as Series A convertible, with a $100 value per share for conversion purposes. Series A is nonvoting preferred stock. The same cash dividends will be paid on Series A as would have been paid on the common stock exchanged for Series A. Series A has the same restrictions on sale as are applicable to the 8.5% convertible subordinated notes.
The holder of the 8.5% convertible subordinated notes has the option through 1997 to exchange common stock of the Corporation for Series A. If the common stock is acquired by the holder in conversion of the notes, the exchange ratio is one share of Series A for 11.43 shares of common stock. If acquired otherwise, the exchange ratio is one share of Series A, valued at $100, to the holder's weighted average purchase price per common share. Also, the holder has the option to convert Series A into common stock at the same ratio that the common stock was exchanged for Series A. The Corporation has issued 348,944 shares of its Series A convertible preferred stock in exchange for 3,832,957 shares of common stock.
The preferred stock is treated as a common stock equivalent in all per share calculations.
The Corporation has a Stock Repurchase Program which was approved by the Corporation's Board of Directors in April, 1993 and reaffirmed in October, 1994. In October 1994, the Board of Directors also authorized an increase in the number of shares to be repurchased from 9.0 million shares to 15.1 million shares. The shares are being acquired in anticipation of the conversion of the Corporation's 8.5% convertible subordinated notes, to fund the on-going program to deliver or have available shares of common stock for stock option and other employee benefit plans and other corporate needs. During 1995, the Corporation purchased 2.7 million shares and has cumulatively purchased 12.5 million shares since inception of the program.
Federal banking regulatory agencies have established capital adequacy rules which take into account risk attributable to balance sheet assets and off-balance sheet activities. All banks and bank holding companies must meet a minimum total risk-based capital ratio of 8%. Of the 8% required, half must be comprised of core capital elements defined as Tier 1 capital. The federal banking agencies also have adopted leverage capital guidelines which banking organizations must meet. Under these guidelines, the most highly rated banking organizations must meet a minimum leverage ratio of at least 3% Tier 1 capital to total assets, while lower rated banking organizations must maintain a ratio of at least 4% to 5%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
The Corporation's risk-based capital and leverage ratios are as follows:
All of the Corporation's banking subsidiaries' risk-based capital and leverage ratios meet or exceed the defined minimum requirements.
Banking subsidiaries are restricted by banking regulations from making dividend distributions above prescribed amounts and are limited in making loans and advances to the Corporation. At December 31, 1995, the retained earnings of subsidiaries available for distribution as dividends without regulatory approval was approximately $131,998.
14. INCOME TAXES
Total income tax expense for the years ended December 31, 1995, 1994 and 1993 was allocated as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
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, 1995, 1994, AND 1993 ($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 $1,762, ($2,171) and $3,103, in 1995, 1994, and 1993, respectively.
15. STOCK OPTION AND RESTRICTED STOCK PLANS
The Corporation has Executive Stock Option and Restricted Stock Plans which provide for the grant of nonqualified and incentive stock options, stock appreciation rights and rights to purchase restricted shares to key employees at prices ranging from not less than the par value of the common shares to the fair market value of the shares at the date of grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
Activity relating to common stock options was:
Options exercisable at December 31, 1995 and 1994, were 4,949,541 and 4,825,426, respectively. Shares reserved for the granting of additional options at December 31, 1995 were 1,735,961.
There were 5,000 restricted stock purchase rights outstanding at December 31, 1995 and 13,000 restricted stock purchase rights outstanding at December 31, 1994. During 1995, 26,000 stock purchase rights were exercised and 3,000 purchase rights were exercised in 1994.
Restrictions on stock issued pursuant to the exercise of stock purchase rights lapse within a seven-year period. Accordingly, the compensation related to issuance of the rights is deferred and amortized over the vesting period. Unamortized deferred compensation is reflected as a reduction of shareholders' equity.
Aggregate compensation expense related to stock purchase rights was $611, $747, and $1,008 in 1995, 1994, and 1993, respectively.
The Corporation also has a Long-term Incentive Plan (the "Plan"). Under the Plan, performance units may be awarded from time to time. Once awarded, additional performance units will be credited to each participant based on dividends paid by the Corporation on its common stock. At the end of a designated vesting period, participants will receive an amount, either in cash, common stock or some combination thereof, equal to some percent (0%-275%) of the initial performance units credited plus those additional units credited as dividends based on the established performance criteria. During 1995, 91,700 units and in 1994, 156,500 units were awarded to certain executives of the Corporation. The vesting period is three years from the date the performance units were awarded. Based on the performance criteria, without regard to the vesting, no amount would be due to the participants at December 31, 1995.
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, which must be adopted in 1996, establishes financial accounting and reporting standards for stock-based employee compensation plans such as stock options, restricted stock plans and stock appreciation rights.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
Currently compensation cost is 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 fair value of the options granted.
This standard permits entities to continue to measure compensation cost for such plans using the accounting method prescribed by APBO 25 as long as pro forma disclosures of net income and earnings per share are presented as if the fair value based method of accounting as defined in SFAS 123 had been applied.
The Corporation has not yet determined whether it will adopt the SFAS 123 method of accounting or continue APBO 25 accounting with the required disclosures. However, based on the fixed stock option grants in 1995, the impact of adopting the SFAS 123 accounting would be immaterial to the consolidated financial statements.
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 $23,883, $21,631 and $17,771 in 1995, 1994 and 1993, 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 $1,023 in 1995, $910 in 1994, and $2,703 in 1993.
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 following table reflects the plan's funded status and amounts recognized in the financial statements at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
The net pension cost for 1994 and 1993, 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 following assumptions were used in determining the projected benefit obligation:
The Corporation sponsors a defined benefit health plan that provides health care benefits to all eligible current and retired employees. The plan is contributory, with contributions adjusted periodically such that participants contribute approximately 40% of the cost of health care benefits. The plan also contains other cost-sharing features such as deductibles and coinsurance. Retiree eligibility is dependent upon age, years of service, and participation in the health plan during active service. The plan is not funded.
Valley provided postretirement health care benefits to retired employees. These benefits were subject to deductibles, copayment provisions and other limitations. Only those employees retiring on or before December 31, 1994 were eligible for such benefits. As part of the merger, all former Valley employees became eligible to participate in the Corporation's postretirement health plan. The Corporation did not recognize years of service with Valley prior to the merger.
The components of the accumulated postretirement benefit obligation (APBO) reconciled with the amount recognized in the Corporation's Consolidated Balance Sheets at December 31, were:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
Net periodic postretirement benefit cost for the years ended December 31, 1995, 1994 and 1993 includes the following components:
For measurement purposes, the assumed health care cost trend rate was 11% and 12% in 1995 and 1994, respectively, and gradually declines to 5.5% in the year 2022.
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, 1995 by $7,569 and increase 1995 postretirement benefit expense by $564.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Financial instruments with off-balance sheet risk at December 31 were:
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
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, 1995, the Corporation's foreign currency positions resulting from foreign exchange contracts by major currency was as follows ($000's US):
These amounts do not represent the actual credit or market exposure.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values and estimated fair values for on and off-balance sheet financial instruments as of December 31, 1995 and 1994 are reflected below:
BALANCE SHEET FINANCIAL INSTRUMENTS ($ 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. SFAS 107 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used in estimating the fair value for financial instruments.
CASH AND SHORT-TERM INVESTMENTS
The carrying amounts reported for cash and short-term investments approximates the fair values for those assets.
TRADING AND INVESTMENT SECURITIES
Fair value is based on quoted market prices or dealer quotes. See Note 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
were assigned fair values based on a discounted cash flow analysis. The discount rate was based on the treasury yield curve, with rate adjustments for credit quality, cost and profit factors.
DEPOSITS
The fair value for demand deposits or any interest bearing deposits with no fixed maturity date was considered to be equal to the carrying value. Time deposits with defined maturity dates were considered to have a fair value equal to the book value if the maturity date was within three months of December 31. The remaining time deposits were assigned fair values based on a discounted cash flow analysis using discount rates which approximate interest rates currently being offered on time deposits with comparable maturities.
BORROWINGS
Short-term borrowings are carried at cost which approximates fair value. The Corporation has convertible debt (see Note 12) for which fair value was considered to be the current market value of the shares that would be issued in a full conversion. Other long-term debt was generally valued using a discounted cash flow analysis with a discount rate based on current incremental borrowing rates for similar types of arrangements or, if not readily available, based on a build up approach similar to that used for loans and deposits. Long-term borrowings include their related current maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS ($ IN MILLIONS)
Fair values of loan commitments and letters of credit have been estimated based on the equivalent fees, net of expenses, that would be charged for similar contracts and customers at December 31.
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.
See Note 17 for additional information on off-balance sheet financial instruments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($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 Corporation, 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.
Revenues from affiliated customers are charged at rates available to and transacted with unaffiliated customers.
Operating profit is pretax net income. Depreciation and amortization expense for the banking services business amounted to $8,189, $40,733, and $30,378 in 1995, 1994, and 1993, respectively, and for M&I Data Services amounted to $38,978 in 1995, $31,224 in 1994, and $26,680 in 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
20. CONDENSED FINANCIAL INFORMATION -- PARENT CORPORATION ONLY
CONDENSED BALANCE SHEETS DECEMBER 31
Scheduled maturities of long-term borrowings are $69,981 in 1996, $143,980 in 1997, $7,895 in 1998, $2,863 in 1999 and $75 in 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($000'S EXCEPT SHARE DATA)
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994, AND 1993 ($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, 1995 and 1994.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -- CONTINUED ($000'S EXCEPT SHARE DATA)
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, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1995, 1994 and 1993. 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, 1995 and 1994, and the results of their operations and cash flows for the years ended December 31, 1995, 1994 and 1993, 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 26, 1996
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 23, 1996, 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 23, 1996.
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 23, 1996.
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 23, 1996.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
By: /s/ J.B. Wigdale -------------------------------------- J.B. Wigdale Chairman of the Board
Date: February 26, 1996
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:
Directors: Richard A. Abdoo, Oscar C. Boldt, J.P. Bolduc, Wendell F. Bueche, 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.
- --------------- * 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
(4) (a) Indenture between M&I and Chemical Bank (as successor to Manufacturers Hanover Trust Company) dated as of November 15, 1985 ("Senior Indenture"), incorporated by reference to M&I's Registration Statement on Form S-3 (Registration No. 33-21377), as supplemented by the First Supplemental Indenture to the Senior Indenture dated as of May 31, 1990, incorporated by reference to M&I's Current Report on Form 8-K dated May 31, 1990, and as supplemented by the Second Supplemental Indenture to the Senior Indenture dated as of July 15, 1993, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, SEC File No. 0-1220
(b) Form of Medium Term Notes, Series B, issued pursuant to the Senior Indenture, incorporated by reference to M&I's Current Report on Form 8-K dated May 31, 1990, SEC File No. 0-1220
(c) Form of Medium Term Notes, Series C, and Series D issued pursuant to the Senior Indenture, included in Exhibit 4(a)
(d) Indenture between M&I and Chemical Bank dated as of July 15, 1993 ("Subordinated Indenture"), incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, SEC File No. 0-1220
(e) Form of Subordinated Note issued pursuant to the Subordinated Indenture, included in Exhibit 4(d)
(f) Investment Agreement between M&I and The Northwestern Mutual Life Insurance Company dated August 30, 1985, incorporated by reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-1220
(g) Subordinated Convertible Note Agreement between The Northwestern Mutual Life Insurance Company dated December 31, 1985, incorporated by reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-1220
(h) Form of Convertible Subordinated Note, incorporated by reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-1220
(i) Designation of Rights and Preferences of holders of Series A Preferred Stock, incorporated by reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-1220
(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*
(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*
(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.