============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-15403
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
770 North Water Street
Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-7801
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class July 31, 2003
----- ----------------
Common Stock, $1.00 Par Value 227,312,174
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
June 30, December 31, June 30,
2003 2002 2002
------------- ------------- -------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 988,252 $ 1,012,090 $ 818,715
Federal funds sold and security resale agreements 34,237 30,117 49,370
Money market funds 95,653 104,325 483,211
------------- ------------- -------------
Total cash and cash equivalents 1,118,142 1,146,532 1,351,296
Investment securities:
Trading securities, at market value 30,001 21,252 12,475
Short-term investments, at cost which approximates market value 133,112 93,851 46,642
Available for sale at market value 4,471,856 4,266,372 3,736,684
Held to maturity at amortized cost, market value $963,801
($993,937 December 31, and $1,028,904 June 30, 2002) 891,145 942,819 986,684
------------- ------------- -------------
Total investment securities 5,526,114 5,324,294 4,782,485
Loans and leases
Mortgage loans held for sale 298,474 311,077 60,140
Loans and leases, net of unearned income 24,600,345 23,597,769 20,858,567
------------- ------------- -------------
Total loans and leases, net of unearned income 24,898,819 23,908,846 20,918,707
Less: Allowance for loan and lease losses 348,100 338,409 292,512
------------- ------------- -------------
Net loans and leases 24,550,719 23,570,437 20,626,195
Premises and equipment 438,197 442,395 414,462
Goodwill and other intangibles 1,084,813 1,088,804 730,705
Accrued interest and other assets 1,348,110 1,302,180 1,219,280
------------- ------------- -------------
Total Assets $ 34,066,095 $ 32,874,642 $ 29,124,423
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 4,652,703 $ 4,461,880 $ 3,649,761
Interest bearing 17,617,437 15,931,826 14,498,279
------------- ------------- -------------
Total deposits 22,270,140 20,393,706 18,148,040
Funds purchased and security repurchase agreements 2,152,778 946,583 1,480,425
Other short-term borrowings 3,144,623 4,335,213 4,221,738
Accrued expenses and other liabilities 983,735 1,067,120 892,152
Long-term borrowings 2,271,533 3,095,352 1,675,098
------------- ------------- -------------
Total liabilities 30,822,809 29,837,974 26,417,453
Shareholders' equity:
---------------------
Series A convertible preferred stock, $1.00 par value;
336,370 shares issued June 30, 2002 -- -- 336
Common stock, $1.00 par value; 240,832,522 shares issued 240,833 240,833 240,833
Additional paid-in capital 561,982 569,162 752,885
Retained earnings 2,860,996 2,675,148 2,501,735
Accumulated other comprehensive income, net of related taxes (41,127) (44,427) 32,272
Less: Treasury common stock, at cost:13,693,706 shares
(14,599,565 December 31, and 30,608,636 June 30, 2002) 358,686 381,878 799,725
Deferred compensation 20,712 22,170 21,366
------------- ------------- -------------
Total shareholders' equity 3,243,286 3,036,668 2,706,970
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 34,066,095 $ 32,874,642 $ 29,124,423
============= ============= =============
See notes to financial statements.
3
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended
June 30,
---------------------------
2003 2002
------------- -------------
Interest income
---------------
Loans and leases $ 331,009 $ 321,574
Investment securities:
Taxable 41,253 49,617
Exempt from federal income taxes 14,452 15,377
Trading securities 57 123
Short-term investments 708 3,452
------------- -------------
Total interest income 387,479 390,143
Interest expense
----------------
Deposits 60,274 73,403
Short-term borrowings 20,974 37,806
Long-term borrowings 42,288 28,936
------------- -------------
Total interest expense 123,536 140,145
------------- -------------
Net interest income 263,943 249,998
Provision for loan and lease losses 19,642 16,980
------------- -------------
Net interest income after provision for loan and lease losses 244,301 233,018
Other income
------------
Data processing services:
e-Finance solutions 40,449 33,967
Financial technology solutions 117,541 112,328
------------- -------------
Total data processing services 157,990 146,295
Item processing 9,570 9,070
Trust services 31,183 31,358
Service charges on deposits 25,191 25,224
Mortgage banking 21,764 7,365
Net investment securities losses (2,616) (121)
Life insurance revenue 8,518 7,407
Other 43,139 37,556
------------- -------------
Total other income 294,739 264,154
Other expense
-------------
Salaries and employee benefits 193,456 185,294
Net occupancy 18,201 18,802
Equipment 27,973 29,170
Software expenses 10,371 10,030
Processing charges 10,606 8,921
Supplies and printing 5,885 4,937
Professional services 10,540 8,790
Shipping and handling 11,259 10,842
Amortization of intangibles 7,495 4,931
Other 39,887 36,296
------------- -------------
Total other expense 335,673 318,013
------------- -------------
Income before income taxes 203,367 179,159
Provision for income taxes 68,715 58,732
------------- -------------
Net income $ 134,652 $ 120,427
============= =============
Net income per common share
Basic $ 0.59 $ 0.56
Diluted 0.59 0.54
Dividends paid per common share $ 0.180 $ 0.160
Weighted average common shares outstanding:
Basic 226,483 211,417
Diluted 228,394 221,333
See notes to financial statements.
4
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Six Months Ended
June 30,
---------------------------
2003 2002
------------- -------------
Interest income
---------------
Loans and leases $ 661,194 $ 631,556
Investment securities:
Taxable 87,072 100,384
Exempt from federal income taxes 29,239 30,533
Trading securities 122 182
Short-term investments 1,441 7,895
------------- -------------
Total interest income 779,068 770,550
Interest expense
----------------
Deposits 123,101 144,318
Short-term borrowings 43,024 76,659
Long-term borrowings 84,515 59,298
------------- -------------
Total interest expense 250,640 280,275
------------- -------------
Net interest income 528,428 490,275
Provision for loan and lease losses 45,334 32,176
------------- -------------
Net interest income after provision for loan and lease losses 483,094 458,099
Other income
------------
Data processing services:
e-Finance solutions 80,658 67,774
Financial technology solutions 234,420 223,538
Other -- 2
------------- -------------
Total data processing services 315,078 291,314
Item processing 19,844 19,406
Trust services 61,223 62,337
Service charges on deposits 51,429 50,798
Mortgage banking 39,292 16,741
Net investment securities losses (1,047) (866)
Life insurance revenue 15,761 14,738
Other 83,591 68,688
------------- -------------
Total other income 585,171 523,156
Other expense
-------------
Salaries and employee benefits 390,681 364,780
Net occupancy 36,836 35,892
Equipment 56,669 57,657
Software expenses 20,681 22,621
Processing charges 22,624 18,507
Supplies and printing 11,140 9,650
Professional services 21,236 18,585
Shipping and handling 25,211 22,896
Amortization of intangibles 14,414 9,230
Other 71,771 71,802
------------- -------------
Total other expense 671,263 631,620
------------- -------------
Income before income taxes 397,002 349,635
Provision for income taxes 134,320 113,579
------------- -------------
Net income $ 262,682 $ 236,056
============= =============
Net income per common share
Basic $ 1.16 $ 1.11
Diluted 1.15 1.07
Dividends paid per common share $ 0.340 $ 0.305
Weighted average common shares outstanding:
Basic 226,355 210,527
Diluted 228,022 220,436
See notes to financial statements.
5
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Six Months Ended
June 30,
---------------------------
2003 2002
------------- -------------
Net Cash Provided by Operating Activities $ 367,644 $ 606,105
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 7,801 1,909
Proceeds from maturities of securities available for sale 1,453,731 843,104
Proceeds from maturities of securities held to maturity 52,636 44,053
Purchases of securities available for sale (1,749,825) (991,256)
Purchases of securities held to maturity (1,000) (631)
Net increase in loans (1,241,192) (1,335,757)
Purchases of assets to be leased (294,929) (88,561)
Principal payments on lease receivables 399,961 221,805
Fixed asset purchases, net (31,820) (20,525)
Purchase acquisitions, net of cash equivalents acquired (3,041) (10,338)
Other 8,821 5,148
------------- -------------
Net cash used in investing activities (1,398,857) (1,331,049)
Cash Flows From Financing Activities:
Net increase in deposits 1,869,039 839,524
Proceeds from issuance of commercial paper 3,884,534 3,210,992
Payments for maturity of commercial paper (3,884,786) (3,152,189)
Net decrease in other short-term borrowings (566,006) (243,804)
Proceeds from issuance of long-term debt 13,227 318,818
Payments of long-term debt (243,907) (271,756)
Dividends paid (76,836) (66,096)
Purchases of treasury stock (4,360) (139,806)
Other 11,918 16,792
------------- -------------
Net cash provided by financing activities 1,002,823 512,475
------------- -------------
Net decrease in cash and cash equivalents (28,390) (212,469)
Cash and cash equivalents, beginning of year 1,146,532 1,563,765
------------- -------------
Cash and cash equivalents, end of period $ 1,118,142 $ 1,351,296
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 253,154 $ 262,315
Income taxes 149,364 105,209
See notes to financial statements.
6
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2003 & 2002 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I" or
"Corporation") 2002 Annual Report on Form 10-K. The unaudited financial
information included in this report reflects all adjustments consisting
only of normal recurring accruals and adjustments which are necessary
for a fair statement of the financial position and results of operations
as of and for the three and six months ended June 30, 2003 and 2002.
The results of operations for the three and six months ended June 30,
2003 and 2002 are not necessarily indicative of results to be expected
for the entire year. Certain amounts in the 2002 consolidated financial
statements and analyses have been reclassified to conform with the 2003
presentation.
2. New Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 149 (SFAS 149),
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies financial accounting
and reporting for derivatives instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133
(SFAS 133), Accounting for Derivative Instruments and Hedging
Activities. The amendments to SFAS 133 fall principally into three
categories: amendments related to SFAS 133 Implementation Issues that
were previously cleared by the FASB during the Derivatives
Implementation Group process, amendments clarifying the definition of
a derivative and amendments relating to the definition of expected cash
flows in FASB Concepts Statement No. 7, Using Cash Flow Information and
Present Value in Accounting Measurement. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The provisions
of SFAS 149 that related to SFAS 133 Implementation Issues that have
been effective for fiscal quarters that began prior to June 15, 2003,
continue to be applied in accordance with their respective effective
dates. In addition, those provisions of SFAS 149, which relate to
forward purchases or sales of when-issued securities or other securities
that do not yet exist, should be applied to both existing contracts and
new contracts entered into after June 30, 2003. The Corporation does
not anticipate that SFAS 149 will materially impact its current
derivatives and hedging activities.
In May 2003, the FASB issued FASB No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement prescribes how an issuer classifies and measures
certain financial instruments. Financial instruments within the scope
of SFAS 150 are required to be classified as liabilities (or assets in
some circumstances). Many of those instruments were previously
classified as equity. Examples of financial instruments that are within
the scope of SFAS 150 include: mandatorily redeemable equity shares,
forward purchase contracts or written put options on the issuer's equity
shares that are to be physically settled or net cash settled and
payables that can be settled with a variable number of the issuer's
equity shares. SFAS 150 does not apply to features that are embedded
in a financial instrument that is not a derivative in its entirety.
Financial instruments that are not within the scope of SFAS 150 include:
convertible debt, puttable stock or other outstanding shares that are
conditionally redeemable. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
is effective for the Corporation July 1, 2003.
The trust preferred securities issued by the Corporation's finance
subsidiaries, M&I Capital Trust A and MVBI Capital Trust qualify as
mandatorily redeemable equity shares under SFAS 150. As stated in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
2002, the Corporation's accounting policy is to classify these trust
preferred securities as borrowings net of their related discounts. The
distributions, including the related accretion of discount, are
classified as interest expense for purposes of the Consolidated
Financial Statements. On July 31, 2003, the Corporation redeemed all
of the Floating Rate Debentures held by its subsidiary, MVBI Capital
Trust, and MVBI Capital Trust redeemed all of its outstanding Floating
Rate Trust Preferred Securities at an aggregate liquidation amount of
$14.95 million.
The Corporation believes that its current accounting policies with
respect to the trust preferred securities issued by the Corporation's
finance subsidiaries are in compliance with SFAS 150 and that there
will no impact to the Corporation from adopting SFAS 150 as it relates
to the remaining fixed rate trust preferred securities that were issued
by M&I Capital Trust A.
7
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
3. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
Three Months Ended June 30, 2003
---------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------ ------------
Net income $ 134,652
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 4,178 $ (1,456) 2,722
Reclassification for securities
transactions included in net income -- -- --
------------- ------------ ------------
Unrealized gains (losses) 4,178 (1,456) 2,722
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (8,998) 3,149 (5,849)
Reclassification adjustments for
hedging activities included
in net income 18,783 (6,574) 12,209
------------- ------------ ------------
Net gains (losses) $ 9,785 $ (3,425) 6,360
------------- ------------ ------------
Other comprehensive income (loss) 9,082
------------
Total comprehensive income $ 143,734
============
Three Months Ended June 30, 2002
---------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------ ------------
Net income $ 120,427
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 26,755 $ (9,526) 17,229
Reclassification for securities
transactions included in net income -- -- --
------------- ------------ ------------
Unrealized gains (losses) 26,755 (9,526) 17,229
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (54,493) 19,072 (35,421)
Reclassification adjustments for
hedging activities included in
net income 13,338 (4,667) 8,671
------------- ------------ ------------
Net gains (losses) $ (41,155)$ 14,405 (26,750)
------------- ------------ ------------
Other comprehensive income (loss) (9,521)
------------
Total comprehensive income $ 110,906
============
8
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
Six Months Ended June 30, 2003
---------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------ ------------
Net income $ 262,682
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (7,629)$ 2,679 (4,950)
Reclassification for securities
transactions included in net income (1,675) 586 (1,089)
------------- ------------ ------------
Unrealized gains (losses) (9,304) 3,265 (6,039)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (22,853) 7,998 (14,855)
Reclassification adjustments for
hedging activities included in
net income 37,221 (13,027) 24,194
------------- ------------ ------------
Net gains (losses) $ 14,368 $ (5,029) 9,339
------------- ------------ ------------
Other comprehensive income (loss) 3,300
------------
Total comprehensive income $ 265,982
============
Six Months Ended June 30, 2002
---------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------ ------------
Net income $ 236,056
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 12,384 $ (4,680) 7,704
Reclassification for securities
transactions included in net income -- -- --
------------- ------------ ------------
Unrealized gains (losses) 12,384 (4,680) 7,704
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (47,927) 16,774 (31,153)
Reclassification adjustments for
hedging activities included in
net income 23,262 (8,141) 15,121
------------- ------------ ------------
Net gains (losses) $ (24,665)$ 8,633 (16,032)
------------- ------------ ------------
Other comprehensive income (loss) (8,328)
------------
Total comprehensive income $ 227,728
============
4. A reconciliation of the numerators and denominators of the basic and
diluted per share computations are as follows (dollars and shares in
thousands, except per share data):
Three Months Ended June 30, 2003
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 134,652 226,483 $ 0.59
===========
Effect of Dilutive Securities
Stock Options and Restricted Stock Plans -- 1,911
------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 134,652 228,394 $ 0.59
===========
9
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
Three Months Ended June 30, 2002
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -----------
Net Income $ 120,427
Convertible Preferred Dividends (1,230)
-------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 119,197 211,417 $ 0.56
===========
Effect of Dilutive Securities
Convertible Preferred Stock 1,230 7,688
Stock Options and Restricted Stock Plans -- 2,228
------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 120,427 221,333 $ 0.54
===========
Six Months Ended June 30, 2003
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 262,682 226,355 $ 1.16
===========
Effect of Dilutive Securities
Stock Options and Restricted Stock Plans -- 1,667
------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 262,682 228,022 $ 1.15
===========
Six Months Ended June 30, 2002
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ------------
Net Income $ 236,056
Convertible Preferred Dividends (2,345)
-------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 233,711 210,527 $ 1.11
===========
Effect of Dilutive Securities
Convertible Preferred Stock 2,345 7,688
Stock Options and Restricted Stock Plans -- 2,221
------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 236,056 220,436 $ 1.07
===========
10
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
Options to purchase shares of common stock not included in the
computation of diluted net income per share because the options'
exercise price was greater than the average market price of the common
shares are as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------- ---------------------------------------
2003 2002 2003 2002
----------------- ----------------- ----------------- -----------------
Shares 6,357,146 3,793,400 11,932,304 3,833,400
Price Range $29.600 - $33.938 $31.094 - $33.938 $28.275 - $33.938 $31.045 - $33.938
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," establishes financial
accounting and reporting standards for stock based employee compensation
plans.
SFAS 123 defines a fair value based method of accounting for employee
stock options or similar equity instruments. Under the fair value based
method, compensation cost is measured at the grant date based on the
fair value of the award using an option-pricing model that takes into
account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock,
expected dividends and the risk-free interest rate over the expected
life of the option. The resulting compensation cost is recognized over
the service period, which is usually the vesting period.
Compensation cost can also be measured and accounted for using the
intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 (APBO 25), "Accounting for Stock Issued
to Employees." Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the stock at
grant date or other measurement date over the amount paid to acquire the
stock.
The largest difference between SFAS 123 and APBO 25 as they relate to
the Corporation is the amount of compensation cost attributable to the
Corporation's fixed stock option plans and employee stock purchase plan
(ESPP). Under APBO 25 no compensation cost is recognized for fixed
stock option plans because the exercise price is equal to the quoted
market price at the date of grant and therefore there is no intrinsic
value. SFAS 123 compensation cost would equal the calculated fair value
of the options granted. Under APBO 25 no compensation cost is
recognized for the ESPP because the discount (15%) and the plan meets
the definition of a qualified plan of the Internal Revenue Code and
meets the requirements of APBO 25. Under SFAS 123 the safe-harbor
discount threshold is 5% for a plan to be non-compensatory. SFAS 123
compensation cost would equal the initial discount (15% of beginning of
plan period price per share) plus the value of a one year call option
on 85% of a share of stock for each share purchased.
As permitted by SFAS 123, the Corporation continues to measure
compensation cost for such plans using the accounting method prescribed
by APBO 25.
11
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
Had compensation cost for the Corporation's ESPP and options granted
after January 1, 1995 been determined consistent with SFAS 123, the
Corporation's net income and earnings per share would have been reduced
to the following estimated pro forma amounts:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net Income, as reported $ 134,652 $ 120,427 $ 262,682 $ 236,056
Add: Stock-based employee compensation expense
included in reported net income, net of tax 1,018 890 2,036 1,788
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax (6,090) (6,217) (12,156) (11,937)
------------- ------------- ------------- -------------
Pro forma net income $ 129,580 $ 115,100 $ 252,562 $ 225,907
============= ============= ============= =============
Basic earnings per share:
As reported $ 0.59 $ 0.56 $ 1.16 $ 1.11
Pro forma 0.57 0.54 1.12 1.06
Diluted earnings per share:
As reported $ 0.59 $ 0.54 $ 1.15 $ 1.07
Pro forma 0.57 0.52 1.11 1.03
5. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
June 30, December 31, June 30,
2003 2002 2002
------------- ------------- -------------
Investment securities available for sale:
U.S. treasury and government agencies $ 3,585,172 $ 3,266,144 $ 2,704,736
State and political subdivisions 285,562 265,470 234,709
Mortgage backed securities 141,925 162,268 157,188
Other 459,197 572,490 640,051
------------- ------------- -------------
Total $ 4,471,856 $ 4,266,372 $ 3,736,684
============= ============= =============
Investment securities held to maturity:
U.S. treasury and government agencies $ 30 $ 30 $ --
State and political subdivisions 888,089 939,158 983,048
Other 3,026 3,631 3,636
------------- ------------- -------------
Total $ 891,145 $ 942,819 $ 986,684
============= ============= =============
6. The Corporation's loan and lease portfolio, including mortgage loans
held for sale, consists of the following ($000's):
June 30, December 31, June 30,
2003 2002 2002
------------- ------------- -------------
Commercial, financial and agricultural $ 7,129,832 $ 6,867,091 $ 6,138,083
Cash flow hedging instruments at fair value 16,276 4,423 7,756
------------- ------------- -------------
Total commercial, financial and agricultural 7,146,108 6,871,514 6,145,839
Real estate:
Construction 1,187,777 1,058,144 937,648
Residential mortgage 6,924,069 6,758,650 5,939,553
Commercial mortgage 6,941,263 6,586,332 5,544,479
------------- ------------- -------------
Total real estate 15,053,109 14,403,126 12,421,680
Personal 2,011,826 1,852,202 1,490,252
Lease financing 687,776 782,004 860,936
------------- ------------- -------------
Total loans and leases $ 24,898,819 $ 23,908,846 $ 20,918,707
============= ============= =============
12
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
7. Sale of Receivables
During the second quarter of 2003, $185.1 million of automobile loans
were sold in securitization transactions. Gains of $3.0 million were
recognized and are reported in Other income in the Consolidated
Statements of Income. Other income associated with auto securitizations
in the current quarter amounted to $2.7 million.
Key economic assumptions used in measuring the retained interests at the
date of securitization resulting from securitizations completed during
the second quarter were as follows (rate per annum):
Prepayment speed (CPR) 19-35%
Weighted average life (in months) 19.4
Weighted average expected credit losses
(based on original balance) 0.49%
Residual cash flow discount rate 12.0%
Variable returns to transferees Forward one month
LIBOR yield curve
At June 30, 2003, securitized automobile loans and other automobile
loans managed together with them, along with delinquency and credit loss
information consisted of the following:
Total
Securitized Portfolio Managed
------------ ------------ -----------
Loan balances $ 851,157 $ 148,434 $ 999,591
Principal amounts of loans 60
days or more past due 1,391 251 1,642
Net credit losses (recoveries) year to date 1,021 (5) 1,016
During the second quarter of 2003, the Corporation recognized an
impairment loss of approximately $4.1 million, which is included in net
investment securities losses in the Consolidated Statements of Income.
The difference between revised assumptions compared to the initial
expected assumptions were deemed to be other than temporary.
8. Goodwill and Other Intangibles:
The changes in the carrying amount of goodwill for the six months ended
June 30, 2003 are as follows (dollars in thousands):
Banking Metavante Others Total
------------ ------------ ------------ ------------
Goodwill balance as of January 1, 2003 $ 801,977 $ 136,672 $ 4,687 $ 943,336
Goodwill acquired during the period -- -- -- --
Purchase accounting adjustments 8,036 1,516 -- 9,552
------------ ------------ ------------ ------------
Goodwill balance as of June 30, 2003 $ 810,013 $ 138,188 $ 4,687 $ 952,888
============ ============ ============ ============
Purchase accounting adjustments for the banking segment in the first and
second quarters of 2003 were primarily due to the adjustments required
to be made to the initial estimates of fair value for the loans acquired
and the deposits and borrowings assumed in the acquisition of
Mississippi Valley Bancshares, Inc., partially offset by the reduction
of goodwill allocated to the sale of two branches, during the second
quarter.
Purchase accounting adjustments for Metavante in the first and second
quarters of 2003, represent the net effect of additional contingent
consideration paid as a result of revenue targets being achieved, offset
by the return of consideration placed in escrow associated with
acquisitions completed in 2001 and adjustments required to be made to
the initial estimates of fair value associated with the PayTrust, Inc.
acquisition.
13
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
At June 30, 2003, the Corporation's other intangible assets consisted
of the following (dollars in thousands):
June 30, 2003
----------------------------------------
Gross Accum- Net
Carrying ulated Carrying
Amount Amort Value
------------ ------------ ------------
Other intangible assets:
Core deposit intangible $ 161,028 $ 57,442 $ 103,586
Data processing contract rights/customer lists 33,651 11,215 22,436
Trust customers 750 100 650
Tradename 2,500 625 1,875
------------ ------------ ------------
$ 197,929 $ 69,382 $ 128,547
============ ============ ============
Mortgage loan servicing rights $ 38,969 $ 35,591 $ 3,378
============ ============ ============
9. The Corporation's deposit liabilities consists of the following
($000's):
June 30, December 31, June 30,
2003 2002 2002
------------- ------------- -------------
Noninterest bearing demand $ 4,652,703 $ 4,461,880 $ 3,649,761
Savings and NOW 9,392,962 9,225,899 7,976,263
CD's $100,000 and over 3,713,100 2,793,793 2,279,449
Cash flow hedge-Institutional CDs 21,584 18,330 4,753
------------- ------------- -------------
Total CD's $100,000 and over 3,734,684 2,812,123 2,284,202
Other time deposits 2,756,922 2,979,502 2,838,924
Foreign deposits 1,732,869 914,302 1,398,890
------------- ------------- -------------
Total deposits $ 22,270,140 $ 20,393,706 $ 18,148,040
============= ============= =============
10. Derivative Financial Instruments and Hedging Activities
Trading Instruments
-------------------
The Corporation enters into interest rate swaps as part of its trading
and securitization activities. Interest rate swaps enable customers to
manage their exposures to interest rate risk. The Corporation's market
risk from unfavorable movements in interest rates is generally minimized
by concurrently entering into offsetting positions with nearly identical
notional values, terms and indices.
At June 30, 2003, interest rate swaps designated as trading consisted
of $1.1 billion in notional amount of receive fixed/pay floating with
an aggregate positive fair value of $23.8 million and $0.7 billion in
notional amount of pay fixed/receive floating with an aggregate negative
fair value of $16.3 million.
At June 30, 2003, the notional value of interest rate futures designated
as trading was $3.1 billion with a negative fair value of $0.3 million.
Interest rate swaps designated as trading are recorded at fair value.
Gains and losses arising from changes in fair value are recorded in
other income.
14
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
Hedging Instruments
-------------------
The following table presents information with respect to the
Corporation's fair value hedges.
Fair Value Hedges
June 30, 2003 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------------- ------------------- ------------ ------------- -----------
Callable CDs Receive Fixed Swap $ 230.0 $ 0.7 6.8
Medium Term Notes Receive Fixed Swap 202.9 18.2 3.7
Institutional CDs Receive Fixed Swap 100.0 0.2 0.8
For the three and six months ended June 30, 2003, the impact from fair
value hedges to net interest income was a positive $6.8 million and
$14.0 million, respectively.
The following table presents information with respect to the
Corporation's cash flow hedges.
Cash Flow Hedges
June 30, 2003 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------------- ------------------- ------------ ------------- -----------
Variable Rate Loans Receive Fixed Swap $ 600.0 $ 16.3 4.4
Institutional CDs Pay Fixed Swap 820.0 (21.6) 1.6
Fed Funds Purchased Pay Fixed Swap 860.0 (45.8) 1.8
FHLB Advances Pay Fixed Swap 610.0 (60.5) 3.6
For the three and six months ended June 30, 2003, the impact from cash
flow hedges to net interest income was a negative $17.4 million and
$35.8 million, respectively.
During the second quarter of 2003, the Corporation announced that it
would redeem all of the Floating Rate Debentures held by its subsidiary,
MVBI Capital Trust, and MVBI Capital Trust would redeem all of its
currently outstanding Floating Rate Trust Preferred Securities at an
aggregate liquidation amount of $14.95 million. In conjunction with the
redemption on July 31, 2003, during the second quarter the Corporation
terminated the associated interest rate swap designated as a cash flow
hedge. The loss in accumulated other comprehensive income aggregating
$1.4 million ($0.9 million after tax), was charged to other expense
during the second quarter of 2003.
During the first quarter of 2003, the Corporation terminated the fair
value hedge on long-term borrowings. The adjustment to the fair value
of the hedged instrument of $35.2 million is being accreted as income
into earnings over the expected remaining term of the borrowings using
the effective interest method. Also during the quarter, the cash flow
hedge on commercial paper was terminated. The $32.6 million in
accumulated other comprehensive income at the time of termination is
being amortized as expense into earnings in the remaining periods during
which the hedged forecasted transaction affects earnings.
15
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
11. Segments
The following represents the Corporation's operating segments as of and
for the three and six months ended June 30, 2003 and 2002. There have
not been any changes to the way the Corporation organizes its segments
or reports segment financial information. Fees - Intercompany represent
intercompany revenues charged to other segments for providing certain
services. Expenses - Intercompany represent fees charged by other
segments for certain services received. For each segment, Expenses -
Intercompany are not the costs of that segment's reported intercompany
revenues. Intersegment expenses and assets have been eliminated. ($ in
millions):
Three Months Ended June 30, 2003
---------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues:
Net interest income $ 261.9 $ (0.5)$ 8.0 $ (5.4)$ -- $ 264.0 $ -- $ 264.0
Fees - Other 94.0 158.0 40.7 2.0 -- 294.7 -- 294.7
Fees - Intercompany 14.7 18.0 9.2 -- (41.9) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 370.6 175.5 57.9 (3.4) (41.9) 558.7 -- 558.7
Expenses:
Expenses - Other 145.1 142.5 31.8 16.8 (0.5) 335.7 -- 335.7
Expenses - Intercompany 24.8 9.3 8.6 (1.3) (41.4) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 169.9 151.8 40.4 15.5 (41.9) 335.7 -- 335.7
Provision for loan
and lease losses 19.0 -- 0.6 -- -- 19.6 -- 19.6
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes 181.7 23.7 16.9 (18.9) -- 203.4 -- 203.4
Income tax expense 60.0 9.8 6.3 (7.4) -- 68.7 -- 68.7
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Segment income $ 121.7 $ 13.9 $ 10.6 $ (11.5)$ -- $ 134.7 $ -- $ 134.7
========== ========== ========== ========== ========== ========== ========== ==========
Identifiable assets $ 32,991.3 $ 879.6 $ 715.5 $ 476.4 $ (996.7)$ 34,066.1 $ -- $ 34,066.1
========== ========== ========== ========== ========== ========== ========== ==========
Return on average equity 16.7 % 16.2 % 18.2 % 16.9 %
========== ========== ========== ==========
Three Months Ended June 30, 2002
---------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues:
Net interest income $ 249.6 $ (1.0)$ 6.7 $ (5.3)$ -- $ 250.0 $ -- $ 250.0
Fees - Other 76.5 146.3 40.1 1.3 (0.1) 264.1 -- 264.1
Fees - Intercompany 11.8 16.5 5.5 -- (33.8) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 337.9 161.8 52.3 (4.0) (33.9) 514.1 -- 514.1
Expenses:
Expenses - Other 134.2 137.7 25.0 23.2 (2.1) 318.0 -- 318.0
Expenses - Intercompany 18.8 5.9 8.7 (1.6) (31.8) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 153.0 143.6 33.7 21.6 (33.9) 318.0 -- 318.0
Provision for loan
and lease losses 16.7 -- 0.3 -- -- 17.0 -- 17.0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes 168.2 18.2 18.3 (25.6) -- 179.1 -- 179.1
Income tax expense 53.8 7.5 7.1 (9.7) -- 58.7 -- 58.7
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Segment income $ 114.4 $ 10.7 $ 11.2 $ (15.9)$ -- $ 120.4 $ -- $ 120.4
========== ========== ========== ========== ========== ========== ========== ==========
Identifiable assets $ 28,087.9 $ 700.8 $ 588.1 $ 389.1 $ (641.5)$ 29,124.4 $ -- $ 29,124.4
========== ========== ========== ========== ========== ========== ========== ==========
Return on average equity 18.0 % 14.4 % 20.1 % 17.7 %
========== ========== ========== ==========
16
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2003 & 2002 (Unaudited)
Six Months Ended June 30, 2003
---------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues:
Net interest income $ 524.4 $ (1.5)$ 15.7 $ (10.2)$ -- $ 528.4 $ -- $ 528.4
Fees - Other 185.6 315.1 81.9 2.7 (0.1) 585.2 -- 585.2
Fees - Intercompany 28.2 34.9 16.4 -- (79.5) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 738.2 348.5 114.0 (7.5) (79.6) 1,113.6 -- 1,113.6
Expenses:
Expenses - Other 288.2 284.1 62.4 34.1 -- 668.8 2.5 671.3
Expenses - Intercompany 45.5 17.3 17.8 (1.0) (79.6) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 333.7 301.4 80.2 33.1 (79.6) 668.8 2.5 671.3
Provision for loan
and lease losses 36.7 -- 8.6 -- -- 45.3 -- 45.3
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes 367.8 47.1 25.2 (40.6) -- 399.5 (2.5) 397.0
Income tax expense 121.7 19.5 10.0 (15.9) -- 135.3 (1.0) 134.3
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Segment income $ 246.1 $ 27.6 $ 15.2 $ (24.7)$ -- $ 264.2 $ (1.5)$ 262.7
========== ========== ========== ========== ========== ========== ========== ==========
Identifiable assets $ 32,991.3 $ 879.6 $ 715.5 $ 476.4 $ (996.7)$ 34,066.1 $ -- $ 34,066.1
========== ========== ========== ========== ========== ========== ========== ==========
Return on average equity 17.1 % 16.5 % 13.2 % 16.8 %
========== ========== ========== ==========
Metavante's segment income excludes charges for the six months ended
June 30, 2003 for certain transition expenses associated with the
integration of the July 2002 PayTrust, Inc. acquisition which are
included in "Excluded Charges."
Six Months Ended June 30, 2002
---------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues:
Net interest income $ 489.4 $ (2.0)$ 13.4 $ (10.5)$ -- $ 490.3 $ -- $ 490.3
Fees - Other 149.8 291.4 79.8 2.6 (0.4) 523.2 -- 523.2
Fees - Intercompany 22.0 32.4 11.1 -- (65.5) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 661.2 321.8 104.3 (7.9) (65.9) 1,013.5 -- 1,013.5
Expenses:
Expenses - Other 258.9 275.4 52.2 47.7 (2.6) 631.6 -- 631.6
Expenses - Intercompany 36.4 11.3 17.3 (1.7) (63.3) 0.0 -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 295.3 286.7 69.5 46.0 (65.9) 631.6 -- 631.6
Provision for loan
and lease losses 31.6 -- 0.6 -- -- 32.2 -- 32.2
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes 334.3 35.1 34.2 (53.9) -- 349.7 -- 349.7
Income tax expense 105.8 14.5 13.6 (20.3) -- 113.6 -- 113.6
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Segment income $ 228.5 $ 20.6 $ 20.6 $ (33.6)$ -- $ 236.1 $ -- $ 236.1
========== ========== ========== ========== ========== ========== ========== ==========
Identifiable assets $ 28,087.9 $ 700.8 $ 588.1 $ 389.1 $ (641.5)$ 29,124.4 $ -- $ 29,124.4
========== ========== ========== ========== ========== ========== ========== ==========
Return on average equity 18.7 % 14.3 % 18.6 % 17.9 %
========== ========== ========== ==========
Total Revenue by type in All Others consists of the following:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Trust Services $ 31.3 $ 31.1 $ 61.2 $ 62.0
Residential Mortgage Banking 14.9 8.5 27.6 17.7
Capital Markets 0.2 0.2 2.0 (0.3)
Brokerage and Insurance 5.8 6.6 11.6 13.1
Commercial Leasing 3.7 3.7 7.5 7.6
Commercial Mortgage Banking 1.3 1.3 2.6 2.2
Others 0.7 0.9 1.5 2.0
---------- ---------- ---------- ----------
Total revenue $ 57.9 $ 52.3 $ 114.0 $ 104.3
========== ========== ========== ==========
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended June 30,
----------------------------
2003 2002
------------- -------------
Assets
------
Cash and due from banks $ 746,737 $ 698,182
Investment securities:
Trading securities 24,729 12,932
Short-term investments 282,557 907,098
Other investment securities:
Taxable 4,041,583 3,160,500
Tax-exempt 1,176,175 1,236,252
------------- -------------
Total investment securities 5,525,044 5,316,782
Total loans and leases 24,398,674 20,392,703
Less: Allowance for loan and lease losses 345,233 291,919
------------- -------------
Net loans and leases 24,053,441 20,100,784
Premises and equipment, net 441,803 415,940
Accrued interest and other assets 2,531,549 1,952,720
------------- -------------
Total Assets $ 33,298,574 $ 28,484,408
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 4,072,645 $ 3,360,327
Interest bearing 18,069,128 15,235,115
------------- -------------
Total deposits 22,141,773 18,595,442
Funds purchased and security repurchase agreements 2,634,792 2,285,523
Other short-term borrowings 569,678 1,577,361
Long-term borrowings 3,699,813 2,414,191
Accrued expenses and other liabilities 1,052,205 883,472
------------- -------------
Total liabilities 30,098,261 25,755,989
Shareholders' equity 3,200,313 2,728,419
------------- -------------
Total Liabilities and Shareholders' Equity $ 33,298,574 $ 28,484,408
============= =============
18
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Six Months Ended June 30,
----------------------------
2003 2002
------------- -------------
Assets
------
Cash and due from banks $ 755,183 $ 674,003
Investment securities:
Trading securities 21,569 11,278
Short-term investments 270,039 996,036
Other investment securities:
Taxable 3,962,950 3,047,285
Tax-exempt 1,186,673 1,232,808
------------- -------------
Total investment securities 5,441,231 5,287,407
Total loans and leases 24,150,954 19,924,364
Less: Allowance for loan and lease losses 345,145 285,961
------------- -------------
Net loans and leases 23,805,809 19,638,403
Premises and equipment, net 442,656 407,841
Accrued interest and other assets 2,523,553 1,909,170
------------- -------------
Total Assets $ 32,968,432 $ 27,916,824
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,967,157 $ 3,272,763
Interest bearing 17,679,972 14,545,517
------------- -------------
Total deposits 21,647,129 17,818,280
Funds purchased and security repurchase agreements 2,826,174 2,323,701
Other short-term borrowings 579,773 1,843,189
Long-term borrowings 3,698,908 2,420,926
Accrued expenses and other liabilities 1,065,982 846,692
------------- -------------
Total liabilities 29,817,966 25,252,788
Shareholders' equity 3,150,466 2,664,036
------------- -------------
Total Liabilities and Shareholders' Equity $ 32,968,432 $ 27,916,824
============= =============
19
Net income for the second quarter of 2003 amounted to $134.7 million compared
to $120.4 million for the same period in the prior year. Basic and diluted
earnings per share were $0.59 for the three months ended June 30, 2003,
compared with $0.56 and $0.54, respectively for the three months ended June
30, 2002. The return on average assets and average equity was 1.62% and
16.88% for the quarter ended June 30, 2003, and 1.70% and 17.70% for the
quarter ended June 30, 2002.
Net income for the six months ended June 30, 2003, amounted to $262.7 million
compared to $236.1 million for the first half of the prior year. Basic and
diluted earnings per share were $1.16 and $1.15, respectively for the six
months ended June 30, 2003, compared with $1.11 and $1.07, respectively for
the six months ended June 30, 2002. The return on average assets and average
equity was 1.61% and 16.81% for the six months ended June 30, 2003, and 1.71%
and 17.87% for the six months ended June 30, 2002.
The results of operations and financial position as of and for the three and
six months ended June 30, 2003, include the effects of Metavante's acquisition
of PayTrust, Inc. ("PayTrust") in the third quarter of 2002 and the
Corporation's banking acquisitions of Richfield State Agency, Inc. and Century
Bancshares, Inc. which both closed on March 1, 2002 and the acquisition of
Mississippi Valley Bancshares, Inc. ("Southwest") which closed on October 1,
2002. All acquisitions were accounted for using the purchase method of
accounting and accordingly the results of operations and financial position
are included from the dates the transactions were closed.
Net income for the first half of 2003 includes the final transition charges
related to the integration of Metavante's July 2002 acquisition of PayTrust.
Acquisition related transition expenses associated with PayTrust amounted to
$1.5 million (after-tax) or $.01 per diluted share in the first quarter of
2003. Total cumulative transition expenses with respect to PayTrust, which
were incurred in the third and fourth quarters of 2002 and the first quarter
of 2003, amounted to $5.7 million after-tax which was in line with the
previously announced estimate of transition expenses of approximately $6.0
million after-tax.
NET INTEREST INCOME
-------------------
Net interest income for the second quarter of 2003 amounted to $263.9 million
compared to $250.0 million reported for the second quarter of 2002. For the
six months ended June 30, 2003, net interest income amounted to $528.4 million
compared to $490.3 million for the six months ended June 30, 2002. Loan
growth and increased spreads on certain loan products and the impact of the
2002 banking acquisitions contributed to the increase in net interest income.
Factors negatively affecting net interest income included accelerated levels
of prepayments, asset repricing in excess of deposit repricing, the impact
from lengthening liabilities in order to reduce future volatility in net
interest income due to interest rate movements and the cash expenditures for
common share buybacks and acquisitions in the prior year.
Average earning assets in the second quarter of 2003 increased $4.2 billion
or 16.4% and on a year-to-date basis increased $4.4 billion or 17.4% compared
to the same periods a year ago. Average loans and leases accounted for $4.0
billion of the quarter over quarter growth and $4.2 billion of the year-to-
date period over period growth in earning assets. Average investment
securities increased $0.8 billion and other short-term investments declined
$0.6 billion in the second quarter of 2003 compared to the second quarter of
2002. On a comparative average year-to-date basis, average investment
securities increased $0.9 billion and other short-term investments declined
$0.7 billion in the six months ended June 30, 2003, compared to the first half
of 2002. The Corporation estimates that approximately $1.6 billion and $1.9
billion of the average loan and lease growth in the three and six months ended
June 30, 2003 compared to like periods in the prior year, was attributable to
the 2002 banking acquisitions.
Average interest bearing liabilities increased $3.5 billion or 16.1% in the
second quarter of 2003 compared to the same period in 2002. For the six
months ended June 30, 2003, average interest bearing liabilities increased
$3.7 billion or 17.3% over the comparable period. Average interest bearing
deposits increased $2.8 billion or 18.6% in the second quarter of 2003
compared to the second quarter of last year. On a year-to-date basis, average
interest bearing deposits increased $3.1 billion or 21.5% in the six months
ended June 30, 2003, compared to the first half of 2002. Average borrowings
increased $0.6 billion or 10.0% in the second quarter of 2003 and increased
$0.5 billion or 7.8% in the first half of 2003 compared to the same periods
in 2002. The Corporation estimates that approximately $1.5 billion and $1.7
billion of the average interest bearing deposit growth in the three and six
months ended June 30, 2003 compared to like periods in the prior year, was
attributable to the 2002 banking acquisitions.
20
Average noninterest bearing deposits increased $0.7 billion or 21.2% in both
the three and six months ended June 30, 2003, compared to the same periods
last year. Approximately $0.2 billion of the growth in average noninterest
bearing deposits in the three and six months ended June 30, 2003, compared to
the same periods in 2002 was attributable to the 2002 banking acquisitions.
The growth and composition of the Corporation's quarterly average loan and
lease portfolio for the current quarter and previous four quarters are
reflected in the following table. ($ in millions):
Consolidated Average Loans and Leases
-------------------------------------
2003 2002 Growth Pct.
----------------- -------------------------- ----------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
-------- -------- -------- -------- -------- ------- --------
Commercial
Commercial $ 7,043 $ 6,827 $ 6,636 $ 5,998 $ 6,087 15.7 % 3.2 %
Commercial real estate
Commercial mortgages 6,859 6,677 6,464 5,617 5,491 24.9 2.7
Construction 977 934 896 799 697 40.1 4.6
-------- -------- -------- -------- -------- ------- --------
Total commercial
real estate 7,836 7,611 7,360 6,416 6,188 26.6 2.9
Commercial lease financing 390 394 395 384 391 (0.4) (1.0)
-------- -------- -------- -------- -------- ------- --------
Total Commercial 15,269 14,832 14,391 12,798 12,666 20.5 2.9
Personal
Residential real estate
Residential mortgages 2,705 2,623 2,741 2,545 2,371 14.1 3.1
Construction 189 175 156 150 137 37.4 8.3
-------- -------- -------- -------- -------- ------- --------
Total residential
real estate 2,894 2,798 2,897 2,695 2,508 15.4 3.4
Personal loans
Student 97 107 94 86 116 (16.4) (9.5)
Credit card 191 187 182 172 163 16.9 1.9
Home equity loans
and lines 4,075 4,048 3,873 3,543 3,518 15.8 0.7
Other 1,551 1,561 1,445 1,198 934 66.1 (0.6)
-------- -------- -------- -------- -------- ------- --------
Total personal loans 5,914 5,903 5,594 4,999 4,731 25.0 0.2
Personal lease financing 322 367 406 449 488 (34.0) (12.3)
-------- -------- -------- -------- -------- ------- --------
Total Personal 9,130 9,068 8,897 8,143 7,727 18.2 0.7
-------- -------- -------- -------- -------- ------- --------
Total Consolidated Average
Loans and Leases $ 24,399 $ 23,900 $ 23,288 $ 20,941 $ 20,393 19.6 % 2.1 %
======== ======== ======== ======== ======== ======= ========
Compared with the second quarter of 2002, total consolidated average loans and
leases increased $4.0 billion or 19.6%. Approximately $1.6 billion of average
total consolidated loan and lease growth in the second quarter of 2003 was
attributable to the 2002 banking acquisitions. Excluding the impact of these
acquisitions, total average commercial loans and leases increased $1.2 billion
and was driven by average commercial real estate loans which grew
approximately $0.9 billion. Total average personal loans and leases increased
$1.2 billion excluding the impact of acquisitions. Average personal loan and
lease growth, excluding acquisitions, was driven primarily by growth in home
equity loans and lines of $0.5 billion with the remainder of the growth
attributable to indirect auto loans and residential real estate mortgage and
construction loans. From a production standpoint, residential real estate
loan closings increased 32% in the current quarter compared to the first
quarter of 2003. The current application volume appears to be strong but
slowing.
Generally, the Corporation sells residential real estate production in the
secondary market, although throughout 2002 as well as the first six months of
2003, selected loans with wider spreads and adjustable rate characteristics
were retained in the portfolio and serve as a potential source of liquidity
in the future. Residential real estate loans sold to investors amounted to
$1.1 billion in the second quarter of 2003 compared to $0.4 billion in the
second quarter of the prior year. For the six months ended June 30, 2003, and
2002, residential real estate loans sold to investors amounted to $2.1 billion
and $0.9 billion, respectively. At June 30, 2003, and 2002, the Corporation
had approximately $0.3 billion and $0.1 billion of mortgage loans held for
sale, respectively. Gains from the sale of mortgage loans amounted to $17.0
million in the second quarter of 2003 compared to $4.5 million in the second
quarter of last year and are reported as a component of mortgage banking
revenue in the consolidated statements of income. For the six months ended
June 30, 2003, and 2002, gains from the sale of mortgage loans amounted to
$30.3 million and $10.6 million, respectively.
21
Auto loans securitized and sold in the second quarter of 2003 amounted to $0.2
billion compared to $0.1 billion in the second quarter of last year. For the
six months ended June 30, 2003, and 2002, auto loans securitized and sold
amounted to $0.3 billion and $0.2 billion, respectively. Gains from the sale
and securitization of auto loans amounted to $3.0 million in the current
quarter compared to $1.5 million in the same period last year. For the six
months ended June 30, 2003, and 2002, gains from the sale and securitization
of auto loans amounted to $5.3 million and $3.0 million, respectively.
During the second quarter of 2003, the Corporation also sold $30.3 million of
student loans. Gains from the sale of student loans amounted to $1.3 million
in the current quarter. The Corporation anticipates that it will continue to
divest narrower interest rate spread assets through sale or securitization in
future periods.
The rate of growth experienced in commercial loans has largely been the result
of attracting new customers in all of the Corporation's markets. Existing
customers are generally not increasing their credit needs but appear to be
successfully managing their businesses through the slower economic conditions
and lower revenue levels. The Corporation's commercial lending activities
have historically fared well as the economy strengthens and it anticipates
loan demand for existing customers will slowly strengthen reflecting the
condition of its markets in future quarters. Home equity loans and lines,
which includes M&I's wholesale activity, continue to be the primary consumer
loan product. The Corporation anticipates these products will continue to
drive growth to the consumer side of its banking activities even as the recent
refinance activity for mortgages slows.
The growth and composition of the Corporation's quarterly average deposits for
the current and previous four quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2003 2002 Growth Pct.
----------------- -------------------------- ----------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
-------- -------- -------- -------- -------- ------- --------
Bank issued deposits
Noninterest bearing deposits
Commercial $ 2,799 $ 2,666 $ 2,811 $ 2,432 $ 2,275 23.0 % 5.0 %
Personal 818 761 728 711 729 12.3 7.5
Other 456 433 439 363 357 27.7 4.9
-------- -------- -------- -------- -------- ------- --------
Total noninterest
bearing deposits 4,073 3,860 3,978 3,506 3,361 21.2 5.5
Interest bearing deposits
Savings and NOW 3,139 2,896 2,733 2,420 2,252 39.3 8.4
Money market 6,135 6,274 6,443 5,556 5,727 7.1 (2.2)
Foreign activity 861 867 891 733 686 25.4 (0.8)
-------- -------- -------- -------- -------- ------- --------
Total interest
bearing deposits 10,135 10,037 10,067 8,709 8,665 17.0 1.0
Time deposits
Other CDs and
time deposits 2,791 2,905 3,033 2,756 2,868 (2.7) (3.9)
CDs greater
than $100,000 628 662 680 634 657 (4.3) (5.1)
-------- -------- -------- -------- -------- ------- --------
Total time deposits 3,419 3,567 3,713 3,390 3,525 (3.0) (4.2)
-------- -------- -------- -------- -------- ------- --------
Total bank issued deposits 17,627 17,464 17,758 15,605 15,551 13.3 0.9
Wholesale deposits
Money market 75 77 75 74 75 0.6 (1.9)
Brokered CDs 3,048 2,682 1,584 1,606 1,621 88.0 13.7
Foreign time 1,392 924 1,206 1,001 1,348 3.2 50.5
-------- -------- -------- -------- -------- ------- --------
Total wholesale deposits 4,515 3,683 2,865 2,681 3,044 48.3 22.6
-------- -------- -------- -------- -------- ------- --------
Total consolidated
average deposits $ 22,142 $ 21,147 $ 20,623 $ 18,286 $ 18,595 19.1 % 4.7 %
======== ======== ======== ======== ======== ======= ========
22
Total average deposits increased $3.5 billion or 19.1% in the second quarter
of 2003 compared to the second quarter of 2002. The Corporation believes that
annual deposit growth better reflects trends due to the seasonality that
occurs between quarters. Average deposits associated with the 2002 banking
acquisitions accounted for approximately $1.7 billion of the second quarter
2003 versus 2002 quarterly average deposit growth. Excluding the effect of
these acquisitions, noninterest bearing deposits increased $0.5 billion while
bank-issued interest bearing activity accounts increased $0.4 billion. The
growth in bank-issued transaction deposits reflects the successful sales focus
on certain activity accounts particularly in the new and expanded markets.
Excluding acquisitions, average bank-issued time deposits declined $0.6
billion. M&I's markets have continued to experience some unprofitable pricing
on single service time deposit relationships to the extent of pricing time
deposits above comparable wholesale levels. The Corporation has elected not
to pursue such relationships. The Corporation believes this strategy serves
to help stabilize the interest margin, given the current rate environment,
both now and in future periods when market rates begin to rise and these
deposit accounts rapidly reprice.
The growth in bank issued deposits includes both commercial and retail banking
and the effect of the lower interest rate environment. In commercial banking,
the focus remains on developing deeper relationships through the sale of
treasury management products and services along with revised incentive plans
focused on growing deposits. The retail banking strategy continues to focus
on aggressively selling the right products to meet the needs of customers and
enhance the Corporation's profitability. Specific retail deposit initiatives
include bank-at-work, single service calling, and retention calling programs
as well as in 2002, an aggressive checking promotion in the Arizona market.
Compared with the second quarter of 2002, average wholesale deposits increased
$1.5 billion in the current quarter. The Corporation has made greater use of
wholesale funding alternatives, especially institutional CDs, during the
latter half of 2002 and 2003. These deposits are funds in the form of
deposits generated through distribution channels other than M&I's own banking
branches. These deposits allow the Corporation's bank subsidiaries to gather
funds across a wider geographic base and at pricing levels considered
attractive, where the underlying depositor may be retail or institutional.
Access to and use of these funding sources also provide the Corporation with
the flexibility to not pursue unprofitable single service time deposit
relationships as previously discussed.
During the second quarter of 2003, $10.0 million of the banking segment's
borrowings from the Federal Home Loan Bank matured. MiNotes aggregating $13.1
million were issued during the second quarter of 2003. During the second
quarter of 2003, the Corporation announced that it would redeem all of the
Floating Rate Debentures held by its subsidiary, MVBI Capital Trust and MVBI
Capital Trust would redeem all of its currently outstanding Floating Rate
Trust Preferred Securities at an aggregate liquidation amount of $14.95
million. The Floating Rate Trust Preferred Securities were redeemed on July
31, 2003.
23
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the three and six
months ended June 30, 2003 and 2002, are presented in the following tables ($
in millions):
Consolidated Yield and Cost Analysis
------------------------------------
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
------------------------------ ------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------------------------- ------------------------------
Loans and leases: (a)
Commercial loans and leases $ 7,432.7 $ 86.6 4.68 % $ 6,478.2 $ 86.3 5.35 %
Commercial real estate loans 7,835.8 112.4 5.75 6,187.6 103.1 6.68
Residential real estate loans 2,894.0 43.8 6.07 2,508.2 44.3 7.08
Home equity loans and lines 4,074.8 59.0 5.81 3,517.7 59.0 6.73
Personal loans and leases 2,161.4 29.8 5.53 1,701.0 29.4 6.93
---------- --------- ------ ---------- --------- ------
Total loans and leases 24,398.7 331.6 5.45 20,392.7 322.1 6.34
Investment securities (b):
Taxable 4,041.6 41.3 4.15 3,160.5 49.6 6.47
Tax Exempt (a) 1,176.2 21.7 7.57 1,236.3 22.9 7.50
---------- --------- ------ ---------- --------- ------
Total investment securities 5,217.8 63.0 4.92 4,396.8 72.5 6.76
Trading securities (a) 24.7 0.1 0.94 12.9 0.1 3.88
Other short-term investments 282.5 0.7 1.01 907.1 3.4 1.53
---------- --------- ------ ---------- --------- ------
Total interest earning assets $ 29,923.7 $ 395.4 5.31 % $ 25,709.5 $ 398.1 6.24 %
========== ========= ====== ========== ========= ======
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 10,134.8 $ 20.7 0.82 % $ 8,665.4 $ 26.8 1.24 %
Bank issued time deposits 3,418.9 21.6 2.54 3,525.0 28.8 3.27
---------- --------- ------ ---------- --------- ------
Total bank issued deposits 13,553.7 42.3 1.25 12,190.4 55.6 1.83
Wholesale deposits 4,515.4 18.0 1.60 3,044.7 17.8 2.34
---------- --------- ------ ---------- --------- ------
Total interest bearing deposits 18,069.1 60.3 1.34 15,235.1 73.4 1.93
Short-term borrowings 3,204.5 21.0 2.63 3,862.9 37.8 3.93
Long-term borrowings 3,699.8 42.3 4.58 2,414.2 28.9 4.81
---------- --------- ------ ---------- --------- ------
Total interest bearing liabilities $ 24,973.4 $ 123.6 1.98 % $ 21,512.2 $ 140.1 2.61 %
========== ========= ====== ========== ========= ======
Net interest margin (FTE) as a
percent of average earning assets $ 271.8 3.65 % $ 258.0 4.04 %
========= ====== ========= ======
Net interest spread (FTE) 3.33 % 3.63 %
====== ======
24
Consolidated Yield and Cost Analysis
------------------------------------
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
------------------------------ ------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------------------------- ------------------------------
Loans and leases: (a)
Commercial loans and leases $ 7,327.3 $ 170.4 4.69 % $ 6,368.6 $ 169.7 5.37 %
Commercial real estate loans 7,724.4 224.3 5.86 6,021.2 201.9 6.76
Residential real estate loans 2,846.1 87.9 6.23 2,492.5 88.3 7.14
Home equity loans and lines 4,061.6 118.5 5.88 3,348.0 113.3 6.83
Personal loans and leases 2,191.5 61.3 5.64 1,694.1 59.4 7.07
---------- --------- ------ ---------- --------- ------
Total loans and leases 24,150.9 662.4 5.53 19,924.4 632.6 6.40
Investment securities (b):
Taxable 3,963.0 87.1 4.50 3,047.3 100.4 6.83
Tax Exempt (a) 1,186.7 43.9 7.61 1,232.8 45.5 7.51
---------- --------- ------ ---------- --------- ------
Total investment securities 5,149.7 131.0 5.21 4,280.1 145.9 7.03
Trading securities (a) 21.6 0.1 1.18 11.3 0.2 3.33
Other short-term investments 270.0 1.5 1.08 996.0 7.9 1.60
---------- --------- ------ ---------- --------- ------
Total interest earning assets $ 29,592.2 $ 795.0 5.43 % $ 25,211.8 $ 786.6 6.31 %
========== ========= ====== ========== ========= ======
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 10,085.8 $ 43.1 0.86 % $ 8,598.9 $ 54.2 1.27 %
Bank issued time deposits 3,492.7 45.4 2.62 3,528.7 61.3 3.50
---------- --------- ------ ---------- --------- ------
Total bank issued deposits 13,578.5 88.5 1.31 12,127.6 115.5 1.92
Wholesale deposits 4,101.5 34.7 1.71 2,417.9 28.8 2.40
---------- --------- ------ ---------- --------- ------
Total interest bearing deposits 17,680.0 123.2 1.40 14,545.5 144.3 2.00
Short-term borrowings 3,405.9 43.0 2.55 4,166.9 76.7 3.71
Long-term borrowings 3,698.9 84.5 4.61 2,420.9 59.3 4.94
---------- --------- ------ ---------- --------- ------
Total interest bearing liabilities $ 24,784.8 $ 250.7 2.04 % $ 21,133.3 $ 280.3 2.67 %
========== ========= ====== ========== ========= ======
Net interest margin (FTE) as a
percent of average earning assets $ 544.3 3.72 % $ 506.3 4.07 %
========= ====== ========= ======
Net interest spread (FTE) 3.39 % 3.64 %
====== ======
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax rate
of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for available
for sale securities.
The net interest margin, as a percent of average earning assets on a fully
taxable equivalent basis ("FTE"), decreased 39 basis points from 4.04 percent
in the second quarter 2002 to 3.65 percent in the second quarter of 2003. The
yield on average interest earning assets decreased 93 basis points in the
second quarter of 2003 compared to the second quarter of the prior year. The
cost of bank issued interest bearing deposits in the current quarter decreased
58 basis points from the same quarter of the previous year. The increase in
noninterest bearing deposits as previously discussed provided a benefit to the
net interest margin. The cost of other funding sources (wholesale deposits
and total borrowings) decreased 78 basis points in the current quarter
compared to the second quarter of last year.
On a year-to-date basis, the net interest margin FTE decreased 35 basis points
from 4.07 percent for the six months ended June 30, 2002 to 3.72 percent for
the six months ended June 30, 2003. The yield on average interest earning
assets decreased 88 basis points in the first half of 2003 compared to the
first half of the prior year. The cost of bank issued interest bearing
deposits decreased 61 basis points while the cost of other funding sources
decreased 77 basis points for the six months ended June 30, 2003, compared to
the six months ended June 30, 2002.
25
The Corporation expects that net interest income will continue to be affected
by a number of factors. Solid balance sheet growth and increased loan spreads
have been beneficial to net interest income in the first half of 2003. The
current lower absolute level of interest rates and increased level of
prepayments has shortened the expected life of many of the Corporation's
financial assets. Lower reinvestment rates, holding assets with shorter lives
and a conscious slowing in deposit re-pricing resulting from selectively
lowering deposit rates, have negatively impacted net interest income. The
Corporation continues to actively manage the repricing characteristics of its
interest bearing assets and liabilities so as to minimize the long-term impact
on net interest income as well as position itself to be able to retain those
new deposit customers which the Corporation believes are more rate sensitive
due to the current interest rate environment. These actions in the current
interest rate environment could compromise net interest income in the near
term. The Corporation anticipates the net interest margin as a percent of
average earning assets will continue to decline somewhat over each of the next
two quarters. Net interest income and the net interest margin can vary and
continues to be influenced by loan and deposit growth, product spreads,
pricing competition in the Corporation's markets, prepayment activity, future
interest rate changes and various other factors.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of June 30, 2003, and the prior four quarters.
Nonperforming Assets
--------------------
($000's)
2003 2002
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Nonaccrual $ 195,448 $ 205,373 $ 188,232 $ 173,185 $ 160,250
Renegotiated 304 312 326 305 314
Past due 90 days or more 7,561 6,439 5,934 7,407 6,560
Total nonperforming loans and leases 203,313 212,124 194,492 180,897 167,124
Other real estate owned 10,527 8,259 8,692 8,223 6,296
---------- ----------- ----------- ----------- -----------
Total nonperforming assets $ 213,840 $ 220,383 $ 203,184 $ 189,120 $ 173,420
========== =========== =========== =========== ===========
Allowance for loan and lease losses $ 348,100 $ 338,253 $ 338,409 $ 300,628 $ 292,512
========== =========== =========== =========== ===========
Consolidated Statistics
-----------------------
2003 2002
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Net charge-offs to average
loans and leases annualized 0.16 % 0.44 % 0.23 % 0.20 % 0.17 %
Total nonperforming loans and leases
to total loans and leases 0.82 0.88 0.81 0.84 0.80
Total nonperforming assets to total loans
and leases and other real estate owned 0.86 0.91 0.85 0.88 0.83
Allowance for loan and lease losses
to total loans and leases 1.40 1.40 1.42 1.40 1.40
Allowance for loan and lease losses
to total nonperforming loans and leases 171 159 174 166 175
26
Nonaccrual Loans and Leases By Type
-----------------------------------
($000's)
2003 2002
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Commercial
Commercial, financial and agricultural $ 77,389 $ 93,400 $ 81,433 $ 78,421 $ 62,349
Lease financing receivables 6,350 6,755 2,819 2,994 3,993
---------- ----------- ----------- ----------- -----------
Total commercial 83,739 100,155 84,252 81,415 66,342
Real estate
Construction and land development 460 2,017 145 79 1,399
Commercial mortgage 46,346 42,241 46,179 37,408 40,933
Residential mortgage 63,843 59,547 56,166 52,590 50,079
---------- ----------- ----------- ----------- -----------
Total real estate 110,649 103,805 102,490 90,077 92,411
Personal 1,060 1,413 1,490 1,693 1,497
---------- ----------- ----------- ----------- -----------
Total nonaccrual loans and leases $ 195,448 $ 205,373 $ 188,232 $ 173,185 $ 160,250
========== =========== =========== =========== ===========
Reconciliation of Allowance for Loan and Lease Losses
-----------------------------------------------------
($000's)
2003 2002
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Beginning balance $ 338,253 $ 338,409 $ 300,628 $ 292,512 $ 284,179
Provision for loan and lease losses 19,642 25,692 23,398 18,842 16,980
Allowance of banks and loans acquired -- -- 27,848 -- --
Loans and leases charged-off
Commercial 6,619 2,256 8,276 6,482 3,740
Real estate 3,739 3,130 3,074 2,113 2,580
Personal 2,942 2,969 3,608 2,632 3,086
Leases 1,191 20,060 2,496 2,053 1,767
---------- ----------- ----------- ----------- -----------
Total charge-offs 14,491 28,415 17,454 13,280 11,173
Recoveries on loans and leases
Commercial 2,624 902 1,525 1,070 542
Real estate 772 495 971 343 770
Personal 732 733 813 667 840
Leases 568 437 680 474 374
---------- ----------- ----------- ----------- -----------
Total recoveries 4,696 2,567 3,989 2,554 2,526
---------- ----------- ----------- ----------- -----------
Net loans and leases charge-offs 9,795 25,848 13,465 10,726 8,647
---------- ----------- ----------- ----------- -----------
Ending balance $ 348,100 $ 338,253 $ 338,409 $ 300,628 $ 292,512
========== =========== =========== =========== ===========
Nonperforming assets consist of nonperforming loans and leases and other real
estate owned (OREO).
OREO is principally comprised of commercial and residential properties
acquired in partial or total satisfaction of problem loans and amounted to
$10.5 million at June 30, 2003, compared to $8.3 million at March 31, 2003 and
$6.3 million at June 30, 2002. Approximately $1.0 million of the increase
since March 31, 2003 relates to commercial real estate and $0.6 million of the
increase since March 31, 2003 relates to residential real estate.
Nonperforming loans and leases consist of nonaccrual, renegotiated or
restructured loans, and loans and leases that are delinquent 90 days or more
and still accruing interest. The balance of nonperforming loans and leases
can fluctuate widely based on the timing of cash collections, renegotiations
and renewals.
Maintaining nonperforming assets at an acceptable level is important to the
ongoing success of a financial services institution. The Corporation's
comprehensive credit review and approval process is critical to ensuring that
the amount of nonperforming assets on a long-term basis is minimized within
the overall framework of acceptable levels of credit risk. In addition to the
negative impact on net interest income and credit losses, nonperforming assets
also increase operating costs due to the expense associated with collection
efforts.
27
At June 30, 2003, nonperforming loans and leases amounted to $203.3 million
or 0.82% of consolidated loans and leases compared to $212.1 million or 0.88%
of consolidated loans and leases at March 31, 2003, a decrease of $8.8 million
or 4.2%. Nonaccrual loans and leases accounted for $9.9 million of the
decrease since March 31, 2003. Nonaccrual commercial loans decreased $16.0
million. Nonaccrual commercial real estate loans increased $4.1 million.
Nonaccrual construction and land development loans decreased $1.6 million
largely due to one larger credit. Nonaccrual residential real estate loans
increased $4.3 million. Nonaccrual consumer loans decreased $0.4 million.
Nonaccrual leases decreased $0.4 million compared to the first quarter of
2003. During the first quarter of 2003, nonaccrual leases increased $3.9
million primarily due to the addition of the remaining airplane lease exposure
associated with Midwest Express Airlines, Inc.
Net charge-offs amounted to $9.8 million or 0.16% of average loans and leases
in the second quarter of 2003 compared to $25.8 million or 0.44% of average
loans in the first quarter of 2003 and $8.6 million or 0.17% of average loans
in the second quarter of 2002. Included in net charge-offs in the first
quarter of 2003 was $19.0 million related to the carrying value of lease
obligations for airplanes leased to Midwest Express Airlines, Inc.
Until the economy demonstrates clear strengthening, some degree of stress and
uncertainty exists. The Corporation continues to expect net charge-offs,
excluding the airline lease charge-offs taken in the first quarter, to range
from 0.15% to 0.25% for the year. While this expected range is higher than
the Corporation's historical net charge-off levels, it is considered
manageable.
The provision for loan and lease losses amounted to $19.6 million and $45.3
million for the three and six months ended June 30, 2003, respectively
compared to $17.0 million and $32.2 million for the three and six months ended
June 30, 2002, respectively. The Corporation has not substantively changed
any aspect to its overall approach in the determination of the allowance for
loan and lease losses. There have been no material changes in assumptions or
estimation techniques as compared to prior periods that impacted the
determination of the current period allowance. The allowance for loan and
lease losses to the total loan and lease portfolio was 1.40% at June 30, 2003,
and 2002, respectively.
OTHER INCOME
------------
Total other income in the second quarter of 2003 amounted to $294.7 million
compared to $264.2 million in the same period last year, an increase of $30.5
million or 11.6%. For the six months ended June 30, 2003, total other income
amounted to $585.2 million, an increase of $62.0 million or 11.9% compared to
$523.2 million for the six months ended June 30, 2002.
Total data processing services revenue amounted to $158.0 million in the
second quarter of 2003 compared to $146.3 million in the second quarter of
2002, an increase of $11.7 million or 8.0%. On a year to date basis, total
data processing services revenue amounted to $315.1 million for the first half
of 2003 compared to $291.3 million in the first half of 2002, an increase of
$23.8 million or 8.2%. e-Finance solutions revenue increased $6.5 million or
19.1% and $12.9 million or 19.0% in the three and six months ended June 30,
2003, respectively compared to the same periods in the prior year. Revenue
growth was driven by consumer payment volume from three large financial
institution clients, increased adoption of electronic bill presentment and
payment in the customer base and revenues associated with the PayTrust
acquisition. Financial technology solutions revenue, the traditional
outsourcing business, increased $5.2 million or 4.6% in the second quarter of
2003 compared to the second quarter of last year and increased $10.9 million
or 4.9% for the six months ended June 30, 2003, compared to the six months
ended June 30, 2002. Primary contributors to revenue growth in the current
quarter included electronic funds delivery, card solutions, and private label
banking. During the current quarter several new outsourcing contracts were
announced. Total buyout revenue, which varies from period to period, was
relatively unchanged in the current quarter compared to the second quarter of
last year and was $2.5 million less in the first half of 2003 compared to the
first half of 2002.
28
Trust services revenue was relatively unchanged in the second quarter of 2003
compared to the second quarter of 2002 amounting to $31.2 million in 2003 and
$31.4 million in 2002, respectively. For the six months ended June 30, 2003,
trust services revenue amounted to $61.2 million compared to $62.3 million for
the six months ended June 30, 2002, a decrease of $1.1 million or 1.8%. The
positive impact from acquisitions and sales efforts were offset by the decline
in market values of assets under management. Assets under management were
approximately $14.0 billion at June 30, 2003, compared to $12.9 billion at
December 31, 2002, and June 30, 2002, respectively. During the second quarter
of 2003, Trust services experienced some shifting of funds into equities as
a result of improved market performance which provided some benefit to
revenue. The Corporation believes that the consistent sales results and
continued account retention has well-positioned this segment as the equity
markets stabilize. During the second quarter of 2003, Trust services entered
into an agreement to acquire some of the employee benefit business from UMB
Bank, N.A. This acquisition provides opportunity to enter into some new
markets and work with new customers and is expected to close in phases
beginning in the fourth quarter of 2003. This acquisition is not expected to
have a material impact to the consolidated financial statements.
Service charges on deposits in the second quarter of 2003 were relatively
unchanged compared to the second quarter of 2002. For the six months ended
June 30, 2003 service charges on deposits increased $0.6 million or 1.2%
compared with the six months ended June 30, 2002. For the three and six
months ended June 30, 2003, service charges on deposits associated with the
Southwest acquisition amounted to $0.8 million and $1.5 million, respectively.
Mortgage banking revenue was $21.8 million in the second quarter of 2003
compared with $7.4 million in the second quarter of 2002, an increase of $14.4
million. Mortgage banking revenue was $39.3 million in the first half of 2003
compared with $16.7 million in the first half of 2002, an increase of $22.6
million. Gains from sales of mortgages to the secondary market and mortgage-
related fees accounted for the increase. For the three and six months ended
June 30, 2003, the Corporation sold $1.1 billion and $2.1 billion of loans to
the secondary market, respectively. Retained interests in the form of
mortgage servicing rights amounted to $1.0 million in the first half of 2003.
For the three and six months ended June 30, 2002, the Corporation sold $0.4
billion and $0.9 billion of loans to the secondary market, respectively.
Retained interests in the form of mortgage servicing rights amounted to $0.5
million in the first half of 2002.
Net investment securities losses in the second quarter of 2003 amounted to
$2.6 million. Impairment losses on the interest-only strips which represent
retained interests associated with auto loan securitization activity amounted
to $4.1 million in the second quarter of 2003. The Corporation's Capital
Markets Group had gains of $1.8 million for the six months ended June 30,
2003, and losses of $0.6 million for the six months ended June 30, 2002.
Other income in the second quarter of 2003 amounted to $43.1 million compared
to $37.6 million in the second quarter of 2002, an increase of $5.5 million
or 14.9%. For the six months ended June 30, 2003, compared to the six months
ended June 30, 2002, other income increased $14.9 million or 21.7%.
Approximately $0.8 million and $3.1 million of the increase for the three and
six months ended June 30, 2003, respectively, was attributable to the 2002
banking acquisitions. Loan fees, which include prepayment charges, and other
commissions and fees, excluding the impact of the Southwest acquisition,
increased $3.9 million in the current quarter compared to the second quarter
of last year and for the six month period increased $8.9 million. Auto
securitization income increased $1.9 million and $3.1 million for the three
and six months ended June 30, 2003, respectively, compared to the same periods
of the prior year and was primarily due to increased gains and increased
servicing fee income. Auto loans securitized and sold in the second quarter
of 2003 amounted to $0.2 billion compared to $0.1 billion in the second
quarter of last year. Auto loans securitized and sold in the first half of
2003 amounted to $0.3 billion compared to $0.2 billion in the first half of
last year. Gains from the sale of student loans increased $1.2 million in the
current quarter compared to the second quarter of 2002. Approximately $30.3
million and $2.8 million student loans were sold in the second quarters of
2003 and 2002, respectively. Gains from the sale of two branches contributed
approximately $0.9 million to other income in the second quarter and first
half of 2003. Trading income in the second quarter of 2003 decreased $2.7
million compared to the same period last year and was primarily due to lower
income from fair value adjustments on trading assets associated with auto
loans sold to the multi-seller revolving conduit. Beginning in the second
half of 2002 and throughout 2003, the Corporation has employed interest rate
futures designated as trading to hedge the market value volatility from the
auto-related trading assets due to changes in interest rates.
29
OTHER EXPENSE
-------------
Total other expense for the three months ended June 30, 2003, amounted to
$335.7 million compared to $318.0 million for the three months ended June 30,
2002, an increase of $17.7 million or 5.6%. For the six months ended June 30,
2003, total other expense amounted to $671.3 million compared to $631.6
million for the six months ended June 30, 2002, an increase of $39.7 million
or 6.3%.
The Corporation estimates that approximately $10.6 million of the quarter over
quarter expense growth was attributable to the acquisitions by the banking and
Metavante segments which were included in M&I's operating expenses since their
acquisition dates. On a year to date basis, the Corporation estimates expense
growth attributable to the acquisitions was approximately $21.1 million. In
addition, for the six months ended June 30, 2003, approximately $2.5 million
of the expense growth was due to the transition costs associated with
Metavante's integration of PayTrust.
Expense control is sometimes measured in the financial services industry by
the efficiency ratio statistic. The efficiency ratio is calculated by taking
total other expense divided by the sum of total other income (including
Capital Markets revenue but excluding investment securities gains or losses)
and net interest income on a fully taxable equivalent basis. The
Corporation's efficiency ratios for the three months ended June 30, 2003, and
prior four quarters were:
Efficiency Ratios
-----------------
June 30, March 31, December 31, September 30, June 30,
2003 2003 2002 2002 2002
----------- ----------- ----------- ----------- -----------
Consolidated Corporation 59.0 % 59.6 % 60.4 % 60.7 % 60.9 %
Consolidated Corporation
Excluding Metavante 48.2 % 48.5 % 49.6 % 50.0 % 50.1 %
Salaries and employee benefits expense amounted to $193.5 million in the
second quarter of 2003 compared to $185.3 million in the second quarter of
2002, an increase of $8.2 million. For the six months ended June 30, 2003,
salaries and employee benefits expense amounted to $390.7 million compared to
$364.8 million for the six months ended June 30, 2002, an increase of $25.9
million. Salaries and employee benefits expense associated with the banking
and Metavante acquisitions and the PayTrust transition costs accounted for
approximately $4.8 million and $12.7 million of the increase for the three and
six months ended June 30, 2003, respectively.
For the three months ended June 30, 2003, occupancy and equipment expense
amounted to $46.2 million compared to $48.0 million in the comparative three
month period in 2002. On a year to date basis, occupancy and equipment
expense amounted to $93.5 million in the first half of 2003 and was relatively
unchanged compared to the first half of 2002. Occupancy and equipment expense
associated with the banking and Metavante acquisitions accounted for an
increase of approximately $1.7 million this quarter compared to the second
quarter of 2002, and together with the PayTrust transition costs, accounted
for an increase of approximately $4.4 million in the first six months of 2003
compared to the first six months of 2002.
Software expense in the second quarter of 2003 amounted to $10.4 million
compared to $10.0 million in the second quarter of 2002. For the six months
ended June 30, 2003, software expense amounted to $20.7 million compared to
$22.6 million for the six months ended June 30, 2002. As previously reported,
during the first quarter of 2002, the Corporation's banking segment incurred
nonrecurring software charges of approximately $1.7 million.
For the three months ended June 30, 2003, processing charges amounted to $10.6
million compared to $8.9 million for the three months ended June 30, 2002.
For the six months ended June 30, 2003, processing charges amounted to $22.6
million compared to $18.5 million for the six months ended June 30, 2002. The
quarter over quarter and year to date over year to date growth in processing
charges was primarily attributable to the banking segment and was due to
increased third-party processing charges associated with wholesale loan
activity.
Supplies and printing and shipping and handling expense amounted to $17.1
million in the second quarter of 2003 compared to $15.8 million in the second
quarter of 2002, an increase of $1.3 million or 8.7%. On a year to date
basis, supplies and printing and shipping and handling expense amounted to
$36.4 million in the first half of 2003 compared to $32.5 million in the first
half of 2002, an increase of $3.9 million or 11.7%. Approximately $0.2
million and $0.4 million of the increase for the three and six months ended
June 30, 2003, respectively, was attributable to the banking and Metavante
acquisitions and the PayTrust transition costs. The remainder of the increase
was primarily attributable to Metavante for both comparable periods.
30
For the three months ended June 30, 2003, professional services expense
amounted to $10.5 million compared to $8.8 million for the three months ended
June 30, 2002, an increase of $1.7 million. Approximately $0.2 million of the
increase in professional services expense was attributable to the banking and
Metavante acquisitions. For the six months ended June 30, 2003, professional
services expense amounted to $21.2 million compared to $18.6 million for the
six months ended June 30, 2002, an increase of $2.6 million. Approximately
$0.6 million of the increase in professional services expense was attributable
to the banking and Metavante acquisitions and the PayTrust transition costs.
Generally, increases experienced across all of the Corporation's segments were
offset by lower consulting fees at the Corporation.
Intangible amortization expense increased $2.6 million in the second quarter
of 2003 compared to the second quarter of 2002 and on a year to date basis,
increased $5.2 million in the first half of 2003 compared to the first half
of 2002. Core deposit premium amortization accounted for $1.0 million and
$3.2 million of the increase in amortization expense for the three and six
months ended June 30, 2003, respectively. On a year to date basis,
accelerated amortization and valuation reserves associated with mortgage
servicing rights increased amortization expense $3.1 million in the first half
of 2003 compared to the first half of 2002. The carrying value of the
Corporation's mortgage servicing rights was $3.4 million at June 30, 2003.
Other expense amounted to $39.9 million in the second quarter of 2003 compared
to $36.3 million in the second quarter of 2002, an increase of $3.6 million
or 9.9%. For both the six months ended June 30, 2003, and 2002, other expense
amounted to $71.8 million. Expense associated with the banking and Metavante
acquisitions and the PayTrust transition costs contributed approximately $1.4
million to other expense in the second quarter of 2003 and contributed $2.4
million to other expense in the first half of 2003. Increases in the cost of
business related insurance coverage, increased spending in advertising and
promotion and increased costs associated with Metavante's card solutions and
equipment sales added an additional $2.9 million to other expense in the
second quarter of 2003 compared to the second quarter of 2002 and $6.6 million
in the six months ended June 30, 2003, compared to the six months ended June
30, 2002. During the second quarter of 2003, the Corporation announced that
it would redeem all of the Floating Rate Debentures held by its subsidiary,
MVBI Capital Trust, and MVBI Capital Trust, would redeem all of its currently
outstanding Floating Rate Trust Preferred Securities at an aggregate
liquidation amount of $14.95 million. In conjunction with the redemption, the
Corporation terminated the associated interest rate swap designated as a cash
flow hedge. The loss in accumulated other comprehensive income and
unamortized debt issuance costs aggregating $2.0 million, were charged to
other expense during the second quarter of 2003. Litigation, environmental
clean-up and other losses recorded in the second quarter of 2002 and asset
write-downs associated with foreclosed properties and commercial leasing
residual values recorded in the first quarter of 2002 offset the comparable
quarter over quarter and year to date over year to date expense growth.
Other expense is affected by the capitalization of costs, net of amortization
and write-downs associated with software development and customer data
processing conversions. Net software and conversion capitalization was $5.2
million in the second quarter of 2003 and in the second quarter of 2002
amounted to $5.9 million resulting in an increase to other expense over the
comparative quarters of approximately $0.7 million. Net software and
conversion capitalization was $8.4 million for the six months ended June 30,
2003, and for the six months ended June 30, 2002, amounted to $7.1 million
resulting in a decrease to other expense over the comparative year to date
periods of approximately $1.3 million. Approximately $1.5 million of net
software capitalization in the six months ended June 30, 2003 relates to
PayTrust.
INCOME TAXES
------------
The provision for income taxes for the three months ended June 30, 2003,
amounted to $68.7 million or 33.8% of pre-tax income compared to $58.7 million
or 32.8% of pre-tax income for the three months ended June 30, 2002. The
provision for income taxes for the six months ended June 30, 2003, amounted
to $134.3 million or 33.8% of pre-tax income compared to $113.6 million or
32.5% of pre-tax income for the six months ended June 30, 2002. During the
first half of 2002, the Corporation recognized income tax benefits associated
with the sale of preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Shareholders' equity was $3.24 billion or 9.5% of total consolidated assets
at June 30, 2003, compared to $3.04 billion or 9.2% of total consolidated
assets at December 31, 2002, and $2.71 billion or 9.3% of total consolidated
assets at June 30, 2002. The increase at June 30, 2003 was primarily due to
earnings net of dividends paid. Accumulated other comprehensive income was
relatively unchanged since December 31, 2002, and declined $73.4 million since
June 30, 2002, primarily due to the change in fair value of the Corporation's
pay fixed derivative financial instruments designated as cash flow hedges in
the recent low interest rate environment.
31
The Corporation has a Stock Repurchase Program under which up to 12 million
shares can be repurchased annually. During the second quarter of 2003,
147,000 common shares were acquired at an aggregate cost of $4.4 million or
$29.66 per common share.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in
the following tables.
Risk-Based Capital Ratios
-------------------------
($ in millions)
June 30, 2003 December 31, 2002
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,524 9.06 % $ 2,344 8.75 %
Tier 1 Capital
Minimum Requirement 1,114 4.00 1,072 4.00
-------------------------------- --------------------------------
Excess $ 1,410 5.06 % $ 1,272 4.75 %
================================ ================================
Total Capital $ 3,515 12.62 % $ 3,322 12.40 %
Total Capital
Minimum Requirement 2,228 8.00 2,143 8.00
-------------------------------- --------------------------------
Excess $ 1,287 4.62 % $ 1,179 4.40 %
================================ ================================
Risk-Adjusted Assets $ 27,853 $ 26,791
================= =================
Leverage Ratios
---------------
($ in millions)
June 30, 2003 December 31, 2002
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,524 7.84 % $ 2,344 7.58 %
Minimum Leverage
Requirement 966 - 1,610 3.00 - 5.00 928 - 1,546 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,558 - 914 4.84 - 2.84 % $ 1,416 - 798 4.58 - 2.58 %
================================ ================================
Adjusted Average
Total Assets $ 32,192 $ 30,924
================= =================
As previously discussed, during the second quarter of 2003, the Corporation
announced that MVBI Capital Trust would redeem all of its currently
outstanding Floating Rate Trust Preferred Securities on July 31, 2003. The
preferred securities are considered long-term borrowings for financial
reporting purposes and qualified as "Tier 1" capital for regulatory capital
purposes in prior periods. The Corporation estimates that the redemption
adversely impacted its regulatory risk-based capital ratios by approximately
6 basis points and its leverage ratio by approximately 4 basis points. The
impact of the redemption on the Corporation's regulatory capital ratios is
included in the table presented above.
M&I manages its liquidity to ensure that funds are available to each of its
banks to satisfy the cash flow requirements of depositors and borrowers and
to ensure the Corporation's own cash requirements are met. M&I maintains
liquidity by obtaining funds from several sources.
The Corporation's most readily available source of liquidity is its investment
portfolio. Investment securities available for sale, which totaled $4.5
billion at June 30, 2003, represent a highly accessible source of liquidity.
The Corporation's portfolio of held-to-maturity investment securities, which
totaled $0.9 billion at June 30, 2003, provides liquidity from maturities and
amortization payments. The Corporation's mortgage loans held-for-sale provide
additional liquidity. The loans, which aggregated $0.3 billion at June 30,
2003, represent recently funded home mortgage loans that are prepared for
delivery to investors, which generally occurs within thirty to ninety days
after the loan has been funded.
Depositors within M&I's defined markets are another source of liquidity. Core
deposits (demand, savings, money market and consumer time deposits) averaged
$17.6 billion in the second quarter of 2003. The Corporation's banking
affiliates may also access the federal funds markets or utilize collateralized
borrowings such as treasury demand notes or FHLB advances.
32
The banking affiliates may use wholesale deposits. Wholesale deposits are
funds in the form of deposits generated through distribution channels other
than the Corporation's own banking branches. These deposits allow the
Corporation's banking subsidiaries to gather funds across a national
geographic base and at pricing levels considered attractive, where the
underlying depositor may be retail or institutional. Access to wholesale
deposits also provides the Corporation with the flexibility to not pursue
single service time deposit relationships in markets that have experienced
some unprofitable pricing levels. Wholesale deposits averaged $4.5 billion
in the second quarter of 2003.
The Corporation utilizes certain financing arrangements to meet its balance
sheet management, funding, liquidity, and market or credit risk management
needs. The majority of these activities are basic term or revolving
securitization vehicles. These vehicles are generally funded through term-
amortizing debt structures or with short-term commercial paper designed to be
paid off based on the underlying cash flows of the assets securitized. These
vehicles provide access to funding sources substantially separate from the
general credit risk of the Corporation and its subsidiaries. See Note 7 to
the Consolidated Financial Statements for an update of the Corporation's
securitization activities in the second quarter of 2003.
The Corporation's lead bank, M&I Marshall & Ilsley Bank ("Bank"), has
implemented a bank note program which permits it to issue up to $7.0 billion
of short-term and medium-term notes which are offered and sold only to
institutional investors. This program is intended to enhance liquidity by
enabling the Bank to sell its debt instruments in private markets in the
future without the delays which would otherwise be incurred. Bank notes
outstanding at June 30, 2003, amounted to $2.2 billion of which $0.6 billion
is subordinated and qualifies as supplementary capital for regulatory capital
purposes. No bank notes were issued during the second quarter of 2003.
The national capital markets represent a further source of liquidity to M&I.
M&I has filed a shelf registration statement which is intended to permit M&I
to raise funds through sales of corporate debt securities with a relatively
short lead time. Under the shelf registration statement, the Corporation may
issue up to $0.5 billion of medium-term Series E notes with maturities ranging
from 9 months to 30 years and at fixed or floating rates. At June 30, 2003,
Series E notes outstanding amounted to $0.3 billion. No Series E were issued
during the second quarter of 2003. The Corporation may issue up to $0.5
billion of medium-term MiNotes with maturities ranging from 9 months to 30
years and at fixed or floating rates. The MiNotes are issued in smaller
denominations to attract retail investors. Approximately $13.1 million of
MiNotes were issued during the second quarter of 2003. Additionally, the
Corporation has a commercial paper program. At June 30, 2003, commercial
paper outstanding amounted to $0.3 billion.
Short-term borrowings represent contractual debt obligations with maturities
of one year or less and amounted to $3.9 billion at June 30, 2003. Long-term
borrowings which are scheduled to mature in one year or less at June 30, 2003,
amounted to $1.4 billion. Other obligations include future minimum lease
payments on facilities and equipment as described in Note 10 and commitments
to extend credit and letters of credit as described in Note 19 of the Notes
to Consolidated Financial Statements contained in Item 8 of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2002. Many
commitments to extend credit expire without being drawn upon and letters of
credit are contingent commitments. The amounts outstanding at any time do not
necessarily represent future cash requirements. Under Federal Reserve Board
policy, the Corporation is expected to act as a source of financial strength
to each subsidiary bank in circumstances when it might not do so absent such
policy.
CRITICAL ACCOUNTING POLICIES
----------------------------
The Corporation has established various accounting policies which govern the
application of accounting principles generally accepted in the United States
in the preparation of the Corporation's consolidated financial statements.
The significant accounting policies of the Corporation are described in the
footnotes to the consolidated financial statements contained in the
Corporation's Annual Report on Form 10-K and updated as necessary in its
Quarterly Reports on Form 10-Q. Certain accounting policies involve
significant judgments and assumptions by management that may have a material
impact on the carrying value of certain assets and liabilities. Management
considers such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical
experience and other factors, which are believed to be reasonable under the
circumstances. Because of the nature of judgments and assumptions made by
management, actual results could differ from these judgments and estimates
which could have a material impact on the carrying values of assets and
liabilities and the results of the operations of the Corporation. Management
continues to consider the following to be those accounting policies that
require significant judgments and assumptions:
33
Allowance for Loan and Lease Losses
-----------------------------------
The allowance for loan and lease losses represents management's estimate of
probable losses inherent in the Corporation's loan and lease portfolio.
Management evaluates the allowance each quarter to determine that it is
adequate to absorb these inherent losses. This evaluation is supported by a
methodology that identifies estimated losses based on assessments of
individual problem loans and historical loss patterns of homogeneous loan
pools. In addition, environmental factors, including regulatory guidance,
unique to each measurement date are also considered. This reserving
methodology has the following components:
Specific Reserve. The Corporation's internal risk rating system is used to
identify loans and leases rated "Classified" as defined by regulatory
agencies. In general, these loans have been internally identified as credits
requiring management's attention due to underlying problems in the borrower's
business or collateral concerns. Subject to a minimum size, a quarterly review
of these loans is performed to identify the specific reserve necessary to be
allocated to each of these loans. This analysis considers expected future
cash flows, the value of collateral and also other factors that may impact the
borrower's ability to make payments when due. Included in this group are
those nonaccrual or renegotiated loans that meet the criteria as being
"impaired" under the definition in SFAS 114. A loan is impaired when, based
on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. For impaired loans, impairment is measured using one of three
alternatives: (1) the present value of expected future cash flows discounted
at the loan's effective interest rate; (2) the loan's observable market price,
if available; or (3) the fair value of the collateral for collateral dependent
loans and loans for which foreclosure is deemed to be probable.
Collective Loan Impairment. This portion of the allowance for loan and lease
losses is comprised of two components. First, the Corporation makes a
significant number of loans and leases, which due to their underlying similar
characteristics, are assessed for loss as homogeneous pools. Included in the
homogeneous pools are loans and leases from the retail sector and commercial
loans under a certain size, which have been excluded from the specific reserve
allocation previously discussed. The Corporation segments the pools by type
of loan or lease and using historical loss information, estimates a loss
reserve for each pool.
The second component reflects management's recognition of the uncertainty and
imprecision underlying the process of estimating losses. Based on
management's judgment, reserves are allocated to industry segments or product
types due to environmental conditions unique to the measurement period.
Consideration is given to both internal and external environmental factors
such as economic conditions in certain geographic or industry segments of the
portfolio, economic trends in the retail lending sector, risk profile, and
portfolio composition. Reserves are allocated based on estimates of loss
exposure that management has identified based on these economic trends or
conditions. The internal risk rating system is then used to identify those
loans within these industry segments that based on financial, payment or
collateral performance, warrant closer ongoing monitoring by management. The
specific loans mentioned earlier are excluded from this analysis.
The following factors were taken into consideration in determining the
adequacy of the allowance for loans and lease losses at June 30, 2003:
Management continues to be concerned over the lack of economic
improvement forecasted for 2003 and the resulting impact this will have
on the Corporation's customer base. Although recent economic reports
and opinions indicate there may be some signs of improvement, the
uncertainty remains as to when there may be any substantive increase in
business activity. In addition, the retail loan portfolio will continue
to be affected by the prolonged economic conditions as evidenced by the
generally increasing personal bankruptcy and unemployment rates.
At June 30, 2003, nonperforming loans and leases amounted to $203.3
million or 0.82% of consolidated loans and leases compared to $212.1
million or 0.88% of consolidated loans and leases at March 31, 2003, and
$194.5 million or 0.81% of consolidated loans and leases at December 31,
2002. Nonperforming loans decreased $8.8 million or 4.2% in the second
quarter of 2003 compared to the first quarter of 2003. Over 80% of the
decline was attributable to two larger credits. Average nonperforming
loans and leases have remained at consistent levels between the first
and second quarters of 2003. Average nonperforming loans and leases
amounted to $216.5 million in the current quarter compared to $214.4
million in the first quarter of 2003. Nonperforming loans and leases
were $8.8 million or 4.5% higher at June 30, 2003, compared to December
31, 2002. A portion of the increase since year end is due to the
remaining Midwest Express Airlines, Inc. ("Midwest Express") lease
receivable being placed on a nonperforming status during the first
quarter of 2003. The remainder of the increase since year end is
generally spread across all of M&I's lending segments and is primarily
the result of the slow economy. As stated in previous quarters, some
of the Corporation's largest nonperforming loans are in industries that
have undergone well-publicized declines in recent months. Among those
industries affected are construction and related, technology, airline,
manufacturing and healthcare.
34
At the present time, there is no specific industry that is of immediate
concern, however, the Corporation believes that the current economic
environment will continue to negatively affect the markets and
communities it serves in the near term. While nonperforming loans have
remained in the 80-90 basis point range over the past two years, there
continues to be some risk of nonperforming loans increasing.
The Corporation's primary lending areas are Wisconsin, Arizona,
Minnesota and Missouri. The recent acquisitions in Minnesota and
Missouri represent new geographic regions for the Corporation. Each of
these regions has cultural and environmental factors that are unique to
them. The risk in entering these new regions and the uncertainty
regarding the inherent losses in their respective loan portfolios will
remain until the Corporation's credit underwriting and monitoring
processes are fully implemented.
Net charge-offs in the second quarter of 2003 amounted to $9.8 million,
or 16 basis points of total average loans and leases outstanding this
quarter compared to $25.8 million or 44 basis points of total average
loans and leases outstanding in the first quarter of 2003. Included in
charge-offs for the first quarter was $19.0 million related to the
carrying value of lease obligations for airplanes leased to Midwest
Express. In 2002 and 2001, annual net charge-offs have remained in the
range of approximately 20 basis points. This range of net charge-offs
to average loans is somewhat higher than historical levels incurred by
the Corporation over the past five years. The Corporation believes some
degree of stress continues to exist and expects quarterly net charges-
offs, excluding the lease charge-offs previously discussed, to continue
in the 15-25 basis point range in the near term.
During the second quarter of 2003, the Corporation's commitments to
shared national credits were approximately $2.0 billion with usage
averaging around 42%. Many of these borrowers are in industries
currently impacted by the economic climate. In addition, many of the
Corporation's largest charge-offs have come from the shared national
credit portfolio. Although these factors result in an increased risk
profile, as of June 30, 2003, shared national credit nonperforming
loans were less than 0.75% and 1.75% of this segment's total commitments
and outstandings, respectively. The Corporation's exposure to shared
national credits is monitored closely given the economic uncertainty as
well as this segment's loss experience.
At June 30, 2003, special reserves continue to be carried for exposures
to manufacturing, healthcare, production agriculture (including dairy
and cropping operations), and the airline and travel industries. The
majority of the commercial charge-offs incurred during the past year
were in these industry segments. While most loans in these categories
are still performing, the Corporation continues to believe these sectors
have been more adversely affected by the economic slowdown. Reduced
revenues causing a declining utilization of the industry's capacity
levels have impacted manufacturing. As a result, collateral values and
the amounts realized through the sale or liquidation of manufacturing
plant and equipment have declined accordingly. Revenue levels in the
dairy industry have also declined as milk prices have fallen below
breakeven for a growing segment of the portfolio.
Based on the above loss estimates, senior lending and financial management
determine their best estimate of the required reserve. Management's
evaluation of the factors described above resulted in an allowance for loan
and lease losses of $348.1 million at June 30, 2003, compared to $338.3
million at March 31, 2003. The resulting provisions for loan and lease losses
are the amounts required to establish the allowance for loan and lease losses
to the required level after considering charge-offs and recoveries.
Management recognizes there are significant estimates in the process and the
ultimate losses could be significantly different from those currently
estimated.
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the allowance for loan and lease losses.
There have been no material changes in assumptions or estimation techniques
as compared to prior periods that impacted the determination of the current
period allowance.
35
Capitalized Software and Conversion Costs
-----------------------------------------
Direct costs associated with the production of computer software that will be
licensed externally or used in a service bureau environment are capitalized.
Capitalization of such costs is subject to strict accounting policy criteria,
however, the appropriate time to initiate capitalization requires management
judgment. Once the specific capitalized project is put into production, the
software cost is amortized over its estimated useful life, generally four
years. Each quarter, the Corporation performs net realizable value tests to
ensure the assets are recoverable. Such tests require management judgment as
to the future sales and profitability of a particular product which involves,
in some cases, multi-year projections. Technology changes and changes in
customer requirements can have a significant impact on the recoverability of
these assets and can be difficult to predict. Should significant adverse
changes occur, estimates of useful life may have to be revised or write-offs
would be required to recognize impairment. For the three months ended June
30, 2003, and 2002, the amount of software costs capitalized amounted to $16.6
million and $16.1 million, respectively. Amortization expense of software
costs amounted to $10.8 million and $8.6 million for the three months ended
June 30, 2003, and 2002, respectively. For the six months ended June 30, 2003,
and 2002, the amount of software costs capitalized amounted to $32.0 million
and $27.6 million, respectively. Amortization expense of software costs
amounted to $21.5 million and $16.2 million for the six months ended June 30,
2003, and 2002, respectively.
Direct costs associated with customer system conversions to the data
processing operations are capitalized and amortized on a straight-line basis
over the terms, generally five to seven years, of the related servicing
contracts.
Capitalization only occurs when management is satisfied that such costs are
recoverable through future operations or penalties (buyout fees) in the case
of early termination. For the three months ended June 30, 2003, and 2002, the
amount of conversion costs capitalized amounted to $3.6 million and $2.8
million, respectively. Amortization expense amounted to $4.2 million and $4.4
million for the three months ended June 30, 2003, and 2002, respectively. For
the six months ended June 30, 2003, and 2002, the amount of conversion costs
capitalized amounted to $6.2 million and $4.4 million, respectively.
Amortization expense amounted to $8.3 million and $8.7 million for the six
months ended June 30, 2003, and 2002, respectively.
Net unamortized costs were ($ in millions):
June 30,
-------------------------
2003 2002
----------- -----------
Software $ 153.1 $ 124.8
Conversions 33.8 39.0
----------- -----------
Total $ 186.9 $ 163.8
=========== ===========
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the amount of costs that are capitalized for
software development or conversion activities. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the periodic amortization of such costs.
Financial Asset Sales and Securitizations
-----------------------------------------
The Corporation utilizes certain financing arrangements to meet its balance
sheet management, funding, liquidity, and market or credit risk management
needs. The majority of these activities are basic term or revolving
securitization vehicles. These vehicles are generally funded through term-
amortizing debt structures or with short-term commercial paper designed to be
paid off based on the underlying cash flows of the assets securitized. These
financing entities are contractually limited to a narrow range of activities
that facilitate the transfer of or access to various types of assets or
financial instruments. In certain situations, the Corporation provides
liquidity and/or loss protection agreements. In determining whether the
financing entity should be consolidated, the Corporation considers whether the
entity is a qualifying special-purpose entity (QSPE) as defined in Statement
of Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. For non-
consolidation a QSPE must be demonstrably distinct, have significantly limited
permitted activities, hold assets that are restricted to transferred financial
assets and related assets, and can sell or dispose of non-cash financial
assets only in response to specified conditions.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. This interpretation addresses
consolidation by business enterprises of variable interest entities. Under
current practice, entities generally have been included in consolidated
financial statements because they are controlled through voting interests.
This interpretation explains how to identify variable interest entities and
how an entity assesses its interests in a variable interest entity to decide
whether to consolidate that entity. FIN 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries
if the entities do not effectively disperse risks among parties involved.
Variable interest entities that effectively disperse risks will not be
consolidated unless a single party holds an interest or combination of
interests that effectively recombines risks that were previously dispersed.
Transferors to QSPEs and "grandfathered" QSPEs subject to the reporting
requirements of SFAS 140 are outside the scope of FIN 46 and do not
consolidate those entities. FIN 46 also requires certain disclosures by the
primary beneficiary of a variable interest entity or an entity that holds a
significant variable interest in a variable interest entity.
36
With respect to its existing securitization activities, the Corporation does
not believe FIN 46 impacts its consolidated financial statements because its
transfers are generally to QSPEs or to entities in which the Corporation does
not hold a significant variable interest.
The Corporation sells financial assets, in a two-step process that results in
a surrender of control over the assets as evidenced by true-sale opinions from
legal counsel, to unconsolidated entities that securitize the assets. The
Corporation retains interests in the securitized assets in the form of
interest-only strips and a cash reserve account. Gain or loss on sale of the
assets depends in part on the carrying amount assigned to the assets sold
allocated between the asset sold and retained interests based on their
relative fair values at the date of transfer. The value of the retained
interests is based on the present value of expected cash flows estimated using
management's best estimates of the key assumptions - credit losses, prepayment
speeds, forward yield curves and discount rates commensurate with the risks
involved. Actual results can differ from expected results.
The Corporation reviews the carrying values of the retained interests monthly
to determine if there is a decline in value that is other than temporary and
periodically reviews the propriety of the assumptions used based on current
historical experience as well as the sensitivities of the carrying value of
the retained interests to adverse changes in the key assumptions. The
Corporation believes that its estimates result in a reasonable estimate of
fair value of the retained interests.
During the second quarter of 2003, the Corporation recognized an impairment
loss of approximately $4.1 million, which is included in net investment
securities losses in the Consolidated Statements of Income. The difference
between revised assumptions based on actual and projected experience compared
to initially expected assumptions were deemed to be other than temporary.
The Corporation regularly sells automobile loans to an unconsolidated multi-
seller special purpose entity commercial paper conduit in securitization
transactions in which subordinated interests are retained. The outstanding
balances of automobile loans sold in these securitization transactions was
$851.2 million at June 30, 2003. At June 30, 2003, the carrying amount of
retained interests amounted to $44.6 million.
The Corporation also sells, from time to time, debt securities classified as
available for sale that are highly rated to an unconsolidated bankruptcy
remote QSPE whose activities are limited to issuing highly rated asset-backed
commercial paper with maturities up to 180 days which is used to finance the
purchase of the investment securities. The Corporation's lead bank, M&I
Marshall & Ilsley Bank ("Bank"), provides liquidity back-up in the form of
Liquidity Purchase Agreements. In addition, the Bank acts as counterparty to
interest rate swaps that enable the QSPE to hedge its interest rate risk.
Such swaps are designated as trading in the Corporation's Consolidated Balance
Sheet.
Under the terms of the Administration Agreement, the Bank, as administrator
of the QSPE, is required to sell interests in the securities funded by the
QSPE to the Bank as the liquidity purchaser under the liquidity agreements,
if at any time (after giving effect to any issuance of new commercial paper
notes and the receipt of payments under any swap agreement) the QSPE has
insufficient funds to repay any maturing commercial paper note and the Bank,
as liquidity agent, has received a notice of such deficiency. The Bank, as
the liquidity provider, will be obligated to purchase interests in such
securities under the terms of the liquidity agreement to repay the maturing
commercial paper notes unless (i) after giving effect to such purchase, the
aggregate of securities, purchased under the relevant liquidity agreement
would exceed the aggregate maximum liquidity purchase amount under such
liquidity agreement or (ii) certain bankruptcy events with respect to the QSPE
have occurred; provided that the Bank is not required to purchase any
defaulted security. For this purpose, a defaulted security is any security
that is rated below "Caa2" by Moody's and below "CCC" by Standard & Poors.
To date, the Bank has never acquired interests in any securities under the
terms of the liquidity agreements.
A subsidiary of the Bank has entered into interest rate swaps with the QSPE
designed to counteract the interest rate risk associated with third party
beneficial interest (commercial paper) and the transferred assets. The
beneficial interests in the form of commercial paper have been issued by the
QSPE to parties other than the Bank and its subsidiary or any other
affiliates. The notional amounts do not exceed the amount of beneficial
interests. The swap agreements do not provide the QSPE or its administrative
agent any decision-making authority other than those specified in the standard
ISDA Master Agreement.
At June 30, 2003, highly rated investment securities in the amount of $255.0
million were outstanding in the QSPE to support the outstanding commercial
paper.
37
Income Taxes
------------
Income taxes are accounted for using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
tax assets and liabilities of a change in tax rates is recognized in the
income statement in the period that includes the enactment date.
The determination of current and deferred income taxes is based on complex
analyses of many factors including interpretation of Federal and state income
tax laws, the difference between tax and financial reporting basis of assets
and liabilities (temporary differences), estimates of amounts currently due
or owed such as the timing of reversals of temporary differences and current
accounting standards. The Corporation's interpretation of Federal and state
income tax laws is periodically reviewed by the Federal and state taxing
authorities who make assessments based on their determination of tax laws.
Tax liabilities could differ significantly from the estimates and
interpretations used in determining the current and deferred income tax
liabilities based on the completion of taxing authority examinations.
FORWARD-LOOKING STATEMENTS
--------------------------
Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of
Financial Position and Results of Operations" and "Quantitative and
Qualitative Disclosures about Market Risk," respectively, contain forward-
looking statements within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include, without limitation, statements regarding expected
operating activities and results. Such statements are subject to important
factors that could cause the Corporation's actual results to differ materially
than those anticipated by the forward-looking statements. These factors
include those referenced in Item 1, Business, of the Corporation's Annual
Report on Form 10-K for the period ending December 31, 2002 under the heading
"Forward-Looking Statements" or as may be described from time to time in the
Corporation's subsequent SEC filings, and such factors are incorporated herein
by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following updated information should be read in conjunction with the
Corporation's 2002 Annual Report on Form 10-K. Updated information regarding
the Corporation's use of derivative financial instruments is contained in
Note 10, Notes to Financial Statements contained in Item 1 herein.
Market risk arises from exposure to changes in interest rates, exchange rates,
commodity prices, and other relevant market rate or price risk. The
Corporation faces market risk through trading and other than trading
activities. While market risk that arises from trading activities in the form
of foreign exchange and interest rate risk is immaterial to the Corporation,
market risk from other than trading activities in the form of interest rate
risk is measured and managed through a number of methods.
Interest Rate Risk
------------------
The Corporation uses financial modeling techniques to identify potential
changes in income under a variety of possible interest rate scenarios.
Financial institutions, by their nature, bear interest rate and liquidity risk
as a necessary part of the business of managing financial assets and
liabilities. The Corporation has designed strategies to limit these risks
within prudent parameters and identify appropriate risk/reward tradeoffs in
the financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing and
embedded option characteristics of the assets and liabilities held by the
Corporation. Policies are in place to assure that neither earnings nor fair
value at risk exceed appropriate limits. The use of a limited array of
derivative financial instruments has allowed the Corporation to achieve the
desired balance sheet repricing structure while simultaneously meeting the
desired objectives of both its borrowing and depositing customers.
38
The models used include measures of the expected repricing characteristics of
administered rate (NOW, savings and money market accounts) and non-rate
related products (demand deposit accounts, other assets and other
liabilities). These measures recognize the relative insensitivity of these
accounts to changes in market interest rates, as demonstrated through current
and historical experiences. However, during the second quarter of 2003, the
Corporation increased the proportion of these accounts modeled as rate
sensitive, in order to recognize the instability of some of the recent balance
growth in these accounts. This modeling treatment will be maintained until
the incremental balances can be observed across a more complete interest rate
cycle. In addition to contractual payment information for most other assets
and liabilities, the models also include estimates of expected prepayment
characteristics for those items that are likely to materially change their
payment structures in different rate environments, including residential
mortgage products, certain commercial and commercial real estate loans and
certain mortgage-related securities. Estimates for these sensitivities are
based on industry assessments and are substantially driven by the differential
between the contractual coupon of the item and current market rates for
similar products.
This information is incorporated into a model that allows the projection of
future income levels in several different interest rate environments.
Earnings at risk is calculated by modeling income in an environment where
rates remain constant, and comparing this result to income in a different rate
environment, and then dividing this difference by the Corporation's budgeted
operating income before taxes for the calendar year. Since future interest
rate moves are difficult to predict, the following table presents two
potential scenarios - a gradual increase of 100bp across the entire yield
curve over the course of a year (+25bp per quarter), and a gradual decrease
of 100bp across the entire yield curve over the course of a year (-25bp per
quarter) for the balance sheet as of the indicated dates:
Impact to Annual Pretax Income as of
---------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
2003 2002 2002 2002 2002
----------- ----------- ----------- ----------- -----------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (0.6)% 0.9 % 0.9 % 1.5 % (0.5)%
Decline in rates (2.0)% (1.4)% (2.0)% (2.0)% (0.3)%
These results are based solely on the modeled parallel changes in market
rates, and do not reflect the earnings sensitivity that may arise from other
factors such as changes in the shape of the yield curve, the changes in spread
between key market rates, or accounting recognition for impairment of certain
intangibles. These results also do not include any management action to
mitigate potential income variances within the simulation process. Such
action could potentially include, but would not be limited to, adjustments to
the repricing characteristics of any on- or off-balance sheet item with regard
to short-term rate projections and current market value assessments.
Actual results will differ from simulated results due to the timing,
magnitude, and frequency of interest rate changes as well as changes in market
conditions and management strategies.
Another component of interest rate risk is measuring the fair value at risk
for a given change in market interest rates. The Corporation also uses
computer modeling techniques to determine the present value of all asset and
liability cash flows (both on- and off-balance sheet), adjusted for prepayment
expectations, using a market discount rate. The net change in the present
value of the asset and liability cash flows in different market rate
environments is the amount of fair value at risk from those rate movements.
As of June 30, 2003, the fair value of equity at risk for a gradual 100bp
shift in rates has not changed materially since December 31, 2002.
Equity Risk
-----------
In addition to interest rate risk, the Corporation incurs market risk in the
form of equity risk. M&I's Capital Markets Group invests in private, medium-
sized companies to help establish new businesses or recapitalize existing
ones. Exposure to the change in equity values for the companies that are held
in their portfolio exist, however, fair values are difficult to determine
until an actual sale or liquidation transaction actually occurs.
As of June 30, 2003, M&I Trust Services administered $59.5 billion in assets
and directly managed a portfolio of $14.0 billion. Exposure exists to changes
in equity values due to the fact that fee income is partially based on equity
balances. While this exposure is present, quantification remains difficult
due to the number of other variables affecting fee income. Interest rate
changes can also have an effect on fee income for the above stated reasons.
39
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in the reports filed
by us under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. We carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and President and our Executive Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based
on that evaluation, our Chief Executive Officer and President and our
Executive Vice President and Chief Financial Officer concluded that our
disclosure controls and procedures are effective as of the end of the period
covered by this report.
There have been no changes in our internal control over our financial
reporting identified in connection with the evaluation discussed above that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
40
PART II - OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. The Corporation held its Annual Meeting of Shareholders on April 22,
2003.
B. Votes cast for the election of six directors to serve until the 2006
Annual Meeting of Shareholders are as follows:
Director For Withheld Abstentions Non-Vote
_____________________ ___________ __________ ___________ ________
Richard A. Abdoo 173,782,317 12,437,869 -- --
Ted D. Kellner 176,329,488 9,890,698 -- --
Katharine C. Lyall 175,070,146 11,150,040 -- --
Peter M. Platten, III 154,110,670 32,109,516 -- --
James A. Urdan 175,857,034 10,363,152 -- --
James B. Wigdale 176,489,552 9,730,634 -- --
The continuing directors of the Corporation are as follows:
Jon F. Chait David L. Andrea
Bruce E. Jacobs Andrew N. Baur
Donald R. Johnson John A. Mellowes
Dennis J. Kuester Robert J. O'Toole
Edward L. Meyer, Jr. Robert A. Schaefer
San W. Orr, Jr. John S. Shiely
George E. Wardeberg
C. Votes cast for approving the Corporation's 2003 Executive Stock Option
and Restricted Stock Plan are as follows:
For Withheld Abstentions Non-Vote
___________ __________ ___________ __________
119,200,732 22,123,745 10,485,868 34,409,841
D. Votes cast for approving the Corporation's Amended and Restated 1994
Long-term Incentive Plan for Executives are as follows:
For Withheld Abstentions Non-Vote
___________ __________ ___________ __________
125,760,458 15,080,468 10,969,419 34,409,841
E. Votes cast for approving the amendment to the Corporation's Restated
Articles of Incorporation are as follows:
For Withheld Abstentions Non-Vote
___________ __________ ___________ __________
164,814,091 17,533,710 3,872,385 --
41
ITEM 5. OTHER INFORMATION
In 1999, Congress enacted the Gramm-Leach-Bliley Act (the "Act"), which
eliminated certain barriers to and restrictions on affiliations between
banks and securities firms, insurance companies and other financial
services organizations. Among other things, the Act repealed certain
Glass-Steagall Act restrictions on affiliations between banks and
securities firms, and amended the Bank Holding Company Act of 1956 to
permit bank holding companies that qualify as "financial holding
companies" to engage in a broad list of "financial activities," and any
non-financial activity that the Federal Reserve Board, in consultation
with the Secretary of the Treasury, determines is "complementary" to a
financial activity and poses no substantial risk to the safety and
soundness of depository institutions or the financial system. The Act
treats various lending, insurance underwriting, insurance company
portfolio investment, financial advisory, securities underwriting,
dealing and market-making, and merchant banking activities as financial
in nature for this purpose.
Under the Act, a bank holding company may become certified as a
financial holding company by filing a notice with the Federal Reserve
Board, together with a certification that the bank holding company meets
certain criteria, including capital, management and Community
Reinvestment Act requirements. M&I had made a determination not to
become certified as a financial holding company. However, M&I
reconsidered this determination and on June 18, 2003, the Corporation
became certified as a financial holding company.
The Audit Committee of the Board of Directors of Marshall & Ilsley
Corporation has approved the following audit and non-audit services
performed or to be performed for the Corporation by its independent
auditors, Deloitte & Touche LLP:
Certain agreed-upon procedures to assist Metavante Corporation in
connection with Metavante's and a customer's evaluation of logical
security controls related to the customer's data.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit 10 - Change of Control Agreement dated as of June 30, 2003
between the Corporation and Kenneth C. Krei.
Exhibit 11 - Statement Regarding Computation of Earnings Per Share,
Incorporated by Reference to NOTE 4 of Notes to
Financial Statements contained in Item 1 - Financial
Statements (unaudited) of Part 1 - Financial
Information herein.
Exhibit 12 - Statement Regarding Computation of Ratio of Earnings
to Fixed Charges
Exhibit 31.1 - Rule 13a-14(a) Certification of Chief Executive Officer.
Exhibit 31.2 - Rule 13a-14(a) Certification of Chief Financial Officer.
Exhibit 32.1 - Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350.
Exhibit 32.2 - Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350.
B. Reports on Form 8-K:
On April 14, 2003, the Corporation furnished Items 7 and 9 in a Current
Report on Form 8-K relating to the release of earnings for the quarterly
period ended March 31, 2003.
42
SIGNATURES
__________
Pursuant to the requirements 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
(Registrant)
/s/ Patricia R. Justiliano
____________________________________
Patricia R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ James E. Sandy
____________________________________
James E. Sandy
Vice President
August 13, 2003
43
EXHIBIT INDEX
Exhibit Number Description of Exhibit
______________ ______________________________________________
(10) Change of Control Agreement dated as of June 30,
2003 between the Corporation and Kenneth C. Krei
(11) Statement Regarding Computation of Earnings Per
Share, Incorporated by Reference to NOTE 4 of
Notes to Financial Statements contained in Item 1
- Financial Statements (unaudited) of Part 1 -
Financial Information herein.
(12) Statement Regarding Computation of Ratio of
Earnings to Fixed Charges.
(31.1) Rule 13a-14(a) Certification of Chief Executive
Officer.
(31.2) Rule 13a-14(a) Certification of Chief Financial
Officer.
(32.1) Certification of Chief Executive Officer pursuant
to 18 U.S.C .Section 1350.
(32.2) Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350.