===============================================================================
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, 2001
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 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, 2001
----- ----------------
Common Stock, $1.00 Par Value 103,403,822
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,
2001 2000 2000
------------- ------------- --------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 873,991 $ 760,103 $ 699,804
Federal funds sold and security resale agreements 25,466 54,443 102,078
Money market funds 168,419 50,147 84,212
------------- ------------- -------------
Total cash and cash equivalents 1,067,876 864,693 886,094
Investment securities:
Trading securities, at market value 17,456 15,317 31,087
Short-term investments, at cost which
approximates market value 45,105 43,528 7,419
Available for sale at market value 4,186,974 4,735,722 4,163,535
Held to maturity at amortized cost, market
value $1,101,702 ($1,124,756 December 31,
and $1,117,970 June 30, 2000) 1,075,242 1,112,545 1,140,340
------------- ------------- -------------
Total investment securities 5,324,777 5,907,112 5,342,381
Loans and leases 17,803,111 17,587,087 17,394,515
Less: Allowance for loan and lease losses 244,486 235,115 234,119
------------- ------------- -------------
Net loans and leases 17,558,625 17,351,972 17,160,396
Premises and equipment 390,181 392,995 372,157
Goodwill 332,111 295,784 307,992
Other intangibles 45,001 49,500 40,688
Accrued interest and other assets 1,177,084 1,215,683 1,110,044
------------- ------------- -------------
Total Assets $ 25,895,655 $ 26,077,739 $ 25,219,752
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 2,943,114 $ 3,129,834 $ 2,805,295
Interest bearing 13,306,539 16,118,793 14,101,144
------------- ------------- -------------
Total deposits 16,249,653 19,248,627 16,906,439
Funds purchased and security repurchase agreements 1,189,660 1,092,723 934,952
Other short-term borrowings 4,204,956 1,722,008 3,596,146
Accrued expenses and other liabilities 849,853 850,916 652,572
Long-term borrowings 1,044,132 921,276 1,001,055
------------- ------------- -------------
Total liabilities 23,538,254 23,835,550 23,091,164
Shareholders' Equity:
---------------------
Series A convertible preferred stock,
$1.00 par value; 336,370 shares issued 336 336 336
Common stock, $1.00 par value;
112,757,546 shares issued 112,757 112,757 112,757
Additional paid-in capital 436,735 452,212 454,332
Retained earnings 2,203,803 2,117,759 2,038,922
Accumulated other comprehensive
income, net of related taxes 64,923 38,127 (50,246)
Less: Treasury common stock, at cost:
9,475,724 shares (9,910,839 December 31,
and 8,796,387 June 30, 2000) 440,458 458,472 407,851
Deferred compensation 20,695 20,530 19,662
------------- ------------- -------------
Total shareholders' equity 2,357,401 2,242,189 2,128,588
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 25,895,655 $ 26,077,739 $ 25,219,752
============= ============= =============
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended June 30,
---------------------------
2001 2000
------------- -------------
Interest income
---------------
Loans and leases $ 341,678 $ 344,685
Investment securities:
Taxable 70,012 66,225
Exempt from federal income taxes 15,512 16,523
Trading securities 341 484
Short-term investments 3,904 4,672
------------- -------------
Total interest income 431,447 432,589
Interest expense
----------------
Deposits 155,954 185,606
Short-term borrowings 49,291 60,580
Long-term borrowings 24,968 21,348
------------- -------------
Total interest expense 230,213 267,534
Net interest income 201,234 165,055
Provision for loan and lease losses 10,737 9,616
------------- -------------
Net interest income after provision for loan and lease losses 190,497 155,439
Other income
------------
Data processing services:
Account processing fees 108,069 94,512
Professional services fees 15,379 16,761
Software revenue 8,690 9,971
Other revenue 6,006 6,492
------------- -------------
Total data processing services 138,144 127,736
Item processing 12,048 12,669
Trust services 30,571 29,967
Service charges on deposits 20,447 18,549
Mortgage banking 12,329 4,381
Capital Markets revenue 3,160 2,156
Net investment securities (losses)/gains (16,176) 1,281
Life insurance revenue 6,695 7,360
Other 30,659 41,324
------------- -------------
Total other income 237,877 245,423
Other expense
Salaries and employee benefits 178,067 158,861
Net occupancy 15,329 13,678
Equipment 28,969 27,772
Software expenses 9,224 7,033
Processing charges 11,838 7,446
Supplies and printing 5,443 5,129
Professional services 6,642 9,584
Shipping and handling 10,926 9,642
Amortization of intangibles 9,002 7,158
Single charter 5,972 --
Other 61,144 20,678
------------- -------------
Total other expense 342,556 266,981
Income before income taxes 85,818 133,881
Provision for income taxes 26,135 43,134
------------- -------------
Net income $ 59,683 $ 90,747
============= =============
Net income per common share
Basic: $ 0.57 $ 0.86
Diluted: 0.55 0.83
Dividends paid per common share $ 0.290 $ 0.265
Weighted average common shares outstanding:
Basic 102,906 103,895
Diluted 107,738 108,742
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Six Months Ended June 30,
---------------------------
2001 2000
------------- -------------
Interest income
---------------
Loans and leases $ 695,668 $ 671,163
Investment securities:
Taxable 147,963 134,115
Exempt from federal income taxes 31,412 32,970
Trading securities 669 1,011
Short-term investments 8,169 7,955
------------- -------------
Total interest income 883,881 847,214
Interest expense
----------------
Deposits 343,137 358,184
Short-term borrowings 103,392 117,619
Long-term borrowings 50,339 37,235
------------- -------------
Total interest expense 496,868 513,038
Net interest income 387,013 334,176
Provision for loan and lease losses 21,800 15,435
------------- -------------
Net interest income after provision for loan and lease losses 365,213 318,741
Other income
------------
Data processing services:
Account processing fees 212,857 189,177
Professional services fees 30,884 35,046
Software revenue 16,713 19,289
Other revenue 10,682 14,225
------------- -------------
Total data processing services 271,136 257,737
Item processing 24,505 25,113
Trust services 60,600 57,775
Service charges on deposits 41,273 37,063
Mortgage banking 20,100 7,720
Capital Markets revenue 9,494 17,267
Net investment securities (losses)/gains (16,299) 1,281
Life insurance revenue 13,225 14,032
Other 60,804 68,861
------------- -------------
Total other income 484,838 486,849
Other expense
-------------
Salaries and employee benefits 345,989 316,179
Net occupancy 31,226 27,005
Equipment 57,601 55,172
Software expenses 17,294 13,898
Processing charges 20,788 14,995
Supplies and printing 10,393 9,986
Professional services 13,802 17,161
Shipping and handling 22,243 21,027
Amortization of intangibles 17,006 14,863
Single charter 11,952 --
Other 85,038 44,692
------------- -------------
Total other expense 633,332 534,978
Income before income taxes and cumulative
effect of changes in accounting principles 216,719 270,612
Provision for income taxes 70,434 89,150
------------- -------------
Income before cumulative effect of changes
in accounting principles 146,285 181,462
Cumulative effect of changes in accounting
principles, net of income taxes (436) (2,279)
------------- -------------
Net income $ 145,849 $ 179,183
============= =============
Net income per common share
Basic:
Income before cumulative effect of changes
in accounting principles $ 1.40 $ 1.72
Cumulative effect of changes in accounting
principles, net of income taxes -- (0.02)
------------- -------------
Net income $ 1.40 1.70
============= =============
Diluted:
Income before cumulative effect of changes
in accounting principles $ 1.35 $ 1.66
Cumulative effect of changes in accounting
principles, net of income taxes -- (0.02)
------------- -------------
Net income $ 1.35 $ 1.64
============= =============
Dividends paid per common share $ 0.555 $ 0.505
Weighted average common shares outstanding:
Basic 102,872 104,276
Diluted 107,772 109,153
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Six Months Ended June 30,
---------------------------
2001 2000
------------- -------------
Net Cash Provided/(Used) by Operating Activities $ 206,780 $ 351,058
Cash Flows From Investing Activities:
-------------------------------------
Proceeds from sales of securities available for sale 21,376 17,329
Proceeds from maturities of securities available for sale 803,255 316,407
Proceeds from maturities of securities held to maturity 36,048 30,188
Purchases of securities available for sale (216,355) (146,329)
Net increase in loans (327,881) (1,123,858)
Purchases of assets to be leased (267,895) (233,584)
Principal payments on lease receivables 360,367 163,711
Fixed asset purchases, net (18,410) (29,458)
Acquisitions and investments in joint ventures (24,845) (265)
Other 12,486 5,806
------------- -------------
Net cash provided/(used) in investing activities 378,146 (1,000,053)
Cash Flows From Financing Activities:
-------------------------------------
Net increase/(decrease) in deposits (3,001,689) 479,760
Proceeds from issuance of commercial paper 1,252,765 1,615,801
Payments for maturity of commercial paper (1,258,609) (1,465,293)
Net increase /(decrease) in other short-term borrowings 2,144,581 (144,738)
Proceeds from issuance of long-term debt 627,029 381,641
Payments of long-term debt (87,726) (61,661)
Dividends paid (59,116) (54,389)
Purchases of treasury stock (15,520) (98,209)
Other 16,542 2,321
------------- -------------
Net cash provided/(used) by financing activities (381,743) 655,233
------------- -------------
Net increase in cash and cash equivalents 203,183 6,238
Cash and cash equivalents, beginning of year 864,693 879,856
------------- -------------
Cash and cash equivalents, end of period $ 1,067,876 $ 886,094
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 521,879 $ 465,855
Income taxes 66,931 67,348
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I" or
"Corporation") 2000 Annual Report on Form 10-K. The unaudited
financial information included in this report reflects all adjustments
(consisting only of normal recurring accruals) 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, 2001 and 2000. The
results of operations for the three and six months ended June 30, 2001
and 2000 are not necessarily indicative of results to be expected for
the entire year. Certain amounts in the 2000 consolidated financial
statements and analyses have been reclassified to conform with the 2001
presentation.
2. Change in Method of Accounting
During the fourth quarter of 2000, the Corporation adopted the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101
- REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB 101). SAB 101
provides guidance on a variety of revenue recognition matters. The
cumulative effect of change in accounting principles was retroactively
recorded as of January 1, 2000. The financial position and results of
operations as of and for the three and six months ended June 30, 2000
have been restated to reflect application of the guidance contained in
SAB 101. See Note 2 of the Notes to Consolidated Financial Statements
of Item 8 of the Corporation's 2000 Annual Report on Form 10-K.
On January 1, 2001, the Corporation adopted the Financial Accounting
Standards Board SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES. SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The Statement requires that changes in the derivatives fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. The statement requires that a company
must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The effects of adopting
SFAS 133 are as follows:
Other
Consolidated Comprehensive
Income Income
Statement (Equity)
------------- -------------
Fair value hedges $ (628) $ --
Cash flow hedges (43) (15,665)
------------- -------------
(671) (15,665)
Income tax benefit 235 5,483
------------- -------------
Cumulative effect of change in accounting principles $ (436) $ (10,182)
============= =============
See Note 10 for additional information regarding the Corporation's use
of derivative financial instruments.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
3. New Accounting Pronouncements
In September, 2000, the FASB issued SFAS 140, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
SFAS 140 replaces SFAS 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. It revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but
it carries over most of SFAS 125's provisions without reconsideration.
SFAS 140 is generally effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
March 31, 2001. The disclosure requirements are effective for
financial statements for fiscal years ending after December 15, 2000.
The adoption of SFAS 140 did not materially impact the Corporation's
present securitization activities.
In June, 2001, the FASB issued SFAS 141, BUSINESS COMBINATIONS. SFAS
141 supercedes APB Opinion No. 16, BUSINESS COMBINATIONS, and SFAS 38,
ACCOUNTING FOR PREACQUISTION CONTINGENCIES OF PURCHASED ENTERPRISES.
All business combinations in the scope of this Statement are to be
accounted for using the purchase method. This Statement carries
forward without reconsideration portions of APB Opinion No. 16 that
provide guidance related to the application of the purchase method.
The provisions of this Statement shall apply to all business
combinations initiated after June 30, 2001 and the provisions of this
Statement also shall apply to all business combinations accounted for
by the purchase method for which the date of acquisition is July 1,
2001, or later.
In June 2001, the FASB also issued SFAS 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. This Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supercedes APB Opinion No. 17, INTANGIBLE ASSETS. It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. The provisions of this Statement are
required to be applied starting with fiscal years beginning after
December 15, 2001. Goodwill and intangible assets acquired after June
30, 2001, will be subject immediately to the provisions of this
Statement.
With respect to the recent acquisitions of Derivion and Cyberbills,
the provisions of SFAS 142 will be applicable beginning January 1,
2002. The provisions of both SFAS 141 and SFAS 142 will apply to the
Corporation's merger with National City Bancorporation which was
completed on August 1, 2001. For the three months ended June 30, 2001
and 2000, the estimated after-tax goodwill amortization which would
cease under the provisions of SFAS 142 was approximately $4.7 million
and $4.4 million, respectively, and for the six months ended June 30,
2001 and 2000, was approximately $9.2 million and $8.6 million,
respectively. The Corporation is assessing whether SFAS 142 will
result in a reduction of amortization of identifiable intangibles and
has not yet determined how the impairment provisions of the standard
will affect its financial statements.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
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, 2001
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- ----------
Net Income $ 59,683
Convertible Preferred Dividends (1,115)
-------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 58,568 102,906 $ 0.57
==========
Effect of Dilutive Securities
Convertible Preferred Stock 1,115 3,844
Stock Options and Restricted Stock Plans -- 988
------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 59,683 107,738 $ 0.55
==========
Three Months Ended June 30, 2000
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- ----------
Net Income $ 90,747
Convertible Preferred Dividends (1,019)
-------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 89,728 103,895 $ 0.86
==========
Effect of Dilutive Securities
Convertible Preferred Stock 1,019 3,844
Stock Options and Restricted Stock Plans -- 1,003
------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 90,747 108,742 $ 0.83
==========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
Six Months Ended June 30, 2001
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- ----------
Net Income $ 145,849
Convertible Preferred Dividends (2,133)
-------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 143,716 102,872 $ 1.40
==========
Effect of Dilutive Securities
Convertible Preferred Stock 2,133 3,844
Stock Options and Restricted Stock Plans -- 1,056
------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 145,849 107,772 $ 1.35
==========
Six Months Ended June 30, 2001
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- ----------
Net Income $ 179,183
Convertible Preferred Dividends (1,941)
-------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 177,242 104,276 $ 1.70
==========
Effect of Dilutive Securities
Convertible Preferred Stock 1,941 3,844
Stock Options and Restricted Stock Plans -- 1,033
------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 179,183 109,153 $ 1.64
==========
5. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
June 30, December 31, June 30,
2001 2000 2000
------------- ------------- -------------
Investment securities available for sale:
U.S. treasury and government agencies $ 2,941,326 $ 3,342,952 $ 3,622,576
State and political subdivisions 151,999 151,041 147,525
Mortgage backed securities 278,779 342,171 163,455
Other 814,870 899,558 229,979
------------- ------------- -------------
Total $ 4,186,974 $ 4,735,722 $ 4,163,535
============= ============= =============
Investment securities held to maturity:
State and political subdivisions $ 1,070,665 $ 1,107,476 $ 1,135,147
Other 4,577 5,069 5,193
------------- ------------- -------------
Total $ 1,075,242 $ 1,112,545 $ 1,140,340
============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
6. The Corporation's loan and lease portfolio consists of the following
($000's):
June 30, December 31, June 30,
2001 2000 2000
------------- ------------- -------------
Commercial, financial & agricultural $ 5,293,256 $ 5,289,537 $ 5,068,961
Real estate:
Construction 675,881 619,281 542,958
Residential mortgage 4,978,639 5,049,557 5,377,244
Commercial mortgage 4,692,009 4,359,812 4,242,058
------------- ------------- -------------
Total real estate 10,346,529 10,028,650 10,162,260
Personal 1,129,611 1,174,248 1,248,109
Lease financing 1,018,677 1,094,652 915,185
Cash flow hedging instruments at fair value 15,038 -- --
------------- ------------- -------------
Total $ 17,803,111 $ 17,587,087 $ 17,394,515
============= ============= =============
7. Sale of Receivables
During the second quarter of 2001, $92.9 million of automobile loans
were sold in securitization transactions and gains of $2.1 million were
recognized. Other income associated with auto securitizations amounted
to $0.7 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 25.0 %
Weighted average life (in months) 30.2
Expected credit losses 0.18 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one month LIBOR yield curve
At June 30, 2001, 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 $ 302,183 $ 280,730 $ 582,913
Principal amounts of loans 60 days or more past due 461 871 1,332
Net credit losses 136 416 552
8. The Corporation's deposit liabilities consists of the following
($000's)
June 30, December 31, June 30,
2001 2000 2000
------------- ------------- -------------
Noninterest bearing demand $ 2,943,114 $ 3,129,834 $ 2,805,295
Savings and NOW 7,129,347 7,486,094 6,920,968
CD's $100,000 and over 2,355,617 2,663,050 2,272,079
Other time deposits 3,143,204 3,532,310 3,420,918
Foreign deposits 671,656 2,437,339 1,487,179
Fair value hedging instruments 6,715 0 0
------------- ------------- -------------
$ 16,249,653 $ 19,248,627 $ 16,906,439
============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
9. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
Three Months Ended June 30, 2001
-----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 59,683
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 3,206 $ (353) 2,853
Reclassification for securities
transactions included in net income (3,072) 1,075 (1,997)
------------- ------------ ------------
Unrealized gains (losses) 134 722 856
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 5,082 (1,780) 3,302
Reclassification adjustments for
hedging activities included in net income 1,871 (654) 1,217
------------- ------------ ------------
Net gains (losses) $ 6,953 $ (2,434) 4,519
------------- ------------ ------------
Other comprehensive income 5,375
------------
Total comprehensive income $ 65,058
============
Three Months Ended June 30, 2000
-----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 90,747
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (9,135) $ 3,193 (5,942)
Reclassification for securities
transactions included in net income 1,159 (406) 753
------------- ------------ ------------
Unrealized gains (losses) (7,976) 2,787 (5,189)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period N/A N/A N/A
Reclassification adjustments for
hedging activities included in net income N/A N/A N/A
------------- ------------ ------------
Net gains (losses) $ N/A $ N/A N/A
------------- ------------ ------------
Other comprehensive income (5,189)
------------
Total comprehensive income $ 85,558
============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
Six Months Ended June 30, 2001
-----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 145,849
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 57,576 $ (20,359) 33,217
Reclassification for securities
transactions included in net income (3,072) 1,075 (1,997)
------------- ------------ ------------
Unrealized gains (losses) 54,504 (19,284) 35,220
Net gains (losses) on derivatives
hedging variability of cash flows:
Adoption of SFAS 133 (15,665) 5,483 (10,182)
Arising during the period (213) 74 (139)
Reclassification adjustments for
hedging activities included in net income 2,918 (1,021) 1,897
------------- ------------ ------------
Net gains (losses) $ (12,960) $ 4,536 (8,424)
------------- ------------ ------------
Other comprehensive income 26,796
------------
Total comprehensive income $ 172,645
============
Six Months Ended June 30, 2000
-----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 179,183
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (40,344) $ 14,127 (26,217)
Reclassification for securities
transactions included in net income 13,415 (4,695) 8,720
------------- ------------ ------------
Unrealized gains (losses) (26,929) 9,432 (17,497)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period N/A N/A N/A
Reclassification adjustments for
hedging activities included in net income N/A N/A N/A
------------- ------------ ------------
Net gains (losses) $ N/A $ N/A N/A
------------- ------------ ------------
Other comprehensive income (17,497)
------------
Total comprehensive income $ 161,686
============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
10. Derivative Financial Instruments and Hedging Activities
TRADING INSTRUMENTS
The Corporation enters into interest rate swaps as part of its trading
activities which enable its 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, 2001, interest rate swaps designated as trading consisted
of $309.9 million in notional amount of receive fixed/pay floating with
an aggregate positive fair value of $1.3 million and $309.9 million in
notional amount of pay fixed/receive floating with an aggregate
negative fair value of $1.1 million.
Interest rate swaps designated as trading are recorded at fair value.
Gains and losses arising from changes in fair value are recorded in
other income.
FAIR VALUE HEDGES
The following table presents information with respect to the
Corporation's fair value hedges.
Fair Value Hedges
June 30, 2001 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
---------------------------------------------------------------------------------
Callable CDs Receive Fixed Swap $ 310.2 $ (5.9) 6.7
Equity Index CDs Receive Fixed Swap 14.3 (0.8) 3.8
Long-term Borrowings Receive Fixed Swap 200.0 11.2 25.4
----------- -----------
$ 524.5 $ 4.5
=========== ===========
The following table presents the Corporation's fair value hedges'
impact to net income.
Fair Value Hedges Three Months Ended June 30, 2001
Impact to Net Interest Income ($000's)
----------------------------------------------------------
Components
Hedged Excluded from Net
Item Ineffectiveness Ineffectiveness Settlement Total
---------------------------------------------------------------------------------
Callable CDs $ (159) $ -- $ 1,865 $ 1,706
Equity Index CDs -- -- (167) (167)
Long-term Borrowings -- -- 1,789 1,789
CMO's (Prepay Option) (269) -- 167 (102)
--------------- -------------- ----------- ------------
$ (428) $ -- $ 3,654 $ 3,226
=============== ============== =========== ============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
CASH FLOW HEDGES
The following table summarizes the Corporation's cash flow hedges at
June 30, 2001.
Cash Flow Hedges
June 30, 2001 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
---------------------------------------------------------------------------------
Variable Rate Loans Pay Fixed Swap $ 683.7 $ 14.9 1.5
Commercial Paper Pay Fixed Swap 200.0 (14.0) 5.4
Fed Funds Purchased Pay Fixed Swap 500.0 (5.2) 2.6
Variable Rate Loans Interest Rate Floor 25.0 0.1 0.5
------------ -------------
$ 1,408.7 $ (4.2)
============ =============
The following table presents the Corporation's cash flow hedges' impact
to net income.
Cash Flow Hedges Three Months Ended June 30, 2001
Impact to Net Interest Income ($000's) Estimated
------------------------------------------------------ Reclass From
Components Reclass AOCI in Next
Hedged Excluded from From 12 Months
Item Ineffectiveness Ineffectiveness AOCI Total ($000's)
---------------------------------------------------------------------------------------------
Variable Rate Loans $ -- $ -- $ 1,127 $ 1,127 $ 11,481
Commercial Paper 1,123 -- (1,505) (382) (6,614)
Fed Funds Purchased -- -- (1,522) (1,522) (4,749)
Variable Rate Loans 32 -- 29 61 178
---------------- --------------- --------- --------- -------------
$ 1,155 $ -- $ (1,871) $ (716) $ 296
================ =============== ========= ========= =============
For the three and six months ended June 30, 2000, the effect on net
interest income resulting from derivative financial instruments was a
negative $0.4 million and a negative $0.5 million, respectively.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
11. Acquisitions
The Corporation, through its Metavante Subsidiary, completed the
following acquisitions during the second quarter of 2001:
Derivion Corporation, a privately held company based in Atlanta
with operations in Toronto, Canada and London, is a provider of
e-bill presentment and payment technology.
CyberBills, Inc. is also a privately held company. Based in San
Jose, California with operations in Henderson, Nevada,
CyberBills is an electronic bill presentment and payment
application service provider.
In conjunction with these acquisitions, Metavante incurred
approximately $7.2 million of charges to write-off other
technologies replaced by these acquisitions. The Corporation
estimates that an addition $7 million of nonrecurring charges
will be incurred in the third and fourth quarters of 2001.
On August 1, 2001, the Corporation completed its merger with National
City Bancorporation which will be included in the Corporation's
financial statements beginning in the third quarter of 2001.
12. Segments
Generally, the Corporation organizes its segments based on legal
entities. Each entity offers a variety of products and services to
meet the needs of its customers and the particular market served. Each
entity has its own president and is separately managed subject to
adherence to Corporate policies. Discrete financial information is
reviewed by senior management to assess performance on a monthly basis.
Certain segments are combined and consolidated for purposes of
assessing financial performance.
Prior period segment information for the Banking segment and Data
Services segment have been restated for the transfer of certain assets
and liabilities of the Data Services Division, which represent the
payment services or item processing line of business. The transfer to
the Banking segment occurred at the beginning of the third quarter of
2000.
The Corporation evaluates the profit or loss performance of its
segments based on operating income. Operating income is after-tax
income excluding nonrecurring charges and charges for services from the
holding company. The accounting policies of the Corporation's segments
are the same as those described in Note 1 to the Corporation's Annual
Report on Form 10K, Item 8. Intersegment revenues may be based on
cost, current market prices or negotiated prices between the providers
and receivers of services.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
Based on the way the Corporation organizes its segments and the
requirements of Statement of Financial Accounting Standards No. 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION",
the Corporation has determined that it has two reportable segments.
Information with respect to M&I's segments is as follows:
Banking
-------
Banking consists of two banks headquartered in Wisconsin, with branches
in Wisconsin, Arizona. Nevada and Florida, one federally chartered
thrift headquartered in Nevada and an operational support subsidiary
which, beginning in the third quarter of 2000, includes item
processing. Banking consists of accepting deposits, making loans and
providing other services such as cash management, foreign exchange and
correspondent banking to a variety of commercial and retail customers.
Products and services are provided through a variety of delivery
channels including traditional branches, supermarket branches,
telephone centers, ATMs and the internet. Intrasegment revenues,
expenses and assets have been eliminated in the following information
and prior periods have been restated to include the item processing
line of business. ($ in millions):
Six Months Ended June 30, Three Months Ended June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenue:
Net interest income $ 388.3 $ 338.2 $ 200.8 $ 167.3
Other revenues:
Unaffiliated customers 140.7 134.4 72.1 76.5
Affiliated customers 14.7 9.1 6.7 4.5
------------- ------------- ------------- -------------
Total revenues 543.7 481.7 279.6 248.3
Expenses:
Intersegment charges 35.9 26.9 20.2 17.1
Other operating expense 229.1 210.8 115.0 104.3
------------- ------------- ------------- -------------
Total expenses 265.0 237.7 135.2 121.4
Provision for loan and lease losses 21.4 15.3 10.6 9.5
Income tax expense 83.2 72.1 43.2 36.7
------------- ------------- ------------- -------------
Operating income $ 174.1 $ 156.6 $ 90.6 $ 80.7
============= ============= ============= =============
Identifiable assets $ 24,923.7 $ 24,149.1 $ 24,923.7 $ 24,149.1
============= ============= ============= =============
Return on tangible equity 19.1% 19.6% 19.4% 19.7%
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
The following tables present revenue and operating income by line of
business for Banking. This information is based on the Corporation's
product profitability measurement system and is an aggregation of the
revenues and expenses associated with the products and services within
each line of business. Net interest income is derived from the
Corporation's internal funds transfer pricing system, expenses are
allocated based on available transaction volumes and the provision for
loan and lease losses is allocated based on credit risk. Equity is
assigned to products and services on a basis that considers market,
operational and reputation risk. ($ in millions):
Six Months Ended June 30, Three Months Ended June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Banking revenues:
Commercial Banking $ 215.0 $ 200.2 $ 108.0 $ 101.6
Retail Banking 218.4 201.0 114.0 105.9
Investments and Other 110.3 80.5 57.6 40.8
------------- ------------- ------------- -------------
Total banking revenues $ 543.7 $ 481.7 $ 279.6 $ 248.3
============= ============= ============= =============
Percent of total banking revenue:
Commercial Banking 39.5% 41.6% 38.6% 40.9%
Retail Banking 40.2 41.7 40.8 42.7
Investments and Other 20.3 16.7 20.6 16.4
------------- ------------- ------------- -------------
Total banking revenues 100.0% 100.0% 100.0% 100.0%
============= ============= ============= =============
Operating banking income
Commercial Banking $ 95.7 $ 83.0 $ 48.4 $ 42.8
Retail Banking 44.3 53.7 19.7 29.3
Investments and Other 34.1 19.9 22.5 8.6
------------- ------------- ------------- -------------
Total operating banking income $ 174.1 $ 156.6 $ 90.6 $ 80.7
============= ============= ============= =============
Percent of total operating banking income:
Commercial Banking 55.0% 53.0% 53.4% 53.0%
Retail Banking 25.5 34.3 21.8 36.4
Investments and Other 19.5 12.7 24.8 10.6
------------- ------------- ------------- -------------
Total operating banking income 100.0% 100.0% 100.0% 100.0%
============= ============= ============= =============
Banking return on tangible equity
Commercial Banking 23.5% 22.4% 23.3% 22.8%
Retail Banking 16.0 21.0 14.3 22.7
------------- ------------- ------------- -------------
Total banking return
on tangible equity 19.1% 19.6% 19.4% 19.7%
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
Data Services
-------------
Data Services includes Metavante and its nonbank subsidiaries.
Metavante provides data processing services, develops and sells
software and provides consulting services to M&I affiliates as well as
banks, thrifts, credit unions, trust companies and other financial
services companies throughout the world although its activities are
primarily domestic. In addition, Metavante derives revenue from the
Corporation's credit card merchant operations. The majority of
Metavante revenue is derived from internal and external processing.
Intrasegment revenues, expenses and assets have been eliminated in the
following information and prior periods have been restated to exclude
the item processing business. ($ in millions):
Six Months Ended June 30, Three Months Ended June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenue:
Net interest expense $ (1.5) $ (2.3) $ (0.9) $ (1.1)
Other revenues:
Unaffiliated customers 268.9 256.1 137.3 126.9
Affiliated customers 31.7 30.1 15.7 15.0
------------- ------------- ------------- -------------
Total revenues 299.1 283.9 152.1 140.8
Expenses:
Intersegment charges 8.2 2.1 5.0 1.4
Other operating expense 256.3 243.6 127.2 120.4
------------- ------------- ------------- -------------
Total expenses 264.5 245.7 132.2 121.8
Income tax expense 14.4 16.0 8.2 8.0
------------- ------------- ------------- -------------
Operating income $ 20.2 $ 22.2 $ 11.7 $ 11.0
============= ============= ============= =============
Identifiable assets $ 687.8 $ 558.6 $ 687.8 $ 558.6
============= ============= ============= =============
Return on equity 14.1% 17.9% 16.2% 17.4%
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
All Others
----------
M&I's primary other operating segments includes Trust Services,
Mortgage Banking (residential and commercial), Capital Markets Group,
Brokerage and Insurance Services and Commercial Leasing. Trust
Services provides investment management and advisory services as well
as personal, commercial and corporate trust services in Wisconsin,
Florida and Arizona. Capital Markets Group provide venture capital and
advisory services. Intrasegment revenues, expenses and assets for the
entities that comprise Trust Services and Capital Markets Group have
been eliminated in the following information. ($ in millions):
Six Months Ended June 30, Three Months Ended June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenue:
Net interest income $ 12.5 $ 10.4 $ 7.0 $ 5.4
Other revenues:
Unaffiliated customers 90.7 94.1 43.5 41.2
Affiliated customers 9.7 7.1 6.1 4.0
------------- ------------- ------------- -------------
Total revenues 112.9 111.6 56.6 50.6
Expenses:
Intersegment charges 14.5 15.2 7.1 7.8
Other operating expense 56.1 52.5 27.2 26.5
------------- ------------- ------------- -------------
Total expenses 70.6 67.7 34.3 34.3
Provision for loan and lease losses 0.4 0.1 0.2 0.1
Income tax expense 16.7 17.5 8.8 6.4
------------- ------------- ------------- -------------
Operating income $ 25.2 $ 26.3 $ 13.3 $ 9.8
============= ============= ============= =============
Identifiable assets $ 750.6 $ 724.2 $ 750.6 $ 724.2
============= ============= ============= =============
Return on tangible equity 21.0% 24.2% 21.4% 17.9%
============= ============= ============= =============
Total Revenues by type in All Others consist of the following:
Six Months Ended June 30, Three Months Ended June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
All Others Revenues:
Trust Services $ 61.3 $ 59.1 $ 31.0 $ 30.6
Residential Mortgage Banking 18.5 12.5 11.1 6.8
Capital Markets 10.9 18.6 3.8 2.8
Brokerage and Insurance 10.5 12.0 5.0 5.6
Commercial Leasing 6.4 5.0 3.5 2.6
Commercial Mortgage Banking 1.3 0.8 0.7 0.4
Others 4.0 3.6 1.5 1.8
------------- ------------- ------------- -------------
Total All Others revenues $ 112.9 $ 111.6 $ 56.6 $ 50.6
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2001 & 2000 (Unaudited)
Segment information reconciled to the Consolidated Financial Statements
is as follows ($ in millions):
Six Months Ended June 30, Three Months Ended June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
Banking $ 543.7 $ 481.7 $ 279.6 $ 248.3
Data Services 299.1 283.9 152.1 140.8
All Others 112.9 111.6 56.6 50.6
Corporate overhead (11.2) (9.3) (4.2) (5.1)
Nonrecurring securities losses (16.1) -- (16.1) --
Intersegment eliminations (56.6) (46.9) (28.9) (24.1)
------------- ------------- ------------- -------------
Consolidated revenues $ 871.8 $ 821.0 $ 439.1 $ 410.5
============= ============= ============= =============
Expenses:
Banking $ 265.0 $ 237.7 $ 135.2 $ 121.4
Data Services 264.5 245.7 132.2 121.8
All Others 70.6 67.7 34.3 34.3
Corporate overhead 38.0 30.8 23.9 13.6
Nonrecurring 51.8 -- 45.9 --
Intersegment eliminations (56.6) (46.9) (28.9) (24.1)
------------- ------------- ------------- -------------
Consolidated expenses $ 633.3 $ 535.0 $ 342.6 $ 267.0
============= ============= ============= =============
Net income (loss):
Operating income:
Banking $ 174.1 $ 156.6 $ 90.6 $ 80.7
Data Services 20.2 22.2 11.7 11.0
All Others 25.2 26.3 13.3 9.8
Corporate overhead (30.4) (23.6) (17.6) (10.7)
Nonrecurring (43.3) (2.3) (38.3) --
------------- ------------- ------------- -------------
Consolidated net income $ 145.8 $ 179.2 $ 59.7 $ 90.8
============= ============= ============= =============
Assets:
Banking $ 24,923.7 $ 24,149.1 $ 24,923.7 $ 24,149.1
Data Services 687.8 558.6 687.8 558.6
All Others 750.6 724.2 750.6 724.2
Corporate overhead 241.6 288.8 241.6 288.8
Intersegment eliminations (708.0) (501.0) (708.0) (501.0)
------------- ------------- ------------- -------------
Consolidated assets $ 25,895.7 $ 25,219.7 $ 25,895.7 $ 25,219.7
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended June 30,
-----------------------------
2001 2000
------------- -------------
Assets
Cash and due from banks $ 602,661 $ 614,749
Investment securities:
Trading securities 30,272 38,874
Short-term investments 402,889 279,762
Other investment securities:
Taxable 4,095,798 4,018,607
Tax-exempt 1,267,049 1,333,331
------------- -------------
Total investment securities 5,796,008 5,670,574
Loans and leases:
Commercial 5,328,255 5,013,395
Real estate 10,309,199 9,918,905
Personal 1,180,966 1,350,883
Lease financing 1,050,144 876,449
------------- -------------
Total loans and leases 17,868,564 17,159,632
Less: Allowance for loan and lease losses 245,020 234,395
------------- -------------
Net loans and leases 17,623,544 16,925,237
Premises and equipment, net 385,000 371,908
Accrued interest and other assets 1,580,144 1,454,088
------------- -------------
Total Assets $ 25,987,357 $ 25,036,556
============= =============
Liabilities and Shareholders' Equity
Deposits:
Noninterest bearing $ 2,727,725 $ 2,618,845
Interest bearing 14,471,737 14,573,829
------------- -------------
Total deposits 17,199,462 17,192,674
Funds purchased and security repurchase agreements 2,343,424 1,862,392
Other short-term borrowings 1,591,153 1,944,267
Long-term borrowings 1,697,154 1,309,830
Accrued expenses and other liabilities 814,578 629,156
------------- -------------
Total liabilities 23,645,771 22,938,319
Shareholders' equity 2,341,586 2,098,237
------------- -------------
Total Liabilities and Shareholders' Equity $ 25,987,357 $ 25,036,556
============= =============
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Six Months Ended June 30,
-----------------------------
2001 2000
------------- -------------
Assets
Cash and due from banks $ 607,625 $ 622,431
Investment securities:
Trading securities 30,097 40,214
Short-term investments 360,716 257,098
Other investment securities:
Taxable 4,291,126 4,075,637
Tax-exempt 1,280,329 1,337,611
------------- -------------
Total investment securities 5,962,268 5,710,560
Loans and leases:
Commercial 5,293,561 4,955,041
Real estate 10,207,841 9,759,153
Personal 1,177,455 1,332,301
Lease financing 1,064,838 850,874
------------- -------------
Total loans and leases 17,743,695 16,897,369
Less: Allowance for loan and lease losses 241,425 231,429
------------- -------------
Net loans and leases 17,502,270 16,665,940
Premises and equipment, net 385,706 372,104
Accrued interest and other assets 1,552,615 1,447,700
------------- -------------
Total Assets $ 26,010,484 $ 24,818,735
============= =============
Liabilities and Shareholders' Equity
Deposits:
Noninterest bearing $ 2,692,949 $ 2,613,962
Interest bearing 14,744,553 14,498,268
------------- -------------
Total deposits 17,437,502 17,112,230
Funds purchased and security repurchase agreements 2,131,319 2,306,975
Other short-term borrowings 1,675,081 1,543,886
Long-term borrowings 1,654,637 1,160,157
Accrued expenses and other liabilities 799,996 607,185
------------- -------------
Total liabilities 23,698,535 22,730,433
Shareholders' equity 2,311,949 2,088,302
------------- -------------
Total Liabilities and Shareholders' Equity $ 26,010,484 $ 24,818,735
============= =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 and 2000
-----------------------------------------
Net income for the second quarter of 2001 amounted to $59.7 million compared
to $90.7 million for the same period in the prior year. Basic and diluted
earnings per share were $.57 and $.55 respectively for the three months ended
June 30, 2001, compared with $.86 and $.83 respectively for the three months
ended June 30, 2000. The return on average assets and average equity were
0.92% and 10.22% for the quarter ended June 30, 2001 and 1.46% and 17.39% for
the quarter ended June 30, 2000.
Net income for the current quarter includes certain losses and expenses
incurred in connection with the previously announced structural changes and
acquisitions at the Corporation's Metavante subsidiary, auto lease residual
value write-downs and the final charge for the charter consolidation
initiative announced a year ago. The impact of these items is shown in the
following table ($000's):
Three Months ended June 30,
Pre-tax --------------------------------
Effect 2001 2000
--------------- --------------- ---------------
Income as Reported $ 59,683 $ 90,747
Nonrecurring Losses and Expenses:
Metavante Subsidiary
Reduction in force and realignment $ 11,028
Investment losses 12,706
Acquisition related 7,194
---------------
Metavante Subsidiary 30,928 18,587 --
Auto Lease Residual Value Write-downs 25,000 15,843 --
Charter Consolidations 5,972 3,940 --
--------------- --------------- ---------------
Total Nonrecurring Losses and Expenses $ 61,900 38,370 --
=============== --------------- ---------------
Operating Income $ 98,053 $ 90,747
=============== ===============
The following tables present a summary of each of the major elements of the
consolidated operating income statement, certain financial statistics and a
summary of the major operating income statement elements stated as a percent
of average consolidated assets converted to a fully taxable equivalent basis
(FTE) where appropriate for the current quarter and previous four quarters.
Operating income for the second quarter of 2001 excludes the items discussed
above. Operating income for the first quarter of 2001 excludes expenses
associated with charter consolidations and the cumulative effect of the
change in accounting for derivatives and hedging activities while operating
income in the third and fourth quarters of 2000 excludes certain nonrecurring
losses and expenses associated with balance sheet restructuring, charter
consolidations and the withdrawn Metavante IPO. "Cash operating income" and
related statistics is operating income before amortization of intangibles.
Amortization includes amortization of goodwill and core deposit premiums and
is net of negative goodwill accretion and the income tax expense or benefit,
if any related to each component. These calculations were specifically
formulated by the Corporation and may not be comparable to similarly titled
measures reported by other companies.
Summary Consolidated Operating Income Statements and Financial Statistics
-------------------------------------------------------------------------
($000's except per share data)
------------------------------
2001 2000
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------------------- -----------------------------------
Interest income $ 431,447 $ 452,434 $ 457,503 $ 443,265 $ 432,589
Interest expense (230,213) (266,655) (282,738) (279,200) (267,534)
---------- ----------- ----------- ----------- -----------
Net interest income 201,234 185,779 174,765 164,065 165,055
Provision for loan and lease losses (10,737) (11,063) (8,979) (5,938) (9,616)
Net investment securities gains (losses) (119) (123) (120) (110) 1,281
Other income 254,053 247,084 249,543 247,560 244,142
Other expense (296,713) (284,796) (282,262) (271,542) (266,981)
---------- ----------- ----------- ----------- -----------
Income before taxes 147,718 136,881 132,947 134,035 133,881
Income tax provision (49,665) (45,754) (43,230) (43,578) (43,134)
---------- ----------- ----------- ----------- -----------
Operating income $ 98,053 $ 91,127 $ 89,717 $ 90,457 $ 90,747
========== =========== =========== =========== ===========
Cash operating income $ 102,802 $ 95,828 $ 94,663 $ 95,606 $ 95,307
========== =========== =========== =========== ===========
Per Common Share
Operating income
Basic $ 0.94 $ 0.88 $ 0.86 $ 0.86 $ 0.86
Diluted 0.91 0.85 0.83 0.83 0.83
Cash Operating income
Basic $ 0.99 $ 0.92 $ 0.90 $ 0.91 $ 0.91
Diluted 0.95 0.89 0.87 0.88 0.88
Dividends 0.290 0.265 0.265 0.265 0.265
Return on Average Equity
Operating income 16.80% 16.20% 15.92% 16.57% 17.39%
Cash Operating income 20.15 19.60 19.40 20.45 21.52
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
2001 2000
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------------------- -----------------------------------
Interest income (FTE) 6.78% 7.16% 7.27% 7.16% 7.08%
Interest expense (3.55) (4.15) (4.42) (4.43) (4.30)
---------- ----------- ----------- ----------- -----------
Net interest income 3.23 3.01 2.85 2.73 2.78
Provision for loan and lease losses (0.17) (0.17) (0.14) (0.10) (0.15)
Net investment securities gains (losses) 0.00 0.00 0.00 0.00 0.02
Other income 3.92 3.85 3.90 3.93 3.91
Other expense (4.58) (4.45) (4.41) (4.31) (4.28)
---------- ----------- ----------- ----------- -----------
Income before taxes 2.40 2.24 2.20 2.25 2.28
Income tax provision (0.89) (0.82) (0.80) (0.81) (0.82)
---------- ----------- ----------- ----------- -----------
Return on average assets
based on operating income 1.51% 1.42% 1.40% 1.44% 1.46%
========== =========== =========== =========== ===========
Return on tangible average assets
based on cash operating income 1.61% 1.51% 1.50% 1.54% 1.55%
========== =========== =========== =========== ===========
NET INTEREST INCOME
-------------------
Net interest income for the second quarter of 2001 amounted to $201.2 million
compared to $165.1 million reported for the second quarter of 2000. The
reduction in interest rates of 275 basis points since early January along
with continued loan growth and increased spreads in loan products contributed
to the $36.1 million increase in net interest income. Factors negatively
affecting net interest income included the continued reliance on higher-cost
wholesale funding sources, reduced spreads due to an adverse shift in the mix
of bank-issued deposit types and the ongoing process of lengthening
liabilities in order to reduce future volatility in net interest income due
to interest rate movements.
Average earning assets in the second quarter of 2001 increased $0.8 billion
or 3.7% compared to the same period a year ago. Average loans, including
securitized adjustable rate mortgage loans (ARMs), accounted for $1.0 billion
of the growth in earning assets compared to the second quarter of last year.
Average investment securities, excluding securitized ARMs, declined $0.3
billion while other earning assets increased $0.1 billion for the three
months ended June 30, 2001 compared with the same period in the prior year.
Average interest bearing liabilities increased $0.4 billion or 2.1% in the
second quarter of 2001 compared to the same period in 2000. Since the second
quarter of 2000, average interest bearing deposits decreased $0.1 billion
while average total short-term borrowings increased $0.1 billion and average
long-term borrowings increased $0.4 billion.
Average noninterest bearing deposits increased $0.1 billion or 4.2% compared
to the same period last year.
The growth and composition of the Corporation's quarterly average loan
portfolio for the current quarter and previous four quarters are reflected
in the following table. Securitized ARM loans which are classified in the
consolidated balance sheets as investment securities available for sale are
included to provide a more meaningful comparison ($ in millions):
Consolidated Average Loans, Leases and Securitized ARMs
-------------------------------------------------------
2001 2000 Growth Pct.
------------------- ----------------------------- ----------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- -------- --------
Commercial $ 5,328 $ 5,258 $ 5,042 $ 4,950 $ 5,013 6.3 % 1.3 %
Real Estate
Construction
Commercial 538 495 469 450 407 32.3 8.7
Residential 122 126 123 117 112 9.5 (2.9)
--------- --------- --------- --------- --------- -------- --------
Total Construction 660 621 592 567 519 27.4 6.3
Commercial Mortgages 4,625 4,429 4,300 4,219 4,159 11.2 4.4
Residential
Residential mortgages 2,384 2,409 2,740 3,168 3,011 (20.8) (1.0)
Home equity loans and lines 2,641 2,647 2,462 2,261 2,230 18.4 (0.2)
Securitized ARM loans 734 828 523 375 403 82.0 (11.4)
--------- --------- --------- --------- --------- -------- --------
Total Residential 5,759 5,884 5,725 5,804 5,644 2.0 (2.1)
--------- --------- --------- --------- --------- -------- --------
Total Real Estate 11,044 10,934 10,617 10,590 10,322 7.0 1.0
Personal
Student 133 134 119 108 254 (47.7) (0.9)
Credit card 184 190 187 171 153 20.0 (3.3)
Other 864 850 852 883 944 (8.4) 1.7
--------- --------- --------- --------- --------- -------- --------
Total Personal 1,181 1,174 1,158 1,162 1,351 (12.6) 0.6
Lease financing
Commercial 382 385 377 360 341 12.1 (0.8)
Personal 668 695 698 616 536 24.8 (3.8)
--------- --------- --------- --------- --------- -------- --------
Total Lease Financing 1,050 1,080 1,075 976 877 19.8 (2.7)
--------- --------- --------- --------- --------- -------- --------
Total Consolidated Average
Loans, Leases and ARMs $ 18,603 $ 18,446 $ 17,892 $ 17,678 $ 17,563 5.9 % 0.8 %
========= ========= ========= ========= ========= ======== ========
Total Consolidated Average
Loans, Leases and ARMs
Commercial Banking $ 10,873 $ 10,567 $ 10,188 $ 9,979 $ 9,920 9.6 % 2.9 %
Retail Banking 7,730 7,879 7,704 7,699 7,643 1.1 (1.9)
--------- --------- --------- --------- --------- -------- --------
Total Consolidated Average
Loans, Leases and ARMs $ 18,603 $ 18,446 $ 17,892 $ 17,678 $ 17,563 5.9 % 0.8 %
========= ========= ========= ========= ========= ======== ========
Total Consolidated Average
Loans and Leases $ 17,869 $ 17,618 $ 17,369 $ 17,303 $ 17,160 4.1 % 1.4 %
========= ========= ========= ========= ========= ======== ========
Compared with the second quarter of 2000, total consolidated average loans,
leases and securitized ARMs increased $1.0 billion or 5.9%. The increase was
almost entirely attributable to commercial banking. Total loan growth in
commercial banking amounted to $953 million or 9.6% and was driven by
commercial loan growth of $315 million and commercial real estate loan growth
of $597 million of which, $131 million was attributable to commercial
construction loan growth. Retail banking loan growth amounted to $87 million
or 1.1%. Loan growth in retail banking was generally adversely affected by
increased prepayment activity. Home equity loans and lines increased $411
million. In the fourth quarter of 2000, the Corporation acquired $341
million of home equity loans and lines related to its private-label banking
services. Personal lease financing receivables increased $132 million.
Residential mortgages decreased $627 million or 20.8% while securitized ARM
loans increased $331 million. In addition to the ongoing sale of residential
mortgage production in the secondary market, late in the third quarter of
2000, the Corporation sold $300.8 million of portfolio ARM loans and late in
the fourth quarter of 2000, securitized $511 million of ARM loans. The
decline in average student loans of $121 million reflects the sale of
approximately $150 million of such loans late in the second quarter of 2000.
Also, late in the second quarter of 2001, approximately $46 million of
student loans were sold. Average other personal loans decreased $80 million
or 8.4%. Beginning in the third quarter of 2000, the Corporation began
securitizing indirect auto loans. Indirect auto loans securitized and sold
in 2000 amounted to $223 million and for the six months ended June 30, 2001
amounted to $161 million. The Corporation anticipates that indirect auto
loan origination will continue to be securitized and sold in future quarters.
Generally, the Corporation sells residential real estate loan production in
the secondary market. Residential real estate loans originated and sold to
investors amounted to $1.0 billion in the first half of 2001 compared to $215
million in the first six months of the prior year.
The growth and composition of the Corporation's quarterly average deposits
for the current and prior year's quarters are as follows ($ in millions):
Consolidated Average Deposits
Consolidated Average Deposits
-----------------------------
2001 2000 Growth Pct.
------------------- ----------------------------- ----------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- -------- --------
Noninterest bearing deposits
Commercial $ 1,779 $ 1,639 $ 1,716 $ 1,694 $ 1,677 6.1 % 8.5 %
Personal 601 583 582 572 591 1.7 3.1
Other 347 436 428 373 351 (1.0) (20.2)
--------- --------- --------- --------- --------- -------- --------
Total noninterest
bearing deposits 2,727 2,658 2,726 2,639 2,619 4.2 2.6
Interest bearing deposits
Savings & NOW 1,719 1,720 1,760 1,826 1,880 (8.6) (0.1)
Money market 5,590 5,873 5,558 5,248 5,092 9.8 (4.8)
Other CDs & time deposits 3,202 3,397 3,452 3,394 3,399 (5.8) (5.8)
CDs greater than $100,000 750 820 856 874 852 (12.0) (8.5)
Foreign Time 1,471 1,415 2,042 1,951 2,112 (30.3) 3.9
Brokered CDs 1,740 1,795 1,780 1,653 1,239 40.5 (3.1)
--------- --------- --------- --------- --------- -------- --------
Total interest
bearing deposits 14,472 15,020 15,448 14,946 14,574 (0.7) (3.7)
--------- --------- --------- --------- --------- -------- --------
Total consolidated
average deposits $ 17,199 $ 17,678 $ 18,174 $ 17,585 $ 17,193 0.0 % (2.7)%
========= ========= ========= ========= ========= ======== ========
Bank issued deposits $ 14,298 $ 14,182 $ 14,125 $ 13,715 $ 13,572 5.4 % 0.8 %
Wholesale deposits 2,901 3,496 4,049 3,870 3,621 (19.9) (17.0)
--------- --------- --------- --------- --------- -------- --------
Total consolidated
average deposits $ 17,199 $ 17,678 $ 18,174 $ 17,585 $ 17,193 0.0 % (2.7)%
========= ========= ========= ========= ========= ======== ========
Average bank issued deposits increased $726 million or 5.4% in the second
quarter of 2001 compared to the second quarter of 2000. As part of its
private-label banking services, the Corporation acquired $354 million of
deposits late in 2000. Average money market index accounts accounted for
approximately $1.1 billion of the growth in average bank issued deposits
while savings and NOW declined $161 million and bank issued money market
savings decreased $164 million. This shift in mix had an adverse impact on
the interest margin. Noninterest bearing deposits, as previously discussed,
increased $108 million. Average bank issued deposits were negatively
impacted by the sale of three bank branches in 2000 all located in Illinois.
Total deposits sold amounted to approximately $111 million. Approximately
$90 million of the aforementioned deposit sales occurred in the second
quarter of 2000.
The Corporation continues to have some reliance on wholesale deposits for
funding. Compared with the second quarter of 2000, average wholesale
deposits declined $720 million or 19.9% and were replaced, in part, with
borrowings. The increase in Brokered CDs of $501 million was offset by a
decrease in Eurodollar term and overnight funds, which are included in
foreign time, of $787 million and a decrease in brokered money market funds
of $434 million. The decrease in wholesale deposits reflects in part, M&I
electing during the current quarter to discontinue a contractual
institutional relationship that would have repriced to levels above
comparable funding alternatives.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current
quarter and prior year second quarter are presented in the following table.
Securitized ARM loans that are classified in the balance sheet as investment
securities available for sale are included with loans to provide a more
meaningful comparison ($ in millions):
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
-------------------------------- --------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
---------- ---------- ---------- ---------- ---------- ----------
Loans and leases (a) $ 18,602.7 $ 356.2 7.68 % $ 17,563.1 $ 352.9 8.08 %
Investment securities:
Taxable 3,361.7 56.1 6.86 3,615.2 58.5 6.34
Tax Exempt (a) 1,267.0 23.1 7.39 1,333.3 23.9 7.23
Other short-term investments (a) 433.2 4.2 3.93 318.6 5.1 6.51
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets $ 23,664.6 $ 439.6 7.48 % $ 22,830.2 $ 440.4 7.73 %
========== ========== ========== ========== ========== ==========
Money market savings $ 5,589.8 $ 53.8 3.86 % $ 5,092.1 $ 66.0 5.21 %
Regular savings & NOW 1,718.9 5.1 1.19 1,880.3 8.2 1.75
Other CDs & time deposits 4,673.1 66.2 5.68 5,510.8 79.4 5.79
CDs greater than
$100 & Brokered CDs 2,489.9 30.8 4.96 2,090.6 32.0 6.17
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing deposits 14,471.7 155.9 4.32 14,573.8 185.6 5.12
Short-term borrowings 3,934.6 49.3 5.02 3,806.7 60.6 6.40
Long-term borrowings 1,697.2 25.0 5.90 1,309.8 21.3 6.56
---------- ---------- ---------- ---------- ---------- ----------
Total interest
bearing liabilities $ 20,103.5 $ 230.2 4.59 % $ 19,690.3 $ 267.5 5.46 %
========== ========== ========== ========== ========== ==========
Net interest margin (FTE) as a
percent of average earning assets $ 209.4 3.56 % $ 172.9 3.03 %
========== ========== ========== ==========
Net interest spread (FTE) 2.89 % 2.27 %
========== ==========
(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 yield on average earning assets decreased 25 basis points since the
second quarter of 2000, which had a negative impact on interest income (FTE)
of approximately $15.4 million. The increase in the yield of taxable
investment securities reflects the Corporation's realignment of its available
for sale investment securities portfolio through the sale and purchase of
approximately $1.6 billion of U.S. Government Agency securities during the
third quarter of
2000. The increase in the volume of earning assets, primarily loans and
securitized ARMs, increased interest income by approximately $14.5 million
compared with the second quarter of 2000. The cost of interest bearing
deposits decreased 80 basis points from the same quarter of the previous year
which reflects, in part, less reliance on wholesale deposits offset by the
adverse shift in the bank issued deposit mix as previously discussed. Short-
term borrowing costs decreased 138 basis points and long-term borrowing costs
decreased 66 basis points compared with the second quarter of 2000 which
reflects, in part, the greater use of bank notes which were issued in the
later part of 2000. The overall decrease in the cost of interest bearing
liabilities of 87 basis points decreased interest expense by approximately
$45.5 million while the increase in the volume of interest bearing
liabilities increased interest expense by approximately $8.2 million.
In the recent declining interest rate environment, the Corporation has taken
certain actions and will continue to take certain actions, such as issuing
term debt, to lessen the amount of income at risk due to changes in interest
rates. As a result, net interest income will not experience the same
magnitude of benefit as it might have, absent the actions taken. In addition
to continuing to seek less costly funding sources, the Corporation may, among
other actions, continue to divest of lower yielding assets through sale or
securitization in the future.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of June 30, 2001 and the prior four quarters.
NONPERFORMING ASSETS
--------------------
($000's)
2001 2000
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Nonaccrual $ 137,355 $ 130,640 $ 121,425 $ 116,682 $ 119,584
Renegotiated 249 560 614 658 421
Past due 90 days or more 7,166 7,080 7,371 7,295 10,069
---------- ----------- ----------- ----------- -----------
Total nonperforming loans and leases 144,770 138,280 129,410 124,635 130,074
Other real estate owned 3,671 3,790 3,797 3,804 4,592
---------- ----------- ----------- ----------- -----------
Total nonperforming assets $ 148,441 $ 142,070 $ 133,207 $ 128,439 $ 134,666
========== =========== =========== =========== ===========
Allowance for loan and lease losses $ 244,486 $ 240,348 $ 235,115 $ 232,690 $ 234,119
========== =========== =========== =========== ===========
CONSOLIDATED STATISTICS
-----------------------
2001 2000
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Net Charge-offs (Recoveries) to
average loans and leases annualized 0.15% 0.13% 0.16% 0.17% 0.19%
Total nonperforming loans and leases
to total loans and leases 0.81 0.78 0.74 0.72 0.75
Total nonperforming assets to total loans
and leases and other real estate owned 0.83 0.80 0.76 0.74 0.77
Allowance for loan and lease losses
to total loans and leases 1.37 1.35 1.34 1.34 1.35
Allowance for loan and lease losses
to nonperforming loans and leases 169 174 182 187 180
NONACCRUAL LOANS AND LEASES BY TYPE
-----------------------------------
($000's)
2001 2000
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Commercial
Commercial, financial & agricultural $ 54,576 $ 50,273 $ 49,965 $ 39,203 $ 51,505
Lease financing receivables 1,892 2,959 1,921 2,046 2,271
---------- ----------- ----------- ----------- -----------
Total commercial 56,468 53,232 51,886 41,249 53,776
Real estate
Construction & land development 2,590 2,584 2,896 2,929 2,915
Commercial mortgage 38,440 38,797 35,011 42,246 36,159
Residential mortgage 38,389 34,244 29,895 28,155 25,198
---------- ----------- ----------- ----------- -----------
Total real estate 79,419 75,625 67,802 73,330 64,272
Personal 1,468 1,783 1,737 2,103 1,536
---------- ----------- ----------- ----------- -----------
Total nonaccrual loans and leases $ 137,355 $ 130,640 $ 121,425 $ 116,682 $ 119,584
========== =========== =========== =========== ===========
RECONCILIATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
-----------------------------------------------------
($000's)
2001 2000
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Beginning balance $ 240,348 $ 235,115 $ 232,690 $ 234,119 $ 232,471
Provision for loan and lease losses 10,737 11,063 8,979 5,938 9,616
Allowance of banks and loans acquired -- -- 1,270 -- --
Allowance transfer for loan securitization -- -- (1,022) -- --
Loans and leases charged-off
Commercial 3,607 2,577 2,253 5,210 2,711
Real estate 1,734 2,075 3,267 943 4,989
Personal 2,561 2,383 2,629 2,285 1,758
Leases 770 496 397 193 539
---------- ----------- ----------- ----------- -----------
Total charge-offs 8,672 7,531 8,546 8,631 9,997
Recoveries on loans and leases
Commercial 1,042 515 429 436 1,020
Real estate 403 410 645 291 373
Personal 531 728 627 508 539
Leases 97 48 43 29 97
---------- ----------- ----------- ----------- -----------
Total recoveries 2,073 1,701 1,744 1,264 2,029
---------- ----------- ----------- ----------- -----------
Net loans and leases
charge-offs (recoveries) 6,599 5,830 6,802 7,367 7,968
---------- ----------- ----------- ----------- -----------
Ending balance $ 244,486 $ 240,348 $ 235,115 $ 232,690 $ 234,119
========== =========== =========== =========== ===========
Nonperforming assets consist of nonperforming loans and leases and other real
estate owned (OREO).
OREO is comprised of commercial and residential properties acquired in
partial or total satisfaction of problem loans and branch premises held for
sale. At June 30, 2001, OREO acquired in satisfaction of debts amounted to
$3.1 million and branch premises held for sale amounted to $0.6 million.
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.
At June 30, 2001, nonperforming loans and leases amounted to $144.8 million
or 0.81% of consolidated loans and leases of $17.8 billion, an increase of
$6.5 million or 4.7% since March 31, 2001. Nonaccrual loans and leases
accounted for $6.7 million of the increase compared to the prior quarter.
Nonaccrual residential real estate loans increased $4.1 million. Nonaccrual
commercial, financial and agricultural loans increased $4.3 million. The
increase in nonaccrual commercial loans reflects the addition of two larger
syndicated loans, which were downgraded by their lead bank near the end of
the quarter. Offsetting this increase was the payoff of one larger syndicated
loan as well as other paydowns, payoffs and charge-offs. Nonaccrual
commercial real estate, lease financing receivables and personal loans all
decreased compared to the prior quarter.
Net charge-offs amounted to $6.6 million or 0.15% of average loans in the
second quarter of 2001 compared with net charge-offs of $5.8 million or 0.13%
of average loans in the first quarter of 2001 and have remained fairly stable
over the past four quarters.
The allowance for loan and lease losses represents management's estimate of
probable inherent losses which have occurred as of the date of the financial
statements. In determining the adequacy of the reserve the Corporation
evaluates the reserves necessary for specific nonperforming loans and also
estimates losses inherent in other loans and leases. As a result, the
allowance for loans and leases contains the following components:
Specific Reserve. The amount of specific reserves is determined
through a loan-by-loan analysis of nonperforming loans that
considers expected future cash flows, the value of collateral
and other factors that may impact the borrower's ability to make
payments when due. Included in this group are those nonaccrual
or renegotiated loans, which 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.
Allocated inherent reserve. The amount of the allocated portion
of the inherent loss reserve is determined by reserving factors
assigned to loans and leases based on the Corporation's internal
loan grading system. Line officers and loan committees are
responsible for continually assigning grades to commercial loan
types based on standards established in the Corporation's loan
policies and adherence to the standards is closely monitored by
the Corporation's Loan Review Group. Loan grades are similar
to, but generally more conservative than, regulatory
classifications. In addition, reserving factors are applied to
retail and smaller balance ungraded credits as well as specialty
loan products such as credit card, student loans and mortgages.
Reserving factors are derived and are determined based on such
factors as historical charge-off experience, remaining life, and
industry practice for reserve levels. The use of industry
practice is
intended to prevent an understatement of reserves based upon an over-
reliance on historical charge-offs during favorable economic
conditions.
Unallocated inherent reserve. Management determines the
unallocated portion of the inherent loss reserve based on
factors that cannot be associated with a specific credit or loan
categories. These factors include management's subjective
evaluation of local, national and international economic and
business conditions, changes to underwriting standards and
marketing channels such as use of centralized retail and small
business credit centers, trends towards higher advance rates and
longer amortization periods and the impact of acquisitions on
the Corporation's credit risk profile. The unallocated portion
of the inherent loss reserve also reflects management's attempt
to ensure that the overall reserve appropriately reflects a
margin for the imprecision necessarily inherent in estimates of
expected credit losses.
Management's evaluation of the factors described above resulted in a
allowance for loan and lease losses of $244.5 million at June 30, 2001
compared to $240.3 million at March 31, 2001. The level of reserve
reflects management's belief that losses inherent in the loan and lease
portfolio were larger than would otherwise be suggested by the
Corporation's favorable charge-off experience in recent years; the
Corporation's experience, as most recently evidenced in the current
quarter as well as the second and third quarters of 2000, of larger losses
in commercial and commercial real estate loans in brief periods at
particular points in economic cycles; and the view that the absolute level
of the allowance should not decline appreciably given continuing loan
growth and the slowing of economic prosperity.
OTHER INCOME
------------
Total other income in the second quarter of 2001 amounted to $237.9
million, a decrease of $7.5 million or 3.1%, compared to $245.4 million in
the same period last year. Included in other income in the current
quarter was approximately $16.0 million of investment securities losses
associated with equity investments held by Metavante relating to the
mortgage origination business as well as an equity investment whose
technology was replaced by Metavante's recent acquisitions of Derivion and
Cyberbills. Excluding the securities losses, total other income amounted
to $253.9 million in the current quarter, an increase of 3.5% compared to
the second quarter of last year.
Total data processing services revenue increased $10.4 million or 8.1%
from $127.7 million in the second quarter of 2000 to $138.1 million in the
current quarter. Account processing fees increased $13.6 million or 14.3%
and reflects growth in transaction volumes in electronic bill payment and
presentment and electronic banking. Professional services fees and
software revenue declined primarily due to lower software consulting fees.
Other revenue declined primarily due to lower equipment sales which was
offset by buyout fees, which increased $0.8 million compared to second
quarter of last year.
Trust services revenue amounted to $30.6 million in the second quarter of
2001, an increase of $0.6 million or 2.0% compared to $30.0 million in the
second quarter of 2000. Trust services revenue is largely derived from
asset-based fees. Maintaining year-over-year revenue growth in the
current market environment will be a continuing challenge.
Service charges on deposits increased $1.9 million or 10.2% and amounted
$20.4 million in the second quarter of 2001. The increase was primarily
attributable to service charges on commercial demand accounts.
Mortgage banking revenue increased $8.4 million in the second quarter of
2001 compared to the second quarter of 2000. Gains on the sale of
mortgage loans accounted for the majority of the increase which reflects
the increased origination and sale activity as previously discussed.
The increase in capital markets revenue is due to gains from the sale of
investments and other net unrealized gains which vary from period to
period.
Life insurance revenue for the second quarter of 2000 includes death
benefit gains of $0.6 million.
Other income in the second quarter of 2001 amounted to $30.7 million
compared to $41.3 million in the second quarter of 2000, a decrease of
$10.6 million or 25.7%. Gains and income from indirect auto
securitizations, which began in the third quarter of 2000 as previously
discussed, amounted to $2.8 million in the current quarter. Offsetting
this income was lower gains from the sale of student loans of
approximately $3.4 million. During the second quarter of 2000, the
Corporation recognized gains from the sale of branches of approximately
$9.9 million.
OTHER EXPENSE
-------------
Total other expense for the three months ended June 30, 2001, amounted to
$342.6 million including costs attributable to Metavante's acquisitions /
divestitures and its reduction in force and realignment of $14.9 million,
auto lease residual write-downs of $25.0 million and $6.0 million for the
single charter initiative which was completed during the current quarter.
Excluding these nonrecurring items, total other expense amounted to $296.7
million in the current quarter compared to $267.0 million in the second
quarter of last year, an increase of $29.7 million or 11.1%.
As previously announced, Metavante's reduction in force and realignment
consisted of the closing of selected regional offices in Idaho, Maryland,
Michigan, Virginia, and Green Bay, Wisconsin and a general reduction in
force across all classes of employees in the Milwaukee metropolitan area.
Approximately 400 positions were eliminated. Total costs were
approximately $11.0 million consisting primarily of severance of $9.6
million, lease termination and other occupancy exit costs of $0.7 million
and professional fees, including outplacement services of $0.4 million.
Approximately $5.6 million of the cost was paid as of June 30, 2001.
Also as previously announced, expenses and write-downs incurred in
conjunction with the acquisitions of Derivion and Cyberbills amounted to
$2.8 million and consisted of prepaid maintenance fees and capitalized
software costs associated with other technologies that will be replaced by
the new and enhanced bill presentment and payment technology obtained in
the acquisitions. In addition, a loss of approximately $1.0 million was
recorded from the sale of the assets of a subsidiary.
Single Charter related expenses incurred in the current quarter consisted
of the costs of programming changes required to support operations and
processes to achieve the scale required in the single charter environment,
systems conversion costs, consulting and other professional fees, costs
incurred to eliminate duplicate loan and deposit customer's accounts and
other affiliate shareholder matters and costs associated with employee
relocation, retention and severance. During the second quarter of 2001,
the remaining charter mergers were completed and the Corporation believes
there will be no more material single charter expenses in future quarters.
The total cost incurred for this initiative, which began in the third
quarter of 2000, was approximately $21.1 million which is approximately
$3.0 million ($1.0 million after-tax) less than originally estimated.
The Corporation's nonbanking businesses, especially its Data Services
segment ("Metavante"), continue to be the primary contributors to
operating expense growth. Excluding salaries and benefits expense,
Metavante operating expense growth represents over half of all of the
consolidated operating expense growth and reflects the cost of ongoing
investments in software, technology research and development and
infrastructure in potentially high-growth areas.
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 (excluding nonrecurring charges) 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, 2001 and 2000 and December 31, 2000 are:
Three Months Three Months Three Months
Ended Ended Ended
June 30, December 31, June 30,
2001 2000 2000
------------- ------------- -------------
Consolidated Corporation 64.0 % 65.4 % 64.0 %
Consolidated Corporation Excluding Metavante
Including Intangible Amortization 54.4 % 55.8 % 54.0 %
Excluding Intangible Amortization 52.2 % 53.4 % 52.0 %
Salaries and employee benefits expense amounted to $178.1 million in the
second quarter of 2001 including the severance charges of $9.6 million
previously discussed. Excluding the charge, salaries and benefits expense
amounted to $168.5 million compared to $158.9 million in the second
quarter of 2000, an increase of $9.6 million or 6.1%. Operating salaries
and employee benefits expense of Metavante decreased $0.1 million.
Adverse claims experience in employee health plans added $4.3 million to
expense in the current quarter.
Metavante's operating expense growth accounted for approximately $6.1
million or 85% of the increase in net occupancy, equipment, software,
supplies and printing and processing expenses in the second quarter of
2001 compared to the second quarter of 2000. These expense items also
include approximately $2.6 million of nonrecurring charges relating to
Metavante as previously discussed.
Approximately $2.2 million of the decline in professional fees was
attributable to Metavante. In addition, there were no fees relating to
mortgage Internet banking software development (Mortgagebot.com) in the
current year.
The increase in shipping and handling is attributable to increased costs
in the banking segment, which includes the item processing business.
The increase in intangibles amortization is primarily attributable to
amortization of loan servicing rights and more particularly amortization
of mortgage servicing rights which accounted for $1.0 million of the
increase in the current quarter compared to the same period in the prior
period and reflect accelerated amortization in response to increased
prepayment activity.
Other expense amounted to $61.1 million in the second quarter of 2001.
Included in this category in the current quarter were nonrecurring charges
aggregating $27.2 million consisting of auto lease residual write-downs of
$25.0 million, Metavante acquisition related software write-downs of $0.9
million, the loss on the sale of assets of a subsidiary of $1.0 million
and other miscellaneous charges related to Metavante's reduction in force
and realignment. Excluding these charges, other expense amounted to $33.9
million in the current quarter compared to $20.7 million in the second
quarter of last year, an increase of $13.2 million.
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 $11.2 million in the second quarter of 2000 and in the
current quarter amounted to $4.7 million resulting in an increase of $6.5
million in other expense in the second quarter of 2001 compared to second
quarter of 2000. Customer related expense, including advertising and
promotion, was $3.7 million higher in the current quarter compared to the
same period last year.
INCOME TAXES
------------
The provision for income taxes for the three months ended June 30, 2001
amounted to $26.1 million or 30.5% of pre-tax income compared to $43.1
million or 32.2% of pre-tax income for the three months ended June 30,
2000. The decrease in the effective tax rate is attributable to increased
state income tax benefits associated with the nonrecurring charges
previously discussed.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
---------------------------------------
Net income for the six months ended June 30, 2001 amounted to $145.8
million compared to $179.2 million in the same period of 2000. Basic and
diluted earnings per share were $1.40 and $1.35, respectively for the six
months ended June 30, 2001 compared to $1.70 and $1.64, respectively for
the same period last year. The year to date return on average equity was
12.72% in the current period and 17.25% for the six months ended June 30,
2000.
Net income for the first six months of 2001, includes certain losses and
expenses incurred in connection with the previously announced structural
changes and acquisitions at the Corporation's Metavante subsidiary, auto
lease residual value write-downs, the final charge for the charter
consolidation and the cumulative effect of the change in accounting for
derivatives and hedging activities. Net income for the first half of the
prior year includes the cumulative effect of the change in accounting for
certain conversion services provided by Metavante. The impact of these items
is shown in the following table ($000's):
Six Months ended June 30,
Pre-tax --------------------------------
Effect 2001 2000
---------------- --------------- ---------------
Income as Reported $ 145,849 $ 179,183
Nonrecurring Losses and Expenses:
Metavante Subsidiary
Reduction in force and realignment $ 11,028
Investment losses 12,706
Acquisition related 7,194
---------------
Metavante Subsidiary 30,928 18,587 --
Auto Lease Residual Value Write-downs 25,000 15,843 --
Charter Consolidations 11,952 8,465 --
Change in Accounting:
Derivatives and Hedging Activities 671 436 --
Conversion Services - Metavante 3,811 -- 2,279
--------------- --------------- ---------------
Total Nonrecurring Losses and Expenses $ 72,362 43,331 2,279
=============== --------------- ---------------
Operating Income $ 189,180 $ 181,462
=============== ===============
The following tables present a summary of each of the major elements of the
consolidated operating income statement, certain financial statistics and a
summary of the major operating income statement elements stated as a percent
of average consolidated assets converted to a fully taxable equivalent basis
(FTE) where appropriate for the six months ended June 30, 2001 and 2000,
respectively. Operating income for the six months ended June 30, 2001, and
2000, excludes the nonrecurring items previously discussed. "Cash operating
income" and related statistics is operating income before amortization of
intangibles. Amortization includes amortization of goodwill and core deposit
premiums and is net of negative goodwill accretion and the income tax expense
or benefit, if any, related to each component. These calculations were
specifically formulated by the Corporation and may not be comparable to
similarly titled measures reported by other companies.
Summary Consolidated Operating Income Statements and Financial Statistics
-------------------------------------------------------------------------
($000's except per share data)
Six Months Ended June 30,
--------------------------
2001 2000
------------ -------------
Interest income $ 883,881 $ 847,214
Interest expense (496,868) (513,038)
------------ -------------
Net interest income 387,013 334,176
Provision for loan and lease losses (21,800) (15,435)
Net investment securities gains (242) 1,281
Other income 501,137 485,568
Other expense (581,509) (534,978)
------------ -------------
Income before taxes 284,599 270,612
Income tax provision (95,419) (89,150)
------------ -------------
Operating income $ 189,180 $ 181,462
============ =============
Cash operating income $ 198,629 $ 190,510
============ =============
Per Common Share
Operating income
Basic $ 1.82 $ 1.72
Diluted 1.76 1.66
Cash Operating income
Basic $ 1.91 $ 1.81
Diluted 1.84 1.75
Dividends 0.555 0.505
Return on Average Equity
Operating income 16.50 % 17.47 %
Cash Operating income 19.88 21.72
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
Six Months Ended June 30,
--------------------------
2001 2000
------------ -------------
Interest income (FTE) 6.97 % 6.99 %
Interest expense (3.85) (4.16)
------------ -------------
Net interest income 3.12 2.83
Provision for loan and lease losses (0.17) (0.13)
Net investment securities gains 0.00 0.01
Other income 3.89 3.93
Other expense (4.51) (4.32)
------------ -------------
Income before taxes 2.33 2.32
Income tax provision (0.86) (0.85)
------------ -------------
Return on average assets
based on operating income 1.47 % 1.47 %
============ =============
Return on tangible average assets
based on cash operating income 1.56 % 1.56 %
============ =============
The increase in operating income was primarily due to growth in net interest
income of $52.8 million or 15.8%. Other income increased 3.2% and was
driven by data processing services and mortgage banking revenue. The
provision for loan and lease losses increased $6.4 million and other
operating expenses increased $46.5 million.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current six
months and prior year six months are presented in the following table.
Securitized ARM loans that are classified in the balance sheet as investment
securities available for sale are included with loans to provide a more
meaningful comparison ($ in millions):
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
-------------------------------- --------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
---------- ---------- ---------- ---------- ---------- ----------
Loans and leases (a) $ 18,524.7 $ 725.7 7.90 % $ 17,311.0 $ 687.9 7.99 %
Investment securities:
Taxable 3,510.1 119.0 6.98 3,662.0 118.4 6.34
Tax Exempt (a) 1,280.4 45.7 7.28 1,337.6 47.7 7.21
Other short-term investments (a) 390.8 8.8 4.56 297.3 9.0 6.09
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets $ 23,706.0 $ 899.2 7.68 % $ 22,607.9 $ 863.0 7.65 %
========== ========== ========== ========== ========== ==========
Money market savings $ 5,730.5 $ 125.6 4.42 % $ 5,078.7 $ 127.2 5.04 %
Regular savings & NOW 1,719.4 10.8 1.27 1,899.3 16.6 1.76
Other CDs & time deposits 4,742.6 135.7 5.77 5,497.9 154.1 5.64
CDs greater than $100
& Brokered CDs 2,552.1 71.0 5.61 2,022.4 60.3 5.99
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing deposits 14,744.6 343.1 4.69 14,498.3 358.2 4.97
Short-term borrowings 3,806.4 103.4 5.48 3,850.9 117.6 6.14
Long-term borrowings 1,654.6 50.4 6.14 1,160.1 37.2 6.45
---------- ---------- ---------- ---------- ---------- ----------
Total interest
bearing liabilities $ 20,205.6 $ 496.9 4.96 % $ 19,509.3 $ 513.0 5.29 %
========== ========== ========== ========== ========== ==========
Net interest margin (FTE) as a
percent of average earning assets $ 402.3 3.44 % $ 350.0 3.10 %
========== ========= ========== ==========
Net interest spread (FTE) 2.72 % 2.36 %
========= ==========
(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.
CAPITAL RESOURCES
-----------------
Shareholders' equity was $2.36 billion at June 30, 2001 compared to $2.24
billion at December 31, 2000 and $2.13 billion at June 30, 2000.
The Corporation had net unrealized gains on securities available for sale at
June 30, 2001 of $73.3 million, an increase in market value net of related
income tax effects of $35.2 million since December 31, 2000. Net unrealized
losses associated with derivative financial instruments designated as cash
flow hedges at June 30, 2001 amounted to $8.4 million.
There were no Common Stock repurchases in the second quarter of 2001. For
the six months ended June 30, 2001, M&I repurchased 0.3 million shares of its
Common Stock. The aggregate cost of the shares repurchased was $15.5
million.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in
the following tables.
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
June 30, 2001 December 31, 2000
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,137 10.20 % $ 2,071 10.20 %
Tier 1 Capital
Minimum Requirement 838 4.00 812 4.00
-------------------------------- --------------------------------
Excess $ 1,299 6.20 % $ 1,259 6.20 %
================================ ================================
Total Capital $ 2,521 12.03 % $ 2,445 12.05 %
Total Capital
Minimum Requirement 1,677 8.00 1,624 8.00
-------------------------------- --------------------------------
Excess $ 844 4.03 % $ 821 4.05 %
================================ ================================
Risk-Adjusted Assets $ 20,959 $ 20,294
================= =================
LEVERAGE RATIOS
---------------
($ in millions)
June 30, 2001 December 31, 2000
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,137 8.37 % $ 2,071 8.25 %
Minimum Leverage
Requirement 766 - 1,276 3.00 - 5.00 753 - 1,255 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,371 - 861 5.37 - 3.37 % $ 1,318 - 816 5.25 - 3.25 %
================================ ================================
Adjusted Average
Total Assets $ 25,535 $ 25,096
================= =================
FORWARD-LOOKING STATEMENTS
--------------------------
Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of
Financial Condition 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 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 the Corporation's Annual Report on Form 10-K for the
period ending December 31, 2000 and the Corporation's Prospectus dated June
18, 2001 as filed with the SEC pursuant to Rule 424(b)(3) under the
Securities Act of 1933, as amended, or as may be described form time to time
in the Corporation's subsequent SEC filings, and such factors ate
incorporated by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following updated information should be read in conjunction with the
Corporation's 2000 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 confine 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 across the array of 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.
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. In addition to information about 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 are 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 result into the Corporation's
budgeted / forecasted pre-tax income for the ensuing twelve months. 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,
2001 2001 2000
----------------- ----------------- ------------------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (4.6)% (4.9)% (6.4)%
Decline in rates 2.7 % 3.7 % 5.3 %
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 are also considered to be conservative
estimates due to the fact that they 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 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 assets 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, 2001 the fair value of equity at risk for a gradual 100bp
shift in rates was less than 1.0% of the market value of the Corporation.
The Corporation uses derivative financial instruments to manage interest rate
exposure. A small amount of derivatives are sold to customers where the
Corporation acts as an intermediary. The Corporation through its trading
accounts matches off these instruments in order to minimize exposure to
market risks.
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, but due to the nature of the investments,
cannot be quantified within acceptable levels of precision.
M&I Trust Services administer $58.2 billion in assets and directly manage a
portfolio of $12.5 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.
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 24,
2001.
B. Votes cast for the election of seven directors to serve until the 2004
Annual Meeting of Shareholders are as follows:
Director For Abstentions Non-Vote
-------------------- ---------- ------------ ----------
Jon F. Chait 80,110,465 -- --
Bruce E. Jacobs 79,990,577 -- --
Donald R. Johnson 80,072,253 -- --
D.J. Kuester 80,092,759 -- --
Edward L. Meyer, Jr. 80,054,514 -- --
San W. Orr, Jr. 80,101,138 -- --
George E. Wardeberg 80,055,490 -- --
Votes cast for the election of one director to serve until the 2003
Annual Meeting of Shareholders are as follows:
Director For Abstentions Non-Vote
-------------------- ---------- ----------- ----------
James A. Urdan 80,046,828 -- --
The continuing Directors of the Corporation are as follows:
Oscar C. Boldt Richard A. Abdoo
Timothy E. Hoeksema Wendell F. Bueche
Burleigh E. Jacobs Ted D. Kellner
James F. Kress Katharine C. Lyall
Robert A. Schaefer P.M. Platten, III
John S. Shiely J.B. Wigdale
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits:
Exhibit 11 Statements - 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 Computation of Ratio of Earnings to Fixed Charges
B. Reports on Form 8-K:
On June 22, 2001, the Corporation reported Items 5 and 7 in a Current
Report on Form 8-K in connection with expected second quarter financial
results.
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/ P.R. Justiliano
______________________________________
P.R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ J.E. Sandy
______________________________________
J.E. Sandy
Vice President
August 14, 2001
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ---------------------------------------------
(11) Statements - 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) Computation of Ratio of Earnings to Fixed Charges