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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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-15403
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
770 North Water Street
Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-7801
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class April 30, 2003
----- ----------------
Common Stock, $1.00 Par Value 226,676,936
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
March 31, December 31, March 31,
2003 2002 2002
------------- ------------- -------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 957,805 $ 1,012,090 $ 714,372
Federal funds sold and security resale agreements 11,045 30,117 64,368
Money market funds 185,551 104,325 1,116,767
------------- ------------- -------------
Total cash and cash equivalents 1,154,401 1,146,532 1,895,507
Investment securities:
Trading securities, at market value 22,245 21,252 7,350
Short-term investments, at cost which approximates market value 77,945 93,851 47,775
Available for sale at market value 4,355,890 4,266,372 3,229,268
Held to maturity at amortized cost, market value $980,528
($993,937 December 31, and $1,035,696 March 31, 2002) 921,662 942,819 1,010,677
------------- ------------- -------------
Total investment securities 5,377,742 5,324,294 4,295,070
Loans and leases
Mortgage loans held for sale 221,812 311,077 87,718
Loans and leases, net of unearned income 23,977,886 23,597,769 20,197,194
------------- ------------- -------------
Total loans and leases, net of unearned income 24,199,698 23,908,846 20,284,912
Less: Allowance for loan and lease losses 338,253 338,409 284,179
------------- ------------- -------------
Net loans and leases 23,861,445 23,570,437 20,000,733
Premises and equipment 438,820 442,395 416,547
Goodwill and other intangibles 1,093,868 1,088,804 729,705
Accrued interest and other assets 1,322,396 1,302,180 1,221,668
------------- ------------- -------------
Total Assets $ 33,248,672 $ 32,874,642 $ 28,559,230
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 4,278,218 $ 4,461,880 $ 3,381,636
Interest bearing 17,047,956 15,931,826 14,447,074
------------- ------------- -------------
Total deposits 21,326,174 20,393,706 17,828,710
Funds purchased and security repurchase agreements 3,730,611 946,583 3,404,461
Other short-term borrowings 1,780,463 4,335,213 2,205,009
Accrued expenses and other liabilities 1,010,058 1,067,120 875,085
Long-term borrowings 2,272,324 3,095,352 1,523,175
------------- ------------- -------------
Total liabilities 30,119,630 29,837,974 25,836,440
Shareholders' equity:
Series A convertible preferred stock, $1.00 par value;
336,370 shares issued March 31, 2002 -- -- 336
Common stock, $1.00 par value; 240,832,522 shares issued
(120,416,261 March 31, 2002) 240,833 240,833 120,416
Additional paid-in capital 566,004 569,162 877,577
Retained earnings 2,767,034 2,675,148 2,416,242
Accumulated other comprehensive income, net of related taxes (50,209) (44,427) 41,793
Less: Treasury common stock, at cost: 14,296,874 shares
(14,599,565 December 31, and 13,946,539 March 31, 2002) 373,959 381,878 712,590
Deferred compensation 20,661 22,170 20,984
------------- ------------- -------------
Total shareholders' equity 3,129,042 3,036,668 2,722,790
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 33,248,672 $ 32,874,642 $ 28,559,230
============= ============= =============
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended
March 31,
---------------------------
2003 2002
------------- -------------
Interest income
---------------
Loans and leases $ 330,185 $ 309,982
Investment securities:
Taxable 45,819 50,767
Exempt from federal income taxes 14,787 15,156
Trading securities 64 59
Short-term investments 734 4,443
------------- -------------
Total interest income 391,589 380,407
Interest expense
----------------
Deposits 62,827 70,915
Short-term borrowings 22,050 38,853
Long-term borrowings 42,227 30,362
------------- -------------
Total interest expense 127,104 140,130
Net interest income 264,485 240,277
Provision for loan and lease losses 25,692 15,196
------------- -------------
Net interest income after provision for loan and lease losses 238,793 225,081
Other income
------------
Data processing services:
e-Finance solutions 40,209 33,807
Financial technology solutions 116,879 111,210
Other -- 2
------------- -------------
Total data processing services 157,088 145,019
Item processing 10,274 10,336
Trust services 30,040 30,979
Service charges on deposits 26,238 25,574
Mortgage banking 17,528 9,376
Net investment securities gains (losses) 1,569 (745)
Life insurance revenue 7,243 7,331
Other 40,452 31,131
------------- -------------
Total other income 290,432 259,001
Other expense
-------------
Salaries and employee benefits 197,225 179,486
Net occupancy 18,635 17,090
Equipment 28,697 28,487
Software expenses 10,310 12,591
Processing charges 12,018 9,586
Supplies and printing 5,254 4,713
Professional services 10,696 9,795
Shipping and handling 13,953 12,054
Amortization of intangibles 6,919 4,299
Other 31,884 35,505
------------- -------------
Total other expense 335,591 313,606
------------- -------------
Income before income taxes 193,634 170,476
Provision for income taxes 65,604 54,847
------------- -------------
Net income $ 128,030 $ 115,629
============= =============
Net income per common share
Basic $ 0.57 $ 0.55
Diluted 0.56 0.53
Dividends paid per common share $ 0.160 $ 0.145
Weighted average common shares outstanding:
Basic 226,225 209,626
Diluted 227,774 219,541
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Three Months Ended
March 31,
---------------------------
2003 2002
------------- -------------
Net Cash Provided by Operating Activities $ 214,673 $ 427,929
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 7,049 1,167
Proceeds from maturities of securities available for sale 713,537 492,575
Proceeds from maturities of securities held to maturity 21,111 19,529
Purchases of securities available for sale (832,039) (166,103)
Net increase in loans (469,376) (606,725)
Purchases of assets to be leased (162,816) (38,563)
Principal payments on lease receivables 210,290 103,239
Fixed asset purchases, net (13,915) (6,400)
Purchase acquisitions, net of cash equivalents acquired (3,541) (7,853)
Other 4,854 2,632
------------- -------------
Net cash used in investing activities (524,846) (206,502)
Cash Flows From Financing Activities:
Net increase in deposits 929,955 526,930
Proceeds from issuance of commercial paper 1,735,063 928,180
Payments for maturity of commercial paper (1,763,649) (928,845)
Net increase in other short-term borrowings (320,939) (283,418)
Proceeds from issuance of long-term debt 392 200,300
Payments of long-term debt (231,673) (259,561)
Dividends paid (36,145) (31,164)
Purchases of treasury stock -- (48,492)
Other 5,038 6,385
------------- -------------
Net cash provided by financing activities 318,042 110,315
------------- -------------
Net increase in cash and cash equivalents 7,869 331,742
Cash and cash equivalents, beginning of year 1,146,532 1,563,765
------------- -------------
Cash and cash equivalents, end of period $ 1,154,401 $ 1,895,507
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 148,833 $ 151,744
Income taxes 18,886 10,340
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2003 & 2002 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I" or
"Corporation") 2002 Annual Report on Form 10-K. The unaudited financial
information included in this report reflects all adjustments consisting
only of normal recurring accruals and adjustments which are necessary for
a fair statement of the financial position and results of operations as
of and for the three months ended March 31, 2003 and 2002. The results
of operations for the three months ended March 31, 2003 and 2002 are not
necessarily indicative of results to be expected for the entire year.
Certain amounts in the 2002 consolidated financial statements and
analyses have been reclassified to conform with the 2003 presentation.
Common stock per share and average share information have been restated
for the 2-for-1 stock split effected in the form of a 100% stock dividend
for reporting periods prior to the effective date of June 17, 2002.
2. New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146 (SFAS 146),
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This
Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, LIABILITY RECOGNITION FOR CERTAIN
EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The principal
difference between SFAS 146 and Issue 94-3 relates to its requirements
for recognition of a liability for a cost associated with an exit or
disposal activity. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred and establishes that fair value is the objective
for initial measurement of the liability. Under Issue 94-3, a liability
for an exit cost was recognized at the date of an entity's commitment to
an exit plan. This statement is effective for exit or disposal activity
initiated after December 31, 2002. The provisions of Issue 94-3 shall
continue to apply for an exit activity initiated under an exit plan that
met the criteria of Issue 94-3 prior to the initial application of SFAS
146. The Corporation had no exit or disposal activities during the first
quarter of 2003.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS. This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to
recognize at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in this Interpretation
are effective for financial statements of interim or annual periods
ending after December 15, 2002. Loan commitments and commercial letters
of credit are excluded from the scope of this Interpretation. The
Corporation already records as a liability the premium received from the
issuance of a standby letter of credit and amortizes that liability into
earnings as the Corporation is released from risk which is generally the
term of the guarantee. As a result, the impact of this statement on the
consolidated financial statements of the Corporation is not material.
Standby letters of credit are contingent commitments issued by the
Corporation to support the obligations of a customer to a third party.
Standby letters of credit are issued to support public and private
financing, and other financial or performance obligations of customers.
Standby letters of credit have maturities which generally reflect the
maturities of the underlying obligations. The credit risk involved in
issuing standby letters of credit is the same as that involved in
extending loans to customers. If deemed necessary, the Corporation holds
various forms of collateral to support the standby letters of credit.
The gross amount of standby letters of credit issued at March 31, 2003
was $1.0 billion. Of the amount outstanding at March 31, 2003, standby
letters of credit conveyed to others in the form of participations
amounted to $60.0 million. Since many of the standby letters of credit
are expected to expire without being drawn upon, the amounts outstanding
do not necessarily represent future cash requirements. At March 31,
2003, the estimated fair value associated with letters of credit amounted
to $3.0 million.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2003 & 2002 (Unaudited)
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. This Interpretation
addresses consolidation by business enterprises of variable interest
entities. Under current practice, entities generally have been included
in consolidated financial statements because they are controlled through
voting interests. This Interpretation explains how to identify variable
interest entities and how an entity assesses its interests in a variable
interest entity to decide whether to consolidate that entity. FIN 46
requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. Variable interest
entities that effectively disperse risks will not be consolidated unless
a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. Transferors
to qualifying special purpose entities (QSPEs) and "grandfathered" QSPEs
subject to the reporting requirements of SFAS 140 are outside the scope
of FIN 46 and do not consolidate those entities. FIN 46 also requires
certain disclosures by the primary beneficiary of a variable interest
entity or an entity that holds a significant variable interest in a
variable interest entity.
FIN 46 is applicable for all entities with variable interests in variable
interest entities created after January 31, 2003 immediately. Public
companies with a variable interest in a variable interest entity created
before February 1, 2003, shall apply the provisions of FIN 46 no later
than the beginning of the first interim reporting period beginning after
June 15, 2003.
The Corporation does not believe FIN 46 impacts its consolidated
financial statements because its financial asset transfers are generally
to QSPEs or to entities in which the Corporation does not hold a
significant variable interest. For additional discussion on the
Corporation's asset sales and securitization activities see Note 7 and
the discussion of critical accounting policies contained in Item 2.
Management's Discussion and Analysis of Financial Position and Results
of Operations.
3. Comprehensive Income
The following tables present the Corporation's comprehensive income
$000's):
Three Months Ended March 31, 2003
----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- ------------ ------------
Net income $ 128,030
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (11,807) $ 4,135 (7,672)
Reclassification for securities
transactions included in net income (1,675) 586 (1,089)
-------------- ------------ ------------
Unrealized gains (losses) (13,482) 4,721 (8,761)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (10,484) 3,669 (6,815)
Reclassification adjustments for
hedging activities included in net income 15,067 (5,273) 9,794
-------------- ------------ ------------
Net gains (losses) $ 4,583 $ (1,604) 2,979
-------------- ------------ ------------
Other comprehensive income (loss) (5,782)
------------
Total comprehensive income (loss) $ 122,248
============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2003 & 2002 (Unaudited)
Three Months Ended March 31, 2002
----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- ------------ ------------
Net income $ 115,629
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (14,371) $ 4,846 (9,525)
Reclassification for securities
transactions included in net income -- -- --
-------------- ------------ ------------
Unrealized gains (losses) (14,371) 4,846 (9,525)
Net gains (losses) on derivatives
hedging variability of cash flows:
Adoption of SFAS 133
Arising during the period 6,566 (2,298) 4,268
Reclassification adjustments for
hedging activities included in net income 9,924 (3,474) 6,450
-------------- ------------ ------------
Net gains (losses) $ 16,490 $ (5,772) 10,718
-------------- ------------ ------------
Other comprehensive income (loss) 1,193
------------
Total comprehensive income (loss) $ 116,822
============
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 March 31, 2003
------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- --------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 128,030 226,225 $ 0.57
============
Effect of Dilutive Securities
Stock Options and Restricted Stock Plans -- 1,549
------------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 128,030 227,774 $ 0.56
============
Three Months Ended March 31, 2002
------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- --------------- -----------
Net Income $ 115,629
Convertible Preferred Dividends (1,115)
-------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 114,514 209,626 $ 0.55
============
Effect of Dilutive Securities
Convertible Preferred Stock 1,115 7,688
Stock Options and Restricted Stock Plans -- 2,227
------------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 115,629 219,541 $ 0.53
============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2003 & 2002 (Unaudited)
Options to purchase shares of common stock not included in the
computation of diluted net income per share because the options' exercise
price was greater than the average market price of the common shares are
as follows:
Three months ended March 31,
---------------------------------------
2003 2002
------------------ -------------------
Shares 11,903,950 6,445,128
Price Range $26.875 - $33.938 $28.457 - $33.938
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"ACCOUNTING FOR STOCK-BASED COMPENSATION," establishes financial
accounting and reporting standards for stock based employee compensation
plans.
SFAS 123 defines a fair value based method of accounting for employee
stock option or similar equity instruments. Under the fair value based
method, compensation cost is measured at the grant date based on the fair
value of the award using an option-pricing model that takes into account
the stock price at the grant date, the exercise price, the expected life
of the option, the volatility of the underlying stock, expected dividends
and the risk-free interest rate over the expected life of the option.
The resulting compensation cost is recognized over the service period,
which is usually the vesting period.
Compensation cost can also be measured and accounted for using the
intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 (APBO 25), "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES." Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant
date or other measurement date over the amount paid to acquire the stock.
The largest difference between SFAS 123 and APBO 25 as they relate to the
Corporation is the amount of compensation cost attributable to the
Corporation's fixed stock option plans and employee stock purchase plan
(ESPP). Under APBO 25 no compensation cost is recognized for fixed stock
option plans because the exercise price is equal to the quoted market
price at the date of grant and therefore there is no intrinsic value.
SFAS 123 compensation cost would equal the calculated fair value of the
options granted. Under APBO 25 no compensation cost is recognized for
the ESPP because the discount (15%) and the plan meets the definition of
a qualified plan of the Internal Revenue Code and meets the requirements
of APBO 25. Under SFAS 123 the safe-harbor discount threshold is 5% for
a plan to be non-compensatory. SFAS 123 compensation cost would equal
the initial discount (15% of beginning of plan period price per share)
plus the value of a one year call option on 85% of a share of stock for
each share purchased.
As permitted by SFAS 123, the Corporation continues to measure
compensation cost for such plans using the accounting method prescribed
by APBO 25.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2003 & 2002 (Unaudited)
Had compensation cost for the Corporation's ESPP and options granted
after January 1, 1995 been determined consistent with SFAS 123, the
Corporation's net income and earnings per share would have been reduced
to the following pro forma amounts:
Three months ended
March 31,
-------------------------
2003 2002
------------ ------------
Net Income, as reported $ 128,030 $ 115,629
Add: Stock-based employee compensation expense
included in reported net income, net of tax 1,018 898
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax (5,530) (5,295)
------------ ------------
Pro forma net income $ 123,518 $ 111,232
============ ============
Basic earnings per share:
As reported $ 0.57 $ 0.55
Pro forma 0.55 0.53
Diluted earnings per share:
As reported $ 0.56 $ 0.53
Pro forma 0.54 0.51
5. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
March 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Investment securities available for sale:
U.S. treasury and government agencies $ 3,384,400 $ 3,266,144 $ 2,125,690
State and political subdivisions 267,376 265,470 230,099
Mortgage backed securities 179,992 162,268 229,687
Other 524,122 572,490 643,792
--------------- --------------- ---------------
Total $ 4,355,890 $ 4,266,372 $ 3,229,268
=============== =============== ===============
Investment securities held to maturity:
U.S. government agencies $ 30 $ 30 $ --
State and political subdivisions 918,604 939,158 1,007,140
Other 3,028 3,631 3,537
--------------- --------------- ---------------
Total investment securities $ 921,662 $ 942,819 $ 1,010,677
=============== =============== ===============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2003 & 2002 (Unaudited)
6. The Corporation's loan and lease portfolio, including mortgage loans held
for sale, consists of the following ($000's):
March 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Commercial, financial and agricultural $ 7,009,023 $ 6,867,091 $ 6,106,708
Cash flow hedging instruments at fair value 2,644 4,423 9,205
--------------- --------------- ---------------
Total commercial, financial and agricultural 7,011,667 6,871,514 6,115,913
Real estate:
Construction 1,150,770 1,058,144 784,532
Residential mortgage 6,745,651 6,758,650 5,879,668
Commercial mortgage 6,754,730 6,586,332 5,426,945
--------------- --------------- ---------------
Total real estate 14,651,151 14,403,126 12,091,145
Personal 1,804,091 1,852,202 1,165,470
Lease financing 732,789 782,004 912,384
--------------- --------------- ---------------
Total loans and leases $ 24,199,698 $ 23,908,846 $ 20,284,912
=============== =============== ===============
7. Sale of Receivables
During the first quarter of 2003, $161.8 million of automobile loans were
sold in securitization transactions. Gains of $2.3 million were
recognized and is reported in Other income in the Consolidated Statements
of Income. Other income associated with auto securitizations in the
current quarter amounted to $1.8 million.
Key economic assumptions used in measuring the retained interests at the
date of securitization resulting from securitizations completed during
the first quarter were as follows (rate per annum):
Prepayment speed (CPR) 18-42 %
Weighted average life (in months) 19.9
Expected credit losses (based on original balance) 0.15-0.50 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one month LIBOR yield curve
At March 31, 2003, securitized automobile loans and other automobile
loans managed together with them along with delinquency and credit loss
information consisted of the following:
Securitized Portfolio Managed
----------- ----------- -----------
Loan balances $ 776,524 $ 128,289 $ 904,813
Principal amounts of loans 60 days or more past 698 240 938
Net credit losses year to date 613 67 680
8. Goodwill and Other Intangibles:
The changes in the carrying amount of goodwill for the three months ended
March 31, 2003 are as follows (dollars in thousands):
Banking Metavante Others Total
------------- ------------- ------------- -------------
Goodwill balance as of January 1, 2003 $ 801,977 $ 136,672 $ 4,687 $ 943,336
Goodwill acquired during the period -- -- -- --
Purchase accounting adjustments 7,881 3,541 -- 11,422
------------- ------------- ------------- -------------
Goodwill balance as of March 31, 2003 $ 809,858 $ 140,213 $ 4,687 $ 954,758
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2003 & 2002 (Unaudited)
Purchase accounting adjustments for the banking segment in the first
quarter of 2003 were primarily due to the adjustments required to be made
to the initial estimates of fair value for the loans acquired and the
deposits and borrowings assumed in the acquisition of Mississippi Valley
Bancshares, Inc. Upon conversion to the M&I systems, the final
valuations were completed.
Purchase accounting adjustments for Metavante in the first quarter of
2003, represent the net effect of additional contingent consideration
paid as a result of revenue targets being achieved, offset by the return
of consideration placed in escrow associated with acquisitions completed
in 2001.
At March 31, 2003, the Corporation's other intangible assets consisted
of the following (dollars in thousands):
March 31, 2003
---------------------------------------------
Gross Accum- Net
Carrying ulated Carrying
Amount Amort Value
------------- ------------- -------------
Other intangible assets:
Core deposit intangible $ 161,028 $ 53,659 $ 107,369
Data processing contract rights/customer lists 33,809 10,386 23,423
Trust customers 750 81 669
Tradename 2,500 417 2,083
------------- ------------- -------------
$ 198,087 $ 64,543 $ 133,544
============= ============= =============
Mortgage loan servicing rights $ 38,501 $ 32,935 $ 5,566
============= ============= =============
9. The Corporation's deposit liabilities consists of the following ($000's):
March 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Noninterest bearing demand $ 4,278,218 $ 4,461,880 $ 3,381,636
Savings and NOW 9,265,264 9,225,899 8,171,884
CD's $100,000 and over 3,279,520 2,793,793 1,891,344
Cash flow hedge-Institutional CDs 19,714 18,330 --
--------------- --------------- ---------------
Total CD's $100,000 and over 3,299,234 2,812,123 1,891,344
Other time deposits 2,853,089 2,979,502 2,914,585
Foreign deposits 1,630,369 914,302 1,469,261
--------------- --------------- ---------------
Total deposits $ 21,326,174 $ 20,393,706 $ 17,828,710
=============== =============== ===============
10. Derivative Financial Instruments and Hedging Activities
Trading Instruments
-------------------
The Corporation enters into interest rate swaps as part of its trading
and securitization activities. Interest rate swaps enable customers to
manage their exposures to interest rate risk. The Corporation's market
risk from unfavorable movements in interest rates is generally minimized
by concurrently entering into offsetting positions with nearly identical
notional values, terms and indices.
At March 31, 2003, interest rate swaps designated as trading consisted
of $852.3 million in notional amount of receive fixed/pay floating with
an aggregate positive fair value of $13.6 million and $598.2 million in
notional amount of pay fixed/receive floating with an aggregate negative
fair value of $10.2 million.
At March 31, 2003, the notional value of interest rate futures designated
as trading was $1.8 billion with a negative fair value of $0.2 million.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2003 & 2002 (Unaudited)
Interest rate swaps designated as trading are recorded at fair value.
Gains and losses arising from changes in fair value are recorded in other
income.
Hedging Instruments
-------------------
The following table presents information with respect to the
Corporation's fair value hedges.
Fair Value Hedges
March 31, 2003 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------------- -------------------- ------------- ------------- ------------
Callable CDs Receive Fixed Swap $ 234.0 $ (0.4) 6.6
Medium Term Notes Receive Fixed Swap 196.4 16.9 3.6
For the three months ended March 31, 2003, the impact from fair value
hedges to net interest income was a positive $6.6 million.
The following table presents information with respect to the
Corporation's cash flow hedges.
Cash Flow Hedges
March 31, 2003 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------------- -------------------- ------------- ------------- ------------
Variable Rate Loans Receive Fixed Swap $ 125.0 $ 2.6 0.5
Institutional CDs Pay Fixed Swap 820.0 (19.7) 1.9
Fed Funds Purchased Pay Fixed Swap 860.0 (46.6) 2.1
FHLB Advances Pay Fixed Swap 610.0 (53.5) 3.9
Long-Term Borrowings Pay Fixed Swap 15.0 (1.4) 3.3
For the three months ended March 31, 2003, the impact from cash flow
hedges to net interest income was a negative $17.9 million.
During the first quarter of 2003, the Corporation terminated the fair
value hedge on long-term borrowings. The adjustment to the fair value
of the hedged instrument of $35.2 million is being accreted as income
into earnings over the expected remaining term of the borrowings using
the effective interest method. Also during the quarter, the cash flow
hedge on commercial paper was terminated. The $32.6 million in
accumulated other comprehensive income at the time of termination is
being amortized as expense into earnings in the remaining periods during
which the hedged forecasted transaction affects earnings.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2003 & 2002 (Unaudited)
11. Segments
The following represents the Corporation's operating segments as of and
for the three months ended March 31, 2003 and 2002. There have not been
any changes to the way the Corporation organizes its segments or reports
segment financial information. Intersegment expenses and assets have been
eliminated. ($ in millions):
Three Months Ended March 31, 2003
------------------------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues:
Net interest income $ 262.5 $ (1.0) $ 7.8 $ (4.8) $ -- $ 264.5 $ -- $ 264.5
Fees - Unaffiliated
customers 91.6 157.1 41.2 0.6 (0.1) 290.4 -- 290.4
Fees - Affiliated
customers 13.5 16.9 7.2 -- (37.6) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues 367.6 173.0 56.2 (4.2) (37.7) 554.9 -- 554.9
Expenses:
Expenses - Unaffiliated
customers 143.1 141.6 30.6 17.3 0.5 333.1 2.5 335.6
Expenses - Affiliated
customers 20.8 8.0 9.2 0.2 (38.2) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses 163.9 149.6 39.8 17.5 (37.7) 333.1 2.5 335.6
Provision for loan and
lease losses 17.6 -- 8.1 -- -- 25.7 -- 25.7
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before taxes 186.1 23.4 8.3 (21.7) -- 196.1 (2.5) 193.6
Income tax expense 61.7 9.7 3.7 (8.5) -- 66.6 (1.0) 65.6
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Segment income $ 124.4 $ 13.7 $ 4.6 $ (13.2) $ -- $ 129.5 $ (1.5) $ 128.0
=========== =========== =========== =========== =========== =========== =========== ===========
Identifiable assets $ 32,161.9 $ 838.2 $ 651.7 $ 403.3 $ (806.4) $ 33,248.7 $ -- $ 33,248.7
=========== =========== =========== =========== =========== =========== =========== ===========
Return on average equity 17.5 % 16.8 % 8.1 % 16.8 %
=========== =========== =========== ===========
Metavante's segment income excludes charges for the three months ended
March 31, 2003 certain transition expenses associated with the
integration of the July 2002 PayTrust, Inc. acquisition which are
included in "Excluded Changes."
Three Months Ended March 31, 2002
------------------------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues:
Net interest income $ 239.7 $ (1.1) $ 6.8 $ (5.1) $ -- $ 240.3 $ -- $ 240.3
Fees - Unaffiliated
customers 73.3 145.1 39.6 1.3 (0.3) 259.0 -- 259.0
Fees - Affiliated
customers 10.2 15.9 5.5 -- (31.6) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues 323.2 159.9 51.9 (3.8) (31.9) 499.3 -- 499.3
Expenses:
Expenses - Unaffiliated
customers 124.7 137.7 27.1 24.5 (0.4) 313.6 -- 313.6
Expenses - Affiliated
customers 17.6 5.4 8.6 (0.1) (31.5) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses 142.3 143.1 35.7 24.4 (31.9) 313.6 -- 313.6
Provision for loan and
lease losses 14.9 -- 0.3 -- -- 15.2 -- 15.2
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before taxes 166.0 16.8 15.9 (28.2) -- 170.5 -- 170.5
Income tax expense 52.0 7.0 6.5 (10.6) -- 54.9 -- 54.9
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Segment income $ 114.0 $ 9.8 $ 9.4 $ (17.6) $ -- $ 115.6 $ -- $ 115.6
=========== =========== =========== =========== =========== =========== =========== ===========
Identifiable assets $ 27,571.6 $ 667.9 $ 635.4 $ 410.5 $ (726.2) $ 28,559.2 $ -- $ 28,559.2
=========== =========== =========== =========== =========== =========== =========== ===========
Return on average equity 19.4 % 13.7 % 17.1 % 18.0 %
=========== =========== =========== ===========
Total Revenue by type in All Others consists of the following:
Three Months Ended
March 31,
------------------------
2003 2002
----------- -----------
Trust Services $ 29.9 $ 30.9
Residential Mortgage Banking 12.7 9.2
Capital Markets 1.8 (0.5)
Brokerage and Insurance 5.8 6.5
Commercial Leasing 3.8 3.9
Commercial Mortgage Banking 1.3 0.9
Others 0.9 1.0
----------- -----------
Total revenue $ 56.2 $ 51.9
=========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended March 31,
----------------------------
2003 2002
------------- -------------
Assets
------
Cash and due from banks $ 763,722 $ 649,555
Investment securities:
Trading securities 18,374 9,606
Short-term investments 257,382 1,085,962
Other investment securities:
Taxable 3,883,443 2,932,812
Tax-exempt 1,197,289 1,229,325
------------- -------------
Total investment securities 5,356,488 5,257,705
Total loans and leases 23,900,481 19,450,822
Less: Allowance for loan and lease losses 345,055 279,936
------------- -------------
Net loans and leases 23,555,426 19,170,886
Premises and equipment, net 443,518 399,652
Accrued interest and other assets 2,515,467 1,865,136
------------- -------------
Total Assets $ 32,634,621 $ 27,342,934
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,860,497 $ 3,184,224
Interest bearing 17,286,492 13,848,258
------------- -------------
Total deposits 21,146,989 17,032,482
Funds purchased and security repurchase agreements 3,019,683 2,362,303
Other short-term borrowings 589,980 2,111,971
Long-term borrowings 3,697,993 2,427,736
Accrued expenses and other liabilities 1,079,911 809,505
------------- -------------
Total liabilities 29,534,556 24,743,997
Shareholders' equity 3,100,065 2,598,937
------------- -------------
Total Liabilities and Shareholders' Equity $ 32,634,621 $ 27,342,934
============= =============
Net income for the first quarter of 2003 amounted to $128.0 million compared
to $115.6 million for the same period in the prior year. Basic and diluted
earnings per share were $0.57 and $0.56, respectively, for the three months
ended March 31, 2003, compared with $0.55 and $0.53 for the three months ended
March 31, 2002. The return on average assets and average equity was 1.59% and
16.75% for the quarter ended March 31, 2003 and 1.72% and 18.04% for the
quarter ended March 31, 2002.
The results of operations and financial position as of and for the three months
ended March 31, 2003, include the effects of Metavante's acquisitions in the
second and third quarters of 2002 and the Corporation's banking acquisitions
of Richfield State Agency, Inc. and Century Bancshares, Inc. which both closed
on March 1, 2002 and the fourth quarter acquisition of Mississippi Valley
Bancshares, Inc. All acquisitions were accounted for using the purchase method
of accounting and accordingly the results of operations and financial position
are included from the dates the transactions were closed.
Net income in the current quarter includes the final transition charges related
to the integration of Metavante's July, 2002 acquisition of PayTrust, Inc.
("PayTrust"). Acquisition related transition expenses associated with PayTrust
amounted to $1.5 million (after-tax) or $.01 per diluted share in the first
quarter of 2003. Total cumulative transition expenses with respect to
PayTrust, which were incurred in the third and fourth quarters of 2002 and the
current quarter, amounted to $5.7 million after-tax which was in line with the
previously announced estimate of transition expenses of approximately $6.0
million after-tax.
NET INTEREST INCOME
-------------------
Net interest income for the first quarter of 2003 amounted to $264.5 million
compared to $240.3 million reported for the first quarter of 2002. Loan growth
and increased spreads on loan products and the impact of the banking purchase
acquisitions contributed to the increase in net interest income. Factors
negatively affecting net interest income included asset repricing in excess of
deposit repricing, the impact from lengthening liabilities in order to reduce
future volatility in net interest income due to interest rate movements and the
cash expenditures for common share buybacks and acquisitions in the prior year.
Average earning assets in the first quarter of 2003 increased $4.5 billion or
18.4% compared to the same period a year ago. Average loans and leases
accounted for $4.4 billion of the quarter over quarter growth in earning
assets. Average investment securities increased $0.9 billion and other short-
term investments declined $0.8 billion compared to the prior year. The
Corporation estimates that approximately $2.1 billion of the average loan and
lease growth in the current quarter was attributable to the banking related
purchase acquisitions.
Average interest bearing liabilities increased $3.8 billion or 18.5% in the
first quarter of 2003 compared to the same period in 2002. Average interest
bearing deposits increased $3.4 billion or 24.8% in the first quarter of 2003
compared to the first quarter of last year. Average borrowings increased $0.4
billion in the three months ended March 31, 2003 compared to the three months
ended March 31, 2002. The Corporation estimates that approximately $2.0
billion of the growth in average interest bearing deposits in the three months
ended March 31, 2003 was attributable to the banking related purchase
acquisitions.
Average noninterest bearing deposits in the current quarter increased $0.7
billion or 21.2% compared to the same period last year. Approximately $0.3
billion of the growth in average noninterest bearing deposits in the three
months ended March 31, 2003 compared to the same period in 2002 was
attributable to the banking related purchase acquisitions.
The growth and composition of the Corporation's quarterly average loan and
lease portfolio for the current quarter and previous four quarters are
reflected in the following table. ($ in millions):
Consolidated Average Loans and Leases
-------------------------------------
2003 2002 Growth Pct.
-------- ----------------------------------- ----------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
-------- -------- -------- -------- -------- ------- --------
Commercial
Commercial $ 6,827 $ 6,636 $ 5,998 $ 6,087 $ 5,848 16.8 % 2.9 %
Commercial real estate
Commercial mortgages 6,677 6,464 5,617 5,491 5,228 27.7 3.3
Construction 934 896 799 697 625 49.6 4.3
-------- -------- -------- -------- -------- ------- -------
Total commercial
real estate 7,611 7,360 6,416 6,188 5,853 30.1 3.4
Commercial lease financing 394 395 384 391 410 (4.0) (0.4)
-------- -------- -------- -------- -------- ------- -------
Total commercial 14,832 14,391 12,798 12,666 12,111 22.5 3.1
Personal
Residential real estate
Residential mortgages 2,623 2,741 2,545 2,371 2,346 11.8 (4.3)
Construction 175 156 150 137 131 33.0 11.9
-------- -------- -------- -------- -------- ------- -------
Total residential
real estate 2,798 2,897 2,695 2,508 2,477 13.0 (3.4)
Personal loans
Student 107 94 86 116 117 (8.2) 14.2
Credit card 187 182 172 163 164 14.3 2.8
Home equity loans
and lines 4,048 3,873 3,543 3,518 3,176 27.5 4.5
Other 1,561 1,445 1,198 934 876 78.2 8.0
-------- -------- -------- -------- -------- ------- -------
Total personal loans 5,903 5,594 4,999 4,731 4,333 36.2 5.5
Personal lease financing 367 406 449 488 530 (30.8) (9.6)
-------- -------- -------- -------- -------- ------- -------
Total personal 9,068 8,897 8,143 7,727 7,340 23.5 1.9
-------- -------- -------- -------- -------- ------- -------
Total consolidated Average
Loans and Leases $ 23,900 $ 23,288 $ 20,941 $ 20,393 $ 19,451 22.9 % 2.6 %
======== ======== ======== ======== ======== ====== ======
Compared with the first quarter of 2002, total consolidated average loans and
leases increased $4.4 billion or 22.9%. Approximately $2.1 billion of average
total consolidated loan and lease growth in the first quarter of 2003 was
attributable to acquisitions. Excluding the impact of acquisitions, total
average commercial loans and leases increased $0.9 billion and was driven by
average commercial real estate loans which grew approximately $0.8 billion.
Total average personal loans and leases increased $1.4 billion excluding the
impact of acquisitions. Average personal loan and lease growth, excluding
acquisitions, was driven primarily by growth in home equity loans and lines of
$0.8 billion with the remainder of the growth attributable to indirect auto
loans and residential real estate loans.
Generally, the Corporation sells residential real estate production in the
secondary market, although throughout 2002 as well as the current quarter,
selected loans with wider spreads and adjustable rate characteristics were
retained in the portfolio and serve as a potential source of liquidity in the
future. Residential real estate loans sold to investors amounted to $1.0
billion in the first quarter of 2003 compared to $0.6 billion in the first
quarter of the prior year. At March 31, 2003 and 2002, the Corporation had
approximately $0.2 billion and $0.1 billion of mortgage loans held for sale,
respectively. Auto loans securitized and sold in the first quarter of 2003
amounted to $0.2 billion compared to $0.1 billion in the first quarter of last
year. The Corporation anticipates that it will continue to divest of narrower
interest rate spread assets through sale or securitization in future periods.
Gains from the sale of mortgage loans amounted to $13.3 million in the first
quarter of 2003 compared to $6.1 million in the first quarter of last year and
are reported as a component of mortgage banking revenue in the consolidated
statements of income. Gains from the sale and securitization of auto loans
amounted to $2.3 million in the current quarter compared to $1.5 million in the
same period last year.
The rate of growth experienced in commercial loans has largely been the result
of attracting new customers in all of the Corporation's markets. Approximately
25% of the average loan growth from March 2002 to March 2003, excluding
acquired loans, came from the new markets that M&I either entered or expanded
(Arizona, Minneapolis and St. Louis). Existing customers are generally not
increasing their credit needs but appear to be successfully managing their
businesses through the slower economic conditions and lower revenue levels.
The Corporation's commercial lending activities have historically fared well
as the economy strengthens and it anticipates loan demand for existing
customers will slowly strengthen reflecting the condition of its markets in
future quarters. Home equity loans and lines, which includes M&I's wholesale
activity, continue to be the primary consumer loan product. The Corporation
anticipates these products will continue to drive growth to the consumer side
of its banking activities even as the recent refinance activity for first
mortgages slows.
The growth and composition of the Corporation's quarterly average deposits for
the current and prior year's quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2003 2002 Growth Pct.
-------- ----------------------------------- ----------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
-------- -------- -------- -------- -------- ------- --------
Bank issued deposits
Noninterest bearing deposits
Commercial $ 2,666 $ 2,811 $ 2,432 $ 2,275 $ 2,160 23.4 % (5.2)%
Personal 761 728 711 729 678 12.3 4.5
Other 433 439 363 357 346 25.1 (1.4)
-------- -------- -------- -------- -------- ------- -------
Total noninterest
bearing deposits 3,860 3,978 3,506 3,361 3,184 21.2 (2.9)
Interest bearing deposits
Savings and NOW 2,896 2,733 2,420 2,252 1,994 45.2 6.0
Money market 6,274 6,443 5,556 5,727 5,844 7.4 (2.6)
Foreign activity 867 891 733 686 694 24.9 (2.7)
-------- -------- -------- -------- -------- ------- -------
Total interest
bearing deposits 10,037 10,067 8,709 8,665 8,532 17.6 (0.3)
Time deposits
Other CDs and
time deposits 2,905 3,033 2,756 2,868 2,881 0.8 (4.2)
CDs greater than $100,000 662 680 634 657 651 1.6 (2.6)
-------- -------- -------- -------- -------- ------- -------
Total time deposits 3,567 3,713 3,390 3,525 3,532 1.0 (3.9)
-------- -------- -------- -------- -------- ------- -------
Total bank issued deposits 17,464 17,758 15,605 15,551 15,248 14.5 (1.7)
Wholesale deposits
Money market 77 75 74 75 83 (7.3) 2.1
Brokered CDs 2,682 1,584 1,606 1,621 1,043 157.1 69.3
Foreign time 924 1,206 1,001 1,348 658 40.4 (23.4)
-------- -------- -------- -------- -------- ------- -------
Total wholesale deposits 3,683 2,865 2,681 3,044 1,784 106.4 28.5
-------- -------- -------- -------- -------- ------- -------
Total consolidated
average deposits $ 21,147 $ 20,623 $ 18,286 $ 18,595 $ 17,032 24.2 % 2.5 %
======== ======== ======== ======== ======== ======= =======
Total average deposits increased $4.1 billion or 24.2% in the first quarter of
2003 compared to the first quarter of 2002. The Corporation believes that
annual deposit growth better reflects trends due to the seasonality that occurs
between quarters. Average deposits associated with the acquisitions accounted
for approximately $2.3 billion of the first quarter 2003 versus 2002 quarterly
average deposit growth. Excluding the effect of the acquisitions, noninterest
bearing deposits increased $0.4 billion while bank-issued interest bearing
activity accounts increased $0.2 billion. The growth in bank-issued transaction
deposits reflects the successful sales focus on certain activity accounts
particularly in the new and expanded markets which accounted for almost 60% of
the growth in transaction deposits, excluding acquired balances. Excluding
acquisitions, average bank-issued time deposits declined $0.6 billion. M&I's
markets have continued to experience some unprofitable pricing on single
service time deposit relationships to the extent of pricing time deposits above
comparable wholesale levels. The Corporation has elected not to pursue such
relationships. The Corporation believes this strategy serves to help stabilize
the interest margin, given the current rate environment, both now and in future
periods when market rates begin to rise and these deposit accounts rapidly
reprice.
The growth in bank issued deposits includes both commercial and retail banking
and the effect of the lower interest rate environment. In commercial banking,
the focus remains on developing deeper relationships through the sale of
treasury management products and services along with revised incentive plans
focused on growing deposits. The retail banking strategy continues to focus
on aggressively selling the right products to meet the needs of customers and
enhance the Corporation's profitability. Specific retail deposit initiatives
include bank-at-work, single service calling, and retention calling programs
as well as in 2002, an aggressive checking promotion in the Arizona market.
Compared with the first quarter of 2002, average wholesale deposits increased
$1.9 billion. The Corporation has made greater use of wholesale funding
alternatives, especially institutional CDs, during the latter half of 2002 and
2003. These deposits are funds in the form of deposits generated through
distribution channels other than M&I's own banking branches. These deposits
allow the Corporation's bank subsidiaries to gather funds across a geographic
base and at pricing levels considered attractive, where the underlying
depositor may be retail or institutional. Access and use of these funding
sources also provides the Corporation with the flexibility to not pursue
unprofitable single service time deposit relationships as previously discussed.
During the first quarter of 2003, $2.0 million of the Corporation's Medium-term
Series D notes and $227.0 million of the banking segment's borrowings from the
Federal Home Loan Bank matured. There was no material issuance of long-term
debt during the first quarter of 2003.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the three months
ended March 31, 2003 and 2002, are presented in the following tables ($ in
millions):
Consolidated Yield and Cost Analysis
------------------------------------
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
------------------------------- -------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------------------------- --------------------------------
Loans and leases: (a)
Commercial loans and leases $ 7,220.8 $ 83.8 4.70 % $ 6,257.8 $ 83.4 5.40 %
Commercial real estate loans 7,611.9 111.9 5.96 5,852.9 98.8 6.85
Residential real estate loans 2,797.6 44.0 6.39 2,476.7 44.0 7.21
Home equity loans and lines 4,048.3 59.5 5.96 3,176.2 54.3 6.93
Personal loans and leases 2,221.9 31.6 5.76 1,687.2 30.0 7.21
---------- --------- --------- ---------- --------- ---------
Total loans and leases 23,900.5 330.8 5.61 19,450.8 310.5 6.48
Investment securities (b):
Taxable 3,883.4 45.8 4.87 2,932.8 50.8 7.24
Tax Exempt (a) 1,197.3 22.2 7.66 1,229.3 22.6 7.52
---------- --------- --------- ---------- --------- ---------
Total investment securities 5,080.7 68.0 5.52 4,162.1 73.4 7.32
Trading securities (a) 18.4 0.1 1.48 9.6 0.1 2.58
Other short-term investments 257.4 0.7 1.16 1,086.0 4.4 1.66
---------- --------- --------- ---------- --------- ---------
Total interest earning assets $ 29,257.0 $ 399.6 5.56 % $ 24,708.5 $ 388.4 6.40 %
========== ========= ========= ========== ========= =========
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 10,036.2 $ 22.4 0.91 % $ 8,531.5 $ 27.3 1.30 %
Bank issued time deposits 3,567.3 23.7 2.70 3,532.6 32.6 3.74
---------- --------- --------- ---------- --------- ---------
Total bank issued deposits 13,603.5 46.1 1.38 12,064.1 59.9 2.01
Wholesale deposits 3,683.0 16.7 1.84 1,784.2 11.0 2.50
---------- --------- --------- ---------- --------- ---------
Total interest bearing deposits 17,286.5 62.8 1.47 13,848.3 70.9 2.08
Short-term borrowings 3,609.6 22.1 2.48 4,474.3 38.8 3.52
Long-term borrowings 3,698.0 42.2 4.63 2,427.7 30.4 5.07
---------- --------- --------- ---------- --------- ---------
Total interest bearing liabilities $ 24,594.1 $ 127.1 2.10 % $ 20,750.3 $ 140.1 2.74 %
========== ========= ========= ========== ========= =========
Net interest margin (FTE) as a
percent of average earning assets $ 272.5 3.79 % $ 248.3 4.09 %
========= ========= ========= =========
Net interest spread (FTE) 3.46 % 3.66 %
========= =========
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax rate
of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for available
for sale securities.
The net interest margin on a fully taxable equivalent basis ("FTE") decreased
30 basis points from 4.09 percent in the first quarter 2002 to 3.79 percent in
the first quarter of 2003. The yield on average earning assets decreased 84
basis points in the first quarter of 2003 compared to the first quarter of the
prior year. The cost of bank issued interest bearing deposits in the current
quarter decreased 63 basis points from the same quarter of the previous year.
The increase in noninterest bearing deposits as previously discussed was a
source of benefit to the net interest margin. The cost of other funding
sources (wholesale deposits and total borrowings) decreased 76 basis points in
the current quarter compared to the first quarter of last year.
The Corporation anticipates the net interest margin will decline a few basis
points over each of the next two quarters, with net interest income growing
with internal growth. The current lower absolute level of interest rates and
increased level of prepayments has shortened the expected life of many of the
Corporation's financial assets. The Corporation intends to continue to
actively manage the repricing characteristics of its interest bearing
liabilities so as to minimize the long-term impact on net interest income. The
net interest margin can vary depending on loan and deposit growth, lending
spreads and future interest rate changes.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of March 31, 2003 and the prior four quarters.
Nonperforming Assets
--------------------
($000's)
2003 2002
---------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Nonaccrual $ 205,373 $ 188,232 $ 173,185 $ 160,250 $ 164,444
Renegotiated 312 326 305 314 366
Past due 90 days or more 6,439 5,934 7,407 6,560 5,520
----------- ----------- ----------- ----------- -----------
Total nonperforming loans and leases 212,124 194,492 180,897 167,124 170,330
Other real estate owned 8,259 8,692 8,223 6,296 6,736
----------- ----------- ----------- ----------- -----------
Total nonperforming assets $ 220,383 $ 203,184 $ 189,120 $ 173,420 $ 177,066
=========== =========== =========== =========== ===========
Allowance for loan and lease losses $ 338,253 $ 338,409 $ 300,628 $ 292,512 $ 284,179
=========== =========== =========== =========== ===========
Consolidated Statistics
-----------------------
2003 2002
----------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Net charge-offs to average
loans and leases annualized 0.44 % 0.23 % 0.20 % 0.17 % 0.23 %
Total nonperforming loans and leases
to total loans and leases 0.88 0.81 0.84 0.80 0.84
Total nonperforming assets to total loans
and leases and other real estate owned 0.91 0.85 0.88 0.83 0.87
Allowance for loan and lease losses
to total loans and leases 1.40 1.42 1.40 1.40 1.40
Allowance for loan and lease losses
to nonperforming loans and leases 159 174 166 175 167
Nonaccrual Loans and Leases by Type
-----------------------------------
($000's)
2003 2002
----------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Commercial
Commercial, financial and agricultural $ 93,400 $ 81,433 $ 78,421 $ 62,349 $ 65,513
Lease financing receivables 6,755 2,819 2,994 3,993 4,876
----------- ----------- ----------- ----------- -----------
Total commercial 100,155 84,252 81,415 66,342 70,389
Real estate
Construction and land development 2,017 145 79 1,399 533
Commercial mortgage 42,241 46,179 37,408 40,933 39,436
Residential mortgage 59,547 56,166 52,590 50,079 52,504
----------- ----------- ----------- ----------- -----------
Total real estate 103,805 102,490 90,077 92,411 92,473
Personal 1,413 1,490 1,693 1,497 1,582
----------- ----------- ----------- ----------- -----------
Total nonaccrual loans and leases $ 205,373 $ 188,232 $ 173,185 $ 160,250 $ 164,444
=========== =========== =========== =========== ===========
Reconciliation of Allowance for Loan and Lease Losses
-----------------------------------------------------
($000's)
2003 2002
----------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Beginning balance $ 338,409 $ 300,628 $ 292,512 $ 284,179 $ 268,198
Provision for loan and lease losses 25,692 23,398 18,842 16,980 15,196
Allowance of banks and loans acquired -- 27,848 -- -- 11,965
Loans and leases charged-off
Commercial 2,256 8,276 6,482 3,740 4,505
Real estate 3,130 3,074 2,113 2,580 3,008
Personal 2,969 3,608 2,632 3,086 2,939
Leases 20,060 2,496 2,053 1,767 2,930
----------- ----------- ----------- ----------- -----------
Total charge-offs 28,415 17,454 13,280 11,173 13,382
Recoveries on loans and leases
Commercial 902 1,525 1,070 542 682
Real estate 495 971 343 770 474
Personal 733 813 667 840 733
Leases 437 680 474 374 313
----------- ----------- ----------- ----------- -----------
Total recoveries 2,567 3,989 2,554 2,526 2,202
----------- ----------- ----------- ----------- -----------
Net loans and leases charge-offs 25,848 13,465 10,726 8,647 11,180
----------- ----------- ----------- ----------- -----------
Ending balance $ 338,253 $ 338,409 $ 300,628 $ 292,512 $ 284,179
=========== =========== =========== =========== ===========
Nonperforming assets consist of nonperforming loans and leases and other real
estate owned (OREO).
OREO is principally comprised of commercial and residential properties acquired
in partial or total satisfaction of problem loans and amounted to $8.3 million
at March 31, 2003 compared to $8.7 million at December 31, 2002 and has
remained at that level over the past three quarters.
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 March 31, 2003, nonperforming loans and leases amounted to $212.1 million
or 0.88% of consolidated loans and leases compared to $194.5 million or .81%
of consolidated loans and leases at December 31, 2002, an increase of $17.6
million or 9.1%. Nonaccrual loans and leases accounted for $17.1 million of
the increase. Since December 31, 2002, nonaccrual commercial loans increased
$12.0 million while nonaccrual commercial real estate loans decreased $3.9
million. Nonaccrual construction and land development loans increased $1.9
million largely due to the addition of one larger credit and nonaccrual
residential real estate loans increased $3.4 million. Nonaccrual consumer
loans were relatively unchanged. Nonaccrual leases increased $3.9 million
since year-end and was primarily due to the remaining airplane lease exposure
associated with Midwest Express Airlines, Inc.
Net charge-offs amounted to $25.8 million or 0.44% of average loans in the
first quarter of 2003 compared with net charge-offs of $13.5 million or 0.23%
of average loans in the fourth quarter of 2002 and $11.2 million or 0.23% of
average loans in the first quarter of the prior year. Included in net charge-
offs in the first quarter of 2003 was $19.0 million related to the carrying
value of lease obligations for airplanes leased to Midwest Express Airlines,
Inc.
Until the economy demonstrates clear strengthening, some degree of stress and
uncertainty exists. The Corporation continues to expect net charge-offs,
excluding the airline lease charge-offs taken this quarter, to range from 0.15%
to 0.25% for the year. While this expected range is higher than the
Corporation's historical net charge-off levels, it is considered manageable.
The provision for loan and lease losses amounted to $25.7 million for the three
months ended March 31, 2003 compared to $23.4 million in the fourth quarter of
2002 and $15.2 million for the three months ended March 31, 2002. The
Corporation has not substantively changed any aspect to its overall approach
in the determination of the allowance for loan and lease losses. There have
been no material changes in assumptions or estimation techniques as compared
to prior periods that impacted the determination of the current period
allowance. The allowance for loan and lease losses to the total loan and lease
portfolio was 1.40% at March 31, 2003 and 2002, respectively.
OTHER INCOME
------------
Total other income in the first quarter of 2003 amounted to $290.4 million
compared to $259.0 million in the same period last year, an increase of $31.4
million or 12.1%.
Total data processing services revenue amounted to $157.1 million in the first
quarter of 2003 compared to $145.0 million in the first quarter of 2002 an
increase of $12.1 million or 8.3%. e-Finance solutions revenue increased $6.4
million or 18.9% compared to the first quarter of 2002. Revenue growth was
driven by consumer payment volume from three large financial institution
clients, increased adoption of electronic bill presentment and payment in the
customer base and revenues associated with the PayTrust acquisition. Financial
technology solutions revenue, the traditional outsourcing business, increased
$5.7 million or 5.1% in the first quarter compared to the first quarter of last
year. Primary contributors to revenue growth in the current quarter compared
to the first quarter of last year included electronic funds delivery and card
solutions, wealth management and financial account processing. During the
current quarter several new outsourcing contracts were negotiated. Total
buyout revenue, which varies from period to period, was $2.5 million less in
the current quarter compared to the first quarter of last year.
Trust services revenue amounted to $30.0 million in the first quarter of 2003
compared to $31.0 million in the first quarter of 2002. The positive impact
from acquisitions and sales efforts were offset by the decline in market values
of assets under management. Assets under management were approximately $13.2
billion at March 31, 2003, $12.9 billion at December 31, 2002 and $13.0 billion
at March 31, 2002.
Service charges on deposits increased $0.7 million in the current quarter and
amounted to $26.2 million for the three months ended March 31, 2003. Revenue
growth in the comparative quarters was largely attributable to the banking
segment acquisitions.
Mortgage banking revenue was $17.5 million in the first quartet of 2003
compared with $9.4 million in the first quarter of 2002, an increase of $8.1
million or 87%. Gains from sales of mortgages to the secondary market and
mortgage-related fees accounted for the increase. During the first quarter of
2003, the Corporation sold $1.0 billion of loans to the secondary market.
Retained interests in the form of mortgage servicing rights amounted to $0.6
million. During the first quarter of 2002, the Corporation sold $0.6 billion
of loans to the secondary market. Retained interests in the form of mortgage
servicing rights amounted to $0.3 million.
Net investment securities gains in the first quarter of 2003 amounted to $1.6
million compared to net investment securities losses in the first quarter of
2002 of $0.7 million. Activity in both periods was primarily attributable to
the Corporation's Capital Markets Group which varies from period to period.
Other income in the first quarter of 2003 amounted to $40.5 million compared
to $31.1 million in the first quarter of 2002, an increase of $9.4 million or
29.9%. For the three months ended March 31, 2003, approximately $2.3 million
of the increase was attributable to the banking acquisitions. Loan fees, which
include prepayment charges, and other commissions and fees, excluding the
impact of acquisitions, increased $4.9 million in the current quarter compared
to the first quarter of last year. Auto securitization income increased $1.1
million for the three months ended March 31, 2003 compared to the first quarter
of the prior year and was primarily due to increased gains and increased
servicing fee income. Auto loans securitized and sold in the first quarter of
2003 amounted to $0.2 billion compared to $0.1 billion in the first quarter of
last year. Gains from the disposition of other real estate increased $1.4
million in the current quarter compared to the same period last year. The
increase was primarily due to the sale of one large property.
OTHER EXPENSE
-------------
Total other expense for the three months ended March 31, 2003 amounted to
$335.6 million compared to $313.6 million for the three months ended March 31,
2002, an increase of $22.0 million or 7.0%.
The Corporation estimates that approximately $10.4 million of the quarter over
quarter expense growth was attributable to the purchase acquisitions by the
banking and Metavante segments which were included in M&I's operating expenses
since their merger dates. In addition, approximately $2.5 million of the
expense growth was due to the transition costs associated with Metavante's
integration of the PayTrust acquisition.
Expense control is sometimes measured in the financial services industry by the
efficiency ratio statistic. The efficiency ratio is calculated by taking total
other expense divided by the sum of total other income (including Capital
Markets revenue but excluding investment securities gains or losses) and net
interest income on a fully taxable equivalent basis. The Corporation's
efficiency ratios for the three months ended March 31, 2003 and prior four
quarters were:
Efficiency Ratios
-----------------
Three Months Ended
---------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2003 2002 2002 2002 2002
---------------------------------------------------------------------
Consolidated Corporation 59.2 % 60.4 % 60.7 % 60.9 % 61.8 %
Consolidated Corporation Excluding Metavante
48.5 % 49.6 % 50.0 % 50.1 % 50.7 %
Salaries and employee benefits expense amounted to $197.2 million in the first
quarter of 2003 compared to $179.5 million in the first quarter of 2002, an
increase of $17.7 million. Salaries and employee benefits expense associated
with the banking and Metavante acquisitions and the PayTrust transition costs
accounted for approximately $7.9 million of the increase.
For the three months ended March 31, 2003, occupancy and equipment expense
amounted to $47.3 million compared to $45.6 million in the comparative three
month period in 2002. Occupancy and equipment expense associated with the
banking and Metavante acquisitions and the PayTrust transition costs accounted
for an increase of approximately $2.8 million.
Software expense in the first quarter of 2003 amounted to $10.3 million
compared to $12.6 million in the first quarter of 2002. During the first
quarter of 2002, the Corporation's banking segment incurred nonrecurring
software charges of approximately $1.7 million. Excluding that charge,
software expenses in the current quarter were relatively unchanged compared to
the first quarter of the prior year.
The growth in processing charges was primarily attributable to the banking
segment and was due to increased third-party processing charges associated with
wholesale loan activity.
Supplies and printing and shipping and handling expense amounted to $19.2
million in the first quarter of 2003 compared to $16.8 million in the first
quarter of 2002, an increase of $2.4 million or 14.6%. Approximately $0.3
million of the increase was attributable to the banking and Metavante
acquisitions and the PayTrust transition costs. The remainder of the increase
was primarily attributable to Metavante.
Approximately $0.4 million of the increase in professional services expense was
attributable to the banking and Metavante acquisitions and the PayTrust
transition costs. Increases experienced across all of the Corporation's
segments, primarily legal fees, were offset by lower consulting fees at the
Corporation in the first quarter of 2003 compared to the first quarter of the
prior year.
Intangible amortization expense increased $2.6 million in the first quarter of
2003 compared to the first quarter of 2002. Core deposit premium amortization
accounted for $2.2 million of the increase in amortization expense for the
quarter ended March 31, 2003. Accelerated amortization and valuation reserves
associated with mortgage servicing rights increased amortization expense $0.9
million in the first quarter of 2003 compared to the first quarter of 2002.
The carrying value of the Corporation's mortgage servicing rights was $5.6
million at March 31, 2003.
Other expense amounted to $31.9 million in the first quarter of 2003 compared
to $35.5 million in the first quarter of 2002, a decrease of $3.6 million or
10.2%. Included in other expense in the first quarter of 2002 were asset
write-downs associated with foreclosed properties and residual values at the
Corporation's commercial leasing subsidiary which aggregated approximately $6.8
million. Expense associated with the banking and Metavante acquisitions and
the PayTrust transition costs contributed approximately $0.9 million to other
expense in the first quarter of 2003. Increases in the cost of business
related insurance coverage, increased spending in advertising and promotion and
increased costs associated with Metavante's card solutions and equipment sales
added an additional $3.8 million to other expense in the first quarter of 2003
compared to the first quarter of 2002.
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 $1.2
million in the first quarter of 2002 and in the current quarter amounted to
$3.1 million resulting in a decrease to other expense over the comparative
quarters of approximately $1.9 million. Approximately $1.5 million of net
software capitalization in the current quarter relates to PayTrust.
INCOME TAXES
------------
The provision for income taxes for the three months ended March 31, 2003
amounted to $65.6 million or 33.9% of pre-tax income compared to $54.8 million
or 32.2% of pre-tax income for the three months ended March 31, 2002. During
the first quarter of 2002, the Corporation recognized income tax benefits
associated with the sale of preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Shareholders' equity was $3.13 billion or 9.4% of total consolidated assets at
March 31, 2003 compared to $3.04 billion or 9.2% of total consolidated assets
at December 31, 2002 and $2.72 billion or 9.5% of total consolidated assets at
March 31, 2002. The increase at March 31, 2003 was primarily due to earnings
net of dividends paid. Accumulated other comprehensive income was relatively
unchanged since December 31, 2002 and declined $92.0 million since March 31,
2002 primarily due to the change in fair value of the Corporation's pay fixed
derivative financial instruments designated as cash flow hedges in the recent
low interest rate environment.
The Corporation has a Stock Repurchase Program under which up to 12 million
shares can be repurchased annually. During the first quarter of 2003, there
were no common shares repurchased.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in the
following tables.
Risk-Based Capital Ratios
-------------------------
($ in millions)
March 31, 2003 December 31, 2002
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,431 8.94 % $ 2,344 8.75 %
Tier 1 Capital
Minimum Requirement 1,088 4.00 1,072 4.00
-------------------------------- --------------------------------
Excess $ 1,343 4.94 % $ 1,272 4.75 %
================================ ================================
Total Capital $ 3,412 12.55 % $ 3,322 12.40 %
Total Capital
Minimum Requirement 2,176 8.00 2,143 8.00
-------------------------------- --------------------------------
Excess $ 1,236 4.55 % $ 1,179 4.40 %
================================ ================================
Risk-Adjusted Assets $ 27,197 $ 26,791
================= =================
Leverage Ratios
---------------
($ in millions)
March 31, 2003 December 31, 2002
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,431 7.70 % $ 2,344 7.58 %
Minimum Leverage
Requirement 947 - 1,578 3.00 - 5.00 928 - 1,546 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,484 - 853 4.70 - 2.70 % $ 1,416 - 798 4.58 - 2.58 %
================================ ================================
Adjusted Average
Total Assets $ 31,547 $ 30,924
================= =================
M&I manages its liquidity to ensure that funds are available to each of its
banks to satisfy the cash flow requirements of depositors and borrowers and to
ensure the Corporation's own cash requirements are met. M&I maintains
liquidity by obtaining funds from several sources.
The Corporation's most readily available source of liquidity is its investment
portfolio. Investment securities available for sale, which totaled $4.4
billion at March 31, 2003, represent a highly accessible source of liquidity.
The Corporation's portfolio of held-to-maturity investment securities, which
totaled $0.9 billion at March 31, 2003, provides liquidity from maturities and
amortization payments. The Corporation's mortgage loans held-for-sale provide
additional liquidity. The loans, which aggregated $0.2 billion at March 31,
2003, represent recently funded home mortgage loans that are prepared for
delivery to investors, which generally occurs within thirty to ninety days
after the loan has been funded.
Depositors within M&I's defined markets are another source of liquidity. Core
deposits (demand, savings, money market and consumer time deposits) averaged
$17.5 billion in the first quarter of 2003. The Corporation's banking
affiliates may also access the federal funds markets or utilize collateralized
borrowings such as treasury demand notes or FHLB advances.
The banking affiliates may use wholesale deposits. Wholesale deposits are
funds in the form of deposits generated through distribution channels other
than the Corporation's own banking branches. These deposits allow the
Corporation's banking subsidiaries to gather funds across a national geographic
base and at pricing levels considered attractive, where the underlying
depositor may be retail or institutional. Access to wholesale deposits also
provides the Corporation with the flexibility to not pursue single service time
deposit relationships in markets that have experienced some unprofitable
pricing levels. Wholesale deposits averaged $3.7 billion in the first quarter
of 2003.
The Corporation utilizes certain financing arrangements to meet its balance
sheet management, funding, liquidity, and market or credit risk management
needs. The majority of these activities are basic term or revolving
securitization vehicles. These vehicles are generally funded through term-
amortizing debt structures or with short-term commercial paper designed to be
paid off based on the underlying cash flows of the assets securitized. These
vehicles provide access to funding sources substantially separate from the
general credit risk of the Corporation and its subsidiaries. See Note 7 to the
Consolidated Financial Statements for an update of the Corporation's
securitization activities in the first quarter of 2003.
The Corporation's lead bank ("Bank") has implemented a bank note program which
permits it to issue up to $7.0 billion of short-term and medium-term notes
which are offered and sold only to institutional investors. This program is
intended to enhance liquidity by enabling the Bank to sell its debt instruments
in private markets in the future without the delays which would otherwise be
incurred. Longer-term bank notes outstanding at March 31, 2003, amounted to
$2.2 billion of which $0.6 billion is subordinated and qualifies as
supplementary capital for regulatory capital purposes. No bank notes were
issued during the first quarter of 2003.
The national capital markets represent a further source of liquidity to M&I.
M&I has filed a shelf registration statement which is intended to permit M&I
to raise funds through sales of corporate debt securities with a relatively
short lead time. Under the shelf registration statement, the Corporation may
issue up to $0.5 billion of medium-term Series E notes with maturities ranging
from 9 months to 30 years and at fixed or floating rates. At March 31, 2003,
Series E notes outstanding amounted to $0.3 billion. The Corporation may issue
up to $0.5 billion of medium-term MiNotes with maturities ranging from 9 months
to 30 years and at fixed or floating rates. The MiNotes are issued in smaller
denominations to attract retail investors. No Series E or MiNotes were issued
during the first quarter of 2003. Additionally, the Corporation has a
commercial paper program. At March 31, 2003, commercial paper outstanding
amounted to $0.3 billion.
Short-term borrowings represent contractual debt obligations with maturities
of one year or less and amounted to $4.1 billion at March 31, 2003. Longer-
term borrowings which are scheduled to mature in one year or less at March 31,
2003, amounted to $1.4 billion. Other obligations include future minimum lease
payments on facilities and equipment as described in Note 10 and commitments
to extend credit and letters of credit as described in Note 19 of the Notes to
Consolidated Financial Statements contained in Item 8 of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2002. Many
commitments to extend credit expire without being drawn upon and letters of
credit are contingent commitments. The amounts outstanding at any time do not
necessarily represent future cash requirements. Under Federal Reserve Board
policy, the Corporation is expected to act as a source of financial strength
to each subsidiary bank in circumstances when it might not do so absent such
policy.
CRITICAL ACCOUNTING POLICIES
----------------------------
The Corporation has established various accounting policies which govern the
application of accounting principles generally accepted in the United States
in the preparation of the Corporation's consolidated financial statements. The
significant accounting policies of the Corporation are described in the
footnotes to the consolidated financial statements contained in the
Corporation's Annual Report on Form 10-K and updated as necessary in its
Quarterly Reports on Form 10-Q. Certain accounting policies involve
significant judgments and assumptions by management that may have a material
impact on the carrying value of certain assets and liabilities. Management
considers such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical experience
and other factors, which are believed to be reasonable under the circumstances.
Because of the nature of judgments and assumptions made by management, actual
results could differ from these judgments and estimates which could have a
material impact on the carrying values of assets and liabilities and the
results of the operations of the Corporation. Management continues to consider
the following to be those accounting policies that require significant
judgments and assumptions:
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management's estimate of
probable losses inherent in the Corporation's loan and lease portfolio.
Management evaluates the allowance each quarter to determine that it is
adequate to absorb these inherent losses. This evaluation is supported by a
methodology that identifies estimated losses based on assessments of individual
problem loans and historical loss patterns of homogeneous loan pools. In
addition, environmental factors, including regulatory guidance, unique to each
measurement date are also considered. This reserving methodology has the
following components:
Specific Reserve.
-----------------
The Corporation's internal risk rating system is used to identify loans and
leases rated "Classified" as defined by regulatory agencies. In general, these
loans have been internally identified as credits requiring management's
attention due to underlying problems in the borrower's business or collateral
concerns. Subject to a minimum size, a quarterly review of these loans is
performed to identify the specific reserve necessary to be allocated to each
of these loans. This analysis considers expected future cash flows, the value
of collateral and also other factors that may impact the borrower's ability to
make payments when due. Included in this group are those nonaccrual or
renegotiated loans that meet the criteria as being "impaired" under the
definition in SFAS 114. A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. For
impaired loans, impairment is measured using one of three alternatives: (1) the
present value of expected future cash flows discounted at the loan's effective
interest rate; (2) the loan's observable market price, if available; or (3) the
fair value of the collateral for collateral dependent loans and loans for which
foreclosure is deemed to be probable.
Collective Loan Impairment.
---------------------------
This portion of the allowance for loan and lease losses is comprised of two
components. First, the Corporation makes a significant number of loans and
leases, which due to their underlying similar characteristics, are assessed for
loss as homogeneous pools. Included in the homogeneous pools are loans and
leases from the retail sector and commercial loans under a certain size, which
have been excluded from the specific reserve allocation previously discussed.
The Corporation segments the pools by type of loan or lease and using
historical loss information, estimates a loss reserve for each pool.
The second component reflects management's recognition of the uncertainty and
imprecision underlying the process of estimating losses. Based on management's
judgment, reserves are allocated to industry segments or product types due to
environmental conditions unique to the measurement period. Consideration is
given to both internal and external environmental factors such as economic
conditions in certain geographic or industry segments of the portfolio,
economic trends in the retail lending sector, risk profile, and portfolio
composition. Reserves are allocated based on estimates of loss exposure that
management has identified based on these economic trends or conditions. The
internal risk rating system is then used to identify those loans within these
industry segments that based on financial, payment or collateral performance,
warrant closer ongoing monitoring by management. The specific loans mentioned
earlier are excluded from this analysis.
The following factors were taken into consideration in determining the adequacy
of the allowance for loans and lease losses at March 31, 2003:
Management continues to be concerned over the lack of economic
improvement forecasted for 2003 and the resulting impact this will have
on the Corporation's customer base. Although recent economic reports and
opinions indicate there may be some signs of improvement, the uncertainty
remains as to when there may be any substantive increase in business
activity. In addition, the retail loan portfolio will continue to be
affected by the prolonged economic conditions as evidenced by the
generally increasing personal bankruptcy and unemployment rates.
At March 31, 2003, nonperforming loans and leases amounted to $212.1
million or 0.88% of consolidated loans and leases compared to $194.5
million or 0.81% of consolidated loans and leases at December 31, 2002,
an increase of $17.6 million or 9.1%. A portion of the increase is due
to the remaining Midwest Express Airlines, Inc. ("Midwest Express") lease
receivable being placed on a nonperforming status. The remainder of the
increase is generally spread across all of M&I's lending segments and is
primarily the result of the slow economy. As stated in previous
quarters, some of the Corporation's largest nonperforming loans are in
industries that have undergone well-publicized declines in recent
months. Among those industries affected are construction and related,
technology, airline, manufacturing and healthcare.
At the present time, there is no specific industry that is of immediate
concern, however, the Corporation believes that the current economic
environment will continue to negatively affect the markets and
communities it serves in the near term. While nonperforming loans have
remained in the 80-90 basis point range over the past two years, there
continues to be some risk of nonperforming loans increasing.
The Corporation's primary lending areas are Wisconsin, Arizona, Minnesota
and Missouri. The recent acquisitions in Minnesota and Missouri
represent new geographic regions for the Corporation. Each of these
regions has cultural and environmental factors that are unique to them.
The risk in entering these new regions and the uncertainty regarding the
inherent losses in their respective loan portfolios will remain until the
Corporation's credit underwriting and monitoring processes are fully
implemented.
Net charge-offs in the first quarter of 2003 amounted to $25.8 million,
or 44 basis points of total average loans and leases outstanding this
quarter. Included in charge-offs for the current quarter was $19.0
million related to the carrying value of lease obligations for airplanes
leased to Midwest Express. In 2002 and 2001, annual net charge-offs have
remained in the range of approximately 20 basis points. This range of
net charge-offs to average loans is somewhat higher than historical
levels incurred by the Corporation over the past five years. The
Corporation believes some degree of stress continues to exist and expects
net charges-offs, excluding the lease charge-offs previously discussed,
to continue in the 15-25 basis point range in the near term.
As discussed at December 31, 2002, the Corporation's commitments to
shared national credits have increased to approximately $2.0 billion with
usage averaging around 40%. Many of these borrowers are in industries
currently impacted by the economic climate. In addition, many of the
Corporation's largest charge-offs have come from the shared national
credit portfolio. Although these factors result in an increased risk
profile, as of March 31, 2003, shared national credit nonperforming loans
were less than .75% and 1.75% of this segment's total commitments and
outstandings, respectively. The Corporation's exposure to shared
national credits is monitored closely given the economic uncertainty as
well as this segments loss experience.
At March 31, 2003, special reserves continue to be carried for exposures
to manufacturing, healthcare, production agriculture (including dairy and
cropping operations), and the airline and travel industries. The
majority of the commercial charge-offs incurred during the past year were
in these industry segments. While most loans in these categories are
still performing, the Corporation continues to believe these sectors have
been more adversely affected by the economic slowdown. Reduced revenues
causing a declining utilization of the industry's capacity levels have
impacted manufacturing. As a result, collateral values and the amounts
realized through the sale or liquidation of manufacturing plant and
equipment have declined accordingly. Revenue levels in the dairy
industry have also declined as milk prices have fallen below breakeven
for a growing segment of the portfolio.
Based on the above loss estimates, senior lending and financial management
determine their best estimate of the required reserve. Management's evaluation
of the factors described above resulted in an allowance for loan and lease
losses of $338.3 million at March 31, 2003 compared to $338.4 million at
December 31, 2002. The resulting provisions for loan and lease losses are the
amounts required to establish the allowance for loan and lease losses to the
required level after considering charge-offs and recoveries. Management
recognizes there are significant estimates in the process and the ultimate
losses could be significantly different from those currently estimated.
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the allowance for loan and lease losses.
There have been no material changes in assumptions or estimation techniques as
compared to prior periods that impacted the determination of the current period
allowance.
Capitalized Software and Conversion Costs
-----------------------------------------
Direct costs associated with the production of computer software that will be
licensed externally or used in a service bureau environment are capitalized.
Capitalization of such costs is subject to strict accounting policy criteria,
however, the appropriate time to initiate capitalization requires management
judgment. Once the specific capitalized project is put into production, the
software cost is amortized over its estimated useful life, generally four
years. Each quarter, the Corporation performs net realizable value tests to
ensure the assets are recoverable. Such tests require management judgment as
to the future sales and profitability of a particular product which involves,
in some cases, multi-year projections. Technology changes and changes in
customer requirements can have a significant impact on the recoverability of
these assets and can be difficult to predict. Should significant adverse
changes occur, estimates of useful life may have to be revised or write-offs
would be required to recognize impairment. For the three months ended March
31, 2003 and 2002, the amount of software costs capitalized amounted to $15.3
million and $11.5 million, respectively. Amortization expense of software
costs amounted to $10.7 million and $7.6 million for the three months ended
March 31, 2003 and 2002, respectively.
Direct costs associated with customer system conversions to the data processing
operations are capitalized and amortized on a straight-line basis over the
terms, generally five to seven years, of the related servicing contracts.
Capitalization only occurs when management is satisfied that such costs are
recoverable through future operations or penalties (buyout fees) in the case
of early termination. For the three months ended March 31, 2003 and 2002, the
amount of conversion costs capitalized amounted to $2.6 million and $1.6
million, respectively. Amortization expense amounted to $4.1 million and $4.3
million for the three months ended March 31, 2003 and 2002, respectively.
Net unamortized costs were ($ in millions):
March 31,
-------------------------
2003 2002
----------- -----------
Software $ 145.9 $ 116.4
Conversions 34.5 40.5
----------- -----------
Total $ 180.4 $ 156.9
=========== ===========
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the amount of costs that are capitalized for
software development or conversion activities. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the periodic amortization of such costs.
Financial Asset Sales and Securitizations
-----------------------------------------
The Corporation utilizes certain financing arrangements to meet its balance
sheet management, funding, liquidity, and market or credit risk management
needs. The majority of these activities are basic term or revolving
securitization vehicles. These vehicles are generally funded through term-
amortizing debt structures or with short-term commercial paper designed to be
paid off based on the underlying cash flows of the assets securitized. These
financing entities are contractually limited to a narrow range of activities
that facilitate the transfer of or access to various types of assets or
financial instruments. In certain situations, the Corporation provides
liquidity and/or loss protection agreements. In determining whether the
financing entity should be consolidated, the Corporation considers whether the
entity is a qualifying special-purpose entity (QSPE) as defined in Statement
of Financial Accounting Standards (SFAS) No. 140, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. For non-
consolidation a QSPE must be demonstrably distinct, have significantly limited
permitted activities, hold assets that are restricted to transferred financial
assets and related assets, and can sell or dispose of non-cash financial assets
only in response to specified conditions.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. This interpretation addresses
consolidation by business enterprises of variable interest entities. Under
current practice, entities generally have been included in consolidated
financial statements because they are controlled through voting interests.
This interpretation explains how to identify variable interest entities and how
an entity assesses its interests in a variable interest entity to decide
whether to consolidate that entity. FIN 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries
if the entities do not effectively disperse risks among parties involved.
Variable interest entities that effectively disperse risks will not be
consolidated unless a single party holds an interest or combination of
interests that effectively recombines risks that were previously dispersed.
Transferors to QSPEs and "grandfathered" QSPEs subject to the reporting
requirements of SFAS 140 are outside the scope of FIN 46 and do not consolidate
those entities. FIN 46 also requires certain disclosures by the primary
beneficiary of a variable interest entity or an entity that holds a significant
variable interest in a variable interest entity.
With respect to its existing securitization activities, the Corporation does
not believe FIN 46 impacts its consolidated financial statements because its
transfers are generally to QSPEs or to entities in which the Corporation does
not hold a significant variable interest.
The Corporation sells financial assets, in a two-step process that results in
a surrender of control over the assets as evidenced by true-sale opinions from
legal counsel, to unconsolidated entities that securitize the assets. The
Corporation retains interests in the securitized assets in the form of
interest-only strips and a cash reserve account. Gain or loss on sale of the
assets depends in part on the carrying amount assigned to the assets sold
allocated between the asset sold and retained interests based on their relative
fair values at the date of transfer. The value of the retained interests is
based on the present value of expected cash flows estimated using management's
best estimates of the key assumptions - credit losses, prepayment speeds,
forward yield curves and discount rates commensurate with the risks involved.
Actual results can differ from expected results.
The Corporation reviews the carrying values of the retained interests monthly
to determine if there is a decline in value that is other than temporary and
periodically reviews the propriety of the assumptions used based on current
historical experience as well as the sensitivities of the carrying value of the
retained interests to adverse changes in the key assumptions. The Corporation
believes that its estimates result in a reasonable carrying value of the
retained interests.
The Corporation regularly sells automobile loans to an unconsolidated multi-
seller special purpose entity commercial paper conduit in securitization
transactions in which subordinated interests are retained. The outstanding
balances of automobile loans sold in these securitization transactions was
$776.5 million at March 31, 2003. At March 31, 2003, the carrying amount of
retained interests amounted to $52.2 million.
The Corporation also sells, from time to time, debt securities classified as
available for sale that are highly rated to an unconsolidated bankruptcy remote
QSPE whose activities are limited to issuing highly rated asset-backed
commercial paper with maturities up to 180 days which is used to finance the
purchase of the investment securities. The Corporation's lead bank ("Bank")
provides liquidity back-up in the form of Liquidity Purchase Agreements. In
addition, the Bank acts as counterparty to interest rate swaps that enable the
QSPE to hedge its interest rate risk. Such swaps are designated as trading in
the Corporation's Consolidated Balance Sheet.
Under the terms of the Administration Agreement, the Bank, as administrator of
the QSPE, is required to sell interests in the securities funded by the QSPE
to the Bank as the liquidity purchaser under the liquidity agreements, if at
any time (after giving effect to any issuance of new commercial paper notes and
the receipt of payments under any swap agreement) the QSPE has insufficient
funds to repay any maturing commercial paper note and the Bank, as liquidity
agent, has received a notice of such deficiency. The Bank, as the liquidity
provider, will be obligated to purchase interests in such securities under the
terms of the liquidity agreement to repay the maturing commercial paper notes
unless (i) after giving effect to such purchase, the aggregate of securities,
purchased under the relevant liquidity agreement would exceed the aggregate
maximum liquidity purchase amount under such liquidity agreement or (ii)
certain bankruptcy events with respect to the QSPE have occurred; provided that
the Bank is not required to purchase any defaulted security. For this purpose,
a defaulted security is any security that is rated below "Caa2" by Moody's and
below "CCC" by Standard & Poors. To date, the Bank has never acquired
interests in any securities under the terms of the liquidity agreements.
A subsidiary of the Bank has entered into interest rate swaps with the QSPE
designed to counteract the interest rate risk associated with third party
beneficial interest (commercial paper) and the transferred assets. The
beneficial interests in the form of commercial paper have been issued by the
QSPE to parties other than the Bank and its subsidiary or any other affiliates.
The notional amounts do not exceed the amount of beneficial interests. The
swap agreements do not provide the QSPE or its administrative agent any
decision-making authority other than those specified in the standard ISDA
Master Agreement.
At March 31, 2003, highly rated investment securities in the amount of $269.6
million were outstanding in the QSPE to support the outstanding commercial
paper.
Income Taxes
------------
Income taxes are accounted for using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on tax assets
and liabilities of a change in tax rates is recognized in the income statement
in the period that includes the enactment date.
The determination of current and deferred income taxes is based on complex
analyses of many factors including interpretation of Federal and state income
tax laws, the difference between tax and financial reporting basis of assets
and liabilities (temporary differences), estimates of amounts currently due
or owed such as the timing of reversals of temporary differences and current
accounting standards. The Corporation's interpretation of Federal and state
income tax laws is periodically reviewed by the Federal and state taxing
authorities. Actual results could differ significantly from the estimates and
interpretations used in determining the current and deferred income tax
liabilities.
FORWARD-LOOKING STATEMENTS
--------------------------
Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of
Financial Position and Results of Operations" and "Quantitative and Qualitative
Disclosures about Market Risk," respectively, contain forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include, without limitation, statements regarding operating activities and
results. Such statements are subject to important factors that could cause the
Corporation's actual results to differ materially than those anticipated by the
forward-looking statements. These factors include those referenced in Item 1,
Business, of the Corporation's Annual Report on Form 10-K for the period ending
December 31, 2002 under the heading "Forward-Looking Statements" or as may be
described from time to time in the Corporation's subsequent SEC filings, and
such factors are incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following updated information should be read in conjunction with the
Corporation's 2002 Annual Report on Form 10-K. Updated information regarding
the Corporation's use of derivative financial instruments is contained in Note
10, Notes to Financial Statements contained in Item 1 herein.
Market risk arises from exposure to changes in interest rates, exchange rates,
commodity prices, and other relevant market rate or price risk. The Corporation
faces market risk through trading and other than trading activities. While
market risk that arises from trading activities in the form of foreign exchange
and interest rate risk is immaterial to the Corporation, market risk from other
than trading activities in the form of interest rate risk is measured and
managed through a number of methods.
Interest Rate Risk
-------------------
The Corporation uses financial modeling techniques to identify potential
changes in income under a variety of possible interest rate scenarios.
Financial institutions, by their nature, bear interest rate and liquidity risk
as a necessary part of the business of managing financial assets and
liabilities. The Corporation has designed strategies to limit these risks
within prudent parameters and identify appropriate risk/reward tradeoffs in the
financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing and
embedded option characteristics of the assets and liabilities held by the
Corporation. Policies are in place to assure that neither earnings nor fair
value at risk exceed appropriate limits. The use of a limited array of
derivative financial instruments has allowed the Corporation to achieve the
desired balance sheet repricing structure while simultaneously meeting the
desired objectives of both its borrowing and depositing customers.
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 contractual payment information for most other
assets and liabilities, the models also include estimates of expected
prepayment characteristics for those items that are likely to materially change
their payment structures in different rate environments, including residential
mortgage products, certain commercial and commercial real estate loans and
certain mortgage-related securities. Estimates for these sensitivities are
based on industry assessments and are substantially driven by the differential
between the contractual coupon of the item and current market rates for similar
products.
This information is incorporated into a model that allows the projection of
future income levels in several different interest rate environments. Earnings
at risk is calculated by modeling income in an environment where rates remain
constant, and comparing this result to income in a different rate environment,
and then dividing this difference by the Corporation's budgeted operating
income before taxes for the calendar year. Since future interest rate moves
are difficult to predict, the following table presents two potential scenarios
- a gradual increase of 100bp across the entire yield curve over the course of
a year (+25bp per quarter), and a gradual decrease of 100bp across the entire
yield curve over the course of a year (-25bp per quarter) for the balance sheet
as of the indicated dates:
Impact to Annual Pretax Income as of
---------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2003 2002 2002 2002 2002
----------- ----------- ----------- ----------- -----------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates 0.9 % 0.9 % 1.5 % (0.5)% (0.9)%
Decline in rates (1.4)% (2.0)% (2.0)% (0.3)% 0.2 %
These results are based solely on the modeled parallel changes in market rates,
and do not reflect the earnings sensitivity that may arise from other factors
such as changes in the shape of the yield curve, the changes in spread between
key market rates, or accounting recognition for impairment of certain
intangibles. These results also do not include any management action to
mitigate potential income variances within the simulation process. Such action
could potentially include, but would not be limited to, adjustments to the
repricing characteristics of any on- or off-balance sheet item with regard to
short-term rate projections and current market value assessments.
Actual results will differ from simulated results due to the timing, magnitude,
and frequency of interest rate changes as well as changes in market conditions
and management strategies.
Another component of interest rate risk is measuring the fair value at risk for
a given change in market interest rates. The Corporation also uses computer
modeling techniques to determine the present value of all asset and liability
cash flows (both on- and off-balance sheet), adjusted for prepayment
expectations, using a market discount rate. The net change in the present
value of the asset and liability cash flows in different market rate
environments is the amount of fair value at risk from those rate movements.
As of March 31, 2003, the fair value of equity at risk for a gradual 100bp
shift in rates has not changed materially since December 31, 2002.
Equity Risk
-----------
In addition to interest rate risk, the Corporation incurs market risk in the
form of equity risk. M&I's Capital Markets Group invests in private, medium-
sized companies to help establish new businesses or recapitalize existing ones.
Exposure to the change in equity values for the companies that are held in
their portfolio exist, however, fair values are difficult to determine until
an actual sale or liquidation transaction actually occurs.
As of March 31, 2003, M&I Trust Services administered $59.3 billion in assets
and directly managed a portfolio of $13.2 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.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in the reports filed by
us under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Within the 90 days prior to the date of this report,
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and President and our
Executive Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-14 of the Exchange Act. Based on that evaluation, our Chief Executive
Officer and President and our Executive Vice President and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
There have been no significant changes in our internal controls or other
factors that could significantly affect those controls subsequent to the
conclusion of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
ITEM 5. OTHER INFORMATION
The Audit Committee of the Board of Directors of Marshall & Ilsley Corporation
has approved the following audit and non-audit services performed or to be
performed for the Corporation by its independent auditors, Deloitte & Touche
LLP:
Audit-related services pursuant to M&I Marshall Ilsley Bank's (the "Bank")
compliance with the Bank's established minimum servicing standards for certain
securitization trusts.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
-------------
Exhibit 3 - Restated Articles of Incorporation, as amended
Exhibit 10 - Change of Control Agreement dated as of
January 13, 2003 between the Corporation and
Frank R. Martire
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
Exhibit 99.1 - Certification of Chief Executive Officer pursuant
to 18 U.S.C Section 1350.
Exhibit 99.2 - Certification of Chief Financial Officer pursuant
to 18 U.S.C Section 1350.
B. Reports on Form 8-K:
------------------------
On March 11, 2003, the Corporation reported Items 5 and 7 in a Current
Report on Form 8-K relating to the resignation of a director of the
Corporation.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
(Registrant)
/s/ Patricia R. Justiliano
____________________________________
Patricia R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ James E. Sandy
____________________________________
James E. Sandy
Vice President
May 14, 2003
CERTIFICATION
-------------
I, Dennis J. Kuester, Chief Executive Officer and President of Marshall &
Ilsley Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marshall & Ilsley
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 12, 2003
/s/ Dennis J. Kuester
_________________________________________
Dennis J. Kuester
Chief Executive Officer and President
MW714042_1.DOC
CERTIFICATION
-------------
I, Mark F. Furlong, Executive Vice President and Chief Financial Officer of
Marshall & Ilsley Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marshall & Ilsley
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 12, 2003
/s/ Mark F. Furlong
_________________________________________
Mark F. Furlong
Executive Vice President and
Chief Financial Officer
MW714042_1.DOC
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- -----------------------------------------------------
(3) Restated Articles of Incorporation, as amended
(10) Change of Control Agreement dated as of
January 13, 2003 between the Corporation and
Frank R. Martire
(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
(99.1) Certification of Chief Executive Officer pursuant to
18 U.S.C Section 1350.
(99.2) Certification of Chief Financial Officer pursuant to
18 U.S.C Section 1350.