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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-15403
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
770 North Water Street
Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-7801
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class April 30, 2002
----- ----------------
Common Stock, $1.00 Par Value 106,104,412
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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,
2002 2001 2001
------------ ------------ ------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 714,372 $ 617,183 $ 639,557
Federal funds sold and security resale agreements 64,368 119,561 13,577
Money market funds 1,116,767 827,021 288,161
------------ ------------ ------------
Total cash and cash equivalents 1,895,507 1,563,765 941,295
Investment securities:
Trading securities, at market value 7,350 6,119 45,300
Short-term investments, at cost
which approximates market value 47,775 41,668 30,668
Available for sale at market value 3,229,268 3,383,632 4,575,569
Held to maturity at amortized cost,
market value $1,035,696 ($1,049,952
December 31, and $1,131,004 March 31, 2001) 1,010,677 1,032,093 1,100,398
------------ ------------ ------------
Total investment securities 4,295,070 4,463,512 5,751,935
Loans and leases 20,284,912 19,295,372 17,804,471
Less: Allowance for loan and lease losses 284,179 268,198 240,348
------------ ------------ ------------
Net loans and leases 20,000,733 19,027,174 17,564,123
Premises and equipment 416,547 393,030 384,174
Goodwill 645,752 524,748 290,925
Other intangibles 85,200 63,337 47,655
Accrued interest and other assets 1,221,668 1,218,168 1,174,438
------------ ------------ ------------
Total Assets $ 28,560,477 $ 27,253,734 $ 26,154,545
============ ============ ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,381,636 $ 3,558,571 $ 2,737,891
Interest bearing 14,447,074 12,934,476 15,035,449
------------ ------------ ------------
Total deposits 17,828,710 16,493,047 17,773,340
Funds purchased and security repurchase agreements 3,404,461 1,111,412 2,028,462
Other short-term borrowings 2,205,009 4,745,830 2,189,732
Accrued expenses and other liabilities 876,332 850,300 806,981
Long-term borrowings 1,523,175 1,560,177 1,042,712
------------ ------------ ------------
Total liabilities 25,837,687 24,760,766 23,841,227
Shareholders' equity:
---------------------
Series A convertible preferred stock,
$1.00 par value; 336,370 shares issued 336 336 336
Common stock, $1.00 par value;
120,416,261 shares issued (117,301,755
December 31, and 112,757,546 March 31, 2001) 120,416 117,302 112,757
Additional paid-in capital 877,577 698,289 443,213
Retained earnings 2,416,242 2,331,776 2,174,964
Accumulated other comprehensive
income, net of related taxes 41,793 40,600 59,548
Less: Treasury common stock, at cost:
13,946,539 shares (13,352,817 December 31,
and 9,839,811 March 31, 2001) 712,590 673,494 457,375
Deferred compensation 20,984 21,841 20,125
------------ ------------ ------------
Total shareholders' equity 2,722,790 2,492,968 2,313,318
------------ ------------ ------------
Total Liabilities and Shareholders' Equity $ 28,560,477 $ 27,253,734 $ 26,154,545
============ ============ ============
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended March 31,
----------------------------
2002 2001
------------- -------------
Interest income
---------------
Loans and leases $ 309,982 $ 353,990
Investment securities:
Taxable 50,767 77,951
Exempt from federal income taxes 15,156 15,900
Trading securities 59 328
Short-term investments 4,443 4,265
------------- ------------
Total interest income 380,407 452,434
Interest expense
----------------
Deposits 70,915 187,183
Short-term borrowings 38,853 54,101
Long-term borrowings 30,362 25,371
------------- ------------
Total interest expense 140,130 266,655
Net interest income 240,277 185,779
Provision for loan and lease losses 15,196 11,063
------------- ------------
Net interest income after provision
for loan and lease losses 225,081 174,716
Other income
------------
Data processing services:
e-Finance solutions 33,807 26,248
Financial technology solutions 111,210 104,090
Other 2 2,654
------------- ------------
Total data processing services 145,019 132,992
Item processing 10,336 12,457
Trust services 30,979 30,029
Service charges on deposits 25,574 20,827
Mortgage banking 9,376 7,795
Net investment securities (losses) gains (745) 6,105
Life insurance revenue 7,250 6,530
Other 31,212 29,836
------------- ------------
Total other income 259,001 246,571
Other expense
-------------
Salaries and employee benefits 179,486 167,922
Net occupancy 17,090 15,897
Equipment 28,487 28,632
Software expenses 12,591 8,070
Processing charges 9,586 8,950
Supplies and printing 4,713 4,950
Professional services 9,795 7,160
Shipping and handling 12,054 11,317
Amortization of intangibles 4,299 7,615
Other 35,505 29,873
------------- ------------
Total other expense 313,606 290,386
Income before income taxes and cumulative
effect of changes in accounting principle 170,476 130,901
Provision for income taxes 54,847 44,299
------------- ------------
Income before cumulative effect of
changes in accounting principle 115,629 86,602
Cumulative effect of changes in accounting
principle, net of income taxes -- (436)
------------- ------------
Net income $ 115,629 $ 86,166
============= ============
Net income per common share
Basic:
Income before cumulative effect of
changes in accounting principle $ 1.09 $ 0.83
Cumulative effect of changes in accounting
principle, net of income taxes -- --
------------- ------------
Net income $ 1.09 $ 0.83
============= ============
Diluted:
Income before cumulative effect of
changes in accounting principle $ 1.05 $ 0.80
Cumulative effect of changes in accounting
principle, net of income taxes -- --
------------- ------------
Net income $ 1.05 $ 0.80
============= ============
Dividends paid per common share $ 0.290 $ 0.265
============= ============
Weighted average common shares outstanding:
Basic 104,813 102,839
Diluted 109,771 107,819
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Three Months Ended March 31,
----------------------------
2002 2001
------------- -------------
Net Cash Provided (Used) by Operating Activities $ 427,929 $ (8,828)
Cash Flows From Investing Activities:
-------------------------------------
Proceeds from sales of
securities available for sale 1,167 10,875
Proceeds from maturities of
securities available for sale 492,575 252,132
Proceeds from maturities of
securities held to maturity 19,529 11,978
Purchases of securities available for sale (166,103) (23,040)
Net increase in loans (606,725) (202,724)
Purchases of assets to be leased (38,563) (124,366)
Principal payments on lease receivables 103,239 174,957
Fixed asset purchases, net (6,400) (7,147)
Purchase acquisitions, net of
cash equivalents acquired (7,853) --
Other 2,632 5,534
------------ ------------
Net cash provided/(used) in investing activities (206,502) 98,199
Cash Flows From Financing Activities:
-------------------------------------
Net increase/(decrease) in deposits 526,930 (1,476,456)
Proceeds from issuance of commercial paper 928,180 604,163
Payments for maturity of commercial paper (928,845) (564,729)
Net increase /(decrease) in other short-term borrowings (283,418) 867,938
Proceeds from issuance of long-term debt 200,300 625,651
Payments of long-term debt (259,561) (32,066)
Dividends paid (31,164) (28,279)
Purchases of treasury stock (48,492) (15,520)
Other 6,385 6,529
------------ ------------
Net cash provided/(used) by financing activities 110,315 (12,769)
Net increase in cash and cash equivalents 331,742 76,602
------------ ------------
Cash and cash equivalents, beginning of year 1,563,765 864,693
------------ ------------
Cash and cash equivalents, end of period $ 1,895,507 $ 941,295
============ ============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 151,744 $ 293,851
Income taxes 10,340 6,221
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I" or
"Corporation") 2001 Annual Report on Form 10-K. The unaudited financial
information included in this report reflects all adjustments (consisting
only of normal recurring accruals) which are necessary for a fair
statement of the financial position and results of operations as of and
for the three months ended March 31, 2002 and 2001. The results of
operations for the three months ended March 31, 2002 and 2001 are not
necessarily indicative of results to be expected for the entire year.
Certain amounts in the 2001 consolidated financial statements and
analyses have been reclassified to conform with the 2002 presentation.
2. Change in Method of Accounting
On January 1, 2002, the Corporation adopted SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS. This statement addresses financial accounting
and reporting for acquired goodwill and other intangible assets and
supercedes APB Opinion No. 17, INTANGIBLE ASSETS. SFAS 142 prescribes
the accounting and reporting for intangible assets that are acquired
individually or with a group of other assets (but not those acquired in
a business combination) upon their acquisition. SFAS 142 also
prescribes how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial
statements.
SFAS 142 adopts an aggregate view of goodwill and bases the accounting
for goodwill on the units of the combined entity into which an acquired
entity is integrated (those units are referred to as Reporting Units).
A Reporting Unit is an operating segment as defined in SFAS 131 or one
level below an operating segment.
Goodwill and intangible assets that have indefinite useful lives will
not be amortized under the new standard but rather will be tested
annually for impairment. Intangible assets with finite lives will
continue to be amortized over their useful lives, but without the
constraint of the prescribed ceilings required under APB Opinion 17.
SFAS 142 provides specific guidance for testing goodwill and intangible
assets that will not be amortized for impairment. Goodwill will be
tested for impairment at least annually using a two-step process that
begins with an estimation of the fair value of a Reporting Unit. The
first step is a screen for potential impairment and the second step
measures the amount of impairment, if any. Intangible assets that will
not be amortized, will be tested annually by comparing the fair values
of the assets with their recorded amounts.
The provisions of SFAS 142 are now being applied by the Corporation.
Goodwill and intangible assets acquired after June 30, 2001, are subject
immediately to the nonamortization and amortization provisions of the
statement. In addition, the Corporation has six months from the date
it initially applies this standard to complete the first step of the
transitional goodwill impairment test. The amounts used in the
transitional goodwill impairment test shall be measured as of January
1, 2002. Impairment losses for goodwill and indefinite-lived intangible
assets that arise due to initial application of this standard (resulting
from a transitional impairment test) would be reported as a change in
accounting principle.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
Income before cumulative effect of changes in accounting principles and
related earnings per share after giving effect to the nonamortization
provision of SFAS 142 are as follows (dollars and shares in thousands,
except per share data):
Three Months Ended March 31,
----------------------------
2002 2001
------------- -------------
Income before cumulative effect
of changes in accounting principle $ 115,629 $ 86,602
Adjustments:
Goodwill amortization, net of taxes -- 3,972
Negative goodwill amortization -- (390)
------------- -------------
Total adjustments -- 3,582
------------- -------------
Income before cumulative effect
of changes in accounting principle $ 115,629 $ 90,184
============= =============
Income before cumulative effect
of changes in accounting principle:
Basic:
Reported income before cumulative effect
of changes in accounting principle $ 1.09 $ 0.83
Goodwill/negative goodwill amortization -- 0.03
------------- -------------
$ 1.09 $ 0.86
============= =============
Diluted:
Reported income before cumulative effect
of changes in accounting principle $ 1.05 $ 0.80
Goodwill/negative goodwill amortization -- 0.03
------------- -------------
$ 1.05 $ 0.83
============= =============
The changes in the carrying amount of goodwill for the three months
ended March 31, 2002 are as follows (dollars in thousands):
Banking Metavante Others Total
------------- ------------- ------------- -------------
Goodwill balance as
of January 1, 2002 $ 367,612 $ 125,587 $ 31,549 $ 524,748
Goodwill acquired
during the period 128,691 -- -- 128,691
Purchase accounting
adjustments -- (7,290) -- (7,290)
Goodwill amortization (397) -- -- (397)
------------- ------------- ------------- -------------
Goodwill balance as
of March 31, 2002 $ 495,906 $ 118,297 $ 31,549 $ 645,752
============= ============= ============= =============
At March 31, 2002, the Corporation's intangible assets consisted of the
following (dollars in thousands):
Amortized intangible assets:
Core deposit intangible $ 53,764
Data processing contract rights/customer lists 19,312
Loan servicing rights 11,380
Trust customers 744
------------
Total amortized intangible assets $ 85,200
============
Goodwill:
Amortized (SFAS 72) $ 2,989
Unamortized 642,763
------------
Total goodwill $ 645,752
============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
Estimated aggregate amortization expense for the twelve months ended
December 31, is as follows:
2002 $ 18,723
2003 16,081
2004 13,754
2005 11,726
2006 10,278
The Corporation has not yet completed its determination of how the
impairment provisions of the standard applied to the five identified
Reporting Units with recorded goodwill will affect its financial
statements.
3. Business Combinations
The following acquisitions, which were not considered material business
combinations, were completed during the first quarter of 2002.
On March 1, 2002 the Corporation acquired all of the common stock of
Richfield State Agency, Inc. ("Richfield"), a Minnesota bank holding
company. Richfield had consolidated total assets of approximately $0.8
billion at completion of the merger. The Corporation issued 2.5 million
common shares and paid cash of approximately $10.0 million in a tax-free
exchange for the outstanding common stock of Richfield using the
purchase method of accounting. The core deposit intangible and other
identifiable intangible assets recorded in this transaction amounted to
$19.3 million and $0.8 million, respectively. Initial goodwill subject
to the completion of appraisals and valuations of the assets acquired
and liabilities assumed, amounted to $94.6 million.
Also, on March 1, 2002 the Corporation acquired all of the common stock
of Century Bancshares, Inc. ("Century"), a Minnesota bank holding
company. Century had consolidated total assets of approximately $0.3
billion at completion of the merger. The Corporation issued 0.6 million
common shares and paid cash of approximately $19.9 million in a tax-free
exchange for the outstanding common stock of Century using the purchase
method of accounting. The core deposit intangible recorded in this
transaction amounted to $6.1 million. Initial goodwill subject to the
completion of appraisals and valuations of the assets acquired and
liabilities assumed, amounted to $34.1 million.
The results of operations of the acquired entities have been included
in the consolidated results since the dates the transactions were
closed.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
The summary of the intangible assets acquired during the first quarter
of 2002 are as follows (dollars in thousands):
March 31, 2002
----------------------------
Gross Accum-
Carrying ulated
Amount Amort
------------- -------------
Amortized intangible assets:
Core deposit intangible $ 25,400 $ (361)
Other intangible assets 750 (6)
------------- -------------
Total amortized intangible assets $ 26,150 $ (367)
============= =============
Unamortized intangible assets:
Goodwill $ 128,691
-------------
Total unamortized intangible assets $ 128,691
=============
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, 2002
-------------------------------------
Income Average Share Per Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
Net Income $ 115,629
Convertible Preferred Dividends (1,115)
----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 114,514 104,813 $ 1.09
========
Effect of Dilutive Securities
Convertible Preferred Stock 1,115 3,844
Stock Options and Restricted Stock Plans -- 1,114
---------- ----------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 115,629 109,771 $ 1.05
========
Three Months Ended March 31, 2001
-------------------------------------
Income Average Share Per Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
Net Income $ 86,166
Convertible Preferred Dividends (1,019)
-----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 85,147 102,839 $ 0.83
========
Effect of Dilutive Securities
Convertible Preferred Stock 1,019 3,844
Stock Options and Restricted Stock Plans -- 1,136
---------- ----------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 86,166 107,819 $ 0.80
========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
5. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
March 31, December 31, March 31,
2002 2001 2001
------------- ------------- -------------
Investment securities available for sale:
U.S. treasury and government agencies $ 2,125,690 $ 2,346,566 $ 3,201,179
State and political subdivisions 230,099 176,167 153,356
Mortgage backed securities 229,687 175,471 329,044
Other 643,792 685,428 891,990
------------- ------------- -------------
Total $ 3,229,268 $ 3,383,632 $ 4,575,569
============= ============= =============
Investment securities held to maturity:
State and political subdivisions $ 1,007,140 $ 1,028,555 $ 1,095,239
Other 3,537 3,538 5,159
------------- ------------- -------------
Total $ 1,010,677 $ 1,032,093 $ 1,100,398
============= ============= =============
6. The Corporation's loan and lease portfolio consists of the following
($000's):
March 31, December 31, March 31,
2002 2001 2001
------------- ------------- -------------
Commercial, financial & agricultural $ 6,106,708 $ 5,716,061 $ 5,329,597
Real estate:
Construction 784,532 730,864 636,429
Residential mortgage 5,879,668 5,563,975 5,083,629
Commercial mortgage 5,426,945 5,099,093 4,497,606
------------- ------------- -------------
Total real estate 12,091,145 11,393,932 10,217,664
Personal 1,165,470 1,210,808 1,180,833
Lease financing 912,384 962,356 1,064,813
Cash flow hedging instruments at fair value 9,205 12,215 11,564
------------- ------------- -------------
Total $ 20,284,912 $ 19,295,372 $ 17,804,471
============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
7. Sale of Receivables
During the first quarter of 2002, $97.8 million of automobile loans were
sold in securitization transactions and gains of $1.5 million were
recognized. Other income associated with auto securitizations in the
current quarter amounted to $0.6 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 25.0 %
Weighted average life (in months) 20.8
Expected credit losses 0.12 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one month LIBOR yield
At March 31, 2002, securitized automobile loans and other automobile
loans managed together with them along with delinquency and credit loss
information consisted of the following:
Total
Securitized Portfolio Managed
----------- --------- ---------
Loan balances $ 474,844 $ 209,845 $ 684,689
Principal amounts of loans
60 days or more past 642 511 1,153
Net credit losses year to date 325 205 530
8. The Corporation's deposit liabilities consists of the following
($000's):
March 31, December 31, March 31,
2002 2001 2001
------------- ------------- -------------
Noninterest bearing demand $ 3,381,636 $ 3,558,571 $ 2,737,891
Savings and NOW 8,171,884 7,867,106 7,758,708
CD's $100,000 and over 1,891,344 1,321,746 2,455,636
Other time deposits 2,914,585 2,962,724 3,307,283
Foreign deposits 1,469,261 782,900 1,513,822
------------- ------------- -------------
Total $ 17,828,710 $ 16,493,047 $ 17,773,340
============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
9. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
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:
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 1,193
-----------
Total comprehensive income $ 116,822
===========
Three Months Ended March 31, 2001
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- ------------
Net income $ 86,166
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 54,370 $ (20,006) 34,364
Reclassification for securities
transactions included in net income -- -- --
------------ ------------ -----------
Unrealized gains (losses) 54,370 (20,006) 34,364
Net gains (losses) on derivatives
hedging variability of cash flows:
Adoption of SFAS 133 (15,665) 5,483 (10,182)
Arising during the period (5,294) 1,853 (3,441)
Reclassification adjustments for
hedging activities included in net income 1,047 (367) 680
------------ ------------ -----------
Net gains (losses) $ (19,912) $ 6,969 (12,943)
------------ ------------ -----------
Other comprehensive income 21,421
-----------
Total comprehensive income $ 107,587
===========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
10. Derivative Financial Instruments and Hedging Activities
TRADING INSTRUMENTS
The Corporation enters into interest rate swaps as part of its trading
activities which enable its customers to manage their exposures to
interest rate risk. The Corporation's market risk from unfavorable
movements in interest rates is generally minimized by concurrently
entering into offsetting positions with nearly identical notional
values, terms and indices.
At March 31, 2002, interest rate swaps designated as trading consisted
of $451.1 million in notional amount of receive fixed/pay floating with
an aggregate positive fair value of $1.0 million and $436.9 million in
notional amount of pay fixed/receive floating with an aggregate negative
fair value of $1.0 million.
Interest rate swaps designated as trading are recorded at fair value.
Gains and losses arising from changes in fair value are recorded in
other income.
FAIR VALUE HEDGES
The following table presents information with respect to the
Corporation's fair value hedges.
Fair Value Hedges
March 31, 2002
Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------- ------------------- ----------- ----------- -----------
Callable CDs Receive Fixed Swap $ 82.5 $ (0.9) 7.1
Medium Term Notes Receive Fixed Swap 190.0 0.2 4.4
Long-term Borrowing Receive Fixed Swap 200.0 15.4 24.7
The impact from fair value hedges to total net interest income for the
three months ended March 31, 2002 was a positive $5.3 million.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
CASH FLOW HEDGES
The following table presents information with respect to the
Corporation's cash flow hedges.
Cash Flow Hedges
March 31, 2002
Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------- ------------------- ----------- ----------- -----------
Variable Rate Loans Receive Fixed Swap $ 534.6 $ 9.2 1.3
Commercial Paper Pay Fixed Swap 200.0 (17.0) 4.7
Fed Funds Purchased Pay Fixed Swap 860.0 (13.3) 3.1
FHLB Advances Pay Fixed Swap 510.0 4.8 4.8
The impact from cash flow hedges to total net interest income for the
three months ended March 31, 2002 was a negative $9.9 million.
11. Segments
Generally, the Corporation organizes its segments based on legal
entities. Each entity offers a variety of products and services to meet
the needs of its customers and the particular market served. Each
entity has its own president and is separately managed subject to
adherence to Corporate policies. Discrete financial information is
reviewed by senior management to assess performance on a monthly basis.
Certain segments are combined and consolidated for purposes of assessing
financial performance.
The Corporation evaluates the profit or loss performance of its segments
based on operating income. Operating income is after-tax income
excluding nonrecurring charges and charges for services from the holding
company. The accounting policies of the Corporation's segments are the
same as those described in Note 1 to the Corporation's Annual Report on
Form 10K, Item 8. Intersegment revenues may be based on cost, current
market prices or negotiated prices between the providers and receivers
of services.
Based on the way the Corporation organizes its segments and the
requirements of Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
the Corporation has determined that it has two reportable segments.
Information with respect to M&I's segments is as follows:
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
Banking
-------
Banking consists of two banks headquartered in Wisconsin, with branches
in Wisconsin, Arizona, Nevada and Florida, two banks headquartered in
Minnesota, one federally chartered thrift headquartered in Nevada, an
asset-based lending subsidiary and an operational support subsidiary
which includes item processing. Banking consists of accepting deposits,
making loans and providing other services such as cash management,
foreign exchange and correspondent banking to a variety of commercial
and retail customers. Products and services are provided through a
variety of delivery channels including traditional branches, supermarket
branches, telephone centers, ATMs and the Internet.
Data Services
-------------
Data Services consists of Metavante and its nonbank subsidiaries.
Metavante provides data processing services, develops and sells software
and provides consulting services to M&I affiliates as well as banks,
thrifts, credit unions, trust companies and other financial services
companies throughout the world although its activities are primarily
domestic. In addition, Metavante derives revenue from the Corporation's
credit card merchant operations. The majority of Metavante revenue is
derived from internal and external processing. Intrasegment revenues,
expenses and assets have been eliminated.
All Others
----------
M&I's primary other operating segments includes Trust Services, Mortgage
Banking (residential and commercial), Capital Markets Group, Brokerage
and Insurance Services and Commercial Leasing. Trust Services provides
investment management and advisory services as well as personal,
commercial and corporate trust services in Wisconsin, Florida, Arizona,
North Carolina, Minnesota, Nevada and Illinois. Capital Markets Group
provide venture capital and advisory services. Intrasegment revenues,
expenses and assets for the entities that comprise Trust Services and
Capital Markets Group have been eliminated in the following information.
($ in millions):
Total Revenues by type in All Others consist of the following:
Three Months Ended
March 31,
----------------------
2002 2001
---------- ----------
Trust Services $ 30.9 $ 30.3
Residential Mortgage Banking 9.2 7.7
Capital Markets (0.5) 7.1
Brokerage and Insurance 6.5 5.5
Commercial Leasing 3.9 2.9
Commercial Mortgage Banking 0.9 0.6
Others 1.0 2.2
---------- ----------
Total revenue $ 51.9 $ 56.3
========== ==========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2002 & 2001 (Unaudited)
The following represents the Corporation's operating segments as of and
for the three months ended March 31, 2002 and 2001. Intersegment
expenses and assets have been eliminated. ($ in millions):
Three Months Ended March 31, 2002
-------------------------------------------------------------------------------------
Consol-
Non- idated
Reclass- Consol- recurring Income
ifications idated & Before
Corporate & Elim- Operating Goodwill Accounting
Banking Metavante Others Overhead nations Income Charges Change
-------------------------------------------------------------------------------------
Revenue:
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
---------- --------- --------- ---------- ---------- ---------- ---------- ----------
Operating 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
---------- --------- --------- ---------- ---------- ---------- ---------- ----------
Operating income $ 114.0 $ 9.8 $ 9.4 $ (17.6)$ -- $ 115.6 $ -- $ 115.6
========== ========= ========= ========== ========== ========== ========== ==========
Identifiable assets $ 27,572.9 $ 667.9 $ 635.4 $ 410.5 $ (726.2)$ 28,560.5 $ -- $ 28,560.5
========== ========= ========= ========== ========== ========== ========== ==========
Return on average
tangible equity 24.3% 23.8% 17.3% 23.6% 23.6%
========= ========= ========= ========== ==========
Return on average equity 19.4 % 13.7 % 17.1 % 18.0% 18.0%
========= ========= ========= ========== ==========
Three Months Ended March 31, 2001
------------------------------------------------------------------------------------
Consol-
Non- idated
Reclass- Consol- recurring Income
ifications idated & Before
Corporate & Elim- Operating Goodwill Accounting
Banking Metavante Others Overhead nations Income Charges Change
-------------------------------------------------------------------------------------
Revenue:
Net interest income $ 187.5 $ (0.6)$ 5.5 $ (6.6)$ -- $ 185.8 $ -- $ 185.8
Fees - Unaffiliated
customers 68.2 131.6 47.2 (0.4) -- 246.6 -- 246.6
Fees - Affiliated
customers 8.0 16.0 3.6 -- (27.6) -- -- --
---------- --------- --------- ---------- ---------- ---------- ---------- ----------
Total revenues 263.7 147.0 56.3 (7.0) (27.6) 432.4 -- 432.4
Expenses:
Expenses - Unaffiliated
customers 110.9 128.2 28.9 14.1 (1.6) 280.5 9.9 290.4
Expenses - Affiliated
customers 15.7 3.2 7.4 (0.3) (26.0) -- -- --
---------- --------- --------- ---------- ---------- ---------- ---------- ----------
Total expenses 126.6 131.4 36.3 13.8 (27.6) 280.5 9.9 290.4
Provision for loan
and lease losses 10.9 -- 0.2 -- -- 11.1 -- 11.1
---------- --------- --------- ---------- ---------- ---------- ---------- ----------
Operating income
before taxes 126.2 15.6 19.8 (20.8) -- 140.8 (9.9) 130.9
Income tax expense 39.9 6.5 7.9 (8.2) -- 46.1 (1.8) 44.3
---------- --------- --------- ---------- ---------- ---------- ---------- ----------
Operating income $ 86.3 $ 9.1 $ 11.9 $ (12.6)$ -- $ 94.7 $ (8.1)$ 86.6
========== ========= ========= ========== ========== ========== ========== ==========
Identifiable assets $ 25,230.2 $ 610.5 $ 759.0 $ 364.3 $ (809.5)$ 26,154.5 $ -- $ 26,154.5
========== ========= ========= ========== ========== ========== ========== ==========
Return on average
tangible equity 18.8% 15.3% 20.5% 19.6% 17.7%
========= ========= ========= ========== ==========
Return on average equity 16.4% 12.8% 20.4% 16.8% 15.4%
========= ========= ========= ========== ==========
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended March 31,
----------------------------
2002 2001
------------- -------------
Assets
------
Cash and due from banks $ 649,555 $ 612,645
Investment securities:
Trading securities 9,606 29,919
Short-term investments 1,085,962 318,075
Other investment securities:
Taxable 2,932,812 4,488,625
Tax-exempt 1,229,325 1,293,755
------------- -------------
Total investment securities 5,257,705 6,130,374
Total loans and leases 19,450,822 17,617,439
Less: Allowance for loan and lease losses 279,936 237,791
------------- -------------
Net loans and leases 19,170,886 17,379,648
Premises and equipment, net 399,653 386,423
Accrued interest and other assets 1,865,135 1,524,781
------------- -------------
Total Assets $ 27,342,934 $ 26,033,871
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,184,224 $ 2,657,789
Interest bearing 13,848,258 15,020,398
------------- -------------
Total deposits 17,032,482 17,678,187
Funds purchased and security repurchase agreements 2,362,303 1,916,858
Other short-term borrowings 2,111,971 1,759,942
Long-term borrowings 2,427,736 1,611,647
Accrued expenses and other liabilities 809,505 785,255
------------- -------------
Total liabilities 24,743,997 23,751,889
Shareholders' equity 2,598,937 2,281,982
------------- -------------
Total Liabilities and Shareholders' Equity $ 27,342,934 $ 26,033,871
============= =============
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 and 2001
------------------------------------------
Net income for the first quarter of 2002 amounted to $115.6 million compared
to $86.2 million for the same period in the prior year. Basic and diluted
earnings per share were $1.09 and $1.05 respectively for the three months
ended March 31, 2002, compared with $.83 and $.80 respectively for the three
months ended March 31, 2001. The return on average assets and average equity
was 1.72% and 18.04% for the quarter ended March 31, 2002 and 1.34% and
15.31% for the quarter ended March 31, 2001.
The results of operations and financial position as of and for the three
months ended March 31, 2002, include the effects of Metavante's four
acquisitions in the second, third and fourth quarters of 2001, the
Corporation's acquisitions of National City Bancorporation ("National City")
and certain Arizona branches in the third quarter of 2001 and the
acquisitions of Richfield State Agency, Inc. ("Richfield") and Century
Bancshares, Inc. ("Century") which both closed on March 1, 2002. All
acquisitions were accounted for using the purchase method of accounting and
accordingly the results of operations and financial position are included
from the dates the transactions were closed.
Net income for the prior year quarter includes expenses associated with the
charter consolidation, the cumulative effect of adopting the accounting
standard on accounting for derivative financial instruments and hedging
activities and certain goodwill amortization and negative goodwill accretion
which ceased on January 1, 2002 as a result of adopting Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
The impact of these items is shown in the following table ($000's):
Three Months ended March 31,
-----------------------------
Pre-tax
Effect 2002 2001
------------- ------------ -------------
Income as Reported $ 115,629 $ 86,166
Charter Consolidation $ 5,980 -- 4,525
Change in Accounting for Derivatives
and Hedging Activities 671 -- 436
Goodwill Amortization and Negative
Goodwill Accretion 3,954 -- 3,582
------------ ------------
Total Adjustments -- 8,543
------------ ------------
Operating Income $ 115,629 $ 94,709
============ ============
The following tables present a summary of each of the major elements of the
consolidated operating income statement, certain financial statistics and a
summary of the major operating income statement elements stated as a percent
of average consolidated assets converted to a fully taxable equivalent basis
(FTE) where appropriate for the current quarter and previous four quarters.
Operating income for the third and fourth quarters of 2001 excludes certain
expenses incurred in connection with acquisitions at the Corporation's
Metavante subsidiary. Operating income for the second quarter of 2001
excludes certain losses and expenses incurred in connection with structural
changes and acquisitions at the Corporation's Metavante subsidiary, auto
lease residual value write-downs and the final charge for the charter
consolidation initiative. Operating income for the first quarter of 2001
excludes those items previously discussed. In addition, operating income for
the second, third and fourth quarters of 2001 exclude certain goodwill
amortization and negative goodwill accretion which ceased on January 1, 2002
as a result of adopting the new accounting standard on goodwill and other
intangible assets. Return on tangible equity is based on operating income
before amortization of intangibles. Amortization includes amortization of
goodwill and core deposit premiums and is net of negative goodwill accretion
and the income tax expense or benefit, if any, related to each component.
This calculation was specifically formulated by the Corporation and may not
be comparable to similarly titled measures reported by other companies.
Summary Consolidated Operating Income Statements and Financial Statistics
-------------------------------------------------------------------------
($000's except per share data)
2002 2001
---------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Interest income $ 380,407 $ 401,974 $ 423,248 $ 431,447 $ 452,434
Interest expense (140,130) (164,686) (204,746) (230,213) (266,655)
---------- ----------- ----------- ----------- -----------
Net interest income 240,277 237,288 218,502 201,234 185,779
Provision for loan and lease losses (15,196) (20,109) (12,206) (10,737) (11,063)
Net investment securities gains (losses) (745) (572) 774 2,991 6,105
Other income 259,666 262,492 254,497 250,554 240,466
Other expense (313,526) (308,611) (297,057) (292,239) (280,452)
---------- ----------- ----------- ----------- -----------
Income before taxes 170,476 170,488 164,510 151,803 140,835
Income tax provision (54,847) (56,274) (54,223) (50,037) (46,126)
---------- ----------- ----------- ----------- -----------
Operating income $ 115,629 $ 114,214 $ 110,287 $ 101,766 $ 94,709
========== =========== =========== =========== ===========
Per Common Share
Operating income
Basic $ 1.09 $ 1.08 $ 1.03 $ 0.98 $ 0.91
Diluted 1.05 1.04 0.99 0.94 0.88
Dividends 0.290 0.290 0.290 0.290 0.265
Return on Average Equity
Operating income 18.04 % 17.84 % 17.16 % 17.43 % 16.83 %
Return on Average Tangible Equity 23.64 22.83 20.93 20.15 19.59
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
2002 2001
---------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Interest income (FTE) 5.76 % 6.02 % 6.48 % 6.78 % 7.16 %
Interest expense (2.08) (2.42) (3.08) (3.55) (4.15)
---------- ----------- ----------- ----------- -----------
Net interest income 3.68 3.60 3.40 3.23 3.01
Provision for loan and lease losses (0.23) (0.30) (0.18) (0.17) (0.17)
Net investment securities gains (losses) (0.01) (0.01) 0.01 0.05 0.10
Other income 3.85 3.85 3.82 3.87 3.75
Other expense (4.64) (4.52) (4.46) (4.51) (4.38)
---------- ----------- ----------- ----------- -----------
Income before taxes 2.65 2.62 2.59 2.47 2.31
Income tax provision (0.93) (0.94) (0.93) (0.90) (0.83)
---------- ----------- ----------- ----------- -----------
Return on average assets
based on operating income 1.72 % 1.68 % 1.66 % 1.57 % 1.48 %
========== =========== =========== =========== ===========
Return on tangible average assets
based on tangible operating income 1.78 % 1.73 % 1.71 % 1.61 % 1.51 %
========== =========== =========== =========== ===========
NET INTEREST INCOME
-------------------
Net interest income for the first quarter of 2002 amounted to $240.3 million
compared to $185.8 million reported for the first quarter of 2001. Loan
growth and increased spreads on loan products, the impact of the banking
purchase acquisitions and the downward repricing of funding sources all
contributed to the $54.5 million increase in net interest income. Factors
negatively affecting net interest income included the ongoing process of
lengthening liabilities in order to reduce future volatility in net interest
income due to interest rate movements, the cost of treasury share repurchases
and the cost of acquisitions.
Average earning assets in the first quarter of 2002 increased $1.0 billion
or 4.0% compared to the same period a year ago. Average loans accounted for
$1.8 billion of the growth in earning assets compared to the first quarter
of last year, while average investment securities and other short-term
investments declined $0.8 billion. The Corporation estimates that
approximately $1.7 billion of average earning asset growth was attributable
to the banking related purchase acquisitions.
Average interest bearing liabilities increased $0.4 billion or 2.2% in the
first quarter of 2002 compared to the same period in 2001. Since the first
quarter of 2001, average interest bearing deposits decreased $1.2 billion
while average total short-term borrowings increased $0.8 billion and average
long-term borrowings increased $0.8 billion. The Corporation estimates that
approximately $1.3 billion of the growth in average interest bearing
liabilities in the three months ended March 31, 2002, was attributable to the
banking related purchase acquisitions.
Average noninterest bearing deposits increased $0.5 billion or 19.8% compared
to the same period last year. Approximately $0.3 billion of average
noninterest bearing deposits in the three months ended March 31, 2002 are
attributable to the banking related purchase acquisitions.
The growth and composition of the Corporation's quarterly average loan
portfolio for the current quarter and previous four quarters are reflected
in the following table. ($ in millions):
Consolidated Average Loans and Leases
-------------------------------------
2002 2001 Growth Pct.
--------- --------------------------------------- -------------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- --------- ---------
Commercial
Commercial $ 5,848 $ 5,680 $ 5,640 $ 5,328 $ 5,258 11.2 % 2.9 %
Commercial real estate
Commercial mortgages 5,228 5,071 4,831 4,625 4,429 18.1 3.1
Construction 625 534 520 538 495 26.2 16.9
--------- --------- --------- --------- --------- -------- --------
Total commercial real estate 5,853 5,605 5,351 5,163 4,924 18.9 4.4
Commercial lease financing 410 399 394 382 385 6.4 2.8
--------- --------- --------- --------- --------- -------- --------
Total Commercial 12,111 11,684 11,385 10,873 10,567 14.6 3.6
Personal
Residential real estate
Residential mortgages 2,346 2,444 2,303 2,384 2,409 (2.6) (4.0)
Construction 131 142 120 122 126 4.3 (7.6)
--------- --------- --------- --------- --------- -------- --------
Total residential real estate 2,477 2,586 2,423 2,506 2,535 (2.3) (4.2)
Personal loans
Student 117 105 94 133 134 (12.5) 11.9
Credit card 164 161 174 184 190 (14.0) 1.3
Home equity loans and lines 3,176 2,944 2,723 2,641 2,647 20.0 7.9
Other 876 912 927 864 850 3.1 (3.9)
--------- --------- --------- --------- --------- -------- --------
Total personal loans 4,333 4,122 3,918 3,822 3,821 13.4 5.1
Personal lease financing 530 572 612 668 695 (23.7) (7.3)
--------- --------- --------- --------- --------- -------- --------
Total personal 7,340 7,280 6,953 6,996 7,051 4.1 0.8
--------- --------- --------- --------- --------- -------- --------
Total Consolidated Average
Loans and Leases $ 19,451 $ 18,964 $ 18,338 $ 17,869 $ 17,618 10.4 % 2.6 %
========= ========= ========= ========= ========= ======== ========
Compared with the first quarter of 2001, total consolidated average loans and
leases increased $1.8 billion or 10.4%. Approximately $1.5 billion of
average total consolidated loan and lease growth in the first quarter of 2002
is attributable to acquisitions of which, approximately $0.2 billion is the
estimated impact on average loans resulting from the Richfield and Century
acquisitions which closed March 1, 2002. Excluding the impact of
acquisitions, average commercial loans declined $0.2 billion while average
commercial real estate loans grew approximately $0.7 billion. Portfolio
decreases in indirect auto loans and leases and student loans, tighter spread
products, were offset by growth in consumer and home equity portfolios, both
wider spread products. Approximately $0.1 billion of indirect auto loan
production was securitized and sold in the current quarter. Excluding the
impact of acquisitions, average consumer loans grew approximately $0.2
billion. The decline in average residential real estate loans, excluding
acquisitions, reflects the continued strategy of selling residential real
estate loan production in the secondary market. Residential real estate
loans sold to investors amounted to $0.6 billion in the first three months
of 2002 and reflects in part the carryover of remaining inventory from year-
end 2001. Approximately $0.3 billion of residential loans were sold in the
first quarter of the prior year.
Commercial loan growth in the quarter came from new business relationship
activities, customers continuing to acquire and some modest expansion. Home
equity loan and line sales were strong in the first quarter and continue to
be the focus of direct mail and retail branch efforts.
The growth and composition of the Corporation's quarterly average deposits
for the current and prior year's quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2002 2001 Growth Pct.
--------- --------------------------------------- -------------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- --------- ---------
Bank issued deposits
Noninterest bearing deposits
Commercial $ 2,160 $ 2,225 $ 1,968 $ 1,779 $ 1,639 31.8 % (2.9)%
Personal 678 634 608 601 583 16.2 6.9
Other 346 388 365 347 436 20.5 (10.8)
--------- --------- --------- --------- --------- -------- --------
Total noninterest
bearing deposits 3,184 3,247 2,941 2,727 2,658 19.8 (1.9)
Interest bearing deposits
Savings & NOW 1,994 1,877 1,784 1,719 1,720 16.0 6.2
Money market 5,844 5,825 5,563 5,368 5,110 14.3 0.3
Foreign activity 694 704 640 532 476 45.8 (1.4)
--------- --------- --------- --------- --------- -------- --------
Total interest
bearing deposits 8,532 8,406 7,987 7,619 7,306 16.8 1.5
Time deposits
Other CDs & time deposits 2,881 3,097 3,167 3,203 3,399 (15.2) (7.0)
CDs greater than $100,000 651 721 751 749 819 (20.4) (9.6)
--------- --------- --------- --------- --------- -------- --------
Total time deposits 3,532 3,818 3,918 3,952 4,218 (16.2) (7.5)
--------- --------- --------- --------- --------- -------- --------
Total bank issued deposits 15,248 15,471 14,846 14,298 14,182 7.5 (1.4)
Wholesale deposits
Money market 83 78 -- 222 762 (89.2) 5.6
Brokered CDs 1,043 872 1,517 1,740 1,795 (41.9) 19.7
Foreign time 658 487 624 939 939 (29.9) 35.3
--------- --------- --------- --------- --------- -------- --------
Total wholesale deposits 1,784 1,437 2,141 2,901 3,496 (49.0) 24.2
--------- --------- --------- --------- --------- -------- --------
Total consolidated
average deposits $ 17,032 $ 16,908 $ 16,987 $ 17,199 $ 17,678 (3.7)% 0.7 %
========= ========= ========= ========= ========= ======== ========
Average bank issued deposits increased $1.1 billion or 7.5% in the first
quarter of 2002 compared to the first quarter of 2001. Average bank issued
deposits associated with the acquisitions were approximately $1.3 billion of
which approximately $0.3 billion is the estimated impact on average bank
issued deposits resulting from the Richfield and Century acquisitions.
Excluding the effect of the acquisitions, noninterest bearing deposits
increased $0.3 billion and interest bearing activity accounts increased $0.8
billion of which average money market index accounts accounted for
approximately $0.5 billion of the growth. Excluding acquisitions, average
CDs and time deposits declined $1.2 billion. M&I's markets have experienced
some irrational pricing on single service time deposit relationships to the
extent of pricing time deposits above comparable wholesale levels which the
Corporation has elected not to pursue. Recently the Corporation introduced
two longer-term step-up CD products that provide consumers with an increasing
rate over the term of the CD.
The growth in bank issued deposits includes both commercial and retail
banking. 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 an
aggressive checking promotion in the Arizona market.
Compared with the first quarter of 2001, average wholesale deposits declined
$1.7 billion and were replaced, in part, with borrowings. The Corporation
has made greater use of wholesale funding alternatives especially
institutional CDs. Average wholesale deposits were $0.3 billion greater in
the current quarter compared with the fourth quarter of 2001.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current
quarter and prior year first quarter are presented in the following table
($ in millions):
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
------------------------------ ------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------------------------ ------------------------------
Loans and leases: (a)
Commercial $ 6,257.8 $ 83.4 5.40% $ 5,643.8 $ 111.7 8.03%
Commercial real estate 5,852.9 98.8 6.85 4,923.8 99.8 8.22
Residential real estate 2,476.7 44.0 7.21 2,534.7 48.0 7.68
Personal 4,863.4 84.3 7.03 4,515.1 95.0 8.53
---------- --------- -------- ---------- --------- --------
Total loans and leases 19,450.8 310.5 6.47 17,617.4 354.5 8.16
Investment securities: (a)
Taxable 2,932.8 50.8 7.24 4,488.6 77.9 7.16
Tax Exempt (a) 1,229.3 22.6 7.52 1,293.8 22.6 7.17
---------- --------- -------- ---------- --------- --------
Total investment securities 4,162.1 73.4 7.32 5,782.4 100.5 7.16
Other short-term investments (a) 1,095.6 4.5 1.67 348.0 4.6 5.36
---------- --------- -------- ---------- --------- --------
Total interest earning assets $ 24,708.5 $ 388.4 6.40% $ 23,747.8 $ 459.6 7.88%
========== ========= ======== ========== ========= ========
Interest bearing deposits:
Bank issued deposits:
Interest bearing activity $ 8,531.5 $ 27.3 1.30% $ 7,306.4 $ 74.6 4.14%
Time deposits 3,532.6 32.6 3.74 4,217.4 61.5 5.91
---------- --------- -------- ---------- --------- --------
Total bank issued deposits 12,064.1 59.9 2.01 11,523.8 136.1 4.79
Wholesale deposits 1,784.2 11.0 2.50 3,496.6 51.1 5.93
---------- --------- -------- ---------- --------- --------
Total interest bearing deposits 13,848.3 70.9 2.08 15,020.4 187.2 5.05
Short-term borrowings 4,474.3 38.8 3.52 3,676.8 54.1 5.97
Long-term borrowings 2,427.7 30.4 5.07 1,611.6 25.3 6.38
---------- --------- -------- ---------- --------- --------
Total interest bearing liabilities $ 20,750.3 $ 140.1 2.74% $ 20,308.8 $ 266.6 5.32%
========== ========= ======== ========== ========= ========
Net interest margin (FTE) as a
percent of average earning assets $ 248.3 4.09% $ 193.0 3.31%
========= ======== ========= ========
Net interest spread (FTE) 3.66% 2.56%
======== ========
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax
rate of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for
available for sale securities.
The yield on average earning assets decreased 148 basis points since the
first quarter of 2001, which had a negative impact on interest income (FTE)
of approximately $89.8 million. The increase in the volume of earning assets,
primarily loans and short term investments, increased interest income by
approximately $17.8 million compared with the first quarter of 2001. The
cost of interest bearing deposits decreased 297 basis points from the same
quarter of the previous year which reflects rate declines. Less reliance on
wholesale deposits together with the favorable shift in the bank issued
deposit mix as previously discussed also provided a benefit to the interest
margin. Short-term borrowing costs decreased 245 basis points and long-term
borrowing costs decreased 131 basis points compared with the first quarter
of 2001. The overall decrease in the cost of interest bearing liabilities
of 258 basis points decreased interest expense by approximately $128.6
million while the increase in the volume of interest bearing liabilities
increased interest expense by approximately $2.1 million.
The Corporation anticipates the net interest margin will be relatively flat
in the second quarter, with net interest income growing with internal growth
and the acquisitions. The Corporation intends to continue to manage its
interest rate risk sensitivity by extending liabilities. 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, 2002 and the prior four quarters.
NONPERFORMING ASSETS
--------------------
($000's)
2002 2001
---------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Nonaccrual $ 164,444 $ 166,434 $ 163,946 $ 137,355 $ 130,640
Renegotiated 366 378 389 249 560
Past due 90 days or more 5,520 6,982 7,185 7,166 7,080
---------- ----------- ----------- ----------- -----------
Total nonperforming loans and leases 170,330 173,794 171,520 144,770 138,280
Other real estate owned 6,736 6,796 5,842 3,671 3,790
---------- ----------- ----------- ----------- -----------
Total nonperforming assets $ 177,066 $ 180,590 $ 177,362 $ 148,441 $ 142,070
========== =========== =========== =========== ===========
Allowance for loan and lease losses $ 284,179 $ 268,198 $ 264,736 $ 244,486 $ 240,348
========== =========== =========== =========== ===========
CONSOLIDATED STATISTICS
-----------------------
2002 2001
---------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Net Charge-offs to average
loans and leases annualized 0.23 % 0.35 % 0.24 % 0.15 % 0.13 %
Total nonperforming loans and leases
to total loans and leases 0.84 0.90 0.90 0.81 0.78
Total nonperforming assets to total loans
and leases and other real estate owned 0.87 0.94 0.93 0.83 0.80
Allowance for loan and lease losses
to total loans and leases 1.40 1.39 1.39 1.37 1.35
Allowance for loan and lease losses
to nonperforming loans and leases 167 154 154 169 174
NONACCRUAL LOANS AND LEASES BY TYPE
-----------------------------------
($000's)
2002 2001
---------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Commercial
Commercial, financial & agricultural $ 65,513 $ 70,256 $ 78,623 $ 54,576 $ 50,273
Lease financing receivables 4,876 12,041 2,022 1,892 2,959
---------- ----------- ----------- ----------- -----------
Total commercial 70,389 82,297 80,645 56,468 53,232
Real estate
Construction & land development 533 720 1,063 2,590 2,584
Commercial mortgage 39,436 34,546 38,117 38,440 38,797
Residential mortgage 52,504 47,783 42,147 38,389 34,244
---------- ----------- ----------- ----------- -----------
Total real estate 92,473 83,049 81,327 79,419 75,625
Personal 1,582 1,088 1,974 1,468 1,783
---------- ----------- ----------- ----------- -----------
Total nonaccrual loans and leases $ 164,444 $ 166,434 $ 163,946 $ 137,355 $ 130,640
========== =========== =========== =========== ===========
RECONCILIATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
-----------------------------------------------------
($000's)
2002 2001
---------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Beginning balance $ 268,198 $ 264,736 $ 244,486 $ 240,348 $ 235,115
Provision for loan and lease losses 15,196 20,109 12,206 10,737 11,063
Allowance of banks and loans acquired 11,965 -- 19,151 -- --
Loans and leases charged-off
Commercial 4,505 11,323 5,266 3,607 2,577
Real estate 3,008 4,404 3,768 1,734 2,075
Personal 2,939 3,253 2,768 2,561 2,383
Leases 2,930 1,174 450 770 496
---------- ----------- ----------- ----------- -----------
Total charge-offs 13,382 20,154 12,252 8,672 7,531
Recoveries on loans and leases
Commercial 682 2,216 362 1,042 515
Real estate 474 292 357 403 410
Personal 733 954 354 531 728
Leases 313 45 72 97 48
---------- ----------- ----------- ----------- -----------
Total recoveries 2,202 3,507 1,145 2,073 1,701
---------- ----------- ----------- ----------- -----------
Net loans and leases charge-offs 11,180 16,647 11,107 6,599 5,830
---------- ----------- ----------- ----------- -----------
Ending balance $ 284,179 $ 268,198 $ 264,736 $ 244,486 $ 240,348
========== =========== =========== =========== ===========
Nonperforming assets consist of nonperforming loans and leases and other real
estate owned (OREO).
OREO is comprised of commercial and residential properties acquired in
partial or total satisfaction of problem loans and branch premises held for
sale. At March 31, 2002, OREO acquired in satisfaction of debts amounted to
$6.5 million and branch premises held for sale amounted to $0.2 million.
Nonperforming loans and leases consist of nonaccrual, renegotiated or
restructured loans, and loans and leases that are delinquent 90 days or more
and still accruing interest. The balance of nonperforming loans and leases
can fluctuate widely based on the timing of cash collections, renegotiations
and renewals.
Maintaining nonperforming assets at an acceptable level is important to the
ongoing success of a financial services institution. The Corporation's
comprehensive credit review and approval process is critical to ensuring that
the amount of nonperforming assets on a long-term basis is minimized within
the overall framework of acceptable levels of credit risk. In addition to
the negative impact on net interest income and credit losses, nonperforming
assets also increase operating costs due to the expense associated with
collection efforts.
At March 31, 2002, nonperforming loans and leases amounted to $170.3 million
or 0.84% of consolidated loans and leases of $20.3 billion, a decrease of
$3.5 million or 2.0% since December 31, 2001. Nonaccrual loans and leases
accounted for $2.0 million of the decline. Since year end, nonaccrual
commercial loans and leases declined $11.9 million while nonaccrual
commercial real estate and nonaccrual residential real estate increased $4.9
million and $4.7 million, respectively. At March 31, 2002, approximately
$33.8 million of nonperforming loans are related to recent acquisitions of
which, approximately $9.4 million were attributable to the Richfield and
Century acquisitions which were completed March 1, 2002.
Net charge-offs amounted to $11.2 million or 0.23% of average loans in the
first quarter of 2002 compared with net charge-offs of $16.6 million or 0.35%
of average loans in the fourth quarter of 2001 and $5.8 million or 0.13% of
average loans in the first quarter of the prior year.
The allowance for loan and lease losses is determined using a methodology
which reserves currently for those loans and leases in which it is determined
that a loss is probable based on characteristics of the individual loan,
historical loss patterns of similar "homogeneous" loans and environmental
factors unique to each measurement date. This reserving methodology has the
following components:
Specific Reserve.
-----------------
The amount of specific reserves is determined through a loan-by-loan
analysis of problem loans over a minimum size that considers expected
future cash flows, the value of collateral and other factors that may
impact the borrower's ability to make payments when due. Included in
this group are those nonaccrual or renegotiated loans, which meet the
criteria as being "impaired" under the definition in SFAS 114. A loan
is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Problem
loans also include those credits that have been internally classified
as credits requiring management's attention due to underlying problems
in the borrower's business or collateral concerns. Ranges of loss are
determined based on best-and worst-case scenarios for each loan.
Reserves for homogeneous loan pools.
------------------------------------
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.
Special Reserve.
----------------
The Corporation's senior lending management also allocates reserves for
special situations which are unique to the measurement period. These
include environmental factors, such as economic conditions in certain
geographical or industry segments of the portfolio, economic trends in
the retail lending sector and peer-group loss history. Reserves
allocated are based on estimates of loss that senior lending
management has isolated based on these economic trends or conditions.
At March 31, 2002, special reserves continue to be carried for
exposures to the airline and travel industries, manufacturing, paper
and allied products and dairy sectors. While most loans in these
categories are still performing, the Corporation continues to believe
that these sectors were more adversely affected by the economic
slowdown and deteriorating operating results and the potential for
reduced collateral values, especially in a liquidation, have not
exhibited a significant improvement since year end.
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 $284.2 million at March 31, 2002 compared to $268.2
million at December 31, 2001 and $240.3 million at March 31, 2001. 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.
OTHER INCOME
------------
Total other income in the first quarter of 2002 amounted to $259.0 million
compared to $246.6 million in the same period last year, an increase of $12.4
million or 5.0%.
Total data processing services revenue amounted to $145.0 million in the
first quarter of 2002 compared to $133.0 million in the first quarter of
2001. e-Finance solutions revenue increased $7.6 million or 28.8% compared
the first quarter of 2001, but was relatively unchanged when compared with
the fourth quarter of 2001. Despite the purging activity of one large
customer in the fourth quarter of last year and first quarter of this year,
Internet banking accounts continued to show growth. Active customers and
transactions processed in bill presentment and payment showed strong linked
quarter and year over year growth. Financial technology solutions revenue,
the traditional outsourcing business, increased $7.1 million or 6.8%. Buyout
fees, which can vary from period to period, accounted for $2.4 million of the
revenue increase. Growth in this source of data processing services revenue
has slowed due to continued bank consolidation and a weaker economy.
However, the Corporation is beginning to experience some strengthening in the
sales pipeline. Other revenue declined primarily due to lower professional
services revenue. Revenue associated with acquisitions amounted to $6.3
million in the first quarter of 2002.
Item processing revenue amounted to $10.3 million in the first quarter of
2002 compared to $12.5 million in the first quarter of 2001. During the
latter part of 2001, the Corporation sold certain item processing
relationships and also sold four Midwest item processing centers.
Trust services revenue amounted to $31.0 million in the first quarter of
2002, an increase of $1.0 million or 3.2% compared to $30.0 million in the
first quarter of 2001. Acquisitions contributed approximately $0.6 million
to the revenue growth. Assets under management were approximately $13.0
billion at March 31, 2002 compared to $11.8 billion at March 31, 2001 an
increase of $1.2 billion or 10.2%. For the first time in several quarters,
managed assets experienced some slight shifting from fixed income and money
market funds into equities which generally results in higher fee income.
Service charges on deposits increased $4.7 million or 22.8% and amounted to
$25.6 million in the first quarter of 2002. Acquisitions accounted for
approximately $0.6 million of the revenue in the first quarter of 2002. The
remainder of the increase was primarily attributable to service charges on
commercial demand accounts.
Mortgage banking revenue increased $1.6 million in the first quarter of 2002
compared to the first quarter of 2001. Gains on the sale of mortgage loans
accounted for the majority of the increase which reflects the increased sale
activity as previously discussed. Loan applications and closings were lower
in the first quarter 2002 than the fourth quarter of 2001 and have shifted
from predominantly refinance activity to purchase and construction.
Net investment securities activities are primarily the result of the
activities of the Corporation's Capital Markets Group and vary from period
to period.
Other income in the first quarter of 2002 amounted to $31.2 million compared
to $29.8 million in the first quarter of 2001, an increase of $1.4 million
or 4.6%. Approximately $0.9 million of increase was attributable to the
banking acquisitions.
OTHER EXPENSE
-------------
Total other expense for the three months ended March 31, 2002, amounted to
$313.6 million compared to $290.4 million for the three ended March 31, 2001.
Nonrecurring expenses in the first quarter of 2001 consisted of the
following:
Single charter related expenses which are included in other expenses
in the Consolidated Statement of Income amounted to $6.0 million in the
first quarter of 2001.
Included in amortization of intangibles for the three months
ended March 31, 2001, is $4.0 million of goodwill amortization
which ceased to be amortized under the new accounting standard
for goodwill and intangibles which was adopted on January 1,
2002.
Excluding these nonrecurring expenses, total other operating expense amounted
to $313.6 million in the first quarter of 2002 compared to $280.5 million in
the first quarter of 2001, an increase of $33.1 million or 11.8%.
Approximately $5.9 million of operating expenses, excluding salaries and
benefits, in the first quarter of 2002 were attributable to purchase
acquisitions which were included in M&I's operating expenses since the merger
dates.
The Corporation's nonbanking businesses, especially its Data Services segment
("Metavante"), continue to be the primary contributors to operating expense
growth. Excluding salaries and benefits expense, Metavante operating expense
growth represents over half of all of the consolidated operating expense
growth and reflects the cost of its acquisitions as well as ongoing
investments in software, technology research and development and
infrastructure in potentially high-growth areas.
Expense control is sometimes measured in the financial services industry by
the efficiency ratio statistic. The efficiency ratio is calculated by taking
total other expense (excluding nonrecurring charges) divided by the sum of
total other income (including Capital Markets revenue but excluding
investment securities gains or losses) and net interest income on a fully
taxable equivalent basis. The Corporation's efficiency ratios for the three
months ended March 31, 2002 and 2001 and December 31, 2001 are:
Three Months Three Months Three Months
Ended Ended Ended
March 31, December 31, March 31,
2002 2001 2001
------------ ------------ ------------
Consolidated Corporation 61.8 % 60.7 % 63.8 %
Consolidated Corporation Excluding Metavante
Including Intangible Amortization 50.7 % 51.6 % 52.8 %
Excluding Intangible Amortization 49.9 % 50.3 % 51.7 %
Salaries and employee benefits expense amounted to $179.5 million in the
first quarter of 2002 compared to $167.9 million in the first quarter of
2001, an increase of $11.6 million or 6.9%. Operating salaries and employee
benefits expense associated with banking acquisitions accounted for $2.9
million of the increase. Increased costs in employee health plans added $1.9
million to expense and variable incentive compensation charges increased $4.1
million in the current quarter compared to the same period in the prior year.
The increase in salaries and benefits expense associated with Metavante's
acquisitions were offset by the savings arising from the structural changes
implemented in the second quarter of 2001.
Occupancy and equipment expense in the first quarter of 2002 amounted to
$45.6 million. Approximately $2.2 million of the expense in the current
quarter was attributable to the banking and Metavante's acquisitions.
Excluding the impact of acquisitions, occupancy and equipment expense
decreased approximately $1.1 million compared to the first quarter of 2001.
Metavante's operating expense growth accounted for approximately $2.3 million
of the increase in software expenses in the first quarter of 2002 compared
to the first quarter of 2001. During the first quarter of 2002, the
Corporation's banking segment incurred nonrecurring software charges of
approximately $1.7 million.
Acquisitions accounted for approximately $0.6 million of the quarter over
quarter increase in processing charges, supplies and printing and shipping
and handling. The increase in professional services expense was primarily
attributable to consulting services performed for the Corporation.
Excluding the effect of the new accounting standard on accounting for
goodwill and intangibles, amortization expense increased $0.6 million and was
primarily attributable to increased core deposit intangible amortization and
other intangible amortization associated with the banking and Metavante's
acquisitions.
Other expense amounted to $35.5 million in the first quarter of 2002 compared
to $29.9 million in the first quarter of 2001. Included in this category in
the prior year quarter were the single charter nonrecurring charges
aggregating $6.0 million as previously discussed. Excluding these charges,
other expense amounted to $35.5 million in the current quarter compared to
$23.9 million in the first quarter of last year, an increase of $11.6
million. Losses arising from asset write-downs increased $3.9 million in the
current quarter. Other operating expenses associated with acquisitions
accounted for approximately $1.5 million of the increase.
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 $6.4
million in the first quarter of 2001 and in the current quarter amounted to
$0.9 million excluding acquisitions resulting in an increase of $5.5 million
in other expense in the first quarter of 2002 compared to the first quarter
of 2001.
INCOME TAXES
------------
The provision for income taxes for the three months ended March 31, 2002
amounted to $54.8 million or 32.2% of pre-tax income compared to $44.3
million or 33.8% of pre-tax income for the three months ended March 31, 2001.
The decline in the effective tax rate was due to the effect of discontinuing
goodwill amortization and the recognition of income tax benefits associated
with the sale of preferred stock.
CAPITAL RESOURCES
-----------------
Shareholders' equity was $2.72 billion at March 31, 2002 compared to $2.49
billion at December 31, 2001 and $2.31 billion at March 31, 2001.
During the first quarter of 2002, the Corporation issued 3.1 million shares
of its common stock ($186.6 million) in the purchase acquisitions of
Richfield and Century.
The Corporation acquired 0.8 million shares of its common stock during the
first quarter of 2002 at an aggregate cost of $48.5 million.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in
the following tables.
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
March 31, 2002 December 31, 2001
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,165 9.42 % $ 2,091 9.70 %
Tier 1 Capital
Minimum Requirement 920 4.00 862 4.00
-------------------------------- --------------------------------
Excess $ 1,245 5.42 % $ 1,229 5.70 %
================================ ================================
Total Capital $ 2,865 12.46 % $ 2,775 12.88 %
Total Capital
Minimum Requirement 1,839 8.00 1,724 8.00
-------------------------------- --------------------------------
Excess $ 1,026 4.46 % $ 1,051 4.88 %
================================ ================================
Risk-Adjusted Assets $ 22,985 $ 21,555
================= =================
LEVERAGE RATIOS
---------------
($ in millions)
March 31, 2002 December 31, 2001
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,165 8.16 % $ 2,091 7.93 %
Minimum Leverage
Requirement 796 - 1,327 3.00 - 5.00 791 - 1,318 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,369 - 838 5.16 - 3.16 % $ 1,300 - 773 4.93 - 2.93 %
================================ ================================
Adjusted Average
Total Assets $ 26,537 $ 26,371
================= =================
FORWARD-LOOKING STATEMENTS
--------------------------
Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Quantitative and
Qualitative Disclosures about Market Risk," respectively, contain forward-
looking statements within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include, without limitation, statements regarding operating
activities and results. Such statements are subject to important factors that
could cause the Corporation's actual results to differ materially than those
anticipated by the forward-looking statements. These factors include those
referenced in the Corporation's Annual Report on Form 10-K for the period
ending December 31, 2001 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 2001 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,
2002 2001
----------------- -----------------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (0.9) % (3.9) %
Decline in rates 0.2 % 3.1 %
These results are based solely on the modeled parallel changes in market rates,
and do not reflect the earnings sensitivity that may arise from other factors
such as changes in the shape of the yield curve, the changes in spread between
key market rates, or accounting recognition for impairment of certain
intangibles. These results are also considered to be conservative estimates
due to the fact that they do not include any management action to mitigate
potential income variances within the simulation process. Such action could
potentially include, but would not be limited to, adjustments to the repricing
characteristics of any on- or off-balance sheet item with regard to short-term
rate projections and current market value assessments.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and
management strategies.
Another component of interest rate risk is measuring the fair value at risk for
a given change in market interest rates. The Corporation also uses computer
modeling techniques to determine the present value of all asset and liability
cash flows (both on- and off-balance sheet), adjusted for prepayment
expectations, using a market discount rate. The net change in the present
value of the assets and liability cash flows in different market rate
environments is the amount of fair value at risk from those rate movements.
As of March 31, 2002 the fair value of equity at risk for a gradual 100bp shift
in rates was less than 2.0% of the market value of the Corporation.
EQUITY RISK
-----------
In addition to interest rate risk, the Corporation incurs market risk in the
form of equity risk. M&I's Capital Markets Group invests in private, medium-
sized companies to help establish new businesses or recapitalize existing ones.
Exposure to the change in equity values for the companies that are held in
their portfolio exist, but due to the nature of the investments, cannot be
quantified within acceptable levels of precision.
As of March 31, 2002, M&I Trust Services administered $57.2 billion in assets
and directly managed a portfolio of $13.0 billion. Exposure exists to changes
in equity values due to the fact that fee income is partially based on equity
balances. While this exposure is present, quantification remains difficult due
to the number of other variables affecting fee income. Interest rate changes
can also have an effect on fee income for the above stated reasons.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits:
Exhibit (3)(ii)(a) - Certificate of Assistant Secretary
Exhibit (3)(ii)(b) - By-laws, as amended
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 - Letter of Marshall & Ilsley Corporation regarding
representations from Arthur Andersen LLP
B. Reports on Form 8-K:
None
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, 2002
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- -----------------------------------------------
(3)(ii)(a) Certificate of Assistant Secretary
(3)(ii)(b) By-laws, as amended
(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) Letter of Marshall & Ilsley Corporation regarding
representations from Arthur Andersen LLP