-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mc5I2DOIfI8Kv7n6LpKxjYO0tB3pAQ23QoLRcxVKMVHgv0xrNA/zzHX+/PFqITFJ gsRls04wK5yDlUpAlt+Sag== 0000062741-03-000128.txt : 20030514 0000062741-03-000128.hdr.sgml : 20030514 20030514153213 ACCESSION NUMBER: 0000062741-03-000128 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARSHALL & ILSLEY CORP/WI/ CENTRAL INDEX KEY: 0000062741 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 390968604 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15403 FILM NUMBER: 03698850 BUSINESS ADDRESS: STREET 1: 770 N WATER ST CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4147657801 MAIL ADDRESS: STREET 1: 770 NORTH WATER ST CITY: MILWAUKEE STATE: WI ZIP: 53202 10-Q 1 fm10q_03-2003.txt FORM 10-Q DATED 03/31/2003 ============================================================================ 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 ============================================================================ 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. EX-3 3 ex03_03-2003.txt EXHIBIT 3 TO FORM 10-Q DATED 03/31/2003 Exhibit 3 AMENDMENT TO RESTATED --------------------- ARTICLES OF INCORPORATION OF ---------------------------- MARSHALL & ILSLEY CORPORATION ----------------------------- Pursuant to and in accordance with Section 180.1003 of the Wisconsin Statutes, the following amendment to the Restated Articles of Incorporation was duly adopted by the vote required on February 20, 2003 by the Board of Directors and April 22, 2003 by the shareholders of Marshall & Ilsley Corporation: BE IT RESOLVED, that the first paragraph of Article III of the Restated Articles of Incorporation of Marshall & Ilsley Corporation be, and hereby is, amended to read as follows: ARTICLE III ----------- The aggregate number of shares which the Corporation shall have the authority to issue, the designation of each class of shares, the authorized number of shares of each class, and the par value thereof per share, shall be as follows: Designation Par Value Authorized of Class per Share Number of Shares ------------------------- ----------- ------------------ Preferred Stock........... $1.00 5,000,000 Common Stock.............. $1.00 700,000,000 BE IT FURTHER RESOLVED, except as set forth above, Article III shall remain in full force and effect without further amendment or modification. Executed in duplicate as of the 23rd day of April, 2003. MARSHALL & ILSLEY CORPORATION By: /s/ Randall J. Erickson _____________________________________ Randall J. Erickson, Senior Vice President, General Counsel and Secretary This instrument was drafted by: Michelle M. Nelson Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, Wisconsin 53202 MW681688_1.DOC AMENDMENT TO ARTICLES OF INCORPORATION OF MARSHALL & ILSLEY CORPORATION The undersigned, in his official capacity as Secretary of Marshall & Ilsley Corporation, a corporation duly organized under the laws of the State of Wisconsin (the "Corporation"), hereby certifies that in accordance with Section 180.1002 of the Wisconsin Statutes, the following Amendment was duly adopted: "Section 6(a) of Article III of the Corporation's Restated Articles of Incorporation shall be amended to increase the number of shares of Preferred Stock designated as Class A Preferred Stock from 500,000 shares to "2,000,000" shares." Except as set forth above, Article III shall remain in full force and effect without further amendment or modification. The Amendment to the Articles of Incorporation of Marshall & Ilsley Corporation was adopted by the Board of Directors of the Corporation on April 14, 1994. Executed in duplicate this 15th day of April, 1994. MARSHALL & ILSLEY CORPORATION By: /s/ M.A. Hatfield _____________________________________ M.A. Hatfield, Secretary This instrument was drafted by: Scott A. Moehrke Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, Wisconsin 53202 MW716003_1.DOC RESTATED ARTICLES OF INCORPORATION OF MARSHALL & ILSLEY CORPORATION These Restated Articles of Incorporation are executed by the undersigned to supersede and replace the heretofore existing Articles of Incorporation and amendments thereto of Marshall & Ilsley Corporation, a corporation organized under the laws of the State of Wisconsin: ARTICLE I The name of the corporation is Marshall & Ilsley Corporation (the "Corporation"). ARTICLE II The Corporation may engage in any lawful activity within the purpose for which corporations may be organized under the Wisconsin Business Corporation Law; provided, however, that the Corporation shall not engage in any activities prohibited by the United States Bank Holding Company Act of 1956. ARTICLE III The aggregate number of shares which the Corporation shall have the authority to issue, the designation of each class of shares, the authorized number of shares of each class of par value and the par value thereof per share, shall be as follows: Designation Par Value Authorized of Class per Share Number of Shares ------------------------- ----------- ------------------ Preferred Stock........... $1.00 5,000,000 Common Stock.............. $1.00 160,000,000 Any and all such shares of Common Stock and Preferred Stock may be issued for such consideration, not less than the par value thereof, as shall be fixed from time to time by the Board of Directors. Any and all such shares so issued, the full consideration for which has been paid or delivered, shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon, and the holders of such shares shall not be liable for any further payments except as otherwise provided by the laws of the State of Wisconsin. The preferences, limitations and relative rights of such classes shall be as follows: (1) Designation of Series. The Preferred Stock may from time to time as hereinafter provided, be divided into and issued in one or more series, and the Board of Directors is hereby expressly authorized to establish one or more series, to fix and determine the variations as among series and to fix and determine, prior to the issuance of any shares of a particular series, the following designations, terms, limitations and relative rights and preferences of such series: (a) The designations of such series and the number of shares which shall constitute such series, which number may at any time, or from time to time, be increased or decreased (but not below the number of shares thereof then outstanding) by the Board of Directors unless the Board of Directors shall have otherwise provided in establishing such series; (b) The voting rights to which the holders of the shares of such series are entitled, if any; (c) The yearly rate of dividends on the shares of such series, the dates in each year upon which such dividend shall be payable and, if such dividend shall be cumulative, the date or dates from which such dividend shall be cumulative; (d) The amount per share payable on the shares of such series in the event of the liquidation or dissolution or winding up of the Corporation (whether voluntary or involuntary); (e) The terms, if any, on which the shares of such series shall be redeemable, and, if redeemable, the amount per share payable thereon in the case of the redemption thereof (which amount may vary with regard to (i) shares redeemed on different dates; and (ii) shares redeemed through the operation of a sinking fund, if any, applicable to such shares, from the amount payable with respect to shares otherwise redeemed); (f) The extent to and manner in which a sinking fund, if any, shall be applied to the redemption or purchase of the shares of such series, and the terms and provisions relative to the operation of such fund; (g) The terms, if any, on which the shares of such series shall be convertible into shares of any other class or of any other series of the same or any other class and, if so convertible, the price or prices or the rate or rates of conversion, including the method, if any, for adjustments of such prices or rates, and any other terms and conditions applicable thereto; and (h) Such other terms, limitations and relative rights and preferences, if any, of such series as the Board of Directors may lawfully fix and determine and as shall not be inconsistent with the laws of the State of Wisconsin or these Amended and Restated Articles of Incorporation. All shares of the same series of Preferred Stock shall be identical in all respects, except that shares of any one series issued at different times may differ as to dates from which any cumulative dividends thereon shall be cumulative. All shares of the Preferred Stock of all series shall be equal and shall be identical in all respects, except as permitted by the foregoing provisions of this paragraph (1). (2) Dividends. The holders of Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends at the annual rate fixed by the Board of Directors with respect to each series of shares and no more. Such dividends shall be payable on such dates and in respect of such periods in such year as may be fixed by the Board of Directors to the holders of record thereof on such date as may be determined by the Board of Directors. Such dividends shall be paid or declared and set apart for payment for each dividend period before any dividend (other than a dividend payable solely in Common Stock) for the same period shall be paid upon or set apart for payment on the Common Stock, and, if dividends on the Preferred Stock shall be cumulative, all unpaid dividends thereon for any past dividend period shall be fully paid or declared and set apart for payment, but without interest, before any dividend (other than a dividend payable solely in Common Stock) shall be paid upon or set apart for payment on the Common Stock. The holders of Preferred Stock shall not, however, be entitled to participate in any other or additional earnings or profits of the Corporation, except for such premiums, if any, as may be payable in case of redemption, liquidation, dissolution or winding up. (3) Redemption. In the event that the shares of any series of the Preferred Stock shall be made redeemable as provided in subparagraph (e) of paragraph (1), above, the Corporation may, at its option, redeem at any time or from time to time all or any part of such shares, upon notice duly given as hereinafter provided, by paying for each share the redemption price then applicable thereto fixed by the Board of Directors as provided in subparagraph (e) of paragraph (1), above. Notice of every such redemption shall be mailed at least thirty (30) days prior to the date fixed for such redemption to the holders of record of the shares called for redemption at their respective addresses as shown on the stock records of the Corporation. In case of a redemption of a part of a series of Preferred Stock at the time outstanding, the Corporation shall select by lot, in such manner as the Board of Directors may determine, the shares so to be redeemed. On or before the date fixed for a redemption specified therein, the Corporation shall deposit funds sufficient to redeem such shares with a bank or trust company in good standing, as designated in such notice, organized under the laws of the United States or of the State of Wisconsin, doing business in the City of Milwaukee, Wisconsin, and having a capital, surplus and undivided profit aggregating at least $50,000,000.00, according to its last published statement of condition, in trust for the pro rata benefit of the holders of the shares called for redemption, and if the name and address of such bank or trust company and the deposit or intent to deposit the redemption funds in such trust account shall have been stated in such notice of redemption, and the Corporation shall have given such bank or trust company irrevocable instructions and authorization to pay the amount payable upon redemption to the proper holders upon surrender of certificates representing such shares, then, from and after the mailing of such notice and the making of such deposit, all shares so called for redemption shall no longer be deemed to be outstanding for any purpose whatsoever and the right to receive dividends thereon and all rights of the holders of such shares in or with respect to such shares of the Corporation shall forthwith cease and terminate, except only the right of the holders thereof to receive from such bank or trust company the amount payable upon redemption together with all accrued but unpaid dividends to the date fixed for redemption, without interest, upon the surrender of the certificates representing the shares to be redeemed, and the right to exercise privileges of conversion, if any, on or before the date fixed for redemption or such earlier date as may be fixed for the expiration thereof. Any funds so deposited by the Corporation which shall not be required for such redemption because of the exercise of any right of conversion subsequent to the time of such deposit shall be released and repaid to the Corporation upon its request. Any funds so deposited and unclaimed at the end of five (5) years (or such shorter period as shall be provided by law) after the date fixed for redemption shall be released and repaid to the Corporation, after which holders of the shares called for redemption shall no longer look to the said bank or trust company but shall look only to the Corporation, or to others, as the case may be, for payment of any lawful claim for such funds which the holders of said shares may still have. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. (4) Reissue of Shares. Shares of the Preferred Stock which shall have been converted, redeemed, purchased or otherwise acquired by the Corporation, whether through the operation of a sinking fund or otherwise, shall be retired and restored to the status of authorized but unissued shares, but may be reissued only as a part of the Preferred Stock other than the series of which they were originally a part. (5) Liquidation. In the event of liquidation, dissolution or winding up (whether voluntary or involuntary) of the Corporation, the holders of shares of Preferred Stock shall be entitled to be paid the full amount payable on such shares upon the liquidation, dissolution or winding up of the Corporation fixed by the Board of Directors with respect to such shares as provided in subparagraph (d) of paragraph (1), above, before any amount shall be paid to the holders of the Common Stock. After payment to holders of the Preferred Stock of the full preferential amounts to which they are entitled, the remaining assets of the Corporation shall be distributed ratably among the holders of the Common Stock. (6) Designation of Rights and Preferences Series A Convertible Preferred Stock. (a) Designation of Series. There is hereby established effective February 14, 1986 from the authorized preferred stock a series of preferred stock to be designated as Series A Convertible Preferred Stock, consisting of 500,000 shares, and having the powers, rights, limitations, restrictions and preferences set forth herein, The number of shares designated as Series A Convertible Preferred Stock may at any time, or from time to time, be increased or decreased (but not below the number of shares thereof then outstanding or then reserved for issuance in connection with the conversion of any securities of the Company) by the Board of Directors. (b) Voting Rights. The holders of Series A Convertible Preferred Stock shall have only such right to vote as provided by Sections 180.64(2) and 180.52 of the Wisconsin Statutes or by other applicable law. (c) Dividends. The holders of all issued and outstanding shares of Series A Convertible Preferred Stock shall be entitled to receive cash dividends when and as cash dividends are declared and become payable with respect to the Common Stock of the Corporation, in an amount, in the case of each holder of shares of Series A Convertible Preferred Stock with respect to each cash dividend declared with respect to the Common Stock, equal to the amount of the cash dividend that such holder would have received with respect to the resulting shares of Common Stock had he converted such shares of Preferred Stock into Common Stock immediately before the declaration of such dividend with respect to the Common Stock. Dividends on the Series A Convertible Preferred Stock shall be noncumulative. The holders of Series A Convertible Preferred Stock shall not be entitled to participate in any other or additional earnings or profits of the Corporation, except for such premiums, if any, as may be payable in case of liquidation, dissolution or winding up. (d) Liquidation Preference. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of the Common Stock or any other series or class of stock of the Corporation ranking junior to the Series A Convertible Preferred Stock upon liquidation, dissolution or winding up, the holders of the shares of the Series A Convertible Preferred Stock shall be entitled to receive $100 per share plus an amount equal to all dividends, if any, which have accrued thereon as the result of the declaration of dividends on the Common Stock but which remain unpaid to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation to be paid or distributed to the holders of the shares of the Series A Convertible Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid and the preferential amount, if any, to be paid or distributed to the holders of any other preferred stock ranking as to liquidation, dissolution or winding up, on a parity with the Series A Convertible Preferred Stock, then such assets shall be distributed among the holders of Series A Convertible Preferred Stock and such other preferred stock, if any, ratably in accordance with the respective amounts that would be payable upon liquidation, dissolution or winding up to such holders with respect to such shares of Series A Convertible Preferred Stock and such other preferred stock, if any, if all preferential amounts payable thereon were paid in full. For the purposes of this subparagraph (d), a consolidation or merger of the Corporation with one or more corporations shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. Subject to the rights of the holders of shares of any series or class of stock ranking on a parity with or prior to the Series A Convertible Preferred Stock upon liquidation, dissolution or winding up, upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the Series A Convertible Preferred Stock as provided in this subparagraph d, but not prior thereto, the holders of the Common Stock or any other series or class of stock ranking junior to the Series A Convertible Preferred Stock upon liquidation, dissolution or winding up shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the Series A Convertible Preferred Stock shall not be entitled to share therein. (e) Conversion Rights. The holders of shares of Series A Convertible Preferred Stock shall have the right, at their option, to convert such shares into shares of Common Stock of the Corporation at any time on and subject to the following terms and conditions: (i) The shares of Series A Convertible Preferred Stock shall be convertible at the offices of the transfer agent or agents for the Series A Convertible Preferred Stock and at such other office or offices, if any, as the Board of Directors may designate, into fully paid and nonassessable shares (except as provided in Section 180.40(6) of the Wisconsin Statutes) of Common Stock of the Corporation, at the conversion price, determined as hereinafter provided, in effect at the time of conversion, each share of Series A Convertible Preferred Stock being valued at $100 for the purpose of such conversion. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "Conversion Price") shall be initially $78.75 per share of Common Stock, except that the initial Conversion Price applicable to shares of Series A Convertible Preferred Stock issued in exchange for Common Stock shall be the weighted average purchase price paid for such Common Shares as determined in good faith by the Board of Directors of the Company. The Conversion Price shall be adjusted in certain instances as provided in subparagraph (e)(iii), (iv), (v), (vi), (ix), (x) and (xi) below. (ii) In order to convert shares of Series A Convertible Preferred Stock into Common Stock, the holder thereof shall surrender at any office hereinabove mentioned the certificate or certificates therefor, duly endorsed or assigned to the Corporation or in blank, and give written notice to the Corporation at said office that such holder elects to convert such shares. Any such notice shall be irrevocable. No payment or adjustment shall be made upon conversion on account of any dividends, if any, which have accrued as the result of the declaration of dividends on the Common Stock on the shares of Series A Convertible Preferred Stock surrendered for conversion, but which remain unpaid, but payment or adjustment shall be made on account of any dividends payable with respect to the Common Stock issued upon conversion. Shares of Series A Convertible Preferred Stock shall be deemed to have been converted immediately prior to the close of business on the day of the surrender of such shares for conversion in accordance with the foregoing provisions, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of Common Stock at such time. As promptly as practicable on or after the conversion date, the Corporation shall issue and shall deliver at said office a certificate or certificates for the number of full shares of Common Stock issued upon such conversion, together with payment in lieu of any fraction of a share, as hereinafter provided, to the person or persons entitled to receive the same. (iii) In case the Corporation shall pay or make a dividend or other distribution on any class of Capital Stock of the Corporation in Common Stock, the Conversion Price shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the day fixed for the determination of shareholders entitled to receive such dividend or other distribution and of which the denominator shall be the sum of such number of shares plus the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For purposes of this subparagraph (e)(iii), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation. The Corporation will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Corporation. (iv) In case the Corporation shall issue rights or warrants to all holders of its Common Stock, entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in subparagraph (e)(viii) below) of the Common Stock on the date fixed for the determination of shareholders entitled to receive such rights or warrants, the Conversion Price shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the sum of the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate offering price for all of the shares of Common Stock so offered for subscription or purchase would purchase at such current market price and of which the denominator shall be the sum of the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this subparagraph (e)(iv), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation. The Corporation will not issue any rights or warrants in respect of shares of Common Stock held in the treasury of the Corporation. (v) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares, the Conversion Price shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares, the Conversion Price shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the date upon which such subdivision or combination becomes effective. (vi) In case the Corporation shall, by dividend or otherwise, distribute to all holders of its Common Stock, evidences of its indebtedness or assets (including securities, but excluding any rights or warrants referred to in subparagraph (e)(iv) above, any dividend or distribution paid in cash out of earned surplus of the Corporation and any dividend or distribution referred to in subparagraph (e)(iii) above), the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction of which the numerator shall be the difference of the current market price per share (determined as provided in subparagraph (e)(viii) below) of the Common Stock on the date fixed for the determination of the shareholders entitled to receive such distribution less the then fair market value (as determined by the Board of Directors, whose good faith determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed applicable to one share of the then outstanding Common Stock, and of which the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately after the opening of business on the day following the date fixed for such determination. For purposes of this subparagraph (e)(vi), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation. The Corporation will not distribute any evidences of its indebtedness or assets with respect to shares of Common Stock held in the treasury of the Corporation. (vii) A reclassification (including any reclassification upon a consolidation or merger of which the Corporation is the continuing corporation) of the Common Stock into securities including securities other than the Common Stock shall be deemed to involve (aa) a distribution of such securities other than Common Stock into which the Common Stock is reclassified to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of shareholders entitled to receive such distribution" within the meaning of subparagraph (e)(vi) above) and (bb) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the date upon which such subdivision or combination becomes effective" within the meaning of subparagraph (e)(v), above). (viii) For the purpose of any computation under subparagraph (e)(iv), (vi), and (x), the current market price per share of Common Stock on any date shall be deemed to be 90% (100%, in the case of subparagraph (e)(xvi) of (aa) the average of the daily closing prices for the five (5) consecutive business days commencing ten (10) business days before the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on any exchange on which the Common Stock is listed or admitted to trading selected by the Board of Directors, or (bb) if the Common Stock is not listed or admitted to trading on any such exchange, the closing sale price in the over-the-counter market, or (cc) in case no such reported sale takes place or such data is not reported on such day, the average of the closing bid and asked prices in the over-the- counter market, as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting such information. If on any such day the Common Stock is not quoted by any such organization, the closing price for such day shall be the fair value of such Common Stock on such day, as determined by the Board of Directors in good faith. (ix) In case of any capital reorganization of the Corporation (other than any reorganization referred to in subparagraph (e)(iii), (iv), (v), (vi), or (vii), above), any reclassification of the Common Stock (other than any reclassification of the Common Stock referred to in subparagraph (e)(ii), (v) or (vii) above), the consolidation or merger of the Corporation with or into any other corporation or of the sale of all or substantially all of the properties and assets of the Corporation to any other corporation, each share of Series A Convertible Preferred Stock shall immediately thereafter be convertible into the number of shares of stock, other securities, assets and/or cash to which a holder of the number of shares of Common Stock into which such share was convertible immediately prior thereto would have been entitled to receive upon such reorganization, reclassification, consolidation, merger or sale. In case of any such reorganization, reclassification, consolidation, merger or sale, the provisions set forth in this subparagraph (e)(ix) with respect to the rights and interests of the holders of the Series A Convertible Preferred Stock shall automatically be appropriately adjusted so as to be applicable as nearly as possible to the shares of stock, other securities, assets and/or cash into which the Series A Convertible Preferred Stock thereby becomes convertible, and effective provision shall be made in the Articles of Incorporation of the resulting or surviving corporation or otherwise, so that such provisions shall thereafter be applicable, as nearly as possible, to any such shares of stock, other securities, assets and/or cash. The Corporation shall not effect any such consolidation, merger or sale, unless before the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger, the corporation purchasing such assets, or other appropriate corporation or entity shall expressly assume in writing the obligation to deliver to the holder of each share of Series A Convertible Preferred Stock, upon conversion thereof, such shares of stock, other securities, assets and/or cash as such holder shall be entitled to receive pursuant to the provisions hereof, and to make provisions for the protection of such conversion right as above provided. The provisions of this subparagraph (e)(ix) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers or sales. (x) In the event that the Corporation shall (except as hereinafter provided) issue any additional shares of Common Stock for cash at a price less than the Current Market Price per share of Common Stock then in effect, then the Conversion Price upon each such issuance shall be adjusted to that price determined by multiplying the Conversion Price in effect immediately prior to such event by a fraction: (aa) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock plus the number of full shares of Common Stock which the aggregate consideration for the total number of such additional shares of Common Stock so issued would purchase at the Current Market Price per share, and (bb) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock plus the number of such additional shares of Common Stock to issued; For purposes of clauses (aa) and (bb) the date as of which the Current Market Price per share of Common Stock shall be computed shall be the earlier of (xx) the date on which the Corporation shall enter into a firm contract for the issuance of such additional shares of Common Stock or (zz) the date of actual issuance of such additional shares of Common Stock; (xi) The Corporation may make such reductions in the Conversion Price, so as to increase the number of Common Shares into which the Series A Convertible Preferred Stock may be converted, in addition to those required by subparagraph (e)(iii), (iv), (v), (vi) and (ix), as it considers to be advisable in order that any event treated for federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. (xii) No adjustments to the Conversion Price will be made for the issuance of options or securities to employees of the Corporation or its subsidiaries pursuant to any stock option, restricted stock, thrift, stock purchase, savings or other employee benefit plan or to shareholders of the Corporation pursuant to any dividend reinvestment plan. No adjustment will be required to be made in the Conversion Price until accumulative adjustments require an adjustment of at least $.25, with any smaller adjustments not made hereunder cumulated with future adjustments. (xiii) The Corporation shall mail to each holder of Series A Convertible Preferred Stock notice of the proposed effective date of any action which would result in an adjustment in the Conversion Price determined as provided in this subparagraph (e) at least twenty (20) days prior to the record date thereof. Whenever the Conversion Price is adjusted as herein provided, the Corporation shall forthwith file with any transfer agent for the Series A Convertible Preferred Stock a certificate signed by the Chairman of the Board or one of the Vice Presidents of the Corporation and by its Treasurer or an Assistant Treasurer, stating the adjusted Conversion Price determined as provided in this subparagraph (e), and setting forth the facts requiring such adjustment. Any such transfer agent shall be under no duty to make any inquiry or investigation as to the statements contained in any such certificate or as to the manner in which any computation was made, but may accept such certificate as conclusive evidence of the statements therein contained, and any such transfer agent shall be fully protected with respect to any and all acts done or action taken or suffered by it in reliance thereon. No transfer agent in its capacity as transfer agent shall be deemed to have any knowledge with respect to any change of capital structure of the Corporation unless and until it receives a notice thereof pursuant to the provisions hereof, and, in the absence of any such notice, each transfer agent may conclusively assume that there has been no such change. Whenever the Conversion Price is adjusted, the Corporation shall forthwith cause a notice stating the adjustment, and describing the events requiring such adjustments and the Conversion Price to be mailed to the holders of record of Series A Convertible Preferred Stock. (xiv) The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of Series A Convertible Preferred Stock, such number of shares as shall from time to time be sufficient to effect the conversion of all Series A Convertible Preferred Stock from time to time outstanding. The Corporation shall from time to time, in accordance with the laws of Wisconsin, increase the authorized amount of Common Stock if at any time the number of shares of Common Stock remaining unissued shah not be sufficient to permit the conversion of all the then outstanding shares of Series A Convertible Preferred Stock. (xv) The Corporation will pay any and all issue and other taxes (other than taxes based on income) that may be payable in respect of any issue or delivery of Common Stock on conversion of Series A Convertible Preferred Stock pursuant hereto. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Stock in a name other than that in which the Series A Convertible Preferred Stock so converted was registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid. (xvi) No fractional shares of Common Stock will be issued upon conversion of the Series A Convertible Preferred Stock, and in lieu of any fractional shares that would otherwise be issuable, the Corporation will pay cash on the basis of the current market price per share of the Common Stock on the business day immediately preceding the day of conversion determined in accordance with subparagraph (e)(viii) above. (xvii) The Board of Directors of the Corporation shall not authorize for issuance any class of capital stock ranking prior to the Series A Convertible Preferred Stock without the consent of holders of two-thirds of the outstanding shares of Series A Convertible Preferred Stock. For purposes of this Agreement, any class or classes of stock of the Corporation shall be deemed to rank: (aa) Prior to the Series A Convertible Preferred Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of the Series A Convertible Preferred Stock; and (bb) On a parity with the Series A Convertible Preferred Stock as to dividends or as to distributions of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates, or liquidation amounts per share thereof be different from those of the Series A Convertible Preferred Stock, if the holders of such class and the Series A Convertible Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation amounts, without preference or priority of one over the other. ARTICLE IV Pre-emptive Rights. No holder of any stock of the corporation shall have any pre-emptive or other subscription rights nor be entitled, as of right, to purchase or subscribe for any part of the unissued stock of this corporation or any of additional stock issued by reason of any increase of authorized capital stock of this corporation or other securities whether or not convertible into stock of this corporation. ARTICLE V The address of the registered office of the Corporation is 770 North Water Street, Milwaukee, Wisconsin 53202 and its registered agent at such address is Michael A. Hatfield. ARTICLE VI The business and affairs of the Corporation shall be managed by a Board of Directors. The number of directors (exclusive of directors, if any, elected by the holders of one or more series of Preferred Stock, voting separately as a series pursuant to the provisions of these Restated Articles of Incorporation applicable thereto) shall be not less than 3 directors, the exact number of directors to be determined from time to time by resolution adopted by affirmative vote of a majority of the entire Board of Directors then in office. The directors shall be divided into three classes, designated Class I, Class II, and Class III, and the term of office of directors of each class shall be three years. Each class shall consist, as nearly as possible, of one-third of the total number of directors constituting the entire Board of Directors. If the number of directors is changed by resolution of the Board of Directors pursuant to this Article VI, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify. Any newly created directorship resulting from an increase in the number of directors and any other vacancy on the Board of Directors, however caused, shall be filled by the vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any director so elected to fill any vacancy in the Board of Directors, including a vacancy created by an increase in the number of directors, shall hold office for the remaining term of directors of the class to which he has been elected and until his successor shall be elected and shall qualify. Exclusive of directors, if any, elected by the holders of one or more series of Preferred Stock, no director of the Corporation may be removed from office, except for Cause and by the affirmative vote of two-thirds of the outstanding shares of capital stock of the Corporation entitled to vote at a meeting of shareholders duly called for such purpose. As used in this Article VI, the term "Cause" shall mean solely malfeasance arising from the performance of a director's duties which has a materially adverse affect on the business of the Corporation. No person, except those nominated by or at the direction of the Board of Directors, shall be eligible for election as a director at any annual or special meeting of shareholders unless a written request, in the form established by the Corporation's By-laws, that his or her name be placed in nomination is received from a shareholder of record by the Secretary of the Corporation not less than 30 days prior to the date fixed for such meeting, together with the written consent of such person to serve as a director. Where such a request for nomination and such consent have been timely received, but such nominee is unable or declines to serve, the person who placed the individual's name in nomination may request that an alternative name be placed in nomination at the meeting. Notwithstanding the foregoing, whenever the holders of any one or more series of Preferred Stock issued by the Corporation shall have the right, voting separately by series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of these Restated Articles of Incorporation applicable thereto. Directors so elected shall not be divided into classes unless expressly provided by such terms, and during the prescribed terms of office of such directors the Board of Directors shall consist of such directors in addition to the number of directors determined as provided in the first paragraph of this Article VI. ARTICLE VII The period of existence of the Corporation shall be perpetual. ARTICLE VIII Acquisition and Disposition of Own Shares. The Corporation shall have the right to purchase, take, receive or otherwise acquire, hold, own, pledge, transfer or otherwise dispose of its own shares; provided that no such acquisition, directly or indirectly, of its own shares of equal or subordinate rank shall be made unless: (a) At the time of such acquisition the Corporation is not and would not thereby be rendered insolvent; and (b) The net assets of the Corporation remaining after such acquisition would be not less than the aggregate preferential amount payable in the event of voluntary liquidation to the holders of shares having preferential rights to the assets of the corporation in the event of liquidation. ARTICLE IX Notwithstanding any other provision of these Restated Articles of Incorporation or the Corporation's By-Laws (and notwithstanding the fact that some lesser percentage may be specified by law, these Restated Articles of Incorporation or the Corporation's By-Laws), the Corporation's By-Laws may be amended, altered or repealed, and new By-Laws may be enacted, only by the affirmative vote of not less than two-thirds of the outstanding shares of capital stock of the Corporation entitled to vote at a meeting of shareholders duly called for such purpose, or by a vote of not less than three-quarters of the entire Board of Directors then in office. ARTICLE X Except as otherwise specified herein, the "requisite affirmative votes," and the recitals of votes which are "requisite for adoption" or "requisite for approval" under Section 180.25 of the Wisconsin Statutes for the approval or authorization of any (i) plan of merger or consolidation of the Corporation with or into any other corporation, (ii) sale, lease, exchange or disposition of all or substantially all the property and assets of the Corporation to or with any other person, corporation or entity not made in the ordinary course of business, or (iii) voluntary dissolution of the Corporation or revocation of voluntary dissolution proceedings, shall be the affirmative vote of the holders of two-thirds of the outstanding shares of capital stock of the Corporation entitled to vote at a meeting called for such purpose (unless any class or series of shares is entitled to vote thereon as a class, in which event the "requisite affirmative votes" shall be the affirmative votes of the holders of two-thirds of the outstanding shares of each class of shares and of each series entitled to vote thereon as a class and of the total shares entitled to vote thereon), provided, however, if the Board of Directors shall have approved any transaction described in clauses (i), (ii) or (iii) above by a resolution adopted by three-quarters of the Board of Directors then in office and entitled to vote thereon, the "requisite affirmative votes," and the recitals of votes which are "requisite for adoption" or "requisite for approval," shall be the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Corporation entitled to vote at a meeting called for such purpose (unless any class or series of shares is entitled to vote thereon as a class, in which event the "requisite affirmative votes" shall be the affirmative votes of the holders of a majority of the outstanding shares of each class of shares and of each series entitled to vote thereon as a class and of the total shares entitled to vote thereon). ARTICLE XI A. In addition to any affirmative vote required by law or these Restated Articles of Incorporation or the By-Laws of the Corporation, and except as otherwise expressly provided in Section (B) of this Article XI, a Business Combination (as hereinafter defined) shall require the affirmative vote of not less than: (1) Eighty percent (80%) of the votes entitled to be cast by the holders of all then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (hereinafter referred to in this Article XI as "Voting Stock"), voting together as a single class (it being understood that, for purposes of this Article XI, each share of the Voting Stock shall have the number of votes granted to it pursuant to the Wisconsin Business Corporation Law or as otherwise provided pursuant to Article III of these Restated Articles of Incorporation); or (2) Two-thirds of the votes entitled to be cast by holders of Voting Stock, voting together as a single class, other than Voting Stock beneficially owned by an Interested Stockholder (as defined below) who is a party to the Business Combination or an Affiliate or Associate of such Interested Stockholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified by law or in any agreement with any national securities exchange or otherwise, but such affirmative separate class vote shall be required in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law or pursuant to Article III of these Restated Articles of Incorporation. B. The provisions of Section (A) of this Article XI shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative separate class vote as is required by law and any other provision of these Restated Articles of Incorporation, and any resolution or resolutions adopted by the Board of Directors pursuant to these Restated Articles of Incorporation, as amended, if the conditions specified in either of the following paragraphs (1) or (2) are met: 1. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined), it being understood that this condition shall not be capable of satisfaction unless there is at least one Disinterested Director; or 2. All of the following conditions are met: (a) the aggregate amount of cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of any Business Combination (the "Consummation Date") of consideration other than cash to be received per share of Common Stock as a result of such Business Combination shall be at least equal to the higher of the following: (i) (If applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any shares of Common Stock acquired by it (aa) within the two-year period immediately prior to the first public announcement of the proposed Business Combination (the "Announcement Date"), or (bb) in the transaction in which it became an Interested Stockholder, whichever is higher, plus interest compounded annually from the date on which the Interested Stockholder became an Interested Stockholder (the "Determination Date") through the Consummation Date at the base rate for interest rate determinations of M&I Marshall & Ilsley Bank in effect from time to time, less the aggregate amount of any cash dividends paid, and the Fair Market Value of any dividends paid other than in cash, per share of Common Stock from the Determination Date through the Consummation Date (but not exceeding the amount of such interest payable per share of Common Stock); and (ii) The Fair Market Value per share of Common Stock on the Announcement Date or on the Determination Date, whichever is higher. The provisions of this Paragraph B(2)(a) of this Article XI shall be required to be met with respect to all shares of Common Stock outstanding whether or not the Interested Stockholder has previously acquired any shares of Common Stock. (b) The aggregate amount of cash and the Fair Market Value as of the Consummation Date of consideration other than cash to be received per share of any class or series of outstanding Capital Stock, other than Common Stock, shall be at least equal to the highest of the following (such requirement being applicable to each such class or series of outstanding Capital Stock, whether or not the Interested Stockholder has previously acquired beneficial ownership of any shares of such class or series): (i) (If applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of such class or series of Capital Stock acquired by it (aa) within the two-year period immediately prior to the Announcement Date, or (bb) in the transaction in which it became an Interested Stockholder, whichever is higher, plus interest compounded annually from the Determination Date through the Consummation Date at the base rate for interest rate determinations of M&I Marshall & Ilsley Bank in effect from time to time, less the aggregate amount of any cash dividends paid, and the Fair Market Value of any dividends paid other than in cash, per share of such class or series of Capital Stock from the Determination Date through the Consummation Date (but not exceeding the amount of such interest payable per share of such class of Capital Stock); (ii) (If applicable) the highest preferential amount per share to which the holders of shares of such class or series of Capital Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (iii) The Fair Market Value per share of such class or series of Capital Stock on the Announcement Date or on the Determination Date, whichever is higher. (c) The consideration to be received by holders of a particular class or series of outstanding Capital Stock (including Common Stock) in such Business Combination shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class or series of Capital Stock. If the Interested Stockholder has paid for shares of any class or series of Capital Stock with varying forms of consideration, the form of consideration of such class or series of Capital Stock shall be either cash or the form used to acquire the largest number of shares of such class or series of Capital Stock previously acquired by it. (d) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding stock having a preference over the Common Stock as to dividends or upon liquidations; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (2) an increase in such annual rate of dividends (as necessary to prevent any reduction) in the event of any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and (c) such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which resulted in such Interested Stockholder becoming an Interested Stockholder. (e) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately, solely in such Interested Stockholder's capacity as a stockholder of the Corporation), of any loans, advances, guaranties, pledges or other financial assistance or any tax credits or other tax advantageous provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination in accordance with the requirements of the 1934 Act (or any subsequent provisions replacing such Act) shall be mailed to all Stockholders of the Corporation at least thirty (30) days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). The first page of such proxy or information statement shall prominently display the recommendation, if any, which a majority of the Disinterested Directors then in office may choose to make to the holders of Capital Stock regarding the proposed Business Combination. Such proxy or information statement shall also contain, if a majority of the Disinterested Directors then in office so request, an opinion of a reputable investment banking firm of recognized national standing (which firm shall be selected by a majority of the Disinterested Directors then in office, furnished with all information it reasonably requests, and paid a reasonable fee for its services by the Corporation upon the Corporation's receipt of such opinion) as to the fairness (or lack of fairness) of the terms of the proposed Business Combination from the point of view of the holders of Capital Stock other than the Interested Stockholder. (g) For purposes of this Article XI, the following definitions shall apply: (i) The term "Business Combination" shall mean any transaction referred to any one or more of the following clauses: (aa) Any merger or consolidation of the Corporation or any Subsidiary, with (1) any Interested Stockholder or (2) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate or an Associate of any Interested Stockholder; or (bb) Any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value of $25,000,000 or more; or (cc) The issuance or transfer by the Corporation or any Subsidiary (in any one transaction or a series of transactions) of any Securities of the Corporation or any Subsidiary having an aggregate Fair Market Value of $25,000,000 or more to any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (dd) The adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (ee) Any reclassification of Securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries of any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible Securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or an Affiliate of any Interested Stockholder; or (ff) Any series or combination of transactions directly or indirectly having the same effect as any of the foregoing. (ii) "Interested Stockholder" shall mean any person (other than the Corporation, any Subsidiary, or any pension, savings or other employee benefit plan for the benefit of employees of the Corporation and/or any Subsidiary) who or which: (aa) is the beneficial owner, directly or indirectly, of more than 10% of the Corporation's outstanding Voting Stock; or (bb) is an Affiliate or Associate of the Corporation and at any time within the two-year period immediately prior to the date in question was a beneficial owner, directly or indirectly, of 10% or more of the Corporation's then outstanding Voting Stock; or (cc) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any other Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the 1933 Act. (iii) A person shall be deemed the "beneficial owner" of any Voting Stock; (aa) which such person or any of its Affiliates or Associates owns, directly or indirectly; or (bb) which such person or any of its Affiliates or Associates has (y) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (z) the right to vote pursuant to any agreement, arrangement or understanding; or (cc) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Capital Stock. (iv) In determining whether a person is an Interested Stockholder pursuant to Subparagraph (g)(ii) of this Article XI, the number of shares of Voting Securities deemed to be outstanding shall include shares deemed owned through application of Subparagraph (g)(iii) of this Article XI, but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (v) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purpose of the definition of Interested Stockholder set forth in Subparagraph (g)(ii) of this Article XI, the term "Subsidiary" shall mean only a corporation of which a majority of each class of Voting Securities is owned, directly or indirectly, by the Corporation. (vi) "Disinterested Director" means any member of the Board of Directors of the Corporation who is not affiliated with the Interested Stockholder and who either was a member of the Board of Directors prior to the Determination Date or was elected or recommended for election by majority of the Disinterested Directors in office at the time such Director was nominated for election. (vii) "Fair Market Value" means: (aa) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the composite tape for the New York Stock Exchange listed stocks, or, if such stock is not quoted on the composite tape, on the New York Stock Exchange, or, if such stock is not listed or admitted for trading on such exchange, on the principal United States Securities Exchange registered under the 1934 Act on which such stock is listed or admitted for trading, or, if such stock is not listed or admitted for trading on any such exchange, the highest closing sale price (if applicable) or bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. automated quotations system or any system then in use, or if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined in good faith by a majority of the Disinterested Directors then in office, in each case with respect to any class or series of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock; and (bb) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined in good faith by a majority of the Disinterested Directors then in office. (viii) Reference to "highest per share price" shall in each case with respect to any class or series of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. (ix) In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in Paragraphs B(2)(a) and (b) of this Article XI, shall include the shares of Common Stock and/or shares of any other class or series of Capital Stock retained by the holders of such shares. (x) "Capital Stock" shall mean all capital stock of the Corporation issued from time to time under Article III of the Corporation's Restated Articles of Incorporation. ARTICLE XII These Restated Articles of Incorporation supersede and take the place of the heretofore existing Articles of Incorporation of the Corporation and amendments thereto. Executed in duplicate this 25th day of March, 1994. MARSHALL & ILSLEY CORPORATION By: /s/ James B. Wigdale _____________________________________________ James B. Wigdale, Chairman Attest: /s/ M.A. Hatfield _____________________________________________ M.A. Hatfield, Secretary This instrument was drafted by: Scott A. Moehrke Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, Wisconsin 53202-3590 MW415898_1.DOC EX-10 4 ex10_03-2003.txt EXHIBIT 10 TO FORM 10-Q DATED 03/31/2003 Exhibit 10 CHANGE OF CONTROL AGREEMENT --------------------------- THIS AGREEMENT, entered into as of the 13th day of January, 2003, by and between MARSHALL & ILSLEY CORPORATION (the "Company"), and Frank R. Martire (the "Executive") (hereinafter collectively referred to as "the parties"). W I T N E S S E T H : WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change of Control (as hereinafter defined in Section 2) exists and that the threat of or the occurrence of a Change of Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; and WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its shareholders to retain the services of the Executive in the event of a threat or occurrence of a Change of Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat of or the occurrence of a Change of Control, the Company desires to enter into this Agreement with the Executive. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Employment Term. (a) The "Employment Term" shall commence on the first date during the Protected Period (as defined in Section 1(c), below) on which a Change of Control (as defined in Section 2, below) occurs (the "Effective Date") and shall expire on the second anniversary of the Effective Date; provided, however, that at the end of each day of the Employment Term the Employment Term shall automatically be extended for one (1) day unless either the Company or the Executive shall have given written notice to the other at least thirty (30) days prior thereto that the Employment Term shall not be so extended. (b) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to the Effective Date and the Executive reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise occurred in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, the Effective Date shall mean the date immediately prior to the date of such termination of the Executive's employment. (c) For purposes of this Agreement, the "Protected Period" shall be the two (2) year period commencing on the date hereof; provided, however, that at the end of each day the Protected Period shall be automatically extended for one (1) day unless at least thirty (30) days prior thereto the Company shall have given written notice to the Executive that the Protected Period shall not be so extended; and provided, further, that notwithstanding any such notice by the Company not to extend, the Protected Period shall not end if prior to the expiration thereof any third party has indicated an intention or taken steps reasonably calculated to effect a Change of Control, in which event the Protected Period shall end only after such third party publicly announces that it has abandoned all efforts to effect a Change of Control. 2. Change of Control. For purposes of this Agreement, a "Change of Control" shall mean the first to occur of the following: (a) The acquisition by any individual, entity or "group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty-three percent (33%) or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions of common stock shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege or by one person or a group of persons acting in concert), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger, statutory share exchange or consolidation which would not be a Change of Control under subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened "election contest" or other actual or threatened "solicitation" (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) of proxies or consents by or on behalf of a person other than the Incumbent Board; or (c) Consummation of a reorganization, merger, statutory share exchange or consolidation, unless, following such reorganization, merger, statutory share exchange or consolidation, (i) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger, statutory share exchange or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, statutory share exchange or consolidation, (ii) no person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger, statutory share exchange or consolidation and any person beneficially owning, immediately prior to such reorganization, merger, statutory share exchange or consolidation, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Consummation of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. Employment. (a) Subject to the provisions of Section 3, hereof, the Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed in such executive capacity as may be mutually agreed to by the parties. During the Employment Term, Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held or assigned at any time during the twelve (12) month period immediately preceding the Effective Date, and Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective Date or at any office or location less than thirty-five (35) miles from such location, unless mutually agreed to in writing by the parties. (b) Excluding periods of vacation and sick leave to which the Executive is entitled, during the Employment Term the Executive agrees to devote full time attention to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, provided that the Executive may take reasonable amounts of time to (i) serve on corporate, civil or charitable boards or committees, and (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, if such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of Executive's responsibilities hereunder. 4. Compensation. (a) Base Salary. During the Employment Term, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve (12) times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve (12) month period immediately preceding the month in which the Effective Date occurs, including any amounts which were deferred under any plans of the Company and its affiliated companies. During the Employment Term, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (b) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Term, an annual bonus (the "Annual Bonus") in cash at least equal to the average annualized (for any fiscal year consisting of less than twelve (12) full months or with respect to which the Executive has been employed by the Company for less than twelve (12) full months) bonuses paid or payable, including any amounts which were deferred under any plans of the Company and its affiliated companies, to the Executive by the Company and its affiliated companies in respect of the three (3) fiscal years immediately preceding the fiscal year in which the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus shall be paid no later than seventy-five (75) days after the end of the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus under any plan or arrangement of the Company allowing therefor. (c) Incentive, Savings and Retirement Plans. During the Employment Term, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the twelve (12) month period immediately preceding the Effective Date, or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (d) Benefit Plans. During the Employment Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription drug, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies and their families; but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive and his family at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies and their families. (e) Expenses. During the Employment Term, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (f) Fringe Benefits. During the Employment Term, the Executive shall be entitled to fringe benefits (including but not limited to Company cars, club dues and physical examinations) in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (g) Office and Support Staff. During the Employment Term, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, in accordance with the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (h) Vacation and Sick Leave. During the Employment Term, the Executive shall be entitled to paid vacation and sick leave (without loss of pay) in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (i) Restrictions. As of the Effective Date, all restrictions limiting the exercise, transferability or other incidents of ownership of any outstanding award, including but not limited to restricted stock, options, stock appreciation rights, or other property or rights of the Company granted to the Executive shall lapse, and such awards shall become fully vested and be held by the Executive free and clear of all such restrictions. This provision shall apply to all such property or rights notwithstanding the provisions of any other plan or agreement, unless the effect of the application of this provision to a particular right or property would result in the loss of favorable securities law treatment for participants under the plan pursuant to which the award was granted. 5. Termination of Employment. During the Employment Term, the Executive's employment hereunder may be terminated under the following circumstances: (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 5 of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for one hundred eighty (180) consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative, provided if the parties are unable to agree, the parties shall request the Dean of the Medical College of Wisconsin to choose such physician. (b) Cause. The Company may terminate the Executive's employment for "Cause." A termination for Cause is a termination evidenced by a resolution adopted in good faith by a majority of the Board that the Executive (i) willfully, deliberately and continually failed to substantially perform his duties under Section 3, above (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure constitutes gross misconduct, and results in and was intended to result in demonstrable material injury to the Company, monetary or otherwise, or (ii) committed acts of fraud and dishonesty constituting a felony, as determined by a final judgment or order of a court of competent jurisdiction, and resulting or intended to result in gain to or personal enrichment of the Executive at the Company's expense, provided, however, that no termination of the Executive's employment shall be for Cause as set forth in (i), above, until (a) Executive shall have had at least sixty (60) days to cure any conduct or act alleged to provide Cause for termination after a written notice of demand has been delivered to the Executive specifying in detail the manner in which the Executive's conduct violates this Agreement, and (b) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, or failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act in bad faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (c) Good Reason. (1) The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change of Control of any of the events or conditions described in Subsections (i) through (vi) hereof: (i) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with his status, title, position or responsibilities in effect immediately prior to such assignment; or any removal of the Executive from or failure to reappoint or reelect him to any position, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (ii) Any failure by the Company to comply with any of the provisions of Section 4 of this Agreement. (iii) The insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company; (iv) Any material breach by the Company of any provision of this Agreement; (v) Any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 5 of this Agreement; and (vi) The failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company, to assume and agree to perform this Agreement, as contemplated in Section 10 hereof. (2) Any event or condition described in Section 5(c)(1) which occurs prior to the Effective Date but which the Executive reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise arose in connection with or in anticipation of a Change of Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Effective Date. (3) The Executive's right to terminate his employment pursuant to this Section 5(c) shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment or failure to give Notice of Termination shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (4) For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive. (d) Voluntary Termination. The Executive may voluntarily terminate his employment hereunder at any time. (e) Notice of Termination. Any purported termination by the Company or by the Executive (other than by death of the Executive) shall be communicated by Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) the Termination Date. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (f) Termination Date, etc. "Termination Date" shall mean in the case of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company, the date specified in the Notice of Termination shall be at least thirty (30) days after the date the Notice of Termination is given to the Executive, provided, however, that in the case of Disability, the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days; (2) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days after the date the Notice of Termination is given to the Company; and (3) In the event that within thirty (30) days following the date of receipt of the Notice of Termination, one party notifies the other that a dispute exists concerning the basis for termination, the Executive's employment hereunder shall not be terminated except after the dispute is finally resolved and a Termination Date is determined either by a mutual written agreement of the parties, or by a binding and final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 6. Obligations of the Company Upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Term, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Termination Date the aggregate of the following amounts: A. The sum of: (1) The Executive's Annual Base Salary through the Termination Date to the extent not theretofore paid; and (2) The product of (x) the higher of (I) the Recent Average Bonus and (II) the Annual Bonus paid or payable, including any amount deferred, (and annualized for any fiscal year consisting of less than twelve (12) full months or for which the Executive has been employed for less than twelve (12) full months) for the most recently completed fiscal year during the Employment Term, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days completed in the current fiscal year through the Termination Date, and the denominator of which is 365. The sum of the amounts described in Clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"; B. The amount equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary (increased for this purpose by any Section 401(k) deferrals, cafeteria plan elections, or other deferrals that would have increased Executive's Annual Base Salary if paid in cash to Executive when earned) and (y) the Executive's Highest Annual Bonus; C. A separate lump-sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the most favorable to the Executive actuarial assumptions and Company contribution history with respect to the applicable retirement plan, incentive plans, savings plans and other plans described in Section 4(c) (or any successor plan thereto) (the "Retirement Plans") during the twelve (12) month period immediately preceding the Effective Date) of the benefit payable under the Retirement Plans and any supplemental and/or excess retirement plan providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued for an additional two (2) years after the Termination Date with annual compensation equal to the sum of the Annual Base Salary and Highest Annual Bonus, assuming for this purpose that all accrued benefits and contributions are fully vested and that benefit accrual formulas and Company contributions are no less advantageous to the Executive than those in effect during the twelve (12) month period immediately preceding the Effective Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plans during the twelve (12) month period immediately preceding the Effective Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plans and the SERP. For example, if there were a termination today this supplemental retirement benefit would be interpreted with respect to two plans in existence today as follows: (i) with respect to the Retirement Growth component of the retirement program of the Company, the Executive would receive two times eight percent (8%) (or sixteen percent (16%)) of the sum of the Executive's Annual Base Salary (determined in accordance with subsection C of Section 6(a)(i)) and the Executive's Highest Annual Bonus; and (ii) with respect to the Incentive Savings component of the retirement program of the Company, the Executive would receive two times the annual Company match of fifty percent (50%) of the Executive's maximum allowable contribution to the Plan assuming Executive's compensation is as set forth above; and D. The amount equal to the product of (i) two and (ii) the sum of (x) the imputed income reflected on Executive's W-2 attributable to the car provided to Executive by the Company or its affiliates for the last calendar year ending before the Effective Date and (y) the club dues for Executive paid by the Company or its affiliates attributable to such year. (ii) For twenty-four (24) months after the Termination Date, the Company shall continue to provide medical and dental benefits to the Executive and/or the Executive's family in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their families as in effect from time to time thereafter; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other benefits under another employer provided plan, the medical and other benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility, provided that the aggregate coverage of the combined benefit plans is no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage required hereunder. For purposes of determining eligibility of the Executive for retiree health insurance, the Executive shall be considered to have remained employed until the end of such twenty-four (24) month period and to have retired on the last day of such period. If the Executive would qualify at the end of such twenty-four (24) month period for retiree health insurance under the Company's plan guidelines as in existence on the Effective Date, the Company shall provide to the Executive and his or her spouse, for life, retiree health insurance, subsidized to at least the same percentage extent as under the Company's plan as in existence on the Effective Date. Such retiree health insurance shall provide medical benefits to the Executive and/or the Executive's spouse in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their spouses as in effect from time to time thereafter; provided, however, that if the Executive and/or the Executive's spouse qualifies for coverage by Medicare or any successor program, the Company may require that the Executive and/or the Executive's spouse fully participate in Medicare and pay the premiums therefor personally. (iii) The Executive shall have the right to purchase the car provided to him by the Company or its affiliates during the twelve (12) month period immediately preceding the Effective Date, if applicable, (or a comparable car acceptable to the Executive if such car is no longer owned by the Company or its affiliates), at the book value thereof on the Termination Date, exercisable within thirty (30) days after the Termination Date; and if the car is not purchased, Executive shall return the car to the Company. (iv) For the twenty-four (24) month period after the Termination Date, the Company shall continue to provide group term life insurance (or comparable term coverage) in the same face amount and on substantially the same terms as in effect for the Executive just prior to the Effective Time. At the end of the twenty-four (24) month period, the Executive shall have any conversion rights as regards such coverage as are provided by law. (v) To the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive pursuant to this Agreement under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (vi) All options awarded by the Company to the Executive on or after the date of this Agreement which are outstanding as of the Termination Date shall remain exercisable for the lesser of (A) the remainder of their respective terms or (B) one year after the Executive's death. The option term for each option is set out in the relevant agreement granting each option. Notwithstanding anything herein contained to the contrary, the payments and benefits provided in this Section 6(a) (other than the Accrued Obligations) shall not be paid or provided to the Executive unless and until he executes a Complete and Permanent Release (the "Release") in the form attached hereto, and the applicable period for rescission of the Release has expired. The parties agree that the Release may be expanded to include any company acquiring the Company and its affiliates as "Released Parties," as defined in the Release. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Term, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, except that the Company shall pay or provide the Accrued Obligations, six (6) months of Annual Base Salary, and the Other Benefits. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within thirty (30) days of the Termination Date. The six (6) months of Annual Base Salary shall be paid during the six (6) month period following the Termination Date on a monthly basis. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, and the Executive's family shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and any of its affiliated companies to surviving families of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to family death benefits, if any, as in effect with respect to other peer executives and their families at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their families. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Term, this Agreement shall terminate without further obligations to the Executive, except that the Company shall pay or provide the Accrued Obligations and the Other Benefits. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Termination Date. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other Than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Term, or if the Executive voluntarily terminates employment during the Employment Term for other than Good Reason, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination and any other amounts earned or accrued through the Termination Date, in each case to the extent theretofore unpaid; provided that if Executive voluntarily terminates, Executive shall receive the benefits normally provided upon normal or early retirement with respect to other peer Executives and their families to the extent he qualifies therefore All salary or compensation hereunder shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination. (e) Delinquent Payments. If any of the payments referred to in this Section 6 are not paid within the time specified after the Termination Date (hereinafter a "Delinquent Payment"), in addition to such principal sum, the Company will pay to the Executive interest on all such Delinquent Payments computed at the prime rate as announced from time to time by M&I Marshall & Ilsley Bank, or its successor, compounded monthly. Notwithstanding the foregoing, no interest shall be due and owing as regards payments which are delayed because of Executive's failure to execute the Release or the recision thereof. (f) Vacation Pay. In consideration of all payments made by the Company to the Executive pursuant to this Agreement, the Executive hereby waives any claim he may have for accrued and unpaid vacation pay as of the Termination Date. 7. No Mitigation. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced (except to the extent set forth in Section 6(a)(ii)) whether or not the Executive obtains other employment. 8. Excise Tax Payments. (a) If any payment or distribution to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any interest and penalties, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains, or has paid to the taxing authority on his behalf, an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing, no Gross-Up Payment will be made to the Executive if reducing the amount paid to the Executive under Section 6(a)(i)(B) of this Agreement by $50,000 or less would avoid the application of the Excise Tax. (b) A determination shall be made as to whether and when a Gross-Up Payment is required pursuant to this Section 8 and the amount of such Gross-Up Payment, such determination to be made within fifteen (15) business days of the Termination Date, or such other time as reasonably requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax). Such determination shall be made by a national independent accounting firm selected by the Executive (the "Accounting Firm"). All fees, costs and expenses (including, but not limited to, the cost of retaining experts) of the Accounting Firm shall be borne by the Company and the Company shall pay such fees, costs and expenses as they become due. The Accounting Firm shall provide detailed supporting calculations, acceptable to the Executive, both to the Company and the Executive. The Gross-Up Payment, if any, as determined pursuant to this Section 8(b) shall be paid by the Company to the Executive or paid by the Company on behalf of the Executive to the applicable government taxing authorities by means of payroll tax withholding if required by law or if timely requested by the Executive when payment of all or any portion of the Excise Tax is due. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it shall furnish the Executive with an unqualified opinion that no Excise Tax will be imposed with respect to any such Payment or Payments. Any such initial determination by the Accounting Firm of the Gross-Up Payment shall be binding upon the Company and the Executive subject to the application of Section 8(c). (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Overpayment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred upon notice (formal or informal) to the Executive from any governmental taxing authority that the tax liability of the Executive (whether in respect of the then current taxable year of the Executive or in respect of any prior taxable year of the Executive) may be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment. An Overpayment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Payment or Payments with respect to which the Executive had previously received a Gross-Up Payment. A Final Determination shall be deemed to have occurred when the Executive has received from the applicable governmental taxing authority a refund of taxes or other reduction in his tax liability by reason of the Overpayment and upon either (i) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (ii) the expiration of the statute of limitations with respect to the Executive's applicable tax return. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall pay to the Executive at least five (5) business days prior to the date on which the applicable governmental taxing authority has requested payment, an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties imposed on the Underpayment. If an Overpayment occurs, the amount of the Overpayment shall be treated as a loan by the Company to the Executive and the Executive shall, within ten (10) business days of the occurrence of such Overpayment, pay to the Company the amount of the Overpayment plus interest at an annual rate equal to the rate provided for in Section 1274(b)(2)(B) of the Code from the date the Gross-Up Payment (to which the Overpayment relates) was paid to the Executive. (d) If no Gross-Up Payment is made because reducing the Payments to the Executive under Section 6(a)(i)(B) of this Agreement by $50,000 or less would avoid the application of the Excise Tax, then the amount paid to the Executive under Section 6(a)(i)(B) of this Agreement shall be reduced by the amount necessary to avoid the Excise Tax; provided, however, the reduction will only be made if doing so would result in the Executive retaining more after-tax than if the reduction were not made. 9. Unauthorized Disclosure. During the term of the Executive's employment with the Company, and during the two-year period following the Termination Date, the Executive shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean disclosure by the Executive without the consent of the Board to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or as may be legally required, of any confidential information obtained by the Executive while in the employ of the Company (including, but not limited to, any confidential information with respect to any of the Company's customers or methods of operation) the disclosure of which he knows or has reason to believe will be materially injurious to the Company; provided, however, that such term shall not include the use or disclosure by the Executive, without consent, of any information known generally to the public (other than as a result of disclosure by him in violation of this Section 9) or any information not otherwise considered confidential by a reasonable person engaged in the same business as that conducted by the Company. Notwithstanding the foregoing, the Executive's obligation hereunder not to make any Unauthorized Disclosure shall continue after the end of the two-year period following his termination of employment with the Company as regards any information which is a trade secret as defined in Section 134.90 of the Wisconsin Statutes. In no event shall an asserted violation of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 10. Successors and Assigns. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representative. 11. Fees and Expenses. From and after the Effective Date, the Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) reasonably incurred by the Executive as they become due as a result of (i) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (ii) the Executive's hearing before the Board as contemplated in Section 5(b) of this Agreement or (iii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits. 12. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, if to the Company, to Marshall & Ilsley Corporation, 770 North Water Street, Milwaukee, Wisconsin 53202, or if to Executive, to the address set forth below Executive's signature, or to such other address as the party may be notified, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 13. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries for which the Executive may qualify. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 14. Settlement of Claims. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 15. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 16. Employment. The Executive and the Company acknowledge that the employment of the Executive by the Company is "at will" and prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the company terminates, the Executive shall have no further rights under this Agreement. 17. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Wisconsin without giving effect to the conflict of law principles thereof. 18. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 19. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. 20. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. 21. Modification. No provision of this Agreement may be modified or amended unless such modification or amendment is agreed to in writing signed by both the Executive and the Company. 22. Withholding. The Company shall be entitled to withhold from amounts paid to the Executive hereunder any federal, estate or local withholding or other taxes or charges which it is, from time to time, required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. MARSHALL & ILSLEY CORPORATION By: /s/ Dennis J. Kuester __________________________________________ Dennis J. Kuester, Chief Executive Officer ATTEST: /s/ Randall J. Erickson _________________________________ Randall J. Erickson, Secretary EXECUTIVE: /s/ Frank R. Martire __________________________________________ Frank R. Martire Address: ________________________________ ________________________________ MW2yrchangec EX-12 5 ex12_03-2003.txt EXHIBIT 12 TO FORM 10-Q DATED 03/31/2003 Exhibit 12 MARSHALL & ILSLEY CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($000's)
Three Months Ended Years Ended December 31, March 31, ---------------------------------------------------------------- 2003 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ ------------ Earnings: Earnings before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 193,634 $ 718,592 $ 501,045 $ 470,350 $ 527,939 $ 465,285 Fixed charges, excluding interest on deposits 70,243 301,518 321,059 321,812 222,172 206,546 ----------- ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges but excluding interest on deposits 263,877 1,020,110 822,104 792,162 750,111 671,831 Interest on deposits 62,827 283,385 566,899 772,016 585,864 564,540 ----------- ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges and interest on deposits $ 326,704 $ 1,303,495 $ 1,389,003 $ 1,564,178 $ 1,335,975 $ 1,236,371 =========== =========== =========== =========== =========== =========== Fixed Charges: Interest Expense: Short-term borrowings $ 22,050 $ 150,310 $ 188,587 $ 224,187 $ 142,294 $ 126,624 Long-term borrowings 42,227 127,343 110,842 78,773 63,145 66,810 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor) 5,966 23,865 21,630 18,852 16,733 13,112 ----------- ----------- ----------- ----------- ----------- ----------- Fixed charges excluding interest on deposits 70,243 301,518 321,059 321,812 222,172 206,546 Interest on deposits 62,827 283,385 566,899 772,016 585,864 564,540 ----------- ----------- ----------- ----------- ----------- ----------- Fixed charges including interest on deposits $ 133,070 $ 584,903 $ 887,958 $ 1,093,828 $ 808,036 $ 771,086 =========== =========== =========== =========== =========== =========== Ratio of Earnings to Fixed Charges: Excluding interest on deposits 3.76 x 3.38 x 2.56 x 2.46 x 3.38 x 3.25 x Including interest on deposits 2.46 x 2.23 x 1.56 x 1.43 x 1.65 x 1.60 x
EX-99 6 ex991_03-2003.txt EXHIBIT 99.1 TO FORM 10-Q DATED 03/31/2003 Exhibit 99.1 CERTIFICATION OF PERIODIC REPORT -------------------------------- I, Dennis J. Kuester, Chief Executive Officer of Marshall & Ilsley Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (14 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 12, 2003. /s/ Dennis J. Kuester __________________________________ Dennis J. Kuester Chief Executive Officer Marshall & Ilsley Corporation This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Marshall & Ilsley Corporation for purposes of the Securities Exchange Act of 1934. A signed original of this written statement required by Section 906 has been provided to Marshall & Ilsley Corporation and will be retained by Marshall & Ilsley Corporation and furnished to the Securities and Exchange Commission or its staff upon request. MW711348_2.DOC EX-99 7 ex992_03-2003.txt EXHIBIT 99.2 TO FORM 10-Q DATED 03/31/2003 Exhibit 99.2 CERTIFICATION OF PERIODIC REPORT -------------------------------- I, Mark F. Furlong, Chief Financial Officer of Marshall & Ilsley Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (14 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 12, 2003. /s/ Mark F. Furlong __________________________________ Mark F. Furlong Chief Financial Officer Marshall & Ilsley Corporation This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Marshall & Ilsley Corporation for purposes of the Securities Exchange Act of 1934. A signed original of this written statement required by Section 906 has been provided to Marshall & Ilsley Corporation and will be retained by Marshall & Ilsley Corporation and furnished to the Securities and Exchange Commission or its staff upon request. MW711357_2.DOC -----END PRIVACY-ENHANCED MESSAGE-----