-----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, Rfb0e8EtOACdTMOAIagxd75cNWd6IQDmBZz8uHgBuLqpzCUEYpgGiA6mdYh7fY9y 5DDB4Z0rmz4OW2xd+Ij1SA== 0000062741-03-000208.txt : 20030813 0000062741-03-000208.hdr.sgml : 20030813 20030813164701 ACCESSION NUMBER: 0000062741-03-000208 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 03842011 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 fm10q603.txt FORM 10-Q DATED 06/30/2003 ============================================================================ 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 June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-15403 MARSHALL & ILSLEY CORPORATION (Exact name of registrant as specified in its charter) Wisconsin 39-0968604 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 770 North Water Street Milwaukee, Wisconsin 53202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 765-7801 None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class July 31, 2003 ----- ---------------- Common Stock, $1.00 Par Value 227,312,174 ============================================================================ 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ($000's except share data) June 30, December 31, June 30, 2003 2002 2002 ------------- ------------- ------------- Assets - ------ Cash and cash equivalents: Cash and due from banks $ 988,252 $ 1,012,090 $ 818,715 Federal funds sold and security resale agreements 34,237 30,117 49,370 Money market funds 95,653 104,325 483,211 ------------- ------------- ------------- Total cash and cash equivalents 1,118,142 1,146,532 1,351,296 Investment securities: Trading securities, at market value 30,001 21,252 12,475 Short-term investments, at cost which approximates market value 133,112 93,851 46,642 Available for sale at market value 4,471,856 4,266,372 3,736,684 Held to maturity at amortized cost, market value $963,801 ($993,937 December 31, and $1,028,904 June 30, 2002) 891,145 942,819 986,684 ------------- ------------- ------------- Total investment securities 5,526,114 5,324,294 4,782,485 Loans and leases Mortgage loans held for sale 298,474 311,077 60,140 Loans and leases, net of unearned income 24,600,345 23,597,769 20,858,567 ------------- ------------- ------------- Total loans and leases, net of unearned income 24,898,819 23,908,846 20,918,707 Less: Allowance for loan and lease losses 348,100 338,409 292,512 ------------- ------------- ------------- Net loans and leases 24,550,719 23,570,437 20,626,195 Premises and equipment 438,197 442,395 414,462 Goodwill and other intangibles 1,084,813 1,088,804 730,705 Accrued interest and other assets 1,348,110 1,302,180 1,219,280 ------------- ------------- ------------- Total Assets $ 34,066,095 $ 32,874,642 $ 29,124,423 ============= ============= ============= Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 4,652,703 $ 4,461,880 $ 3,649,761 Interest bearing 17,617,437 15,931,826 14,498,279 ------------- ------------- ------------- Total deposits 22,270,140 20,393,706 18,148,040 Funds purchased and security repurchase agreements 2,152,778 946,583 1,480,425 Other short-term borrowings 3,144,623 4,335,213 4,221,738 Accrued expenses and other liabilities 983,735 1,067,120 892,152 Long-term borrowings 2,271,533 3,095,352 1,675,098 ------------- ------------- ------------- Total liabilities 30,822,809 29,837,974 26,417,453 Shareholders' equity: - --------------------- Series A convertible preferred stock, $1.00 par value; 336,370 shares issued June 30, 2002 -- -- 336 Common stock, $1.00 par value; 240,832,522 shares issued 240,833 240,833 240,833 Additional paid-in capital 561,982 569,162 752,885 Retained earnings 2,860,996 2,675,148 2,501,735 Accumulated other comprehensive income, net of related taxes (41,127) (44,427) 32,272 Less: Treasury common stock, at cost:13,693,706 shares (14,599,565 December 31, and 30,608,636 June 30, 2002) 358,686 381,878 799,725 Deferred compensation 20,712 22,170 21,366 ------------- ------------- ------------- Total shareholders' equity 3,243,286 3,036,668 2,706,970 ------------- ------------- ------------- Total Liabilities and Shareholders' Equity $ 34,066,095 $ 32,874,642 $ 29,124,423 ============= ============= ============= See notes to financial statements.
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MARSHALL & ILSLEY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($000's except share data) Three Months Ended June 30, --------------------------- 2003 2002 ------------- ------------- Interest income - --------------- Loans and leases $ 331,009 $ 321,574 Investment securities: Taxable 41,253 49,617 Exempt from federal income taxes 14,452 15,377 Trading securities 57 123 Short-term investments 708 3,452 ------------- ------------- Total interest income 387,479 390,143 Interest expense - ---------------- Deposits 60,274 73,403 Short-term borrowings 20,974 37,806 Long-term borrowings 42,288 28,936 ------------- ------------- Total interest expense 123,536 140,145 ------------- ------------- Net interest income 263,943 249,998 Provision for loan and lease losses 19,642 16,980 ------------- ------------- Net interest income after provision for loan and lease losses 244,301 233,018 Other income - ------------ Data processing services: e-Finance solutions 40,449 33,967 Financial technology solutions 117,541 112,328 ------------- ------------- Total data processing services 157,990 146,295 Item processing 9,570 9,070 Trust services 31,183 31,358 Service charges on deposits 25,191 25,224 Mortgage banking 21,764 7,365 Net investment securities losses (2,616) (121) Life insurance revenue 8,518 7,407 Other 43,139 37,556 ------------- ------------- Total other income 294,739 264,154 Other expense - ------------- Salaries and employee benefits 193,456 185,294 Net occupancy 18,201 18,802 Equipment 27,973 29,170 Software expenses 10,371 10,030 Processing charges 10,606 8,921 Supplies and printing 5,885 4,937 Professional services 10,540 8,790 Shipping and handling 11,259 10,842 Amortization of intangibles 7,495 4,931 Other 39,887 36,296 ------------- ------------- Total other expense 335,673 318,013 ------------- ------------- Income before income taxes 203,367 179,159 Provision for income taxes 68,715 58,732 ------------- ------------- Net income $ 134,652 $ 120,427 ============= ============= Net income per common share Basic $ 0.59 $ 0.56 Diluted 0.59 0.54 Dividends paid per common share $ 0.180 $ 0.160 Weighted average common shares outstanding: Basic 226,483 211,417 Diluted 228,394 221,333 See notes to financial statements.
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MARSHALL & ILSLEY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($000's except share data) Six Months Ended June 30, --------------------------- 2003 2002 ------------- ------------- Interest income - --------------- Loans and leases $ 661,194 $ 631,556 Investment securities: Taxable 87,072 100,384 Exempt from federal income taxes 29,239 30,533 Trading securities 122 182 Short-term investments 1,441 7,895 ------------- ------------- Total interest income 779,068 770,550 Interest expense - ---------------- Deposits 123,101 144,318 Short-term borrowings 43,024 76,659 Long-term borrowings 84,515 59,298 ------------- ------------- Total interest expense 250,640 280,275 ------------- ------------- Net interest income 528,428 490,275 Provision for loan and lease losses 45,334 32,176 ------------- ------------- Net interest income after provision for loan and lease losses 483,094 458,099 Other income - ------------ Data processing services: e-Finance solutions 80,658 67,774 Financial technology solutions 234,420 223,538 Other -- 2 ------------- ------------- Total data processing services 315,078 291,314 Item processing 19,844 19,406 Trust services 61,223 62,337 Service charges on deposits 51,429 50,798 Mortgage banking 39,292 16,741 Net investment securities losses (1,047) (866) Life insurance revenue 15,761 14,738 Other 83,591 68,688 ------------- ------------- Total other income 585,171 523,156 Other expense - ------------- Salaries and employee benefits 390,681 364,780 Net occupancy 36,836 35,892 Equipment 56,669 57,657 Software expenses 20,681 22,621 Processing charges 22,624 18,507 Supplies and printing 11,140 9,650 Professional services 21,236 18,585 Shipping and handling 25,211 22,896 Amortization of intangibles 14,414 9,230 Other 71,771 71,802 ------------- ------------- Total other expense 671,263 631,620 ------------- ------------- Income before income taxes 397,002 349,635 Provision for income taxes 134,320 113,579 ------------- ------------- Net income $ 262,682 $ 236,056 ============= ============= Net income per common share Basic $ 1.16 $ 1.11 Diluted 1.15 1.07 Dividends paid per common share $ 0.340 $ 0.305 Weighted average common shares outstanding: Basic 226,355 210,527 Diluted 228,022 220,436 See notes to financial statements.
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MARSHALL & ILSLEY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($000's) Six Months Ended June 30, --------------------------- 2003 2002 ------------- ------------- Net Cash Provided by Operating Activities $ 367,644 $ 606,105 Cash Flows From Investing Activities: Proceeds from sales of securities available for sale 7,801 1,909 Proceeds from maturities of securities available for sale 1,453,731 843,104 Proceeds from maturities of securities held to maturity 52,636 44,053 Purchases of securities available for sale (1,749,825) (991,256) Purchases of securities held to maturity (1,000) (631) Net increase in loans (1,241,192) (1,335,757) Purchases of assets to be leased (294,929) (88,561) Principal payments on lease receivables 399,961 221,805 Fixed asset purchases, net (31,820) (20,525) Purchase acquisitions, net of cash equivalents acquired (3,041) (10,338) Other 8,821 5,148 ------------- ------------- Net cash used in investing activities (1,398,857) (1,331,049) Cash Flows From Financing Activities: Net increase in deposits 1,869,039 839,524 Proceeds from issuance of commercial paper 3,884,534 3,210,992 Payments for maturity of commercial paper (3,884,786) (3,152,189) Net decrease in other short-term borrowings (566,006) (243,804) Proceeds from issuance of long-term debt 13,227 318,818 Payments of long-term debt (243,907) (271,756) Dividends paid (76,836) (66,096) Purchases of treasury stock (4,360) (139,806) Other 11,918 16,792 ------------- ------------- Net cash provided by financing activities 1,002,823 512,475 ------------- ------------- Net decrease in cash and cash equivalents (28,390) (212,469) Cash and cash equivalents, beginning of year 1,146,532 1,563,765 ------------- ------------- Cash and cash equivalents, end of period $ 1,118,142 $ 1,351,296 ============= ============= Supplemental cash flow information: Cash paid during the period for: Interest $ 253,154 $ 262,315 Income taxes 149,364 105,209 See notes to financial statements.
6 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements June 30, 2003 & 2002 (Unaudited) 1. The accompanying unaudited consolidated financial statements should be read in conjunction with Marshall & Ilsley Corporation's ("M&I" or "Corporation") 2002 Annual Report on Form 10-K. The unaudited financial information included in this report reflects all adjustments consisting only of normal recurring accruals and adjustments which are necessary for a fair statement of the financial position and results of operations as of and for the three and six months ended June 30, 2003 and 2002. The results of operations for the three and six months ended June 30, 2003 and 2002 are not necessarily indicative of results to be expected for the entire year. Certain amounts in the 2002 consolidated financial statements and analyses have been reclassified to conform with the 2003 presentation. 2. New Accounting Pronouncements In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivatives instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. The amendments to SFAS 133 fall principally into three categories: amendments related to SFAS 133 Implementation Issues that were previously cleared by the FASB during the Derivatives Implementation Group process, amendments clarifying the definition of a derivative and amendments relating to the definition of expected cash flows in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurement. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The provisions of SFAS 149 that related to SFAS 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, continue to be applied in accordance with their respective effective dates. In addition, those provisions of SFAS 149, which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The Corporation does not anticipate that SFAS 149 will materially impact its current derivatives and hedging activities. In May 2003, the FASB issued FASB No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement prescribes how an issuer classifies and measures certain financial instruments. Financial instruments within the scope of SFAS 150 are required to be classified as liabilities (or assets in some circumstances). Many of those instruments were previously classified as equity. Examples of financial instruments that are within the scope of SFAS 150 include: mandatorily redeemable equity shares, forward purchase contracts or written put options on the issuer's equity shares that are to be physically settled or net cash settled and payables that can be settled with a variable number of the issuer's equity shares. SFAS 150 does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety. Financial instruments that are not within the scope of SFAS 150 include: convertible debt, puttable stock or other outstanding shares that are conditionally redeemable. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the Corporation July 1, 2003. The trust preferred securities issued by the Corporation's finance subsidiaries, M&I Capital Trust A and MVBI Capital Trust qualify as mandatorily redeemable equity shares under SFAS 150. As stated in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2002, the Corporation's accounting policy is to classify these trust preferred securities as borrowings net of their related discounts. The distributions, including the related accretion of discount, are classified as interest expense for purposes of the Consolidated Financial Statements. On July 31, 2003, the Corporation redeemed all of the Floating Rate Debentures held by its subsidiary, MVBI Capital Trust, and MVBI Capital Trust redeemed all of its outstanding Floating Rate Trust Preferred Securities at an aggregate liquidation amount of $14.95 million. The Corporation believes that its current accounting policies with respect to the trust preferred securities issued by the Corporation's finance subsidiaries are in compliance with SFAS 150 and that there will no impact to the Corporation from adopting SFAS 150 as it relates to the remaining fixed rate trust preferred securities that were issued by M&I Capital Trust A. 7 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited) 3. Comprehensive Income The following tables present the Corporation's comprehensive income ($000's):
Three Months Ended June 30, 2003 --------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------ ------------ Net income $ 134,652 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ 4,178 $ (1,456) 2,722 Reclassification for securities transactions included in net income -- -- -- ------------- ------------ ------------ Unrealized gains (losses) 4,178 (1,456) 2,722 Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period (8,998) 3,149 (5,849) Reclassification adjustments for hedging activities included in net income 18,783 (6,574) 12,209 ------------- ------------ ------------ Net gains (losses) $ 9,785 $ (3,425) 6,360 ------------- ------------ ------------ Other comprehensive income (loss) 9,082 ------------ Total comprehensive income $ 143,734 ============
Three Months Ended June 30, 2002 --------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------ ------------ Net income $ 120,427 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ 26,755 $ (9,526) 17,229 Reclassification for securities transactions included in net income -- -- -- ------------- ------------ ------------ Unrealized gains (losses) 26,755 (9,526) 17,229 Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period (54,493) 19,072 (35,421) Reclassification adjustments for hedging activities included in net income 13,338 (4,667) 8,671 ------------- ------------ ------------ Net gains (losses) $ (41,155)$ 14,405 (26,750) ------------- ------------ ------------ Other comprehensive income (loss) (9,521) ------------ Total comprehensive income $ 110,906 ============
8 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited)
Six Months Ended June 30, 2003 --------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------ ------------ Net income $ 262,682 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ (7,629)$ 2,679 (4,950) Reclassification for securities transactions included in net income (1,675) 586 (1,089) ------------- ------------ ------------ Unrealized gains (losses) (9,304) 3,265 (6,039) Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period (22,853) 7,998 (14,855) Reclassification adjustments for hedging activities included in net income 37,221 (13,027) 24,194 ------------- ------------ ------------ Net gains (losses) $ 14,368 $ (5,029) 9,339 ------------- ------------ ------------ Other comprehensive income (loss) 3,300 ------------ Total comprehensive income $ 265,982 ============
Six Months Ended June 30, 2002 --------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------ ------------ Net income $ 236,056 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ 12,384 $ (4,680) 7,704 Reclassification for securities transactions included in net income -- -- -- ------------- ------------ ------------ Unrealized gains (losses) 12,384 (4,680) 7,704 Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period (47,927) 16,774 (31,153) Reclassification adjustments for hedging activities included in net income 23,262 (8,141) 15,121 ------------- ------------ ------------ Net gains (losses) $ (24,665)$ 8,633 (16,032) ------------- ------------ ------------ Other comprehensive income (loss) (8,328) ------------ Total comprehensive income $ 227,728 ============
4. A reconciliation of the numerators and denominators of the basic and diluted per share computations are as follows (dollars and shares in thousands, except per share data):
Three Months Ended June 30, 2003 --------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ----------- Basic Earnings Per Share Income Available to Common Shareholders $ 134,652 226,483 $ 0.59 =========== Effect of Dilutive Securities Stock Options and Restricted Stock Plans -- 1,911 ------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders $ 134,652 228,394 $ 0.59 ===========
9 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited)
Three Months Ended June 30, 2002 --------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ----------- Net Income $ 120,427 Convertible Preferred Dividends (1,230) ------------- Basic Earnings Per Share Income Available to Common Shareholders $ 119,197 211,417 $ 0.56 =========== Effect of Dilutive Securities Convertible Preferred Stock 1,230 7,688 Stock Options and Restricted Stock Plans -- 2,228 ------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders Plus Assumed Conversions $ 120,427 221,333 $ 0.54 ===========
Six Months Ended June 30, 2003 --------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------ Basic Earnings Per Share Income Available to Common Shareholders $ 262,682 226,355 $ 1.16 =========== Effect of Dilutive Securities Stock Options and Restricted Stock Plans -- 1,667 ------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders $ 262,682 228,022 $ 1.15 ===========
Six Months Ended June 30, 2002 --------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------ Net Income $ 236,056 Convertible Preferred Dividends (2,345) ------------- Basic Earnings Per Share Income Available to Common Shareholders $ 233,711 210,527 $ 1.11 =========== Effect of Dilutive Securities Convertible Preferred Stock 2,345 7,688 Stock Options and Restricted Stock Plans -- 2,221 ------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders Plus Assumed Conversions $ 236,056 220,436 $ 1.07 ===========
10 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited) Options to purchase shares of common stock not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares are as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------------------- --------------------------------------- 2003 2002 2003 2002 ----------------- ----------------- ----------------- ----------------- Shares 6,357,146 3,793,400 11,932,304 3,833,400 Price Range $29.600 - $33.938 $31.094 - $33.938 $28.275 - $33.938 $31.045 - $33.938
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," establishes financial accounting and reporting standards for stock based employee compensation plans. SFAS 123 defines a fair value based method of accounting for employee stock options or similar equity instruments. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, expected dividends and the risk-free interest rate over the expected life of the option. The resulting compensation cost is recognized over the service period, which is usually the vesting period. Compensation cost can also be measured and accounted for using the intrinsic value based method of accounting prescribed in Accounting Principles Board Opinion No. 25 (APBO 25), "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount paid to acquire the stock. The largest difference between SFAS 123 and APBO 25 as they relate to the Corporation is the amount of compensation cost attributable to the Corporation's fixed stock option plans and employee stock purchase plan (ESPP). Under APBO 25 no compensation cost is recognized for fixed stock option plans because the exercise price is equal to the quoted market price at the date of grant and therefore there is no intrinsic value. SFAS 123 compensation cost would equal the calculated fair value of the options granted. Under APBO 25 no compensation cost is recognized for the ESPP because the discount (15%) and the plan meets the definition of a qualified plan of the Internal Revenue Code and meets the requirements of APBO 25. Under SFAS 123 the safe-harbor discount threshold is 5% for a plan to be non-compensatory. SFAS 123 compensation cost would equal the initial discount (15% of beginning of plan period price per share) plus the value of a one year call option on 85% of a share of stock for each share purchased. As permitted by SFAS 123, the Corporation continues to measure compensation cost for such plans using the accounting method prescribed by APBO 25. 11 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited) Had compensation cost for the Corporation's ESPP and options granted after January 1, 1995 been determined consistent with SFAS 123, the Corporation's net income and earnings per share would have been reduced to the following estimated pro forma amounts:
Three Months Ended June 30, Six Months Ended June 30, ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Net Income, as reported $ 134,652 $ 120,427 $ 262,682 $ 236,056 Add: Stock-based employee compensation expense included in reported net income, net of tax 1,018 890 2,036 1,788 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (6,090) (6,217) (12,156) (11,937) ------------- ------------- ------------- ------------- Pro forma net income $ 129,580 $ 115,100 $ 252,562 $ 225,907 ============= ============= ============= ============= Basic earnings per share: As reported $ 0.59 $ 0.56 $ 1.16 $ 1.11 Pro forma 0.57 0.54 1.12 1.06 Diluted earnings per share: As reported $ 0.59 $ 0.54 $ 1.15 $ 1.07 Pro forma 0.57 0.52 1.11 1.03
5. Selected investment securities, by type, held by the Corporation are as follows ($000's):
June 30, December 31, June 30, 2003 2002 2002 ------------- ------------- ------------- Investment securities available for sale: U.S. treasury and government agencies $ 3,585,172 $ 3,266,144 $ 2,704,736 State and political subdivisions 285,562 265,470 234,709 Mortgage backed securities 141,925 162,268 157,188 Other 459,197 572,490 640,051 ------------- ------------- ------------- Total $ 4,471,856 $ 4,266,372 $ 3,736,684 ============= ============= ============= Investment securities held to maturity: U.S. treasury and government agencies $ 30 $ 30 $ -- State and political subdivisions 888,089 939,158 983,048 Other 3,026 3,631 3,636 ------------- ------------- ------------- Total $ 891,145 $ 942,819 $ 986,684 ============= ============= =============
6. The Corporation's loan and lease portfolio, including mortgage loans held for sale, consists of the following ($000's):
June 30, December 31, June 30, 2003 2002 2002 ------------- ------------- ------------- Commercial, financial and agricultural $ 7,129,832 $ 6,867,091 $ 6,138,083 Cash flow hedging instruments at fair value 16,276 4,423 7,756 ------------- ------------- ------------- Total commercial, financial and agricultural 7,146,108 6,871,514 6,145,839 Real estate: Construction 1,187,777 1,058,144 937,648 Residential mortgage 6,924,069 6,758,650 5,939,553 Commercial mortgage 6,941,263 6,586,332 5,544,479 ------------- ------------- ------------- Total real estate 15,053,109 14,403,126 12,421,680 Personal 2,011,826 1,852,202 1,490,252 Lease financing 687,776 782,004 860,936 ------------- ------------- ------------- Total loans and leases $ 24,898,819 $ 23,908,846 $ 20,918,707 ============= ============= =============
12 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited) 7. Sale of Receivables During the second quarter of 2003, $185.1 million of automobile loans were sold in securitization transactions. Gains of $3.0 million were recognized and are reported in Other income in the Consolidated Statements of Income. Other income associated with auto securitizations in the current quarter amounted to $2.7 million. Key economic assumptions used in measuring the retained interests at the date of securitization resulting from securitizations completed during the second quarter were as follows (rate per annum): Prepayment speed (CPR) 19-35% Weighted average life (in months) 19.4 Weighted average expected credit losses (based on original balance) 0.49% Residual cash flow discount rate 12.0% Variable returns to transferees Forward one month LIBOR yield curve At June 30, 2003, securitized automobile loans and other automobile loans managed together with them, along with delinquency and credit loss information consisted of the following:
Total Securitized Portfolio Managed ------------ ------------ ----------- Loan balances $ 851,157 $ 148,434 $ 999,591 Principal amounts of loans 60 days or more past due 1,391 251 1,642 Net credit losses (recoveries) year to date 1,021 (5) 1,016
During the second quarter of 2003, the Corporation recognized an impairment loss of approximately $4.1 million, which is included in net investment securities losses in the Consolidated Statements of Income. The difference between revised assumptions compared to the initial expected assumptions were deemed to be other than temporary. 8. Goodwill and Other Intangibles: The changes in the carrying amount of goodwill for the six months ended June 30, 2003 are as follows (dollars in thousands):
Banking Metavante Others Total ------------ ------------ ------------ ------------ Goodwill balance as of January 1, 2003 $ 801,977 $ 136,672 $ 4,687 $ 943,336 Goodwill acquired during the period -- -- -- -- Purchase accounting adjustments 8,036 1,516 -- 9,552 ------------ ------------ ------------ ------------ Goodwill balance as of June 30, 2003 $ 810,013 $ 138,188 $ 4,687 $ 952,888 ============ ============ ============ ============
Purchase accounting adjustments for the banking segment in the first and second quarters of 2003 were primarily due to the adjustments required to be made to the initial estimates of fair value for the loans acquired and the deposits and borrowings assumed in the acquisition of Mississippi Valley Bancshares, Inc., partially offset by the reduction of goodwill allocated to the sale of two branches, during the second quarter. Purchase accounting adjustments for Metavante in the first and second quarters of 2003, represent the net effect of additional contingent consideration paid as a result of revenue targets being achieved, offset by the return of consideration placed in escrow associated with acquisitions completed in 2001 and adjustments required to be made to the initial estimates of fair value associated with the PayTrust, Inc. acquisition. 13 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited) At June 30, 2003, the Corporation's other intangible assets consisted of the following (dollars in thousands):
June 30, 2003 ---------------------------------------- Gross Accum- Net Carrying ulated Carrying Amount Amort Value ------------ ------------ ------------ Other intangible assets: Core deposit intangible $ 161,028 $ 57,442 $ 103,586 Data processing contract rights/customer lists 33,651 11,215 22,436 Trust customers 750 100 650 Tradename 2,500 625 1,875 ------------ ------------ ------------ $ 197,929 $ 69,382 $ 128,547 ============ ============ ============ Mortgage loan servicing rights $ 38,969 $ 35,591 $ 3,378 ============ ============ ============
9. The Corporation's deposit liabilities consists of the following ($000's):
June 30, December 31, June 30, 2003 2002 2002 ------------- ------------- ------------- Noninterest bearing demand $ 4,652,703 $ 4,461,880 $ 3,649,761 Savings and NOW 9,392,962 9,225,899 7,976,263 CD's $100,000 and over 3,713,100 2,793,793 2,279,449 Cash flow hedge-Institutional CDs 21,584 18,330 4,753 ------------- ------------- ------------- Total CD's $100,000 and over 3,734,684 2,812,123 2,284,202 Other time deposits 2,756,922 2,979,502 2,838,924 Foreign deposits 1,732,869 914,302 1,398,890 ------------- ------------- ------------- Total deposits $ 22,270,140 $ 20,393,706 $ 18,148,040 ============= ============= =============
10. Derivative Financial Instruments and Hedging Activities Trading Instruments ------------------- The Corporation enters into interest rate swaps as part of its trading and securitization activities. Interest rate swaps enable customers to manage their exposures to interest rate risk. The Corporation's market risk from unfavorable movements in interest rates is generally minimized by concurrently entering into offsetting positions with nearly identical notional values, terms and indices. At June 30, 2003, interest rate swaps designated as trading consisted of $1.1 billion in notional amount of receive fixed/pay floating with an aggregate positive fair value of $23.8 million and $0.7 billion in notional amount of pay fixed/receive floating with an aggregate negative fair value of $16.3 million. At June 30, 2003, the notional value of interest rate futures designated as trading was $3.1 billion with a negative fair value of $0.3 million. Interest rate swaps designated as trading are recorded at fair value. Gains and losses arising from changes in fair value are recorded in other income. 14 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited) Hedging Instruments ------------------- The following table presents information with respect to the Corporation's fair value hedges.
Fair Value Hedges June 30, 2003 Weighted Notional Fair Average Hedged Hedging Amount Value Remaining Item Instrument ($ in mil) ($ in mil) Term (Yrs) - ------------------------- ------------------- ------------ ------------- ----------- Callable CDs Receive Fixed Swap $ 230.0 $ 0.7 6.8 Medium Term Notes Receive Fixed Swap 202.9 18.2 3.7 Institutional CDs Receive Fixed Swap 100.0 0.2 0.8
For the three and six months ended June 30, 2003, the impact from fair value hedges to net interest income was a positive $6.8 million and $14.0 million, respectively. The following table presents information with respect to the Corporation's cash flow hedges.
Cash Flow Hedges June 30, 2003 Weighted Notional Fair Average Hedged Hedging Amount Value Remaining Item Instrument ($ in mil) ($ in mil) Term (Yrs) - ------------------------- ------------------- ------------ ------------- ----------- Variable Rate Loans Receive Fixed Swap $ 600.0 $ 16.3 4.4 Institutional CDs Pay Fixed Swap 820.0 (21.6) 1.6 Fed Funds Purchased Pay Fixed Swap 860.0 (45.8) 1.8 FHLB Advances Pay Fixed Swap 610.0 (60.5) 3.6
For the three and six months ended June 30, 2003, the impact from cash flow hedges to net interest income was a negative $17.4 million and $35.8 million, respectively. During the second quarter of 2003, the Corporation announced that it would redeem all of the Floating Rate Debentures held by its subsidiary, MVBI Capital Trust, and MVBI Capital Trust would redeem all of its currently outstanding Floating Rate Trust Preferred Securities at an aggregate liquidation amount of $14.95 million. In conjunction with the redemption on July 31, 2003, during the second quarter the Corporation terminated the associated interest rate swap designated as a cash flow hedge. The loss in accumulated other comprehensive income aggregating $1.4 million ($0.9 million after tax), was charged to other expense during the second quarter of 2003. During the first quarter of 2003, the Corporation terminated the fair value hedge on long-term borrowings. The adjustment to the fair value of the hedged instrument of $35.2 million is being accreted as income into earnings over the expected remaining term of the borrowings using the effective interest method. Also during the quarter, the cash flow hedge on commercial paper was terminated. The $32.6 million in accumulated other comprehensive income at the time of termination is being amortized as expense into earnings in the remaining periods during which the hedged forecasted transaction affects earnings. 15 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited) 11. Segments The following represents the Corporation's operating segments as of and for the three and six months ended June 30, 2003 and 2002. There have not been any changes to the way the Corporation organizes its segments or reports segment financial information. Fees - Intercompany represent intercompany revenues charged to other segments for providing certain services. Expenses - Intercompany represent fees charged by other segments for certain services received. For each segment, Expenses - Intercompany are not the costs of that segment's reported intercompany revenues. Intersegment expenses and assets have been eliminated. ($ in millions):
Three Months Ended June 30, 2003 --------------------------------------------------------------------------------------- Reclass- ifications Consol- Corporate & Elim- Sub- Excluded idated Banking Metavante Others Overhead nations total Charges Income ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Revenues: Net interest income $ 261.9 $ (0.5)$ 8.0 $ (5.4)$ -- $ 264.0 $ -- $ 264.0 Fees - Other 94.0 158.0 40.7 2.0 -- 294.7 -- 294.7 Fees - Intercompany 14.7 18.0 9.2 -- (41.9) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total revenues 370.6 175.5 57.9 (3.4) (41.9) 558.7 -- 558.7 Expenses: Expenses - Other 145.1 142.5 31.8 16.8 (0.5) 335.7 -- 335.7 Expenses - Intercompany 24.8 9.3 8.6 (1.3) (41.4) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total expenses 169.9 151.8 40.4 15.5 (41.9) 335.7 -- 335.7 Provision for loan and lease losses 19.0 -- 0.6 -- -- 19.6 -- 19.6 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes 181.7 23.7 16.9 (18.9) -- 203.4 -- 203.4 Income tax expense 60.0 9.8 6.3 (7.4) -- 68.7 -- 68.7 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Segment income $ 121.7 $ 13.9 $ 10.6 $ (11.5)$ -- $ 134.7 $ -- $ 134.7 ========== ========== ========== ========== ========== ========== ========== ========== Identifiable assets $ 32,991.3 $ 879.6 $ 715.5 $ 476.4 $ (996.7)$ 34,066.1 $ -- $ 34,066.1 ========== ========== ========== ========== ========== ========== ========== ========== Return on average equity 16.7 % 16.2 % 18.2 % 16.9 % ========== ========== ========== ==========
Three Months Ended June 30, 2002 --------------------------------------------------------------------------------------- Reclass- ifications Consol- Corporate & Elim- Sub- Excluded idated Banking Metavante Others Overhead nations total Charges Income ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Revenues: Net interest income $ 249.6 $ (1.0)$ 6.7 $ (5.3)$ -- $ 250.0 $ -- $ 250.0 Fees - Other 76.5 146.3 40.1 1.3 (0.1) 264.1 -- 264.1 Fees - Intercompany 11.8 16.5 5.5 -- (33.8) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total revenues 337.9 161.8 52.3 (4.0) (33.9) 514.1 -- 514.1 Expenses: Expenses - Other 134.2 137.7 25.0 23.2 (2.1) 318.0 -- 318.0 Expenses - Intercompany 18.8 5.9 8.7 (1.6) (31.8) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total expenses 153.0 143.6 33.7 21.6 (33.9) 318.0 -- 318.0 Provision for loan and lease losses 16.7 -- 0.3 -- -- 17.0 -- 17.0 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes 168.2 18.2 18.3 (25.6) -- 179.1 -- 179.1 Income tax expense 53.8 7.5 7.1 (9.7) -- 58.7 -- 58.7 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Segment income $ 114.4 $ 10.7 $ 11.2 $ (15.9)$ -- $ 120.4 $ -- $ 120.4 ========== ========== ========== ========== ========== ========== ========== ========== Identifiable assets $ 28,087.9 $ 700.8 $ 588.1 $ 389.1 $ (641.5)$ 29,124.4 $ -- $ 29,124.4 ========== ========== ========== ========== ========== ========== ========== ========== Return on average equity 18.0 % 14.4 % 20.1 % 17.7 % ========== ========== ========== ==========
16 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2003 & 2002 (Unaudited)
Six Months Ended June 30, 2003 --------------------------------------------------------------------------------------- Reclass- ifications Consol- Corporate & Elim- Sub- Excluded idated Banking Metavante Others Overhead nations total Charges Income ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Revenues: Net interest income $ 524.4 $ (1.5)$ 15.7 $ (10.2)$ -- $ 528.4 $ -- $ 528.4 Fees - Other 185.6 315.1 81.9 2.7 (0.1) 585.2 -- 585.2 Fees - Intercompany 28.2 34.9 16.4 -- (79.5) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total revenues 738.2 348.5 114.0 (7.5) (79.6) 1,113.6 -- 1,113.6 Expenses: Expenses - Other 288.2 284.1 62.4 34.1 -- 668.8 2.5 671.3 Expenses - Intercompany 45.5 17.3 17.8 (1.0) (79.6) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total expenses 333.7 301.4 80.2 33.1 (79.6) 668.8 2.5 671.3 Provision for loan and lease losses 36.7 -- 8.6 -- -- 45.3 -- 45.3 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes 367.8 47.1 25.2 (40.6) -- 399.5 (2.5) 397.0 Income tax expense 121.7 19.5 10.0 (15.9) -- 135.3 (1.0) 134.3 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Segment income $ 246.1 $ 27.6 $ 15.2 $ (24.7)$ -- $ 264.2 $ (1.5)$ 262.7 ========== ========== ========== ========== ========== ========== ========== ========== Identifiable assets $ 32,991.3 $ 879.6 $ 715.5 $ 476.4 $ (996.7)$ 34,066.1 $ -- $ 34,066.1 ========== ========== ========== ========== ========== ========== ========== ========== Return on average equity 17.1 % 16.5 % 13.2 % 16.8 % ========== ========== ========== ==========
Metavante's segment income excludes charges for the six months ended June 30, 2003 for certain transition expenses associated with the integration of the July 2002 PayTrust, Inc. acquisition which are included in "Excluded Charges."
Six Months Ended June 30, 2002 --------------------------------------------------------------------------------------- Reclass- ifications Consol- Corporate & Elim- Sub- Excluded idated Banking Metavante Others Overhead nations total Charges Income ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Revenues: Net interest income $ 489.4 $ (2.0)$ 13.4 $ (10.5)$ -- $ 490.3 $ -- $ 490.3 Fees - Other 149.8 291.4 79.8 2.6 (0.4) 523.2 -- 523.2 Fees - Intercompany 22.0 32.4 11.1 -- (65.5) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total revenues 661.2 321.8 104.3 (7.9) (65.9) 1,013.5 -- 1,013.5 Expenses: Expenses - Other 258.9 275.4 52.2 47.7 (2.6) 631.6 -- 631.6 Expenses - Intercompany 36.4 11.3 17.3 (1.7) (63.3) 0.0 -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total expenses 295.3 286.7 69.5 46.0 (65.9) 631.6 -- 631.6 Provision for loan and lease losses 31.6 -- 0.6 -- -- 32.2 -- 32.2 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes 334.3 35.1 34.2 (53.9) -- 349.7 -- 349.7 Income tax expense 105.8 14.5 13.6 (20.3) -- 113.6 -- 113.6 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Segment income $ 228.5 $ 20.6 $ 20.6 $ (33.6)$ -- $ 236.1 $ -- $ 236.1 ========== ========== ========== ========== ========== ========== ========== ========== Identifiable assets $ 28,087.9 $ 700.8 $ 588.1 $ 389.1 $ (641.5)$ 29,124.4 $ -- $ 29,124.4 ========== ========== ========== ========== ========== ========== ========== ========== Return on average equity 18.7 % 14.3 % 18.6 % 17.9 % ========== ========== ========== ==========
Total Revenue by type in All Others consists of the following:
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Trust Services $ 31.3 $ 31.1 $ 61.2 $ 62.0 Residential Mortgage Banking 14.9 8.5 27.6 17.7 Capital Markets 0.2 0.2 2.0 (0.3) Brokerage and Insurance 5.8 6.6 11.6 13.1 Commercial Leasing 3.7 3.7 7.5 7.6 Commercial Mortgage Banking 1.3 1.3 2.6 2.2 Others 0.7 0.9 1.5 2.0 ---------- ---------- ---------- ---------- Total revenue $ 57.9 $ 52.3 $ 114.0 $ 104.3 ========== ========== ========== ==========
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
MARSHALL & ILSLEY CORPORATION CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited) ($000's) Three Months Ended June 30, ---------------------------- 2003 2002 ------------- ------------- Assets - ------ Cash and due from banks $ 746,737 $ 698,182 Investment securities: Trading securities 24,729 12,932 Short-term investments 282,557 907,098 Other investment securities: Taxable 4,041,583 3,160,500 Tax-exempt 1,176,175 1,236,252 ------------- ------------- Total investment securities 5,525,044 5,316,782 Total loans and leases 24,398,674 20,392,703 Less: Allowance for loan and lease losses 345,233 291,919 ------------- ------------- Net loans and leases 24,053,441 20,100,784 Premises and equipment, net 441,803 415,940 Accrued interest and other assets 2,531,549 1,952,720 ------------- ------------- Total Assets $ 33,298,574 $ 28,484,408 ============= ============= Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 4,072,645 $ 3,360,327 Interest bearing 18,069,128 15,235,115 ------------- ------------- Total deposits 22,141,773 18,595,442 Funds purchased and security repurchase agreements 2,634,792 2,285,523 Other short-term borrowings 569,678 1,577,361 Long-term borrowings 3,699,813 2,414,191 Accrued expenses and other liabilities 1,052,205 883,472 ------------- ------------- Total liabilities 30,098,261 25,755,989 Shareholders' equity 3,200,313 2,728,419 ------------- ------------- Total Liabilities and Shareholders' Equity $ 33,298,574 $ 28,484,408 ============= =============
18
MARSHALL & ILSLEY CORPORATION CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited) ($000's) Six Months Ended June 30, ---------------------------- 2003 2002 ------------- ------------- Assets - ------ Cash and due from banks $ 755,183 $ 674,003 Investment securities: Trading securities 21,569 11,278 Short-term investments 270,039 996,036 Other investment securities: Taxable 3,962,950 3,047,285 Tax-exempt 1,186,673 1,232,808 ------------- ------------- Total investment securities 5,441,231 5,287,407 Total loans and leases 24,150,954 19,924,364 Less: Allowance for loan and lease losses 345,145 285,961 ------------- ------------- Net loans and leases 23,805,809 19,638,403 Premises and equipment, net 442,656 407,841 Accrued interest and other assets 2,523,553 1,909,170 ------------- ------------- Total Assets $ 32,968,432 $ 27,916,824 ============= ============= Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 3,967,157 $ 3,272,763 Interest bearing 17,679,972 14,545,517 ------------- ------------- Total deposits 21,647,129 17,818,280 Funds purchased and security repurchase agreements 2,826,174 2,323,701 Other short-term borrowings 579,773 1,843,189 Long-term borrowings 3,698,908 2,420,926 Accrued expenses and other liabilities 1,065,982 846,692 ------------- ------------- Total liabilities 29,817,966 25,252,788 Shareholders' equity 3,150,466 2,664,036 ------------- ------------- Total Liabilities and Shareholders' Equity $ 32,968,432 $ 27,916,824 ============= =============
19 Net income for the second quarter of 2003 amounted to $134.7 million compared to $120.4 million for the same period in the prior year. Basic and diluted earnings per share were $0.59 for the three months ended June 30, 2003, compared with $0.56 and $0.54, respectively for the three months ended June 30, 2002. The return on average assets and average equity was 1.62% and 16.88% for the quarter ended June 30, 2003, and 1.70% and 17.70% for the quarter ended June 30, 2002. Net income for the six months ended June 30, 2003, amounted to $262.7 million compared to $236.1 million for the first half of the prior year. Basic and diluted earnings per share were $1.16 and $1.15, respectively for the six months ended June 30, 2003, compared with $1.11 and $1.07, respectively for the six months ended June 30, 2002. The return on average assets and average equity was 1.61% and 16.81% for the six months ended June 30, 2003, and 1.71% and 17.87% for the six months ended June 30, 2002. The results of operations and financial position as of and for the three and six months ended June 30, 2003, include the effects of Metavante's acquisition of PayTrust, Inc. ("PayTrust") in the third quarter of 2002 and the Corporation's banking acquisitions of Richfield State Agency, Inc. and Century Bancshares, Inc. which both closed on March 1, 2002 and the acquisition of Mississippi Valley Bancshares, Inc. ("Southwest") which closed on October 1, 2002. All acquisitions were accounted for using the purchase method of accounting and accordingly the results of operations and financial position are included from the dates the transactions were closed. Net income for the first half of 2003 includes the final transition charges related to the integration of Metavante's July 2002 acquisition of PayTrust. Acquisition related transition expenses associated with PayTrust amounted to $1.5 million (after-tax) or $.01 per diluted share in the first quarter of 2003. Total cumulative transition expenses with respect to PayTrust, which were incurred in the third and fourth quarters of 2002 and the first quarter of 2003, amounted to $5.7 million after-tax which was in line with the previously announced estimate of transition expenses of approximately $6.0 million after-tax. NET INTEREST INCOME ------------------- Net interest income for the second quarter of 2003 amounted to $263.9 million compared to $250.0 million reported for the second quarter of 2002. For the six months ended June 30, 2003, net interest income amounted to $528.4 million compared to $490.3 million for the six months ended June 30, 2002. Loan growth and increased spreads on certain loan products and the impact of the 2002 banking acquisitions contributed to the increase in net interest income. Factors negatively affecting net interest income included accelerated levels of prepayments, asset repricing in excess of deposit repricing, the impact from lengthening liabilities in order to reduce future volatility in net interest income due to interest rate movements and the cash expenditures for common share buybacks and acquisitions in the prior year. Average earning assets in the second quarter of 2003 increased $4.2 billion or 16.4% and on a year-to-date basis increased $4.4 billion or 17.4% compared to the same periods a year ago. Average loans and leases accounted for $4.0 billion of the quarter over quarter growth and $4.2 billion of the year-to- date period over period growth in earning assets. Average investment securities increased $0.8 billion and other short-term investments declined $0.6 billion in the second quarter of 2003 compared to the second quarter of 2002. On a comparative average year-to-date basis, average investment securities increased $0.9 billion and other short-term investments declined $0.7 billion in the six months ended June 30, 2003, compared to the first half of 2002. The Corporation estimates that approximately $1.6 billion and $1.9 billion of the average loan and lease growth in the three and six months ended June 30, 2003 compared to like periods in the prior year, was attributable to the 2002 banking acquisitions. Average interest bearing liabilities increased $3.5 billion or 16.1% in the second quarter of 2003 compared to the same period in 2002. For the six months ended June 30, 2003, average interest bearing liabilities increased $3.7 billion or 17.3% over the comparable period. Average interest bearing deposits increased $2.8 billion or 18.6% in the second quarter of 2003 compared to the second quarter of last year. On a year-to-date basis, average interest bearing deposits increased $3.1 billion or 21.5% in the six months ended June 30, 2003, compared to the first half of 2002. Average borrowings increased $0.6 billion or 10.0% in the second quarter of 2003 and increased $0.5 billion or 7.8% in the first half of 2003 compared to the same periods in 2002. The Corporation estimates that approximately $1.5 billion and $1.7 billion of the average interest bearing deposit growth in the three and six months ended June 30, 2003 compared to like periods in the prior year, was attributable to the 2002 banking acquisitions. 20 Average noninterest bearing deposits increased $0.7 billion or 21.2% in both the three and six months ended June 30, 2003, compared to the same periods last year. Approximately $0.2 billion of the growth in average noninterest bearing deposits in the three and six months ended June 30, 2003, compared to the same periods in 2002 was attributable to the 2002 banking acquisitions. The growth and composition of the Corporation's quarterly average loan and lease portfolio for the current quarter and previous four quarters are reflected in the following table. ($ in millions): Consolidated Average Loans and Leases -------------------------------------
2003 2002 Growth Pct. ----------------- -------------------------- ---------------- Second First Fourth Third Second Prior Quarter Quarter Quarter Quarter Quarter Annual Quarter -------- -------- -------- -------- -------- ------- -------- Commercial Commercial $ 7,043 $ 6,827 $ 6,636 $ 5,998 $ 6,087 15.7 % 3.2 % Commercial real estate Commercial mortgages 6,859 6,677 6,464 5,617 5,491 24.9 2.7 Construction 977 934 896 799 697 40.1 4.6 -------- -------- -------- -------- -------- ------- -------- Total commercial real estate 7,836 7,611 7,360 6,416 6,188 26.6 2.9 Commercial lease financing 390 394 395 384 391 (0.4) (1.0) -------- -------- -------- -------- -------- ------- -------- Total Commercial 15,269 14,832 14,391 12,798 12,666 20.5 2.9 Personal Residential real estate Residential mortgages 2,705 2,623 2,741 2,545 2,371 14.1 3.1 Construction 189 175 156 150 137 37.4 8.3 -------- -------- -------- -------- -------- ------- -------- Total residential real estate 2,894 2,798 2,897 2,695 2,508 15.4 3.4 Personal loans Student 97 107 94 86 116 (16.4) (9.5) Credit card 191 187 182 172 163 16.9 1.9 Home equity loans and lines 4,075 4,048 3,873 3,543 3,518 15.8 0.7 Other 1,551 1,561 1,445 1,198 934 66.1 (0.6) -------- -------- -------- -------- -------- ------- -------- Total personal loans 5,914 5,903 5,594 4,999 4,731 25.0 0.2 Personal lease financing 322 367 406 449 488 (34.0) (12.3) -------- -------- -------- -------- -------- ------- -------- Total Personal 9,130 9,068 8,897 8,143 7,727 18.2 0.7 -------- -------- -------- -------- -------- ------- -------- Total Consolidated Average Loans and Leases $ 24,399 $ 23,900 $ 23,288 $ 20,941 $ 20,393 19.6 % 2.1 % ======== ======== ======== ======== ======== ======= ========
Compared with the second quarter of 2002, total consolidated average loans and leases increased $4.0 billion or 19.6%. Approximately $1.6 billion of average total consolidated loan and lease growth in the second quarter of 2003 was attributable to the 2002 banking acquisitions. Excluding the impact of these acquisitions, total average commercial loans and leases increased $1.2 billion and was driven by average commercial real estate loans which grew approximately $0.9 billion. Total average personal loans and leases increased $1.2 billion excluding the impact of acquisitions. Average personal loan and lease growth, excluding acquisitions, was driven primarily by growth in home equity loans and lines of $0.5 billion with the remainder of the growth attributable to indirect auto loans and residential real estate mortgage and construction loans. From a production standpoint, residential real estate loan closings increased 32% in the current quarter compared to the first quarter of 2003. The current application volume appears to be strong but slowing. Generally, the Corporation sells residential real estate production in the secondary market, although throughout 2002 as well as the first six months of 2003, selected loans with wider spreads and adjustable rate characteristics were retained in the portfolio and serve as a potential source of liquidity in the future. Residential real estate loans sold to investors amounted to $1.1 billion in the second quarter of 2003 compared to $0.4 billion in the second quarter of the prior year. For the six months ended June 30, 2003, and 2002, residential real estate loans sold to investors amounted to $2.1 billion and $0.9 billion, respectively. At June 30, 2003, and 2002, the Corporation had approximately $0.3 billion and $0.1 billion of mortgage loans held for sale, respectively. Gains from the sale of mortgage loans amounted to $17.0 million in the second quarter of 2003 compared to $4.5 million in the second quarter of last year and are reported as a component of mortgage banking revenue in the consolidated statements of income. For the six months ended June 30, 2003, and 2002, gains from the sale of mortgage loans amounted to $30.3 million and $10.6 million, respectively. 21 Auto loans securitized and sold in the second quarter of 2003 amounted to $0.2 billion compared to $0.1 billion in the second quarter of last year. For the six months ended June 30, 2003, and 2002, auto loans securitized and sold amounted to $0.3 billion and $0.2 billion, respectively. Gains from the sale and securitization of auto loans amounted to $3.0 million in the current quarter compared to $1.5 million in the same period last year. For the six months ended June 30, 2003, and 2002, gains from the sale and securitization of auto loans amounted to $5.3 million and $3.0 million, respectively. During the second quarter of 2003, the Corporation also sold $30.3 million of student loans. Gains from the sale of student loans amounted to $1.3 million in the current quarter. The Corporation anticipates that it will continue to divest narrower interest rate spread assets through sale or securitization in future periods. The rate of growth experienced in commercial loans has largely been the result of attracting new customers in all of the Corporation's markets. Existing customers are generally not increasing their credit needs but appear to be successfully managing their businesses through the slower economic conditions and lower revenue levels. The Corporation's commercial lending activities have historically fared well as the economy strengthens and it anticipates loan demand for existing customers will slowly strengthen reflecting the condition of its markets in future quarters. Home equity loans and lines, which includes M&I's wholesale activity, continue to be the primary consumer loan product. The Corporation anticipates these products will continue to drive growth to the consumer side of its banking activities even as the recent refinance activity for mortgages slows. The growth and composition of the Corporation's quarterly average deposits for the current and previous four quarters are as follows ($ in millions): Consolidated Average Deposits -----------------------------
2003 2002 Growth Pct. ----------------- -------------------------- ---------------- Second First Fourth Third Second Prior Quarter Quarter Quarter Quarter Quarter Annual Quarter -------- -------- -------- -------- -------- ------- -------- Bank issued deposits Noninterest bearing deposits Commercial $ 2,799 $ 2,666 $ 2,811 $ 2,432 $ 2,275 23.0 % 5.0 % Personal 818 761 728 711 729 12.3 7.5 Other 456 433 439 363 357 27.7 4.9 -------- -------- -------- -------- -------- ------- -------- Total noninterest bearing deposits 4,073 3,860 3,978 3,506 3,361 21.2 5.5 Interest bearing deposits Savings and NOW 3,139 2,896 2,733 2,420 2,252 39.3 8.4 Money market 6,135 6,274 6,443 5,556 5,727 7.1 (2.2) Foreign activity 861 867 891 733 686 25.4 (0.8) -------- -------- -------- -------- -------- ------- -------- Total interest bearing deposits 10,135 10,037 10,067 8,709 8,665 17.0 1.0 Time deposits Other CDs and time deposits 2,791 2,905 3,033 2,756 2,868 (2.7) (3.9) CDs greater than $100,000 628 662 680 634 657 (4.3) (5.1) -------- -------- -------- -------- -------- ------- -------- Total time deposits 3,419 3,567 3,713 3,390 3,525 (3.0) (4.2) -------- -------- -------- -------- -------- ------- -------- Total bank issued deposits 17,627 17,464 17,758 15,605 15,551 13.3 0.9 Wholesale deposits Money market 75 77 75 74 75 0.6 (1.9) Brokered CDs 3,048 2,682 1,584 1,606 1,621 88.0 13.7 Foreign time 1,392 924 1,206 1,001 1,348 3.2 50.5 -------- -------- -------- -------- -------- ------- -------- Total wholesale deposits 4,515 3,683 2,865 2,681 3,044 48.3 22.6 -------- -------- -------- -------- -------- ------- -------- Total consolidated average deposits $ 22,142 $ 21,147 $ 20,623 $ 18,286 $ 18,595 19.1 % 4.7 % ======== ======== ======== ======== ======== ======= ========
22 Total average deposits increased $3.5 billion or 19.1% in the second quarter of 2003 compared to the second quarter of 2002. The Corporation believes that annual deposit growth better reflects trends due to the seasonality that occurs between quarters. Average deposits associated with the 2002 banking acquisitions accounted for approximately $1.7 billion of the second quarter 2003 versus 2002 quarterly average deposit growth. Excluding the effect of these acquisitions, noninterest bearing deposits increased $0.5 billion while bank-issued interest bearing activity accounts increased $0.4 billion. The growth in bank-issued transaction deposits reflects the successful sales focus on certain activity accounts particularly in the new and expanded markets. Excluding acquisitions, average bank-issued time deposits declined $0.6 billion. M&I's markets have continued to experience some unprofitable pricing on single service time deposit relationships to the extent of pricing time deposits above comparable wholesale levels. The Corporation has elected not to pursue such relationships. The Corporation believes this strategy serves to help stabilize the interest margin, given the current rate environment, both now and in future periods when market rates begin to rise and these deposit accounts rapidly reprice. The growth in bank issued deposits includes both commercial and retail banking and the effect of the lower interest rate environment. In commercial banking, the focus remains on developing deeper relationships through the sale of treasury management products and services along with revised incentive plans focused on growing deposits. The retail banking strategy continues to focus on aggressively selling the right products to meet the needs of customers and enhance the Corporation's profitability. Specific retail deposit initiatives include bank-at-work, single service calling, and retention calling programs as well as in 2002, an aggressive checking promotion in the Arizona market. Compared with the second quarter of 2002, average wholesale deposits increased $1.5 billion in the current quarter. The Corporation has made greater use of wholesale funding alternatives, especially institutional CDs, during the latter half of 2002 and 2003. These deposits are funds in the form of deposits generated through distribution channels other than M&I's own banking branches. These deposits allow the Corporation's bank subsidiaries to gather funds across a wider geographic base and at pricing levels considered attractive, where the underlying depositor may be retail or institutional. Access to and use of these funding sources also provide the Corporation with the flexibility to not pursue unprofitable single service time deposit relationships as previously discussed. During the second quarter of 2003, $10.0 million of the banking segment's borrowings from the Federal Home Loan Bank matured. MiNotes aggregating $13.1 million were issued during the second quarter of 2003. During the second quarter of 2003, the Corporation announced that it would redeem all of the Floating Rate Debentures held by its subsidiary, MVBI Capital Trust and MVBI Capital Trust would redeem all of its currently outstanding Floating Rate Trust Preferred Securities at an aggregate liquidation amount of $14.95 million. The Floating Rate Trust Preferred Securities were redeemed on July 31, 2003. 23 The Corporation's consolidated average interest earning assets and interest bearing liabilities, interest earned and interest paid for the three and six months ended June 30, 2003 and 2002, are presented in the following tables ($ in millions): Consolidated Yield and Cost Analysis ------------------------------------
Three Months Ended Three Months Ended June 30, 2003 June 30, 2002 ------------------------------ ------------------------------ Average Average Average Yield or Average Yield or Balance Interest Cost (b) Balance Interest Cost (b) ------------------------------- ------------------------------ Loans and leases: (a) Commercial loans and leases $ 7,432.7 $ 86.6 4.68 % $ 6,478.2 $ 86.3 5.35 % Commercial real estate loans 7,835.8 112.4 5.75 6,187.6 103.1 6.68 Residential real estate loans 2,894.0 43.8 6.07 2,508.2 44.3 7.08 Home equity loans and lines 4,074.8 59.0 5.81 3,517.7 59.0 6.73 Personal loans and leases 2,161.4 29.8 5.53 1,701.0 29.4 6.93 ---------- --------- ------ ---------- --------- ------ Total loans and leases 24,398.7 331.6 5.45 20,392.7 322.1 6.34 Investment securities (b): Taxable 4,041.6 41.3 4.15 3,160.5 49.6 6.47 Tax Exempt (a) 1,176.2 21.7 7.57 1,236.3 22.9 7.50 ---------- --------- ------ ---------- --------- ------ Total investment securities 5,217.8 63.0 4.92 4,396.8 72.5 6.76 Trading securities (a) 24.7 0.1 0.94 12.9 0.1 3.88 Other short-term investments 282.5 0.7 1.01 907.1 3.4 1.53 ---------- --------- ------ ---------- --------- ------ Total interest earning assets $ 29,923.7 $ 395.4 5.31 % $ 25,709.5 $ 398.1 6.24 % ========== ========= ====== ========== ========= ====== Interest bearing deposits: Bank issued deposits: Bank issued interest bearing activity deposits $ 10,134.8 $ 20.7 0.82 % $ 8,665.4 $ 26.8 1.24 % Bank issued time deposits 3,418.9 21.6 2.54 3,525.0 28.8 3.27 ---------- --------- ------ ---------- --------- ------ Total bank issued deposits 13,553.7 42.3 1.25 12,190.4 55.6 1.83 Wholesale deposits 4,515.4 18.0 1.60 3,044.7 17.8 2.34 ---------- --------- ------ ---------- --------- ------ Total interest bearing deposits 18,069.1 60.3 1.34 15,235.1 73.4 1.93 Short-term borrowings 3,204.5 21.0 2.63 3,862.9 37.8 3.93 Long-term borrowings 3,699.8 42.3 4.58 2,414.2 28.9 4.81 ---------- --------- ------ ---------- --------- ------ Total interest bearing liabilities $ 24,973.4 $ 123.6 1.98 % $ 21,512.2 $ 140.1 2.61 % ========== ========= ====== ========== ========= ====== Net interest margin (FTE) as a percent of average earning assets $ 271.8 3.65 % $ 258.0 4.04 % ========= ====== ========= ====== Net interest spread (FTE) 3.33 % 3.63 % ====== ======
24 Consolidated Yield and Cost Analysis ------------------------------------
Six Months Ended Six Months Ended June 30, 2003 June 30, 2002 ------------------------------ ------------------------------ Average Average Average Yield or Average Yield or Balance Interest Cost (b) Balance Interest Cost (b) ------------------------------- ------------------------------ Loans and leases: (a) Commercial loans and leases $ 7,327.3 $ 170.4 4.69 % $ 6,368.6 $ 169.7 5.37 % Commercial real estate loans 7,724.4 224.3 5.86 6,021.2 201.9 6.76 Residential real estate loans 2,846.1 87.9 6.23 2,492.5 88.3 7.14 Home equity loans and lines 4,061.6 118.5 5.88 3,348.0 113.3 6.83 Personal loans and leases 2,191.5 61.3 5.64 1,694.1 59.4 7.07 ---------- --------- ------ ---------- --------- ------ Total loans and leases 24,150.9 662.4 5.53 19,924.4 632.6 6.40 Investment securities (b): Taxable 3,963.0 87.1 4.50 3,047.3 100.4 6.83 Tax Exempt (a) 1,186.7 43.9 7.61 1,232.8 45.5 7.51 ---------- --------- ------ ---------- --------- ------ Total investment securities 5,149.7 131.0 5.21 4,280.1 145.9 7.03 Trading securities (a) 21.6 0.1 1.18 11.3 0.2 3.33 Other short-term investments 270.0 1.5 1.08 996.0 7.9 1.60 ---------- --------- ------ ---------- --------- ------ Total interest earning assets $ 29,592.2 $ 795.0 5.43 % $ 25,211.8 $ 786.6 6.31 % ========== ========= ====== ========== ========= ====== Interest bearing deposits: Bank issued deposits: Bank issued interest bearing activity deposits $ 10,085.8 $ 43.1 0.86 % $ 8,598.9 $ 54.2 1.27 % Bank issued time deposits 3,492.7 45.4 2.62 3,528.7 61.3 3.50 ---------- --------- ------ ---------- --------- ------ Total bank issued deposits 13,578.5 88.5 1.31 12,127.6 115.5 1.92 Wholesale deposits 4,101.5 34.7 1.71 2,417.9 28.8 2.40 ---------- --------- ------ ---------- --------- ------ Total interest bearing deposits 17,680.0 123.2 1.40 14,545.5 144.3 2.00 Short-term borrowings 3,405.9 43.0 2.55 4,166.9 76.7 3.71 Long-term borrowings 3,698.9 84.5 4.61 2,420.9 59.3 4.94 ---------- --------- ------ ---------- --------- ------ Total interest bearing liabilities $ 24,784.8 $ 250.7 2.04 % $ 21,133.3 $ 280.3 2.67 % ========== ========= ====== ========== ========= ====== Net interest margin (FTE) as a percent of average earning assets $ 544.3 3.72 % $ 506.3 4.07 % ========= ====== ========= ====== Net interest spread (FTE) 3.39 % 3.64 % ====== ======
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax rate of 35%, and excluding disallowed interest expense. (b) Based on average balances excluding fair value adjustments for available for sale securities. The net interest margin, as a percent of average earning assets on a fully taxable equivalent basis ("FTE"), decreased 39 basis points from 4.04 percent in the second quarter 2002 to 3.65 percent in the second quarter of 2003. The yield on average interest earning assets decreased 93 basis points in the second quarter of 2003 compared to the second quarter of the prior year. The cost of bank issued interest bearing deposits in the current quarter decreased 58 basis points from the same quarter of the previous year. The increase in noninterest bearing deposits as previously discussed provided a benefit to the net interest margin. The cost of other funding sources (wholesale deposits and total borrowings) decreased 78 basis points in the current quarter compared to the second quarter of last year. On a year-to-date basis, the net interest margin FTE decreased 35 basis points from 4.07 percent for the six months ended June 30, 2002 to 3.72 percent for the six months ended June 30, 2003. The yield on average interest earning assets decreased 88 basis points in the first half of 2003 compared to the first half of the prior year. The cost of bank issued interest bearing deposits decreased 61 basis points while the cost of other funding sources decreased 77 basis points for the six months ended June 30, 2003, compared to the six months ended June 30, 2002. 25 The Corporation expects that net interest income will continue to be affected by a number of factors. Solid balance sheet growth and increased loan spreads have been beneficial to net interest income in the first half of 2003. The current lower absolute level of interest rates and increased level of prepayments has shortened the expected life of many of the Corporation's financial assets. Lower reinvestment rates, holding assets with shorter lives and a conscious slowing in deposit re-pricing resulting from selectively lowering deposit rates, have negatively impacted net interest income. The Corporation continues to actively manage the repricing characteristics of its interest bearing assets and liabilities so as to minimize the long-term impact on net interest income as well as position itself to be able to retain those new deposit customers which the Corporation believes are more rate sensitive due to the current interest rate environment. These actions in the current interest rate environment could compromise net interest income in the near term. The Corporation anticipates the net interest margin as a percent of average earning assets will continue to decline somewhat over each of the next two quarters. Net interest income and the net interest margin can vary and continues to be influenced by loan and deposit growth, product spreads, pricing competition in the Corporation's markets, prepayment activity, future interest rate changes and various other factors. PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY ------------------------------------------------------ The following tables present comparative consolidated credit quality information as of June 30, 2003, and the prior four quarters. Nonperforming Assets -------------------- ($000's)
2003 2002 ---------------------- ----------------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ---------- ----------- ----------- ----------- ----------- Nonaccrual $ 195,448 $ 205,373 $ 188,232 $ 173,185 $ 160,250 Renegotiated 304 312 326 305 314 Past due 90 days or more 7,561 6,439 5,934 7,407 6,560 Total nonperforming loans and leases 203,313 212,124 194,492 180,897 167,124 Other real estate owned 10,527 8,259 8,692 8,223 6,296 ---------- ----------- ----------- ----------- ----------- Total nonperforming assets $ 213,840 $ 220,383 $ 203,184 $ 189,120 $ 173,420 ========== =========== =========== =========== =========== Allowance for loan and lease losses $ 348,100 $ 338,253 $ 338,409 $ 300,628 $ 292,512 ========== =========== =========== =========== ===========
Consolidated Statistics -----------------------
2003 2002 ---------------------- ----------------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ---------- ----------- ----------- ----------- ----------- Net charge-offs to average loans and leases annualized 0.16 % 0.44 % 0.23 % 0.20 % 0.17 % Total nonperforming loans and leases to total loans and leases 0.82 0.88 0.81 0.84 0.80 Total nonperforming assets to total loans and leases and other real estate owned 0.86 0.91 0.85 0.88 0.83 Allowance for loan and lease losses to total loans and leases 1.40 1.40 1.42 1.40 1.40 Allowance for loan and lease losses to total nonperforming loans and leases 171 159 174 166 175
26 Nonaccrual Loans and Leases By Type ----------------------------------- ($000's)
2003 2002 ---------------------- ----------------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ---------- ----------- ----------- ----------- ----------- Commercial Commercial, financial and agricultural $ 77,389 $ 93,400 $ 81,433 $ 78,421 $ 62,349 Lease financing receivables 6,350 6,755 2,819 2,994 3,993 ---------- ----------- ----------- ----------- ----------- Total commercial 83,739 100,155 84,252 81,415 66,342 Real estate Construction and land development 460 2,017 145 79 1,399 Commercial mortgage 46,346 42,241 46,179 37,408 40,933 Residential mortgage 63,843 59,547 56,166 52,590 50,079 ---------- ----------- ----------- ----------- ----------- Total real estate 110,649 103,805 102,490 90,077 92,411 Personal 1,060 1,413 1,490 1,693 1,497 ---------- ----------- ----------- ----------- ----------- Total nonaccrual loans and leases $ 195,448 $ 205,373 $ 188,232 $ 173,185 $ 160,250 ========== =========== =========== =========== ===========
Reconciliation of Allowance for Loan and Lease Losses ----------------------------------------------------- ($000's)
2003 2002 ---------------------- ----------------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ---------- ----------- ----------- ----------- ----------- Beginning balance $ 338,253 $ 338,409 $ 300,628 $ 292,512 $ 284,179 Provision for loan and lease losses 19,642 25,692 23,398 18,842 16,980 Allowance of banks and loans acquired -- -- 27,848 -- -- Loans and leases charged-off Commercial 6,619 2,256 8,276 6,482 3,740 Real estate 3,739 3,130 3,074 2,113 2,580 Personal 2,942 2,969 3,608 2,632 3,086 Leases 1,191 20,060 2,496 2,053 1,767 ---------- ----------- ----------- ----------- ----------- Total charge-offs 14,491 28,415 17,454 13,280 11,173 Recoveries on loans and leases Commercial 2,624 902 1,525 1,070 542 Real estate 772 495 971 343 770 Personal 732 733 813 667 840 Leases 568 437 680 474 374 ---------- ----------- ----------- ----------- ----------- Total recoveries 4,696 2,567 3,989 2,554 2,526 ---------- ----------- ----------- ----------- ----------- Net loans and leases charge-offs 9,795 25,848 13,465 10,726 8,647 ---------- ----------- ----------- ----------- ----------- Ending balance $ 348,100 $ 338,253 $ 338,409 $ 300,628 $ 292,512 ========== =========== =========== =========== ===========
Nonperforming assets consist of nonperforming loans and leases and other real estate owned (OREO). OREO is principally comprised of commercial and residential properties acquired in partial or total satisfaction of problem loans and amounted to $10.5 million at June 30, 2003, compared to $8.3 million at March 31, 2003 and $6.3 million at June 30, 2002. Approximately $1.0 million of the increase since March 31, 2003 relates to commercial real estate and $0.6 million of the increase since March 31, 2003 relates to residential real estate. Nonperforming loans and leases consist of nonaccrual, renegotiated or restructured loans, and loans and leases that are delinquent 90 days or more and still accruing interest. The balance of nonperforming loans and leases can fluctuate widely based on the timing of cash collections, renegotiations and renewals. Maintaining nonperforming assets at an acceptable level is important to the ongoing success of a financial services institution. The Corporation's comprehensive credit review and approval process is critical to ensuring that the amount of nonperforming assets on a long-term basis is minimized within the overall framework of acceptable levels of credit risk. In addition to the negative impact on net interest income and credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts. 27 At June 30, 2003, nonperforming loans and leases amounted to $203.3 million or 0.82% of consolidated loans and leases compared to $212.1 million or 0.88% of consolidated loans and leases at March 31, 2003, a decrease of $8.8 million or 4.2%. Nonaccrual loans and leases accounted for $9.9 million of the decrease since March 31, 2003. Nonaccrual commercial loans decreased $16.0 million. Nonaccrual commercial real estate loans increased $4.1 million. Nonaccrual construction and land development loans decreased $1.6 million largely due to one larger credit. Nonaccrual residential real estate loans increased $4.3 million. Nonaccrual consumer loans decreased $0.4 million. Nonaccrual leases decreased $0.4 million compared to the first quarter of 2003. During the first quarter of 2003, nonaccrual leases increased $3.9 million primarily due to the addition of the remaining airplane lease exposure associated with Midwest Express Airlines, Inc. Net charge-offs amounted to $9.8 million or 0.16% of average loans and leases in the second quarter of 2003 compared to $25.8 million or 0.44% of average loans in the first quarter of 2003 and $8.6 million or 0.17% of average loans in the second quarter of 2002. Included in net charge-offs in the first quarter of 2003 was $19.0 million related to the carrying value of lease obligations for airplanes leased to Midwest Express Airlines, Inc. Until the economy demonstrates clear strengthening, some degree of stress and uncertainty exists. The Corporation continues to expect net charge-offs, excluding the airline lease charge-offs taken in the first quarter, to range from 0.15% to 0.25% for the year. While this expected range is higher than the Corporation's historical net charge-off levels, it is considered manageable. The provision for loan and lease losses amounted to $19.6 million and $45.3 million for the three and six months ended June 30, 2003, respectively compared to $17.0 million and $32.2 million for the three and six months ended June 30, 2002, respectively. The Corporation has not substantively changed any aspect to its overall approach in the determination of the allowance for loan and lease losses. There have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. The allowance for loan and lease losses to the total loan and lease portfolio was 1.40% at June 30, 2003, and 2002, respectively. OTHER INCOME ------------ Total other income in the second quarter of 2003 amounted to $294.7 million compared to $264.2 million in the same period last year, an increase of $30.5 million or 11.6%. For the six months ended June 30, 2003, total other income amounted to $585.2 million, an increase of $62.0 million or 11.9% compared to $523.2 million for the six months ended June 30, 2002. Total data processing services revenue amounted to $158.0 million in the second quarter of 2003 compared to $146.3 million in the second quarter of 2002, an increase of $11.7 million or 8.0%. On a year to date basis, total data processing services revenue amounted to $315.1 million for the first half of 2003 compared to $291.3 million in the first half of 2002, an increase of $23.8 million or 8.2%. e-Finance solutions revenue increased $6.5 million or 19.1% and $12.9 million or 19.0% in the three and six months ended June 30, 2003, respectively compared to the same periods in the prior year. Revenue growth was driven by consumer payment volume from three large financial institution clients, increased adoption of electronic bill presentment and payment in the customer base and revenues associated with the PayTrust acquisition. Financial technology solutions revenue, the traditional outsourcing business, increased $5.2 million or 4.6% in the second quarter of 2003 compared to the second quarter of last year and increased $10.9 million or 4.9% for the six months ended June 30, 2003, compared to the six months ended June 30, 2002. Primary contributors to revenue growth in the current quarter included electronic funds delivery, card solutions, and private label banking. During the current quarter several new outsourcing contracts were announced. Total buyout revenue, which varies from period to period, was relatively unchanged in the current quarter compared to the second quarter of last year and was $2.5 million less in the first half of 2003 compared to the first half of 2002. 28 Trust services revenue was relatively unchanged in the second quarter of 2003 compared to the second quarter of 2002 amounting to $31.2 million in 2003 and $31.4 million in 2002, respectively. For the six months ended June 30, 2003, trust services revenue amounted to $61.2 million compared to $62.3 million for the six months ended June 30, 2002, a decrease of $1.1 million or 1.8%. The positive impact from acquisitions and sales efforts were offset by the decline in market values of assets under management. Assets under management were approximately $14.0 billion at June 30, 2003, compared to $12.9 billion at December 31, 2002, and June 30, 2002, respectively. During the second quarter of 2003, Trust services experienced some shifting of funds into equities as a result of improved market performance which provided some benefit to revenue. The Corporation believes that the consistent sales results and continued account retention has well-positioned this segment as the equity markets stabilize. During the second quarter of 2003, Trust services entered into an agreement to acquire some of the employee benefit business from UMB Bank, N.A. This acquisition provides opportunity to enter into some new markets and work with new customers and is expected to close in phases beginning in the fourth quarter of 2003. This acquisition is not expected to have a material impact to the consolidated financial statements. Service charges on deposits in the second quarter of 2003 were relatively unchanged compared to the second quarter of 2002. For the six months ended June 30, 2003 service charges on deposits increased $0.6 million or 1.2% compared with the six months ended June 30, 2002. For the three and six months ended June 30, 2003, service charges on deposits associated with the Southwest acquisition amounted to $0.8 million and $1.5 million, respectively. Mortgage banking revenue was $21.8 million in the second quarter of 2003 compared with $7.4 million in the second quarter of 2002, an increase of $14.4 million. Mortgage banking revenue was $39.3 million in the first half of 2003 compared with $16.7 million in the first half of 2002, an increase of $22.6 million. Gains from sales of mortgages to the secondary market and mortgage- related fees accounted for the increase. For the three and six months ended June 30, 2003, the Corporation sold $1.1 billion and $2.1 billion of loans to the secondary market, respectively. Retained interests in the form of mortgage servicing rights amounted to $1.0 million in the first half of 2003. For the three and six months ended June 30, 2002, the Corporation sold $0.4 billion and $0.9 billion of loans to the secondary market, respectively. Retained interests in the form of mortgage servicing rights amounted to $0.5 million in the first half of 2002. Net investment securities losses in the second quarter of 2003 amounted to $2.6 million. Impairment losses on the interest-only strips which represent retained interests associated with auto loan securitization activity amounted to $4.1 million in the second quarter of 2003. The Corporation's Capital Markets Group had gains of $1.8 million for the six months ended June 30, 2003, and losses of $0.6 million for the six months ended June 30, 2002. Other income in the second quarter of 2003 amounted to $43.1 million compared to $37.6 million in the second quarter of 2002, an increase of $5.5 million or 14.9%. For the six months ended June 30, 2003, compared to the six months ended June 30, 2002, other income increased $14.9 million or 21.7%. Approximately $0.8 million and $3.1 million of the increase for the three and six months ended June 30, 2003, respectively, was attributable to the 2002 banking acquisitions. Loan fees, which include prepayment charges, and other commissions and fees, excluding the impact of the Southwest acquisition, increased $3.9 million in the current quarter compared to the second quarter of last year and for the six month period increased $8.9 million. Auto securitization income increased $1.9 million and $3.1 million for the three and six months ended June 30, 2003, respectively, compared to the same periods of the prior year and was primarily due to increased gains and increased servicing fee income. Auto loans securitized and sold in the second quarter of 2003 amounted to $0.2 billion compared to $0.1 billion in the second quarter of last year. Auto loans securitized and sold in the first half of 2003 amounted to $0.3 billion compared to $0.2 billion in the first half of last year. Gains from the sale of student loans increased $1.2 million in the current quarter compared to the second quarter of 2002. Approximately $30.3 million and $2.8 million student loans were sold in the second quarters of 2003 and 2002, respectively. Gains from the sale of two branches contributed approximately $0.9 million to other income in the second quarter and first half of 2003. Trading income in the second quarter of 2003 decreased $2.7 million compared to the same period last year and was primarily due to lower income from fair value adjustments on trading assets associated with auto loans sold to the multi-seller revolving conduit. Beginning in the second half of 2002 and throughout 2003, the Corporation has employed interest rate futures designated as trading to hedge the market value volatility from the auto-related trading assets due to changes in interest rates. 29 OTHER EXPENSE ------------- Total other expense for the three months ended June 30, 2003, amounted to $335.7 million compared to $318.0 million for the three months ended June 30, 2002, an increase of $17.7 million or 5.6%. For the six months ended June 30, 2003, total other expense amounted to $671.3 million compared to $631.6 million for the six months ended June 30, 2002, an increase of $39.7 million or 6.3%. The Corporation estimates that approximately $10.6 million of the quarter over quarter expense growth was attributable to the acquisitions by the banking and Metavante segments which were included in M&I's operating expenses since their acquisition dates. On a year to date basis, the Corporation estimates expense growth attributable to the acquisitions was approximately $21.1 million. In addition, for the six months ended June 30, 2003, approximately $2.5 million of the expense growth was due to the transition costs associated with Metavante's integration of PayTrust. Expense control is sometimes measured in the financial services industry by the efficiency ratio statistic. The efficiency ratio is calculated by taking total other expense divided by the sum of total other income (including Capital Markets revenue but excluding investment securities gains or losses) and net interest income on a fully taxable equivalent basis. The Corporation's efficiency ratios for the three months ended June 30, 2003, and prior four quarters were: Efficiency Ratios -----------------
June 30, March 31, December 31, September 30, June 30, 2003 2003 2002 2002 2002 ----------- ----------- ----------- ----------- ----------- Consolidated Corporation 59.0 % 59.6 % 60.4 % 60.7 % 60.9 % Consolidated Corporation Excluding Metavante 48.2 % 48.5 % 49.6 % 50.0 % 50.1 %
Salaries and employee benefits expense amounted to $193.5 million in the second quarter of 2003 compared to $185.3 million in the second quarter of 2002, an increase of $8.2 million. For the six months ended June 30, 2003, salaries and employee benefits expense amounted to $390.7 million compared to $364.8 million for the six months ended June 30, 2002, an increase of $25.9 million. Salaries and employee benefits expense associated with the banking and Metavante acquisitions and the PayTrust transition costs accounted for approximately $4.8 million and $12.7 million of the increase for the three and six months ended June 30, 2003, respectively. For the three months ended June 30, 2003, occupancy and equipment expense amounted to $46.2 million compared to $48.0 million in the comparative three month period in 2002. On a year to date basis, occupancy and equipment expense amounted to $93.5 million in the first half of 2003 and was relatively unchanged compared to the first half of 2002. Occupancy and equipment expense associated with the banking and Metavante acquisitions accounted for an increase of approximately $1.7 million this quarter compared to the second quarter of 2002, and together with the PayTrust transition costs, accounted for an increase of approximately $4.4 million in the first six months of 2003 compared to the first six months of 2002. Software expense in the second quarter of 2003 amounted to $10.4 million compared to $10.0 million in the second quarter of 2002. For the six months ended June 30, 2003, software expense amounted to $20.7 million compared to $22.6 million for the six months ended June 30, 2002. As previously reported, during the first quarter of 2002, the Corporation's banking segment incurred nonrecurring software charges of approximately $1.7 million. For the three months ended June 30, 2003, processing charges amounted to $10.6 million compared to $8.9 million for the three months ended June 30, 2002. For the six months ended June 30, 2003, processing charges amounted to $22.6 million compared to $18.5 million for the six months ended June 30, 2002. The quarter over quarter and year to date over year to date growth in processing charges was primarily attributable to the banking segment and was due to increased third-party processing charges associated with wholesale loan activity. Supplies and printing and shipping and handling expense amounted to $17.1 million in the second quarter of 2003 compared to $15.8 million in the second quarter of 2002, an increase of $1.3 million or 8.7%. On a year to date basis, supplies and printing and shipping and handling expense amounted to $36.4 million in the first half of 2003 compared to $32.5 million in the first half of 2002, an increase of $3.9 million or 11.7%. Approximately $0.2 million and $0.4 million of the increase for the three and six months ended June 30, 2003, respectively, was attributable to the banking and Metavante acquisitions and the PayTrust transition costs. The remainder of the increase was primarily attributable to Metavante for both comparable periods. 30 For the three months ended June 30, 2003, professional services expense amounted to $10.5 million compared to $8.8 million for the three months ended June 30, 2002, an increase of $1.7 million. Approximately $0.2 million of the increase in professional services expense was attributable to the banking and Metavante acquisitions. For the six months ended June 30, 2003, professional services expense amounted to $21.2 million compared to $18.6 million for the six months ended June 30, 2002, an increase of $2.6 million. Approximately $0.6 million of the increase in professional services expense was attributable to the banking and Metavante acquisitions and the PayTrust transition costs. Generally, increases experienced across all of the Corporation's segments were offset by lower consulting fees at the Corporation. Intangible amortization expense increased $2.6 million in the second quarter of 2003 compared to the second quarter of 2002 and on a year to date basis, increased $5.2 million in the first half of 2003 compared to the first half of 2002. Core deposit premium amortization accounted for $1.0 million and $3.2 million of the increase in amortization expense for the three and six months ended June 30, 2003, respectively. On a year to date basis, accelerated amortization and valuation reserves associated with mortgage servicing rights increased amortization expense $3.1 million in the first half of 2003 compared to the first half of 2002. The carrying value of the Corporation's mortgage servicing rights was $3.4 million at June 30, 2003. Other expense amounted to $39.9 million in the second quarter of 2003 compared to $36.3 million in the second quarter of 2002, an increase of $3.6 million or 9.9%. For both the six months ended June 30, 2003, and 2002, other expense amounted to $71.8 million. Expense associated with the banking and Metavante acquisitions and the PayTrust transition costs contributed approximately $1.4 million to other expense in the second quarter of 2003 and contributed $2.4 million to other expense in the first half of 2003. Increases in the cost of business related insurance coverage, increased spending in advertising and promotion and increased costs associated with Metavante's card solutions and equipment sales added an additional $2.9 million to other expense in the second quarter of 2003 compared to the second quarter of 2002 and $6.6 million in the six months ended June 30, 2003, compared to the six months ended June 30, 2002. During the second quarter of 2003, the Corporation announced that it would redeem all of the Floating Rate Debentures held by its subsidiary, MVBI Capital Trust, and MVBI Capital Trust, would redeem all of its currently outstanding Floating Rate Trust Preferred Securities at an aggregate liquidation amount of $14.95 million. In conjunction with the redemption, the Corporation terminated the associated interest rate swap designated as a cash flow hedge. The loss in accumulated other comprehensive income and unamortized debt issuance costs aggregating $2.0 million, were charged to other expense during the second quarter of 2003. Litigation, environmental clean-up and other losses recorded in the second quarter of 2002 and asset write-downs associated with foreclosed properties and commercial leasing residual values recorded in the first quarter of 2002 offset the comparable quarter over quarter and year to date over year to date expense growth. Other expense is affected by the capitalization of costs, net of amortization and write-downs associated with software development and customer data processing conversions. Net software and conversion capitalization was $5.2 million in the second quarter of 2003 and in the second quarter of 2002 amounted to $5.9 million resulting in an increase to other expense over the comparative quarters of approximately $0.7 million. Net software and conversion capitalization was $8.4 million for the six months ended June 30, 2003, and for the six months ended June 30, 2002, amounted to $7.1 million resulting in a decrease to other expense over the comparative year to date periods of approximately $1.3 million. Approximately $1.5 million of net software capitalization in the six months ended June 30, 2003 relates to PayTrust. INCOME TAXES ------------ The provision for income taxes for the three months ended June 30, 2003, amounted to $68.7 million or 33.8% of pre-tax income compared to $58.7 million or 32.8% of pre-tax income for the three months ended June 30, 2002. The provision for income taxes for the six months ended June 30, 2003, amounted to $134.3 million or 33.8% of pre-tax income compared to $113.6 million or 32.5% of pre-tax income for the six months ended June 30, 2002. During the first half of 2002, the Corporation recognized income tax benefits associated with the sale of preferred stock. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Shareholders' equity was $3.24 billion or 9.5% of total consolidated assets at June 30, 2003, compared to $3.04 billion or 9.2% of total consolidated assets at December 31, 2002, and $2.71 billion or 9.3% of total consolidated assets at June 30, 2002. The increase at June 30, 2003 was primarily due to earnings net of dividends paid. Accumulated other comprehensive income was relatively unchanged since December 31, 2002, and declined $73.4 million since June 30, 2002, primarily due to the change in fair value of the Corporation's pay fixed derivative financial instruments designated as cash flow hedges in the recent low interest rate environment. 31 The Corporation has a Stock Repurchase Program under which up to 12 million shares can be repurchased annually. During the second quarter of 2003, 147,000 common shares were acquired at an aggregate cost of $4.4 million or $29.66 per common share. The Corporation continues to have a strong capital base and its regulatory capital ratios are significantly above the minimum requirements as shown in the following tables. Risk-Based Capital Ratios ------------------------- ($ in millions)
June 30, 2003 December 31, 2002 --------------------------------- --------------------------------- Amount Ratio Amount Ratio --------------------------------- --------------------------------- Tier 1 Capital $ 2,524 9.06 % $ 2,344 8.75 % Tier 1 Capital Minimum Requirement 1,114 4.00 1,072 4.00 -------------------------------- -------------------------------- Excess $ 1,410 5.06 % $ 1,272 4.75 % ================================ ================================ Total Capital $ 3,515 12.62 % $ 3,322 12.40 % Total Capital Minimum Requirement 2,228 8.00 2,143 8.00 -------------------------------- -------------------------------- Excess $ 1,287 4.62 % $ 1,179 4.40 % ================================ ================================ Risk-Adjusted Assets $ 27,853 $ 26,791 ================= =================
Leverage Ratios --------------- ($ in millions)
June 30, 2003 December 31, 2002 --------------------------------- --------------------------------- Amount Ratio Amount Ratio --------------------------------- --------------------------------- Tier 1 Capital $ 2,524 7.84 % $ 2,344 7.58 % Minimum Leverage Requirement 966 - 1,610 3.00 - 5.00 928 - 1,546 3.00 - 5.00 -------------------------------- -------------------------------- Excess $ 1,558 - 914 4.84 - 2.84 % $ 1,416 - 798 4.58 - 2.58 % ================================ ================================ Adjusted Average Total Assets $ 32,192 $ 30,924 ================= =================
As previously discussed, during the second quarter of 2003, the Corporation announced that MVBI Capital Trust would redeem all of its currently outstanding Floating Rate Trust Preferred Securities on July 31, 2003. The preferred securities are considered long-term borrowings for financial reporting purposes and qualified as "Tier 1" capital for regulatory capital purposes in prior periods. The Corporation estimates that the redemption adversely impacted its regulatory risk-based capital ratios by approximately 6 basis points and its leverage ratio by approximately 4 basis points. The impact of the redemption on the Corporation's regulatory capital ratios is included in the table presented above. M&I manages its liquidity to ensure that funds are available to each of its banks to satisfy the cash flow requirements of depositors and borrowers and to ensure the Corporation's own cash requirements are met. M&I maintains liquidity by obtaining funds from several sources. The Corporation's most readily available source of liquidity is its investment portfolio. Investment securities available for sale, which totaled $4.5 billion at June 30, 2003, represent a highly accessible source of liquidity. The Corporation's portfolio of held-to-maturity investment securities, which totaled $0.9 billion at June 30, 2003, provides liquidity from maturities and amortization payments. The Corporation's mortgage loans held-for-sale provide additional liquidity. The loans, which aggregated $0.3 billion at June 30, 2003, represent recently funded home mortgage loans that are prepared for delivery to investors, which generally occurs within thirty to ninety days after the loan has been funded. Depositors within M&I's defined markets are another source of liquidity. Core deposits (demand, savings, money market and consumer time deposits) averaged $17.6 billion in the second quarter of 2003. The Corporation's banking affiliates may also access the federal funds markets or utilize collateralized borrowings such as treasury demand notes or FHLB advances. 32 The banking affiliates may use wholesale deposits. Wholesale deposits are funds in the form of deposits generated through distribution channels other than the Corporation's own banking branches. These deposits allow the Corporation's banking subsidiaries to gather funds across a national geographic base and at pricing levels considered attractive, where the underlying depositor may be retail or institutional. Access to wholesale deposits also provides the Corporation with the flexibility to not pursue single service time deposit relationships in markets that have experienced some unprofitable pricing levels. Wholesale deposits averaged $4.5 billion in the second quarter of 2003. The Corporation utilizes certain financing arrangements to meet its balance sheet management, funding, liquidity, and market or credit risk management needs. The majority of these activities are basic term or revolving securitization vehicles. These vehicles are generally funded through term- amortizing debt structures or with short-term commercial paper designed to be paid off based on the underlying cash flows of the assets securitized. These vehicles provide access to funding sources substantially separate from the general credit risk of the Corporation and its subsidiaries. See Note 7 to the Consolidated Financial Statements for an update of the Corporation's securitization activities in the second quarter of 2003. The Corporation's lead bank, M&I Marshall & Ilsley Bank ("Bank"), has implemented a bank note program which permits it to issue up to $7.0 billion of short-term and medium-term notes which are offered and sold only to institutional investors. This program is intended to enhance liquidity by enabling the Bank to sell its debt instruments in private markets in the future without the delays which would otherwise be incurred. Bank notes outstanding at June 30, 2003, amounted to $2.2 billion of which $0.6 billion is subordinated and qualifies as supplementary capital for regulatory capital purposes. No bank notes were issued during the second quarter of 2003. The national capital markets represent a further source of liquidity to M&I. M&I has filed a shelf registration statement which is intended to permit M&I to raise funds through sales of corporate debt securities with a relatively short lead time. Under the shelf registration statement, the Corporation may issue up to $0.5 billion of medium-term Series E notes with maturities ranging from 9 months to 30 years and at fixed or floating rates. At June 30, 2003, Series E notes outstanding amounted to $0.3 billion. No Series E were issued during the second quarter of 2003. The Corporation may issue up to $0.5 billion of medium-term MiNotes with maturities ranging from 9 months to 30 years and at fixed or floating rates. The MiNotes are issued in smaller denominations to attract retail investors. Approximately $13.1 million of MiNotes were issued during the second quarter of 2003. Additionally, the Corporation has a commercial paper program. At June 30, 2003, commercial paper outstanding amounted to $0.3 billion. Short-term borrowings represent contractual debt obligations with maturities of one year or less and amounted to $3.9 billion at June 30, 2003. Long-term borrowings which are scheduled to mature in one year or less at June 30, 2003, amounted to $1.4 billion. Other obligations include future minimum lease payments on facilities and equipment as described in Note 10 and commitments to extend credit and letters of credit as described in Note 19 of the Notes to Consolidated Financial Statements contained in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2002. Many commitments to extend credit expire without being drawn upon and letters of credit are contingent commitments. The amounts outstanding at any time do not necessarily represent future cash requirements. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each subsidiary bank in circumstances when it might not do so absent such policy. CRITICAL ACCOUNTING POLICIES ---------------------------- The Corporation has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of the Corporation's consolidated financial statements. The significant accounting policies of the Corporation are described in the footnotes to the consolidated financial statements contained in the Corporation's Annual Report on Form 10-K and updated as necessary in its Quarterly Reports on Form 10-Q. Certain accounting policies involve significant judgments and assumptions by management that may have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of the operations of the Corporation. Management continues to consider the following to be those accounting policies that require significant judgments and assumptions: 33 Allowance for Loan and Lease Losses ----------------------------------- The allowance for loan and lease losses represents management's estimate of probable losses inherent in the Corporation's loan and lease portfolio. Management evaluates the allowance each quarter to determine that it is adequate to absorb these inherent losses. This evaluation is supported by a methodology that identifies estimated losses based on assessments of individual problem loans and historical loss patterns of homogeneous loan pools. In addition, environmental factors, including regulatory guidance, unique to each measurement date are also considered. This reserving methodology has the following components: Specific Reserve. The Corporation's internal risk rating system is used to identify loans and leases rated "Classified" as defined by regulatory agencies. In general, these loans have been internally identified as credits requiring management's attention due to underlying problems in the borrower's business or collateral concerns. Subject to a minimum size, a quarterly review of these loans is performed to identify the specific reserve necessary to be allocated to each of these loans. This analysis considers expected future cash flows, the value of collateral and also other factors that may impact the borrower's ability to make payments when due. Included in this group are those nonaccrual or renegotiated loans that meet the criteria as being "impaired" under the definition in SFAS 114. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. For impaired loans, impairment is measured using one of three alternatives: (1) the present value of expected future cash flows discounted at the loan's effective interest rate; (2) the loan's observable market price, if available; or (3) the fair value of the collateral for collateral dependent loans and loans for which foreclosure is deemed to be probable. Collective Loan Impairment. This portion of the allowance for loan and lease losses is comprised of two components. First, the Corporation makes a significant number of loans and leases, which due to their underlying similar characteristics, are assessed for loss as homogeneous pools. Included in the homogeneous pools are loans and leases from the retail sector and commercial loans under a certain size, which have been excluded from the specific reserve allocation previously discussed. The Corporation segments the pools by type of loan or lease and using historical loss information, estimates a loss reserve for each pool. The second component reflects management's recognition of the uncertainty and imprecision underlying the process of estimating losses. Based on management's judgment, reserves are allocated to industry segments or product types due to environmental conditions unique to the measurement period. Consideration is given to both internal and external environmental factors such as economic conditions in certain geographic or industry segments of the portfolio, economic trends in the retail lending sector, risk profile, and portfolio composition. Reserves are allocated based on estimates of loss exposure that management has identified based on these economic trends or conditions. The internal risk rating system is then used to identify those loans within these industry segments that based on financial, payment or collateral performance, warrant closer ongoing monitoring by management. The specific loans mentioned earlier are excluded from this analysis. The following factors were taken into consideration in determining the adequacy of the allowance for loans and lease losses at June 30, 2003: Management continues to be concerned over the lack of economic improvement forecasted for 2003 and the resulting impact this will have on the Corporation's customer base. Although recent economic reports and opinions indicate there may be some signs of improvement, the uncertainty remains as to when there may be any substantive increase in business activity. In addition, the retail loan portfolio will continue to be affected by the prolonged economic conditions as evidenced by the generally increasing personal bankruptcy and unemployment rates. At June 30, 2003, nonperforming loans and leases amounted to $203.3 million or 0.82% of consolidated loans and leases compared to $212.1 million or 0.88% of consolidated loans and leases at March 31, 2003, and $194.5 million or 0.81% of consolidated loans and leases at December 31, 2002. Nonperforming loans decreased $8.8 million or 4.2% in the second quarter of 2003 compared to the first quarter of 2003. Over 80% of the decline was attributable to two larger credits. Average nonperforming loans and leases have remained at consistent levels between the first and second quarters of 2003. Average nonperforming loans and leases amounted to $216.5 million in the current quarter compared to $214.4 million in the first quarter of 2003. Nonperforming loans and leases were $8.8 million or 4.5% higher at June 30, 2003, compared to December 31, 2002. A portion of the increase since year end is due to the remaining Midwest Express Airlines, Inc. ("Midwest Express") lease receivable being placed on a nonperforming status during the first quarter of 2003. The remainder of the increase since year end is generally spread across all of M&I's lending segments and is primarily the result of the slow economy. As stated in previous quarters, some of the Corporation's largest nonperforming loans are in industries that have undergone well-publicized declines in recent months. Among those industries affected are construction and related, technology, airline, manufacturing and healthcare. 34 At the present time, there is no specific industry that is of immediate concern, however, the Corporation believes that the current economic environment will continue to negatively affect the markets and communities it serves in the near term. While nonperforming loans have remained in the 80-90 basis point range over the past two years, there continues to be some risk of nonperforming loans increasing. The Corporation's primary lending areas are Wisconsin, Arizona, Minnesota and Missouri. The recent acquisitions in Minnesota and Missouri represent new geographic regions for the Corporation. Each of these regions has cultural and environmental factors that are unique to them. The risk in entering these new regions and the uncertainty regarding the inherent losses in their respective loan portfolios will remain until the Corporation's credit underwriting and monitoring processes are fully implemented. Net charge-offs in the second quarter of 2003 amounted to $9.8 million, or 16 basis points of total average loans and leases outstanding this quarter compared to $25.8 million or 44 basis points of total average loans and leases outstanding in the first quarter of 2003. Included in charge-offs for the first quarter was $19.0 million related to the carrying value of lease obligations for airplanes leased to Midwest Express. In 2002 and 2001, annual net charge-offs have remained in the range of approximately 20 basis points. This range of net charge-offs to average loans is somewhat higher than historical levels incurred by the Corporation over the past five years. The Corporation believes some degree of stress continues to exist and expects quarterly net charges- offs, excluding the lease charge-offs previously discussed, to continue in the 15-25 basis point range in the near term. During the second quarter of 2003, the Corporation's commitments to shared national credits were approximately $2.0 billion with usage averaging around 42%. Many of these borrowers are in industries currently impacted by the economic climate. In addition, many of the Corporation's largest charge-offs have come from the shared national credit portfolio. Although these factors result in an increased risk profile, as of June 30, 2003, shared national credit nonperforming loans were less than 0.75% and 1.75% of this segment's total commitments and outstandings, respectively. The Corporation's exposure to shared national credits is monitored closely given the economic uncertainty as well as this segment's loss experience. At June 30, 2003, special reserves continue to be carried for exposures to manufacturing, healthcare, production agriculture (including dairy and cropping operations), and the airline and travel industries. The majority of the commercial charge-offs incurred during the past year were in these industry segments. While most loans in these categories are still performing, the Corporation continues to believe these sectors have been more adversely affected by the economic slowdown. Reduced revenues causing a declining utilization of the industry's capacity levels have impacted manufacturing. As a result, collateral values and the amounts realized through the sale or liquidation of manufacturing plant and equipment have declined accordingly. Revenue levels in the dairy industry have also declined as milk prices have fallen below breakeven for a growing segment of the portfolio. Based on the above loss estimates, senior lending and financial management determine their best estimate of the required reserve. Management's evaluation of the factors described above resulted in an allowance for loan and lease losses of $348.1 million at June 30, 2003, compared to $338.3 million at March 31, 2003. The resulting provisions for loan and lease losses are the amounts required to establish the allowance for loan and lease losses to the required level after considering charge-offs and recoveries. Management recognizes there are significant estimates in the process and the ultimate losses could be significantly different from those currently estimated. The Corporation has not substantively changed any aspect to its overall approach in the determination of the allowance for loan and lease losses. There have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. 35 Capitalized Software and Conversion Costs ----------------------------------------- Direct costs associated with the production of computer software that will be licensed externally or used in a service bureau environment are capitalized. Capitalization of such costs is subject to strict accounting policy criteria, however, the appropriate time to initiate capitalization requires management judgment. Once the specific capitalized project is put into production, the software cost is amortized over its estimated useful life, generally four years. Each quarter, the Corporation performs net realizable value tests to ensure the assets are recoverable. Such tests require management judgment as to the future sales and profitability of a particular product which involves, in some cases, multi-year projections. Technology changes and changes in customer requirements can have a significant impact on the recoverability of these assets and can be difficult to predict. Should significant adverse changes occur, estimates of useful life may have to be revised or write-offs would be required to recognize impairment. For the three months ended June 30, 2003, and 2002, the amount of software costs capitalized amounted to $16.6 million and $16.1 million, respectively. Amortization expense of software costs amounted to $10.8 million and $8.6 million for the three months ended June 30, 2003, and 2002, respectively. For the six months ended June 30, 2003, and 2002, the amount of software costs capitalized amounted to $32.0 million and $27.6 million, respectively. Amortization expense of software costs amounted to $21.5 million and $16.2 million for the six months ended June 30, 2003, and 2002, respectively. Direct costs associated with customer system conversions to the data processing operations are capitalized and amortized on a straight-line basis over the terms, generally five to seven years, of the related servicing contracts. Capitalization only occurs when management is satisfied that such costs are recoverable through future operations or penalties (buyout fees) in the case of early termination. For the three months ended June 30, 2003, and 2002, the amount of conversion costs capitalized amounted to $3.6 million and $2.8 million, respectively. Amortization expense amounted to $4.2 million and $4.4 million for the three months ended June 30, 2003, and 2002, respectively. For the six months ended June 30, 2003, and 2002, the amount of conversion costs capitalized amounted to $6.2 million and $4.4 million, respectively. Amortization expense amounted to $8.3 million and $8.7 million for the six months ended June 30, 2003, and 2002, respectively. Net unamortized costs were ($ in millions): June 30, ------------------------- 2003 2002 ----------- ----------- Software $ 153.1 $ 124.8 Conversions 33.8 39.0 ----------- ----------- Total $ 186.9 $ 163.8 =========== =========== The Corporation has not substantively changed any aspect to its overall approach in the determination of the amount of costs that are capitalized for software development or conversion activities. There have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the periodic amortization of such costs. Financial Asset Sales and Securitizations ----------------------------------------- The Corporation utilizes certain financing arrangements to meet its balance sheet management, funding, liquidity, and market or credit risk management needs. The majority of these activities are basic term or revolving securitization vehicles. These vehicles are generally funded through term- amortizing debt structures or with short-term commercial paper designed to be paid off based on the underlying cash flows of the assets securitized. These financing entities are contractually limited to a narrow range of activities that facilitate the transfer of or access to various types of assets or financial instruments. In certain situations, the Corporation provides liquidity and/or loss protection agreements. In determining whether the financing entity should be consolidated, the Corporation considers whether the entity is a qualifying special-purpose entity (QSPE) as defined in Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. For non- consolidation a QSPE must be demonstrably distinct, have significantly limited permitted activities, hold assets that are restricted to transferred financial assets and related assets, and can sell or dispose of non-cash financial assets only in response to specified conditions. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. This interpretation addresses consolidation by business enterprises of variable interest entities. Under current practice, entities generally have been included in consolidated financial statements because they are controlled through voting interests. This interpretation explains how to identify variable interest entities and how an entity assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. Transferors to QSPEs and "grandfathered" QSPEs subject to the reporting requirements of SFAS 140 are outside the scope of FIN 46 and do not consolidate those entities. FIN 46 also requires certain disclosures by the primary beneficiary of a variable interest entity or an entity that holds a significant variable interest in a variable interest entity. 36 With respect to its existing securitization activities, the Corporation does not believe FIN 46 impacts its consolidated financial statements because its transfers are generally to QSPEs or to entities in which the Corporation does not hold a significant variable interest. The Corporation sells financial assets, in a two-step process that results in a surrender of control over the assets as evidenced by true-sale opinions from legal counsel, to unconsolidated entities that securitize the assets. The Corporation retains interests in the securitized assets in the form of interest-only strips and a cash reserve account. Gain or loss on sale of the assets depends in part on the carrying amount assigned to the assets sold allocated between the asset sold and retained interests based on their relative fair values at the date of transfer. The value of the retained interests is based on the present value of expected cash flows estimated using management's best estimates of the key assumptions - credit losses, prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. Actual results can differ from expected results. The Corporation reviews the carrying values of the retained interests monthly to determine if there is a decline in value that is other than temporary and periodically reviews the propriety of the assumptions used based on current historical experience as well as the sensitivities of the carrying value of the retained interests to adverse changes in the key assumptions. The Corporation believes that its estimates result in a reasonable estimate of fair value of the retained interests. During the second quarter of 2003, the Corporation recognized an impairment loss of approximately $4.1 million, which is included in net investment securities losses in the Consolidated Statements of Income. The difference between revised assumptions based on actual and projected experience compared to initially expected assumptions were deemed to be other than temporary. The Corporation regularly sells automobile loans to an unconsolidated multi- seller special purpose entity commercial paper conduit in securitization transactions in which subordinated interests are retained. The outstanding balances of automobile loans sold in these securitization transactions was $851.2 million at June 30, 2003. At June 30, 2003, the carrying amount of retained interests amounted to $44.6 million. The Corporation also sells, from time to time, debt securities classified as available for sale that are highly rated to an unconsolidated bankruptcy remote QSPE whose activities are limited to issuing highly rated asset-backed commercial paper with maturities up to 180 days which is used to finance the purchase of the investment securities. The Corporation's lead bank, M&I Marshall & Ilsley Bank ("Bank"), provides liquidity back-up in the form of Liquidity Purchase Agreements. In addition, the Bank acts as counterparty to interest rate swaps that enable the QSPE to hedge its interest rate risk. Such swaps are designated as trading in the Corporation's Consolidated Balance Sheet. Under the terms of the Administration Agreement, the Bank, as administrator of the QSPE, is required to sell interests in the securities funded by the QSPE to the Bank as the liquidity purchaser under the liquidity agreements, if at any time (after giving effect to any issuance of new commercial paper notes and the receipt of payments under any swap agreement) the QSPE has insufficient funds to repay any maturing commercial paper note and the Bank, as liquidity agent, has received a notice of such deficiency. The Bank, as the liquidity provider, will be obligated to purchase interests in such securities under the terms of the liquidity agreement to repay the maturing commercial paper notes unless (i) after giving effect to such purchase, the aggregate of securities, purchased under the relevant liquidity agreement would exceed the aggregate maximum liquidity purchase amount under such liquidity agreement or (ii) certain bankruptcy events with respect to the QSPE have occurred; provided that the Bank is not required to purchase any defaulted security. For this purpose, a defaulted security is any security that is rated below "Caa2" by Moody's and below "CCC" by Standard & Poors. To date, the Bank has never acquired interests in any securities under the terms of the liquidity agreements. A subsidiary of the Bank has entered into interest rate swaps with the QSPE designed to counteract the interest rate risk associated with third party beneficial interest (commercial paper) and the transferred assets. The beneficial interests in the form of commercial paper have been issued by the QSPE to parties other than the Bank and its subsidiary or any other affiliates. The notional amounts do not exceed the amount of beneficial interests. The swap agreements do not provide the QSPE or its administrative agent any decision-making authority other than those specified in the standard ISDA Master Agreement. At June 30, 2003, highly rated investment securities in the amount of $255.0 million were outstanding in the QSPE to support the outstanding commercial paper. 37 Income Taxes ------------ Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on tax assets and liabilities of a change in tax rates is recognized in the income statement in the period that includes the enactment date. The determination of current and deferred income taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts currently due or owed such as the timing of reversals of temporary differences and current accounting standards. The Corporation's interpretation of Federal and state income tax laws is periodically reviewed by the Federal and state taxing authorities who make assessments based on their determination of tax laws. Tax liabilities could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities based on the completion of taxing authority examinations. FORWARD-LOOKING STATEMENTS -------------------------- Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of Financial Position and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk," respectively, contain forward- looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding expected operating activities and results. Such statements are subject to important factors that could cause the Corporation's actual results to differ materially than those anticipated by the forward-looking statements. These factors include those referenced in Item 1, Business, of the Corporation's Annual Report on Form 10-K for the period ending December 31, 2002 under the heading "Forward-Looking Statements" or as may be described from time to time in the Corporation's subsequent SEC filings, and such factors are incorporated herein by reference. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following updated information should be read in conjunction with the Corporation's 2002 Annual Report on Form 10-K. Updated information regarding the Corporation's use of derivative financial instruments is contained in Note 10, Notes to Financial Statements contained in Item 1 herein. Market risk arises from exposure to changes in interest rates, exchange rates, commodity prices, and other relevant market rate or price risk. The Corporation faces market risk through trading and other than trading activities. While market risk that arises from trading activities in the form of foreign exchange and interest rate risk is immaterial to the Corporation, market risk from other than trading activities in the form of interest rate risk is measured and managed through a number of methods. Interest Rate Risk ------------------ The Corporation uses financial modeling techniques to identify potential changes in income under a variety of possible interest rate scenarios. Financial institutions, by their nature, bear interest rate and liquidity risk as a necessary part of the business of managing financial assets and liabilities. The Corporation has designed strategies to limit these risks within prudent parameters and identify appropriate risk/reward tradeoffs in the financial structure of the balance sheet. The financial models identify the specific cash flows, repricing timing and embedded option characteristics of the assets and liabilities held by the Corporation. Policies are in place to assure that neither earnings nor fair value at risk exceed appropriate limits. The use of a limited array of derivative financial instruments has allowed the Corporation to achieve the desired balance sheet repricing structure while simultaneously meeting the desired objectives of both its borrowing and depositing customers. 38 The models used include measures of the expected repricing characteristics of administered rate (NOW, savings and money market accounts) and non-rate related products (demand deposit accounts, other assets and other liabilities). These measures recognize the relative insensitivity of these accounts to changes in market interest rates, as demonstrated through current and historical experiences. However, during the second quarter of 2003, the Corporation increased the proportion of these accounts modeled as rate sensitive, in order to recognize the instability of some of the recent balance growth in these accounts. This modeling treatment will be maintained until the incremental balances can be observed across a more complete interest rate cycle. In addition to contractual payment information for most other assets and liabilities, the models also include estimates of expected prepayment characteristics for those items that are likely to materially change their payment structures in different rate environments, including residential mortgage products, certain commercial and commercial real estate loans and certain mortgage-related securities. Estimates for these sensitivities are based on industry assessments and are substantially driven by the differential between the contractual coupon of the item and current market rates for similar products. This information is incorporated into a model that allows the projection of future income levels in several different interest rate environments. Earnings at risk is calculated by modeling income in an environment where rates remain constant, and comparing this result to income in a different rate environment, and then dividing this difference by the Corporation's budgeted operating income before taxes for the calendar year. Since future interest rate moves are difficult to predict, the following table presents two potential scenarios - a gradual increase of 100bp across the entire yield curve over the course of a year (+25bp per quarter), and a gradual decrease of 100bp across the entire yield curve over the course of a year (-25bp per quarter) for the balance sheet as of the indicated dates:
Impact to Annual Pretax Income as of --------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, 2003 2002 2002 2002 2002 ----------- ----------- ----------- ----------- ----------- Hypothetical Change in Interest Rate - ------------------------------------ 100 basis point gradual: Rise in rates (0.6)% 0.9 % 0.9 % 1.5 % (0.5)% Decline in rates (2.0)% (1.4)% (2.0)% (2.0)% (0.3)%
These results are based solely on the modeled parallel changes in market rates, and do not reflect the earnings sensitivity that may arise from other factors such as changes in the shape of the yield curve, the changes in spread between key market rates, or accounting recognition for impairment of certain intangibles. These results also do not include any management action to mitigate potential income variances within the simulation process. Such action could potentially include, but would not be limited to, adjustments to the repricing characteristics of any on- or off-balance sheet item with regard to short-term rate projections and current market value assessments. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. Another component of interest rate risk is measuring the fair value at risk for a given change in market interest rates. The Corporation also uses computer modeling techniques to determine the present value of all asset and liability cash flows (both on- and off-balance sheet), adjusted for prepayment expectations, using a market discount rate. The net change in the present value of the asset and liability cash flows in different market rate environments is the amount of fair value at risk from those rate movements. As of June 30, 2003, the fair value of equity at risk for a gradual 100bp shift in rates has not changed materially since December 31, 2002. Equity Risk ----------- In addition to interest rate risk, the Corporation incurs market risk in the form of equity risk. M&I's Capital Markets Group invests in private, medium- sized companies to help establish new businesses or recapitalize existing ones. Exposure to the change in equity values for the companies that are held in their portfolio exist, however, fair values are difficult to determine until an actual sale or liquidation transaction actually occurs. As of June 30, 2003, M&I Trust Services administered $59.5 billion in assets and directly managed a portfolio of $14.0 billion. Exposure exists to changes in equity values due to the fact that fee income is partially based on equity balances. While this exposure is present, quantification remains difficult due to the number of other variables affecting fee income. Interest rate changes can also have an effect on fee income for the above stated reasons. 39 ITEM 4. CONTROLS AND PROCEDURES We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and President and our Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer and President and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. There have been no changes in our internal control over our financial reporting identified in connection with the evaluation discussed above that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 40 PART II - OTHER INFORMATION ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A. The Corporation held its Annual Meeting of Shareholders on April 22, 2003. B. Votes cast for the election of six directors to serve until the 2006 Annual Meeting of Shareholders are as follows: Director For Withheld Abstentions Non-Vote _____________________ ___________ __________ ___________ ________ Richard A. Abdoo 173,782,317 12,437,869 -- -- Ted D. Kellner 176,329,488 9,890,698 -- -- Katharine C. Lyall 175,070,146 11,150,040 -- -- Peter M. Platten, III 154,110,670 32,109,516 -- -- James A. Urdan 175,857,034 10,363,152 -- -- James B. Wigdale 176,489,552 9,730,634 -- -- The continuing directors of the Corporation are as follows: Jon F. Chait David L. Andrea Bruce E. Jacobs Andrew N. Baur Donald R. Johnson John A. Mellowes Dennis J. Kuester Robert J. O'Toole Edward L. Meyer, Jr. Robert A. Schaefer San W. Orr, Jr. John S. Shiely George E. Wardeberg C. Votes cast for approving the Corporation's 2003 Executive Stock Option and Restricted Stock Plan are as follows: For Withheld Abstentions Non-Vote ___________ __________ ___________ __________ 119,200,732 22,123,745 10,485,868 34,409,841 D. Votes cast for approving the Corporation's Amended and Restated 1994 Long-term Incentive Plan for Executives are as follows: For Withheld Abstentions Non-Vote ___________ __________ ___________ __________ 125,760,458 15,080,468 10,969,419 34,409,841 E. Votes cast for approving the amendment to the Corporation's Restated Articles of Incorporation are as follows: For Withheld Abstentions Non-Vote ___________ __________ ___________ __________ 164,814,091 17,533,710 3,872,385 -- 41 ITEM 5. OTHER INFORMATION In 1999, Congress enacted the Gramm-Leach-Bliley Act (the "Act"), which eliminated certain barriers to and restrictions on affiliations between banks and securities firms, insurance companies and other financial services organizations. Among other things, the Act repealed certain Glass-Steagall Act restrictions on affiliations between banks and securities firms, and amended the Bank Holding Company Act of 1956 to permit bank holding companies that qualify as "financial holding companies" to engage in a broad list of "financial activities," and any non-financial activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines is "complementary" to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system. The Act treats various lending, insurance underwriting, insurance company portfolio investment, financial advisory, securities underwriting, dealing and market-making, and merchant banking activities as financial in nature for this purpose. Under the Act, a bank holding company may become certified as a financial holding company by filing a notice with the Federal Reserve Board, together with a certification that the bank holding company meets certain criteria, including capital, management and Community Reinvestment Act requirements. M&I had made a determination not to become certified as a financial holding company. However, M&I reconsidered this determination and on June 18, 2003, the Corporation became certified as a financial holding company. The Audit Committee of the Board of Directors of Marshall & Ilsley Corporation has approved the following audit and non-audit services performed or to be performed for the Corporation by its independent auditors, Deloitte & Touche LLP: Certain agreed-upon procedures to assist Metavante Corporation in connection with Metavante's and a customer's evaluation of logical security controls related to the customer's data. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits: Exhibit 10 - Change of Control Agreement dated as of June 30, 2003 between the Corporation and Kenneth C. Krei. Exhibit 11 - Statement Regarding Computation of Earnings Per Share, Incorporated by Reference to NOTE 4 of Notes to Financial Statements contained in Item 1 - Financial Statements (unaudited) of Part 1 - Financial Information herein. Exhibit 12 - Statement Regarding Computation of Ratio of Earnings to Fixed Charges Exhibit 31.1 - Rule 13a-14(a) Certification of Chief Executive Officer. Exhibit 31.2 - Rule 13a-14(a) Certification of Chief Financial Officer. Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. B. Reports on Form 8-K: On April 14, 2003, the Corporation furnished Items 7 and 9 in a Current Report on Form 8-K relating to the release of earnings for the quarterly period ended March 31, 2003. 42 SIGNATURES __________ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARSHALL & ILSLEY CORPORATION (Registrant) /s/ Patricia R. Justiliano ____________________________________ Patricia R. Justiliano Senior Vice President and Corporate Controller (Chief Accounting Officer) /s/ James E. Sandy ____________________________________ James E. Sandy Vice President August 13, 2003 43 EXHIBIT INDEX Exhibit Number Description of Exhibit ______________ ______________________________________________ (10) Change of Control Agreement dated as of June 30, 2003 between the Corporation and Kenneth C. Krei (11) Statement Regarding Computation of Earnings Per Share, Incorporated by Reference to NOTE 4 of Notes to Financial Statements contained in Item 1 - Financial Statements (unaudited) of Part 1 - Financial Information herein. (12) Statement Regarding Computation of Ratio of Earnings to Fixed Charges. (31.1) Rule 13a-14(a) Certification of Chief Executive Officer. (31.2) Rule 13a-14(a) Certification of Chief Financial Officer. (32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C .Section 1350. (32.2) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. EX-10 3 ex100603.txt EXHIBIT 10 TO FORM 10-Q DATED 06/30/2003 1 Exhibit 10 CHANGE OF CONTROL AGREEMENT --------------------------- THIS AGREEMENT, entered into as of the 30th day of June, 2003, by and between MARSHALL & ILSLEY CORPORATION (the "Company"), and Kenneth C. Krei (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 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 3 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. 4 (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. 5 (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. 6 (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. 7 (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. 8 (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: 9 (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 10 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. 11 (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. 12 (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 recission 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. 13 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. 14 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. 15 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. 16 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. 17 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/ Kenneth C. Krei ______________________________________ Kenneth C. Krei Address: __________________________ __________________________ MW2yrchangec EX-12 4 ex120603.txt EXHIBIT 12 TO FORM 10-Q DATED 06/30/2003 Exhibit 12 MARSHALL & ILSLEY CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($000's)
Six Months Ended Years Ended December 31, June 30, ---------------------------------------------------------------- 2003 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ ------------ Earnings: Earnings before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 397,002 $ 718,592 $ 501,045 $ 470,350 $ 527,939 $ 465,285 Fixed charges, excluding interest on deposits 139,472 301,518 321,059 321,812 222,172 206,546 ----------- ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges but excluding interest on deposits 536,474 1,020,110 822,104 792,162 750,111 671,831 Interest on deposits 123,101 283,385 566,899 772,016 585,864 564,540 ----------- ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges and interest on deposits $ 659,575 $ 1,303,495 $ 1,389,003 $ 1,564,178 $ 1,335,975 $ 1,236,371 =========== =========== =========== =========== =========== =========== Fixed Charges: Interest Expense: Short-term borrowings $ 43,024 $ 150,310 $ 188,587 $ 224,187 $ 142,294 $ 126,624 Long-term borrowings 84,515 127,343 110,842 78,773 63,145 66,810 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor) 11,933 23,865 21,630 18,852 16,733 13,112 ----------- ----------- ----------- ----------- ----------- ----------- Fixed charges excluding interest on deposits 139,472 301,518 321,059 321,812 222,172 206,546 Interest on deposits 123,101 283,385 566,899 772,016 585,864 564,540 ----------- ----------- ----------- ----------- ----------- ----------- Fixed charges including interest on deposits $ 262,573 $ 584,903 $ 887,958 $ 1,093,828 $ 808,036 $ 771,086 =========== =========== =========== =========== =========== =========== Ratio of Earnings to Fixed Charges: Excluding interest on deposits 3.85 x 3.38 x 2.56 x 2.46 x 3.38 x 3.25 x Including interest on deposits 2.51 x 2.23 x 1.56 x 1.43 x 1.65 x 1.60 x
EX-31 5 ex311603.txt EXHIBIT 31.1 TO FORM 10-Q DATED 06/30/2003 Exhibit 31.1 CERTIFICATION _____________ I, Dennis J. Kuester, President and Chief Executive 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Dennis J. Kuester __________________________________ Dennis J. Kuester President and Chief Executive Officer MW740145_1.DOC EX-31 6 ex312603.txt EXHIBIT 31.2 TO FORM 10-Q DATED 06/30/2003 Exhibit 31.2 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Mark F. Furlong __________________________________ Mark F. Furlong Executive Vice President and Chief Financial Officer MW740109_1.DOC EX-32 7 ex321603.txt EXHIBIT 32.1 TO FORM 10-Q DATED 06/30/2003 Exhibit 32.1 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 June 30, 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: August 13, 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. MW711348_2.DOC EX-32 8 ex322603.txt EXHIBIT 32.2 TO FORM 10-Q DATED 06/30/2003 Exhibit 32.2 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 June 30, 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: August 13, 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. MW711357_2.DOC -----END PRIVACY-ENHANCED MESSAGE-----