-----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, D/AFvMfWmjZP64H7c0VlIFKIRFLUsKyc5GwvPol30GErQg9slpWxCP2KVyqGHgWD KiQMK0aYZtHGkOh+y83k9Q== 0000062741-04-000101.txt : 20040510 0000062741-04-000101.hdr.sgml : 20040510 20040510125025 ACCESSION NUMBER: 0000062741-04-000101 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 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: 04791913 BUSINESS ADDRESS: STREET 1: ATTN: OFFICE OF THE GENERAL COUNSEL STREET 2: 770 NORTH WATER STREET 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 fm10q304.txt FORM 10-Q DATED 03/31/2004 1 ============================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-15403 MARSHALL & ILSLEY CORPORATION (Exact name of registrant as specified in its charter) Wisconsin 39-0968604 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 770 North Water Street Milwaukee, Wisconsin 53202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 765-7801 None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class April 30, 2004 ----- ---------------- Common Stock, $1.00 Par Value 222,139,949 ============================================================================ 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ($000's except share data) March 31, December 31, March 31, 2004 2003 2003 ------------- ------------- ------------- Assets - ------ Cash and cash equivalents: Cash and due from banks $ 690,920 $ 810,088 $ 957,805 Federal funds sold and security resale agreements 22,867 44,076 11,045 Money market funds 43,371 57,462 185,551 ------------- ------------- ------------- Total cash and cash equivalents 757,158 911,626 1,154,401 Investment securities: Trading securities, at market value 46,554 16,197 22,245 Short-term investments, at cost which approximates market value 69,364 45,551 77,945 Available for sale at market value 5,207,164 4,786,446 4,355,890 Held to maturity at amortized cost, market value $864,765 ($873,949 December 31, and $980,528 March 31, 2003) 802,452 820,886 921,662 ------------- ------------- ------------- Total investment securities 6,125,534 5,669,080 5,377,742 Mortgage loans held for sale 112,984 34,623 221,812 Loans and leases Loans and leases, net of unearned income 25,942,941 25,150,317 23,977,886 Less: Allowance for loan and lease losses 353,687 349,561 338,253 ------------- ------------- ------------- Net loans and leases 25,589,254 24,800,756 23,639,633 Premises and equipment 434,376 438,485 438,820 Goodwill and other intangibles 1,104,195 1,104,552 1,093,868 Accrued interest and other assets 1,352,934 1,413,521 1,322,396 ------------- ------------- ------------- Total Assets $ 35,476,435 $ 34,372,643 $ 33,248,672 ============= ============= ============= Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 4,359,686 $ 4,715,283 $ 4,278,218 Interest bearing 18,791,325 17,554,822 17,047,956 ------------- ------------- ------------- Total deposits 23,151,011 22,270,105 21,326,174 Funds purchased and security repurchase agreements 2,791,246 765,072 3,730,611 Other short-term borrowings 1,827,355 4,167,929 1,780,463 Accrued expenses and other liabilities 1,083,344 1,106,221 1,010,058 Long-term borrowings 3,221,121 2,734,623 2,272,324 ------------- ------------- ------------- Total liabilities 32,074,077 31,043,950 30,119,630 Shareholders' equity: Series A convertible preferred stock, $1.00 par value; 2,000,000 shares authorized -- -- -- Common stock, $1.00 par value; 240,832,522 shares issued 240,833 240,833 240,833 Additional paid-in capital 553,968 564,269 566,004 Retained earnings 3,167,467 3,061,246 2,767,034 Accumulated other comprehensive income, net of related taxes 38,230 2,694 (50,209) Less: Treasury common stock, at cost: 18,768,505 shares (17,606,489 December 31, and 14,296,874 March 31,2003) 569,056 513,562 373,959 Deferred compensation 29,084 26,787 20,661 ------------- ------------- ------------- Total shareholders' equity 3,402,358 3,328,693 3,129,042 ------------- ------------- ------------- Total Liabilities and Shareholders' Equity $ 35,476,435 $ 34,372,643 $ 33,248,672 ============= ============= ============= 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 March 31, ---------------------------- 2004 2003 ------------- ------------- Interest income - --------------- Loans and leases $ 325,952 $ 330,185 Investment securities: Taxable 48,317 45,819 Exempt from federal income taxes 14,171 14,787 Trading securities 89 64 Short-term investments 544 734 ------------- ------------- Total interest income 389,073 391,589 Interest expense - ---------------- Deposits 55,549 62,827 Short-term borrowings 15,836 22,050 Long-term borrowings 39,052 42,227 ------------- ------------- Total interest expense 110,437 127,104 ------------- ------------- Net interest income 278,636 264,485 Provision for loan and lease losses 9,027 25,692 ------------- ------------- Net interest income after provision for loan and lease losses 269,609 238,793 Other income - ------------ Data processing services 186,124 157,088 Item processing 11,432 10,274 Trust services 36,250 30,040 Service charges on deposits 25,523 26,238 Gains on sale of mortgage loans 5,199 13,313 Other mortgage banking revenue 1,765 4,215 Net investment securities gains (losses) (529) 1,569 Life insurance revenue 6,680 7,243 Other 40,985 40,452 ------------- ------------- Total other income 313,429 290,432 Other expense - ------------- Salaries and employee benefits 203,928 197,225 Net occupancy 19,195 18,635 Equipment 28,168 28,697 Software expenses 11,225 10,310 Processing charges 13,049 12,018 Supplies and printing 5,706 5,254 Professional services 9,072 10,696 Shipping and handling 16,424 13,953 Amortization of intangibles 5,452 6,919 Other 50,109 31,884 ------------- ------------- Total other expense 362,328 335,591 ------------- ------------- Income before income taxes 220,710 193,634 Provision for income taxes 74,601 65,604 ------------- ------------- Net income $ 146,109 $ 128,030 ============= ============= Net income per common share Basic $ 0.66 $ 0.57 Diluted 0.65 0.56 Dividends paid per common share $ 0.180 $ 0.160 Weighted average common shares outstanding: Basic 222,301 226,225 Diluted 226,025 227,774 See notes to financial statements.
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MARSHALL & ILSLEY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($000's) Three Months Ended March 31, ---------------------------- 2004 2003 ------------- ------------- Net Cash Provided by Operating Activities $ 155,723 $ 214,673 Cash Flows From Investing Activities: Proceeds from sales of securities available for sale 4,412 7,049 Proceeds from maturities of securities available for sale 253,449 713,537 Proceeds from maturities of securities held to maturity 18,494 21,111 Purchases of securities available for sale (660,834) (832,039) Net increase in loans (850,516) (469,376) Purchases of assets to be leased (52,302) (162,816) Principal payments on lease receivables 76,067 210,290 Fixed asset purchases, net (12,613) (13,915) Purchase acquisitions, net of cash equivalents acquired (6,803) (3,541) Other 3,906 4,854 ------------- ------------- Net cash used in investing activities (1,226,740) (524,846) Cash Flows From Financing Activities: Net increase in deposits 871,889 929,955 Proceeds from issuance of commercial paper 1,412,913 1,735,063 Payments for maturity of commercial paper (1,393,722) (1,763,649) Net decrease in other short-term borrowings (325,207) (320,939) Proceeds from issuance of long-term debt 575,596 392 Payments of long-term debt (109,247) (231,673) Dividends paid (39,888) (36,145) Purchases of treasury stock (98,381) -- Other 22,596 5,038 ------------- ------------- Net cash provided by financing activities 916,549 318,042 ------------- ------------- Net (decrease) increase in cash and cash equivalents (154,468) 7,869 Cash and cash equivalents, beginning of year 911,626 1,146,532 ------------- ------------- Cash and cash equivalents, end of period $ 757,158 $ 1,154,401 ============= ============= Supplemental cash flow information: Cash paid during the period for: Interest $ 112,835 $ 148,833 Income taxes 6,366 18,886 See notes to financial statements.
5 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements March 31, 2004 & 2003 (Unaudited) 1. The accompanying unaudited consolidated financial statements should be read in conjunction with Marshall & Ilsley Corporation's ("M&I" or "Corporation") 2003 Annual Report on Form 10-K. The unaudited financial information included in this report reflects all adjustments consisting only of normal recurring accruals and adjustments which are necessary for a fair statement of the financial position and results of operations as of and for the three months ended March 31, 2004 and 2003. The results of operations for the three months ended March 31, 2004 and 2003 are not necessarily indicative of results to be expected for the entire year. Certain amounts in the 2003 consolidated financial statements and analyses have been reclassified to conform with the 2004 presentation. 2. New Accounting Pronouncements On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act introduces a prescription drug benefit program under Medicare (Medicare Part D) as well as a 28% federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. At December 31, 2003, the Corporation had elected to defer recognition of the effect of the Act in accordance with Financial Accounting Standards Board Staff Position (FSP) 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, until such time as specific authoritative guidance on the accounting for the federal subsidy was issued. In March 2004, the Financial Accounting Standards Board issued proposed FSP 106-b, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-b addresses the employers' accounting for the effects of the Act. The accounting for the subsidy applies only to the sponsor of a single-employer defined benefit postretirement health care plan. The proposed rule would be effective for fiscal quarters beginning after June 15, 2004 with retroactive application of the guidance generally required. As of and for the three months ended March 31, 2004, any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost do not reflect the effects of the Act. The Corporation is still in the process of determining the financial statement impact of the Act. During March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin 105, "Application of Accounting Principles to Loan Commitments" (SAB 105). SAB 105 provides guidance to the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments and is generally focused on commitments to originate mortgage loans that will be sold after they are funded. SAB 105 generally prohibits an entity from considering expected future cash flows related to the associated servicing of the loan or other internally-developed intangible assets in determining the fair value of the loan commitment. In addition, SAB 105 will require expanded disclosures on an entity's accounting policy related to loan commitments accounted for as derivatives including methods and assumptions used to estimate fair value and any associated hedging strategies. SAB 105 is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. Loan commitments accounted for as derivatives are not material to the Corporation and it does not employ any formal hedging strategies. As a result, the Corporation does not anticipate that implementing SAB 105 will have a material effect on its consolidated financial statements. 6 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 2004 & 2003 (Unaudited) 3. Comprehensive Income The following tables present the Corporation's comprehensive income ($000's):
Three Months Ended March 31, 2004 ----------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------- ------------- Net income $ 146,109 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ 42,444 $ (14,897) 27,547 Reclassification for securities transactions included in net income -- -- -- ------------- ------------- ------------- Unrealized gains (losses) 42,444 (14,897) 27,547 Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period 3,297 (1,154) 2,143 Reclassification adjustments for hedging activities included in net income 8,994 (3,148) 5,846 ------------- ------------- ------------- Net gains (losses) $ 12,291 $ (4,302) 7,989 ------------- ------------- ------------- Other comprehensive income (loss) 35,536 ------------- Total comprehensive income $ 181,645 =============
Three Months Ended March 31, 2003 ----------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------- ------------- Net income $ 128,030 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ (11,807)$ 4,135 (7,672) Reclassification for securities transactions included in net income (1,675) 586 (1,089) ------------- ------------- ------------- Unrealized gains (losses) (13,482) 4,721 (8,761) Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period (10,484) 3,669 (6,815) Reclassification adjustments for hedging activities included in net income 15,067 (5,273) 9,794 ------------- ------------- ------------- Net gains (losses) $ 4,583 $ (1,604) 2,979 ------------- ------------- ------------- Other comprehensive income (loss) (5,782) ------------- Total comprehensive income $ 122,248 =============
7 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 2004 & 2003 (Unaudited) 4. A reconciliation of the numerators and denominators of the basic and diluted per share computations are as follows (dollars and shares in thousands, except per share data):
Three Months Ended March 31, 2004 -------------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount -------------- ------------- ------------- Basic Earnings Per Share Income Available to Common Shareholders $ 146,109 222,301 $ 0.66 ============= Effect of Dilutive Securities Stock Options, Restricted Stock and Other Plans -- 3,724 -------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders $ 146,109 226,025 $ 0.65 =============
Three Months Ended March 31, 2003 -------------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount -------------- ------------- ------------- Basic Earnings Per Share Income Available to Common Shareholders $ 128,030 226,225 $ 0.57 ============= Effect of Dilutive Securities Stock Options, Restricted Stock and Other Plans -- 1,549 -------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders $ 128,030 227,774 $ 0.56 =============
Options to purchase shares of common stock not included in the computation of diluted net income per share because the exercise prices of the options were greater than the average market price of the common shares are as follows:
Three Months Ended March 31, ----------------------------------------- 2004 2003 ------------------- ------------------- Shares 9,000 11,903,905 Price Range $39.340 - $40.150 $26.875 - $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. 8 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 2004 & 2003 (Unaudited) 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. 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 March 31, ------------------------- 2004 2003 ----------- ----------- Net Income, as reported $ 146,109 $ 128,030 Add: Stock-based employee compensation expense included in reported net income, net of tax 1,422 1,018 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (6,224) (5,530) ----------- ----------- Pro forma net income $ 141,307 $ 123,518 =========== =========== Basic earnings per share: As reported $ 0.66 $ 0.57 Pro forma 0.64 0.55 Diluted earnings per share: As reported $ 0.65 $ 0.56 Pro forma 0.62 0.54
5. Business Combinations The following acquisition, which was not considered a material business combination, was completed during the first quarter of 2004: On January 1, 2004, the Banking segment completed the purchase of certain assets and the assumption of certain liabilities of AmerUs Home Lending, Inc. ("AmerUs"), an Iowa-based corporation engaged in the business of brokering and servicing mortgage and home equity loans for $15.0 million in cash. Although not material to the Corporation, this acquisition enhances the Corporation's wholesale lending activities by expanding its broker network and acquiring technology that enhances the efficiency of the wholesale lending process. AmerUs's total revenue in 2003 amounted to $14.0 million. Initial goodwill, subject to the completion of appraisals and valuations of the assets acquired and liabilities assumed, amounted to $5.0 million. The estimated identifiable intangible asset to be amortized (customer relationships) with an estimated useful life of 3 years amounted to $0.3 million. The goodwill and intangibles resulting from this transaction are deductible for tax purposes. 9 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 2004 & 2003 (Unaudited) Recently Announced Acquisitions _______________________________ In April and May 2004, the Corporation's data processing segment, Metavante, announced the signing of two separate definitive agreements to acquire for cash certain assets of the privately held Kirchman Corporation ("Kirchman"), of Orlando, Florida, and all of the outstanding common stock of the privately held Advanced Financial Solutions, Inc. and its affiliated companies (collectively "AFS"), of Oklahoma City, Oklahoma. Kirchman is a provider of automation software and compliance services to the banking industry. It is expected that this acquisition will allow Metavante to provide financial institution customers with core-processing software that they can run in-house, a product that Metavante presently does not offer. AFS is a provider of image-based payment, transaction and document software technologies. AFS also operates an electronic check-clearing network through one of its affiliates. It is expected that this acquisition will allow Metavante to expand its current product offerings in payment and transaction processing and image related services, provide the technology and expertise to help banks facilitate the necessary change to comply with the Check Clearing for the 21st Century Act (known as Check 21 and capture another leg in the payments segment- electronic check image exchange. The combined revenue of Kirchman and AFS amounted to approximately $136.0 million in their most recently completed fiscal years. The transactions are expected to be neutral to the Corporation's diluted earning per share in 2004. Total cash consideration for these two acquisitions is approximately $305.0 million, subject to certain adjustments. With respect to the AFS transaction, additional contingent consideration may be paid based on the attainment of certain performance objectives each year, beginning on the date of closing and ending December 31, 2004, and each year thereafter through 2007. The preliminary estimate of the intangible assets, including goodwill, that will be initially recognized upon completion of both transactions is approximately $290.0 million. Contingent payments, if made, would be reflected as adjustments to goodwill. Both transactions are expected to close in the second quarter of 2004, subject to regulatory approval. 6. Selected investment securities, by type, held by the Corporation are as follows ($000's):
March 31, December 31, March 31, 2004 2003 2003 ------------- ------------- ------------- Investment securities available for sale: U.S. treasury and government agencies $ 4,204,236 $ 3,886,278 $ 3,384,400 State and political subdivisions 357,737 299,321 267,376 Mortgage backed securities 142,583 149,990 179,992 Other 502,608 450,857 524,122 ------------- ------------- ------------- Total $ 5,207,164 $ 4,786,446 $ 4,355,890 ============= ============= ============= Investment securities held to maturity: U.S. treasury and government agencies $ -- $ -- $ 30 State and political subdivisions 799,632 818,065 918,604 Other 2,820 2,821 3,028 ------------- ------------- ------------- Total $ 802,452 $ 820,886 $ 921,662 ============= ============= =============
The following table provides the gross unrealized losses and fair value, aggregated by investment category and the length of time the individual securities have been in a continuous unrealized loss position, at March 31, 2004 ($000's):
Less than 12 Months 12 Months or More Total ---------------------- ---------------------- ---------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ---------- ---------- ---------- ---------- ---------- ---------- U.S. treasury and government agencies $ 314,633 $ 1,378 $ -- $ -- $ 314,633 $ 1,378 State and political subdivisions 21,954 395 -- -- 21,954 395 Other -- -- 6,352 31 6,352 31 ---------- ---------- ---------- ---------- ---------- ---------- Total $ 336,587 $ 1,773 $ 6,352 $ 31 $ 342,939 $ 1,804 ========== ========== ========== ========== ========== ==========
The Corporation believes that the unrealized losses in the investment securities portfolio resulted from increases in market interest rates and not from deterioration in the creditworthiness of the issuer. 10 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 2004 & 2003 (Unaudited) 7. The Corporation's loan and lease portfolio, including mortgage loans held for sale, consists of the following ($000's):
March 31, December 31, March 31, 2004 2003 2003 ------------- ------------- ------------- Commercial, financial and agricultural $ 7,288,396 $ 7,104,844 $ 7,009,023 Cash flow hedging instruments at fair value 36,058 5,830 2,644 ------------- ------------- ------------- Total commercial, financial and agricultural 7,324,454 7,110,674 7,011,667 Real estate: Construction 1,343,985 1,330,526 1,150,770 Residential mortgage 7,696,362 7,270,531 6,745,651 Commercial mortgage 7,362,506 7,149,149 6,754,730 ------------- ------------- ------------- Total real estate 16,402,853 15,750,206 14,651,151 Personal 1,761,886 1,747,738 1,804,091 Lease financing 566,732 576,322 732,789 ------------- ------------- ------------- Total loans and leases $ 26,055,925 $ 25,184,940 $ 24,199,698 ============= ============= =============
8. Sale of Receivables During the first quarter of 2004, $94.5 million of automobile loans were sold in securitization transactions. Gains of $0.9 million were recognized and are reported in Other income in the Consolidated Statements of Income. Other income associated with auto securitizations, primarily servicing fees, amounted to $1.0 million in the current quarter. Key economic assumptions used in measuring the retained interests at the date of securitization resulting from securitizations completed during the first quarter were as follows (rate per annum):
Prepayment speed (CPR) 19-35 % Weighted average life (in months) 15.4 Expected credit losses (based on original balance) 0.03-0.66 % Residual cash flow discount rate 12.0 % Variable returns to transferees Forward one month LIBOR
At March 31, 2004, securitized automobile loans and other automobile loans managed together with them, along with delinquency and credit loss information consisted of the following:
Securitized Portfolio Total Managed ------------- ----------- ------------- Loan balances $ 1,016,712 $ 209,033 $ 1,225,745 Principal amounts of loans 60 days or more past due 690 147 837 Net credit losses year to date 763 72 835
9. Goodwill and Other Intangibles: The changes in the carrying amount of goodwill for the three months ended March 31, 2004 are as follows ($000's):
Banking Metavante Others Total ---------- ---------- ---------- ---------- Goodwill balance as of January 1, 2004 $ 809,772 $ 155,329 $ 4,687 $ 969,788 Goodwill acquired during the period 4,986 -- -- 4,986 Purchase accounting adjustments -- 1,458 -- 1,458 Goodwill amortization -- -- -- -- ---------- ---------- ---------- ---------- Goodwill balance as of March 31, 2004 $ 814,758 $ 156,787 $ 4,687 $ 976,232 ========== ========== ========== ==========
Goodwill acquired for the Banking segment in the first quarter of 2004 was the initial goodwill associated with the AmerUs Home Lending, Inc. acquisition. 11 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 2004 & 2003 (Unaudited) Purchase accounting adjustments for Metavante in the first quarter of 2004 represents the effect of adjustments made to the initial estimates of fair value associated with the November 2003 acquisition of Printing For Systems, Inc. At March 31, 2004, the Corporation's other intangible assets consisted of the following ($000's):
March 31, 2004 ------------------------------------ Gross Accum- Net Carrying ulated Carrying Amount Amort Value ---------- ---------- ---------- Other intangible assets: Core deposit intangible $ 159,474 $ 66,596 $ 92,878 Data processing contract rights/customer lists 35,265 11,161 24,104 Trust customers 5,475 456 5,019 Tradename 2,775 1,273 1,502 ---------- ---------- ---------- $ 202,989 $ 79,486 $ 123,503 ========== ========== ========== Mortgage loan servicing rights $ 4,460 ==========
10. The Corporation's deposit liabilities consists of the following ($000's):
March 31, December 31, March 31, 2004 2003 2003 ------------- ------------- ------------- Noninterest bearing demand $ 4,359,686 $ 4,715,283 $ 4,278,218 Savings and NOW 9,093,090 9,301,744 9,265,264 CD's $100,000 and over 5,242,748 4,480,111 3,279,520 Cash flow hedge-Institutional CDs 22,943 13,071 19,714 ------------- ------------- ------------- Total CD's $100,000 and over 5,265,691 4,493,182 3,299,234 Other time deposits 2,591,887 2,646,639 2,853,089 Foreign deposits 1,840,657 1,113,257 1,630,369 ------------- ------------- ------------- Total deposits $ 23,151,011 $ 22,270,105 $ 21,326,174 ============= ============= =============
11. Derivative Financial Instruments and Hedging Activities Trading Instruments and Other Free Standing Derivatives _______________________________________________________ The Corporation enters into various derivative contracts primarily to focus on providing derivative products to customers which enables them to manage their exposures to interest rate risk. The Corporation's market risk from unfavorable movements in interest rates is generally economically hedged by concurrently entering into offsetting derivative contracts. The offsetting derivative contracts generally have nearly identical notional values, terms and indices. Interest rate lock commitments on residential mortgage loans intended to be held for sale are considered free-standing derivative instruments. The option to sell the mortgage loans at the time the commitments are made are also free-standing derivative instruments. The change in fair value of these derivative instruments due to changes in interest rates tend to offset each other and act as economic hedges. Trading and free-standing derivative contracts are not linked to specific assets and liabilities on the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting under SFAS 133. They are carried at fair value with changes in fair value recorded as a component of other noninterest income. At March 31, 2004, free standing interest rate swaps consisted of $0.8 billion in notional amount of receive fixed/pay floating with an aggregate positive fair value of $14.7 million and $0.6 billion in notional amount of pay fixed/receive floating with an aggregate negative fair value of $11.1 million. 12 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 2004 & 2003 (Unaudited) At March 31, 2004, interest rate caps purchased amounted to $13.8 million in notional amount with a positive fair value of $0.2 million and interest rate caps sold amounted to $13.8 million in notional amount with a negative fair value of $0.2 million. Fair Value Hedges _________________ The Corporation has fixed rate callable and institutional CDs and fixed rate long-term debt which expose the Corporation to variability in fair values due to changes in market interest rates. To limit the Corporation's exposure to changes in fair value due to changes in interest rates, the Corporation has entered into receive- fixed / pay-floating interest rate swaps with identical call features, thereby creating the effect of floating rate deposits and floating rate long-term debt. The Corporation has determined that the hedges on the long-term debt qualify for the special short-cut accounting prescribed by SFAS 133, resulting in no ineffectiveness. The following table presents additional information with respect to selected fair value hedges.
Fair Value Hedges March 31, 2004 Weighted Notional Fair Average Hedged Hedging Amount Value Remaining Item Instrument ($ in mil) ($ in mil) Term (Yrs) -------------------------- --------------------- ------------- ------------- ------------ Fixed Rate CDs Receive Fixed Swap $ 438.0 $ (3.4) 6.8 Medium Term Notes Receive Fixed Swap 370.4 14.8 9.3 Fixed Rate Bank Notes Receive Fixed Swap 225.0 1.5 5.9
The impact from fair value hedges to total net interest income for the quarter ended March 31, 2004 was a positive $9.5 million. The impact to net interest income due to ineffectiveness was immaterial. Cash Flow Hedges ________________ The Corporation has variable rate loans and variable rate short-term borrowings, which expose the Corporation to variability in interest payments due to changes in interest rates. The Corporation believes it is prudent to limit the variability of a portion of its interest receipts and payments. To meet this objective, the Corporation enters into various types of derivative financial instruments to manage fluctuations in cash flows resulting from interest rate risk. The Corporation regularly originates and holds floating rate commercial loans that reprice monthly on the first business day to one-month LIBOR. As a result, the Corporation's interest receipts are exposed to variability in cash flows due to changes in one-month LIBOR. In order to hedge the interest rate risk associated with the floating rate commercial loans indexed to one-month LIBOR, the Corporation has entered into receive fixed/pay LIBOR-based floating interest rate swaps designated as cash flow hedges against the first LIBOR-based interest payments received that, in the aggregate for each period, are interest payments on such principal amount of its then existing LIBOR-indexed floating-rate commercial loans equal to the notional amount of the interest rate swaps outstanding. Hedge effectiveness is assessed at inception and each quarter on an on- going basis using regression analysis that takes into account reset date differences for certain designated interest rate swaps that reset quarterly. Each month the Corporation makes a determination that it is probable that the Corporation will continue to receive interest payments on at least that amount of principal of its existing LIBOR- indexed floating-rate commercial loans that reprice monthly on the first business day of each month to one-month LIBOR equal to the notional amount of the interest rate swaps outstanding. Ineffectiveness is measured using the hypothetical derivative method and is recorded as a component of interest income on loans. 13 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 2004 & 2003 (Unaudited) The interest rate swaps change the variable-rate cash flow exposure on the loans and short-term borrowings to fixed-rate cash flows. Changes in the fair value of the interest rate swaps designated as cash flow hedges are reported in accumulated other comprehensive income. These amounts are subsequently reclassified to interest income or interest expense as a yield adjustment in the same period in which the related interest on the variable rate loans and short-term borrowings affects earnings. Ineffectiveness arising from differences between the critical terms of the hedging instrument and hedged item is recorded in interest income or expense. The following table summarizes the Corporation's cash flow hedges.
Cash Flow Hedges March 31, 2004 Weighted Notional Fair Average Hedged Hedging Amount Value Remaining Item Instrument ($ in mil) ($ in mil) Term (Yrs) -------------------------- --------------------- ------------- ------------- ------------ Variable Rate Loans Receive Fixed Swap $ 1,150.0 $ 36.1 5.6 Institutional CDs Pay Fixed Swap 2,070.0 (22.9) 1.5 Fed Funds Purchased Pay Fixed Swap 360.0 (25.4) 2.8 FHLB Advances Pay Fixed Swap 610.0 (13.6) 3.6
The impact to total net interest income from cash flow hedges, including amortization of terminated cash flow hedges, for the quarter ended March 31, 2004 was a negative $9.0 million. The impact due to ineffectiveness was immaterial. 12. Segments The following represents the Corporation's operating segments as of and for the three months ended March 31, 2004 and 2003. There have not been any changes to the way the Corporation organizes its segments. Charges for services from the holding company had previously been excluded from segment income. Beginning with the presentation of segment information in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, management determined that it was more meaningful to include such charges in evaluating the performance of its segments. Prior year segment information has been restated to include such costs and conform to the current year presentation. Fees - Intercompany represent intercompany revenues charged to other segments for providing certain services. Expenses - Intercompany represent fees charged by other segments for certain services received. For each segment, Expenses - Intercompany are not the costs of that segment's reported intercompany revenues. Intersegment expenses and assets have been eliminated. ($ in millions):
Three Months Ended March 31, 2004 ------------------------------------------------------------------------------------------ Reclass- ifications Consol- Corporate & Elim- Sub- Excluded idated Banking Metavante Others Overhead nations total Charges Income ---------- --------- --------- --------- -------- --------- --------- ---------- Revenues: Net interest income $ 274.8 $ (0.2) $ 6.4 $ (2.4) $ -- $ 278.6 $ -- $ 278.6 Fees - Other 83.1 186.1 43.3 0.9 -- 313.4 -- 313.4 Fees - Intercompany 15.7 18.9 4.8 17.5 (56.9) -- -- -- ---------- --------- --------- --------- --------- --------- -------- ---------- Total revenues 373.6 204.8 54.5 16.0 (56.9) 592.0 -- 592.0 Expenses: Expenses - Other 152.2 164.0 29.8 16.8 (0.5) 362.3 -- 362.3 Expenses - Intercompany 33.2 10.9 12.2 0.1 (56.4) -- -- -- ---------- --------- --------- --------- --------- --------- -------- ---------- Total expenses 185.4 174.9 42.0 16.9 (56.9) 362.3 -- 362.3 Provision for loan and lease losses 8.3 -- 0.7 -- -- 9.0 -- 9.0 ---------- --------- --------- --------- --------- --------- -------- ---------- Income before taxes 179.9 29.9 11.8 (0.9) -- 220.7 -- 220.7 Income tax expense 58.9 11.8 4.5 (0.6) -- 74.6 -- 74.6 ---------- --------- --------- --------- --------- --------- -------- ---------- Segment income $ 121.0 $ 18.1 $ 7.3 $ (0.3) $ -- $ 146.1 $ -- $ 146.1 ========== ========= ========= ========= ========= ========= ======== ========== Identifiable assets $ 34,415.8 $ 979.9 $ 642.3 $ 496.2 $(1,057.8) $ 35,476.4 $ -- $ 35,476.4 ========== ========= ========= ========= ========= ========= ======== ========== Return on average equity 16.1% 18.8% 11.6% 17.4% ========== ========= ========= ==========
14 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 2004 & 2003 (Unaudited)
Three Months Ended March 31, 2003 ------------------------------------------------------------------------------------------ Reclass- ifications Consol- Corporate & Elim- Sub- Excluded idated Banking Metavante Others Overhead nations total Charges Income ---------- --------- --------- --------- -------- --------- --------- ---------- Revenues: Net interest income $ 262.5 $ (1.0) $ 7.8 $ (4.8) $ -- $ 264.5 $ -- $ 264.5 Fees - Other 91.6 157.1 41.2 0.6 (0.1) 290.4 -- 290.4 Fees - Intercompany 13.5 16.9 7.2 15.5 (53.1) -- -- -- ---------- --------- --------- --------- --------- --------- -------- ---------- Total revenues 367.6 173.0 56.2 11.3 (53.2) 554.9 -- 554.9 Expenses: Expenses - Other 143.1 141.6 30.6 17.3 0.5 333.1 2.5 335.6 Expenses - Intercompany 33.5 9.3 10.7 0.2 (53.7) -- -- -- ---------- --------- --------- --------- --------- --------- -------- ---------- Total expenses 176.6 150.9 41.3 17.5 (53.2) 333.1 2.5 335.6 Provision for loan and lease losses 17.6 -- 8.1 -- -- 25.7 -- 25.7 ---------- --------- --------- --------- --------- --------- -------- ---------- Income before taxes 173.4 22.1 6.8 (6.2) -- 196.1 (2.5) 193.6 Income tax expense 56.6 9.2 3.1 (2.3) -- 66.6 (1.0) 65.6 ---------- --------- --------- --------- --------- ---------- -------- --------- Segment income $ 116.8 $ 12.9 $ 3.7 $ (3.9) $ -- $ 129.5 $ (1.5) $ 128.0 ========== ========= ========= ========= ========= ========== ======== ========== Identifiable assets $ 32,161.9 $ 838.2 $ 651.7 $ 403.3 $ (806.4) $ 33,248.7 $ -- $ 33,248.7 ========== ========= ========= ========= ========= ========== ======== ========== Return on average equity 16.4% 15.8% 6.5% 16.8% ========== ========= ========= ==========
Metavante's segment income for the three months ended March 31, 2003 excludes certain transition expenses associated with the integration of the July 2002 acquisition of Paytrust, Inc. Such expenses are included in "Excluded Charges." Total Revenue by type in Others consists of the following:
Three Months Ended March 31, --------------------- 2004 2003 --------- --------- Trust Services $ 35.5 $ 29.9 Residential Mortgage Banking 6.2 12.7 Capital Markets (0.7) 1.8 Brokerage and Insurance 6.8 5.8 Commercial Leasing 4.0 3.8 Commercial Mortgage Banking 1.6 1.3 Others 1.1 0.9 --------- --------- Total revenue $ 54.5 $ 56.2 ========= =========
15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
MARSHALL & ILSLEY CORPORATION CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited) ($000's) Three Months Ended March 31, ------------------------------ 2004 2003 ------------- ------------- Assets - ------ Cash and due from banks $ 771,175 $ 763,722 Investment securities: Trading securities 23,267 18,374 Short-term investments 212,512 257,382 Other investment securities: Taxable 4,533,085 3,883,443 Tax-exempt 1,146,670 1,197,289 ------------- ------------- Total investment securities 5,915,534 5,356,488 Loans and leases: Loans and leases, net of unearned income 25,427,518 23,900,481 Less: Allowance for loan and lease losses 356,146 345,055 ------------- ------------- Net loans and leases 25,071,372 23,555,426 Premises and equipment, net 438,386 443,518 Accrued interest and other assets 2,647,182 2,515,467 ------------- ------------- Total Assets $ 34,843,649 $ 32,634,621 ============= ============= Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 4,316,158 $ 3,860,497 Interest bearing 18,198,398 17,286,492 ------------- ------------- Total deposits 22,514,556 21,146,989 Funds purchased and security repurchase agreements 2,521,642 3,019,683 Other short-term borrowings 906,913 589,980 Long-term borrowings 4,242,589 3,697,993 Accrued expenses and other liabilities 1,283,938 1,079,911 ------------- ------------- Total liabilities 31,469,638 29,534,556 Shareholders' equity 3,374,011 3,100,065 ------------- ------------- Total Liabilities and Shareholders' Equity $ 34,843,649 $ 32,634,621 ============= =============
16 OVERVIEW ________ The first quarter of 2004 was a strong quarter for the Corporation in terms of earnings growth. Loan and deposit growth, the continued improvement in credit quality, revenue and earnings growth by both the data processing segment ("Metavante") and trust services reporting unit and continued expense management resulted in double-digit earnings growth in the first quarter of 2004 compared to the first quarter of 2003. During the first quarter of 2004, the Corporation experienced lower revenue from mortgage loan sales compared to the same period last year. Net income for the first quarter of 2004 amounted to $146.1 million compared to $128.0 million for the same period in the prior year, an increase of $18.1 million, or 14.1%. Diluted earnings per share was $0.65 for the three months ended March 31, 2004, compared with $0.56 for the three months ended March 31, 2003, an increase of 16.1%. The return on average assets and average equity was 1.69% and 17.42% for the quarter ended March 31, 2004, and 1.59% and 16.75%, respectively, for the quarter ended March 31, 2003. Although the Corporation experienced a strong first quarter, management is not expecting comparable earnings growth for the year ended December 31, 2004. Management believes that low double digit earnings growth in 2004 is achievable, however, with the economy recovering slowly and modest evidence of job growth in the markets the Corporation serves, management remains cautious in its expectations that each positive attribute experienced this quarter will continue or improve in future quarters. Management continues to believe that the outlook provided in the Corporation's Annual Report on Form 10-K for 2003 is still representative of its expectations for the year ended December 31, 2004. The Corporation's actual results for the year ended December 31, 2004 could differ materially from those expected by management. See "Forward-Looking Statements" in this Form 10-Q and the Corporation's 2003 Annual Report on Form 10-K for a discussion of the various risk factors that could cause actual results to be different than expected results. NOTEWORTHY TRANSACTIONS _______________________ Some of the more notable transactions that occurred in the first quarters of 2004 and 2003 consisted of the following: During the first quarter of 2004, the Corporation's Banking segment completed the purchase of certain assets and the assumption of certain liabilities for cash of AmerUs Home Lending, Inc. ("AmerUs"), an Iowa-based corporation engaged in the business of brokering and servicing mortgage and home equity loans. Although not material to the Corporation, this acquisition enhances the Corporation's wholesale lending activities by expanding its broker network and acquiring technology that enhances the efficiency of the wholesale lending process. During the first quarter of 2004, the Corporation used its strong earnings base to take advantage of the continued low interest rate environment and prepaid and retired $55.0 million of higher cost fixed rate debt that resulted in a charge to earnings of $4.9 million. The loss is reported in other in Other expense in the Consolidated Statements of Income. During the first quarter of 2003, Metavante completed the integration of its acquisition of Paytrust, Inc. ("Paytrust"). Such acquisition-related transition expenses amounted to $2.5 million and are reported in various line items in Other expense in the Consolidated Statements of Income. NET INTEREST INCOME ___________________ Net interest income for the first quarter of 2004 amounted to $278.6 million compared to $264.5 million reported for the first quarter of 2003. Loan growth, slower prepayment activity across all asset classes, growth in noninterest bearing deposits and the impact of prepaying higher cost debt in the latter part of 2003 all contributed to the increase in net interest income. Factors negatively affecting net interest income included the impact from lengthening liabilities in order to reduce future volatility in net interest income due to interest rate movements and cash expenditures for repurchases of common stock and acquisitions in the prior year. Average earning assets in the first quarter of 2004 increased $2.1 billion or 7.1% compared to the first quarter in 2003. Average loans and leases accounted for $1.5 billion of the quarter over quarter growth. Average investment securities increased $0.6 billion. Other short-term investments and trading securities were relatively unchanged in the first quarter of 2004 compared to the first quarter of 2003. Average interest bearing liabilities increased $1.3 billion or 5.2% in the first quarter of 2004 compared to the same period in 2003. Average interest bearing deposits increased $0.9 billion or 5.3% in the first quarter of 2004 compared to the first quarter of last year. Average total borrowings increased $0.4 billion or 5.0% in the first quarter of 2004 compared to the same period in 2003. 17 Average noninterest bearing deposits increased $0.5 billion or 11.8% in the three months ended March 31, 2004 compared to the same period last year. The growth and composition of the Corporation's quarterly average loan and lease portfolio for the current quarter and previous four quarters are reflected in the following table. ($ in millions): Consolidated Average Loans and Leases _____________________________________
2004 2003 Growth Pct. -------- ----------------------------------- ----------------- First Fourth Third Second First Prior Quarter Quarter Quarter Quarter Quarter Annual Quarter -------- -------- -------- -------- -------- ------- --------- Commercial Commercial $ 7,142 $ 6,839 $ 6,912 $ 7,043 $ 6,827 4.6% 4.4% Commercial real estate Commercial mortgages 7,246 7,076 6,986 6,859 6,677 8.5 2.4 Construction 1,075 1,071 1,014 977 934 15.1 0.3 -------- -------- -------- -------- -------- ------- --------- Total commercial real estate 8,321 8,147 8,000 7,836 7,611 9.3 2.1 Commercial lease financing 399 384 392 390 394 1.2 3.6 -------- -------- -------- -------- -------- ------- --------- Total Commercial 15,862 15,370 15,304 15,269 14,832 6.9 3.2 Personal Residential real estate Residential mortgages 2,958 2,811 2,751 2,705 2,623 12.8 5.2 Construction 269 246 210 189 175 54.2 9.4 -------- -------- -------- -------- -------- ------- --------- Total residential real estate 3,227 3,057 2,961 2,894 2,798 15.3 5.6 Personal loans Student 102 95 84 97 107 (4.6) 7.8 Credit card 230 213 200 191 187 23.0 7.9 Home equity loans and lines 4,439 4,215 4,100 4,075 4,048 9.6 5.3 Other 1,391 1,516 1,692 1,551 1,561 (10.9) (8.3) -------- -------- -------- -------- -------- ------- --------- Total personal loans 6,162 6,039 6,076 5,914 5,903 4.4 2.0 Personal lease financing 177 198 255 322 367 (51.8) (10.7) -------- -------- -------- -------- -------- ------- --------- Total Personal 9,566 9,294 9,292 9,130 9,068 5.5 2.9 -------- -------- -------- -------- -------- ------- --------- Total Consolidated Average Loans and Leases $ 25,428 $ 24,664 $ 24,596 $ 24,399 $ 23,900 6.4% 3.1% ======== ======== ======== ======== ======== ======= =========
Total consolidated average loans and leases increased $1.5 billion or 6.4% in the first quarter of 2004 compared to the first quarter of 2003. Total average commercial loan and lease growth amounted to $1.0 billion or 6.9% in the current quarter compared to the first quarter of the prior year. The growth in average commercial loans and leases in the first quarter of 2004 compared to the first quarter of 2003 was primarily due to the growth in average commercial real estate loans which increased $0.7 billion. Total average personal loans and leases increased $0.5 billion or 5.5% in the first quarter of 2004 compared to the first quarter of 2003. This growth was driven primarily by growth in home equity loans and lines and residential real estate loans which each increased approximately $0.4 billion. Average indirect auto loans and leases declined approximately $0.4 billion in the current quarter compared to the first quarter of the prior year. From a production standpoint, residential real estate loan closings declined approximately $0.5 billion or 39.5% in the first quarter of 2004 compared to the first quarter of 2003. However, loan closings in the first quarter of 2004 were only 2.3% behind loan closings in the fourth quarter of 2003 and early indications, as measured by application volume, suggest that loan closings in the second quarter of 2004 may exceed the loan closings in the first quarter of 2004. Compared to the fourth quarter of 2003, total average consolidated loans and leases increased $0.8 billion or 3.1% in the first quarter of 2004. Total average commercial loan and lease growth amounted to $0.5 billion or 3.2% in the current quarter compared to the fourth quarter of the prior year. The growth in average commercial loans and leases in the first quarter of 2004 compared to the fourth quarter of 2003 was primarily due to the growth in average commercial loans which increased $0.3 billion. Total average personal loans and leases increased $0.3 billion or 2.9% in the first quarter of 2004 compared to the fourth quarter of 2003. Average personal loan and lease growth was driven primarily by growth in home equity loans and lines and residential real estate loans which each increased approximately $0.2 billion. Average indirect auto loans and leases declined approximately $0.1 billion in the first quarter of 2004 compared to the fourth quarter of 2003. 18 In prior quarters, commercial loan growth was largely attributable to new customers. Existing customers were generally not increasing their credit needs but appeared to be focused on successfully managing their businesses through the slower economic conditions and lower revenue levels. The growth in average commercial loans since the fourth quarter of 2003 has been a combination of loans to new customers and increased activity from existing customers whose businesses are in a variety of industries in Wisconsin and generally throughout the Corporation's markets outside of the state. While it may be too early to determine if this is the early stage of more robust business loan demand, the Corporation's commercial lending activities have historically fared well as the economy strengthens in its markets. 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 in the consumer side of its banking activities. Generally, the Corporation sells residential real estate production in the secondary market, although selected loans with adjustable rate characteristics are periodically retained in the portfolio. Residential real estate loans sold to investors amounted to $0.3 billion in the first quarter of 2004 compared to $1.0 billion in the first quarter of the prior year. Approximately $58.4 million of loans sold were attributable to the AmerUs acquisition. At March 31, 2004 and 2003, the Corporation had approximately $113.0 million and $221.8 million of mortgage loans held for sale, respectively. Gains from the sale of mortgage loans amounted to $5.2 million in the first quarter of 2004 compared to $13.3 million in the first quarter of last year. Approximately $1.6 million of the gain in the first quarter of 2004 was attributable to the AmerUs acquisition. Auto loans securitized and sold in the first quarter of 2004 amounted to $0.1 billion compared to $0.2 billion in the first quarter of last year. Gains from the sale and securitization of auto loans amounted to $0.9 million in the current quarter compared to $2.3 million in the same period last year. The Corporation anticipates that it will continue to divest itself of selected assets through sale or securitization in future periods. The growth and composition of the Corporation's quarterly average deposits for the current and previous four quarters are as follows ($ in millions): Consolidated Average Deposits _____________________________
2004 2003 Growth Pct. -------- ----------------------------------- ----------------- First Fourth Third Second First Prior Quarter Quarter Quarter Quarter Quarter Annual Quarter -------- -------- -------- -------- -------- ------- --------- Bank issued deposits Noninterest bearing deposits Commercial $ 2,976 $ 3,112 $ 2,991 $ 2,799 $ 2,666 11.6% (4.4)% Personal 855 855 828 818 761 12.4 0.1 Other 485 502 530 456 433 11.6 (3.4) -------- -------- -------- -------- -------- ------- --------- Total noninterest bearing deposits 4,316 4,469 4,349 4,073 3,860 11.8 (3.4) Interest bearing deposits Savings and NOW 3,303 3,282 3,273 3,139 2,896 14.1 0.6 Money market 5,780 6,015 6,040 6,135 6,274 (7.9) (3.9) Foreign activity 909 799 759 861 867 4.8 13.7 -------- -------- -------- -------- -------- ------- --------- Total interest bearing deposits 9,992 10,096 10,072 10,135 10,037 (0.4) (1.0) Time deposits Other CDs and time deposits 2,611 2,659 2,707 2,791 2,905 (10.1) (1.8) CDs greater than $100,000 632 633 617 628 662 (4.6) (0.2) -------- -------- -------- -------- -------- ------- --------- Total time deposits 3,243 3,292 3,324 3,419 3,567 (9.1) (1.5) -------- -------- -------- -------- -------- ------- --------- Total bank issued deposits 17,551 17,857 17,745 17,627 17,464 0.5 (1.7) Wholesale deposits Money market 75 74 73 75 77 (1.7) 2.2 Brokered CDs 3,854 3,270 2,938 3,048 2,682 43.7 17.8 Foreign time 1,035 1,282 1,399 1,392 924 11.9 (19.3) -------- -------- -------- -------- -------- ------- --------- Total wholesale deposits 4,964 4,626 4,410 4,515 3,683 34.8 7.3 -------- -------- -------- -------- -------- ------- --------- Total consolidated average deposits $ 22,515 $ 22,483 $ 22,155 $ 22,142 $ 21,147 6.5% 0.1% ======== ======== ======== ======== ======== ======= =========
19 Total average consolidated deposits increased $1.4 billion or 6.5% in the first quarter of 2004 compared to the first quarter of 2003. Average noninterest bearing deposits increased $0.5 billion or 11.8% while average bank-issued interest bearing activity accounts were relatively unchanged in the current quarter compared to the first quarter of the prior year. Average bank-issued time deposits declined $0.3 billion in the first quarter of 2004 compared to the first quarter of 2003. M&I's markets continue 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 growth in bank issued deposits, especially noninterest bearing deposits, includes both commercial and retail banking and was influenced by 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. Historically, noninterest bearing balances have decreased in the first quarter compared to the fourth quarter followed by consistent growth in balances throughout the remainder of the year. The decline in average noninterest bearing deposits in the first quarter of 2004 compared to the fourth quarter of 2003 reflects the historical pattern of seasonality in average noninterest deposit balances. The Corporation believes that annual deposit growth better reflects trends due to this seasonality that occurs between quarters. Management expects the annual growth in noninterest bearing balances in 2004 to be more modest than that experienced in 2003. Compared with the first quarter of 2003, average wholesale deposits increased $1.3 billion in the current quarter. The Corporation continues to make greater use of wholesale funding alternatives, especially institutional certificates of deposits. 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 first quarter of 2004, a fixed rate advance from the Federal Home Loan Bank ("FHLB") aggregating $55.0 million with an annual coupon interest rate of 5.06% was prepaid and retired resulting in a charge to earnings of $4.9 million. In addition, $45.0 million of FHLB fixed rate advances with an annual coupon interest rate of 5.48% matured. During the first quarter of 2004, $225.0 million of senior bank notes with an annual weighted average coupon interest rate of 2.81% were issued. In addition, $200.0 million of amortizing senior bank notes with a semi-annual coupon interest rate of 2.90% were issued. New FHLB advances in the first quarter of 2004 amounted to $150.0 million with an annual coupon interest rate of 2.07%. 20 The Corporation's consolidated average interest earning assets and interest bearing liabilities, interest earned and interest paid for the three months ended March 31, 2004 and 2003, are presented in the following tables ($ in millions): Consolidated Yield and Cost Analysis ____________________________________
Three Months Ended Three Months Ended March 31, 2004 March 31, 2003 -------------------------------- ------------------------------- Average Average Average Yield or Average Yield or Balance Interest Cost (b) Balance Interest Cost (b) ----------- --------- --------- ----------- --------- --------- Loans and leases: (a) Commercial loans and leases $ 7,540.9 $ 87.4 4.67 % $ 7,220.8 $ 83.8 4.70 % Commercial real estate loans 8,321.3 111.2 5.37 7,611.9 111.9 5.96 Residential real estate loans 3,226.7 44.6 5.56 2,797.6 44.0 6.39 Home equity loans and lines 4,438.2 59.1 5.35 4,048.3 59.5 5.96 Personal loans and leases 1,900.4 24.3 5.14 2,221.9 31.6 5.76 ------------ --------- --------- ----------- --------- --------- Total loans and leases 25,427.5 326.6 5.17 23,900.5 330.8 5.61 Investment securities (b): Taxable 4,533.1 48.3 4.34 3,883.4 45.8 4.87 Tax Exempt (a) 1,146.7 21.4 7.70 1,197.3 22.2 7.66 ----------- --------- --------- ----------- --------- --------- Total investment securities 5,679.8 69.7 5.01 5,080.7 68.0 5.52 Trading securities (a) 23.3 0.1 1.57 18.4 0.1 1.48 Other short-term investments 212.5 0.5 1.03 257.4 0.7 1.16 ----------- --------- --------- ----------- --------- --------- Total interest earning assets $ 31,343.1 $ 396.9 5.11 % $ 29,257.0 $ 399.6 5.56 % =========== ========= ========= =========== ========= ========= Interest bearing deposits: Bank issued deposits: Bank issued interest bearing activity deposits $ 9,991.9 $ 15.5 0.63 % $ 10,036.2 $ 22.4 0.91 % Bank issued time deposits 3,242.3 19.2 2.38 3,567.3 23.7 2.70 ----------- --------- --------- ----------- --------- --------- Total bank issued deposits 13,234.2 34.7 1.06 13,603.5 46.1 1.38 Wholesale deposits 4,964.2 20.8 1.69 3,683.0 16.7 1.84 ----------- --------- --------- ----------- --------- --------- Total interest bearing deposits 18,198.4 55.5 1.23 17,286.5 62.8 1.47 Short-term borrowings 3,428.5 15.8 1.86 3,609.6 22.1 2.48 Long-term borrowings 4,242.6 39.1 3.70 3,698.0 42.2 4.63 ----------- --------- --------- ----------- --------- --------- Total interest bearing liabilities $ 25,869.5 $ 110.4 1.72 % $ 24,594.1 $ 127.1 2.10 % =========== ========= ========= =========== ========= ========= Net interest margin (FTE) as a percent of average earning assets $ 286.5 3.69 % $ 272.5 3.79 % ========= ========= ========= ========= Net interest spread (FTE) 3.39 % 3.46 % ========= =========
(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 10 basis points from 3.79 percent in the first quarter of 2003 to 3.69 percent in the first quarter of 2004. The yield on average interest earning assets decreased 45 basis points in the first quarter of 2004 compared to the first quarter of the prior year. The cost of bank issued interest bearing deposits in the current quarter decreased 32 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 58 basis points in the current quarter compared to the first quarter of last year. Net interest income was affected by a number of factors. Loan growth, the early retirement of higher cost debt in the latter part of 2003, and lower levels of prepayment activity were beneficial to net interest income in the first three months of 2004. The low absolute level of interest rates and increased level of prepayments experienced in the first three quarters of 2003 shortened the expected life of many of the Corporation's financial assets. Lower reinvestment rates and a conscious slowing in deposit repricing resulting from selectively lowering deposit rates, has adversely impacted net interest income. 21 Management expects the net interest margin as a percent of average earning assets will likely trend down a few basis points over the remainder of 2004. As the economy improves, the Corporation's capacity to generate loans will likely exceed its ability to generate appropriately priced deposits. Net interest income and the net interest margin can vary and continue 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 March 31, 2004, and the prior four quarters. Nonperforming Assets ____________________ ($000's)
2004 2003 ----------- ----------------------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- ----------- Nonaccrual $ 149,550 $ 166,387 $ 180,535 $ 195,448 $ 205,373 Renegotiated 261 278 286 304 312 Past due 90 days or more 6,296 6,111 6,479 7,561 6,439 Total nonperforming loans and leases 156,107 172,776 187,300 203,313 212,124 Other real estate owned 13,172 13,235 13,642 10,527 8,259 Total nonperforming assets $ 169,279 $ 186,011 $ 200,942 $ 213,840 $ 220,383 Allowance for loan and lease losses $ 353,687 $ 349,561 $ 348,100 $ 348,100 $ 338,253
Consolidated Statistics _______________________
2004 2003 ----------- ----------------------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- ----------- Net charge-offs to average loans and leases annualized 0.08% 0.13% 0.13% 0.16% 0.44% Total nonperforming loans and leases to total loans and leases 0.60 0.69 0.76 0.82 0.88 Total nonperforming assets to total loans and leases and other real estate owned 0.65 0.74 0.82 0.86 0.91 Allowance for loan and lease losses to total loans and leases 1.36 1.39 1.41 1.40 1.40 Allowance for loan and lease losses to total nonperforming loans and leases 227 202 186 171 159
22 Nonaccrual Loans and Leases By Type ___________________________________ ($000's)
2004 2003 ----------- ----------------------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- ----------- Commercial Commercial, financial and agricultural $ 45,714 $ 56,096 $ 66,571 $ 77,389 $ 93,400 Lease financing receivables 7,381 13,308 4,538 6,350 6,755 ----------- ----------- ----------- ----------- ----------- Total commercial 53,095 69,404 71,109 83,739 100,155 Real estate Construction and land development 78 800 353 460 2,017 Commercial mortgage 46,172 42,857 47,012 46,346 42,241 Residential mortgage 49,528 52,098 60,287 63,843 59,547 ----------- ----------- ----------- ----------- ----------- Total real estate 95,778 95,755 107,652 110,649 103,805 Personal 677 1,228 1,774 1,060 1,413 ----------- ----------- ----------- ----------- ----------- Total nonaccrual loans and leases $ 149,550 $ 166,387 $ 180,535 $ 195,448 $ 205,373 =========== =========== =========== =========== ===========
Reconciliation of Allowance for Loan and Lease Losses _____________________________________________________ ($000's)
2004 2003 ----------- ----------------------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- ----------- Beginning balance $ 349,561 $ 348,100 $ 348,100 $ 338,253 $ 338,409 Provision for loan and lease losses 9,027 9,807 7,852 19,642 25,692 Allowance of banks and loans acquired 27 -- -- -- -- Loans and leases charged-off Commercial 2,904 4,497 4,317 6,619 2,256 Real estate 3,138 5,142 3,238 3,739 3,130 Personal 3,653 3,661 2,528 2,942 2,969 Leases 1,001 2,494 880 1,191 20,060 ----------- ----------- ----------- ----------- ----------- Total charge-offs 10,696 15,794 10,963 14,491 28,415 Recoveries on loans and leases Commercial 2,886 3,810 1,400 2,624 902 Real estate 1,555 2,508 591 772 495 Personal 756 762 831 732 733 Leases 571 368 289 568 437 ----------- ----------- ----------- ----------- ----------- Total recoveries 5,768 7,448 3,111 4,696 2,567 ----------- ----------- ----------- ----------- ----------- Net loans and leases charge-offs 4,928 8,346 7,852 9,795 25,848 ----------- ----------- ----------- ----------- ----------- Ending balance $ 353,687 $ 349,561 $ 348,100 $ 348,100 $ 338,253 =========== =========== =========== =========== ===========
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 $13.2 million at March 31, 2004, compared to $13.2 million at December 31, 2003 and $8.3 million at March 31, 2003. 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 are 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. 23 At March 31, 2004, nonperforming loans and leases amounted to $156.1 million or 0.60% of consolidated loans and leases compared to $172.8 million or 0.69% of consolidated loans and leases at December 31, 2003, a decrease of $16.7 million or 9.6%. Nonaccrual loans and leases accounted for all of the decrease in nonperforming loans and leases since December 31, 2003. The net decrease was primarily due to continued reductions and positive resolutions in several portfolio segments and across most loan types. Commercial mortgages were the only loan type that experienced an increase in nonaccrual loans since December 31, 2003, and that increase was primarily attributable to two loans placed on nonaccrual during the first quarter. Net charge-offs amounted to $4.9 million or 0.08% of average loans and leases in the first quarter of 2004 compared to $8.3 million or 0.13% of average loans and leases in the fourth quarter of 2003 and $25.8 million or 0.44% of average loans and leases in the first quarter of 2003. Included in net- charge-offs in the first quarter of 2003 was $19.0 million related to obligations of Midwest Airlines, Inc. The net charge-off activity experienced in the current quarter is the lowest level experienced in any individual quarter since the first quarter of 2000 and is the result of lower than average charge-offs and higher than average recoveries. Credit quality continued to show improvement as evidenced by the decline in nonperforming loans and leases and net charge-offs which were lower than expected based on the state of the economy in the markets the Corporation serves. At year-end 2003, the Corporation disclosed that it expects net charge-offs in 2004 to range from 0.15% to 0.20% for the year and nonperfoming loans and leases as a percent of total loans and leases outstanding to be in the range of 70-80 basis points. Based on this quarter's experience, it appears that the Corporation's credit quality ratios may be at the low end of the range in the near term. Management continues to believe that the long-term impact of the recent recession may still provide some unanticipated results within the loan and lease portfolio and until the economy demonstrates a sustained period of strengthening, some degree of stress and uncertainty continues to exist. The provision for loan and lease losses amounted to $9.0 million for the three months ended March 31, 2004 compared to $9.8 million for the three months ended December 31, 2003 and $25.7 million for the three months ended March 31, 2003. 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 total loans and leases outstanding was 1.36% at March 31, 2004 and 1.40% at March 31, 2003. OTHER INCOME ____________ Total other income in the first quarter of 2004 amounted to $313.4 million compared to $290.4 million in the same period last year, an increase of $23.0 million or 7.9%. The increase in other income was primarily due to growth in data processing services and trust services revenue and was partially offset by lower mortgage banking revenue. Data processing services revenue amounted to $186.1 million in the first quarter of 2004 compared to $157.1 million in the first quarter of 2003, an increase of $29.0 million or 18.5%. Revenue associated with Metavante's November 2003 acquisition of Printing For Systems, Inc. contributed approximately $11.9 million to the revenue growth. Overall, revenue growth was generally strong throughout all aspects of the segment. Total buyout revenue, which varies from period to period, increased $0.9 million in the current quarter compared to the first quarter of last year. Due to the normal seasonal nature of revenues in the first quarter, management expects data processing services revenue in the second quarter to be relatively flat compared to the first quarter but will continue to demonstrate revenue growth over the comparative periods of the prior year. Management continues to believe that the revenue and segment income outlook that was provided in the 2003 Annual Report on Form 10-K for the year ended December 31, 2004 is achievable. For the three months ended March 31, 2004, item processing revenue amounted to $11.4 million compared to $10.3 million for the three months ended March 31, 2003, an increase of $1.1 million or 11.3%. The increase in revenues is due to new customers and increased volumes processed. Trust services revenue amounted to $36.3 million in the first quarter of 2004 compared to $30.0 million in the first quarter of 2003, an increase of $6.3 million or 20.7%. Revenue associated with the segments of the employee benefit plan business purchased from a national banking association located in Missouri contributed approximately $1.6 million to the revenue growth. The remainder of the increase in revenue was due to sales efforts, positive equity market performance and some shifting of funds into equities. Assets under management were approximately $16.6 billion at March 31, 2004, compared to $15.7 billion at December 31, 2003, and $13.2 billion at March 31, 2003. 24 Total mortgage banking revenue was $7.0 million in the first quarter of 2004 compared with $17.5 million in the first quarter of 2003, a decrease of $10.5 million. For the three months ended March 31, 2004, the Corporation sold $0.3 billion of loans to the secondary market. Retained interests in the form of mortgage servicing rights amounted to $0.4 million in the first three months of 2004. For the three months ended March 31, 2003, the Corporation sold $1.0 billion of loans to the secondary market. Retained interests in the form of mortgage servicing rights amounted to $0.6 million in the first three months of 2003. Approximately $58.4 million of the loans sold and $1.6 million of the gain recognized in the first quarter of 2004 was attributable to the AmerUs acquisition. Net investment securities losses in the first quarter of 2004 amounted to $0.5 million compared to net investment securities gains in the first quarter of 2003 of $1.6 million. Activity in both periods was primarily attributable to the Corporation's Capital Markets Group which varies from period to period. Other income in the first quarter of 2004 amounted to $41.0 million compared to $40.5 million in the first quarter of 2003, an increase of $0.5 million or 1.3%. Auto securitization income decreased $0.9 million compared to the same period of the prior year. The quarter over quarter decline was primarily due to lower gains from the sale of auto loans which was offset by increased servicing fee income. Auto loans securitized and sold in the first quarter of 2004 amounted to $0.1 billion compared to $0.2 billion in the first quarter of last year. Gains from the sale of other real estate decreased $1.1 million in the three months ended March 31, 2004 compared to the three months ended March 31, 2003. The decrease was primarily due to the sale of one large property in the first quarter of 2003. Growth in various other sources of fee income and a small increase on the gain on sale of student loans in the first quarter of 2004 compared to the first quarter of 2003 offset the income declines previously discussed. OTHER EXPENSE _____________ Total other expense for the three months ended March 31, 2004 amounted to $362.3 million compared to $335.6 million for the three months ended March 31, 2003, an increase of $26.7 million or 8.0%. Total other expense for the first quarter of 2004 includes the charge for the early retirement of some higher cost fixed rate debt and the operating expenses associated with Metavante's acquisition of Printing For Systems, Inc. in November 2002, the purchase of certain employee benefit plan segments beginning in the third quarter of 2003 by the Trust Services reporting unit and the purchase of AmerUs Home Lending, Inc. by the Banking segment on January 1, 2004. Such operating expenses have all been included in the Corporation's consolidated operating expenses since the acquisitions were completed. Total other expense for the three months ended March 31, 2003 includes the transition costs associated with the completion of Metavante's integration of Paytrust. The estimated aggregate impact of these items was an increase to total other expense over the comparative periods of approximately $12.6 million. Excluding the impact of these items, total other expense growth in the first quarter of 2004 compared to the first quarter of 2003 was approximately $14.1 million or 4.3%. Expense control is sometimes measured in the financial services industry by the efficiency ratio statistic. The efficiency ratio is calculated by taking total other expense divided by the sum of total other income (including Capital Markets revenue but excluding investment securities gains or losses) and net interest income on a fully taxable equivalent basis. The Corporation's efficiency ratios for the three months ended March 31, 2004, and prior four quarters were: Efficiency Ratios _________________
March 31, December 31, September 30, June 30, March 31, 2004 2003 2003 2003 2003 ------------- ------------- ------------- ------------- ------------- Consolidated Corporation 60.4 % 63.9 % 69.4 % 59.0 % 59.6 % Consolidated Corporation Excluding Metavante 49.2 % 52.1 % 60.6 % 48.2 % 48.5 %
Salaries and employee benefits expense amounted to $203.9 million in the first quarter of 2004 compared to $197.2 million in the first quarter of 2003, an increase of $6.7 million or 3.4%. The impact of salaries and benefits associated with acquisitions in the current quarter were offset by the salaries and benefits associated with the Paytrust integration activities in the first quarter of the prior year. Occupancy and equipment expense amounted to $47.4 million in the first quarter of 2004 and was relatively unchanged over the comparative periods. Occupancy and equipment expense associated with the Paytrust integration activities in the first quarter of the prior year was approximately $0.8 million. 25 Software expenses, processing charges, supplies and printing, professional services and shipping and handling expenses totaled $55.5 million in the first quarter of 2004 compared to $52.2 million in the first quarter of 2003, an increase of $3.3 million or 6.2%. The Banking segment and Metavante contributed approximately $1.0 million and $4.0 million to the expense growth, respectively. Expenses associated with residential mortgage loan production was approximately $1.8 million lower in the first quarter of 2004 compared to the first quarter of the prior year. Intangible amortization amounted to $5.5 million in the first quarter of 2004 compared to $6.9 million in the first quarter of 2003, a decrease of $1.4 million. Amortization and valuation reserve adjustments associated with mortgage servicing rights decreased amortization expense $0.6 million in the first quarter of 2004 compared to the first quarter of 2003. The carrying value of the Corporation's mortgage servicing rights was $4.5 million at March 31, 2004. Amortization of core deposit intangibles which is based on a declining balance method, decreased $1.1 million in the first quarter of 2004 compared to the first quarter of the prior year. Other expense amounted to $50.1 million in the first quarter of 2004 compared to $31.9 million in the first quarter of 2003, an increase of $18.2 million or 57.2%. As previously discussed, during the first quarter of 2004, the Corporation prepaid and retired $55.0 million of higher cost fixed rate debt that resulted in a charge to earnings of $4.9 million. The cost associated with card plastic sales increased $5.6 million in the first quarter of 2004 compared to the first quarter of the prior year. The increase was primarily attributable to Metavante's acquisition of Printing For Systems, Inc. Increased advertising expenses contributed approximately $1.8 million to the increase in other expense in the current quarter compared to the first quarter in the prior year. 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 amortization was $3.0 million in the first quarter of 2004 and in the first quarter of 2003 net capitalization amounted to $3.1 million resulting in an increase to other expense over the comparative quarters of $6.1 million. INCOME TAXES ____________ The provision for income taxes for the three months ended March 31, 2004 amounted to $74.6 million or 33.8% of pre-tax income compared to $65.6 million or 33.9% of pre-tax income for the three months ended March 31, 2003. LIQUIDITY AND CAPITAL RESOURCES _______________________________ Shareholders' equity was $3.40 billion or 9.6% of total consolidated assets at March 31, 2004, compared to $3.33 billion or 9.7% of total consolidated assets at December 31, 2003, and $3.13 billion or 9.4% of total consolidated assets at March 31, 2003. The increase at March 31, 2004 was primarily due to earnings net of dividends paid. The gain in accumulated other comprehensive income was $35.5 million higher since December 31, 2003. The net unrealized gain associated with available for sale investment securities increased $27.5 million since December 31, 2003, while the unrealized loss associated with the change in fair value of the Corporation's derivative financial instruments designated as cash flow hedges declined $8.0 million since December 31, 2003, resulting in the net increase in shareholders' equity. The Corporation has a Stock Repurchase Program under which up to 12 million shares can be repurchased annually. During the first quarter of 2004, 2.3 million common shares were acquired at an aggregate cost of $88.5 million or $38.98 per common share. See Item 2 in Part II of this Form 10-Q for the monthly purchase activity relating to the Corporation's Stock Repurchase Program. During the first quarter of 2003, there were no common shares repurchased. 26 The Corporation continues to have a strong capital base and its regulatory capital ratios are significantly above the minimum requirements as shown in the following tables. RISK-BASED CAPITAL RATIOS _________________________ ($ in millions)
March 31, 2004 December 31, 2003 --------------------------------- --------------------------------- Amount Ratio Amount Ratio --------------------------------- --------------------------------- Tier 1 Capital $ 2,573 8.93 % $ 2,538 8.87 % Tier 1 Capital Minimum Requirement 1,153 4.00 1,144 4.00 -------------------------------- -------------------------------- Excess $ 1,420 4.93 % $ 1,394 4.87 % ================================ ================================ Total Capital $ 3,555 12.34 % $ 3,511 12.28 % Total Capital Minimum Requirement 2,305 8.00 2,288 8.00 -------------------------------- -------------------------------- Excess $ 1,250 4.34 % $ 1,223 4.28 % ================================ ================================ Risk-Adjusted Assets $ 28,812 $ 28,601 ================= =================
LEVERAGE RATIOS --------------- ($ in millions)
March 31, 2004 December 31, 2003 --------------------------------- --------------------------------- Amount Ratio Amount Ratio --------------------------------- --------------------------------- Tier 1 Capital $ 2,573 7.64 % $ 2,538 7.80 % Minimum Leverage Requirement 1,011 - 1,685 3.00 - 5.00 977 - 1,628 3.00 - 5.00 -------------------------------- -------------------------------- Excess $ 1,562 - 888 4.64 - 2.64 % $ 1,561 - 910 4.80 - 2.80 % ================================ ================================ Adjusted Average Total Assets $ 33,696 $ 32,553 ================= =================
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 $5.2 billion at March 31, 2004, represent a highly accessible source of liquidity. The Corporation's portfolio of held-to-maturity investment securities, which totaled $0.8 billion at March 31, 2004, provides liquidity from maturities and amortization payments. The Corporation's mortgage loans held-for-sale provide additional liquidity. These loans 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 $16.0 billion in the first quarter of 2004. The Corporation's banking affiliates may also access the federal funds markets or utilize collateralized borrowings such as treasury demand notes or FHLB advances. The banking affiliates may use wholesale deposits. Wholesale deposits are funds in the form of deposits generated through distribution channels other than the Corporation's own banking branches. These deposits allow the Corporation's banking subsidiaries to gather funds across a national geographic base and at pricing levels considered attractive, where the underlying depositor may be retail or institutional. Access to wholesale deposits also provides the Corporation with the flexibility to not pursue single service time deposit relationships in markets that have experienced some unprofitable pricing levels. Wholesale deposits averaged $5.0 billion in the first quarter of 2004. The Corporation utilizes certain financing arrangements to meet its balance sheet management, funding, liquidity, and market or credit risk management needs. The majority of these activities are basic term or revolving securitization vehicles. These vehicles are generally funded through term- amortizing debt structures or with short-term commercial paper designed to be paid off based on the underlying cash flows of the assets securitized. These vehicles provide access to funding sources substantially separate from the general credit risk of the Corporation and its subsidiaries. See Note 7 to the Consolidated Financial Statements for an update of the Corporation's securitization activities in the first quarter of 2004. 27 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 March 31, 2004, amounted to $2.6 billion of which $0.6 billion is subordinated and qualifies as supplementary capital for regulatory capital purposes. During the first quarter of 2004, the Bank issued $0.4 billion of senior notes. The national capital markets represent a further source of liquidity to M&I. M&I has filed a shelf registration statement which is intended to permit M&I to raise funds through sales of corporate debt securities with a relatively short lead time. Under the shelf registration statement, the Corporation may issue up to $0.5 billion of medium-term Series E notes with maturities ranging from 9 months to 30 years and at fixed or floating rates. At March 31, 2004, Series E notes issued amounted to $0.3 billion. The Corporation may issue up to $0.5 billion of medium-term MiNotes with maturities ranging from 9 months to 30 years and at fixed or floating rates. The MiNotes are issued in smaller denominations to attract retail investors. At March 31, 2004, MiNotes issued amounted to $0.1 billion. Approximately $1.3 million of MiNotes were issued during the first quarter of 2004. Additionally, the Corporation has a commercial paper program. At March 31, 2004, 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 $3.3 billion at March 31, 2004. Long- term borrowings amounted to $4.5 billion at March 31, 2004. The scheduled maturities of long-term borrowings at March 31, 2004 are as follows: $1.3 billion is due in less than one year; $1.0 billion is due in one to three years; $0.9 billion is due in three to five years; and $1.3 billion is due in more than five years. There have been no other substantive changes to the Corporation's contractual obligations as reported in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003. OFF-BALANCE SHEET ARRANGEMENTS ______________________________ At March 31, 2004, there have been no substantive changes with respect to the Corporation's off-balance sheet activities. See Note 7 to the Consolidated Financial Statements for an update of the Corporation's securitization activities in the first quarter of 2004. Based on the off-balance sheet arrangements with which it is presently involved, the Corporation does not believe that such off-balance sheet arrangements either have, or are reasonably likely to have, a material impact to its current or future financial condition, results of operations, liquidity or capital. CRITICAL ACCOUNTING POLICIES ____________________________ The Corporation has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of the Corporation's consolidated financial statements. The significant accounting policies of the Corporation are described in the footnotes to the consolidated financial statements contained in the Corporation's Annual Report on Form 10-K and updated as necessary in its Quarterly Reports on Form 10-Q. Certain accounting policies involve significant judgments and assumptions by management that may have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of the operations of the Corporation. Management continues to consider the following to be those accounting policies that require significant judgments and assumptions: Allowance for Loan and Lease Losses ___________________________________ The allowance for loan and lease losses represents management's estimate of probable losses inherent in the Corporation's loan and lease portfolio. Management evaluates the allowance each quarter to determine that it is adequate to absorb these inherent losses. This evaluation is supported by a methodology that identifies estimated losses based on assessments of individual problem loans and historical loss patterns of homogeneous loan pools. In addition, environmental factors, including economic conditions and 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. 28 Collective Loan Impairment. This component of the allowance for loan and lease losses is comprised of two elements. 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 element 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 using 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 loan and lease losses at March 31, 2004: In general, the Corporation's borrowing customers appear to be successfully managing their businesses through the slower economic conditions. While there appear to be some signs of improvement in the economy and the Corporation's customer base is beginning to see some signs of increased business activity, the customers remain cautious of there being any substantive increase in revenues until later in the year. As a result, the recession's lagging impact may continue to affect the operating performance of M&I's customers in the near term. At March 31, 2004, special reserves continue to be carried for exposures to manufacturing, healthcare, production agriculture (including dairy and cropping operations), truck transportation, and the airline and travel industries. The majority of the commercial charge-offs incurred during the past two years 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. During the first quarter of 2004, the Corporation's commitments to Shared National Credits were approximately $2.2 billion with usage averaging around 41%. Many of these borrowers are in industries impacted by the recent months economic climate. In addition, many of the Corporation's largest charge-offs have come from Shared National Credits. Approximately $3.1 million of the net charge-offs in 2003 came from Shared National Credits. Although these factors result in an increased risk profile, as of March 31, 2004, Shared National Credit nonperforming loans were approximately 0.14% and 0.25% 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. The Corporation's primary lending areas are Wisconsin, Arizona, Minnesota and Missouri. The acquisitions in Minnesota and Missouri continue to represent relatively new geographic regions for the Corporation. Each of the regions has cultural and environmental factors that are unique to them. Although mitigated by the implementation of the Corporation's credit underwriting and monitoring processes, the uncertainty regarding the inherent losses in their respective loan and lease portfolios continues to present increased risks. At March 31, 2004, nonperforming loans and leases amounted to $156.1 million or 0.60% of consolidated loans and leases compared to $172.8 million or 0.69% of consolidated loans and leases at December 31, 2003, a decrease of $16.7 million or 9.6%. Nonaccrual loans and leases accounted for all of the decrease in nonperforming loans and leases since December 31, 2003. The net decrease was primarily due to continued reductions and positive resolutions in several portfolio segments and across most loan types. Commercial mortgages was the only loan type that experienced an increase in nonaccrual loans since December 31, 2003 and that increase was primarily attributable to two loans placed on nonaccrual during the current quarter. 29 Net charge-offs amounted to $4.9 million or 0.08% of average loans and leases in the first quarter of 2004 compared to $8.3 million or 0.13% of average loans in the fourth quarter of 2003 and $25.8 million or 0.44% of average loans in the first quarter of 2003. 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 Airlines, Inc. The net charge-off activity experienced in the current quarter is the lowest level experienced in any individual quarter since the first quarter of 2000 and is the result of lower than average charge-offs and higher than average recoveries. Credit quality continued to show improvement as evidenced by the decline in nonperforming loans and leases and net charge-offs which were lower than expected based on the state of the economy in the markets the Corporation serves. In the 2003 Annual Report on Form 10- K, the Corporation disclosed that it expects net charge-offs in 2004 to range from 0.15% to 0.20% for the year and nonperfoming loans and leases as a percent of total loans and leases outstanding to be in the range of 70-80 basis points. Based on this quarter's experience, it appears that the Corporation's credit quality ratios may be at the low end of the range in the near term. At the present time, there is no specific industry that is of immediate concern; however, management continues to believe that the long-term impact of the recent recession may still provide some unanticipated results within the loan and lease portfolio and until the economy demonstrates a sustained period of strengthening, some degree of stress and uncertainty continues to exist. 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 $353.7 million or 1.36% of loans and leases outstanding at March 31, 2004 compared to $349.6 million or 1.39% of loans and leases outstanding at December 31, 2003. The resulting provision for loan and lease losses was the amount required to establish the allowance for loan and lease losses to the required level after considering charge-offs and recoveries. Management recognizes there are significant estimates in the process and the ultimate losses could be significantly different from those currently estimated. The Corporation has not substantively changed any aspect to its overall approach in the determination of the allowance for loan and lease losses. There have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. Capitalized Software and Conversion Costs _________________________________________ Direct costs associated with the production of computer software that will be licensed externally or used in a service bureau environment are capitalized. Capitalization of such costs is subject to strict accounting policy criteria, although the appropriate time to initiate capitalization requires management judgment. Once the specific capitalized project is put into production, the software cost is amortized over its estimated useful life, generally four years. Each quarter, the Corporation performs net realizable value tests to ensure the assets are recoverable. Such tests require management judgment as to the future sales and profitability of a particular product which involves, in some cases, multi-year projections. Technology changes and changes in customer requirements can have a significant impact on the recoverability of these assets and can be difficult to predict. Should significant adverse changes occur, estimates of useful life may have to be revised or write-offs would be required to recognize impairment. For the three months ended March 31, 2004 and 2003, the amount of software costs capitalized amounted to $10.1 million and $15.3 million, respectively. Amortization expense of software costs amounted to $11.4 million for the three months ended March 31, 2004 compared to $10.7 million for the three months ended March 31, 2003. 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 case of early termination. For the three months ended March 31, 2004 and 2003, the amount of conversion costs capitalized amounted to $1.6 million and $2.6 million, respectively. Amortization expense of conversion costs amounted to $3.3 million and $4.1 million for the three months ended March 31, 2004 and 2003, respectively. 30 Net unamortized costs were ($ in millions):
March 31, ------------------------- 2004 2003 ----------- ----------- Software $ 133.5 $ 145.9 Conversions 29.0 34.5 ----------- ----------- Total $ 162.5 $ 180.4 =========== ===========
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 December 2003, the Corporation adopted FASB Interpretation No. 46 ("FIN 46R"), Consolidation of Variable Interest Entities (revised December 2003). This interpretation addresses consolidation by business enterprises of variable interest entities and 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 46R 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 46R and do not consolidate those entities. With respect to its existing securitization activities, the Corporation does not believe FIN 46R impacts its consolidated financial statements because its transfers are generally to QSPEs. 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. The Corporation periodically sells automobile loans to an unconsolidated multi-seller special purpose entity commercial paper conduit in securitization transactions in which servicing responsibilities and subordinated interests are retained. The outstanding balances of automobile loans sold in these securitization transactions were $1,016.7 million at March 31, 2004. At March 31, 2004, the carrying amount of retained interests amounted to $44.1 million. 31 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 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 free-standing derivative financial instruments in the Corporation's Consolidated Balance Sheet. Under the terms of the Administration Agreement, the Bank, as administrator of the QSPE, is required to sell interests in the securities funded by the QSPE to the Bank as the liquidity purchaser under the liquidity agreements, if at any time (after giving effect to any issuance of new commercial paper notes and the receipt of payments under any swap agreement) the QSPE has insufficient funds to repay any maturing commercial paper note and the Bank, as liquidity agent, has received a notice of such deficiency. The Bank, as the liquidity provider, will be obligated to purchase interests in such securities under the terms of the liquidity agreement to repay the maturing commercial paper notes unless (i) after giving effect to such purchase, the aggregate of securities purchased under the relevant liquidity agreement would exceed the aggregate maximum liquidity purchase amount under such liquidity agreement or (ii) certain bankruptcy events with respect to the QSPE have occurred; provided that the Bank is not required to purchase any defaulted security. For this purpose, a defaulted security is any security that is rated below "Caa2" by Moody's and below "CCC" by Standard & Poors. To date, the Bank has never acquired interests in any securities under the terms of the liquidity agreements. A subsidiary of the Bank has entered into interest rate swaps with the QSPE designed to counteract the interest rate risk associated with third party beneficial interest (commercial paper) and the transferred assets. The beneficial interests in the form of commercial paper have been issued by the QSPE to parties other than the Bank and its subsidiary or any other affiliates. The notional amounts do not exceed the amount of beneficial interests. The swap agreements do not provide the QSPE or its administrative agent any decision-making authority other than those specified in the standard ISDA Master Agreement. At March 31, 2004, highly rated investment securities in the amount of $295.1 million were outstanding in the QSPE to support the outstanding commercial paper. Income Taxes ____________ Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on tax assets and liabilities of a change in tax rates is recognized in the income statement in the period that includes the enactment date. The determination of current and deferred income taxes is based on complex analyses of many factors, including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts currently due or owed such as the timing of reversals of temporary differences and current accounting standards. The Federal and state taxing authorities who make assessments based on their determination of tax laws periodically review the Corporation's interpretation of Federal and state income 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 financial and operating activities and results which are preceded by words such as "expects", "anticipates" or "believes". Such statements are subject to important factors that could cause the Corporation's actual results to differ materially from 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, 2003 under the heading "Forward-Looking Statements" and as may be described from time to time in the Corporation's subsequent SEC filings, and such factors are incorporated herein by reference. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following updated information should be read in conjunction with the Corporation's 2003 Annual Report on Form 10-K. Updated information regarding the Corporation's use of derivative financial instruments is contained in Note 11, Notes to Financial Statements contained in Item 1 herein. Market risk arises from exposure to changes in interest rates, exchange rates, commodity prices, and other relevant market rate or price risk. The Corporation faces market risk through trading and other than trading activities. While market risk that arises from trading activities in the form of foreign exchange and interest rate risk is immaterial to the Corporation, market risk from other than trading activities in the form of interest rate risk is measured and managed through a number of methods. Interest Rate Risk ___________________ The Corporation uses financial modeling techniques to identify potential changes in income under a variety of possible interest rate scenarios. Financial institutions, by their nature, bear interest rate and liquidity risk as a necessary part of the business of managing financial assets and liabilities. The Corporation has designed strategies to limit these risks within prudent parameters and identify appropriate risk/reward tradeoffs in the financial structure of the balance sheet. The financial models identify the specific cash flows, repricing timing and embedded option characteristics of the assets and liabilities held by the Corporation. Policies are in place to assure that neither earnings nor fair value at risk exceed appropriate limits. The use of a limited array of derivative financial instruments has allowed the Corporation to achieve the desired balance sheet repricing structure while simultaneously meeting the desired objectives of both its borrowing and depositing customers. The models used include measures of the expected repricing characteristics of administered rate (NOW, savings and money market accounts) and non-rate related products (demand deposit accounts, other assets and other liabilities). These measures recognize the relative insensitivity of these accounts to changes in market interest rates, as demonstrated through current and historical experiences. 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 growth in balances 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 ------------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, 2004 2003 2003 2003 2003 ------------- ------------- ------------- ------------- ------------- Hypothetical Change in Interest Rate - ------------------------------------ 100 basis point gradual: Rise in rates (0.7)% (0.6)% (1.1)% (0.6)% 0.9 % Decline in rates (2.1)% (1.8)% (1.6)% (2.0)% (1.4)%
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 and the changes in spread between key market rates. 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. 33 Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies. Another component of interest rate risk is measuring the fair value at risk for a given change in market interest rates. The Corporation also uses computer modeling techniques to determine the present value of all asset and liability cash flows (both on- and off-balance sheet), adjusted for prepayment expectations, using a market discount rate. The net change in the present value of the asset and liability cash flows in different market rate environments is the amount of fair value at risk from those rate movements. As of March 31, 2004, the fair value of equity at risk for a gradual 100bp shift in rates has not changed materially since December 31, 2003. Equity Risk ___________ In addition to interest rate risk, the Corporation incurs market risk in the form of equity risk. M&I's Capital Markets Group invests in private, medium- sized companies to help establish new businesses or recapitalize existing ones. Exposure to the change in equity values for the companies that are held in their portfolio exist, however, fair values are difficult to determine until an actual sale or liquidation transaction actually occurs. As of March 31, 2004, M&I Trust Services administered $71.5 billion in assets and directly managed a portfolio of $16.6 billion. Exposure exists to changes in equity values due to the fact that fee income is partially based on equity balances. While this exposure is present, quantification remains difficult due to the number of other variables affecting fee income. Interest rate changes can also have an effect on fee income for the above stated reasons. ITEM 4. CONTROLS AND PROCEDURES We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. 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 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. 34 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES E. Shares Purchased The following table reflects the purchases of Marshall & Ilsley Corporation stock for the specified period:
Total Number of Shares Purchased as Maximum Number of Average Part of Publicly Shares that May Yet Total Number of Price Paid Announced Plans or Be Purchased Under Period Shares Purchased per Share Programs the Plans or Programs - ------------------- ----------------- ------------ -------------------- --------------------- January 1 to January 31, 2004 625,900 $ 38.53 625,900 11,374,100 February 1 to February 29, 2004 1,317,200 39.03 1,317,200 10,056,900 March 1 to March 31, 2004 326,900 39.67 326,900 9,730,000
The Corporation's Share Repurchase Program was publicly reconfirmed in April 2003 and again in April 2004. The Share Repurchase Program authorizes the purcahse of up to 12 million shares annually and renews each year at that level unless changed or terminated by subsequent Board action. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits: Exhibit 10(a) - Change of Control Agreement dated as of February 19, 2004 between the Corporation and Frank R. Martire. Exhibit 10(b) - Letter Agreement dated April 12, 2004 between the Corporation and Thomas M. Bolger. 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(a) - Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. Exhibit 31(b) - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. Exhibit 32(a) - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32(b) - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. B. Reports on Form 8-K: On January 14, 2004, the Corporation furnished Items 7 and 12 in a Current Report on Form 8-K relating to the release of earnings for the quarter and year ended December 31, 2003. 35 SIGNATURES __________ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARSHALL & ILSLEY CORPORATION (Registrant) /s/ Patricia R. Justiliano __________________________________ Patricia R. Justiliano Senior Vice President and Corporate Controller (Chief Accounting Officer) /s/ James E. Sandy __________________________________ James E. Sandy Vice President May 10, 2004 36 EXHIBIT INDEX Exhibit Number Description of Exhibit ______________ ____________________________________________ 10(a) Change of Control Agreement dated as of February 19, 2004 between the Corporation and Frank R. Martire. 10(b) Letter Agreement dated April 12, 2004 between the Corporation and Thomas M. Bolger. (11) Statement Regarding Computation of Earnings Per Share,Incorporated by Reference to NOTE 4 of Notes to Financial Statements contained in Item 1 - FinancialStatements (unaudited) of Part 1 - Financial Information herein. (12) Statement Regarding Computation of Ratio of Earnings to Fixed Charges. (31)(a) Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (31)(b) Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (32)(a) Certification of Chief Executive Officer pursuant to 18 U.S.C .Section 1350. (32)(b) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. EX-10 2 ex10a304.txt EXHIBIT 10(A) TO FORM 10-Q DATED 03/31/2004 1 Exhibit 10(a) CHANGE OF CONTROL AGREEMENT THIS AGREEMENT, entered into as of the 19th day of February, 2004, by and between MARSHALL & ILSLEY CORPORATION (the "Company"), and Frank R. Martire (the "Executive") (hereinafter collectively referred to as "the parties"). W I T N E S S E T H: WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change of Control (as hereinafter defined in Section 2) exists and that the threat of or the occurrence of a Change of Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; and WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its shareholders to retain the services of the Executive in the event of a threat or occurrence of a Change of Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat of or the occurrence of a Change of Control, the Company desires to enter into this Agreement with the Executive. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Employment Term. (a) The "Employment Term" shall commence on the first date during the Protected Period (as defined in Section 1(c), below) on which a Change of Control (as defined in Section 2, below) occurs (the "Effective Date") and shall expire on the third 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 three (3) 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 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 3 (d) Consummation of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. Employment. (a) Subject to the provisions of Section 3, hereof, the Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed in such executive capacity as may be mutually agreed to by the parties. During the Employment Term, Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held or assigned at any time during the twelve (12) month period immediately preceding the Effective Date, and Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective Date or at any office or location less than thirty-five (35) miles from such location, unless mutually agreed to in writing by the parties. (b) Excluding periods of vacation and sick leave to which the Executive is entitled, during the Employment Term the Executive agrees to devote full time attention to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, provided that the Executive may take reasonable amounts of time to (i) serve on corporate, civil or charitable boards or committees, and (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, if such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of Executive's responsibilities hereunder. 4 4. Compensation. (a) Base Salary. During the Employment Term, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve (12) times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve (12) month period immediately preceding the month in which the Effective Date occurs, including any amounts which were deferred under any plans of the Company and its affiliated companies. During the Employment Term, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (b) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Term, an annual bonus (the "Annual Bonus") in cash at least equal to the average annualized (for any fiscal year consisting of less than twelve (12) full months or with respect to which the Executive has been employed by the Company for less than twelve (12) full months) bonuses paid or payable, including any amounts which were deferred under any plans of the Company and its affiliated companies, to the Executive by the Company and its affiliated companies in respect of the three (3) fiscal years immediately preceding the fiscal year in which the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus shall be paid no later than seventy-five (75) days after the end of the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus under any plan or arrangement of the Company allowing therefor. (c) Incentive, Savings and Retirement Plans. During the Employment Term, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the twelve (12) month period immediately preceding the Effective Date, or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (d) Benefit Plans. During the Employment Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription drug, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies and their families; but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive and his family at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies and their families. 5 (e) Expenses. During the Employment Term, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (f) Fringe Benefits. During the Employment Term, the Executive shall be entitled to fringe benefits (including but not limited to Company cars, club dues and physical examinations) in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (g) Office and Support Staff. During the Employment Term, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, in accordance with the most favorable of the foregoing provided to the Executive by the company and its affiliated companies at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (h) Vacation and Sick Leave. During the Employment Term, the Executive shall be entitled to paid vacation and sick leave (without loss of pay) in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (i) Restrictions. As of the Effective Date, all restrictions limiting the exercise, transferability or other incidents of ownership of any outstanding award, including but not limited to restricted stock, options, stock appreciation rights, or other property or rights of the Company granted to the Executive shall lapse, and such awards shall become fully vested and be held by the Executive free and clear of all such restrictions. This provision shall apply to all such property or rights notwithstanding the provisions of any other plan or agreement, unless the effect of the application of this provision to a particular right or property would result in the loss of favorable securities law treatment for participants under the plan pursuant to which the award was granted. 5. Termination of Employment. During the Employment Term, the Executive's employment hereunder may be terminated under the following circumstances: 6 (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 5 of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for one hundred eighty (180) consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative, provided if the parties are unable to agree, the parties shall request the Dean of the Medical College of Wisconsin to choose such physician. (b) Cause. The Company may terminate the Executive's employment for "Cause." A termination for Cause is a termination evidenced by a resolution adopted in good faith by a majority of the Board that the Executive (i) willfully, deliberately and continually failed to substantially perform his duties under Section 3, above (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure constitutes gross misconduct, and results in and was intended to result in demonstrable material injury to the Company, monetary or otherwise, or (ii) committed acts of fraud and dishonesty constituting a felony, as determined by a final judgment or order of a court of competent jurisdiction, and resulting or intended to result in gain to or personal enrichment of the Executive at the Company's expense, provided, however, that no termination of the Executive's employment shall be for Cause as set forth in (i), above, until (a) Executive shall have had at least sixty (60) days to cure any conduct or act alleged to provide Cause for termination after a written notice of demand has been delivered to the Executive specifying in detail the manner in which the Executive's conduct violates this Agreement, and (b) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, or failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act in bad faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (c) Good Reason. (1) The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change of Control of any of the events or conditions described in Subsections (i) through (vi) hereof: (i) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with his status, title, position or responsibilities in effect immediately prior to such assignment; or any removal of the Executive from or failure to reappoint or reelect him to any position, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; 7 (ii) Any failure by the Company to comply with any of the provisions of Section 4 of this Agreement. (iii) The insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company; (iv) Any material breach by the Company of any provision of this Agreement; (v) Any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 5 of this Agreement; and (vi) The failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company, to assume and agree to perform this Agreement, as contemplated in Section 10 hereof. (2) Any event or condition described in Section 5(c)(1) which occurs prior to the Effective Date but which the Executive reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise arose in connection with or in anticipation of a Change of Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Effective Date. (3) The Executive's right to terminate his employment pursuant to this Section 5(c) shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment or failure to give Notice of Termination shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (4) For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason or for no reason during the sixty (60) day period commencing on the date six (6) months after the Effective Date shall be deemed to be a termination by the Executive for Good Reason for all purposes of this Agreement. (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. 8 (f) Termination Date, etc. "Termination Date" shall mean in the case of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company, the date specified in the Notice of Termination shall be at least thirty (30) days after the date the Notice of Termination is given to the Executive, provided, however, that in the case of Disability, the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days; (2) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days after the date the Notice of Termination is given to the Company; and (3) In the event that within thirty (30) days following the date of receipt of the Notice of Termination, one party notifies the other that a dispute exists concerning the basis for termination, the Executive's employment hereunder shall not be terminated except after the dispute is finally resolved and a Termination Date is determined either by a mutual written agreement of the parties, or by a binding and final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 6. Obligations of the Company Upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Term, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Termination Date the aggregate of the following amounts: A. The sum of: (1) The Executive's Annual Base Salary through the Termination Date to the extent not theretofore paid; and (2) The product of (x) the higher of (I) the Recent Average Bonus and (II) the Annual Bonus paid or payable, including any amount deferred, (and annualized for any fiscal year consisting of less than twelve (12) full months or for which the Executive has been employed for less than twelve (12) full months) for the most recently completed fiscal year during the Employment Term, if any (such higher amount being referred to as the "Highest Annual Bonus.") and (y) a fraction, the numerator of which is the number of days completed in the current fiscal year through the Termination Date, and the denominator of which is 365. 9 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) three 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 three (3) 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 10 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 three times eight percent (8%) (or twenty-four percent (24%)) 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 plan of the Company, the Executive would receive three times the annual Company match of fifty percent (50%) of the Executive's maximum allowable contribution to the Plan assuming Executive's compensation is as set forth above; and D. The amount equal to the product of (i) three 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 thirty-six (36) 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 thirty-six (36) month period and to have retired on the last day of such period. If the Executive would qualify at the end of such thirty-six (36) 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. 11 (iii) The Executive shall have the right to purchase the car provided to him by the Company or its affiliates during the twelve (12) month period immediately preceding the Effective Date, if applicable, (or a comparable car acceptable to the Executive if such car is no longer owned by the Company or its affiliates), at the book value thereof on the Termination Date, exercisable within thirty (30) days after the Termination Date; and if the car is not purchased, Executive shall return the car to the Company. (iv) The Executive shall have the option of purchasing any split dollar life insurance owned by the Company or its affiliates on the life of Executive for the Company's investment in the contract, exercisable at any time within thirty (30) days after the Termination Date; and the Company agrees during the Employment Term not to terminate, sell, transfer or otherwise dispose of any such insurance without first allowing Executive the opportunity to exercise such option. For the thirty-six (36) 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 thirty-six (36) 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. 13 (f) Vacation Pay. In consideration of all payments made by the Company to the Executive pursuant to this Agreement, the Executive hereby waives any claim he may have for accrued and unpaid vacation pay as of the Termination Date. 7. No Mitigation. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced (except to the extent set forth in Section 6(a)(ii)) whether or not the Executive obtains other employment. 8. Excise Tax Payments. (a) Notwithstanding anything contained in this Agreement to the contrary, in the event that 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 an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (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 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 within five (5) business days of the receipt of the Accounting Firm's determination. 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). 14 (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Overpayment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred upon notice (formal or informal) to the Executive from any governmental taxing authority that the tax liability of the Executive (whether in respect of the then current taxable year of the Executive or in respect of any prior taxable year of the Executive) may be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment. An Overpayment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Payment or Payments with respect to which the Executive had previously received a Gross-Up Payment. A Final Determination shall be deemed to have occurred when the Executive has received from the applicable governmental taxing authority a refund of taxes or other reduction in his tax liability by reason of the Overpayment and upon either (i) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (ii) the expiration of the statute of limitations with respect to the Executive's applicable tax return. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall pay to the Executive at least five (5) business days prior to the date on which the applicable governmental taxing authority has requested payment, an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties imposed on the Underpayment. If an Overpayment occurs, the amount of the Overpayment shall be treated as a loan by the Company to the Executive and the Executive shall, within ten (10) business days of the occurrence of such Overpayment, pay to the Company the amount of the Overpayment plus interest at an annual rate equal to the rate provided for in Section 1274(b)(2)(B) of the Code from the date the Gross-Up Payment (to which the Overpayment relates) was paid to the Executive. 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, (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 or (iv) a dispute between the Executive and the Internal Revenue Service (or any other taxing authority) with regard to an "Underpayment" (as defined in Section 8 of this Agreement). 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. In consideration of the terms, conditions and benefits to be provided under this Agreement, the Executive hereby expressly waives all rights under that certain Change of Control Agreement between the Executive and the Company dated January 13, 2003. 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. 17 22. Withholding. The Company shall be entitled to withhold from amounts paid to the Executive hereunder any federal, estate or local withholding or other taxes or charges which it is, from time to time, required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. MARSHALL & ILSLEY CORPORATION By: /s/ Dennis J. Kuester ______________________________ Dennis J. Kuester Chief Executive Officer ATTEST: /s/ Randall J. Erickson _________________________________ Randall J. Erickson, Secretary EXECUTIVE: /s/ Frank R. Martire ______________________________ Frank R. Martire Address: _______________________________ _______________________________ MW3yr M&I COC Agreement.doc EX-10 3 ex10b304.txt EXHIBIT 10(B) TO FORM 10-Q DATED 03/31/2004 1 Exhibit 10(b) April 12, 2004 Tom Bolger c/o Marshall & Ilsley Corporation 770 North Water Street Milwaukee, Wisconsin 53202 Dear Tom: This Letter Agreement ("Letter Agreement") is intended to reflect our agreement concerning your early retirement from Marshall & Ilsley Corporation ("M&I") and all related matters. 1. Status of Employment Through June 30, 2004. From the date of this letter through June 30, 2004 (the "Full-Time Employment Period"), you will remain a full-time employee of M&I. You will continue to report to Dennis Kuester. During the Full-Time Employment Period, your compensation and benefits will remain the same as they were immediately prior to the date of this letter. On July 1, 2004, the title to your current company vehicle will be transferred to you at no cost. The value of the company vehicle will be reported for income tax purposes as compensation to you, with value determination and taxable income allocation pursuant to the Marshall & Ilsley Corporation Automobile Policy - 2004. M&I will pay you an incentive for the six- month period beginning January 1 and ending June 30, 2004 in the amount of $240,000 no later than July 31, 2004 if you comply with the following: (a) you assist in a positive transition of your responsibilities and (b) you execute, and do not revoke during the applicable rescission period, the Complete and Permanent Release provided to you once the Full-Time Employment Period ends. 2. Status of Employment from July 1, 2004 through December 31, 2005. From July 1, 2004 through December 31, 2005 (the "Part-Time Employment Period"), you will be a part-time employee of M&I, working less than 17.5 hours per week, and you will continue to report to Dennis Kuester; however, none of the payments or benefits promised to you herein are or will be contingent upon your performance of duties other than ones that the parties (including you) shall mutually agree in writing after the end of the Full-Time Employment Period (instead the payments and benefits in this Letter Agreement will be guaranteed as set forth in this document). During the Part-Time Employment Period, you agree not to take any action, perform any duties, or incur any expenses on M&I's behalf without Dennis Kuester's written direction. Throughout the Part-Time Employment Period, you will receive monthly payments of $72,000, totaling $1,296,000, in accordance with M&I's regular payroll practices. Because of the reduction in your hours of employment, you will be eligible to participate in M&I's health and dental plans to the extent that you elect continuation coverage in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"). M&I will subsidize your health and dental coverage (including payment of your COBRA premiums) to the same extent as for full-time active employees through and until June 30, 2006. This continued subsidy will last through and until June 30, 2006, notwithstanding the fact that COBRA will run out December 31, 2005; such that you will continue to participate in M&I's health and dental plans through June 30, 2006 as if you remained an active, full-time employee, and M&I will continue to subsidize your participation to the same extent as for full-time active employees. Starting on July 1, 2006, you will be eligible to participate in the M&I Retiree Medical Program, and any other retirement plans or programs which similarly situated M&I retirees 2 (excluding retirees of companies acquired by M&I who may have been provided benefits according to the terms of an acquisition agreement) enjoy, in accordance with their terms as in effect from time to time pursuant to similar treatment of other similarly-situated retirees, if you have remained a participant in the M&I health plans through June 30, 2006. Because of your part-time employment starting on July 1, 2004, you will not be eligible to participate in any of M&I's other benefit plans (other than ones specified in this Letter Agreement) including M&I's long-term disability plans. This does not, however, limit in any way, your right to purchase the conversion coverage provided by the United Wisconsin Life Insurance Program. Any vested benefits you have in M&I's qualified or nonqualified benefit plans as of December 31, 2005 will thereafter be governed by the terms of those plans, except as such rights are set forth otherwise in this Agreement, in which case the terms of this Agreement shall prevail. As of December 31, 2005, you will be deemed to have utilized all vacation to which you may be eligible and, therefore, will not be entitled to any payment for earned, but unused, vacation. In addition, you agree not to apply for unemployment compensation benefits from M&I respecting the end of your employment with it. 3. Salary and Incentive Continuation Payments. For the period beginning January 1, 2006 and ending on June 30, 2006, you shall receive monthly payments of $72,000, totaling $432,000, if you execute, and do not revoke during the applicable rescission period, the second Complete and Permanent Release provided to you once the Part-Time Employment Period ends. 4. Treatment of Stock Options. Any M&I stock options which by their terms will vest on or before December 31, 2005 will do so in accordance with their terms and in accordance with your status as an employee until December 31, 2005, and the fact that your employment status changes from Full-Time to Part-Time on July 1, 2004 shall have no effect on your rights to have these options vest. Any M&I stock options which do not vest on or before December 31, 2005 will lapse as of January 1, 2006. The normal terms of the relevant M&I Stock Option Plans provide that the options remain exercisable for ninety days after your employment terminates. However, notwithstanding the terms of those Stock Option Plans, with regard to your vested options (as of December 31, 2005), you will be eligible for retiree treatment and therefore your vested options will remain exercisable for the shorter of (a) the remainder of their terms as if your employment continued indefinitely or (b) one year after your death, but only if, and to the extent, you choose to meet the following two conditions. First, you execute, and do not revoke during the applicable rescission period, the second Complete and Permanent Release provided to you once the Part-Time Employment Period ends. Second, you comply with the confidentiality and non-competition provisions set forth in paragraphs 13 and 14 of this Letter Agreement, not only for the term set forth in those paragraphs, but for such longer period as you want your options to remain exercisable. Should you violate any provision of paragraph 13 or 14 during the term set forth therein, or the extended term of your choosing, you agree that your outstanding M&I stock options (including those transferred to family members) shall, without any action by M&I (other than providing notice), remain exercisable only for the shorter of the remainder of their respective terms or the ninety (90) day period running from the date of your breach; provided that the ninety (90) day period shall not start running until the date on which M&I provides you with written notice of breach; and further provided that this language shall have no impact on your LTIP entitlements delineated in Paragraph 6 of this Letter Agreement. The provisions of this Paragraph 4 shall not apply to the restricted units discussed below in Paragraph 5. 5. Vesting of Restricted Stock. All restricted units that have not vested by December 31, 2005 will automatically vest on December 31, 2005 or January 1, 2006, at your choice (and if you choose January 1, 2006, then the language and terms contained in this Letter Agreement referencing expiration of your unvested stock as of December 31, 2005 shall instead mean as of January 1, 2006, such that your unvested restricted units shall not be deemed to have expired or been forfeited on or as of December 31, 2005) 3 6. Participation in the Long-Term Incentive Plan. You will continue to participate in the awards made to you under M&I's 1994 Long-Term Incentive Plan (the "LTIP") which relate to the periods ended December 31, 2004 and 2005 in the amount of 8,000 units in each year. You will be treated as an age 65 retiree from M&I as regards the 10,000 units which were awarded to you under the LTIP in December 2003 for the performance period ended December 31, 2006. Any incentive owing to you in connection with such awards will be paid to you at such time and upon such terms as payments are made to other participants. Your continued participation with respect to your outstanding LTIP units shall not be impacted in any manner if you choose to breach the terms of Paragraphs 13 or 14 of this Letter Agreement after December 31, 2005. 7. Participation in the Deferred Compensation Plan. Your right to make additional deferrals into M&I's Amended and Restated Executive Deferred Compensation Plan (the "Deferred Compensation Plan") will end on December 31, 2005; however, notwithstanding the terms of the Deferred Compensation Plan, you will be given an opportunity after you execute this Agreement to redeclare/reallocate under the Deferred Compensation Plan for the last six months of calendar year 2004. The balance in your Account, as defined therein, will be distributed to you in accordance with your form of Payment Election in accordance with that Plan's terms. To the extent that the deductibility of any payments made to you under this Letter Agreement would be limited by Section 162(m) of the Internal Revenue Code, such payments will automatically be deferred into your account in the Deferred Compensation Plan, whenever such amounts are otherwise due and owing to you. 8. Retirement Contributions. M&I will make retirement contributions totaling $183,000 related to the services you perform in 2004 and 2005. The contributions for each year will total $91,500, and will first be contributed to the qualified retirement plans to the maximum extent provided by law, including as an employer match under M&I's 401(k) plan, with the remainder contributed to your account in the Deferred Compensation Plan. 9. Club Dues and Tax and Financial Planning Fees. M&I will pay you a lump sum of $30,000, to cover your membership dues and annual (but not extraordinary) capital assessments at your clubs for the 2004 and 2005 calendar years and your income tax preparation for your 2004 and 2005 federal and state income tax returns and associated financial planning in accordance with M&I's policies for executive officers, as well as other financial planning costs. This payment will be made consistently with the tax treatment and reimbursement methods as are used with the Company's senior most executives, and to the extent that any of the Company's senior most executives may be given tax favorable treatment or tax gross-up, then you would be treated and given the same. The value of these benefits, to the extent required by law, will be reported for income tax purposes. M&I's obligations under this Paragraph 9 regarding financial counseling, tax preparation, and club fees, dues and costs will be capped at a total of $30,000, but you will receive a total of $30,000 in benefit and/or payment pursuant to this Paragraph 9, regardless of your actual expenses and costs. In addition to this $30,000 payment, M&I will reimburse you for your legal costs in having this Agreement reviewed and negotiated on your behalf, up to a cap of $10,000. 10. Impact of Life Insurance and Disability Payments. If you should suffer a disability between the date of this Letter Agreement and June 30, 2004 such that you would qualify for short- term or long-term disability payments under the M&I Short-Term Disability Leave Policy or the Marshall and Ilsley Corporation Long-Term Disability Income Plan, the present value of any projected payments will reduce any amounts owing to you under this Letter Agreement. The present value will be computed assuming disability payments will continue for the maximum amount of time allowed under each plan. Should your right to disability payments end prior to the receipt of the maximum payments, the present value will be recomputed based on the actual number of disability payments you received, and any excess reduction will be paid to 4 you within thirty days of the date you no longer receive disability payments. If you were to die during the period between the date of this Letter Agreement and June 30, 2004, any life insurance proceeds from an M&I plan that are paid to your beneficiaries will reduce the amounts paid to your beneficiaries under this Letter Agreement on a dollar-for- dollar basis. Notwithstanding the foregoing, however, M&I understands that you have been and through June 30, 2004 will be continuing to pay the cost of group life insurance premiums to obtain additional death benefit beyond what the Company's premium payments cover, and therefore, in the event of your death on or prior to June 30, 2004, then the amount of life insurance paid out as a result of your paid premiums will not be offset in anyway against the amounts paid to your beneficiaries under this Letter Agreement. 11. Change of Control Agreement. Your Change of Control Agreement with M&I dated August 12, 1999 shall terminate on the date you execute this Letter Agreement. 12. Other Agreements. In exchange for the benefits provided to you in this Letter Agreement, you agree as follows: (a) You acknowledge that you and M&I have agreed on the form of press release announcing your early retirement and the related communication plan. (b) You agree that your positions as President of M&I Marshall & Ilsley Bank and Executive Vice President of M&I, as well as any other officer and director positions you then hold with M&I or any other subsidiary or affiliate of M&I, will end as of 5:00 p.m. (C.D.T.) on June 30, 2004, and that no additional action is required by you in connection with the end of your tenure in such positions. (c) You hereby resign as a director of M&I Marshall & Ilsley Bank and Metavante Corporation effective as of 5:00 p.m. (C.D.T.) on April 12, 2004. (d) You agree that any transactions by you in M&I stock prior to the date on which M&I reports its calendar year 2004 earnings are subject to the "Pre-Clearance" provision of the M&I Securities Trading Policy, but that after that date, you shall be subject only to applicable law. 13. Confidentiality. In exchange for the benefits provided to you above, you agree to be bound by the provisions of Paragraphs 13 and 14 of this Letter Agreement. The term "Company," as used in Paragraphs 13 and 14 hereof, means M&I and any Affiliate. "Affiliate" means any corporation, partnership, limited liability company or other business entity which, directly or indirectly through one or more intermediaries, is controlled by M&I. The term "control" means the power, directly or indirectly, to vote 50% or more of the securities which have ordinary voting power in the election of directors (or individuals filling any analogous positions). (a) Confidential Information. During the Full-Time Employment Period, the Part-Time Employment Period, and until June 30, 2006, you shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean your use or direct or indirect disclosure, without the consent of the Board of Directors of M&I, to any person, other than use or disclosure that may be legally required (provided the provisions of Paragraph 13(c) hereof are complied with), of any confidential information obtained by you while in the employ of M&I, including, but not limited to, confidential information with respect to any of the Company's customers, business plans, financial results and pricing, methods of 5 operation, services and products (the "Confidential Information"); provided, however, that Confidential Information shall not include any information which was or becomes generally available to the public other than as a result of a wrongful disclosure by you, or which M&I previously publicly discloses. Nothing herein shall limit your confidentiality obligation as regards any information which is a trade secret as currently defined in the Wisconsin Uniform Trade Secrets Act, or any successor thereto, which you acknowledge may extend beyond June 30, 2006. (b) Return of Property. All memoranda, notes, records, other documents, customer lists, software, computer files, and equipment, and all copies thereof, relating to the operations or business of the Company, some of which may be prepared by you, and all objects associated therewith in any way obtained by you in connection with the performance of your duties for M&I, shall be the exclusive property of M&I. You shall not copy or duplicate any of the aforementioned, nor use any information concerning them other than in accordance with the performance of your duties for M&I. You will, no later than June 30, 2004, (i) deliver the original and all copies of all of the aforementioned that may be in your possession to M&I and (ii) delete any such information on your home or laptop computer. (c) Legally-Required Disclosure. If you are requested or become legally required or compelled (by oral questions, interrogatories, requests for information or documents, subpoena, civil or criminal investigative demand, or similar process) or are required by a governmental body to make any disclosure that is prohibited or otherwise constrained by this Letter Agreement, you will provide M&I with prompt written notice of such request so that it may seek an appropriate protective order or other appropriate remedy. Subject to the foregoing, you may furnish that portion (and only that portion) of the Confidential Information that you are legally compelled or are otherwise required to disclose. 14. Non-Competition and Nonsolicitation. In exchange for the benefits provided to you above, you agree to be bound by the provisions of Paragraph 14 of this Letter Agreement, all of which are severable. (a) Nonsolicitation of Customers. During the Full- Time Employment Period, the Part-Time Employment Period, and until June 30, 2006, you agree not to solicit, entice or encourage any Customer of the Company so as to cause or attempt to cause such Customer not to do business with the Company, to diminish its business with the Company, or to purchase a products or services sold by the Company from any source other than the Company. For purposes of this paragraph, "Customer" shall mean any person or business (i) which had a borrowing or depository relationship with the Company during any part of the one (1) year period prior to June 30, 2004 or (ii) which purchased products or services from the Company during the one (1) year period preceding the June 30, 2004; and (iii) with whom you had Direct Contact on behalf of the Company during such one (1) year period. For purposes of this Paragraph 14(a) of this Letter Agreement, the term "Direct Contact" means "focused intentional contact by you to either maintain or enhance M&I's business relationship with customer, whether contact was in person, by phone, or in writing." Thus, the prohibitions contained in this Paragraph 14(a) of this Letter Agreement do not cover Customers with whom you did not have Direct Contact during the one (1) year period preceding June 30, 2004. 6 (b) Non-Solicitation of Employees. During the Full-Time Employment Period, the Part-Time Employment Period, and until June 30, 2006, you will not induce or attempt to induce any individual who was employed by M&I on June 30, 2004 (a "Covered Employee") to terminate his or her employment with, or reduce the hours he or she works for, M&I. (c) General Non-Competition Provisions. During the Full-Time Employment Period, the Part-Time Employment Period, and until June 30, 2006, you agree not to directly or indirectly perform services substantially similar to the type performed by you for M&I for any Competitor of the Company where the services you provide benefit any of the Competitor's business activities (as long as such business activities are ones that M&I engages in) in (i) the State of Wisconsin, , (iii) within Phoenix, Arizona or a 75-mile radius of Phoenix, Arizona, (iv) within Tuscon, Arizona or a 40-mile radius of Tucson, Arizona, or (v) within Minneapolis, Minnesota or a 40-mile radius of Minneapolis, Minnesota. A "Competitor" means an entity in the financial services business which is engaged in deposit taking, lending, or trust products or services, in the same manner as M&I. Notwithstanding the foregoing, after December 31, 2005, you may violate the terms of this Paragraph 14(c) of this Letter Agreement in the states of Arizona and Minnesota, and if you do, then the Company shall, commencing on the date of your violation, be relieved of its obligations to continue paying you prospectively any remaining unpaid Salary and Incentive Continuation Payments referenced in Paragraph 3 of this Letter Agreement and your outstanding M&I stock options (including those transferred to family members) shall, without any action by M&I (other than providing you with written notice of the acceleration of your exercise period), remain exercisable only for the shorter of the remainder of their respective terms or the ninety (90) day period running from the date of your violation; however, your violation of the terms of Paragraph 14(c) with respect to the states of Arizona and Minnesota after December 31, 2005 shall have no other detrimental effect to you, and shall not otherwise reduce your entitlements under this Letter Agreement. (d) Acknowledgements/Consequences of Breach. You acknowledge that irreparable and incalculable injury will result to M&I, its business or properties, in the event of a breach by you of any of the restrictions set forth in Paragraphs 13 and 14 of this Letter Agreement. You therefore agree that, in the event of any such actual, impending or threatened breach, M&I will be entitled, in addition to any other remedies, to temporary and permanent injunctive relief (without the necessity of posting a bond or other security) restraining the violation or further violation of such restrictions by you. In addition, M&I shall be entitled to recover from you the monetary value of all consideration paid to you under this Letter Agreement, as well as to suspend all future payments and benefits which might otherwise be due you by them. The election of any one or more remedies by M&I shall not constitute a waiver of the right to pursue other available remedies. You further acknowledge that: (a) you will be able to earn a livelihood without violating the foregoing restrictions, (b) the covenants and restrictions set forth in Paragraphs 13 and 14 are necessary to protect the legitimate business interests of the Company and (c) your compliance with the terms of Paragraphs 13 and 14 are material terms. 15. Miscellaneous. Upon your execution of this Letter Agreement, the following will apply: (a) Severability. The sections, subsections, paragraphs and subparagraphs of this Letter Agreement are severable, and in the event any such section, subsection, paragraph or subparagraph may be held to be invalid by such court, this Letter Agreement shall be interpreted as if any such invalid section, subsection, paragraph or subparagraph were not contained in this Letter Agreement. 7 (b) Entire Agreement; Amendment. This Letter Agreement and the Complete and Permanent Releases (jointly, the "Agreements") constitute the complete understanding between you and M&I, concerning all matters affecting your employment with M&I and the termination thereof. If you execute this Letter Agreement, the Agreements supersede, as of the date of your consent to each of them, all prior agreements, understandings, personnel documents, handbooks, policies and any prior customs or practices concerning such matters, including the Change of Control Agreement between you and M&I dated August 12, 1999. This Letter Agreement may not be amended without the written consent of M&I and you. However, any side letters, if any, shall become a part of this Letter Agreement by a side letter making express reference to this Letter Agreement. (c) Governing Law. The Agreements and their interpretation shall be governed and construed in accordance with the laws of Wisconsin, without regard to its principles of conflicts of laws, and shall be binding upon the parties hereto and their respective successors and assigns. (d) Other Treatment. The amounts to be paid to you are in lieu of any severance or other termination benefits you would otherwise be entitled to under any other plan or arrangement of M&I, and such amounts will not count as compensation for purposes of any qualified or nonqualified retirement or welfare benefit plans except as otherwise expressly provided herein. All dollar amounts set forth herein are stated prior to deduction for any applicable income and employment tax withholding, or such other deduction as may be required by law. (e) Death or Disability. In the event of your death, M&I shall continue to make the payments and provide the benefits specified herein to your spouse or other designated beneficiary (or in the event such beneficiary predeceases you, to your estate), adjusted as provided in paragraph 10 of this Letter Agreement if you were to die prior to July 1, 2004. In the event of your disability, M&I shall continue to make the payments and provide the benefits specified herein, adjusted as provided in paragraph 10 of this Letter Agreement if you were to become disabled prior to July 1, 2004, directly to you, or, if another person or entity has been appointed to handle your financial affairs because you are unable to do so, to that person or entity. 16. Consents, Approvals and Authorizations. M&I warrants and represents to you that all consents, approvals and authorizations required for M&I to execute, deliver and perform this Letter Agreement have been obtained and are in full force and effect as of the date hereof, and the Agreements are valid, binding and enforceable obligations of M&I in accordance with their terms. 17. No Mitigation Obligation. To the extent that you choose to pursue other opportunities prior to July 1, 2006, such pursuits shall have no effect on your entitlement to all payments, benefits and promises owed to you by M&I under this Agreement (assuming your compliance with this Agreement), as such payments, benefits and promises are guaranteed. Moreover, you are under no obligation to mitigate in relation to the changes in your employment status with M&I. The fact that you are under no obligation to mitigate shall have no effect on your obligations to M&I regarding confidentiality, non-competition and nonsolicitation contained in Paragraphs 13 and 14 of this Agreement. 18. Counterparts. This Agreement may be executed in counterparts, all of which taken together shall constitute one Agreement. 8 You may accept this Letter Agreement by signing it in the space provided below and returning it to Paul Renard at Marshall & Ilsley Corporation, 770 North Water Street, Milwaukee, Wisconsin, 53202. Very truly yours, MARSHALL & ILSLEY CORPORATION By: /s/ David J. Mauer _________________________________ David J. Mauer Vice President Human Resources I agree with and accept the above-mentioned terms contained in this Letter Agreement and agree to be bound by them. Dated this 12th day of April, 2004. /s/ Thomas M. Boldger ___________________________________ EX-12 4 ex12_304.txt EXHIBIT 12 TO FORM 10-Q DATED 03/31/2004 Exhibit 12 MARSHALL & ILSLEY CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($000's)
Three Months Ended Years Ended December 31, March 31, ---------------------------------------------------------------- 2004 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ ------------ Earnings: Earnings before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 220,710 $ 758,387 $ 718,592 $ 501,045 $ 470,350 $ 527,939 Fixed charges, excluding interest on deposits 60,628 267,379 301,518 321,059 321,812 222,172 ----------- ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges but excluding interest on deposits 281,338 1,025,766 1,020,110 822,104 792,162 750,111 Interest on deposits 55,549 228,216 283,385 566,899 772,016 585,864 ----------- ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges and interest on deposits $ 336,887 $ 1,253,982 $ 1,303,495 $ 1,389,003 $ 1,564,178 $ 1,335,975 =========== =========== =========== =========== =========== =========== Fixed Charges: Interest Expense: Short-term borrowings $ 15,836 $ 81,070 $ 150,310 $ 188,587 $ 224,187 $ 142,294 Long-term borrowings 39,052 163,348 127,343 110,842 78,773 63,145 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor) 5,740 22,961 23,865 21,630 18,852 16,733 ----------- ----------- ----------- ----------- ----------- ----------- Fixed charges excluding interest on deposits 60,628 267,379 301,518 321,059 321,812 222,172 Interest on deposits 55,549 228,216 283,385 566,899 772,016 585,864 ----------- ----------- ----------- ----------- ----------- ----------- Fixed charges including interest on deposits $ 116,177 $ 495,595 $ 584,903 $ 887,958 $ 1,093,828 $ 808,036 =========== =========== =========== =========== =========== =========== Ratio of Earnings to Fixed Charges: Excluding interest on deposits 4.64 x 3.84 x 3.38 x 2.56 x 2.46 x 3.38 x Including interest on deposits 2.90 x 2.53 x 2.23 x 1.56 x 1.43 x 1.65 x
EX-31 5 ex31a304.txt EXHIBIT 31(A) TO FORM 10-Q DATED 03/31/2004 Exhibit 31(a) 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 the 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 (b) 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. Dated: May 10, 2004 /s/ Dennis J. Kuester _____________________________________ Dennis J. Kuester President and Chief Executive Officer MW786630_1.DOC EX-31 6 ex31b304.txt EXHIBIT 31(B) TO FORM 10-Q DATED 03/31/2004 Exhibit 31(b) 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 the 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 (b) 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. Dated: May 10, 2004 /s/ Mark F. Furlong __________________________________ Mark F. Furlong Executive Vice President and Chief Financial Officer MW786629_2.DOC EX-32 7 ex32a304.txt EXHIBIT 32(A) TO FORM 10-Q DATED 03/31/2004 Exhibit 32(a) CERTIFICATION OF PERIODIC REPORT ________________________________ I, Dennis J. Kuester, Chief Executive Officer of Marshall & Ilsley Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (14 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 10, 2004. /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. MW786631_2.DOC EX-32 8 ex32b304.txt EXHIBIT 32(B) TO FORM 10-Q DATED 03/31/2004 Exhibit 32(b) CERTIFICATION OF PERIODIC REPORT ________________________________ I, Mark F. Furlong, Chief Financial Officer of Marshall & Ilsley Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (14 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 10, 2004. /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. MW786632_2.DOC -----END PRIVACY-ENHANCED MESSAGE-----