-----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, M2xKZ50nDQjVxXtSdDhypOk5rIGIcSQigpOm8Xi81FxSRIMy89HrMUNSkuMgOfs0 aqCIPK1/OuvHrpdO29MKnw== 0000062741-05-000137.txt : 20050809 0000062741-05-000137.hdr.sgml : 20050809 20050809144037 ACCESSION NUMBER: 0000062741-05-000137 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050809 DATE AS OF CHANGE: 20050809 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: 051009172 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 fm10q605.txt FORM 10-Q DATED 06/30/2005 1 ========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-15403 MARSHALL & ILSLEY CORPORATION (Exact name of registrant as specified in its charter) Wisconsin 39-0968604 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 770 North Water Street Milwaukee, Wisconsin 53202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 765-7801 None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class July 31, 2005 ----- ---------------- Common Stock, $1.00 Par Value 232,803,375 ========================================================================== 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ($000's except share data) June 30, December 31, June 30, 2005 2004 2004 -------------- ------------- -------------- Assets - ------ Cash and cash equivalents: Cash and due from banks $ 976,073 $ 838,668 $ 823,790 Federal funds sold and security resale agreements 217,139 72,515 259,964 Money market funds 51,410 76,955 52,144 ------------- ------------- ------------- Total cash and cash equivalents 1,244,622 988,138 1,135,898 Investment securities: Trading securities, at market value 22,539 18,418 27,982 Interest bearing deposits at other banks 14,362 23,105 24,091 Available for sale, at market value 5,572,628 5,358,999 5,144,611 Held to maturity, market value $698,534 ($765,101 December 31, and $802,354 June 30, 2004) 668,107 726,386 769,899 ------------- ------------- ------------- Total investment securities 6,277,636 6,126,908 5,966,583 Loans held for sale 193,092 81,662 84,301 Loans and leases: Loans and leases, net of unearned income 31,952,759 29,455,110 27,111,014 Less: Allowance for loan and lease losses 360,138 358,110 357,898 ------------- ------------- ------------- Net loans and leases 31,592,621 29,097,000 26,753,116 Premises and equipment, net 448,730 467,225 433,562 Goodwill and other intangibles 2,159,624 2,126,433 1,269,059 Accrued interest and other assets 1,567,395 1,550,036 1,429,099 ------------- ------------- ------------- Total Assets $ 43,483,720 $ 40,437,402 $ 37,071,618 ============= ============= ============= Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 5,088,947 $ 4,888,426 $ 4,709,873 Interest bearing 20,972,493 21,566,661 20,515,413 ------------- ------------- ------------- Total deposits 26,061,440 26,455,087 25,225,286 Federal funds purchased and security repurchase agreements 1,705,817 1,488,855 1,263,129 Other short-term borrowings 3,456,383 2,041,181 2,298,897 Accrued expenses and other liabilities 1,576,211 1,535,866 1,149,379 Long-term borrowings 6,470,684 5,026,599 3,700,764 ------------- ------------- ------------- Total liabilities 39,270,535 36,547,588 33,637,455 Shareholders' equity: - --------------------- Series A convertible preferred stock, $1.00 par value; 2,000,000 shares authorized -- -- -- Common stock, $1.00 par value; 244,432,222 shares issued (244,432,222 shares at December 31, 2004 and 240,832,522 shares at June 30, 2004) 244,432 244,432 240,833 Additional paid-in capital 676,386 671,815 549,579 Retained earnings 3,763,977 3,508,477 3,272,646 Accumulated other comprehensive income, net of related taxes 15,508 23,338 (51,912) Less: Treasury stock, at cost: 14,782,208 shares (17,091,528 December 31, and 18,056,286 June 30, 2004) 448,212 518,231 547,469 Deferred compensation 38,906 40,017 29,514 ------------- ------------- ------------- Total shareholders' equity 4,213,185 3,889,814 3,434,163 ------------- ------------- ------------- Total Liabilities and Shareholders' Equity $ 43,483,720 $ 40,437,402 $ 37,071,618 ============= ============= ============= See notes to financial statements.
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MARSHALL & ILSLEY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($000's except per share data) Three Months Ended June 30, ---------------------------- 2005 2004 ------------- ------------- Interest income - --------------- Loans and leases $ 461,532 $ 334,525 Investment securities: Taxable 53,265 48,623 Exempt from federal income taxes 16,103 14,422 Trading securities 47 55 Short-term investments 2,294 404 ------------- ------------- Total interest income 533,241 398,029 Interest expense - ---------------- Deposits 122,803 57,999 Short-term borrowings 28,391 14,260 Long-term borrowings 77,284 41,762 ------------- ------------- Total interest expense 228,478 114,021 Net interest income 304,763 284,008 Provision for loan and lease losses 13,725 9,227 ------------- ------------- Net interest income after provision for loan and lease losses 291,038 274,781 Other income - ------------ Data processing services 271,664 197,344 Item processing 10,716 10,902 Trust services 41,107 37,922 Service charges on deposits 23,936 25,083 Gains on sale of mortgage loans 9,489 8,976 Other mortgage banking revenue 984 2,725 Net investment securities gains 29,422 77 Life insurance revenue 8,055 7,096 Other 47,193 39,860 ------------- ------------- Total other income 442,566 329,985 Other expense - ------------- Salaries and employee benefits 262,389 211,881 Net occupancy 20,789 18,238 Equipment 30,076 26,244 Software expenses 14,143 12,481 Processing charges 13,517 11,812 Supplies and printing 5,791 5,806 Professional services 12,802 10,288 Shipping and handling 16,751 18,087 Amortization of intangibles 8,106 5,438 Other 68,204 54,403 ------------- ------------- Total other expense 452,568 374,678 Income before income taxes 281,036 230,088 Provision for income taxes 92,549 78,379 ------------- ------------- Net income $ 188,487 $ 151,709 ============= ============= Net income per common share Basic $ 0.82 $ 0.68 Diluted 0.81 0.67 Dividends paid per common share $ 0.240 $ 0.210 Weighted average common shares outstanding (000's): Basic 228,630 221,950 Diluted 232,747 225,502 See notes to financial statements.
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MARSHALL & ILSLEY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($000's except per share data) Six Months Ended June 30, ---------------------------- 2005 2004 ------------- ------------- Interest income - --------------- Loans and leases $ 878,376 $ 660,477 Investment securities: Taxable 105,208 96,940 Exempt from federal income taxes 31,510 28,593 Trading securities 116 145 Short-term investments 3,638 947 ------------- ------------- Total interest income 1,018,848 787,102 Interest expense Deposits 226,293 113,548 Short-term borrowings 50,353 30,096 Long-term borrowings 145,658 80,814 ------------- ------------- Total interest expense 422,304 224,458 Net interest income 596,544 562,644 Provision for loan and lease losses 21,851 18,254 ------------- ------------- Net interest income after provision for loan and lease losses 574,693 544,390 Other income - ------------ Data processing services 544,031 383,468 Item processing 21,281 22,334 Trust services 81,453 74,172 Service charges on deposits 47,506 50,606 Gains on sale of mortgage loans 16,426 14,175 Other mortgage banking revenue 2,017 4,490 Net investment securities gains (losses) 35,271 (452) Life insurance revenue 14,264 13,776 Other 89,851 80,845 ------------- ------------- Total other income 852,100 643,414 Other expense - ------------- Salaries and employee benefits 500,921 415,809 Net occupancy 43,153 37,433 Equipment 61,086 54,412 Software expenses 27,495 23,706 Processing charges 28,442 24,861 Supplies and printing 12,287 11,512 Professional services 23,688 19,360 Shipping and handling 36,386 34,511 Amortization of intangibles 16,198 10,890 Other 139,358 104,512 ------------- ------------- Total other expense 889,014 737,006 Income before income taxes 537,779 450,798 Provision for income taxes 179,712 152,980 ------------- ------------- Net income $ 358,067 $ 297,818 ============= ============= Net income per common share Basic $ 1.57 $ 1.34 Diluted 1.54 1.32 Dividends paid per common share $ 0.450 $ 0.390 Weighted average common shares outstanding (000's) : Basic 228,097 222,125 Diluted 232,125 225,764 See notes to financial statements.
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MARSHALL & ILSLEY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($000's) Six Months Ended June 30, ---------------------------- 2005 2004 ------------- ------------- Net Cash Provided by Operating Activities $ 349,951 $ 418,748 Cash Flows From Investing Activities: - ------------------------------------- Proceeds from sales of securities available for sale 82,409 8,890 Proceeds from maturities of securities available for sale 575,259 740,921 Proceeds from maturities of securities held to maturity 58,468 51,142 Purchases of securities available for sale (857,602) (1,183,926) Net increase in loans (2,526,610) (2,118,630) Purchases of assets to be leased (142,589) (104,414) Principal payments on lease receivables 100,071 151,108 Purchases of premises and equipment, net (18,022) (28,519) Acquisitions, net of cash and cash equivalents acquired (15,910) (165,673) Other 3,270 11,207 ------------- ------------- Net cash used in investing activities (2,741,256) (2,637,894) Cash Flows From Financing Activities: - ------------------------------------- Net (decrease) increase in deposits (369,087) 2,970,412 Proceeds from issuance of commercial paper 2,566,764 3,029,442 Principal payments on commercial paper (2,582,429) (3,027,527) Net increase (decrease) in other short-term borrowings 1,197,465 (1,444,961) Proceeds from issuance of long-term borrowings 2,030,041 1,178,185 Payments of long-term borrowings (123,569) (117,094) Dividends paid (102,567) (86,417) Purchases of common stock -- (98,381) Other 31,171 39,759 ------------- ------------- Net cash provided by financing activities 2,647,789 2,443,418 ------------- ------------- Net increase (decrease) in cash and cash equivalents 256,484 224,272 Cash and cash equivalents, beginning of year 988,138 911,626 ------------- ------------- Cash and cash equivalents, end of period $ 1,244,622 $ 1,135,898 ============= ============= Supplemental cash flow information: Cash paid during the period for: Interest $ 355,298 $ 194,136 Income taxes 169,032 138,953 See notes to financial statements.
6 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements June 30, 2005 & 2004 (Unaudited) 1. The accompanying unaudited consolidated financial statements should be read in conjunction with Marshall & Ilsley Corporation's ("M&I" or "Corporation") 2004 Annual Report on Form 10-K. The unaudited financial information included in this report reflects all adjustments consisting only of normal recurring accruals and adjustments which are necessary for a fair statement of the financial position and results of operations as of and for the three and six months ended June 30, 2005 and 2004. The results of operations for the three and six months ended June 30, 2005 and 2004 are not necessarily indicative of results to be expected for the entire year. Certain amounts in the 2004 consolidated financial statements and analyses have been reclassified to conform with the 2005 presentation. 2. New Accounting Pronouncements The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections ("SFAS 154"). This statement is effective for accounting changes and corrections of errors made after January 1, 2006. SFAS 154 generally requires retrospective application of prior periods' financial statements of a voluntary change in accounting principle. However, this statement does not change the transition provisions of any existing accounting pronouncement, including those that are in a transition phase as of the effective date of SFAS 154. In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-based Payment ("SFAS 123(R)"). SFAS 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation and supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires that compensation costs relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) also provides guidance on measuring the fair value of share-based payment awards. The Corporation was originally required to adopt SFAS 123(R) beginning in the third quarter of 2005. In April 2005, the Securities and Exchange Commission ("SEC") announced the adoption of a new rule that amends the compliance dates for SFAS 123(R). The new rule allows companies to implement SFAS 123(R) at the beginning of their next fiscal year. The Corporation plans to adopt SFAS 123(R) effective January 1, 2006. On March 29, 2005 the SEC released Staff Accounting Bulletin No. 107, "Share-based Payment" ("SAB 107"). SAB 107 expresses views of the SEC Staff regarding the application of SFAS 123(R). SAB 107 is intended to assist both public entities in applying the provisions of SFAS 123(R) and investors and other users of financial statements in analyzing the information provided under SFAS 123(R). On May 31, 2005, the FASB issued FSP EITF 00-19-1, "Application of EITF Issue No. 00-19 to Freestanding Financial Instruments Originally Issued as Employee Compensation." The guidance in this FSP should be applied in accordance with the effective date and transition provisions of Statement 123(R). This FSP clarifies that a requirement to deliver registered shares, in and of itself, will not result in liability classification for freestanding financial instruments originally issued as employee compensation. 7 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited) 3. Comprehensive Income The following tables present the Corporation's comprehensive income (000's):
Three Months Ended June 30, 2005 ------------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------- ------------- Net income $ 188,487 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ 49,028 $ (17,313) 31,715 Reclassification for securities transactions included in net income (144) 50 (94) ------------- ------------- ------------- Unrealized gains (losses) 48,884 (17,263) 31,621 Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period 403 (141) 262 Reclassification adjustments for hedging activities included in net income (34) 12 (22) ------------- ------------- ------------- Net gains (losses) $ 369 $ (129) 240 ------------- ------------- ------------- Other comprehensive income (loss) 31,861 ------------- Total comprehensive income $ 220,348 =============
Three Months Ended June 30, 2004 ------------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------- ------------- Net income $ 151,709 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ (142,839) $ 50,282 (92,557) Reclassification for securities transactions included in net income 10 (3) 7 ------------- ------------- ------------- Unrealized gains (losses) (142,829) 50,279 (92,550) Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period (4,286) 1,500 (2,786) Reclassification adjustments for hedging activities included in net income 7,991 (2,797) 5,194 ------------- ------------- ------------- Net gains (losses) $ 3,705 $ (1,297) 2,408 ------------- ------------- ------------- Other comprehensive income (loss) (90,142) ------------- Total comprehensive income $ 61,567 =============
8 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited)
Six Months Ended June 30, 2005 ------------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------- ------------- Net income $ 358,067 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ (26,691) $ 9,426 (17,265) Reclassification for securities transactions included in net income (118) 41 (77) ------------- ------------- ------------- Unrealized gains (losses) (26,809) 9,467 (17,342) Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period 11,594 (4,058) 7,536 Reclassification adjustments for hedging activities included in net income 3,040 (1,064) 1,976 ------------- ------------- ------------- Net gains (losses) $ 14,634 $ (5,122) 9,512 ------------- ------------- ------------- Other comprehensive income (loss) (7,830) ------------- Total comprehensive income $ 350,237 =============
Six Months Ended June 30, 2004 ------------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ------------- ------------- ------------- Net income $ 297,818 Other comprehensive income: Unrealized gains (losses) on securities: Arising during the period $ (100,395) $ 35,385 (65,010) Reclassification for securities transactions included in net income 10 (3) 7 ------------- ------------- ------------- Unrealized gains (losses) (100,385) 35,382 (65,003) Net gains (losses) on derivatives hedging variability of cash flows: Arising during the period (989) 346 (643) Reclassification adjustments for hedging activities included in net income 16,985 (5,945) 11,040 ------------- ------------- ------------- Net gains (losses) $ 15,996 $ (5,599) 10,397 ------------- ------------- ------------- Other comprehensive income (loss) (54,606) ------------- Total comprehensive income $ 243,212 =============
4. A reconciliation of the numerators and denominators of the basic and diluted per share computations are as follows (dollars and shares in thousands, except per share data):
Three Months Ended June 30, 2005 -------------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------- Basic Earnings Per Share Income Available to Common Shareholders $ 188,487 228,630 $ 0.82 ============= Effect of Dilutive Securities Stock Options, Restricted Stock and Other Plans -- 4,117 ------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders $ 188,487 232,747 $ 0.81 =============
9 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited)
Three Months Ended June 30, 2004 -------------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------- Basic Earnings Per Share Income Available to Common Shareholders $ 151,709 221,950 $ 0.68 ============= Effect of Dilutive Securities Stock Options, Restricted Stock and Other Plans -- 3,552 ------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders $ 151,709 225,502 $ 0.67 =============
Six Months Ended June 30, 2005 -------------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------- Basic Earnings Per Share Income Available to Common Shareholders $ 358,067 228,097 $ 1.57 ============= Effect of Dilutive Securities Stock Options, Restricted Stock and Other Plans -- 4,028 ------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders $ 358,067 232,125 $ 1.54 =============
Six Months Ended June 30, 2004 -------------------------------------------- Income Average Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------- Basic Earnings Per Share Income Available to Common Shareholders $ 297,818 222,125 $ 1.34 ============= Effect of Dilutive Securities Stock Options, Restricted Stock and Other Plans -- 3,639 ------------- ------------- Diluted Earnings Per Share Income Available to Common Shareholders $ 297,818 225,764 $ 1.32 =============
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 June 30, Six Months Ended June 30, ------------------------------------- ------------------------------------- 2005 2004 2005 2004 ----------------- ----------------- ----------------- ----------------- Shares 8 33 34 33 Price Range $43.310 - $44.200 $39.090 - $41.150 $42.710 - $44.200 $39.090 - $41.150
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. 10 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited) Compensation cost can also be measured and accounted for using the intrinsic value based method of accounting prescribed in Accounting Principles Board Opinion No. 25 ("APBO 25"), "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount paid to acquire the stock. The largest difference between SFAS 123 and APBO 25 as they relate to the Corporation is the amount of compensation cost attributable to the Corporation's fixed stock option plans and employee stock purchase plan ("ESPP"). Under APBO 25 no compensation cost is recognized for fixed stock option plans because the exercise price is equal to the quoted market price at the date of grant and therefore there is no intrinsic value. SFAS 123 compensation cost would equal the calculated fair value of the options granted. Under APBO 25 no compensation cost is recognized for the ESPP because the discount (15%) and the plan meets the definition of a qualified plan under 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. See Note 2. 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 ($000's except per share data):
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net Income, as reported $ 188,487 $ 151,709 $ 358,067 $ 297,818 Add: Stock-based employee compensation expense included in reported net income, net of tax 4,560 1,432 5,632 2,854 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (9,477) (6,784) (15,045) (12,972) --------- --------- --------- --------- Pro forma net income $ 183,570 $ 146,357 $ 348,654 $ 287,700 ========= ========= ========= ========= Basic earnings per share: As reported $0.82 $0.68 $1.57 $1.34 Pro forma 0.80 0.66 1.53 1.30 Diluted earnings per share: As reported $0.81 $0.67 $1.54 $1.32 Pro forma 0.78 0.65 1.50 1.27
The fair value of each option grant was estimated as of the date of grant using the Black-Scholes closed form option-pricing model for options granted prior to September 30, 2004. A form of a lattice option-pricing model was used for options granted after September 30, 2004. 5. Recently Announced Acquisitions The following acquisitions, which are not considered to be material business combinations, were announced during the second quarter of 2005: In May 2005, Metavante announced the signing of a definitive agreement to acquire Med-i-Bank, Inc. ("MBI") of Waltham, Massachusetts. MBI provides electronic payment services for employee benefit and consumer-directed healthcare accounts. MBI offers flexible spending accounts, health reimbursement arrangement and health savings account systems for third-party administrators and health plans. On July 22, 2005, Metavante completed the acquisition of all of the outstanding capital stock of MBI for $150.5 million. Total consideration consisted of 2.9 million shares of the Corporation's common stock valued at $133.8 million and $16.7 million in cash. Initial goodwill, subject to the completion of appraisals and valuations of the assets acquired and liabilities assumed, amounted to $123.4 million. The estimated identifiable intangible asset to be amortized (customer relationships) with an estimated useful life of 10 years amounted to $25.0 million. The goodwill and intangibles resulting from this transaction are not deductible for tax purposes. 11 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited) In June 2005, Metavante signed a definitive agreement to acquire TREEV LLC ("TREEV"), of Herndon, Virginia. On August 8, 2005, Metavante completed the acquisition of all of the outstanding stock of TREEV for $19.5 million. Total consideration consisted of 0.4 million shares of the Corporation's common stock valued at $16.4 million and $3.0 million in cash. TREEV provides browser-based document and report management software and consulting services to the financial-services industry in both lending and deposit environments. TREEV will complement Metavante's check-imaging products and services by providing solutions for document storage and retrieval, including electronic report storage. In June 2005, Metavante agreed to buy GHR Systems, Inc. ("GHR") for $65 million. This transaction will add consumer finance and mortgage loan origination solutions to Metavante's financial services lines. GHR of Wayne, Pennsylvania provides loan origination technologies for the residential mortgage and consumer finance industries, offering point of sale products for any channel together with comprehensive underwriting, processing and closing technologies. It is expected that this transaction will be funded with approximately $55 million of the Corporation's common stock and $10 million in cash. The transaction is expected to close in the third quarter of 2005 pending regulatory approval and satisfaction of other customary closing conditions. 6. Selected investment securities, by type, held by the Corporation are as follows ($000's):
June 30, December 31, June 30, 2005 2004 2004 ------------- ------------- ------------- Investment securities available for sale: U.S. treasury and government agencies $ 4,254,711 $ 4,157,374 $ 4,096,353 State and political subdivisions 671,782 504,027 397,764 Mortgage backed securities 144,070 150,658 141,448 Other 502,065 546,940 509,046 ------------- ------------- ------------- Total $ 5,572,628 $ 5,358,999 $ 5,144,611 ============= ============= ============= Investment securities held to maturity: State and political subdivisions $ 665,807 $ 724,086 $ 767,580 Other 2,300 2,300 2,319 ------------- ------------- ------------- Total $ 668,107 $ 726,386 $ 769,899 ============= ============= =============
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 June 30, 2005 ($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 $ 1,936,074 $ 14,752 $ 727,179 $ 14,305 $ 2,663,253 $ 29,057 State and political subdivisions 44,000 393 53,690 728 97,690 1,121 Mortgage backed securities 92,158 804 -- -- 92,158 804 Other 6,999 1 972 10 7,971 11 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 2,079,231 $ 15,950 $ 781,841 $ 15,043 $ 2,861,072 $ 30,993 ============ ============ ============ ============ ============ ============
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. 12 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited) 7. The Corporation's loan and lease portfolio, including loans held for sale, consisted of the following ($000's):
June 30, December 31, June 30, 2005 2004 2004 ------------- ------------- ------------- Commercial, financial and agricultural $ 9,147,994 $ 8,483,046 $ 7,785,955 Cash flow hedging instruments at fair value (4,549) (1,583) (26,772) ------------- ------------- ------------- Commercial, financial and agricultural 9,143,445 8,481,463 7,759,183 Real estate: Construction 2,984,601 2,265,227 1,875,852 Residential mortgage 9,313,118 8,548,029 7,720,641 Commercial mortgage 8,585,700 8,164,099 7,696,070 ------------- ------------- ------------- Total real estate 20,883,419 18,977,355 17,292,563 Personal 1,526,442 1,540,024 1,590,166 Lease financing 592,545 537,930 553,403 ------------- ------------- ------------- Total loans and leases $ 32,145,851 $ 29,536,772 $ 27,195,315 ============= ============= =============
8. Sale of Receivables During the second quarter of 2005, automobile loans with principal balances of $115.4 million were sold in securitization transactions. Net losses of $1.9 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 $3.5 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 second quarter were as follows (rate per annum):
Prepayment speed (CPR) 15-40 % Weighted average life (in months) 20.0 Expected credit losses (based on original balance) 0.22-0.74 % Residual cash flow discount rate 12.0 % Variable returns to transferees Forward one month LIBOR yield curve
At June 30, 2005, securitized automobile loans and other automobile loans managed together with them, along with delinquency and credit loss information consisted of the following ($000's):
Total Securitized Portfolio Managed ------------- ------------- ------------- Loan balances $ 950,358 $ 246,847 $ 1,197,205 Principal amounts of loans 60 days or more past due 908 443 1,351 Net credit losses year to date 1,010 342 1,352
9. Goodwill and Other Intangibles The changes in the carrying amount of goodwill for the six months ended June 30, 2005 are as follows ($000's):
Banking Metavante Others Total ------------- ------------- ------------- ------------- Goodwill balance as of January 1, 2005 $ 815,086 $ 978,418 $ 5,412 $ 1,798,916 Goodwill acquired during the period -- 20,675 -- 20,675 Purchase accounting adjustments (114) 20,270 3,598 23,754 ------------- ------------- ------------- ------------- Goodwill balance as of June 30, 2005 $ 814,972 $ 1,019,363 $ 9,010 $ 1,843,345 ============= ============= ============= =============
Goodwill acquired for the Metavante segment includes initial goodwill relating to the acquisition of Prime Associates, Inc. in the first quarter of 2005. 13 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited) Purchase accounting adjustments for Metavante for the six months ended June 2005 represent adjustments made to the initial estimates of fair value associated with the acquisitions of Kirchman Corporation, Advanced Financial Solutions, Inc. and its affiliated companies, NYCE Corporation, Response Data Corp., NuEdge Systems LLC, and VECTORsgi Holdings, Inc. Purchase accounting adjustments for Metavante also include the effect of a contingent payment made in the first quarter of 2005 in connection with the Printing For Systems, Inc. acquisition. Purchase accounting adjustments for the Others segment included the effect of a contingent payment made for an acquisition made by the Corporation's Trust subsidiary in 2004, net of the reduction of goodwill allocated to the sale of a small business line. Purchase accounting adjustments for the Banking segment was the reduction of goodwill allocated to a branch divestiture. At June 30, 2005, the Corporation's other intangible assets consisted of the following ($000's):
June 30, 2005 ------------------------------------------- Accum- Gross ulated Net Carrying Amort- Carrying Amount ization Value ------------- ------------- ------------- Other intangible assets: Core deposit intangible $ 152,816 $ 74,538 $ 78,278 Data processing contract rights/customer lists 254,780 25,150 229,630 Trust customers 4,750 1,011 3,739 Tradename 2,775 2,325 450 Other Intangibles 1,250 277 973 ------------- ------------- ------------- $ 416,371 $ 103,301 $ 313,070 ============= ============= ============= Mortgage loan servicing rights $ 3,209 =============
10. The Corporation's deposit liabilities consisted of the following ($000's):
June 30, December 31, June 30, 2005 2004 2004 ------------- ------------- ------------- Noninterest bearing demand $ 5,088,947 $ 4,888,426 $ 4,709,873 Savings and NOW 9,999,393 10,118,415 9,101,821 Cash flow hedge-Brokered MMDA (2,998) (1,445) -- ------------- ------------- ------------- Total Savings and NOW 9,996,395 10,116,970 9,101,821 CD's $100,000 and over 5,980,536 5,592,947 5,379,731 Cash flow hedge-Institutional CDs (13,944) (8,977) (8,613) ------------- ------------- ------------- Total CD's $100,000 and over 5,966,592 5,583,970 5,371,118 Other time deposits 3,006,936 2,721,214 2,632,467 Foreign deposits 2,002,570 3,144,507 3,410,007 ------------- ------------- ------------- Total deposits $ 26,061,440 $ 26,455,087 $ 25,225,286 ============= ============= =============
11. Derivative Financial Instruments and Hedging Activities The following is an update of the Corporation's use of derivative financial instruments and its hedging activities as described in its Annual Report on Form 10-K for the year ended December 31, 2004. Generally there were no substantive changes in the types of derivative financial instruments the Corporation employs or its hedging activities in the six months ended June 30, 2005. Trading Instruments and Other Free Standing Derivatives ------------------------------------------------------- Loan commitments accounted for as derivatives are not material to the Corporation and the Corporation does not employ any formal hedging strategies. 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. 14 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited) At June 30, 2005, free standing interest rate swaps consisted of $1.8 billion in notional amount of receive fixed/pay floating with an aggregate negative fair value of $1.7 million and $1.0 billion in notional amount of pay fixed/receive floating with an aggregate positive fair value of $1.5 million. At June 30, 2005, interest rate caps purchased amounted to $33.8 million in notional amount with a positive fair value of $0.2 million and interest rate caps sold amounted to $33.8 million in notional amount with a negative fair value of $0.2 million. At June 30, 2005, the notional value of interest rate futures designated as trading was $4.1 billion with an immaterial fair value. Fair Value Hedges ----------------- The following table presents updated information with respect to selected fair value hedges.
Fair Value Hedges Weighted June 30, 2005 Notional Fair Average Amount Value Remaining Hedged Hedging ($ in ($ in Term Item Instrument millions) millions) (Yrs) - -------------------- ------------------ -------- --------- --------- Fixed Rate CDs Receive Fixed Swap $ 747.5 $ (9.7) 9.2 Medium Term Notes Receive Fixed Swap 366.9 (1.6) 8.1 Fixed Rate Bank Notes Receive Fixed Swap 838.6 7.7 8.0 Institutional CDs Receive Fixed Swap 120.0 (0.1) 1.5
The impact from fair value hedges to total net interest income for the three and six months ended June 30, 2005 was a positive $9.1 million and $19.1 million, respectively. The impact to net interest income due to ineffectiveness was immaterial. Cash Flow Hedges ---------------- The following table updates the Corporation's cash flow hedges.
Cash Flow Hedges Weighted June 30, 2005 Notional Fair Average Amount Value Remaining Hedged Hedging ($ in ($ in Term Item Instrument millions) millions) (Yrs) - -------------------- ------------------ -------- --------- --------- Variable Rate Loans Receive Fixed Swap $ 1,150.0 $ (4.5) 4.4 Institutional CDs Pay Fixed Swap 2,305.0 13.9 1.1 Federal Funds Purchased Pay Fixed Swap 300.0 (6.2) 1.9 FHLB Advances Pay Fixed Swap 920.0 8.9 2.9 Floating Rate Bank Notes Pay Fixed Swap 125.0 (0.3) 1.8 Money Market Account Pay Fixed Swap 250.0 3.0 2.0
The impact to total net interest income from cash flow hedges, including amortization of terminated cash flow hedges was immaterial for the three months ended June 30, 2005 and $3.0 million for the six months ended June 30, 2005. The impact due to ineffectiveness was immaterial. 15 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited) 12. Postretirement Health Plan The Corporation sponsors a defined benefit health plan that provides health care benefits to eligible current and retired employees. Eligibility for retiree benefits is dependent upon age, years of service, and participation in the health plan during active service. The plan is contributory and in 1997 and 2002 the plan was amended. Employees hired or retained from mergers after September 1, 1997 will be granted access to the Corporation's plan upon becoming an eligible retiree; however, such retirees must pay 100% of the cost of health care benefits. The plan continues to contain other cost- sharing features such as deductibles and coinsurance. Net periodic postretirement benefit costs for the three and six month periods ended June 30, 2005 and 2004 included the following components ($000's):
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------------- 2005 2004 2005 2004 ----------- ---------- ---------- ---------- Service cost $ 552 $ 631 $ 1,105 $ 1,262 Interest on APBO 1,159 1,366 2,318 2,732 Expected return on assets (150) -- (299) -- Prior service amortization (680) (680) (1,361) (1,360) Actuarial loss amortization 264 562 528 1,125 Other -- -- -- -- ----------- ---------- ---------- ---------- $ 1,145 $ 1,879 $ 2,291 $ 3,759 =========== ========== ========== ==========
Benefit payments and expenses, net of participant contributions, for the three and six months ended June 30, 2005 amounted to $1.0 million and $2.0 million, respectively. 16 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited) 13. Segments The following represents the Corporation's operating segments as of and for the three and six months ended June 30, 2005 and 2004. There have not been any changes to the way the Corporation organizes its segments. Fees - intercompany represent intercompany revenues charged to other segments for providing certain services. Expenses - intercompany represent fees charged by other segments for certain services received. For each segment, Expenses - intercompany are not the costs of that segment's reported intercompany revenues. Intersegment revenues, expenses and assets have been eliminated ($ in millions):
Three Months Ended June 30, 2005 --------------------------------------------------------------------------------- Reclass- ifications Consol- Corporate & Elimi- idated Banking Metavante Others Overhead nations Income ------------ ------------ ------------ ------------ ----------- ------------- Net interest income $ 307.2 $ (6.6) $ 6.1 $ (2.0) $ -- $ 304.7 Other income Fees - other 91.9 271.7 70.7 8.3 -- 442.6 Fees - intercompany 14.2 23.1 5.6 21.6 (64.5) -- ------------ ------------ ------------ ------------ ----------- ------------- Total other income 106.1 294.8 76.3 29.9 (64.5) 442.6 Other expense Expenses - other 158.5 227.6 32.9 34.7 (1.1) 452.6 Expenses - intercompany 41.5 9.5 12.0 0.4 (63.4) -- ------------ ------------ ------------ ------------ ----------- ------------- Total other expense 200.0 237.1 44.9 35.1 (64.5) 452.6 Provision for loan and lease losses 13.4 -- 0.3 -- -- 13.7 ------------ ------------ ------------ ------------ ----------- ------------- Income (loss) before taxes 199.9 51.1 37.2 (7.2) -- 281.0 Income tax expense (benefit) 60.4 20.3 14.4 (2.6) -- 92.5 ------------ ------------ ------------ ------------ ----------- ------------- Segment income $ 139.5 $ 30.8 $ 22.8 $ (4.6) $ -- $ 188.5 ============ ============ ============ ============ =========== ============= Identifiable assets $ 41,164.6 $ 2,454.4 $ 759.5 $ 733.1 $(1,627.9) $ 43,483.7 ============ ============ ============ ============ =========== ============= Return on average equity 16.3 % 19.7 % 34.5 % 18.3 % ============ ============ ============ =============
Three Months Ended June 30, 2004 --------------------------------------------------------------------------------- Reclass- ifications Consol- Corporate & Elimi- idated Banking Metavante Others Overhead nations Income ------------ ------------ ------------ ------------ ----------- ------------- Net interest income $ 280.2 $ (0.9) $ 6.6 $ (1.9) $ -- $ 284.0 Other income Fees - other 85.6 197.4 45.8 1.2 -- 330.0 Fees - intercompany 16.6 19.2 7.0 17.6 (60.4) -- ------------ ------------ ------------ ------------ ----------- ------------- Total other income 102.2 216.6 52.8 18.8 (60.4) 330.0 Other expense Expenses - other 152.4 171.3 29.7 21.0 0.3 374.7 Expenses - intercompany 38.5 12.2 11.5 (1.5) (60.7) -- ------------ ------------ ------------ ------------ ----------- ------------- Total other expense 190.9 183.5 41.2 19.5 (60.4) 374.7 Provision for loan and lease losses 8.5 -- 0.7 -- -- 9.2 ------------ ------------ ------------ ------------ ----------- ------------- Income (loss) before taxes 183.0 32.2 17.5 (2.6) -- 230.1 Income tax expense (benefit) 60.0 12.6 6.9 (1.1) -- 78.4 ------------ ------------ ------------ ------------ ----------- ------------- Segment income $ 123.0 $ 19.6 $ 10.6 $ (1.5) $ -- $ 151.7 ============ ============ ============ ============ =========== ============= Identifiable assets $ 35,778.8 $ 1,218.0 $ 610.0 $ 624.2 $ (1,159.4) $ 37,071.6 ============ ============ ============ ============ =========== ============= Return on average equity 16.4 % 19.3 % 16.8 % 17.9 % ============ ============ ============ =============
17 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued June 30, 2005 & 2004 (Unaudited)
Six Months Ended June 30, 2005 --------------------------------------------------------------------------------- Reclass- ifications Consol- Corporate & Elimi- idated Banking Metavante Others Overhead nations Income ------------ ------------ ------------ ------------ ----------- ------------- Net interest income $ 603.9 $ (14.7) $ 11.1 $ (3.8) $ -- $ 596.5 Other income Fees - other 179.1 544.1 118.9 10.0 -- 852.1 Fees - intercompany 28.8 45.2 10.3 43.3 (127.6) -- ------------ ------------ ------------ ------------ ----------- ------------- Total other income 207.9 589.3 129.2 53.3 (127.6) 852.1 Other expense Expenses - other 312.1 457.0 64.0 56.4 (0.5) 889.0 Expenses - intercompany 80.8 19.9 24.5 1.9 (127.1) -- ------------ ------------ ------------ ------------ ----------- ------------- Total other expense 392.9 476.9 88.5 58.3 (127.6) 889.0 Provision for loan and lease losses 21.2 -- 0.6 -- -- 21.8 ------------ ------------ ------------ ------------ ----------- ------------- Income (loss) before taxes 397.7 97.7 51.2 (8.8) -- 537.8 Income tax expense (benefit) 125.0 38.8 19.8 (3.9) -- 179.7 ------------ ------------ ------------ ------------ ----------- ------------- Segment income $ 272.7 $ 58.9 $ 31.4 $ (4.9) $ -- $ 358.1 ============ ============ ============ ============ =========== ============= Identifiable assets $ 41,164.6 $ 2,454.4 $ 759.5 $ 733.1 $ (1,627.9) $ 43,483.7 ============ ============ ============ ============ =========== ============= Return on average equity 16.3 % 19.7 % 24.7 % 17.8 % ============ ============ ============ =============
Six Months Ended June 30, 2004 --------------------------------------------------------------------------------- Reclass- ifications Consol- Corporate & Elimi- idated Banking Metavante Others Overhead nations Income ------------ ------------ ------------ ------------ ----------- ------------- Net interest income $ 555.1 $ (1.1) $ 13.0 $ (4.3) $ -- $ 562.7 Other income Fees - other 168.7 383.5 89.1 2.1 -- 643.4 Fees - intercompany 32.2 38.1 11.8 35.1 (117.2) -- ------------ ------------ ------------ ------------ ----------- ------------- Total other income 200.9 421.6 100.9 37.2 (117.2) 643.4 Other expense Expenses - other 304.6 335.3 59.6 37.8 (0.3) 737.0 Expenses - intercompany 71.6 23.1 23.6 (1.4) (116.9) -- ------------ ------------ ------------ ------------ ----------- ------------- Total other expense 376.2 358.4 83.2 36.4 (117.2) 737.0 Provision for loan and lease losses 16.9 -- 1.4 -- -- 18.3 ------------ ------------ ------------ ------------ ----------- ------------- Income (loss) before taxes 362.9 62.1 29.3 (3.5) -- 450.8 Income tax expense (benefit) 118.9 24.4 11.4 (1.7) -- 153.0 ------------ ------------ ------------ ------------ ----------- ------------- Segment income $ 244.0 $ 37.7 $ 17.9 $ (1.8) $ -- $ 297.8 ============ ============ ============ ============ =========== ============= Identifiable assets $ 35,778.8 $ 1,218.0 $ 610.0 $ 624.2 $ (1,159.4) $ 37,071.6 ============ ============ ============ ============ =========== ============= Return on average equity 16.3 % 19.1 % 14.2 % 17.7 % ============ ============ ============ =============
Total revenue, net interest income plus other income, by type in Others consisted of the following:
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------------- 2005 2004 2005 2004 ----------- ---------- ---------- ---------- Trust Services $ 40.6 $ 37.2 $ 80.2 $ 72.7 Residential Mortgage Banking 6.1 9.0 11.1 15.2 Capital Markets 21.5 0.3 22.2 (0.4) Brokerage and Insurance 7.2 6.7 14.3 13.5 Commercial Leasing 4.2 4.2 7.6 8.2 Commercial Mortgage Banking 1.6 1.4 2.8 3.0 Others 1.2 0.6 2.1 1.7 ----------- ---------- ---------- ---------- Total revenue $ 82.4 $ 59.4 $ 140.3 $ 113.9 =========== ========== ========== ==========
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARSHALL & ILSLEY CORPORATION CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited) ($000's) Three Months Ended June 30, ---------------------------- 2005 2004 ------------- ------------- Assets - ------ Cash and due from banks $ 938,451 $ 801,986 Investment securities: Trading securities 25,582 22,138 Short-term investments 271,731 164,685 Other investment securities: Taxable 4,828,606 4,671,113 Tax-exempt 1,333,700 1,171,209 ------------- ------------- Total investment securities 6,459,619 6,029,145 Loans and leases: Loans and leases, net of unearned income 31,294,058 26,507,894 Less: Allowance for loan and lease losses 361,488 359,856 ------------- ------------- Net loans and leases 30,932,570 26,148,038 Premises and equipment, net 445,382 434,888 Accrued interest and other assets 3,877,271 2,757,888 ------------- ------------- Total Assets $ 42,653,293 $ 36,171,945 ============= ============= Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 4,826,304 $ 4,513,599 Interest bearing 20,643,276 18,995,645 ------------- ------------- Total deposits 25,469,580 23,509,244 Federal funds purchased and security repurchase agreements 2,393,989 2,279,498 Other short-term borrowings 998,363 979,383 Long-term borrowings 7,920,117 4,703,870 Accrued expenses and other liabilities 1,729,455 1,294,056 ------------- ------------- Total liabilities 38,511,504 32,766,051 Shareholders' equity 4,141,789 3,405,894 ------------- ------------- Total Liabilities and Shareholders' Equity $ 42,653,293 $ 36,171,945 ============= =============
19
MARSHALL & ILSLEY CORPORATION CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited) ($000's) Six Months Ended June 30, ---------------------------- 2005 2004 ------------- ------------- Assets - ------ Cash and due from banks $ 928,733 $ 786,580 Investment securities: Trading securities 24,355 22,703 Short-term investments 229,595 188,598 Other investment securities: Taxable 4,825,732 4,602,099 Tax-exempt 1,306,082 1,158,940 ------------- ------------- Total investment securities 6,385,764 5,972,340 Loans and leases: Loans and leases, net of unearned income 30,592,745 25,967,707 Less: Allowance for loan and lease losses 361,220 358,001 ------------- ------------- Net loans and leases 30,231,525 25,609,706 Premises and equipment, net 448,079 436,637 Accrued interest and other assets 3,857,632 2,702,534 ------------- ------------- Total Assets $ 41,851,733 $ 35,507,797 ============= ============= Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 4,760,154 $ 4,414,879 Interest bearing 20,592,326 18,597,021 ------------- ------------- Total deposits 25,352,480 23,011,900 Federal funds purchased and security repurchase agreements 2,170,661 2,400,570 Other short-term borrowings 973,360 943,148 Long-term borrowings 7,564,611 4,473,229 Accrued expenses and other liabilities 1,729,499 1,288,997 ------------- ------------- Total liabilities 37,790,611 32,117,844 Shareholders' equity 4,061,122 3,389,953 ------------- ------------- Total Liabilities and Shareholders' Equity $ 41,851,733 $ 35,507,797 ============= =============
20 OVERVIEW -------- Current operating trends and financial results have been positive and are a confirmation of the Corporation's overall strategy of driving earnings per share growth by: (1) expanding banking operations into faster growing regions beyond Wisconsin; (2) increasing the number of financial institutions to which the Corporation provides correspondent banking services; (3) expanding trust services and other wealth management product and service offerings for high net-worth individuals; and (4) growing Metavante's business through organic growth and acquisitions. The Corporation continues to focus on its key metrics of growing revenues through balance sheet growth, fee-based income growth and strong credit quality. Management believes that the Corporation has demonstrated solid fundamental performance in each of these key areas and as a result, the second quarter and first half of 2005 produced strong financial results. Net income for the second quarter of 2005 amounted to $188.5 million compared to $151.7 million for the same period in the prior year, an increase of $36.8 million, or 24.2%. Diluted earnings per share were $0.81 for the three months ended June 30, 2005, compared with $0.67 for the three months ended June 30, 2004, an increase of 20.9%. The return on average assets and average equity was 1.77% and 18.25%, respectively, for the quarter ended June 30, 2005, and 1.69% and 17.92%, respectively, for the quarter ended June 30, 2004. For the six months ended June 30, 2005, net income amounted to $358.1 million compared to $297.8 million for the first half of 2004, an increase of $60.3 million, or 20.2%. Diluted earnings per share were $1.54 for the six months ended June 30, 2005, compared with $1.32 for the six months ended June 30, 2004, an increase of 16.7%. The return on average assets and average equity was 1.73% and 17.78%, respectively, for the first six months of 2005, and 1.69% and 17.67%, respectively, for the first six months of 2004. Earnings growth for the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004 was attributable to a number of factors. The increase in net interest income was driven by loan and deposit growth. Net interest income growth was somewhat mitigated by the financing costs associated with Metavante's 2004 acquisitions. On a comparative basis, net charge-offs and the resulting provisions for loan and lease losses were higher in the second quarter and first half of 2005 than the second quarter and first half of 2004. Despite the increase, net charge-offs for the three and six months ended June 30, 2005 continue to be below the Corporation's five-year historical average. Metavante and the trust services reporting unit continued to exhibit growth in both revenue and earnings. Metavante's growth in revenue and earnings reflects, in part, the impact of its acquisition and divestiture activities and higher transaction volumes in payment processing and electronic banking. The acquisition and divestiture activities included one acquisition completed in the first quarter of 2005 and six acquisitions and two divestitures completed in 2004. For the three and six months ended June 30, 2005, the Corporation realized a gain due to the sale of an entity associated with the Corporation's investment in an independent private equity and venture capital partnership. In addition, during the first quarter of 2005 the Corporation realized a gain due to the change in control of PULSE EFT Associates. These factors along with continued expense management resulted in double-digit earnings growth in the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004. Management continues to believe that there are some key factors that could affect future operating trends and financial results. Management believes that credit losses will likely return to historical levels. While it is unclear when this will occur, management does not believe that current net charge-off levels are sustainable indefinitely. Rapidly shifting and unstable yield curves make balance sheet management vulnerable to potential earnings volatility. While the Corporation has taken what it believes to be a conservative position relative to a generally rising interest rate environment, shifts in customer behavior and re-pricing characteristics present a persistent challenge. Based on its performance in the first half of 2005, management expects Metavante's total 2005 revenues (internal and external) will be at the upper end of the $1.1 to $1.2 billion revenue range previously provided and segment earnings will be in the range of $115.0 million to $120.0 million, excluding the impact of recently announced acquisitions. In the Banking segment, management expects double digit loan growth for the remainder of 2005. However, it is possible that loan growth will not be at the same levels experienced during the first half of the current year. The Corporation's actual results for the year ended December 31, 2005 could differ materially from those expected by management. See "Forward- Looking Statements" in this Form 10-Q and the Corporation's 2004 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. 21 NOTEWORTHY TRANSACTIONS AND EVENTS ---------------------------------- Some of the more noteworthy transactions and events that occurred in the three and six months ended June 30, 2005 and 2004 consisted of the following: Second quarter 2005 - ------------------- As announced in the Corporation's Form 8-K dated May 26, 2005, the Corporation realized a gain due to the sale of an entity associated with its investment in an independent private equity and venture capital partnership. The gross gain amounted to $29.0 million and is reported in Net investment securities gains (losses) in the Consolidated Statements of Income. On an after-tax basis, and net of related compensation expense, the gain amounted to $16.2 million or $0.07 per diluted share for the three and six months ended June 30, 2005. During the second quarter Metavante announced three acquisitions. It is expected that these will be funded primarily with the Corporation's common stock. See Note 5 in Notes to Financial Statements for further discussion. First quarter 2005 - ------------------ On February 9, 2005, Metavante completed the acquisition of all of the outstanding common stock of Prime Associates, Inc. ("Prime") of Clark, New Jersey for $24.5 million. Total consideration consisted of 563,114 shares of Marshall & Ilsley Corporation common stock valued at $24.0 million and $0.5 million in cash. Prime is a provider of anti-money laundering and fraud interdiction software and data products for financial institutions, insurance companies and securities firms. During the first quarter of 2005, the Corporation's banking segment's investment in certain membership interests of PULSE EFT Associates ("PULSE") was liquidated by PULSE due to a change in control. The cash received resulted in a gain of $5.3 million which is reported in Net investment securities gains (losses) in the Consolidated Statements of Income. An additional $0.3 million was received in the second quarter of 2005. Second quarter 2004 - ------------------- On May 27, 2004, Metavante completed the purchase of certain assets and the assumption of certain liabilities of Kirchman Corporation ("Kirchman"). Kirchman is a provider of automation software and compliance services to the banking industry. This acquisition provided Metavante with core-processing software that financial institutions can run in-house, a solution Metavante previously did not offer. First quarter 2004 - ------------------ On January 1, 2004, the Corporation's Banking segment completed the purchase for cash 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. Although not material to the Corporation, this acquisition enhances the Corporation's wholesale lending activities by expanding its broker network. 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 loss is reported in other in Other expense in the Consolidated Statements of Income. NET INTEREST INCOME ------------------- Net interest income is the difference between interest earned on earning assets and interest owed on interest bearing liabilities. Net interest income represented approximately 40.8% and 41.2% of the Corporation's source of revenues for the three and six months ended June 30, 2005 compared to 46.3% and 46.7% , respectively for the three and six months ended June 30, 2004. Net interest income for the second quarter of 2005 amounted to $304.8 million compared to $284.0 million reported for the second quarter of 2004, an increase of $20.8 million or 7.3%. For the six months ended June 30, 2005, net interest income amounted to $596.5 million compared to $562.6 million for the six months ended June 30, 2004, an increase of $33.9 million or 6.0%. Loan growth and the growth in noninterest bearing deposits were the primary contributors to the increase in net interest income. Factors negatively affecting net interest income compared to the prior year three and six month periods included the impact of lengthening liabilities in order to reduce future volatility in net interest income due to interest rate changes and the interest expense associated with the incremental debt issued in the third quarter of 2004 to fund Metavante's acquisitions in 2004. 22 Average earning assets in the second quarter of 2005 amounted to $37.8 billion compared to $32.5 billion in the second quarter of 2004, an increase of $5.3 billion or 16.0%. Average loans and leases accounted for $4.8 billion of the growth in average earning assets in the second quarter of 2005 compared to the second quarter of 2004. Average investment securities increased $0.3 billion over the prior quarter. Average earning assets for the six months ended June 30, 2005 amounted to $37.0 billion compared to $31.9 billion for the six months ended June 30, 2004, an increase of $5.1 billion or 15.8%. Average loans and leases accounted for $4.6 billion of the growth in average earning assets over the respective periods. Average investment securities increased $0.4 billion. Average interest bearing liabilities increased $5.0 billion or 18.5% in the second quarter of 2005 compared to the second quarter of 2004. Average interest bearing deposits increased $1.6 billion or 8.7% in the second quarter of 2005 compared to the second quarter of last year. Average total borrowings increased $3.4 billion or 42.1% in the second quarter of 2005 compared to the same period in 2004. For the six months ended June 30, 2005, average interest bearing liabilities increased $4.9 billion or 18.5% compared to the same period in 2004. Average interest bearing deposits increased $2.0 billion or 10.7% in the first six months of 2005 compared to the first six months of last year. Average total borrowings increased $2.9 billion or 37.0% in the first half of 2005 compared to the same period in 2004. Average noninterest bearing deposits increased $0.3 billion or 6.9% in the three months ended June 30, 2005 compared to the same period last year. On a year-to-date basis, average noninterest bearing deposits increased $0.3 billion or 7.8% in the first six months of 2005 compared to the first six months of 2004. The growth and composition of the Corporation's quarterly average loan and lease portfolio for the current quarter and previous four quarters are reflected in the following table ($ in millions): Consolidated Average Loans and Leases --------------------------------------
2005 2004 Growth Pct. ------------------- ------------------------------ ------------------ Second First Fourth Third Second Prior Quarter Quarter Quarter Quarter Quarter Annual Quarter --------- --------- --------- --------- --------- -------- --------- Commercial Loans and Leases - --------------------------- Commercial $ 8,932 $ 8,460 $ 8,076 $ 7,796 $ 7,463 19.7 % 5.6 % Commercial real estate Commercial mortgages 8,509 8,275 8,042 7,826 7,512 13.3 2.8 Construction 1,358 1,241 1,143 1,100 1,071 26.8 9.4 --------- --------- --------- --------- --------- -------- --------- Total commercial real estate 9,867 9,516 9,185 8,926 8,583 15.0 3.7 Commercial lease financing 425 398 402 395 393 8.2 6.8 --------- --------- --------- --------- --------- -------- --------- Total Commercial Loans and Leases 19,224 18,374 17,663 17,117 16,439 16.9 4.6 Personal Loans and Leases - ------------------------- Residential real estate Residential mortgages 3,986 3,562 3,234 2,929 2,743 45.3 11.9 Construction 1,382 1,167 1,017 865 759 82.0 18.4 --------- --------- --------- --------- --------- -------- --------- Total residential real estate 5,368 4,729 4,251 3,794 3,502 53.3 13.5 Personal loans Student 78 88 85 79 83 (6.0) (11.6) Credit card 217 217 208 214 244 (11.4) (0.3) Home equity loans and lines 5,098 5,131 5,035 4,894 4,688 8.7 (0.6) Other 1,186 1,217 1,251 1,256 1,388 (14.5) (2.5) --------- --------- --------- --------- --------- -------- --------- Total personal loans 6,579 6,653 6,579 6,443 6,403 2.7 (1.1) Personal lease financing 123 128 135 146 164 (24.9) (3.8) --------- --------- --------- --------- --------- -------- --------- Total Personal Loans and Leases 12,070 11,510 10,965 10,383 10,069 19.9 4.9 --------- --------- --------- --------- --------- -------- --------- Total Consolidated Average Loans and Leases $ 31,294 $ 29,884 $ 28,628 $ 27,500 $ 26,508 18.1 % 4.7 % ========= ========= ========= ========= ========= ======== =========
Total consolidated average loans and leases increased $4.8 billion or 18.1% in the second quarter of 2005 compared to the second quarter of 2004. Total average commercial loan and lease growth was $2.8 billion, a 16.9% increase in the current quarter compared to the second quarter of the prior year. Approximately 52.7% of the growth in total average commercial loans and leases was attributable to commercial and industrial loans. Total average personal loans and leases increased $2.0 billion or 19.9% in the second quarter of 2005 compared to the second quarter of 2004. This growth was driven primarily by growth in residential real estate loans and home equity loans and lines. Average indirect auto loans and leases declined in the current quarter compared to the second quarter of the prior year which reflects, in part, the effect of the sale and securitization of indirect auto loans. From a production standpoint, residential real estate loan closings in the second quarter of 2005 were $0.3 billion or 21.1% greater than loan closings in the second quarter of 2004 and were $0.4 billion or 34.4% greater than loan closings in the first quarter of 2005. 23 For the six months ended June 30, 2005, total consolidated average loans and leases increased $4.6 billion or 17.8% compared to the six months ended June 30, 2004. Total average commercial loan and lease growth was $2.6 billion, a 16.4% increase in the first six months of 2005 compared to the first six months of the prior year. Approximately 52.6% of the growth in total average commercial loans and leases was attributable to commercial and industrial loans. Total average personal loans and leases increased $2.0 billion or 20.1% in the first half of 2005 compared to the first half of 2004. This growth was driven primarily by growth in residential real estate loans and home equity loans and lines. Year-to- date average indirect auto loans and leases declined in the first six months of 2005 compared to the same period of the prior year which, as previously discussed, reflects in part, the effect of the sale and securitization of indirect auto loans. From a production standpoint, residential real estate loan closings in the first half of 2005 were $0.6 billion or 29.4% greater than loan closings in the first half of 2004. Total average commercial loan and lease growth continued to be strong in the second quarter and first six months of 2005. This growth was spread relatively evenly throughout the first two quarters, was experienced in all of the Corporation's markets and came from both relatively new and existing customers across a variety of industries. Management attributes the loan growth to the strength of the local economies in the markets the Corporation serves, sales success and continued customer satisfaction. The Corporation continues to believe that double-digit loan growth is a reasonable expectation for the year ended December 31, 2005. However, it is uncertain whether the growth rates experienced in the first half of 2005 can be sustained for the remainder of the year. 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. The Corporation sells some of its residential real estate production (residential real estate and home equity loans) in the secondary market. Selected residential real estate loans with rate and term characteristics that are considered desirable are periodically retained in the portfolio. For the three months ended June 30, 2005 and 2004 real estate loans sold to investors amounted to $0.5 billion, respectively. For the six months ended June 30, 2005, real estate loans sold to investors amounted to $0.9 billion compared to $0.8 billion in the six months ended June 30, 2004. At June 30, 2005 and 2004, the Corporation had approximately $153.8 million and $84.3 million of mortgage loans held for sale, respectively. Gains from the sale of mortgage loans amounted to $9.5 million in the second quarter of 2005 compared to $9.0 million in the second quarter of 2004. For the six months ended June 30, 2005, gains from the sale of mortgage loans amounted to $16.4 compared to $14.2 million in the six months ended June 30, 2004. Auto loans securitized and sold in the second quarter of 2005 amounted to $0.1 billion compared to $0.3 billion in the second quarter of 2004. For the six months ended June 30, 2005, auto loans securitized and sold amounted to $0.2 billion compared to $0.4 billion in the six months ended June 30, 2004. For the three months ended June 30, 2005, net losses from the sale and securitization of auto loans amounted to $1.9 million compared to net losses of $3.2 million in the second quarter of 2004. For the six months ended June 30, 2005, net gains from the sale and securitization of auto loans were approximately break-even compared to net losses of $2.3 million for the six month ended June 30, 2004. The losses incurred were primarily due to lower loan interest spreads associated with new auto loan production in a rising interest rate environment. Auto loans held for sale amounted to $39.3 million at June 30, 2005. The Corporation anticipates that it will continue to divest itself of selected assets through sale or securitization in future periods. 24 The growth and composition of the Corporation's quarterly average deposits for the current and previous four quarters are as follows ($ in millions): Consolidated Average Deposits -----------------------------
2005 2004 Growth Pct. ------------------- ------------------------------ ------------------ Second First Fourth Third Second Prior Quarter Quarter Quarter Quarter Quarter Annual Quarter --------- --------- --------- --------- --------- -------- --------- Bank issued deposits - -------------------- Noninterest bearing deposits Commercial $ 3,377 $ 3,263 $ 3,427 $ 3,280 $ 3,143 7.4 % 3.5 % Personal 958 930 923 902 908 5.6 3.0 Other 491 500 521 456 463 6.1 (1.9) --------- --------- --------- --------- --------- -------- --------- Total noninterest bearing deposits 4,826 4,693 4,871 4,638 4,514 6.9 2.8 Interest bearing deposits Savings and NOW 3,149 3,281 3,402 3,452 3,395 (7.3) (4.0) Money market 5,819 5,692 5,654 5,612 5,657 2.9 2.2 Foreign activity 882 904 887 849 943 (6.4) (2.4) --------- --------- --------- --------- --------- -------- --------- Total interest bearing deposits 9,850 9,877 9,943 9,913 9,995 (1.5) (0.3) Time deposits Other CDs and time deposits 2,951 2,787 2,685 2,653 2,582 14.3 5.8 CDs greater than $100,000 1,243 1,074 906 805 660 88.3 15.8 --------- --------- --------- --------- --------- -------- --------- Total time deposits 4,194 3,861 3,591 3,458 3,242 29.4 8.6 Total bank issued deposits 18,870 18,431 18,405 18,009 17,751 6.3 2.4 Wholesale deposits - ------------------ Money market 1,077 1,073 1,096 747 72 1,389.6 0.3 Brokered CDs 4,437 4,761 4,960 5,009 4,498 (1.4) (6.8) Foreign time 1,086 969 811 869 1,188 (8.5) 12.2 --------- --------- --------- --------- --------- -------- --------- Total wholesale deposits 6,600 6,803 6,867 6,625 5,758 14.6 (3.0) --------- --------- --------- --------- --------- -------- --------- Total consolidated average deposits $ 25,470 $ 25,234 $ 25,272 $ 24,634 $ 23,509 8.3 % 0.9 % ========= ========= ========= ========= ========= ======== =========
Total consolidated average deposits increased $2.0 billion or 8.3% in the second quarter of 2005 compared to the second quarter of 2004. Average noninterest bearing deposits increased $0.3 billion or 6.9% while average bank-issued interest bearing deposits increased $0.8 billion or 6.1% in the current quarter compared to the second quarter of the prior year. For the six months ended June 30, 2005, total consolidated average deposits increased $2.3 billion or 10.2% compared to the six months ended June 30, 2004. Average noninterest bearing deposits increased $0.3 billion or 7.8% while average bank-issued interest bearing deposits increased $0.7 billion or 5.0% in the first six months of 2005 compared to the first six months of the prior year. The Corporation has recently experienced success in competing for bank issued time deposits without pricing above comparable wholesale levels. The growth in bank issued deposits, especially noninterest bearing deposits, includes both commercial and retail banking. Noninterest bearing deposits are subject to seasonality and are influenced by the 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. The Corporation continues to emphasize the sale of checking products. 25 For the three months ended June 30, 2005, average wholesale deposits increased $0.8 billion, or 14.6% compared to the three months ended June 30, 2004. For the six months ended June 30, 2005, average wholesale deposits increased $1.3 billion, or 25.0% compared to the six months ended June 30, 2004. The Corporation continues to make greater use of wholesale funding alternatives, especially brokered money market deposits and institutional certificates of deposit. 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. During the second quarter of 2005, $350.0 million of subordinated bank notes were issued. The subordinated bank notes mature in 2015 and have a coupon rate of 4.85%. Senior bank notes in an aggregate amount of $525.0 million were also issued during the second quarter of 2005. The senior bank notes are floating rate and mature at various time in 2007 and 2010. Approximately $125.0 million of the senior bank notes were converted to a fixed rate through the use of an interest rate swap. In addition, during the second quarter of 2005, the Corporation issued $3.6 million of MiNotes with an annual weighted average coupon interest rate of 4.51%. The MiNotes mature at various times in 2010 and 2012. Series E medium-term notes in the amount of $100.0 million with an annual coupon rate of 1.72% matured during the second quarter of 2005. During the first quarter of 2005, a new floating rate advance from the Federal Home Loan Bank ("FHLB") aggregating $250.0 million was obtained. The FHLB advance matures in 2011 and was converted to a fixed rate through the use of an interest rate swap. During the first quarter of 2005, $900.0 million of senior bank notes with an annual weighted average coupon interest rate of 4.13% were issued. The notes mature at various times beginning in 2008 through 2017. In addition, during the first quarter of 2005, the Corporation issued $4.5 million of MiNotes with an annual weighted average coupon interest rate of 5.02%. The MiNotes mature at various times beginning 2012 through 2023. During the first quarter of 2004, a fixed rate FHLB advance aggregating $55.0 million with an annual coupon interest rate of 5.06% was prepaid and retired resulting in a charge to earnings of $4.9 million. 26 The Corporation's consolidated average interest earning assets and interest bearing liabilities, interest earned and interest paid for the three and six months ended June 30, 2005 and 2004, are presented in the following tables ($ in millions): Consolidated Yield and Cost Analysis ------------------------------------
Three Months Ended Three Months Ended June 30, 2005 June 30, 2004 --------------------------- --------------------------- Average Average Average Yield or Average Yield or Balance Interest Cost (b) Balance Interest Cost (b) --------------------------- --------------------------- Loans and leases: (a) Commercial loans and leases $ 9,357.0 $ 134.1 5.75 % $ 7,855.9 $ 89.7 4.59 % Commercial real estate loans 9,867.4 149.4 6.07 8,582.9 113.9 5.34 Residential real estate loans 5,367.6 79.3 5.92 3,501.8 47.2 5.42 Home equity loans and lines 5,098.3 76.1 5.99 4,688.6 61.1 5.24 Personal loans and leases 1,603.8 23.3 5.83 1,878.7 23.3 5.00 ---------- ------- ------- ---------- ------- ------- Total loans and leases 31,294.1 462.2 5.92 26,507.9 335.2 5.09 Investment securities (b): Taxable 4,828.6 53.3 4.41 4,671.1 48.6 4.19 Tax Exempt (a) 1,333.7 23.9 7.34 1,171.2 21.7 7.59 ---------- ------- ------- ---------- ------- ------- Total investment securities 6,162.3 77.2 5.03 5,842.3 70.3 4.87 Trading securities (a) 25.6 0.1 0.78 22.1 0.1 1.05 Other short-term investments 271.7 2.2 3.39 164.7 0.4 1.00 ---------- ------- ------- ---------- ------- ------- Total interest earning assets $ 37,753.7 $ 541.7 5.76 % $ 32,537.0 $ 406.0 5.02 % ========== ======= ======= ========== ======= ======= Interest bearing deposits: Bank issued deposits: Bank issued interest bearing activity deposits $ 9,850.0 $ 41.8 1.70 % $ 9,995.5 $ 15.8 0.64 % Bank issued time deposits 4,193.2 31.6 3.02 3,241.8 19.2 2.38 ---------- ------- ------- ---------- ------- ------- Total bank issued deposits 14,043.2 73.4 2.10 13,237.3 35.0 1.06 Wholesale deposits 6,600.1 49.4 3.00 5,758.3 23.0 1.61 ---------- ------- ------- ---------- ------- ------- Total interest bearing deposits 20,643.3 122.8 2.39 18,995.6 58.0 1.23 Short-term borrowings 3,392.3 28.4 3.36 3,258.9 14.2 1.76 Long-term borrowings 7,920.1 77.3 3.91 4,703.9 41.8 3.57 ---------- ------- ------- ---------- ------- ------- Total interest bearing liabilities $ 31,955.7 $ 228.5 2.87 % $ 26,958.4 $ 114.0 1.70 % ========== ======= ======= ========== ======= ======= Net interest margin (FTE) as a percent of average earning assets $ 313.2 3.33 % $ 292.0 3.61 % ======= ======= ======= ======= Net interest spread (FTE) 2.89 % 3.32 % ======= =======
(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. 27 Consolidated Yield and Cost Analysis ------------------------------------
Six Months Ended Six Months Ended June 30, 2005 June 30, 2004 ---------------------------- ---------------------------- Average Average Average Yield or Average Yield or Balance Interest Cost (b) Balance Interest Cost (b) ---------------------------- ---------------------------- Loans and leases: (a) Commercial loans and leases $ 9,108.7 $ 252.6 5.59 % $ 7,698.4 $ 177.2 4.63 % Commercial real estate loans 9,692.9 286.6 5.96 8,452.1 225.0 5.35 Residential real estate loans 5,050.1 145.9 5.83 3,364.2 91.9 5.49 Home equity loans and lines 5,114.4 148.7 5.86 4,563.4 120.1 5.29 Personal loans and leases 1,626.6 45.8 5.68 1,889.6 47.6 5.07 ---------- -------- -------- ---------- -------- ------- Total loans and leases 30,592.7 879.6 5.80 25,967.7 661.8 5.13 Investment securities (b): Taxable 4,825.7 105.2 4.39 4,602.1 96.9 4.26 Tax Exempt (a) 1,306.1 46.9 7.41 1,158.9 43.1 7.64 ---------- -------- ------- ---------- -------- ------- Total investment securities 6,131.8 152.1 5.02 5,761.0 140.0 4.93 Trading securities (a) 24.4 0.1 0.99 22.7 0.2 1.33 Other short-term investments 229.6 3.7 3.20 188.6 0.9 1.01 ---------- -------- ------- ---------- -------- ------- Total interest earning assets $ 36,978.5 $1,035.5 5.65 % $ 31,940.0 $ 802.9 5.06 % ========== ======== ======= ========== ======== ======= Interest bearing deposits: Bank issued deposits: Bank issued interest bearing activity deposits $ 9,863.4 $ 75.5 1.54 % $ 9,993.7 $ 31.3 0.63 % Bank issued time deposits 4,028.1 57.6 2.89 3,242.0 38.4 2.38 ---------- -------- ------- ---------- -------- ------- Total bank issued deposits 13,891.5 133.1 1.93 13,235.7 69.7 1.06 Wholesale deposits 6,700.8 93.2 2.80 5,361.3 43.8 1.65 ---------- -------- ------- ---------- -------- ------- Total interest bearing deposits 20,592.3 226.3 2.22 18,597.0 113.5 1.23 Short-term borrowings 3,144.0 50.3 3.23 3,343.7 30.1 1.81 Long-term borrowings 7,564.6 145.7 3.88 4,473.3 80.8 3.63 ---------- -------- ------- ---------- -------- ------- Total interest bearing liabilities $ 31,300.9 $ 422.3 2.72 % $ 26,414.0 $ 224.4 1.71 % ========== ======== ======= ========== ======== ======= Net interest margin (FTE) as a percent of average earning assets $ 613.2 3.35 % $ 578.5 3.65 % ======== ======= ======== ======= Net interest spread (FTE) 2.93 % 3.35 % ======= =======
(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 28 basis points from 3.61% in the second quarter of 2004 to 3.33% in the second quarter of 2005. For the six months ended June 30, 2005, the net interest margin, as a percent of average earning assets on a FTE basis was 3.35% compared to 3.65% for the six months ended June 30, 2004, a decrease of 30 basis points. The decrease in net interest margin in 2005 was offset, in part, by the increase in noninterest bearing deposits as previously discussed. When comparing the net interest margin percentage for the three and six months ended June 30, 2005 to the three and six months ended June 30, 2004, the Corporation estimates that the additional interest expense associated with the $1.0 billion of debt issued in late July 2004 to finance Metavante's acquisitions lowered the net interest margin by approximately 12 basis points in the second quarter and first half of 2005. Unlike a bank acquisition or loan growth, where the primary source of revenue is interest income, the revenue impact of Metavante's acquisitions is recorded in Other income and is not a component of the net interest margin statistic. Compared to the first quarter of 2005, the net interest margin, as a percent of average earning assets on a FTE basis, decreased 3 basis points from 3.36% in the first quarter of 2005 to 3.33% in the second quarter of 2005. 28 The contraction of the net interest margin as a percent of average earning assets is primarily driven by the continued growth in loan balances beyond the Corporation's capacity to generate bank-issued deposit growth below the wholesale costs of funds. Management expects modest downward pressure on the net interest margin percentage to continue. Net interest income and the net interest margin percentage 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 June 30, 2005, and the prior four quarters: Nonperforming Assets -------------------- ($000's)
2005 2004 ---------------------- ---------------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- ---------- Nonaccrual $ 126,920 $ 124,416 $ 127,722 $ 139,154 $ 137,845 Renegotiated 176 220 236 244 253 Past due 90 days or more 4,514 5,314 4,405 3,148 6,902 ---------- ---------- ---------- ---------- ---------- Total nonperforming loans and leases 131,610 129,950 132,363 142,546 145,000 Other real estate owned 9,124 6,770 8,056 7,098 10,394 ---------- ---------- ---------- ---------- ---------- Total nonperforming assets $ 140,734 $ 136,720 $ 140,419 $ 149,644 $ 155,394 ========== ========== ========== ========== ========== Allowance for loan and lease losses $ 360,138 $ 358,280 $ 358,110 $ 358,072 $ 357,898 ========== ========== ========== ========== ==========
Consolidated Statistics -----------------------
2005 2004 ---------------------- ---------------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- ---------- Net charge-offs to average loans and leases annualized 0.15 % 0.11 % 0.18 % 0.10 % 0.08 % Total nonperforming loans and leases to total loans and leases 0.41 0.42 0.45 0.51 0.53 Total nonperforming assets to total loans and leases and other real estate 0.44 0.45 0.48 0.53 0.57 Allowance for loan and lease losses to total loans and leases 1.12 1.17 1.21 1.27 1.32 Allowance for loan and lease losses to total nonperforming loans and leases 274 276 271 251 247
29 Nonaccrual Loans and Leases By Type ----------------------------------- ($000's)
2005 2004 ---------------------- ---------------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- ---------- Commercial Commercial, financial and agricultural $ 35,777 $ 37,587 $ 41,047 $ 49,714 $ 39,473 Lease financing receivables 3,990 4,882 4,463 5,476 6,398 ---------- ---------- ---------- ---------- ---------- Total commercial 39,767 42,469 45,510 55,190 45,871 Real estate Construction and land development 1,500 785 578 207 1,724 Commercial mortgage 37,107 28,115 31,852 33,817 38,561 Residential mortgage 47,797 52,056 49,206 48,715 50,776 ---------- ---------- ---------- ---------- ---------- Total real estate 86,404 80,956 81,636 82,739 91,061 Personal 749 991 576 1,225 913 ---------- ---------- ---------- ---------- ---------- Total nonaccrual loans and leases $ 126,920 $ 124,416 $ 127,722 $ 139,154 $ 137,845 ========== ========== ========== ========== ==========
Reconciliation of Allowance for Loan and Lease Losses ----------------------------------------------------- ($000's)
2005 2004 ---------------------- ---------------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- ---------- Beginning balance $ 358,280 $ 358,110 $ 358,072 $ 357,898 $ 353,687 Provision for loan and lease losses 13,725 8,126 12,837 6,872 9,227 Allowance of banks and loans acquired -- -- -- -- -- Loans and leases charged-off Commercial 3,767 6,036 5,453 4,403 4,015 Real estate 8,190 3,339 4,342 3,047 2,765 Personal 3,765 3,416 3,345 3,207 2,616 Leases 380 246 6,178 252 536 ---------- ---------- ---------- ---------- ---------- Total charge-offs 16,102 13,037 19,318 10,909 9,932 Recoveries on loans and leases Commercial 2,264 2,604 5,100 2,366 2,279 Real estate 413 1,380 387 611 1,336 Personal 782 719 765 900 906 Leases 776 378 267 334 395 ---------- ---------- ---------- ---------- ---------- Total recoveries 4,235 5,081 6,519 4,211 4,916 ---------- ---------- ---------- ---------- ---------- Net loans and leases charge-offs 11,867 7,956 12,799 6,698 5,016 ---------- ---------- ---------- ---------- ---------- Ending balance $ 360,138 $ 358,280 $ 358,110 $ 358,072 $ 357,898 ========== ========== ========== ========== ==========
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 $9.1 million at June 30, 2005, compared to $6.8 million at March 31, 2005 and $8.1 million at December 31, 2004. The increase in OREO at June 30, 2005 compared to March 31, 2005 was primarily attributable to acquired non- residential properties. 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. 30 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. At June 30, 2005, nonperforming loans and leases amounted to $131.6 million or 0.41% of consolidated loans and leases compared to $130.0 million or 0.42% of consolidated loans and leases at March 31, 2005, and $132.4 million or 0.45% of consolidated loans and leases at December 31, 2004. At June 30, 2005 nonperforming loans and leases increased slightly compared to nonperforming loans and leases at March 31, 2005. The ratio of nonperforming loans and leases to consolidated loans and leases at June 30, 2005 represents the ninth consecutive quarter that the Corporation has experienced a decline in that ratio. Nonaccrual loans and leases continue to be the primary source of nonperforming loans and leases. Since December 31, 2004, the decline in nonaccrual commercial loans and leases and nonaccrual residential real estate loans was offset by increases in nonaccrual commercial real estate loans and nonaccrual construction and land development loans. Net charge-offs amounted to $11.9 million or 0.15% of average loans and leases in the second quarter of 2005 compared to $8.0 million or 0.11% of average loans and leases in the first quarter of 2005 and $12.8 million or 0.18% of average loans and leases in the fourth quarter of 2004. The lower level of net charge-offs experienced throughout 2004 and the first half of 2005 has to some extent been the result of higher than normal recoveries. Based on the status of some of the larger charge-offs recognized in recent quarters, management expects recoveries will likely return to lower levels in future periods. Recoveries in the second quarter of 2005 were $0.8 million lower than recoveries in the first quarter of 2005 and $2.3 million lower than recoveries in the fourth quarter of 2004. The ratio of recoveries to charge-offs was 26.3% in the second quarter of 2005 which was slightly below the Corporation's five year historical average ratio of recoveries to charge-offs of 26.9%. For the six month ended June 30, 2005, the ratio of recoveries to charge-offs was 32.0%. Management continues to expect the longer term level of nonperforming loans and leases to be in the range of 50-60 basis points of total loans and leases and expects net charge-offs to trend to historical levels. While it is unclear when this will occur, management does not believe that current net charge-off levels are sustainable indefinitely. The provisions for loan and lease losses amounted to $13.7 million for the three months ended June 30, 2005 compared to $8.1 million for the three months ended March 31, 2005 and $9.2 million for the three months ended June 30, 2004. For the six months ended June 30, 2005, the provision for loan and lease losses amounted to $21.9 million compared to $18.3 million for the six months ended June 30, 2004. The allowance for loan and lease losses as a percent of consolidated loans and leases outstanding was 1.12% at June 30, 2005, 1.17% at March 31, 2005 and 1.32% at June 30, 2004. OTHER INCOME ------------ Other income or noninterest sources of revenue represented approximately 59.2% and 53.7% of the Corporation's total sources of revenues for the three months ended June 30, 2005 and 2004, respectively. Total other income in the second quarter of 2005 amounted to $442.6 million compared to $330.0 million in the same period last year, an increase of $112.6 million or 34.1%. For the six months ended June 30, 2005, other income represented approximately 58.8% of the Corporation's total sources of revenues and amounted to $852.1 million. By comparison, for the six months ended June 30, 2004, other income represented approximately 53.4% of the Corporation's total sources of revenues and amounted to $643.4 million. For the six months ended June 30, 2005 other income increased $208.7 million or 32.4% compared to the six months ended June 30, 2004. The increase in other income in the second quarter and first half of 2005 compared to the same periods in 2004 was primarily due to growth in data processing services and trust services revenue and, as previously discussed, the gain from the sale of an entity associated with the Corporation's investment in an independent private equity and venture capital partnership. 31 Data processing services revenue amounted to $271.7 million in the second quarter of 2005 compared to $197.3 million in the second quarter of 2004, an increase of $74.4 million or 37.7%. For the six months ended June 30, 2005, data processing services revenue amounted to $544.0 million compared to $383.5 million in the six months ended June 30, 2004, an increase of $160.5 million or 41.9%. Overall, revenue growth was generally stronger than expected throughout this segment and was driven by revenue associated with acquisitions and higher transaction volumes in payment processing and electronic banking. Revenue associated with Metavante's acquisitions completed in 2005 and 2004 net of revenue lost from the 2004 divestitures (collectively "acquisitions"), contributed a significant portion of the revenue growth in the three and six months ended June 30, 2005, over the comparable three and six months ended June 30, 2004, respectively. The acquisition related revenue growth includes cross sales of acquired products to clients across the entire segment. Total buyout revenue, which varies from period to period, increased $0.2 million in the current quarter compared to the second quarter of last year and was $3.0 million higher in the first half of 2005 compared to the first half of 2004. Based on its performance in the first half of 2005, management expects Metavante's total 2005 revenues (internal and external) will be at the upper end of the $1.1 to $1.2 billion revenue range previously provided and segment earnings will be in the range of $115.0 million to $120.0 million, excluding the impact of recently announced acquisitions. Trust services revenue amounted to $41.1 million in the second quarter of 2005 compared to $37.9 million in the second quarter of 2004, an increase of $3.2 million or 8.4%. For the six months ended June 30, 2005, trust services revenue amounted to $81.5 million compared to $74.2 million for the six months ended June 30, 2004, an increase of $7.3 million or 9.8%. The increase in revenue was due to sales efforts that continue to emphasize cross-selling and integrated delivery. Assets under management were approximately $18.5 billion at June 30, 2005, compared to $18.3 billion at December 31, 2004, and $17.1 billion at June 30, 2004. Service charges on deposits amounted to $23.9 million in the second quarter of 2005 compared to $25.1 million in the second quarter of 2004, a decrease of $1.2 million. For the six months ended June 30, 2005, service charges on deposits amounted to $47.5 million compared to $50.6 million for the six months ended June 30, 2004, a decrease of $3.1 million. A portion of this source of fee income is sensitive to changes in interest rates. In a rising interest rate environment customers receive a higher earnings credit for maintaining balances which results in lower fee income. Service charges on deposits associated with commercial demand deposits accounted for the majority of the decline in this revenue in both the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004. Total mortgage banking revenue was $10.5 million in the second quarter of 2005 compared with $11.7 million in the second quarter of 2004, a decrease of $1.2 million. Total mortgage banking revenue was $18.4 million in the first six months of 2005 compared with $18.7 million in the first six months of 2004. For the three months ended June 30, 2005 and 2004, the Corporation sold $0.5 billion of residential mortgage and home equity loans to the secondary market. For the six months ended June 30, 2005 and 2004, the Corporation sold $0.9 billion and $0.8 billion of residential mortgage and home equity loans to the secondary market, respectively. Retained interests in the form of mortgage servicing rights on residential mortgage loans amounted to $0.5 million for the six months ended June 30, 2005 and $0.7 million for the six months ended June 30, 2004. Net investment securities gains amounted to $29.4 million and $35.3 million for the three and six months ended June 30, 2005, respectively. As previously discussed, during the second quarter of 2005, the Corporation realized a gain due to the sale of an entity associated with its investment in an independent private equity and venture capital partnership. The gross gain amounted to $29.0 million. During the first quarter of 2005, the Corporation's banking segment's investment in certain membership interests of PULSE was liquidated by PULSE. The cash received resulted in a gain of $5.3 million. An additional $0.3 million was received in the second quarter of 2005. Net investment securities activities for the three and six months ended June 30, 2004 were not significant. Other income in the second quarter of 2005 amounted to $47.2 million compared to $39.9 million in the second quarter of 2004, an increase of $7.3 million or 18.4%. For the six months ended June 30, 2005, other income amounted to $89.9 million compared to $80.8 million for the six months ended June 30, 2004, an increase of $9.1 million or 11.1%. Higher auto securitization income, as previously discussed, and increases in loan related and card related fees were the primary contributors to the increase in other income in the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004. Other income for the three and six months ended June 30, 2005 includes a gain from a branch divestiture of $0.9 million. In addition, other income for the six months ended June 30, 2005 includes a gain of $0.8 million from the required sale of a facility that was completed during the first quarter of 2005. OTHER EXPENSE ------------- Total other expense for the three months ended June 30, 2005 amounted to $452.6 million compared to $374.7 million for the three months ended June 30, 2004, an increase of $77.9 million or 20.8%. For the six months ended June 30, 2005, total other expense amounted to $889.0 million compared to $737.0 million for the six months ended June 30, 2004, an increase of $152.0 million or 20.6%. 32 Total other expense for the three and six months ended June 30, 2005 included the operating expenses associated with Metavante's acquisitions of Kirchman Corporation in May 2004, Advanced Financial Solutions, Inc. and its affiliated companies in July 2004, the NYCE Corporation in July 2004, Response Data Corp. in September 2004, NuEdge Systems LLC in October 2004, VECTORsgi Holdings, Inc. in November 2004 and Prime Associates, Inc. on February 9, 2005. Total other expense for the three and six months ended June 30, 2005 excluded the operating expenses associated with the 401k Retirement Plan Services operations and the direct customer base of Paytrust.com that were sold in the fourth quarter of 2004. Metavante's acquisitions and divestitures had a significant impact on the period-to-period comparability of operating expenses in 2005 compared to 2004. Approximately $54.9 million of the operating expense growth in the second quarter of 2005 compared to the second quarter of 2004 was attributable to the acquisitions and divestitures. Approximately $117.4 million of the operating expense growth in the first six months of 2005 compared to the first six months of 2004 was attributable to the acquisitions and divestitures. The operating expenses of the acquired and divested entities have been included in or excluded from the Corporation's consolidated operating expenses from the dates the transactions were completed. Other expense for the three and six months ended June 30, 2004, included a product impairment charge by Metavante that amounted to $5.5 million. As previously discussed, other expense for the six months ended June 30, 2004 included a charge to earnings of $4.9 million because the Corporation prepaid and retired $55.0 million of higher cost fixed rate debt during the first quarter of 2004. The Corporation estimates that its expense growth in the three and six months ended June 30, 2005 compared to the three and six months ended June 2004, excluding the effects of the acquisitions and divestitures, the debt prepayment and the impairment charge, was approximately $28.5 million or 7.9% and $45.0 million or 6.3%, respectively. Expense control is sometimes measured in the financial services industry by the efficiency ratio statistic. The efficiency ratio is calculated by taking total other expense divided by the sum of total other income (including Capital Markets revenue but excluding investment securities gains or losses) and net interest income on a fully taxable equivalent basis. The Corporation's efficiency ratios for the three months ended June 30, 2005, and prior four quarters were: Efficiency Ratios -----------------
Three Months Ended ---------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, 2005 2005 2004 2004 2004 ------------ ------------ ------------ ------------ ------------ Consolidated Corporation 59.9 % 62.0 % 61.6 % 62.2 % 60.2 % Consolidated Corporation Excluding Metavante 47.7 % 48.8 % 47.0 % 49.0 % 48.8 %
Salaries and employee benefits expense amounted to $262.4 million in the second quarter of 2005 compared to $211.9 million in the second quarter of 2005, an increase of $50.5 million or 23.8%. For the six months ended June 30, 2005, salaries and employee benefits expense amounted to $500.9 million compared to $415.8 million for the six months ended June 30, 2004, an increase of $85.1 million or 20.5%. Salaries and benefits associated with acquisitions and divestitures previously discussed accounted for approximately $25.7 million and $55.1 million of the increase in salaries and employee benefits expense in the second quarter and first six months of 2005 compared to the second quarter and first six months of 2004, respectively. Long-term incentive plans, which are tied to consolidated performance and the Corporation's common stock price, and business-line performance incentives, which increased due to significant business success especially in the current quarter, accounted for over half of the remaining increase in salaries and employee benefit expense in the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004. From June 30, 2004 to June 30, 2005, the Corporation's common stock price increased 13.7%. For the second quarter of 2005, occupancy and equipment expense amounted to $50.9 million compared to $44.5 million in the second quarter of 2004, an increase of $6.4 million or 14.3%. For the six months ended June 30, 2005, occupancy and equipment expense amounted to $104.2 million compared to $91.8 million for the six months ended June 30, 2004, an increase of $12.4 million or 13.5%. The acquisitions and divestitures accounted for approximately all of the increase in occupancy and equipment expense in the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004, respectively. 33 Software expenses, processing charges, supplies and printing, professional services and shipping and handling expenses totaled $63.0 million in the second quarter of 2005 compared to $58.5 million in the second quarter of 2004, an increase of $4.5 million or 7.7%. For the six months ended June 30, 2005, software expenses, processing charges, supplies and printing, professional services and shipping and handling expenses totaled $128.3 million compared to $114.0 million, for the six months ended June 30, 2004, an increase of $14.3 million or 12.6%. The acquisitions and divestitures accounted for approximately $6.6 million of the increase in these expense items in the second quarter of 2005 compared to the second quarter of 2004. The increase in these expense items due to the acquisitions and divestitures in the second quarter of 2005 compared to the second quarter of 2004 were offset by lower shipping and handling charges at Metavante and lower processing charges in the other business segments. The acquisitions and divestitures accounted for approximately all of the increase in these expense items in the six months ended June 30, 2005 compared to the six months ended June 30, 2004. Amortization of intangibles amounted to $8.1 million in the second quarter of 2005 compared to $5.4 million in the second quarter of 2004, an increase of $2.7 million. For the six months ended June 30, 2005, amortization of intangibles amounted to $16.2 million compared to $10.9 million for the six months ended June 30, 2004, an increase of $5.3 million. Amortization and valuation reserve adjustments associated with mortgage servicing rights decreased amortization expense $0.1 million and $0.8 million in the second quarter of 2005 and first six months of 2005 compared to the second quarter and first six months of 2004, respectively. The carrying value of the Corporation's mortgage servicing rights was $3.2 million at June 30, 2005. Amortization of core deposit intangibles, which is based on a declining balance method, decreased $0.6 million and $1.1 million in the second quarter and first six months of 2005 compared to the second quarter and first six months of the prior year. For the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004, the acquisitions and divestitures contributed approximately $3.9 million and $7.9 million, respectively to the increase in intangibles amortization expense in the respective periods. Other expense amounted to $68.2 million in the second quarter of 2005 compared to $54.4 million in the second quarter of 2004, an increase of $13.8 million or 25.4%. The acquisitions and divestitures accounted for approximately $10.6 million of the increase in other expense in the second quarter of 2005 compared to the second quarter of 2004. For the six months ended June 30, 2005, other expense amounted to $139.4 million compared to $104.5 million for the six months ended June 30, 2004, an increase of $34.9 million or 33.3%. The acquisitions and divestitures accounted for approximately $23.5 million of the increase in other expense in the first six months of 2005 compared to the first six months of 2004. As previously discussed, other expense for the six months ended June 30, 2004 includes a charge to earnings of $4.9 million for the early retirement of $55.0 million of higher cost fixed rate debt during the first quarter of 2004. Other expense is affected by the capitalization of costs, net of amortization associated with software development and customer data processing conversions. Net software and conversion amortization was $5.6 million in the second quarter of 2005 compared to $6.7 million in the second quarter of 2004, resulting in a decrease to other expense over the comparative quarters of $1.1 million. For the six months ended June 30, 2005 net software and conversion amortization was $11.4 million compared to $9.8 million for the six months ended June 30, 2004, resulting in an increase to other expense over the comparative six months of $1.6 million. The acquisitions and divestitures increased net software and conversion amortization expense in the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004 by $1.2 million and $2.8 million, respectively. Included in net software and conversion amortization for the three and six months ended June 30, 2004 is Metavante's write-off of capitalized software associated with an impaired product as previously discussed. Higher expenses associated with credit cards, advertising and promotion and various other expenses accounted for the remaining increase in other expense in the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004, respectively. INCOME TAXES ------------ The provision for income taxes for the three months ended June 30, 2005 amounted to $92.5 million or 32.9% of pre-tax income compared to $78.4 million or 34.1% of pre-tax income for the three months ended June 30, 2004. For the six months ended June 30, 2005 the provision for income taxes amounted to $179.7 million or 33.4% of pre-tax income compared to $153.0 million or 33.9% of pre-tax income for the six months ended June 30, 2004. In the normal course of business, the Corporation and its affiliates are routinely subject to examinations from federal and state tax authorities. During the second quarter of 2005, an income tax issue was resolved which primarily affected the banking segment and resulted in a lower provision for income taxes in the consolidated statements of income for the three and six months ended June 30, 2005. 34 LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Shareholders' equity was $4.2 billion or 9.7% of total consolidated assets at June 30, 2005, compared to $3.9 billion or 9.6% of total consolidated assets at December 31, 2004, and $3.4 billion or 9.3% of total consolidated assets at June 30, 2004. The increase in shareholders' equity at June 30, 2005 was primarily due to earnings net of dividends paid. In the second quarter of 2005, the Corporation's Board of Directors authorized an increase in the quarterly cash dividend paid on the Corporation's common stock, from $0.21 per share to $0.24 per share, or 14.3%. Shareholders' equity at June 30, 2005 includes the effect of certain common stock issuances in the first quarter of 2005. During the first quarter of 2005, the Corporation issued 563,114 shares of its common stock valued at $24.0 million in conjunction with Metavante's acquisition of Prime Associates, Inc. Also during the first quarter of 2005, the Corporation issued 355,046 shares of its common stock valued at $14.4 million to fund its 2004 obligations under its retirement and employee stock ownership plans. At June 30, 2005, the net gain in accumulated other comprehensive income amounted to $15.5 million which represented a negative change in accumulated other comprehensive income of $7.8 million since December 31, 2004. Net accumulated other comprehensive income associated with available for sale investment securities was a net gain of $13.7 million at June 30, 2005, compared to a net gain of $31.1 million at December 31, 2004, resulting in a net loss of $17.4 million over the six month period. Net accumulated other comprehensive income associated with the change in fair value of the Corporation's derivative financial instruments designated as cash flow hedges was a net gain of $9.5 million over the six month period. The Corporation has a Stock Repurchase Program under which it may repurchase up to 12 million shares of its common stock annually. No shares were acquired under the program in the second quarter or first six months of 2005. For the six months ended June 30, 2004, 2.3 million shares were acquired at an aggregate cost of $88.5 million or an average price of $38.98 per common share. As a result of the Metavante acquisitions, the Corporation does not expect that it will acquire shares of its common stock under the Stock Repurchase Program in the near term. The Corporation continues to have a strong capital base and its regulatory capital ratios are significantly above the minimum requirements as shown in the following tables. RISK-BASED CAPITAL RATIOS ------------------------- ($ in millions)
June 30, 2005 December 31, 2004 --------------------------------- --------------------------------- Amount Ratio Amount Ratio --------------------------------- --------------------------------- Tier 1 Capital $ 2,809 7.55 % $ 2,520 7.42 % Tier 1 Capital Minimum Requirement 1,488 4.00 1,358 4.00 -------------------------------- -------------------------------- Excess $ 1,321 3.55 % $ 1,162 3.42 % ================================ ================================ Total Capital $ 4,434 11.92 % $ 3,802 11.20 % Total Capital Minimum Requirement 2,976 8.00 2,716 8.00 -------------------------------- -------------------------------- Excess $ 1,458 3.92 % $ 1,086 3.20 % ================================ ================================ Risk-Adjusted Assets $ 37,198 $ 33,948 ================= =================
LEVERAGE RATIOS --------------- ($ in millions)
June 30, 2005 December 31, 2004 --------------------------------- --------------------------------- Amount Ratio Amount Ratio --------------------------------- --------------------------------- Tier 1 Capital $ 2,809 6.91 % $ 2,520 6.72 % Minimum Leverage Requirement 1,219 - 2,032 3.00 - 5.00 1,126 - 1,876 3.00 - 5.00 -------------------------------- -------------------------------- Excess $ 1,590 - 777 3.91 - 1.91 % $ 1,394 - 644 3.72 - 1.72 % ================================ ================================ Adjusted Average Total Assets $ 40,648 $ 37,509 ================= =================
35 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 $5.6 billion at June 30, 2005, represent a highly accessible source of liquidity. The Corporation's portfolio of held-to-maturity investment securities, which totaled $0.7 billion at June 30, 2005, provides liquidity from maturities and amortization payments. The Corporation's loans held-for- sale provide additional liquidity. These loans represent recently funded 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 $16.7 billion in the second quarter of 2005. 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 $6.6 billion in the second quarter of 2005. 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 8 to the Consolidated Financial Statements for an update of the Corporation's securitization activities in the second quarter of 2005. The Corporation's lead bank, M&I Marshall & Ilsley Bank ("the Bank"), has implemented a bank note program which permits it to issue up to $7.0 billion of short-term and medium-term notes which are offered and sold only to institutional investors. This program is intended to enhance liquidity by enabling the Bank to sell its debt instruments in private markets in the future without the delays which would otherwise be incurred. Bank notes outstanding at June 30, 2005, amounted to $4.8 billion of which $1.3 billion is subordinated and qualifies as supplementary capital for regulatory capital purposes. Bank notes issued during the second quarter of 2005 amounted to $875.0 million. The national capital markets represent a further source of liquidity to M&I. M&I has filed a number of shelf registration statements that are intended to permit M&I to raise funds through sales of corporate debt and/or equity securities with a relatively short lead time. During the second quarter of 2004, the Corporation filed a shelf registration statement with the Securities and Exchange Commission which will enable the Corporation to issue various securities, including debt securities, common stock, preferred stock, depositary shares, purchase contracts, units, warrants, and trust preferred securities, up to an aggregate amount of $3.0 billion. At June 30, 2005, approximately $1.45 billion was available for future securities issuances. During the fourth quarter of 2004, the Corporation filed a shelf registration statement with the Securities and Exchange Commission which will enable the Corporation to issue up to 6.0 million shares of its common stock which may be offered and issued from time to time in connection with the acquisition by M&I, Metavante and/or other consolidated subsidiaries of businesses that the Corporation determines to be to its advantage as they become available. At June 30, 2005, 5.4 million shares of common stock were available for future issuances. Under other shelf registration statements, the Corporation may issue up to $0.6 billion of medium-term Series F notes with maturities ranging from 9 months to 30 years and at fixed or floating rates. At June 30, 2005, no Series F notes had been issued. 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 June 30, 2005, MiNotes issued amounted to $0.2 billion. Additionally, the Corporation has a commercial paper program. At June 30, 2005, commercial paper outstanding amounted to $0.3 billion. 36 Short-term borrowings represent contractual debt obligations with maturities of one year or less and amounted to $3.1 billion at June 30, 2005. Long-term borrowings amounted to $8.5 billion at June 30, 2005. The scheduled maturities of long-term borrowings including estimated interest payments at June 30, 2005 are as follows: $2.4 billion is due in less than one year; $2.7 billion is due in one to three years; $2.1 billion is due in three to five years; and $3.7 billion is due in more than five years. As previously discussed, during the first quarter of 2005, the Corporation issued shares of its common stock valued at $14.4 million to fund a portion of its 2004 obligations under its retirement and employee stock ownership plans. 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, 2004. OFF-BALANCE SHEET ARRANGEMENTS ------------------------------ At June 30, 2005, there have been no substantive changes with respect to the Corporation's off-balance sheet activities as disclosed in the Corporation's 2004 Annual Report on Form 10-K. See Note 8 to the Consolidated Financial Statements for an update of the Corporation's securitization activities in the second quarter of 2005. The Corporation continues to believe that based on the off-balance sheet arrangements with which it is presently involved, such off-balance sheet arrangements neither 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 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. 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. 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 that 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. The internal risk rating system is used to identify those loans within certain 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. Based on management's judgment, reserve ranges are allocated to industry segments 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, risk profile, and portfolio composition. Reserve ranges are then allocated using estimates of loss exposure that management has identified based on these economic trends or conditions. 37 The following factors were taken into consideration in determining the adequacy of the allowance for loan and lease losses at June 30, 2005: In general, the Corporation's borrowing customers appear to have successfully managed their businesses through the slower economic conditions, the economy is improving and the Corporation's customer base is showing signs of increased business activity as evidenced by the loan growth in this quarter. At June 30, 2005, allowances for loan and lease losses continue to be carried for exposures to manufacturing, healthcare, production agriculture (including dairy and cropping operations), truck transportation, accommodation, general contracting, motor vehicle and parts dealers and the airline 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 previous economic slowdown. Reduced revenues causing a declining utilization of the industry's capacity levels have impacted manufacturing. As a result, collateral values and the amounts realized through the sale or liquidation of manufacturing plant and equipment have declined accordingly. During the second quarter of 2005, the Corporation's commitments to Shared National Credits were approximately $2.9 billion with usage averaging around 40%. Many of the Corporation's largest charge-offs have come from the Shared National Credit portfolio. Although these factors result in an increased risk profile, as of June 30, 2005 Shared National Credit nonperforming loans amounted to $4.0 million. The Corporation's exposure to Shared National Credits is monitored closely given this lending group's loss experience. The Corporation's primary lending areas are Wisconsin, Arizona, Minnesota and Missouri. The Minnesota and Missouri markets continue to represent relatively new geographic regions for the Corporation. Each of these regions has cultural and environmental factors that are unique to them. The uncertainty regarding the inherent losses in their respective loan portfolios continue to present increased risks which have been mitigated by the implementation of the Corporation's credit underwriting and monitoring processes. At June 30, 2005, total nonperforming loans and leases as a percent of total loans and leases for the Minnesota and Missouri regions combined was somewhat higher than the consolidated total of nonperforming loans and leases as a percent of total consolidated loans and leases. At June 30, 2005, nonperforming loans and leases amounted to $131.6 million or 0.41% of consolidated loans and leases compared to $130.0 million or 0.42% of consolidated loans and leases at March 31, 2005, and $132.4 million or 0.45% of consolidated loans and leases at December 31, 2004. At June 30, 2005 nonperforming loans and leases increased slightly compared to nonperforming loans and leases at March 31, 2005. The ratio of nonperforming loans and leases to consolidated loans and leases at June 30, 2005 represents the ninth consecutive quarter that the Corporation has experienced a decline in that ratio. Nonaccrual loans and leases continue to be the primary source of nonperforming loans and leases. Since December 31, 2004, the decline in nonaccrual commercial loans and leases and nonaccrual residential real estate loans was offset by increases in nonaccrual commercial real estate loans and nonaccrual construction and land development loans. Net charge-offs amounted to $11.9 million or 0.15% of average loans and leases in the second quarter of 2005 compared to $8.0 million or 0.11% of average loans and leases in the first quarter of 2005 and $12.8 million or 0.18% of average loans and leases in the fourth quarter of 2004. The lower level of net charge-offs experienced throughout 2004 and the first half of 2005 has to some extent been the result of higher than normal recoveries. Based on the status of some of the larger charge-offs recognized in recent quarters, management expects recoveries will likely return to lower levels in future periods. Recoveries in the second quarter of 2005 were $0.8 million lower than recoveries in the first quarter of 2005 and $2.3 million lower than recoveries in the fourth quarter of 2004. The ratio of recoveries to charge-offs was 26.3% in the second quarter of 2005 which was slightly below the Corporation's five year historical average ratio of recoveries to charge-offs of 26.9%. For the six month ended June 30, 2005, the ratio of recoveries to charge-offs was 32.0%. 38 Management continues to expect the longer term level of nonperforming loans and leases to be in the range of 50-60 basis points of total loans and leases and expects net charge-offs to trend to historical levels. While it is unclear when this will occur, management does not believe that current net charge-off levels are sustainable indefinitely. Based on the above loss estimates, management determined its best estimate of the required allowance for loans and leases. Management's evaluation of the factors described above resulted in an allowance for loan and lease losses of $360.1 million or 1.12% of loans and leases outstanding at June 30, 2005. The allowance for loan and lease losses was $358.1 million or 1.21% of loans and leases outstanding at December 31, 2004 and $357.9 million or 1.32% of loans and leases outstanding at June 30, 2004. Consistent with the credit quality trends noted above, the provision for loan and lease losses amounted to $13.7 million and $21.9 million for the three and six months ended June 30, 2005, respectively. The resulting provisions for loan and lease losses are the amounts required to establish the allowance for loan and lease losses at 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 materially changed any aspect of 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. However, on an on-going basis the Corporation continues to refine the methods used in determining management's best estimate of the allowance for loan and lease losses. 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 June 30, 2005 and 2004, the amount of software costs capitalized amounted to $9.9 million and $10.4 million, respectively. Amortization expense of software costs amounted to $15.4 million for the three months ended June 30, 2005 compared to $16.7 million for the three months ended June 30, 2004. For the six months ended June 30, 2005 and 2004, the amount of software costs capitalized amounted to $18.9 million and $20.4 million, respectively. Amortization expense of software costs amounted to $30.3 million for the six months ended June 30, 2005 compared to $28.1 million for the six months ended June 30, 2004. Based on a strategic product review performed during the second quarter of 2004, Metavante determined that a certain product had limited growth potential and that future marketing of the product should be discontinued. As a result of the strategic product review and net realizable value test on this product, Metavante determined that the capitalized software associated with the product was impaired and recorded a write-down. Amortization expense for the three and six months ended June 30, 2004, includes $4.9 million for the write-down of the capitalized software costs associated with the impaired product. 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 June 30, 2005 and 2004, the amount of conversion costs capitalized amounted to $2.7 million and $2.8 million, respectively. Amortization expense of conversion costs amounted to $2.8 million and $3.2 million for the three months ended June 30, 2005 and 2004, respectively. For the six months ended June 30, 2005 and 2004, the amount of conversion costs capitalized amounted to $5.6 million and $4.4 million, respectively. Amortization expense of conversion costs amounted to $5.6 million and $6.5 million for the six months ended June 30, 2005 and 2004, respectively. 39 Net unamortized costs were ($ in millions):
June 30, ------------------------- 2005 2004 ----------- ----------- Software $ 151.6 $ 139.1 Conversions 26.5 28.6 ----------- ----------- Total $ 178.1 $ 167.7 =========== ===========
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 Financial Accounting Standards Board Interpretation No. 46 ("FIN 46R"), Consolidation of Variable Interest Entities (revised December 2003). This interpretation addresses consolidation by business enterprises of variable interest entities. Under current practice, entities generally have been included in consolidated financial statements because they are controlled through voting interests. This interpretation explains how to identify variable interest entities and how an entity assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 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. FIN 46R also requires certain disclosures by the primary beneficiary of a variable interest entity or an entity that holds a significant variable interest in a variable interest entity. With respect to the Corporation's securitization activities, the adoption of FIN 46R did not have an impact on 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 carrying value of the retained interests. The Corporation regularly sells automobile loans to an unconsolidated multi- seller special purpose entity commercial paper conduit in securitization transactions in which servicing responsibilities and subordinated interests are retained. The outstanding balances of automobile loans sold in these securitization transactions were $950.4 million at June 30, 2005. At June 30, 2005 the carrying amount of retained interests amounted to $28.7 million. 40 The Corporation also sells, from time to time, debt securities classified as available for sale that are highly rated to an unconsolidated bankruptcy remote QSPE whose activities are limited to issuing highly rated asset-backed commercial paper with maturities up to 180 days which is used to finance the purchase of the investment securities. The Corporation provides liquidity back-up in the form of Liquidity Purchase Agreements. In addition, the Corporation 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. At June 30, 2005, highly rated investment securities in the amount of $274.5 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 Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk," respectively, contain forward- looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding 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, 2004 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following updated information should be read in conjunction with the Corporation's 2004 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 balance growth in these accounts. This modeling treatment will be maintained until the incremental balances can be observed across a more complete interest rate cycle. In addition to contractual payment information for most other assets and liabilities, the models also include estimates of expected prepayment characteristics for those items that are likely to materially change their payment structures in different rate environments, including residential mortgage products, certain commercial and commercial real estate loans and certain mortgage-related securities. Estimates for these sensitivities are based on industry assessments and are substantially driven by the differential between the contractual coupon of the item and current market rates for similar products. This information is incorporated into a model that allows the projection of future income levels in several different interest rate environments. Earnings at risk are 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 the year (+25bp per quarter), and a gradual decrease of 100bp across the entire yield curve over the course of the year (-25bp per quarter) for the balance sheet as of the indicated dates:
Impact to Annual Pretax Income as of -------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, 2005 2005 2004 2004 2004 ------------ ------------ ------------ ------------ ------------ Hypothetical Change in Interest Rate - ------------------------------------ 100 basis point gradual: Rise in rates 0.3 % (0.2)% (0.1)% 0.4 % (0.6)% Decline in rates (0.6)% 0.3 % 0.2 % (0.4)% 0.6 %
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 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. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. Another component of interest rate risk is measuring the fair value at risk for a given change in market interest rates. The Corporation also uses computer modeling techniques to determine the present value of all asset and liability cash flows (both on- and off-balance sheet), adjusted for prepayment expectations, using a market discount rate. The net change in the present value of the asset and liability cash flows in different market rate environments is the amount of fair value at risk from those rate movements. As of June 30, 2005 the fair value of equity at risk for a gradual 100bp shift in rates was no more than 2.0% of the market value of the Corporation. Equity Risk ----------- In addition to interest rate risk, the Corporation incurs market risk in the form of equity risk. The Corporation invests directly and indirectly through investment funds, 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 exists. However, fair values are difficult to determine until an actual sale or liquidation transaction actually occurs. At June 30, 2005 the carrying value of total active capital markets investments amounted to approximately $32.7 million. 42 As of June 30, 2005, M&I Trust Services administered $78.5 billion in assets and directly managed a portfolio of $18.5 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 our Senior 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 our Senior 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. 43 PART II - OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table reflects the purchases of Marshall & Ilsley Corporation stock for the specified period:
Total Number of Maximum Number Shares Purchased of Shares that as Part of May Yet Be Total Number Average of Publicly Purchased Under of Shares Price Paid Announced Plans the Plans Period Purchased(1) per Share or Programs or Programs ----------------- ------------- ----------- ------------------ ----------------- January 1 to January 31, 2005 18,100 $ 43.35 -- 12,000,000 February 1 to February 28, 2005 13,523 $ 37.77 -- 12,000,000 March 1 to March 31, 2005 1,000 $ 30.32 -- 12,000,000 April 1 to April 30, 2005 6,048 $ 41.97 -- 12,000,000 May 1 to May 31, 2005 1,108 $ 41.89 -- 12,000,000 June 1 to June 30, 2005 4,888 $ 43.51 -- 12,000,000 ------------ --------- --------------- Total 51,532 $ 41.79 -- ============ ========= ===============
The Corporation's Share Repurchase Program was publicly reconfirmed in April 2004 and again in April 2005. The Share Repurchase Program authorizes the purchase of up to 12 million shares annually and renews each year at that level unless changed or terminated by subsequent Board action. (1) Includes shares purchased by rabbi trusts pursuant to nonqualified deferred compensation plans. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Corporation held its Annual Meeting of Shareholders on April 26, 2005. (b) Votes cast for the election of five directors to serve until the 2008 Annual Meeting of Shareholders are as follows:
Director For Withheld Abstentions Non-Vote --------------------- ------------- ------------- ---------------- ------------- Andrew N. Baur 182,359,417 6,515,109 -- -- John W. Daniels, Jr. 181,912,241 6,962,285 -- -- John A. Mellowes 176,385,088 12,489,438 -- -- Robert J. O'Toole 186,210,789 2,663,737 -- -- John S. Shiely 186,234,471 2,640,055 -- --
44 The continuing directors of the Corporation are as follows: Richard A. Abdoo Jon F. Chait Ted D. Kellner Bruce E. Jacobs Katharine C. Lyall Dennis J. Kuester Peter M. Platten, III Edward L. Meyer, Jr. James A. Urdan San W. Orr, Jr. James B. Wigdale Debra S. Waller George E. Wardeberg (c) Votes cast for the ratification of the appointment of Deloitte & Touche LLP to audit the statements of the Company for the fiscal year ending December 31, 2005 are as follows:
For Withheld Abstentions Non-Vote ------------- ------------- ---------------- ------------- Ratification of Auditors 184,696,099 2,681,021 1,497,406 --
ITEM 6. EXHIBITS Exhibit 10(a) - Form of Restricted Stock Agreement. Exhibit 10(b) - Change of Control Agreement dated as of January 12, 2005 between the Corporation and Ronald E. Smith. 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. 45 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARSHALL & ILSLEY CORPORATION (Registrant) /s/ Patricia R. Justiliano __________________________________ Patricia R. Justiliano Senior Vice President and Corporate Controller (Chief Accounting Officer) /s/ James E. Sandy __________________________________ James E. Sandy Vice President August 9, 2005 46 EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit ______________ ____________________________________________ (10)(a) Form of Restricted Stock Agreement. (10)(b) Change of Control Agreement dated as of January 12, 2005 between the Corporation and Ronald E. Smith. (11) Statement Regarding Computation of Earnings Per Share, Incorporated by Reference to NOTE 4 of Notes to Financial Statements contained in Item 1 - Financial Statements (unaudited) of Part 1 - Financial Information herein. (12) Statement Regarding Computation of Ratio of Earnings to Fixed Charges. (31)(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 ex10a605.txt EXHIBIT 10(A) TO FORM 10-Q DATED 06/30/2005 1 Exhibit 10(a) RESTRICTED STOCK AGREEMENT -------------------------- This Agreement is made and entered into as of the _______ day of ____________, ______ by and between MARSHALL & ILSLEY CORPORATION, a Wisconsin corporation (the "Company"), and ________________ (the "Employee"). All terms used herein and not otherwise defined shall have the same meaning as set forth in the Company's 2003 Executive Stock Option and Restricted Stock Plan (the "Plan"). RECITALS: --------- The Compensation and Human Resources Committee of the Board of Directors of the Company (the "Committee") desires to induce the Employee to provide services to the Company, to provide Employee with a stronger incentive to strive for the continued success and growth of the Company and to further align his interests with those of the Company's shareholders. The Committee has determined to award to the Employee _________ shares of the Common Stock of the Company having a par value of $1.00 per share ("Common Stock"), subject to the restrictions contained herein, pursuant to the Plan. NOW, THEREFORE, in consideration of the benefits that the Company expects to be derived in connection with the services to be hereafter rendered to it or its subsidiaries by the Employee, the Company and the Employee hereby agree as follows: ARTICLE I --------- Restricted Shares ----------------- 1.1. Vesting of the Restricted Shares. ___________ percent of the Restricted Shares shall vest on __________, provided that the Employee is still in the employ of the Company. Notwithstanding the foregoing, the Restricted Shares shall continue to vest upon the disability of the Employee within the meaning of the Company's long-term disability plan and shall immediately vest upon the Employee's death or a Change in Control of the Company. Any Restricted Shares which do not vest shall revert to the Company. The period during which the Restricted Shares are unvested is referred to herein as the Restricted Period. 1.2. Shareholder Status. Prior to the vesting of the Restricted Shares, Employee shall have the right to vote the Restricted Shares, the right to receive and retain all regular cash dividends paid or distributed in respect of the Restricted Shares, and except as expressly provided otherwise herein, all other rights as a holder of outstanding shares of Common Stock. Notwithstanding the foregoing, the Employee shall not have the right to vote or to receive dividends with respect to the Restricted Shares with respect to record dates occurring after any of the Restricted Shares revert to the Company pursuant to Section 1.1 hereof. Until the Restricted Shares vest pursuant to Section 1.1 hereof, the Company shall retain custody of the stock certificates representing the Restricted Shares. As soon as practicable after the lapse of the restrictions, the Company shall issue or release or cause to be issued or released certificate(s) representing the shares. 2 1.3. Prohibition Against Transfer. During the Restricted Period, the Restricted Shares may not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) by the Employee, or be subject to execution, attachment or similar process. Any transfer in violation of this Section 1.3 shall be void and of no further effect. ARTICLE II ---------- Miscellaneous ------------- 2.1. Provisions of the Plan Control. This Agreement shall be governed by the provisions of the Plan, the terms and conditions of which are incorporated herein by reference. The Plan empowers the Committee to make interpretations, rules and regulations thereunder, and, in general, provides that determinations of such Committee with respect to the Plan shall be binding upon the Employee. A copy of the Plan will be delivered to the Employee upon reasonable request. 2.2. Taxes. The Company may require payment of or withhold any income or employment tax which it believes is payable as a result of the grant or vesting of the Restricted Shares or any payments thereon or in connection therewith, and the Company may defer making delivery with respect to the shares until arrangements satisfactory to the Company have been made with regard to any such withholding obligation. 2.3. No Employment Rights. The award of the Restricted Shares pursuant to this Agreement shall not give the Employee any right to remain employed by the Company or any affiliate thereof. 2.4. Notices. Any notice to be given to the Company under the terms of this Agreement shall be given in writing to the Company in care of its Secretary at 770 N. Water Street, Milwaukee, Wisconsin 53202. Any notice to be given to the Employee may be addressed to him at his address as it appears on the payroll records of the Company or any subsidiary thereof. Any such notice shall be deemed to have been duly given if and when actually received by the party to whom it is addressed, as evidenced by a written receipt to that effect. 2.5. Governing Law. This Agreement and all questions arising hereunder or in connection herewith shall be determined in accordance with the laws of the State of Wisconsin without giving effect to its conflicts of law provisions. 3 IN WITNESS WHEREOF, the parties have caused this Agreement to be effective as of the date first written above. MARSHALL & ILSLEY CORPORATION By:________________________________ Dennis J. Kuester, CEO ___________________________________ Employee Name EX-10 3 ex10b605.txt EXHIBIT 10(B) TO FORM 10-Q DATED 06/30/2005 1 Exhibit 10(b) CHANGE OF CONTROL AGREEMENT --------------------------- THIS AGREEMENT, entered into as of the 12th day of January, 2005, by and between MARSHALL & ILSLEY CORPORATION (the "Company"), and Ronald E. Smith (the "Executive") (hereinafter collectively referred to as "the parties"). W I T N E S S E T H : --------------------- WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change of Control (as hereinafter defined in Section 2) exists and that the threat of or the occurrence of a Change of Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; and WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its shareholders to retain the services of the Executive in the event of a threat or occurrence of a Change of Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat of or the occurrence of a Change of Control, the Company desires to enter into this Agreement with the Executive. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Employment Term. (a) The "Employment Term" shall commence on the first date during the Protected Period (as defined in Section 1(c), below) on which a Change of Control (as defined in Section 2, below) occurs (the "Effective Date") and shall expire on the second anniversary of the Effective Date; provided, however, that at the end of each day of the Employment Term the Employment Term shall automatically be extended for one (1) day unless either the Company or the Executive shall have given written notice to the other at least thirty (30) days prior thereto that the Employment Term shall not be so extended. (b) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to the Effective Date and the Executive reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise occurred in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, the Effective Date shall mean the date immediately prior to the date of such termination of the Executive's employment. 2 (c) For purposes of this Agreement, the "Protected Period" shall be the two (2) year period commencing on the date hereof; provided, however, that at the end of each day the Protected Period shall be automatically extended for one (1) day unless at least thirty (30) days prior thereto the Company shall have given written notice to the Executive that the Protected Period shall not be so extended; and provided, further, that notwithstanding any such notice by the Company not to extend, the Protected Period shall not end if prior to the expiration thereof any third party has indicated an intention or taken steps reasonably calculated to effect a Change of Control, in which event the Protected Period shall end only after such third party publicly announces that it has abandoned all efforts to effect a Change of Control. 2. Change of Control. For purposes of this Agreement, a "Change of Control" shall mean the first to occur of the following: (a) The acquisition by any individual, entity or "group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty- three percent (33%) or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions of common stock shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege or by one person or a group of persons acting in concert), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger, statutory share exchange or consolidation which would not be a Change of Control under subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened "election contest" or other actual or threatened "solicitation" (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) of proxies or consents by or on behalf of a person other than the Incumbent Board; or 3 (c) Consummation of a reorganization, merger, statutory share exchange or consolidation, unless, following such reorganization, merger, statutory share exchange or consolidation, (i) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger, statutory share exchange or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, statutory share exchange or consolidation, (ii) no person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger, statutory share exchange or consolidation and any person beneficially owning, immediately prior to such reorganization, merger, statutory share exchange or consolidation, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Consummation of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. Employment. (a) Subject to the provisions of Section 3, hereof, the Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed in such executive capacity as may be mutually agreed to by the parties. During the Employment Term, Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held or assigned at any time during the twelve (12) month period immediately preceding the Effective Date, and Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective Date or at any office or location less than thirty-five (35) miles from such location, unless mutually agreed to in writing by the parties. 4 (b) Excluding periods of vacation and sick leave to which the Executive is entitled, during the Employment Term the Executive agrees to devote full time attention to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, provided that the Executive may take reasonable amounts of time to (i) serve on corporate, civil or charitable boards or committees, and (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, if such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of Executive's responsibilities hereunder. 4. Compensation. (a) Base Salary. During the Employment Term, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve (12) times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve (12) month period immediately preceding the month in which the Effective Date occurs, including any amounts which were deferred under any plans of the Company and its affiliated companies. During the Employment Term, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (b) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Term, an annual bonus (the "Annual Bonus") in cash at least equal to the average annualized (for any fiscal year consisting of less than twelve (12) full months or with respect to which the Executive has been employed by the Company for less than twelve (12) full months) bonuses paid or payable, including any amounts which were deferred under any plans of the Company and its affiliated companies, to the Executive by the Company and its affiliated companies in respect of the three (3) fiscal years immediately preceding the fiscal year in which the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus shall be paid no later than seventy-five (75) days after the end of the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus under any plan or arrangement of the Company allowing therefor. (c) Incentive, Savings and Retirement Plans. During the Employment Term, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the twelve (12) month period immediately preceding the Effective Date, or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. 5 (d) Benefit Plans. During the Employment Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription drug, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies and their families; but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive and his family at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies and their families. (e) Expenses. During the Employment Term, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (f) Fringe Benefits. During the Employment Term, the Executive shall be entitled to fringe benefits (including but not limited to Company cars, club dues and physical examinations) in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (g) Office and Support Staff. During the Employment Term, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, in accordance with the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (h) Vacation and Sick Leave. During the Employment Term, the Executive shall be entitled to paid vacation and sick leave (without loss of pay) in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 6 (i) Restrictions. As of the Effective Date, all restrictions limiting the exercise, transferability or other incidents of ownership of any outstanding award, including but not limited to restricted stock, options, stock appreciation rights, or other property or rights of the Company granted to the Executive shall lapse, and such awards shall become fully vested and be held by the Executive free and clear of all such restrictions. This provision shall apply to all such property or rights notwithstanding the provisions of any other plan or agreement, unless the effect of the application of this provision to a particular right or property would result in the loss of favorable securities law treatment for participants under the plan pursuant to which the award was granted. 5. Termination of Employment. During the Employment Term, the Executive's employment hereunder may be terminated under the following circumstances: (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 5 of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for one hundred eighty (180) consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative, provided if the parties are unable to agree, the parties shall request the Dean of the Medical College of Wisconsin to choose such physician. (b) Cause. The Company may terminate the Executive's employment for "Cause." A termination for Cause is a termination evidenced by a resolution adopted in good faith by a majority of the Board that the Executive (i) willfully, deliberately and continually failed to substantially perform his duties under Section 3, above (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure constitutes gross misconduct, and results in and was intended to result in demonstrable material injury to the Company, monetary or otherwise, or (ii) committed acts of fraud and dishonesty constituting a felony, as determined by a final judgment or order of a court of competent jurisdiction, and resulting or intended to result in gain to or personal enrichment of the Executive at the Company's expense, provided, however, that no termination of the Executive's employment shall be for Cause as set forth in (i), above, until (a) Executive shall have had at least sixty (60) days to cure any conduct or act alleged to provide Cause for termination after a written notice of demand has been delivered to the Executive specifying in detail the manner in which the Executive's conduct violates this Agreement, and (b) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, or failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act in bad faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. 7 (c) Good Reason. (1) The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change of Control of any of the events or conditions described in Subsections (i) through (vi) hereof: (i) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with his status, title, position or responsibilities in effect immediately prior to such assignment; or any removal of the Executive from or failure to reappoint or reelect him to any position, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (ii) Any failure by the Company to comply with any of the provisions of Section 4 of this Agreement. (iii) The insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company; (iv) Any material breach by the Company of any provision of this Agreement; (v) Any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 5 of this Agreement; and (vi) The failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company, to assume and agree to perform this Agreement, as contemplated in Section 10 hereof. (2) Any event or condition described in Section 5(c)(1) which occurs prior to the Effective Date but which the Executive reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise arose in connection with or in anticipation of a Change of Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Effective Date. 8 (3) The Executive's right to terminate his employment pursuant to this Section 5(c) shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment or failure to give Notice of Termination shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (4) For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive. (d) Voluntary Termination. The Executive may voluntarily terminate his employment hereunder at any time. (e) Notice of Termination. Any purported termination by the Company or by the Executive (other than by death of the Executive) shall be communicated by Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) the Termination Date. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (f) Termination Date, etc. "Termination Date" shall mean in the case of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company, the date specified in the Notice of Termination shall be at least thirty (30) days after the date the Notice of Termination is given to the Executive, provided, however, that in the case of Disability, the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days; (2) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days after the date the Notice of Termination is given to the Company; and (3) In the event that within thirty (30) days following the date of receipt of the Notice of Termination, one party notifies the other that a dispute exists concerning the basis for termination, the Executive's employment hereunder shall not be terminated except after the dispute is finally resolved and a Termination Date is determined either by a mutual written agreement of the parties, or by a binding and final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 6. Obligations of the Company Upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Term, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: 9 (i) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Termination Date the aggregate of the following amounts: A. The sum of: (1) The Executive's Annual Base Salary through the Termination Date to the extent not theretofore paid; and (2) The product of (x) the higher of (I) the Recent Average Bonus and (II) the Annual Bonus paid or payable, including any amount deferred, (and annualized for any fiscal year consisting of less than twelve (12) full months or for which the Executive has been employed for less than twelve (12) full months) for the most recently completed fiscal year during the Employment Term, if any (such higher amount being referred to as the "Highest Annual Bonus.") and (y) a fraction, the numerator of which is the number of days completed in the current fiscal year through the Termination Date, and the denominator of which is 365. The sum of the amounts described in Clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"; B. The amount equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary (increased for this purpose by any Section 401(k) deferrals, cafeteria plan elections, or other deferrals that would have increased Executive's Annual Base Salary if paid in cash to Executive when earned) and (y) the Executive's Highest Annual Bonus; C. A separate lump-sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the most favorable to the Executive actuarial assumptions and Company contribution history with respect to the applicable retirement plan, incentive plans, savings plans and other plans described in Section 4(c) (or any successor plan thereto) (the "Retirement Plans") during the twelve (12) month period immediately preceding the Effective Date) of the benefit payable under the Retirement Plans and any supplemental and/or excess retirement plan providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued for an additional two (2) years after the Termination Date with annual compensation equal to the sum of the Annual Base Salary and Highest Annual Bonus, assuming for this purpose that all accrued benefits and contributions are fully vested and that benefit accrual formulas and Company contributions are no less advantageous to the Executive than those in effect during the twelve (12) month period immediately preceding the Effective Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plans during the twelve (12) month period immediately preceding the Effective Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plans and the SERP. For example, if there were a termination today this supplemental retirement benefit would be interpreted with respect to two plans in existence today as follows: (i) with respect to the Retirement Growth component of the retirement program of the Company, the Executive would receive two times eight percent (8%) (or sixteen percent (16%)) of the sum of the Executive's Annual Base Salary (determined in accordance with subsection C of Section 6(a)(i)) and the Executive's Highest Annual Bonus; and (ii) with respect to the Incentive Savings component of the retirement program of the Company, the Executive would receive two times the annual Company match of fifty percent (50%) of the Executive's maximum allowable contribution to the Plan assuming Executive's compensation is as set forth above; and 10 D. The amount equal to the product of (i) two and (ii) the sum of (x) the imputed income reflected on Executive's W-2 attributable to the car provided to Executive by the Company or its affiliates for the last calendar year ending before the Effective Date and (y) the club dues for Executive paid by the Company or its affiliates attributable to such year. (ii) For twenty-four (24) months after the Termination Date, the Company shall continue to provide medical and dental benefits to the Executive and/or the Executive's family in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their families as in effect from time to time thereafter; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other benefits under another employer provided plan, the medical and other benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility, provided that the aggregate coverage of the combined benefit plans is no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage required hereunder. For purposes of determining eligibility of the Executive for retiree health insurance, the Executive shall be considered to have remained employed until the end of such twenty-four (24) month period and to have retired on the last day of such period. If the Executive would qualify at the end of such twenty-four (24) month period for retiree health insurance under the Company's plan guidelines as in existence on the Effective Date, the Company shall provide to the Executive and his or her spouse, for life, retiree health insurance, subsidized to at least the same percentage extent as under the Company's plan as in existence on the Effective Date. Such retiree health insurance shall provide medical benefits to the Executive and/or the Executive's spouse in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their spouses as in effect from time to time thereafter; provided, however, that if the Executive and/or the Executive's spouse qualifies for coverage by Medicare or any successor program, the Company may require that the Executive and/or the Executive's spouse fully participate in Medicare and pay the premiums therefor personally. (iii) The Executive shall have the right to purchase the car provided to him by the Company or its affiliates during the twelve (12) month period immediately preceding the Effective Date, if applicable, (or a comparable car acceptable to the Executive if such car is no longer owned by the Company or its affiliates), at the book value thereof on the Termination Date, exercisable within thirty (30) days after the Termination Date; and if the car is not purchased, Executive shall return the car to the Company. 11 (iv) For the twenty-four (24) month period after the Termination Date, the Company shall continue to provide group term life insurance (or comparable term coverage) in the same face amount and on substantially the same terms as in effect for the Executive just prior to the Effective Time. At the end of the twenty-four (24) month period, the Executive shall have any conversion rights as regards such coverage as are provided by law. (v) To the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive pursuant to this Agreement under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (vi) All options awarded by the Company to the Executive on or after the date of this Agreement which are outstanding as of the Termination Date shall remain exercisable for the lesser of (A) the remainder of their respective terms or (B) one year after the Executive's death. The option term for each option is set out in the relevant agreement granting each option. Notwithstanding anything herein contained to the contrary, the payments and benefits provided in this Section 6(a) (other than the Accrued Obligations) shall not be paid or provided to the Executive unless and until he executes a Complete and Permanent Release (the "Release") in the form attached hereto, and the applicable period for rescission of the Release has expired. The parties agree that the Release may be expanded to include any company acquiring the Company and its affiliates as "Released Parties," as defined in the Release. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Term, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, except that the Company shall pay or provide the Accrued Obligations, six (6) months of Annual Base Salary, and the Other Benefits. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within thirty (30) days of the Termination Date. The six (6) months of Annual Base Salary shall be paid during the six (6) month period following the Termination Date on a monthly basis. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, and the Executive's family shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and any of its affiliated companies to surviving families of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to family death benefits, if any, as in effect with respect to other peer executives and their families at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their families. 12 (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Term, this Agreement shall terminate without further obligations to the Executive, except that the Company shall pay or provide the Accrued Obligations and the Other Benefits. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Termination Date. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other Than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Term, or if the Executive voluntarily terminates employment during the Employment Term for other than Good Reason, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination and any other amounts earned or accrued through the Termination Date, in each case to the extent theretofore unpaid; provided that if Executive voluntarily terminates, Executive shall receive the benefits normally provided upon normal or early retirement with respect to other peer Executives and their families to the extent he qualifies therefore All salary or compensation hereunder shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination. (e) Delinquent Payments. If any of the payments referred to in this Section 6 are not paid within the time specified after the Termination Date (hereinafter a "Delinquent Payment"), in addition to such principal sum, the Company will pay to the Executive interest on all such Delinquent Payments computed at the prime rate as announced from time to time by M&I Marshall & Ilsley Bank, or its successor, compounded monthly. Notwithstanding the foregoing, no interest shall be due and owing as regards payments which are delayed because of Executive's failure to execute the Release or the recission thereof. (f) Vacation Pay. In consideration of all payments made by the Company to the Executive pursuant to this Agreement, the Executive hereby waives any claim he may have for accrued and unpaid vacation pay as of the Termination Date. 7. No Mitigation. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced (except to the extent set forth in Section 6(a)(ii)) whether or not the Executive obtains other employment. 13 8. Excise Tax Payments. (a) If any payment or distribution to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any interest and penalties, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains, or has paid to the taxing authority on his behalf, an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing, no Gross-Up Payment will be made to the Executive if reducing the amount paid to the Executive under Section 6(a)(i)(B) of this Agreement by $50,000 or less would avoid the application of the Excise Tax. (b) A determination shall be made as to whether and when a Gross-Up Payment is required pursuant to this Section 8 and the amount of such Gross-Up Payment, such determination to be made within fifteen (15) business days of the Termination Date, or such other time as reasonably requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax). Such determination shall be made by a national independent accounting firm selected by the Executive (the "Accounting Firm"). All fees, costs and expenses (including, but not limited to, the cost of retaining experts) of the Accounting Firm shall be borne by the Company and the Company shall pay such fees, costs and expenses as they become due. The Accounting Firm shall provide detailed supporting calculations, acceptable to the Executive, both to the Company and the Executive. The Gross-Up Payment, if any, as determined pursuant to this Section 8(b) shall be paid by the Company to the Executive or paid by the Company on behalf of the Executive to the applicable government taxing authorities by means of payroll tax withholding if required by law or if timely requested by the Executive when payment of all or any portion of the Excise Tax is due. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it shall furnish the Executive with an unqualified opinion that no Excise Tax will be imposed with respect to any such Payment or Payments. Any such initial determination by the Accounting Firm of the Gross-Up Payment shall be binding upon the Company and the Executive subject to the application of Section 8(c). 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. (d) If no Gross-Up Payment is made because reducing the Payments to the Executive under Section 6(a)(i)(B) of this Agreement by $50,000 or less would avoid the application of the Excise Tax, then the amount paid to the Executive under Section 6(a)(i)(B) of this Agreement shall be reduced by the amount necessary to avoid the Excise Tax; provided, however, the reduction will only be made if doing so would result in the Executive retaining more after-tax than if the reduction were not made. 9. Unauthorized Disclosure. During the term of the Executive's employment with the Company, and during the two-year period following the Termination Date, the Executive shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean disclosure by the Executive without the consent of the Board to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or as may be legally required, of any confidential information obtained by the Executive while in the employ of the Company (including, but not limited to, any confidential information with respect to any of the Company's customers or methods of operation) the disclosure of which he knows or has reason to believe will be materially injurious to the Company; provided, however, that such term shall not include the use or disclosure by the Executive, without consent, of any information known generally to the public (other than as a result of disclosure by him in violation of this Section 9) or any information not otherwise considered confidential by a reasonable person engaged in the same business as that conducted by the Company. Notwithstanding the foregoing, the Executive's obligation hereunder not to make any Unauthorized Disclosure shall continue after the end of the two-year period following his termination of employment with the Company as regards any information which is a trade secret as defined in Section 134.90 of the Wisconsin Statutes. In no event shall an asserted violation of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 15 10. Successors and Assigns. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representative. 11. Fees and Expenses. From and after the Effective Date, the Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) reasonably incurred by the Executive as they become due as a result of (i) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (ii) the Executive's hearing before the Board as contemplated in Section 5(b) of this Agreement or (iii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits. 12. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, if to the Company, to Marshall & Ilsley Corporation, 770 North Water Street, Milwaukee, Wisconsin 53202, or if to Executive, to the address set forth below Executive's signature, or to such other address as the party may be notified, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 13. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries for which the Executive may qualify. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 16 14. Settlement of Claims. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 15. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 16. Employment. The Executive and the Company acknowledge that the employment of the Executive by the Company is "at will" and prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the company terminates, the Executive shall have no further rights under this Agreement. 17. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Wisconsin without giving effect to the conflict of law principles thereof. 18. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 19. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. 20. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. 21. Modification. No provision of this Agreement may be modified or amended unless such modification or amendment is agreed to in writing signed by both the Executive and the Company. 22. Withholding. The Company shall be entitled to withhold from amounts paid to the Executive hereunder any federal, estate or local withholding or other taxes or charges which it is, from time to time, required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. 17 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. MARSHALL & ILSLEY CORPORATION By: /s/ Dennis J. Kuester -------------------------------- Dennis J. Kuester Chief Executive Officer ATTEST: /s/ Randall J. Erickson - ------------------------------ Randall J. Erickson, Secretary EXECUTIVE: /s/ Ronald E. Smith ----------------------------------- Ronald E. Smith Address: ----------------------------------- ----------------------------------- MW2yr M&I COC Agreement.doc EX-12 4 ex12_605.txt EXHIBIT 12 TO FORM 10-Q DATED 06/30/2005 Exhibit 12 MARSHALL & ILSLEY CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($000's)
Six Months Ended Years Ended December 31, June 30, ---------------------------------------------------------------- 2005 2004 2003 2002 2001 2000 ------------ ------------ ------------ ------------ ------------ ------------ Earnings: Earnings before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 537,779 $ 944,966 $ 758,387 $ 718,592 $ 501,045 $ 470,350 Fixed charges, excluding interest on deposits 207,785 281,244 267,379 301,518 321,059 321,812 ----------- ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges but excluding interest on deposits 745,564 1,226,210 1,025,766 1,020,110 822,104 792,162 Interest on deposits 226,293 276,102 228,216 283,385 566,899 772,016 ----------- ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges and interest on deposits $ 971,857 $ 1,502,312 $ 1,253,982 $ 1,303,495 $ 1,389,003 $ 1,564,178 =========== =========== =========== =========== =========== =========== Fixed Charges: Interest Expense: Short-term borrowings $ 50,353 $ 61,256 $ 81,070 $ 150,310 $ 188,587 $ 224,187 Long-term borrowings 145,658 196,440 163,348 127,343 110,842 78,773 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor) 11,774 23,548 22,961 23,865 21,630 18,852 ----------- ----------- ----------- ----------- ----------- ----------- Fixed charges excluding interest on deposits 207,785 281,244 267,379 301,518 321,059 321,812 Interest on deposits 226,293 276,102 228,216 283,385 566,899 772,016 ----------- ----------- ----------- ----------- ----------- ----------- Fixed charges including interest on deposits $ 434,078 $ 557,346 $ 495,595 $ 584,903 $ 887,958 $ 1,093,828 =========== =========== =========== =========== =========== =========== Ratio of Earnings to Fixed Charges: Excluding interest on deposits 3.59 x 4.36 x 3.84 x 3.38 x 2.56 x 2.46 x Including interest on deposits 2.24 x 2.70 x 2.53 x 2.23 x 1.56 x 1.43 x
EX-31 5 ex31a605.txt EXHIBIT 31(A) TO FORM 10-Q DATED 06/30/2005 Exhibit 31(a) CERTIFICATION _____________ I, Dennis J. Kuester, Chairman of the Board 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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. Date: August 9, 2005 /s/ Dennis J. Kuester _________________________________________________ Dennis J. Kuester Chairman of the Board and Chief Executive Officer MW984572_1.doc EX-31 6 ex31b605.txt EXHIBIT 31(B) TO FORM 10-Q DATED 06/30/2005 Exhibit 31(b) CERTIFICATION _____________ I, John M. Presley, Senior 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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. Date: August 9, 2005 /s/ John M. Presley _________________________________________________ John M. Presley Senior Vice President and Chief Financial Officer MW984574_1.doc EX-32 7 ex32a605.txt EXHIBIT 32(A) TO FORM 10-Q DATED 06/30/2005 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 quarter ended June 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (14 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 9, 2005. /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. MW984575_1.doc EX-32 8 ex32b605.txt EXHIBIT 32(B) TO FORM 10-Q DATED 06/30/2005 Exhibit 32(b) CERTIFICATION OF PERIODIC REPORT ________________________________ I, John M. Presley, 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 quarter ended June 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (14 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 9, 2005. /s/ John M. Presley ______________________________ John M. Presley 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. MW984577_1.doc -----END PRIVACY-ENHANCED MESSAGE-----