-----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, FGu6NZllEnM3XcUYRNkhum0WLTKX8koFLuXt2uFlM01FEItQyz3/LF1E6hH+zfcw OBSQO2Z7LFkoUorAkfLhQA== 0000062741-98-000052.txt : 19980518 0000062741-98-000052.hdr.sgml : 19980518 ACCESSION NUMBER: 0000062741-98-000052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD 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: SEC FILE NUMBER: 000-01220 FILM NUMBER: 98621854 BUSINESS ADDRESS: STREET 1: 770 N WATER ST CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4147657801 MAIL ADDRESS: STREET 1: 770 NORTH WATER ST CITY: MILWAUKEE STATE: WI ZIP: 53202 10-Q 1 10-Q FOR QUARTER ENDED MARCH 31, 1998 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 --------------------------------------------- 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 0-1220 ------------------------------ 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) (414) 765 - 7801 ---------------- (Registrant's telephone number, including area code) None ---- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class April 30, 1998 ----- ----------------- Common Stock, $1.00 Par Value 105,855,245 MARSHALL & ILSLEY CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ($000's except share data)
March 31, December 31, March 31, Assets 1998 1997 1997 - ------ ------------------------------------------ Cash and cash equivalents: Cash and due from banks $ 702,579 $ 800,120 $ 683,073 Federal funds sold and security resale agreements 85,301 26,880 108,776 Money market funds 74,845 62,787 56,376 ------------ ------------ ------------ Total cash and cash equivalents 862,725 889,787 848,225 Trading securities 39,080 43,644 42,076 Other short-term investments 47,035 37,008 48,139 Investment securities available for sale at market value 4,088,984 4,038,713 2,977,094 Investment securities held to maturity, market value $1,006,107 ($953,316 December 31, and $813,497 March 31, 1997) 983,574 930,090 812,122 ------------ ------------ ------------ Total investment securities 5,072,558 4,968,803 3,789,216 Loans and leases 12,638,369 12,542,281 9,576,716 Less: Allowance for loan and lease losses 210,307 202,818 154,599 ------------ ------------ ------------ Net loans and leases 12,428,062 12,339,463 9,422,117 Premises and equipment, net 343,423 338,818 318,092 Accrued interest and other assets 860,011 859,929 422,351 ------------ ------------ ------------ Total Assets $ 19,652,894 $ 19,477,452 $ 14,890,216 ============ ============ ============ Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 2,601,390 $ 2,722,757 $ 2,261,330 Interest bearing 11,651,478 11,633,241 8,574,325 ------------ ------------ ------------ Total deposits 14,252,868 14,355,998 10,835,655 Funds purchased and security repurchase agreements 1,887,393 1,424,359 1,656,974 Other short-term borrowings 277,899 478,421 401,598 Accrued expenses and other liabilities 479,332 507,427 367,776 Long-term borrowings 787,141 791,176 348,042 ------------ ------------ ------------ Total liabilities 17,684,633 17,557,381 13,610,045 Shareholders' equity: Series A convertible preferred stock, $1.00 par value; 685,314 shares issued 685 685 685 Common stock, $1.00 par value; 109,302,590 shares issued (99,494,335 at March 31, 1997) 109,303 109,303 99,494 Additional paid-in capital 604,963 608,087 209,855 Retained earnings 1,427,383 1,376,336 1,246,450 Less: Treasury common stock, at cost; 7,522,162 shares (7,765,169 December 31, and 10,846,046 March 31, 1997) 211,312 215,787 286,186 Deferred compensation 7,443 7,132 1,170 Net unrealized gains on securities available for sale, net of related taxes 44,682 48,579 11,043 ------------ ------------ ------------ Total shareholders' equity 1,968,261 1,920,071 1,280,171 ------------ ------------ ------------ Total Liabilities and Shareholders' Equity $ 19,652,894 $ 19,477,452 $ 14,890,216 ============ ============ ============
See notes to financial statements. MARSHALL & ILSLEY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($000's except per share data) Three Months Ended March 31, ------------------------------ Interest income 1998 1997 - --------------- ------------------------------ Loans $ 253,406 $ 194,946 Investment securities: Taxable 66,725 50,091 Exempt from Federal income taxes 12,268 10,008 Trading securities 488 483 Short-term investments 2,020 2,395 ------------ ------------ Total interest income 334,907 257,923 Interest expense - ---------------- Deposits 134,302 94,309 Short-term borrowings 29,896 23,823 Long-term borrowings 14,072 10,149 ------------ ------------ Total interest expense 178,270 128,281 ------------ ------------ Net interest income 156,637 129,642 Provision for loan and lease losses 4,705 4,311 ------------ ------------ Net interest income after provision for loan and lease losses 151,932 125,331 Other income - ------------ Data processing services 96,838 80,140 Trust services 21,464 18,931 Other customer services 36,242 29,557 Net securities gains 6,375 803 Other 15,331 8,164 ------------ ------------ Total other income 176,250 137,595 Other expense - ------------- Salaries and employee benefits 123,669 105,382 Net occupancy 10,955 10,130 Equipment 24,332 20,864 Software expenses 5,199 4,572 Payments to regulatory agencies 1,065 601 Processing charges 5,996 5,770 Supplies and printing 4,372 4,115 Professional services 4,417 4,126 Other 34,245 25,207 ------------ ------------ Total other expense 214,250 180,767 ------------ ------------ Income before income taxes 113,932 82,159 Provision for income taxes 41,001 27,360 ------------ ------------ Net income $ 72,931 $ 54,799 ============ ============ Net income per common share - --------------------------- Basic $ 0.70 $ 0.61 Diluted 0.66 0.56 Dividends paid per common share $ 0.200 $ 0.185 Weighted average common shares outstanding: Basic 101,587 88,691 Diluted 111,121 98,290 See notes to financial statements. MARSHALL & ILSLEY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($000's) Three Months Ended March 31 ---------------------------- 1998 1997 ------------ ------------ Net Cash Provided by Operating Activities $ 89,275 $ 57,872 Cash Flows From Investing Activities: - ------------------------------------- Net (increase)decrease in securities with maturities of three months or less (10,050) 2,500 Proceeds from sales of securities available for sale 6,076 80,207 Proceeds from maturities of longer term securities 322,951 155,923 Purchases of longer term securities (317,593) (216,703) Net increase in loans (243,116) (284,630) Purchases of assets to be leased (51,039) (52,542) Principal payments on lease receivables 56,730 39,622 Fixed asset purchases, net (19,288) (14,445) Other 5,321 2,004 ------------ ------------ Net cash used in investing activities (250,008) (288,064) ------------ ------------ Cash Flows From Financing Activities: - ------------------------------------- Net decrease in deposits (103,129) (116,703) Proceeds from issuance of commercial paper 302,922 79,743 Payments for maturity of commercial paper (299,210) (81,036) Net increase in other short-term borrowings 308,007 374,325 Proceeds from issuance of long-term debt 2,844 8,916 Payments of long-term debt (56,250) (125,369) Dividends paid (21,885) (17,516) Purchases of treasury stock (4,577) (22,190) Other 4,949 10,323 ------------ ------------ Net cash provided by financing activities 133,671 110,493 ------------ ------------ Net decrease in cash and cash equivalents (27,062) (119,699) Cash and cash equivalents, beginning of year 889,787 967,924 ------------ ------------ Cash and cash equivalents, end of period $ 862,725 $ 848,225 ============ ============ Supplemental cash flow information: - ----------------------------------- Cash paid (received) during the period for: Interest $ 177,239 $ 123,467 Income taxes (3,430) 8,914 See notes to financial statements. MARSHALL & ILSLEY CORPORATION Notes to Financial Statements March 31, 1998 & 1997 (Unaudited) 1. The accompanying unaudited consolidated financial statements should be read in conjunction with Marshall & Ilsley Corporation's ("Corporation") 1997 Annual Report on Form 10-K. The unaudited financial information included in this report reflects all adjustments (consisting only of normal recurring accruals) which are necessary for a fair statement of the financial position and results of operations as of and for the three months ended March 31, 1998 and 1997. The results of operations for the three months ended March 31, 1998 and 1997 are not necessarily indicative of results to be expected for the entire year. Certain amounts in the 1997 consolidated financial statements and analyses have been reclassified to conform with the 1998 presentation. 2. The Corporation has 5,000,000 shares of preferred stock authorized, of which the Board of Directors has designated 2,000,000 shares as Series A convertible, with a $100 value per share for conversion and liquidation purposes. The Corporation has 160,000,000 shares of its $1.00 par value common stock authorized. 3. 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): Period Ending March 31, 1998 --------------------------------- Per Income Average Share Share (Numerator) (Denominator) Amount --------------------------------- Net Income $ 72,931 Convertible Preferred Dividends (1,535) --------- Basic Earnings Per Share Income Available to Common Shareholders $ 71,396 101,587 $ 0.70 Effect of Dilutive Securtities Convertible Preferred Stock 1,535 7,677 Stock Option and Restricted Stock Plans -- 1,857 --------- ----------- Diluted Earnings Per Share Income Available to Common Shareholders Plus Assumed Conversions $ 72,931 111,121 $ 0.66 Period Ending March 31, 1997 --------------------------------- Per Income Average Share Share (Numerator) (Denominator) Amount --------------------------------- Net Income $ 54,799 Convertible Preferred Dividends (1,065) --------- Basic Earnings Per Share Income Available to Common Shareholders $ 53,734 88,691 $ 0.61 Effect of Dilutive Securtities Convertible Preferred Stock 1,065 5,776 8.5% Convertible Debt 232 1,901 Stock Options, Restricted Stock and Performance Plans -- 1,709 Forward Repurchase Contract -- 213 --------- ----------- Diluted Earnings Per Share Income Available to Common Shareholders Plus Assumed Conversions $ 55,031 98,290 $ 0.56 MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 1998 & 1997 (Unaudited) 4. Investment securities, by type, held by the Corporation are as follows ($000's): March 31, December 31, March 31, 1998 1997 1997 --------------------------------------- Investment securities available for sale: U.S. treasury and government agencies $ 3,814,382 $ 3,786,390 $ 2,830,401 State and political subdivisions 224 487 717 Other 274,378 251,836 145,976 --------------------------------------- Investment securities available for sale 4,088,984 4,038,713 2,977,094 Investment securities held to maturity: State and political subdivisions 979,153 925,644 808,072 Other 4,421 4,446 4,050 --------------------------------------- Investment securities held to maturity 983,574 930,090 812,122 --------------------------------------- Total investment securities $ 5,072,558 $ 4,968,803 $ 3,789,216 ======================================= 5. The Corporation's loan portfolio consists of the following ($000's): March 31, December 31, March 31, 1998 1997 1997 --------------------------------------- Commercial, financial & agricultural $ 3,569,977 $ 3,375,519 $ 3,056,559 Real estate: Construction 395,806 402,892 315,401 Residential Mortgage 3,638,424 3,782,181 2,245,344 Commercial Mortgage 3,410,293 3,339,592 2,461,223 --------------------------------------- Total real estate 7,444,523 7,524,665 5,021,968 Personal 1,131,607 1,153,003 1,144,859 Lease financing 492,262 489,094 353,330 --------------------------------------- $ 12,638,369 $ 12,542,281 $ 9,576,716 ======================================= 6. The Corporation's deposit liabilities consists of the following ($000's): March 31, December 31, March 31, 1998 1997 1997 --------------------------------------- Noninterest bearing demand $ 2,601,390 $ 2,722,757 $ 2,261,330 Savings and NOW 5,822,897 5,610,445 4,374,810 Other time deposits $100 and over 1,468,529 1,390,464 1,188,661 Other time deposits under $100 4,360,052 4,632,332 3,010,854 --------------------------------------- $ 14,252,868 $ 14,355,998 $ 10,835,655 ======================================= 7. On March 31, 1997, $16.8 million of the Corporation's 8.5% convertible subordinated notes were converted by the holder into 1,922,114 shares of the Corporation's common stock. The common stock acquired by conversion of the notes was exchanged for 168,185 shares of the Corporation's Series A convertible preferred stock. This is a noncash transaction for purposes of the Consolidated Statements of Cash Flows. MARSHALL & ILSLEY CORPORATION Notes to Financial Statements - Continued March 31, 1998 & 1997 (Unaudited) 8. Comprehensive Income On January 1, 1998, the Corporation adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a complete set of financial statements. Comprehensive income is the total of reported net income and all other revenues, expenses, gains and losses that under generally accepted accounting principles are not includable in reported net income but are reflected in shareholders' equity. The standard permits the statement of changes in shareholders' equity to be used to satisfy its requirements and requires companies to report comparative totals for comprehensive income in interim reports. The following table presents the Corporation's comprehensive income ($000's): Three Months Ended ---------------------------------- March 31, March 31, 1998 1997 ------------- ------------- Net income $ 72,931 $ 54,799 Other comprehensive income Net change in unrealized securities gains (losses), net (3,897) (16,822) ------------- ------------- Total comprehensive income $ 69,034 $ 37,977 ============= ============= Other comprehensive income as shown is net of deferred income tax benefits of $2,093 and $9,703 for the three months ended March 31, 1998 and 1997, respectively. MARSHALL & ILSLEY CORPORATION CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited) ($000's) Three Months Ended March 31 ------------------------------ Assets 1998 1997 - ------ ------------------------------ Cash and due from banks $ 645,383 $ 578,564 Short-term investments 151,533 180,108 Trading securities 37,727 40,528 Investment securities: Taxable 3,975,709 3,027,293 Tax-exempt 1,024,921 848,712 ------------ ------------ Total investment securities 5,000,630 3,876,005 Loans and leases: Commercial 3,381,047 2,946,136 Real estate 7,486,639 4,933,500 Personal 1,136,516 1,159,720 Lease financing 484,706 342,995 ------------ ------------ 12,488,908 9,382,351 Less: Allowance for loan and lease losses 205,106 157,314 ------------ ------------ Total loans and leases 12,283,802 9,225,037 Premises and equipment, net 340,112 316,588 Accrued interest and other assets 852,569 390,713 ------------ ------------ Total Assets $ 19,311,756 $ 14,607,543 ============ ============ Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Noninterest bearing $ 2,362,304 $ 2,087,103 Interest bearing 11,439,013 8,513,308 ------------ ------------ Total deposits 13,801,317 10,600,411 Funds purchased and security repurchase agreements 1,958,933 1,645,089 Other short-term borrowings 239,194 164,563 Long-term borrowings 872,763 574,791 Accrued expenses and other liabilities 483,972 344,549 ------------ ------------ Total liabilities 17,356,179 13,329,403 Shareholders' equity 1,955,577 1,278,140 ------------ ------------ Total Liabilities and Shareholders' Equity $ 19,311,756 $ 14,607,543 ============ ============ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 AND 1997 - ------------------------------------------ Net income for the first quarter of 1998 amounted to $72.9 million compared to $54.8 million for the same period in the prior year. Basic and diluted earnings per share were $.70 and $.66 respectively for the three months ended March 31, 1998, compared with $.61 and $.56, respectively for the three months ended March 31, 1997. The return on average assets and average equity were 1.53% and 15.12% for the quarter ended March 31, 1998 and 1.52% and 17.39% for the quarter ended March 31, 1997. The Corporation's results of operations and average financial position for the first quarter of 1998 includes the effects of the merger with Security Capital Corporation ("Security") which was completed on October 1, 1997 and accounted for as a purchase. Security had approximately $2.2 billion of consolidated loans and $2.3 billion of deposits at the time of merger. The following tables present a summary of each of the major elements of the consolidated operating income statement, certain financial statistics and a summary of the major operating income statement elements stated as a percent of average consolidated assets - converted to a fully taxable equivalent basis (FTE) where appropriate - for the current quarter and previous four quarters. SUMMARY CONSOLIDATED OPERATING INCOME STATEMENTS AND FINANCIAL STATISTICS - ------------------------------------------------------------------------- ($000's except per share data) - ------------------------------
1998 1997 ---------- ------------------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- ---------- Interest Income $ 334,907 $ 343,884 $ 274,583 $ 267,280 $ 257,923 Interest Expense (178,270) (178,237) (139,065) (134,040) (128,281) ---------- ---------- ---------- ---------- ---------- Net Interest Income 156,637 165,647 135,518 133,240 129,642 Provision for Loan and Lease Losses (4,705) (4,378) (4,258) (4,306) (4,311) Net Securities Gains 6,375 2,285 137 13 803 Other Income 169,875 168,178 152,076 138,574 136,792 Other Expense (214,250) (221,958) (190,149) (182,527) (180,767) ---------- ---------- ---------- ---------- ---------- Income Before Taxes 113,932 109,774 93,324 84,994 82,159 Income Tax Provision (41,001) (37,915) (31,460) (28,372) (27,360) ---------- ---------- ---------- ---------- ---------- Operating Income $ 72,931 $ 71,859 $ 61,864 $ 56,622 $ 54,799 ========== ========== ========== ========== ========== Per Common Share Operating Income Per Share Basic $ 0.70 $ 0.69 $ 0.68 $ 0.62 $ 0.61 Diluted 0.66 0.65 0.63 0.58 0.56 Dividends 0.200 0.200 0.200 0.200 0.185 Return on Average Equity Based on Operating Income 15.12 % 15.06 % 18.01 % 17.37 % 17.39 %
CONSOLIDATED OPERATING INCOME STATEMENT COMPONENTS AS A PERCENT OF - ------------------------------------------------------------------ AVERAGE TOTAL ASSETS - --------------------
1998 1997 ---------- ------------------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- ---------- Interest Income (FTE) 7.16 % 7.27 % 7.29 % 7.35 % 7.30 % Interest Expense (3.74) (3.69) (3.62) (3.61) (3.56) ---------- ---------- ---------- ---------- ---------- Net Interest Income 3.42 3.58 3.67 3.74 3.74 Provision for Loan and Lease Losses (0.10) (0.09) (0.11) (0.12) (0.12) Net Securities Gains 0.13 0.05 0.00 0.00 0.02 Other Income 3.57 3.49 3.96 3.74 3.80 Other Expense (4.50) (4.61) (4.95) (4.92) (5.02) ---------- ---------- ---------- ---------- ---------- Income Before Taxes 2.52 2.42 2.57 2.44 2.42 Income Tax Provision (0.99) (0.93) (0.96) (0.91) (0.90) ---------- ---------- ---------- ---------- ---------- Return on Average Assets Based on Operating Income 1.53 % 1.49 % 1.61 % 1.53 % 1.52 % ========== ========== ========== ========== ==========
The following table reconciles net income to operating income before amortization of intangibles ("tangible operating income"). Amortization includes amortization of goodwill and core deposit premiums and is net of negative goodwill accretion and the income tax expense or benefit, if any, related to each component. These calculations were specifically formulated by the Corporation and may not be comparable to similarly titled measures reported by other companies. SUMMARY CONSOLIDATED TANGIBLE OPERATING INCOME AND FINANCIAL STATISTICS - ----------------------------------------------------------------------- ($000's except per share data) - ------------------------------
1998 1997 ---------- ------------------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- ---------- Net Income $ 72,931 $ 71,859 $ 61,864 $ 56,622 $ 54,799 Amortization, net of tax 5,193 5,093 871 872 870 ---------- ---------- ---------- ---------- ---------- Tangible Operating Income $ 78,124 $ 76,952 $ 62,735 $ 57,494 $ 55,669 ========== ========== ========== ========== ========== Tangible Operating Income Per Share Basic $ 0.75 $ 0.74 $ 0.69 $ 0.63 $ 0.62 Diluted 0.70 0.69 0.64 0.59 0.57 Return on Average Tangible Assets 1.67 1.62 % 1.64 % 1.56 % 1.55 % Tangible Equity 19.11 19.24 18.80 18.19 18.25
NET INTEREST INCOME - ------------------- Net interest income for the first quarter of 1998 amounted to $156.6 million, an increase of $27.0 million or 20.8% from the $129.6 million reported for the first quarter of 1997. The increase in the volume of average earning assets contributed approximately $84.4 million while the decrease in yield on earning assets, primarily loans, decreased interest income by approximately $7.4 million. The increase in the volume of average interest bearing liabilities contributed approximately $42.8 million and the increase in the cost of interest bearing liabilities contributed approximately $7.2 million to the increase in interest expense. The large changes attributable to volume reflect the effect of the acquisition of Security in the fourth quarter of 1997. Average earning assets increased $4.2 billion or 31.2% in the first quarter of 1998 compared to the same period a year ago and increased $116.6 million or .7% since the fourth quarter of 1997. Including securitized adjustable rate mortgage loans (ARMS), average loans grew approximately $3.6 billion or 36.1% compared to the first quarter of last year and were relatively unchanged since the fourth quarter of 1997. Average securities, excluding securitized ARMs, increased $649.6 million for the three months ended March 31, 1998 compared with the same period in the prior year and increased $131.5 million since the fourth quarter of 1997. Average interest bearing liabilities increased $3.6 billion or 33.1% in the first quarter of 1998 compared to the same period in 1997 and increased $272.2 million or 1.9% since the fourth quarter of 1997. Since the fourth quarter of 1997, average interest bearing deposits increased $249.4 million or 2.2% while average total borrowings increased $22.9 million. The growth and composition of the Corporation's quarterly average loan portfolio for the current quarter and previous four quarters are reflected in the following table. Securitized ARM loans which are classified in the consolidated balance sheets as investment securities available for sale are included to provide a more meaningful comparison ($ in millions): Marshall & Ilsley Corporation's quarterly average loan and lease portfolio
Growth Pct. ----------------- 1998 1997 First Qtr -------- ----------------------------------- 1998 Vs. First Fourth Third Second First Fourth Qtr Quarter Quarter Quarter Quarter Quarter Annual 1997 -------- -------- -------- ----------------- ------- -------- Commercial Loans $ 3,381 $ 3,285 $ 3,143 $ 3,057 $ 2,946 14.8 % 2.9 % Real Estate Loans Construction 402 397 336 320 323 24.1 1.2 Commercial Mortgages 3,365 3,295 2,526 2,496 2,417 39.2 2.1 Residential Mortgages 3,720 3,919 2,480 2,329 2,193 69.6 (5.1) Securitized ARM loans 1,025 972 436 512 550 86.4 5.5 -------- -------- -------- -------- -------- ------- -------- Residential Mortgages 4,745 4,891 2,916 2,841 2,743 73.0 (3.0) -------- -------- -------- -------- -------- ------- -------- Total Real Estate Loans 8,512 8,583 5,778 5,657 5,483 55.2 (0.8) Personal Loans Personal Loans 857 876 854 850 872 (1.7) (2.1) Student Loans 279 274 267 277 288 (3.0) 1.9 -------- -------- -------- -------- -------- ------- -------- Total Personal Loans 1,136 1,150 1,121 1,127 1,160 (2.0) (1.2) Lease Financing Receivables Commercial 322 321 287 280 279 15.3 0.4 Personal 163 141 114 88 64 155.4 15.1 -------- -------- -------- -------- -------- ------- -------- Lease Financing Receivables 485 462 401 368 343 41.3 4.9 -------- -------- -------- -------- -------- ------- -------- Total Consolidated Average Loans, Leases and ARMS $ 13,514 $ 13,480 $ 10,443 $ 10,209 $ 9,932 36.1 % 0.3 % ======== ======== ======== ======== ======== ======= ======== Total Consolidated Average Loans and Leases $ 12,489 $ 12,508 $ 10,007 $ 9,697 $ 9,382 33.1 % (0.2)% ======== ======== ======== ======== ======== ======= ========
As previously discussed, the annual growth is largely attributable to the Security merger. During the first quarter of 1998, approximately $117 million of ARM loans were converted into government guaranteed agency pool securities. Approximately $218 million of ARM loans were securitized in all of 1997. In addition, approximately $580 million of securitized ARMs were acquired in the Security merger. Compared with the fourth quarter of 1997, total consolidated average loans, leases and securitized ARMs were relatively unchanged. The growth in commercial and commercial real estate loans and lease financing receivables of approximately $188.7 million was offset by declines in total residential real estate loans and securitized ARMs of $145.3 million. The decrease in residential real estate loans and securitized ARMs reflects the effect of increased prepayments associated with customer refinancings to fixed rate loans in response to the recent interest rate environment. Generally, the Corporation sells fixed rate residential real estate loans in the secondary market. The growth and composition of the Corporation's quarterly average deposits for the current and prior year's quarters are as follows ($ in millions): Marshall & Ilsley Corporation's quarterly average deposits
Growth Pct. ----------------- 1998 1997 First Qtr -------- ----------------------------------- 1998 Vs. First Fourth Third Second First Fourth Qtr Quarter Quarter Quarter Quarter Quarter Annual 1997 -------- -------- -------- ----------------- ------- -------- Noninterest Bearing Commercial $ 1,539 $ 1,670 $ 1,476 $ 1,388 $ 1,362 13.0 % (7.9)% Personal 482 468 443 443 430 12.1 3.0 Other 341 402 349 324 295 15.6 (15.2) -------- -------- -------- -------- -------- ------- -------- Total Noninterest Bearing Deposits 2,362 2,540 2,268 2,155 2,087 13.2 (7.0) Interest Bearing Savings & NOW 2,043 2,060 1,753 1,732 1,753 16.5 (0.9) Money Market 3,647 3,517 2,695 2,642 2,613 39.6 3.7 Other CDs & Time Deposits 4,314 4,237 3,122 3,032 3,027 42.5 1.8 Cds Greater than $100,000 831 776 678 672 662 25.5 7.0 Brokered CDs 604 600 600 559 458 31.8 0.7 -------- -------- -------- -------- -------- ------- -------- Total Interest Bearing Deposits 11,439 11,190 8,848 8,637 8,513 34.4 2.2 -------- -------- -------- -------- -------- ------- -------- Total Consolidated Average Deposits $ 13,801 $ 13,730 $ 11,116 $ 10,792 $ 10,600 30.2 % 0.5 % ======== ======== ======== ======== ======== ======= ========
Compared with the fourth quarter of 1997, average deposit growth amounted to $71.6 million or .5%. Money market, CDs greater than $100 and foreign time deposits exhibited the largest growth and accounted for approximately $332.7 million of the growth in average deposits. Offsetting this growth were declines in noninterest bearing deposits of $177.8 million, other time deposits, excluding foreign time, of $70.1 million and savings and NOW declines of $17.5 million. This shift in deposit mix had a negative impact on the net interest margin. The Corporation's consolidated average interest earning assets and interest bearing liabilities, interest earned and interest paid for the current quarter, prior year fourth quarter and prior year first quarter are presented in the following table. Securitized ARM loans that are classified as investment securities available for sale are included with loans to make the comparative information more meaningful. YIELD & COST ANALYSIS ($ in millions)
Three Months Ended Mar. 31, Three Months Ended Dec. 31, Three Months Ended Mar. 31, ---------------------------- ---------------------------- ---------------------------- 1998 1997 1997 ---------------------------- ----------------------------- ---------------------------- Average Average Average Average Yield or Average Yield or Average Yield or Balance Interest Cost (b) Balance Interest Cost (b) Balance Interest Cost (b) ---------------------------- ----------------------------- ---------------------------- Loans and Leases (a) $13,513.8 $ 273.2 8.22 % $13,479.0 $ 281.4 8.30 % $ 9,932.2 $ 205.4 8.40 % Investment Securities: Taxable 2,950.8 47.4 6.55 2,883.3 46.3 6.41 2,477.4 40.1 6.59 Tax Exempt (a) 1,024.9 17.9 7.33 961.0 19.8 8.36 848.7 14.6 7.09 Other Short-term Investments (a) 189.3 2.5 5.38 238.9 3.2 5.39 220.7 2.9 5.29 ---------------------------- ------------------------------ ----------------------------- Total Interest Earning Assets $17,678.8 $ 341.0 7.86 % $17,562.2 $ 350.7 7.95 % $13,479.0 $ 263.0 7.94 % ============================= ============================= ============================= Money Market Savings $ 3,647.5 $ 40.8 4.54 % $ 3,517.2 $ 39.5 4.46 % $ 2,613.0 $ 27.0 4.18 % Regular Savings & NOW 2,042.6 11.1 2.20 2,060.1 11.3 2.17 1,752.9 9.1 2.12 Other CDs & Time Deposits 4,314.3 61.4 5.77 4,236.5 61.7 5.78 3,027.3 42.3 5.67 CDs Greater than $100 & Brokered CDs 1,434.6 21.0 5.93 1,375.8 20.8 6.00 1,120.1 15.9 5.74 ----------------------------- ----------------------------- ----------------------------- Total Interest Bearing Deposits 11,439.0 134.3 4.76 11,189.6 133.3 4.73 8,513.3 94.3 4.49 Short-term Borrowings 2,198.1 29.9 5.52 2,221.1 31.2 5.57 1,809.7 23.8 5.34 Long-term Borrowings 872.8 14.1 6.54 826.9 13.7 6.58 574.8 10.2 7.16 ----------------------------- ----------------------------- ----------------------------- Total Interest Bearing Liabilities $14,509.9 $ 178.3 4.98 % $14,237.6 $ 178.2 4.97 % $10,897.8 $ 128.3 4.77 % ============================= ============================= ============================= Net Interest Margin (FTE) as a Percent of Average Earning Assets $ 162.7 3.75 % $ 172.5 3.91 % $ 134.7 4.06 % ================== ================== ==================
(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 declined 31 basis points since the first quarter of 1997 and decreased 16 basis points from 3.91% in the fourth quarter of 1997 to 3.75% in the current quarter. The yield on average earning assets decreased 9 basis points since the fourth quarter of 1997. The yield on loans and securitized ARMs, the largest earning asset, declined 8 basis points and contributed approximately $8.8 million to the decline in net interest income compared with the fourth quarter of 1997. This decline reflects, in part, accelerated run-off of higher yielding loans and securitized ARMs due to prepayments and refinancings in response to the interest rate environment. As a result, the Corporation increased the amortization associated with the purchase accounting premium assigned to loans and investment securities acquired in the Security merger. Net interest income may continue to be adversely affected if the current prepayment experience continues. In addition, the decline in tax-free dividend income of $1.9 million also contributed to the decrease in net interest income in the current quarter compared with the fourth quarter of 1997. The cost of interest bearing deposits increased 3 basis points while short-term and long-term borrowing costs decreased 5 and 4 basis points, respectively compared with the fourth quarter of 1997. At March 31, 1998, the Corporation had standard receive fixed/pay floating interest rate swaps and interest rate caps and floors designated as hedges to manage the interest rate volatility associated with variable rate loans and variable rate debt. In addition, the Corporation had callable receive fixed / pay floating interest rate swaps designated as hedges to offset the brokered callable CDs previously discussed. The Corporation's position with respect to interest rate swaps and interest rate caps and floors at March 31, 1998 consisted of the following ($ in millions): Interest Rate Swaps ------------------- Notional Value $575 Weighted average receive rate 6.24% Weighted average pay rate 5.68% Weighted average remaining term (in years) 2.06 Estimated fair value $4.20 Callable Interest Rate Swaps ---------------------------- Notional Value $230 Weighted average receive rate 6.47% Weighted average pay rate 5.46% Weighted average remaining term (in years) 7.16 Estimated fair value ($0.67) Interest Rate Caps and Floors ----------------------------- Notional Value $50 Strike Rate 5.63% Index 5.75% Weighted average remaining term (in years) 2.63 Estimated fair value $0.18 Unamortized premium $0.30 For the three months ended March 31, 1998, the effect on net interest income resulting from the swaps, net of cap and floor premium amortization, was a positive $1.1 million compared with a positive $.8 million in the same period in 1997. PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY - ------------------------------------------------------ At March 31, 1998, nonperforming assets were $84.9 million compared to $87.3 million at December 31, 1997 and $77.6 million at March 31, 1997. Nonaccrual loans and leases, the largest component of nonperforming assets, increased $2.4 million since the fourth quarter and increased $3.9 million since March 31, 1997. Other real estate owned decreased $3.5 million and loans and leases past due 90 days or more decreased $1.2 million while since the fourth quarter of 1997. Compared to March 31, 1997, renegotiated loans and loans and leases past due 90 days or more decreased $.5 million and $.4 million, respectively. Other real estate owned increased $4.3 million since March 31, 1997,which is primarily due to branch closures associated with the Security merger which occurred in the fourth quarter of 1997. Total nonaccrual commercial loans and leases increased $2.9 million since the fourth quarter but decreased $1.1 million since March 31, 1997. Nonaccrual commercial loans and leases are substantially responsible for the increase in nonaccrual loans at March 31, 1998 compared to December 31, 1997. Increases in nonaccrual construction and land development loans and nonaccrual commercial real estate loans were offset by declines in nonaccrual residential real estate loans. As a result total nonaccrual real estate loans at March 31, 1998 were relatively unchanged since December 31, 1997. Net recoveries in the first quarter of 1998 amounted to $2.8 million or (.09)% of average loans and leases compared to net charge-offs of $2.2 million or .07% of average loans and leases in the fourth quarter of 1997 and $5.6 million or .24% of average loans and leases in the first quarter of 1997. One larger commercial loan at the Corporation's lead bank accounted for $4.3 million of the recoveries for the three months ended March 31, 1998. The allowance for loan and lease losses amounted to $210.3 million or 1.66% of total loans at March 31, 1998 compared to $202.8 million or 1.62% at December 31, 1997 and $154.6 million or 1.61% at March 31, 1997. The coverage ratio of the allowance for loan and lease losses to nonperforming loans and leases was 281% at March 31, 1998 compared with 275% at December 31, 1997 and 215% at March 31, 1997. The provision for loan and lease losses amounted to $4.7 million in the first quarter of 1998 compared to $4.3 million in the first quarter of 1997. The increase is primarily due to loan growth. CONSOLIDATED CREDIT QUALITY INFORMATION ($000's) 1998 1997 -------- ----------------------------------- First Fourth Third Second First NONPERFORMING ASSETS Quarter Quarter Quarter Quarter Quarter - -------------------- -------- -------- -------- -------- -------- Nonaccrual $ 66,517 $ 64,153 $ 61,685 $ 56,723 $ 62,576 Renegotiated 1,241 1,338 1,242 1,636 1,736 Past Due 90 Days or More 7,080 8,238 7,721 7,461 7,517 -------- -------- -------- -------- -------- Total Nonperforming Loans and Leases 74,838 73,729 70,648 65,820 71,829 Other Real Estate Owned 10,042 13,567 3,637 5,625 5,729 -------- -------- -------- -------- -------- Total Nonperforming Assets $ 84,880 $ 87,296 $ 74,285 $ 71,445 $ 77,558 ======== ======== ======== ======== ======== ALLOWANCE FOR LOAN AND LEASE LOSSES $210,307 $202,818 $157,893 $155,620 $154,599 ======== ======== ======== ======== ======== CONSOLIDATED STATISTICS - ----------------------- Net Charge-offs (Recoveries) to Average Loans and Leases Annualized (0.09)% 0.07 % 0.08 % 0.14 % 0.24 % Total Nonperforming Loans and Leases to Total Loans and Leases 0.59 0.59 0.69 0.66 0.75 Total Nonperforming Assets to Total Loans and Other Real Estate Owned 0.67 0.70 0.73 0.72 0.81 Allowance for Loan and Lease Losses to Total Loans and Leases 1.66 1.62 1.54 1.57 1.61 Allowance for Loan and Lease Losses to Nonperforming Loans and Leases 281 275 223 236 215 1998 1997 NONACCRUAL LOANS -------- ----------------------------------- - ---------------- First Fourth Third Second First AND LEASES BY TYPE Quarter Quarter Quarter Quarter Quarter - ------------------ -------- -------- -------- ----------------- Commercial Commercial, Financial & Agricultural $ 16,491 $ 12,362 $ 17,229 $ 13,462 $ 17,945 Lease Financing Receivables 2,648 3,855 2,073 1,430 2,290 -------- -------- -------- -------- -------- Total Commercial 19,139 16,217 19,302 14,892 20,235 Real Estate Construction and Land Development 1,869 1,329 573 1,311 1,650 Commercial Mortgage 14,942 13,901 19,631 18,185 19,987 Residential Mortgage 27,640 29,320 18,848 19,203 17,286 -------- -------- -------- -------- -------- Total Real Estate 44,451 44,550 39,052 38,699 38,923 Personal 2,927 3,386 3,331 3,132 3,418 -------- -------- -------- -------- -------- Total Nonaccrual Loans and Leases $ 66,517 $ 64,153 $ 61,685 $ 56,723 $ 62,576 ======== ======== ======== ======== ======== RECONCILIATION OF CONSOLIDATED ALLOWANCE FOR LOAN AND LEASE LOSSES ($000's) - --------------------------------------------------------------------------- 1998 1997 -------- ----------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter -------- -------- -------- ----------------- Beginning Balance $202,818 $157,893 $155,620 $154,599 $155,895 Provision for Loan and Lease Losses 4,705 4,378 4,258 4,306 4,311 Allowance of Bank Acquired -- 42,773 -- -- -- Loans and Leases Charged-off Commercial 396 1,249 1,024 2,773 3,305 Real Estate 906 911 807 446 1,466 Personal 2,367 1,992 1,841 1,706 2,003 Leases 165 416 208 462 80 -------- -------- -------- -------- -------- Total Charge-offs 3,834 4,568 3,880 5,387 6,854 Recoveries on Loans and Leases Commercial 5,704 1,387 916 1,089 349 Real Estate 150 302 249 314 235 Personal 759 619 596 617 652 Leases 5 34 134 82 11 -------- -------- -------- -------- -------- Total Recoveries 6,618 2,342 1,895 2,102 1,247 -------- -------- -------- -------- -------- Net Loans and Leases Charge-offs (Recoveries) (2,784) 2,226 1,985 3,285 5,607 -------- -------- -------- -------- -------- Ending Balance $210,307 $ 202,818 $157,893 $155,620 $154,599 ======== ======== ======== ======== ======== OTHER INCOME - ------------ Total other income in the first quarter of 1998 amounted to $176.3 million, an increase of $38.7 million or 28.1%, compared to $137.6 million in the same period last year. Data processing revenue increased $16.7 million or 20.8% from $80.1 million in the first quarter of 1997 to $96.8 million in the current quarter. Processing revenue increased $10.3 million or 18.4%. Software revenue increased $4.2 million or 31.9%. Buyout fees, which can vary from period to period, decreased $2.4 million while conversion fees increased $1.5 million or 54.8%. Revenues from professional services such as contract programming and consulting increased $3.1 million. Compared to the fourth quarter of 1997, revenue from data processing services increased $2.1 million or 2.2%. Trust services revenue amounted to $21.5 million in the first quarter of 1998, an increase of $2.5 million or 13.4% compared to $18.9 million in the first quarter of 1997. All components of trust services revenue experienced an increase led by personal trust fees and corporate trust fees which increased $.9 million and $1.0 million, respectively. Other customer services revenue amounted to $36.2 million in the first quarter of 1998 compared to $29.6 million in the first quarter of 1997. Other customer services revenue for the current quarter include the effects of the Security merger. Service charges on deposits amounted to $14.4 million in the first quarter of 1998 a decrease of $.4 million compared to the fourth quarter of 1997. Compared with the fourth quarter of 1997, real estate loan and late fees increased $1.1 million and Corporate finance fees associated with the Corporation's Capital Markets Group increased $0.2 million in the first quarter of 1998. Net securities gains in the first quarter of 1998 amounted to $6.4 million compared with $.8 million in the first quarter of 1997. The Corporation's Capital Markets Group realized gains of $6.4 million in the three months ended March 31, 1998 compared to $2.1 million for the same period in the prior year. The Capital Markets Group gain recognized in the first quarter of 1997 was offset by $1.3 million of losses recognized by the Corporation from the sale of available for sale securities. All other income amounted to $15.3 million in the first quarter of 1998 compared to $8.2 million in the first quarter of 1997. Gains from the sale of residential mortgage loans, which includes the servicing rights, increased $6.2 million. Revenue from bank-owned life insurance acquired in the Security merger amounted to $.8 million for the three months ended March 31, 1998. OTHER EXPENSE - ------------- Total other expenses in the first quarter of 1998 amounted to $214.3 million compared with $222.0 million in the fourth quarter of 1997 and $180.8 million in the first quarter of 1997. Expenses of the Corporation's banking business in the first quarter of 1998 include the effects of the Security merger. The Corporation added approximately 400 full-time equivalent employees as a direct result of the merger even though the majority of Security' branches and operations facilities were closed due to customer service and operating overlap. The Corporation's nonbanking businesses, especially its Data Services segment ("Data Services"), continue to be the primary contributor to operating expense growth. Data Services expense growth represents over half of the consolidated operating expense growth and reflects the cost of adding processing capacity and other related costs associated with increased revenue growth and maintenance activities for Year 2000. Expense Control is sometimes measured in the financial services industry by the efficiency ratio statistic. The efficiency ratio is calculated by taking total other expense (excluding nonrecurring charges) divided by the sum of total other income (excluding securities gains or losses) and net interest income on a fully taxable equivalent basis. The Corporation's efficiency ratios for the three months ended March 31, 1998 and years ended December 31, 1997 and 1996: Three Months Years Ended Dec. 31, Ended ----------------------- Efficiency Ratios Mar. 31, 1998 1997 1996 - -------------------------------------- ------------- ----------- ----------- Consolidated Corporation 64.4 % 65.6 % 65.9 % Consolidated Corporation Excluding Data Services 54.6 % 56.6 % 57.9 % Salaries and employee benefits expense amounted to $123.7 million in the first quarter of 1998 compared to $105.4 million in the first quarter of 1997, an increase of $18.3 million or 17.4%. Salaries and employee benefits expense of Data Services increased $12.0 million or 24.7% in the current quarter compared to the same period last year. At March 31, 1998 Data Services had on average approximately 621 more full time equivalent employees when compared to March 31, 1997 which reflects, in part, additional processing and service centers. In addition, expense associated with contract programmers and other temporary help primarily used in the Year 2000 project increased $.8 million over the comparative periods. Data Services expense growth accounted for approximately $3.4 million or 69% of the increase in net occupancy, equipment and software expenses in the first quarter of 1998 compared to the first quarter of 1997. The increase in payments to regulatory agencies in the first quarter of 1998 compared to the like period in the prior year reflects the additional deposits acquired in the Security merger. Other expense amounted to $34.2 million in the first quarter of 1998, an increase of $9.0 million or 35.9% compared to the first quarter of 1997. Other expenses associated with Data Services accounted for approximately $2.2 million of the increase including the effect of the capitalization of costs, net of amortization, associated with software development and data processing conversions. Amortization expense for goodwill, core deposit premiums and mortgage servicing rights, primarily attributable to the Security merger, increased $7.4 million. INCOME TAXES - ------------ The provision for income taxes for the three months ended March 31, 1998 amounted to $41.0 million or 36% of pre-tax income compared to $27.4 million or 33% of pre-tax income for the three months ended March 31, 1997. The change in the effective tax is primarily due to the increase in nondeductible goodwill amortization expense and the decrease in tax-exempt income relative to total pre-tax income in the current quarter compared to the prior year quarter. CAPITAL RESOURCES - ----------------- Shareholders' equity was $1.97 billion at March 31, 1998 compared to $1.92 billion at December 31, 1997 and $1.28 billion at March 31, 1997. Net unrealized gains on securities available for sale at March 31, 1998 decreased $3.9 million compared to December 31, 1997. On February 19, 1998, the Corporation announced that its Board of Directors voted to rescind the Corporation's Stock Repurchase Program effective March 16, 1998. During the first quarter of 1998, prior to March 16, 1998, 74,500 shares of common stock were acquired with an aggregate cost of $4.3 million. The Corporation continues to have a strong capital base and its regulatory capital ratios are significantly above the minimum requirements as shown in the following tables.
RISK-BASED CAPITAL RATIOS ($in millions) ------------------------------------------------------------------------- March 31, 1998 December 31, 1997 ------------------------------------ ------------------------------------ Amount Ratio Amount Ratio ------------------- ---------------- ------------------- ---------------- Tier 1 Capital $ 1,785.3 12.51 % $ 1,735.5 12.19 % Tier 1 Capital Minimum Requirement 570.6 4.00 569.7 4.00 ---------- ------ ---------- ------ Excess $ 1,214.7 8.51 % $ 1,165.8 8.19 % ========== ====== ========== ====== Total Capital $ 2,064.0 14.47 % $ 2,013.9 14.14 % Total Capital Minimum Requirement 1,141.3 8.00 1,139.4 8.00 ---------- ------ ---------- ------ Excess $ 922.7 6.47 % $ 874.5 6.14 % ========== ====== ========== ====== Risk-Adjusted Assets $ 14,265.9 $ 14,241.9 ========== ==========
LEVERAGE RATIOS ($in millions) ------------------------------------------------------------------------- March 31, 1998 December 31, 1997 ------------------------------------ ------------------------------------ Amount Ratio Amount Ratio ------------------- ---------------- ------------------- ---------------- Tier 1 Capital $ 1,785.3 9.45 % $ 1,735.5 9.25 % Minimum Leverage Requirement 567.0 -945.1 3.00 - 5.00 562.7 -937.8 3.00 - 5.00 ----------------- -------------- ----------------- -------------- Excess $ 1,218.3 -840.2 6.45 - 4.45 % $ 1,172.8 -797.7 6.25 - 4.25 % ================= ============== ================= ============== Adjusted Average Total Assets $ 18,901.4 $ 18,756.0 ========== ==========
Year 2000 Update - ---------------- At December 31, 1997, Data Services estimated that the net cost to change existing computer programs for both internal and external software will be approximately $30 million. As of March 31, 1998, the most recent estimate places the net cost at approximately $34 million. During the first quarter of 1998, Data Services had net expense related to Year 2000 of approximately $3.1 million and estimates total net expense in 1998 will be approximately $15 million compared with $10 million net expense in 1997. Currently there are approximately 150 full-time equivalent people on the Year 2000 project which generally consists of service bureau code testing and system verification which is scheduled to take place throughout 1998. The majority of Data Services' contracts do not provide for reimbursement over and above the previously contracted maintenance amounts. Future data processing revenue is critically dependent upon the successful implementation of the necessary changes. The Corporation and its other affiliates continue to anticipate that its program for hardware, software, office machines and building systems will be completed late in 1998 in order to allow for adequate testing and contingency planning. Replacement equipment and software will be expensed or capitalized in accordance with the Corporation's normal accounting policies. The effect of writing off the net book value of equipment or software that is not Year 2000 compliant is not considered material. RECENT DEVELOPMENTS - ------------------- On April 1, 1998, the Corporation completed the merger with Advantage Bancorp, Inc. ("Advantage") a Kenosha, Wisconsin based savings and loan holding company for 1.2 shares of the Corporation's Common Stock for each share of Advantage Common Stock. The transaction was accounted for as a pooling-of-interests. In conjunction with this transaction, in the second quarter of 1998, the Corporation will record a merger / restructuring charge of approximately $16.3 million ($23.4 million before-tax) consisting of approximately $9.4 million related to operations and $6.9 million of non-cash employee benefit expenses. Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- 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. The Corporation uses financial modeling techniques which measure the sensitivity of future earnings and the change in fair value due to changing rate environments to measure interest rate risk. Policies established by the Corporate Asset/Liability Committee and approved by the Corporate Board of Directors limit exposure for both earnings and fair value at risk. General interest rate movements are used to develop sensitivity as the Corporation feels it has no primary exposure to a specific point on the yield curve. These limits are based on the Corporation's exposure to a 100 basis point immediate and sustained parallel rate move, either upward or downward. The Corporation manages interest rate risk through the use of a limited array of derivative financial instruments. These instruments allow the Corporation to produce the desired balance sheet repricing structure while simultaneously meeting the desired objectives of both its borrowing and depositing customers. For additional information on the Corporation's derivative financial instruments, see Management's Discussion and Analysis of Financial Position and Results of Operations. Interest Rate Risk - ------------------ In order to measure earnings and fair value sensitivity to changing rates, the Corporation uses three different measurement tools including static gap analysis, simulation of earnings, and market value sensitivity (fair value at risk). The static gap analysis starts with contractual repricing information for assets, liabilities and off-balance sheet instruments. These items are then combined with repricing estimations for administered rate (NOW, Savings, and Money Market accounts) and non rate related products (DDA accounts, Other Assets and Other Liabilities) to create a baseline repricing balance sheet. In addition to the contractual information, residential mortgage whole loan product and mortgage-backed securities are adjusted based on industry estimates of prepayment speeds that capture the expected prepayment of principal above the contractual amount based on how far away the contractual coupon is from market coupon rates. The resulting static gap is the base for the earnings sensitivity calculation. The Corporation's consolidated static gap position as of March 31, 1998 has not materially changed since December 31, 1997. The static gap analysis provides a representation of the Corporation's earnings sensitivity to changes in interest rates. Interest rate risk of embedded positions including prepayment and early withdrawal options, lagged interest rate changes, administered interest rate products, and cap and floor options within products require a more dynamic measuring tool to capture earnings and fair value risk. Earnings simulation and fair value sensitivity analysis are used to create a more complete assessment of interest rate risk. Along with the static gap analysis, determining the sensitivity of future earnings to a hypothetical +/- 100 basis point parallel rate shock can be accomplished through the use of simulation modeling. In addition to the assumptions used to create the static gap, simulation of earnings includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project income based on a hypothetical change in interest rates. The resulting pretax income for the next 12 month period is compared to the pretax income amount calculated using flat rates. This difference represents the Corporation's earnings sensitivity to a +/- 100 basis point parallel rate shock. The following table illustrates these amounts as of March 31, 1998 and December 31, 1997, which are within the limits established by the Corporation: Hypothetical Change in Interest Rates Impact to Pretax Net Income - ----------------- ----------------------------------- March 31, 1998 December 31, 1997 -------------- ----------------- 100 basis point Shock Up (7.2%) (7.1%) 100 basis point Shock Down 6.0 6.1% These results are based solely on immediate and sustained parallel changes in market rates and do not reflect the earnings sensitivity that may arise from other factors such as changes in the shape of the yield curve, the change in spread between key market rates, or accounting recognition for impairment of certain intangibles. The above results are also considered to be conservative estimates due to the fact that no management action to mitigate potential income variances are included within the simulation process. This action would 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. Another component of interest rate risk, fair value at risk, is determined by the Corporation through the technique of simulating the fair value of equity in changing rate environments. This technique involves determining the present value of all contractual asset and liability cash flows (adjusted for prepayments) based on a predetermined discount rate. The net result of all these balance sheet items determine the fair value of equity. The fair value of equity resulting from the current flat rate scenario is compared to the fair value of equity calculated using discount rates +/- 100 basis points from flat rates to determine the fair value of equity at risk. Currently, fair value of equity at risk is less than 1.0% of the market value of the Corporation as of March 31, 1998. Equity Risk - ----------- In addition to interest rate risk, the Corporation incurs market risk in the form of equity risk. M&I's Capital Markets Group invests in private, medium-sized companies to help establish new businesses or recapitalize existing ones. Exposure to the change in equity values for the companies that are held in their portfolio exists, but due to the nature of the investments, cannot be quantified within acceptable levels of precision. M&I Trust Services administers more than $39 billion in assets and directly manages a portfolio of more than $9 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. In addition to the above market risks, material limitations exist in determining the overall net market risk exposure of the Corporation. Computation of prospective effects of hypothetical interest rate changes are based on many assumptions, including levels of market interest rates, predicted prepayment speeds, and projected decay rates of core deposits. Other items, such as post retirement benefit obligations can also have fair value at risk exposure due to changes in interest rates. Therefore, the above outcomes should not be relied upon as indicative of actual results. PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- A. Exhibits: Exhibit 10 - Amended 1995 Directors Stock Option Plan Exhibit 11 - Statements - Computation of Earnings Per Share Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges Exhibit 27 - Financial Data Schedule B. Reports on Form 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARSHALL & ILSLEY CORPORATION (Registrant) /s/ P.R. Justiliano ______________________________________ P.R. Justiliano Senior Vice President and Corporate Controller (Chief Accounting Officer) /s/ J.E. Sandy ______________________________________ J.E. Sandy Vice President May 14, 1998 EX-10 2 10-Q FOR QUARTER ENDED MARCH 31, 1998/EXHIBIT 10 EXHIBIT 10 MARSHALL & ILSLEY CORPORATION 1995 DIRECTORS STOCK OPTION PLAN, AS AMENDED (March 30, 1998) 1. PURPOSE OF THE PLAN ------------------------- The purpose of the Marshall & Ilsley Corporation 1995 Directors Stock Option Plan (the "Plan") is to promote the best interests of Marshall & Ilsley Corporation (the "Company") and its shareholders by providing the non- employee directors of the Company with an opportunity to acquire a proprietary interest in the Company thereby more closely aligning their interests with those of shareholders and providing a stronger incentive for them to put forth maximum effort for the continued success and growth of the Company. In addition, the opportunity to acquire a proprietary interest in the Company will aid the Company in attracting and retaining qualified personnel to serve as directors of the Company. 2. ADMINISTRATION OF THE PLAN -------------------------------- (a) Procedure; Disinterested Directors. The Board of Directors will administer the Plan; provided, however, that the Board of Directors may appoint a committee (the "Committee") of not less than three (3) directors to administer the Plan if the Board of Directors deems it necessary or advisable to appoint such Committee, or if it is otherwise necessary to appoint such Committee in order to comply with the exemptive rules promulgated pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (b) Powers. Grants of options to purchase the common stock, par value $1.00 per share ("Common Stock"), of the Company under the Plan (the "Options") and the amount, price, and timing of the awards to be granted will be automatic as described in Section 5. However, all questions of interpretation of the Plan will be determined by the Board of Directors or the Committee, as applicable, and such determination will be final and binding upon all parties. 3. PARTICIPANTS IN THE PLAN ------------------------------ Participants in the Plan shall consist of all present or future directors of the Company who are not employees of the Company or its subsidiaries. Any director who is an employee of the Company or its subsidiaries and who subsequently ceases to be an employee of the Company and its subsidiaries, but remains a director of the Company, shall become eligible to participate in the Plan at the time such director ceases to be employed by the Company or its subsidiaries. 4. SHARES RESERVED UNDER THE PLAN ------------------------------------ The aggregate number of shares of the Company's Common Stock which may be issued under the Plan shall not exceed an aggregate of five hundred thousand (500,000) shares of Common Stock, which may be treasury shares or authorized but unissued shares, or a combination of the two, subject to adjustment as provided in Paragraph 11 hereof. Any shares of Common Stock which are subject to an Option which expires or terminates for any reason (whether by voluntary surrender, lapse of time, or otherwise) and which is unexercised as to such shares, may again be the subject of an Option under the Plan. The holder of an Option shall be entitled to the rights and privileges of ownership with respect to the shares of Common Stock subject to the Option only after actual purchase and issuance of such shares of Common Stock pursuant to the exercise of all or part of an Option. 5. NUMBER OF SHARES TO BE GRANTED EACH ELIGIBLE DIRECTOR; EXERCISE --------------------------------------------------------------------- (a) Automatic Grant. On the date of the Company's 1995 Annual Meeting of Shareholders, each eligible director of the Company whose term of office continues after the Company's 1995 Annual Meeting of Shareholders shall be granted an Option to purchase that number of shares of Common Stock equal to the multiple of two thousand five hundred (2,500) and the number of years remaining in such director's term as a director of the Company. On the date of each Annual Meeting of Shareholders of the Company after the Company's 1995 Annual Meeting of Shareholders, each eligible director elected or re-elected at such Annual Meeting shall be granted an Option to purchase that number of shares of Common Stock equal to the multiple of two thousand five hundred (2,500) and the number of years in the term to which such director has been elected to the Company's Board of Directors. (b) Exercise. An Option may be exercised in whole at any time or in part from time to time on or after the date of grant; provided, however, that if an Option is exercised within six (6) months from the date of grant, the Common Stock issued upon exercise of such Option may not be sold, transferred, or otherwise disposed of by the director exercising such Option until such six (6) month period has expired. (c) Written Agreement. Each Option shall be evidenced by an appropriate written agreement, the form of which shall be consistent with the terms and conditions of the Plan and applicable law, and which shall be signed by one or more designated members of the Board of Directors or the Committee and the non-employee director. (d) Tax Status of Options. Options granted hereunder shall not comply with the provisions of Section 422 of Internal Revenue Code of 1986, as amended. 6. OPTION PRICE; TERM ------------------------ Options granted hereunder shall consist of options to purchase shares of Common Stock at purchase prices per share of not less than 100 percent of the fair market value per share of the shares of Common Stock on the date the Option is granted. For purposes of this Plan, the fair market value per share of the Common Stock on any date shall be the closing sale price per share of the Common Stock on the National Association of Securities Dealers Automated Quotation/National Market System ("NASDAQ/NMS") on the business day immediately preceding such date. If the Common Stock ceases to be listed on the NASDAQ/NMS, the Board of Directors or the Committee, as applicable, shall designate an alternative method of determining the fair market value per share of the Common Stock. No Option will be exercisable after the expiration of ten (10) years after the date of its grant, and each Option will terminate no later than three (3) years after the holder thereof ceases to be a director of the Company for any reason (but in no event later than ten (10) years after its date of grant). 7. FORM OF PAYMENT --------------------- The exercise price of the Option shall be payable in whole or in part in cash or in shares of Common Stock held by the director for more than six (6) months. If the director elects to pay all or a part of the exercise price in shares of Common Stock, such director may make such payment by delivering to the Company a number of shares already owned by the director equal to the exercise price. All shares of Common Stock so delivered shall be valued at their fair market value per share on the date delivered. 8. TAXES ----------- The Company shall be entitled to pay or withhold the amount of any tax which it believes is required as a result of the grant or exercise of any Option under the Plan, and the Company may defer making delivery with respect to the Common Stock obtained pursuant to exercise of any Option until arrangements satisfactory to it have been made with respect to any such withholding obligations. A director exercising an Option may, at such director's election and subject to Paragraph 5(b), satisfy the obligation for payment of withholding taxes either by having the Company retain a number of shares having an aggregate fair market value per share on the date the shares are withheld equal to the amount of the withholding tax or by delivering to the Company shares already owned by the director having an aggregate fair market value per share on the date the shares are delivered equal to the amount of the withholding tax. 9. TRANSFERABILITY --------------------- Except as provided below, Options granted to a director under this Plan shall not be transferable and during the lifetime of such director shall be exercisable only by such director. Notwithstanding the foregoing, a director may transfer Options to members of the director's immediate family, to trusts for the benefit of the director and/or such immediate family members and to partnerships and other entities in which such director and/or such immediate family members own all the equity interests, provided any such holder shall be subject to all the terms and conditions of this Plan as the director, except as otherwise expressly provided herein. For purposes of the preceding sentence, "immediate family" shall be a director's spouse, issue and spouses of issue. A holder of an Option shall have the right to transfer the Option upon such holder's death, either by the terms of such holder's will or under the laws of descent and distribution, subject to the limitations set forth herein, and all such distributees shall be subject to all terms and conditions of this Plan to the same extent as would such holder if still alive, except as otherwise expressly provided herein. 10. SECURITIES LAW -------------------- Each Option agreement shall contain such representations, warranties and other terms and conditions as shall be necessary in the opinion of counsel to the Company to comply with all applicable federal and state securities law. The Company shall have the right to delay the issue or delivery of any shares of Common Stock under the Plan until (a) the completion of such registration or qualification of such shares under any federal or state law, ruling or regulation as the Company shall determine to be necessary or advisable, and (b) receipt from the holder of the Option of such documents and information as the Company may deem necessary or appropriate in connection with such registration or qualification. 11. ADJUSTMENT PROVISIONS --------------------------- If the Company shall effect a subdivision or consolidation of the Common Stock or other capital readjustment, the payment of a stock dividend, or other increase or reduction in the number of shares of Common Stock outstanding, or shall effect a spin-off, split-off, or other distribution of assets to shareholders, in any case without receiving consideration therefor in money, services or property, the number of shares of Common Stock then remaining subject to or available for Options, including shares as to which Options have been granted but which remain unexercised and shares of Common Stock reserved for Options, shall be appropriately adjusted by the Board of Directors or the Committee, as applicable, subject to the express terms and conditions of this Plan. Subject to any required action by the Company's shareholders, if the Company shall be a party to any merger or consolidation in which the Company is not the surviving corporation or any other transaction or series of transactions which has a reasonable likelihood or a purpose of causing the Common Stock to be neither listed on any national securities exchange nor authorized to be quoted on an inter-dealer quotation system of any registered national securities association, or registered under Section 12 of the Exchange Act, each outstanding Option shall pertain to and apply to the securities which a holder of the number of shares of Common Stock subject to the Option would have been entitled to receive pursuant to such transaction, with any such adjustment in the exercise price as the Board of Directors or the Committee, as applicable, shall deem appropriate. A dissolution of the Company or a sale of all or substantially all of the assets and property of the Company shall cause each outstanding Option to terminate forthwith; provided, however, the holders of outstanding Options may exercise such Options to the extent exercisable immediately prior to such dissolution or sale. 12. EFFECTIVENESS OF THE PLAN ------------------------------- The Plan shall become effective on February 16, 1995, subject to approval of the Plan by the shareholders of the Company. 13. RULE 16b-3 ---------------- It is intended that the Plan and any award made to a person subject to Section 16 of the Exchange Act, and any transaction or election hereunder by any such person, shall meet all of the requirements of Rule 16b-3. If any provision of the Plan or any award hereunder would disqualify the Plan or such award hereunder, or would not comply with Rule 16b-3, such provision or award shall be construed or deemed amended to conform to Rule 16b-3. 14. TENURE ------------ The Plan shall not be construed as conferring any rights upon any person for continuation as a member of the Board of Directors of the Company. 15. TERMINATION AND AMENDMENT ------------------------------- Unless the Plan shall theretofore have been terminated as hereinafter provided, no Option hereunder shall be granted after February 16, 2005. The Plan may be terminated, modified or amended by the affirmative vote of the holders of a majority of the shares of Common Stock present, or represented, and entitled to vote at a meeting of the shareholders of the Company. The Board of Directors of the Company may also terminate the Plan or make such modifications or amendments thereof as it shall deem advisable, including such modifications or amendments as it shall deem advisable in order to conform to any law or regulation applicable thereto; provided, however, that the Board of Directors may not, unless otherwise permitted under the federal securities laws, without further approval of the shareholders of the Company, adopt any amendment to the Plan which would cause the Plan to no longer comply with Rule 16b-3, or any successor rule or other regulatory requirements. No termination, modification or amendment of the Plan may, without the consent of the holder an Option granted hereunder, adversely affect the rights of such holder under an outstanding Option then held by the holder. MW1-116334-1 EX-11 3 10-Q FOR QUARTER ENDED MARCH 31, 1998/EXHIBIT 11 EXHIBIT 11 MARSHALL & ILSLEY CORPORATION EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE ($000's except per share data) Three Months Ended March 31, ----------------------------- BASIC 1998 1997 - ----- ------------ ------------ Earnings: Net income $ 72,931 $ 54,799 Less: Convertible preferred dividends (1,535) (1,065) ------------ ------------ Income available to common shareholders $ 71,396 $ 53,734 ============ ============ Shares: Weighted average number of common shares outstanding 101,692 88,838 Less: Unvested restricted stock (105) (147) ------------ ------------ Total average basic shares outstanding 101,587 88,691 ============ ============ Basic earnings per share $ 0.70 $ 0.61 ============ ============ DILUTED - ------- Earnings: Net income $ 72,931 $ 54,799 Add: Interest on convertible notes, net of income tax effect -- 232 ------------ ------------ Income available to common shareholders plus conversions $ 72,931 $ 55,031 ============ ============ Shares: Weighted average number of common shares outstanding 101,692 88,838 Additional shares relating to: Convertible preferred stock 7,677 5,776 8.5% convertible debt -- 1,901 Stock options, restricted stock and performance plans 1,752 1,562 Forward repurchase contracts -- 213 ------------ ------------ Total average diluted shares outstanding 111,121 98,290 ============ ============ Diluted earnings per share $ 0.66 $ 0.56 ============ ============ EX-12 4 10-Q FOR QUARTER ENDED MARCH 31, 1998/EXHIBIT 12 EXHIBIT 12 EXHIBIT 12 MARSHALL & ILSLEY CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($000's)
Three Months Ended Years Ended December 31, March 31, ---------------------------------------------------------- Earnings: 1998 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- Earnings before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 113,932 $ 370,251 $ 313,141 $ 299,879 $ 167,803 $ 264,584 Fixed charges, excluding interest on deposits 46,508 159,977 113,515 108,683 77,074 47,905 ---------- ---------- ---------- ---------- ---------- ---------- Earnings including fixed charges but excluding interest on deposits 160,440 530,228 426,656 408,562 244,877 312,489 Interest on deposits 134,302 429,805 360,838 331,734 255,861 272,100 ---------- ---------- ---------- ---------- ---------- ---------- Earnings including fixed charges and interest on deposits $ 294,742 $ 960,033 $ 787,494 $ 740,296 $ 500,738 $ 584,589 ========== ========== ========== ========== ========== ========== Fixed Charges: Interest Expense: Short-term borrowings $ 29,896 $ 108,398 $ 62,071 $ 47,740 $ 39,681 $ 18,010 Long-term borrowings 14,072 41,420 42,808 53,709 30,537 23,088 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor) 2,540 10,159 8,636 7,234 6,856 6,807 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges excluding interest on deposits 46,508 159,977 113,515 108,683 77,074 47,905 Interest on deposits 134,302 429,805 360,838 331,734 255,861 272,100 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges including interest on deposits $ 180,810 $ 589,782 $ 474,353 $ 440,417 $ 332,935 $ 320,005 ========== ========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges: Excluding interest on deposits 3.45 x 3.31 x 3.76 x 3.76 x 3.18 x 6.52 x Including interest on deposits 1.63 x 1.63 x 1.66 x 1.68 x 1.50 x 1.83 x
EX-27 5 10-Q FOR QUARTER ENDED MARCH 31, 1998/EXHIBIT 27
9 1,000 3-MOS DEC-31-1997 MAR-31-1998 702,579 121,880 85,301 39,080 4,088,984 983,574 1,006,107 12,638,369 210,307 19,652,894 14,252,868 2,165,292 479,332 787,141 0 685 109,303 1,858,273 19,652,894 253,406 78,993 2,508 334,907 134,302 178,270 156,637 4,705 6,375 214,250 113,932 72,931 0 0 72,931 0.70 0.66 3.75 66,517 7,080 1,241 74,838 202,818 3,834 6,618 210,307 210,307 0 0
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