-----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, J8mvCqXmcSp3dkfroHnY3Hh9S9BrbLSPKtS91lbvxh+huTLhu9ZxLB3UeqomxxMQ zkp5AN7yHLcI/bphsm4VwA== 0000950124-00-001176.txt : 20000314 0000950124-00-001176.hdr.sgml : 20000314 ACCESSION NUMBER: 0000950124-00-001176 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000313 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-K405 SEC ACT: SEC FILE NUMBER: 001-15403 FILM NUMBER: 567749 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-K405 1 FORM 10-K405 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 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 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS: ON WHICH REGISTERED: -------------------- --------------------- Common Stock -- $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant is approximately $5,359,013,000 as of January 31, 2000. The number of shares of common stock outstanding as of January 31, 2000 is 104,566,112. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the Proxy Statement for the registrant's Annual Meeting of Shareholders to be held on April 25, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL Marshall & Ilsley Corporation ("M&I" or the "Corporation"), incorporated in Wisconsin in 1959, is a registered bank holding company under the Bank Holding Company Act of 1956 (the "BHCA"). As of December 31, 1999, M&I had consolidated total assets of approximately $24.4 billion and consolidated total deposits of approximately $16.4 billion, making M&I the second largest bank holding company headquartered in Wisconsin. The executive offices of M&I are located at 770 North Water Street, Milwaukee, Wisconsin 53202 (telephone number (414) 765-7801). M&I's principal assets are the stock of its bank and nonbank subsidiaries and the assets of its Data Services Division ("M&I Data Services"). M&I's subsidiaries include 27 commercial banks, one federal savings bank and a number of companies engaged in businesses that the Federal Reserve Board (the "FRB") has determined to be closely-related or incidental to the business of banking. M&I provides its subsidiaries with financial and managerial assistance in such areas as budgeting, tax planning, compliance assistance, asset and liability management, investment administration and portfolio planning, business development, advertising and human resources management. M&I's bank and savings association subsidiaries provide a full range of banking services to individuals, businesses and governments throughout Wisconsin, and in the Phoenix, Arizona metropolitan area, Las Vegas, Nevada, Naples, Florida, and the northern Chicago, Illinois suburbs. These subsidiaries offer retail, institutional, international, business and correspondent banking, investment and trust services through the operation of over 230 banking offices in Wisconsin, 13 offices in Arizona, 4 offices in Illinois, 1 office in Florida and 1 office in Nevada. The M&I bank and saving association subsidiaries hold a significant portion of their mortgage and investment portfolios indirectly through their ownership interest in direct and indirect subsidiaries. M&I Marshall & Ilsley Bank ("M&I Bank") is M&I's largest bank subsidiary, with consolidated assets as of December 31, 1999 of approximately $10.8 billion. M&I Data Services and two nonbank subsidiaries are major suppliers of financial and data processing services and software to banking, financial and related organizations. M&I Data Services provides services and software to over 3,300 financial service providers in the United States and in numerous foreign countries. M&I's nonbank subsidiaries operate a variety of bank-related businesses, including those providing investment management services, insurance services, trust services, equipment lease financing, commercial and residential mortgage banking, home equity financing, venture capital, brokerage services and financial advisory services. M&I Investment Management Corp. offers a full range of asset management services to M&I's trust company subsidiaries, the Marshall Funds and other individual, business and institutional customers. M&I's trust company subsidiaries provide trust and employee benefit plan services to customers throughout the United States with offices in Wisconsin, Arizona, Florida and Nevada. M&I First National Leasing Corp. and M&I Leasing Corp. of Michigan lease a variety of equipment and machinery to large and small businesses. M&I Dealer Finance, Inc. provides lease financing. M&I Mortgage Corp. originates, purchases, sells and services residential mortgages. M&I Mortgage Reinsurance Corporation, a subsidiary of M&I First National Bank, acts as a reinsurer of private mortgage insurance written in connection with residential mortgage loans originated in the M&I system. The Richter-Schroeder Company originates and services long-term commercial real estate loans for institutional investors. M&I Capital Markets Group L.L.C. provides venture capital, financial advisory and strategic planning services to customers, including assistance in connection with the private placement of securities, raising funds for expansion, leveraged buy-outs, divestitures, mergers and acquisitions and small business investment company transactions. M&I Brokerage Services, Inc., a broker-dealer registered with the National Association of Securities Dealers and the Securities and Exchange Commission, provides brokerage and other investment related services to a variety of retail and commercial customers. 1 3 PRINCIPAL SOURCES OF REVENUE The table below shows the amount and percentages of M&I's total consolidated operating revenues resulting from interest on loans and leases, interest on investment securities and fees for data processing services for each of the last three years ($ in thousands):
INTEREST ON INTEREST ON FEES FOR DATA LOANS AND LEASES INVESTMENT SECURITIES PROCESSING SERVICES ---------------------- ---------------------- -------------------- PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL TOTAL YEAR ENDED OPERATING OPERATING OPERATING OPERATING DECEMBER 31 AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES REVENUES - ----------- ---------- --------- --------- ---------- -------- --------- ---------- 1999................. $1,156,775 49.4% $337,945 14.4% $485,941 20.7% $2,342,358 1998................. 1,085,829 49.6 346,012 15.8 412,632 18.8 2,190,377 1997................. 921,161 50.4 297,156 16.2 343,846 18.8 1,828,802
M&I business segment information is contained in Note 19 of the Notes to the Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data. COMPETITION M&I and its subsidiaries face substantial competition from hundreds of competitors in the markets they serve, some of which are larger and have greater resources than M&I. M&I's bank subsidiaries compete for deposits and other sources of funds and for credit relationships with other banks, savings associations, credit unions, finance companies, mutual funds, life insurance companies (and other long-term lenders) and other financial and non-financial companies located both within and outside M&I's primary market area, many of which offer products functionally equivalent to bank products. M&I's non-bank operations compete with numerous banks, finance companies, data servicing companies, leasing companies, mortgage bankers, brokerage firms, financial advisors, trust companies, mutual funds and investment bankers in Wisconsin and throughout the United States. The market for the banking technology services offered by M&I Data Services is international in scope. In any given geographic area, M&I Data Services' competitors vary in size and include national, regional and local operations. While historically the bank data processing industry has been highly decentralized, there is an accelerating trend toward consolidation in the industry, resulting in fewer companies competing over larger geographic regions. As consolidation continues, successful companies in this business are likely to increase substantially in size as the scale of activity necessary to compete increases. EMPLOYEES As of December 31, 1999, M&I and its subsidiaries employed in the aggregate approximately 11,433 employees. M&I considers employee relations to be excellent. None of the employees of M&I or its subsidiaries are represented by a collective bargaining group. SUPERVISION AND REGULATION As a registered bank holding company, M&I is subject to regulation and examination by the FRB under the BHCA. M&I's state bank subsidiaries are subject to regulation and examination by the Wisconsin Department of Financial Institutions, or in the case of M&I Thunderbird Bank, the Arizona State Banking Department. In addition, all of M&I's state chartered banks are regulated by the FRB. M&I's federal savings bank subsidiary is subject to regulation and examination by the Office of Thrift Supervision. M&I's national bank subsidiary is subject to regulation and examination by the Office of the Comptroller of the Currency. In addition, all of M&I's bank subsidiaries are subject to examination by the FDIC. Under FRB policy, M&I is expected to act as a source of financial strength to each of its bank subsidiaries and to commit resources to support each bank subsidiary in circumstances when it might not do so absent such requirements. In addition, there are numerous federal and state laws and regulations which 2 4 regulate the activities of M&I and its bank subsidiaries, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuances of securities, dividend payments, inter-affiliate liabilities, extensions of credit and branch banking. Information regarding capital requirements for bank holding companies and tables reflecting M&I's regulatory capital position at December 31, 1999 can be found in Note 13 of the Notes to the Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data. The federal regulatory agencies have broad power to take prompt corrective action if a depository institution fails to maintain certain capital levels. In addition, a bank holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of, or any FDIC-assisted transaction involving, an affiliated insured bank or savings association. Current federal law provides that adequately capitalized and managed bank holding companies from any state may acquire banks and bank holding companies located in any other state, subject to certain conditions. Banks are permitted to create interstate branching networks in states that do not "opt out" of interstate branching. The laws and regulations to which M&I is subject are constantly under review by Congress, regulatory agencies and state legislatures. On November 12, 1999, President Clinton signed important legislation passed by Congress to overturn Depression-era restrictions on affiliations by banking organizations. This comprehensive legislation, referred to as the Gramm-Leach-Bliley Act (the "Act"), eliminates certain barriers to and restrictions on affiliations between banks and securities firms, insurance companies and other financial services organizations. The Act provides for a new type of "financial holding company" structure under which affiliations among these entities may occur, subject to the regulation of the Federal Reserve Board and regulation of affiliates by the functional regulators, including the Securities and Exchange Commission and state insurance regulators. In addition, the Act permits certain non-banking financial and financially related activities to be conducted by operating subsidiaries of a national bank. Under the Act, a bank holding company may become certified as a financial holding company by filing a notice with the Federal Reserve Board, together with a certification that the bank holding company meets certain criteria, including capital, management and Community Reinvestment Act requirements. The Act contains a number of provisions allocating regulatory authority among the Federal Reserve Board, other banking regulators, the Securities and Exchange Commission and state insurance regulators. In addition, the Act imposes strict new privacy disclosure and "opt out" requirements regarding the ability of financial institutions to share personal non-public customer information with third parties. Other important provisions of the Act permit merchant banking and venture capital activities, and insurance underwriting, to be conducted by a subsidiary of a financial holding company, and municipal securities underwriting activities to be conducted directly by a national bank or by its subsidiary. Under the Act, a financial holding company may engage in a broad list of "financial activities," and any non-financial activity that the Federal Reserve Board determines is "complementary" to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system. While certain provisions of the Act became effective on November 12, 1999, other provisions are subject to delayed effective dates, and in some cases, will be implemented only upon the adoption by federal regulatory agencies of rules prescribed by the Act. The earnings and business of M&I and its bank subsidiaries also are affected by the general economic and political conditions in the United States and abroad and by the monetary and fiscal policies of various federal agencies. The FRB impacts the competitive conditions under which M&I operates by determining the cost of funds obtained from money market sources for lending and investing and by exerting influence on interest rates and credit conditions. In addition, legislative and economic factors can be expected to have an ongoing impact on the competitive environment within the financial services industry. The impact of fluctuating economic conditions and federal regulatory policies on the future profitability of M&I and its subsidiaries cannot be predicted with certainty. 3 5 SELECTED STATISTICAL INFORMATION Statistical information relating to M&I and its subsidiaries on a consolidated basis is set forth as follows: (1) Average Balance Sheets and Analysis of Net Interest Income for each of the last three years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations. (2) Analysis of Changes in Interest Income and Interest Expense for each of the last two years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations. (3) Nonaccrual, Past Due and Restructured Loans and Leases for each of the last five years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations. (4) Summary of Loan and Lease Loss Experience for each of the last five years (including the narrative discussion) is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations. (5) Return on Average Shareholders' Equity, Return on Average Assets and other statistical ratios for each of the last five years can be found in Item 6, Selected Financial Data. The following tables set forth certain statistical information relating to M&I and its subsidiaries on a consolidated basis. INVESTMENT SECURITIES The amortized cost of M&I's consolidated investment securities, other than trading and other short-term investments, at December 31 of each year are ($ in thousands):
1999 1998 1997 ---------- ---------- ---------- U.S. Treasury and government agencies............ $3,924,192 $3,658,730 $4,051,239 States and political subdivisions................ 1,277,638 1,051,712 926,129 Other............................................ 377,289 304,174 326,329 ---------- ---------- ---------- $5,579,119 $5,014,616 $5,303,697 ========== ========== ==========
The maturities, at amortized cost, and weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 35% tax rate) of investment securities at December 31, 1999 are ($ in thousands):
AFTER ONE BUT AFTER FIVE BUT WITHIN ONE WITHIN FIVE WITHIN TEN AFTER TEN YEAR YEARS YEARS YEARS TOTAL ------------------ ------------------ ---------------- ---------------- ------------------ AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ---------- ----- ---------- ----- -------- ----- -------- ----- ---------- ----- U.S. Treasury and government agencies................... $ 918,073 6.52% $2,302,368 6.57% $671,094 6.43% $ 32,657 7.02% $3,924,192 6.54% States and political subdivisions............... 53,485 6.50 324,449 6.82 286,122 7.08 613,582 7.39 1,277,638 7.14 Other........................ 34,488 7.28 171,373 6.73 18,451 7.94 152,977 5.55 377,289 6.36 ---------- ---- ---------- ---- -------- ---- -------- ---- ---------- ---- $1,006,046 6.54% $2,798,190 6.61% $975,667 6.65% $799,216 7.02% $5,579,119 6.66% ========== ==== ========== ==== ======== ==== ======== ==== ========== ====
4 6 TYPES OF LOANS AND LEASES M&I's consolidated loans and leases, classified by type, at December 31 of each year are ($ in thousands):
1999 1998 1997 1996 1995 ----------- ----------- ----------- ---------- ---------- Commercial, financial and agricultural................ $ 4,691,996 $ 4,025,663 $ 3,346,101 $2,904,341 $2,917,406 Industrial development revenue bonds....................... 62,861 52,174 49,126 32,241 29,358 Real estate: Construction................ 494,558 425,442 458,670 394,228 386,235 Mortgage: Residential.............. 4,941,450 4,045,022 4,146,416 2,560,936 2,325,805 Commercial............... 4,034,771 3,667,924 3,450,897 2,477,652 2,286,537 ----------- ----------- ----------- ---------- ---------- Total mortgage...... 8,976,221 7,712,946 7,597,313 5,038,588 4,612,342 Personal...................... 1,299,416 1,166,541 1,161,608 1,181,846 1,169,920 Lease financing............... 810,009 613,400 489,094 331,505 277,680 ----------- ----------- ----------- ---------- ---------- 16,335,061 13,996,166 13,101,912 9,882,749 9,392,941 Less: Allowance for loan and lease losses................... 225,862 226,052 208,651 161,659 166,815 ----------- ----------- ----------- ---------- ---------- Net loans and leases.......... $16,109,199 $13,770,114 $12,893,261 $9,721,090 $9,226,126 =========== =========== =========== ========== ==========
LOAN AND LEASE BALANCES AND MATURITIES The analysis of selected loan and lease maturities at December 31, 1999 and the rate structure for the categories indicated are ($ in thousands):
RATE STRUCTURE OF LOANS AND LEASES MATURITY DUE AFTER ONE YEAR -------------------------------------------------- ---------------------------------- OVER ONE WITH PRE- WITH ONE YEAR YEAR THROUGH OVER FIVE DETERMINED FLOATING OR LESS FIVE YEARS YEARS TOTAL RATE RATE TOTAL ---------- ------------ --------- ---------- ---------- -------- ---------- Commercial, financial and agricultural... $2,915,367 $1,596,930 $179,699 $4,691,996 $1,393,358 $383,271 $1,776,629 Industrial development revenue bonds.............. 11,387 11,275 40,198 62,861 42,678 8,796 51,474 Real estate -- construction....... 281,979 212,579 -- 494,558 154,427 58,152 212,579 Lease financing...... 156,644 636,672 16,693 810,009 653,365 -- 653,365 ---------- ---------- -------- ---------- ---------- -------- ---------- $3,365,377 $2,457,456 $236,590 $6,059,424 $2,243,828 $450,219 $2,694,047 ========== ========== ======== ========== ========== ======== ==========
Notes: (1) Scheduled repayments are reported in the maturity category in which the payments are due based on the terms of the loan agreements. Demand loans, loans having no stated schedule of repayments and no stated maturity, and over-drafts are reported as due in one year or less. (2) Amounts shown for the rate structure of loans and leases due after one year include the estimated effect arising from the use of interest rate swaps. NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES Generally, a loan is placed on nonaccrual if payment of interest is more than 60 days delinquent and the loan has been determined by management to be a "problem" loan. In addition, loans which are past due 5 7 90 days or more as to interest or principal are also placed on nonaccrual. Exceptions to these rules are generally only for loans fully collateralized by readily marketable securities or other relatively risk free collateral. POTENTIAL PROBLEM LOANS AND LEASES At December 31, 1999 the Corporation had $14.0 million of loans for which payments are presently current, but the borrowers are experiencing serious financial problems. These loans are subject to constant management attention and their classification is reviewed on a quarterly basis. DEPOSITS The average amount of and the average rate paid on selected deposit categories for each of the years ended December 31 is as follows ($ in thousands):
1999 1998 1997 ------------------ ------------------ ------------------ AMOUNT RATE AMOUNT RATE AMOUNT RATE ----------- ---- ----------- ---- ----------- ---- Noninterest bearing demand deposits........................ $ 2,663,609 $ 2,545,724 $ 2,301,097 Interest bearing demand deposits........................ 1,116,919 1.54% 1,129,725 1.85% 1,017,535 1.89% Savings deposits.................. 5,740,898 3.86 5,145,798 4.02 3,921,297 3.88 Time deposits..................... 6,635,476 5.23 5,935,968 5.67 4,999,866 5.78 ----------- ----------- ----------- Total deposits.......... $16,156,902 $14,757,215 $12,239,795 =========== =========== ===========
The maturity distribution of time deposits (CDs $100,000 and over and other time) issued in amounts of $100,000 and over and outstanding at December 31, 1999 ($ in thousands) is: Three months or less..................................... $ 527,200 Over three and through six months........................ 311,685 Over six and through twelve months....................... 320,212 Over twelve months....................................... 755,078 ---------- $1,914,175 ==========
At December 31, 1999, time deposits issued by foreign offices totaled $1.33 billion. SHORT-TERM BORROWINGS Information related to M&I's funds purchased and security repurchase agreements for the last three years is as follows ($ in thousands):
1999 1998 1997 ---------- ---------- ---------- Amount outstanding at year end................. $1,402,077 $1,712,165 $1,486,665 Average amount outstanding during the year..... 2,276,978 2,042,371 1,820,744 Maximum amount outstanding at any month's end.......................................... 2,609,501 2,541,006 1,987,883 Weighted average interest rate at year end..... 3.95% 4.39% 5.70% Weighted average interest rate during the year......................................... 5.00% 5.36% 5.51%
FORWARD-LOOKING STATEMENTS This report contains statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements other than historical facts contained or incorporated by reference in this report. These statements speak of M&I's plans, goals, beliefs or expectations, refer to estimates or use similar terms. Future filings by M&I with the Securities and Exchange Commission, and statements other than historical facts contained in written material, press releases and oral statements issued by, or on behalf of, M&I may also constitute forward-looking statements. 6 8 Forward-looking statements are subject to significant risks and uncertainties, and M&I's actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause actual results to differ from the results discussed in forward-looking statements include, but are not limited to: - General economic conditions, either nationally or in the states in which M&I does business; - Legislation or regulatory changes which adversely affect the businesses in which M&I is engaged; - Changes in the interest rate environment which reduce interest margins; - Changes in securities markets with respect to the market value of financial assets and the level of volatility in certain markets such as foreign exchange; - Significant increases in competition in the banking and financial services industry resulting from industry consolidation, regulatory changes and other factors, as well as actions taken by particular competitors; - M&I's success in continuing to generate significant levels of new business in its existing markets and in identifying and penetrating targeted markets; - Changes in consumer spending, borrowing and saving habits; - Technological changes; - Acquisitions and unanticipated occurrences which delay or reduce the expected benefits of acquisitions; - M&I's ability to increase market share and control expenses; - The effect of compliance with legislation or regulatory changes; - The effect of changes in accounting policies and practices; and - The costs and effects of unanticipated litigation and of unexpected or adverse outcomes in such litigation. All forward-looking statements contained in this report or which may be contained in future statements made for or on behalf of M&I are based upon information available at the time the statement is made and M&I assumes no obligation to update any forward-looking statement. ITEM 2. PROPERTIES M&I and M&I Marshall & Ilsley Bank ("M&I Bank") occupy offices on all or portions of 15 floors of a 21-story building located at 770 North Water Street, Milwaukee, Wisconsin. M&I Bank owns the building and its adjacent 10-story parking lot and leases the remaining floors to a professional tenant. In addition, various subsidiaries of M&I lease commercial office space in downtown Milwaukee office buildings near the 770 North Water Street facility. M&I Bank also owns or leases various branch offices located in Milwaukee and in surrounding suburban communities. M&I has 26 subsidiary banks throughout Wisconsin. M&I Thunderbird Bank, a wholly-owned bank subsidiary of M&I, is located in Phoenix, Arizona and has 13 offices in Phoenix and the surrounding Maricopa County communities. M&I Bank FSB, a federal savings bank subsidiary of M&I, is located in Las Vegas, Nevada and has 4 offices in the northern Chicago, Illinois suburbs and a branch in Naples, Florida. The subsidiary banks and savings association occupy modern facilities which are owned or leased. M&I owns a data processing facility located in Brown Deer, a suburb of Milwaukee, from which M&I Data Services conducts data processing activities. M&I owns an 160,000 square foot facility in Milwaukee that houses the software development teams of M&I Data Services. Properties leased by M&I for M&I Data Services also include commercial office space in Brown Deer, a data processing site in Oak Creek, Wisconsin, and processing centers and sales offices in various cities throughout the United States. 7 9 ITEM 3. LEGAL PROCEEDINGS M&I is not currently involved in any material pending legal proceedings other than litigation of a routine nature and various legal matters which are being defended and handled in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME OF OFFICER OFFICE - --------------- ------ J.B. Wigdale Chairman of the Board since December 1992, Chief Executive Age 63 Officer since October 1992, Director since December 1988, Vice Chairman of the Board, December 1988 to December 1992, Marshall & Ilsley Corporation; Chairman of the Board since January 1989, Chief Executive Officer since 1987, Director since 1981, M&I Marshall & Ilsley Bank; Director -- M&I First National Leasing Corp., M&I Mortgage Corp., M&I Data Services, M&I Insurance Services, Inc., M&I Brokerage Services, Inc., M&I Capital Markets Group L.L.C., Marshall & Ilsley Trust Company and M&I National Trust Company. D.J. Kuester Director since February 1994, President since 1987, Marshall Age 58 & Ilsley Corporation; President and Director since January 1989, M&I Marshall & Ilsley Bank; Chairman of the Board and Director, M&I Data Services; Director -- M&I Support Services Corp.; Director and President -- M&I Insurance Company of Arizona, Inc. G.H. Gunnlaugsson Director since February 1994, Executive Vice President and Age 55 Chief Financial Officer since 1987, Marshall & Ilsley Corporation; Vice President of M&I Marshall & Ilsley Bank since 1976; Vice President and Director -- M&I Insurance Company of Arizona, Inc.; Director -- M&I Mortgage Corp., M&I Data Services, M&I Insurance Services, Inc., M&I Brokerage Services, Inc., M&I Capital Markets Group L.L.C. and M&I Bank FSB. T.M. Bolger Senior Vice President and Chief Credit Officer since 1994, Age 50 Marshall & Ilsley Corporation; Executive Vice President since 1997, M&I Marshall & Ilsley Bank; Director -- Richter-Schroeder Company, Inc. and M&I Bank FSB. J.L. Delgadillo Senior Vice President of Marshall & Ilsley Corporation since Age 47 1993; Chief Executive Officer since January 1998 and Director of M&I Data Services since 1994; President and Chief Operating Officer of M&I Data Services since 1993; Senior Vice President of M&I Data Services from 1989 to 1993; Director and Executive Vice President -- M&I EastPoint Technology, Inc. since 1996. S.T. Happ Senior Vice President since April 1999, Marshall & Ilsley Age 38 Corporation; President, Chief Executive Officer and Director since January 1994, M&I Mortgage Corp.; Vice President, M&I Bank FSB; President and Director, M&I Mortgage Reinsurance Corporation.
8 10
D.R. Jones Senior Vice President since December 1993, Vice President and Affiliate Bank Age 54 Manager since May 1993, Vice President and South Regional Manager from March 1989 to May 1993, Marshall & Ilsley Corporation; Director -- M&I Support Services Corp. P.R. Justiliano Senior Vice President since 1994 and Corporate Controller since April 1989, Age 49 Vice President, 1986 to 1994, Marshall & Ilsley Corporation; Director and Treasurer, M&I Insurance Company of Arizona, Inc.; Director -- M&I Bank FSB. T.J. O'Neill Senior Vice President since April 1997, Marshall & Ilsley Corporation; Age 39 Senior Vice President since 1997, Vice President since 1990, M&I Marshall & Ilsley Bank; President and Director, M&I Bank FSB and M&I Dealer Finance, Inc.; Director -- M&I Support Services Corp. J.L. Roberts Senior Vice President of Marshall & Ilsley Corporation since 1994; Senior Age 47 Vice President since 1994, Vice President and Controller from 1986 to 1995, M&I Marshall & Ilsley Bank; President and Director of M&I Support Services Corporation since 1995; Director -- M&I Bank FSB. T.A. Root Senior Vice President since 1998, Audit Director since May 1996, Vice Age 43 President from 1991 to 1998, Marshall & Ilsley Corporation; Vice President and Auditor since 1993, M&I Marshall & Ilsley Bank. L.I. Sherman Senior Vice President, Director of Marketing of Marshall & Ilsley Age 51 Corporation since 1996; Senior Vice President/Director of Marketing from 1989 to 1995, Old Kent Financial Corp. G.D. Strelow Senior Vice President and Human Resources Director of Marshall & Ilsley Age 65 Corporation since 1993; Vice President and Human Resources Director of M&I Marshall & Ilsley Bank since 1980. J.V. Williams Senior Vice President since December 1997, Marshall & Ilsley Corporation; Age 55 Executive Vice President and Chief Operating Officer since January 1999, Marshall & Ilsley Trust Company; President, Chief Executive Officer and Director since January 1996, M&I Insurance Services, Inc.; Senior Vice President since 1994, M&I Marshall & Ilsley Bank; President, Chief Executive Officer and Director since February 1989, M&I Brokerage Services, Inc.; Director -- M&I Investment Management Corp., M&I Portfolio Services, Inc. and M&I National Trust Company. D.H. Wilson Senior Vice President and Treasurer since December 1996, Vice President and Age 40 Treasurer since 1995, Marshall & Ilsley Corporation; Vice President, Treasury from June 1992 to May 1995, ABN AMRO/LaSalle National Bank; Director -- M&I Custody of Nevada, Inc.
9 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS STOCK LISTING M&I's common stock is traded under the symbol "MI" on the New York Stock Exchange. Common dividends declared and the price range for M&I's common stock for each of the last five years can be found in Item 8, Consolidated Financial Statements, Quarterly Financial Information. A discussion of the regulatory restrictions on the payment of dividends can be found under Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations, and in Note 13 in Item 8, Consolidated Financial Statements. HOLDERS OF COMMON EQUITY At December 31, 1999, M&I had approximately 20,549 record holders of its Common Stock. 10 12 ITEM 6. SELECTED FINANCIAL DATA CONSOLIDATED SUMMARY OF EARNINGS YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- -------- INTEREST INCOME: Loans and Leases................. $1,156,775 $1,085,829 $ 921,161 $ 804,951 $817,247 Investment Securities: Taxable....................... 269,668 280,377 240,238 198,787 146,498 Tax Exempt.................... 58,820 52,969 45,420 30,718 18,112 Other Short-term Investments..... 11,321 14,869 13,514 11,365 14,439 ---------- ---------- ---------- ---------- -------- Total Interest Income.... 1,496,584 1,434,044 1,220,333 1,045,821 996,296 INTEREST EXPENSE: Deposits......................... 585,864 564,540 460,418 392,473 363,488 Short-term Borrowings............ 142,294 126,624 111,193 63,892 48,390 Long-term Borrowings............. 63,145 66,810 54,175 53,615 63,701 ---------- ---------- ---------- ---------- -------- Total Interest Expense... 791,303 757,974 625,786 509,980 475,579 ---------- ---------- ---------- ---------- -------- Net Interest Income................ 705,281 676,070 594,547 535,841 520,717 Provision for Loan and Lease Losses........................... 25,419 27,090 17,633 15,634 16,558 ---------- ---------- ---------- ---------- -------- Net Interest Income After Provision for Loan and Lease Losses........ 679,862 648,980 576,914 520,207 504,159 OTHER INCOME: Data Processing Services......... 485,941 412,632 343,846 268,526 213,914 Trust Services................... 100,963 88,496 78,595 70,190 64,176 Net Securities Gains (Losses).... 7,676 30,783 4,127 15,471 5,189 Other............................ 251,194 224,422 181,901 157,087 146,319 ---------- ---------- ---------- ---------- -------- Total Other Income....... 845,774 756,333 608,469 511,274 429,598 OTHER EXPENSE: Salaries and Benefits............ 583,659 523,606 460,164 392,711 352,466 Merger/Restructuring............. -- 23,373 -- -- -- Other............................ 414,038 393,049 337,047 320,821 268,353 ---------- ---------- ---------- ---------- -------- Total Other Expense...... 997,697 940,028 797,211 713,532 620,819 ---------- ---------- ---------- ---------- -------- Income Before Taxes................ 527,939 465,285 388,172 317,949 312,938 Provision for Income Taxes......... 173,428 163,962 131,487 111,314 111,247 ---------- ---------- ---------- ---------- -------- Net Income............... $ 354,511 $ 301,323 $ 256,685 $ 206,635 $201,691 ========== ========== ========== ========== ======== PER SHARE: Basic Net Income................. $ 3.32 $ 2.79 $ 2.62 $ 2.12 $ 2.04 Diluted Net Income............... 3.14 2.61 2.43 1.98 1.91 Common Dividends Declared........ 0.940 0.860 0.785 0.720 0.645 OTHER SIGNIFICANT DATA: Year-End Common Stock Price...... $ 62.81 $ 58.44 $ 62.13 $ 34.63 $ 26.00 Return on Average Shareholders' Equity........................ 16.32% 14.13% 16.49% 15.03% 15.91% Return on Average Assets......... 1.56 1.45 1.51 1.41 1.48 Dividend Payout Ratio............ 29.94 32.95 32.30 36.36 33.77 Average Equity to Average Assets Ratio......................... 9.57 10.26 9.15 9.39 9.27 Ratio of Earnings to Fixed Charges* Excluding Interest on Deposits.................... 3.38x 3.25x 3.21x 3.52x 3.62x Including Interest on Deposits.................... 1.65x 1.60x 1.61x 1.61x 1.65x
- --------------- * See Exhibit 12 for detailed computation of these ratios. 11 13 CONSOLIDATED AVERAGE BALANCE SHEETS YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA) Assets
1999 1998 1997 1996 1995 ------------ ------------ ----------- ----------- ----------- Cash and Due from Banks.................. $ 638,399 $ 652,988 $ 614,824 $ 586,985 $ 588,012 Short-term Investments................... 186,105 247,049 206,295 188,082 237,094 Trading Securities....................... 37,277 43,404 40,822 25,264 10,346 Investment Securities: Taxable.............................. 4,208,498 4,317,668 3,570,225 3,104,010 2,405,046 Tax Exempt........................... 1,217,847 1,078,333 913,130 668,913 374,014 Loans and Leases: Commercial........................... 4,359,880 3,749,518 3,128,568 2,947,631 2,842,688 Real Estate.......................... 8,639,360 7,967,626 6,309,818 5,139,926 5,268,669 Personal............................. 1,204,931 1,154,110 1,147,203 1,148,511 1,165,852 Lease Financing...................... 705,054 532,043 394,024 293,448 262,566 ------------ ------------ ----------- ----------- ----------- Total Loans and Leases................... 14,909,225 13,403,297 10,979,613 9,529,516 9,539,775 Allowance for Loan and Lease Losses...... 228,500 216,456 174,525 166,886 166,350 ------------ ------------ ----------- ----------- ----------- Net Loans and Leases..................... 14,680,725 13,186,841 10,805,088 9,362,630 9,373,425 Other Assets............................. 1,732,112 1,263,890 851,030 709,803 681,997 ------------ ------------ ----------- ----------- ----------- Total Assets.................... $ 22,700,963 $ 20,790,173 $17,001,414 $14,645,687 $13,669,934 ============ ============ =========== =========== =========== Liabilities and Shareholders' Equity Noninterest Bearing Deposits............. $ 2,663,609 $ 2,545,724 $ 2,301,097 $ 2,116,197 $ 2,003,662 Interest Bearing Deposits: Savings and NOW Accounts............... 2,027,658 2,140,380 1,915,888 1,905,775 2,078,354 Money Market Savings................... 4,830,159 4,135,143 3,022,944 2,597,732 2,113,550 CDs of $100 or more.................... 1,694,301 1,547,816 1,334,532 933,164 693,345 Other.................................. 4,941,175 4,388,152 3,665,334 3,344,644 3,393,785 ------------ ------------ ----------- ----------- ----------- Total Deposits........................... 16,156,902 14,757,215 12,239,795 10,897,512 10,282,696 Short-term Borrowings.................... 2,803,834 2,357,161 2,017,829 1,218,177 850,258 Long-term Borrowings..................... 1,009,132 1,046,321 787,819 823,397 959,022 Accrued Expenses and Other Liabilities... 558,978 496,439 399,605 331,743 310,332 Shareholders' Equity..................... 2,172,117 2,133,037 1,556,366 1,374,858 1,267,626 ------------ ------------ ----------- ----------- ----------- Total Liabilities and Shareholders' Equity.......... $ 22,700,963 $ 20,790,173 $17,001,414 $14,645,687 $13,669,934 ============ ============ =========== =========== =========== Other Significant Data: Book Value Per Share at Year End....... $ 19.47 $ 19.88 $ 17.94 $ 13.75 $ 13.34 Average Common Shares Outstanding...... 104,940,787 105,918,139 95,831,283 95,895,547 97,794,476 Shareholders of Record at Year End*.... 20,549 21,410 21,157 18,460 18,659 Employees at Year End*................. 11,433 10,756 10,227 8,995 9,079 Historically Reported Credit Quality Ratios:* Net Loan and Lease Charge-offs to Average Loans and Leases............. 0.17% 0.07% 0.13% 0.23% 0.10% Total Nonperforming Loans and Leases** & OREO to End of Period Loans and Leases & OREO........................ 0.75 0.85 0.70 0.81 0.79 Allowance for Loan and Lease Losses to End of Period Loans and Leases....... 1.38 1.62 1.62 1.68 1.82 Allowance for Loan and Lease Losses to Total Nonperforming Loans and Leases**......................... 193 206 275 225 261
- --------------- * Not restated for acquisitions accounted for as pooling of interests. ** Loans and leases nonaccrual, restructured, and past due 90 days or more. 12 14 YIELD & COST ANALYSIS YEARS ENDED DECEMBER 31 (TAX EQUIVALENT BASIS)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Average Rates Earned: Loans & Securitized ARMs.................................. 7.77% 8.09% 8.36% 8.41% 8.58% Investment Securities -- Taxable.......................... 6.26 6.26 6.62 6.29 6.09 Investment Securities -- Tax Exempt....................... 7.13 7.44 7.40 6.76 6.89 Trading Securities........................................ 5.08 5.13 5.01 4.83 5.05 Short-term Investments.................................... 5.08 5.13 5.57 5.40 5.89 Average Rates Paid: Interest Bearing Deposits................................. 4.34% 4.62% 4.63% 4.47% 4.39% Short-term Borrowings..................................... 5.07 5.37 5.51 5.24 5.69 Long-term Borrowings...................................... 6.26 6.39 6.88 6.51 6.64 M&I Marshall & Ilsley Bank Average Prime Rate............. 8.02 8.35 8.44 8.27 8.83 Summary Yield and Cost Analysis: (As a % of Average Assets) Average Yield............................................. 6.72% 7.02% 7.31% 7.25% 7.37% Average Cost.............................................. 3.49 3.64 3.68 3.48 3.48 ---- ---- ---- ---- ---- Net Interest Income....................................... 3.23 3.38 3.63 3.77 3.89 Provision for Loan and Lease Losses....................... 0.11 0.13 0.10 0.11 0.12 ---- ---- ---- ---- ---- Net Interest Income After Provision for Loan and Lease Losses................................................. 3.12 3.25 3.53 3.66 3.77 Net Securities Gains (Losses)............................. 0.03 0.15 0.02 0.11 0.04 Other Income.............................................. 3.69 3.49 3.55 3.39 3.10 Other Expense............................................. 4.39 4.52 4.68 4.88 4.54 ---- ---- ---- ---- ---- Income Before Income Taxes................................ 2.45 2.37 2.42 2.28 2.37 Provision for Income Taxes................................ 0.89 0.92 0.91 0.87 0.89 ---- ---- ---- ---- ---- Net Income........................................ 1.56% 1.45% 1.51% 1.41% 1.48% ==== ==== ==== ==== ====
13 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Net income in 1999 amounted to $354.5 million or $3.14 per share on a diluted basis. The return on average assets and return on average equity were 1.56% and 16.32%, respectively. By comparison, 1998 net income was $301.3 million, diluted earnings per share was $2.61, the return on average assets was 1.45% and the return on average equity was 14.13%. For the year ended December 31, 1997, net income was $256.7 million or $2.43 per share diluted and the returns on average assets and average equity were 1.51% and 16.49%, respectively. The results of operations and financial position for the periods presented include the effects of the acquisitions of certain assets and liabilities by the Data Services Division of the Corporation from the dates of merger. All three transactions were accounted for as purchases. Cash consideration in the three transactions aggregated $87 million. On April 1, 1998, the Corporation completed the merger with Advantage Bancorp, Inc. ("Advantage") a Kenosha, Wisconsin based savings and loan holding company by issuing 1.2 shares of the Corporation's Common Stock for each share of Advantage Common Stock. At the time of merger, Advantage had consolidated assets of $1.0 billion. The transaction was accounted for as a pooling of interests. In conjunction with this transaction, the Corporation recorded a merger/restructuring charge of approximately $23.4 million ($16.3 million after-tax). The results of operations and average financial position for the periods presented include the effects of the acquisition of Security Capital Corporation ("Security") from the date of merger which was October 1, 1997. M&I paid approximately $376 million in cash and issued 12.3 million shares of its common stock in a transaction that was accounted for as a purchase. Security had approximately $2.2 billion of consolidated loans and $2.3 billion of consolidated deposits at the time of merger. The following is a summary of the unusual items reported in 1998 and the comparative operating income, earnings per share and return on average equity based on operating income for 1999, 1998, and 1997.
1999 1998 1997 ------ ------ ------ ($ IN MILLIONS, EXCEPT PER SHARE DATA) Net income................................................. $354.5 $301.3 $256.7 Special charges Merger/Restructuring charges............................. -- 16.3 -- ------ ------ ------ Total special charges...................................... -- 16.3 -- ------ ------ ------ Operating income........................................... $354.5 $317.6 $256.7 ====== ====== ====== Operating income per share Basic.................................................... $ 3.32 $ 2.94 $ 2.62 Diluted.................................................. 3.14 2.76 2.43 Operating income to average equity......................... 16.32% 14.89% 16.49%
14 16 The following reconciles operating 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 benefit or expense, 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 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
1999 1998 1997 ------ ------ ------ Operating income........................................... $354.5 $317.6 $256.7 Amortization, net of tax................................... 23.8 21.0 8.5 ------ ------ ------ Tangible operating income.................................. $378.3 $338.6 $265.2 ====== ====== ====== Tangible operating income per share Basic.................................................... $ 3.55 $ 3.14 $ 2.71 Diluted.................................................. 3.35 2.94 2.51 Return on average tangible assets.......................... 1.69% 1.65% 1.57% Return on average tangible equity.......................... 20.49 18.48 18.35
OPERATING INCOME STATEMENT COMPONENTS AS A PERCENT OF AVERAGE TOTAL ASSETS The following table presents a summary of the major elements of the consolidated operating income statements for the years ended December 31, 1999, 1998 and 1997. Each of the elements is stated as a percent of consolidated average total assets outstanding for the respective year and, where appropriate, is converted to a fully taxable equivalent basis (FTE). The results exclude the special charges in 1998 as previously discussed.
1999 1998 1997 ----- ----- ----- Interest Income............................................. 6.72% 7.02% 7.31% Interest Expense............................................ (3.49) (3.64) (3.68) ----- ----- ----- Net Interest Income......................................... 3.23 3.38 3.63 Provision for Loan and Lease Losses......................... (0.11) (0.13) (0.10) Net Securities Gains........................................ 0.03 0.15 0.02 Other Income................................................ 3.69 3.49 3.55 Other Expense............................................... (4.39) (4.41) (4.68) ----- ----- ----- Income Before Income Taxes.................................. 2.45 2.48 2.42 Income Taxes................................................ (0.89) (0.95) (0.91) ----- ----- ----- Operating Income To Average Assets.......................... 1.56% 1.53% 1.51% ===== ===== =====
NET INTEREST INCOME Net interest income in 1999 amounted to $705.3 million, an increase of $29.2 million or 4.3% compared with net interest income of $676.1 million in 1998. Average earning assets in 1999 amounted to $20.6 billion compared to $19.1 billion in 1998, an increase of $1.5 billion or 7.7%. Average loans and leases, including securitized adjustable rate mortgage loans (ARMs), increased $1.1 billion or 7.8%. The remaining growth in average earning assets was primarily attributable to investment securities. Average interest bearing liabilities increased $1.7 billion or 10.8% in 1999 compared to 1998. Average interest bearing deposits increased $1.3 billion or 10.5%. Average short-term borrowings increased $447 million while average long-term borrowings decreased $37 million. Average noninterest bearing deposits increased $118 million or 4.6% in 1999 compared to the prior year. The increase in average interest bearing 15 17 liabilities in 1999 reflects funding of earning asset growth along with the effect of cash paid for acquisitions and the effect of treasury share repurchases. The growth and composition of the Corporation's average loan and lease portfolio for the current year and prior two years are reflected in the following table. The securitized ARM loans that are classified as investment securities available for sale are included to provide a more meaningful comparison ($ in millions):
PERCENT GROWTH ------------ 1999 1998 VS VS 1999 1998 1997 1998 1997 --------- --------- --------- ----- ---- Commercial Loans.................................. $ 4,359.9 $ 3,749.5 $ 3,128.6 16.3% 19.8% Real Estate Loans: Construction.................................... 430.1 421.3 405.5 2.1 3.9 Commercial Mortgages............................ 3,845.3 3,545.1 2,787.7 8.5 27.2 Residential Mortgages........................... 4,363.9 4,001.3 3,116.6 9.1 28.4 Securitized ARM Loans........................... 536.6 919.3 618.2 (41.6) 48.7 --------- --------- --------- ----- ---- Total Real Estate Loans & ARMs.................... 9,175.9 8,887.0 6,928.0 3.3 28.3 Personal Loans: Student Loans................................... 257.9 268.8 280.8 (4.1) (4.3) Other Personal Loans............................ 947.0 885.3 866.4 7.0 2.2 --------- --------- --------- ----- ---- Total Personal Loans.............................. 1,204.9 1,154.1 1,147.2 4.4 0.6 Lease Financing Receivables: Commercial...................................... 335.0 329.6 292.0 1.6 12.9 Personal........................................ 370.1 202.4 102.0 82.8 98.4 --------- --------- --------- ----- ---- Total Lease Financing Receivables................. 705.1 532.0 394.0 32.5 35.0 --------- --------- --------- ----- ---- Total Consolidated Average Loans, Leases & ARMs... $15,445.8 $14,322.6 $11,597.8 7.8% 23.5% ========= ========= ========= ===== ==== Total Consolidated Average Loans, Leases & ARMs Total Commercial Banking........................ $ 8,870.0 $ 7,910.5 $ 6,437.1 12.1% 22.9% ========= ========= ========= ===== ==== Total Retail Banking............................ $ 6,575.8 $ 6,412.1 $ 5,160.7 2.6% 24.2% ========= ========= ========= ===== ==== Total Consolidated Average Loans and Leases....... $14,909.2 $13,403.3 $10,979.6 11.2% 22.1% ========= ========= ========= ===== ====
Compared to 1998, average loans, leases and ARMs increased $1.1 billion or 7.8%. Loan growth was primarily attributable to commercial banking. Total loan growth in commercial banking amounted to $960 million or 12.1% and was driven by commercial loan growth of $610 million and commercial real estate loan growth of $344 million. Retail banking loan growth amounted to $164 million or 2.6% primarily due to growth in home equity loans and lines of $400 million and $168 million of growth in lease financing receivables. Residential real estate loans and securitized ARM loans decreased $455 million which reflects, in part, the effect of increased prepayments throughout 1998 and early 1999 as customers refinanced to fixed rate loans and reduced demand in the second half of 1999 due to increases in interest rates. There were no ARM loan securitizations in 1999. Generally, the Corporation sells fixed rate residential real estate loans in the secondary market. One to four family residential real estate loans sold to investors amounted to $1.1 billion in 1999 compared to $2.2 billion in 1998. 16 18 The growth and composition of the Corporation's consolidated average deposits for the current year and prior two years are reflected below ($ in millions):
PERCENT GROWTH -------------- 1999 1998 VS VS 1999 1998 1997 1998 1997 --------- --------- --------- ----- ----- Noninterest Bearing Commercial....................... $ 1,720.3 $ 1,658.2 $ 1,499.5 3.7% 10.6% Personal......................... 558.7 508.9 452.3 9.8 12.5 Other............................ 384.6 378.6 349.3 1.6 8.4 --------- --------- --------- ---- ---- Total Noninterest Bearing Deposits......................... 2,663.6 2,545.7 2,301.1 4.6 10.6 Interest Bearing Savings and NOW.................. 2,027.6 2,140.4 1,915.9 (5.3) 11.7 Money Market..................... 4,830.2 4,135.1 3,022.9 16.8 36.8 Other CDs & Time................. 4,941.2 4,388.2 3,665.4 12.6 19.7 CDs Greater than $100,000........ 817.9 816.5 703.9 0.2 16.0 Brokered CDs..................... 876.4 731.3 630.6 19.8 16.0 --------- --------- --------- ---- ---- Total Interest Bearing Deposits.... 13,493.3 12,211.5 9,938.7 10.5 22.9 --------- --------- --------- ---- ---- Total Consolidated Average Deposits......................... $16,156.9 $14,757.2 $12,239.8 9.5% 20.6% ========= ========= ========= ==== ==== Total Bank Issued Deposits......... $13,513.5 $13,194.5 $11,421.8 2.4% 15.5% Total Wholesale Deposits........... 2,643.4 1,562.7 818.0 69.2 91.0 --------- --------- --------- ---- ---- Total Consolidated Average Deposits......................... $16,156.9 $14,757.2 $12,239.8 9.5% 20.6% ========= ========= ========= ==== ====
Due to strong earning asset growth, particularly loan growth, the Corporation made greater use of wholesale deposits in 1999 compared to the prior year. Wholesale deposits increased $1.1 billion or 69.2%, of which, eurodollar term and overnight deposits, which are included in Other CDs & Time, accounted for $870 million of the increase while brokered CDs increased $145 million. Money market savings, especially money market index accounts, and noninterest bearing deposits exhibited the greatest growth in bank issued deposits in 1999 compared to 1998. Average bank issued money market savings increased $630 million or 17.5% and noninterest bearing deposits increased $118 million or 4.6%. Average savings and NOW decreased $113 million or 5.3% in 1999 compared to the prior year. During 1999, M&I disposed of eight branches. Deposits and loans aggregating approximately $92 million and $31 million, respectively were divested in 1999. The net interest margin (FTE) as a percent of average earning assets was 3.58% in 1999 compared to 3.69% in 1998, a decrease of 11 basis points. The yield on earning assets decreased 25 basis points from 7.68% in 1998 to 7.43% in 1999 while the cost of interest bearing liabilities decreased 28 basis points from 4.85% in 1998 to 4.57% in 1999. The yield on loans, leases and securitized ARMs was 7.77% in 1999 compared to 8.09% in 1998, a decrease of 32 basis points. The decline in yield reflects, in part, run-off of higher yielding loans and securitized ARMs throughout 1998 and early 1999 as well as lower yields on new loans. Excluding the effects of Security purchase accounting premium amortization, the yields on loans, leases and securitized ARMs would have been 7.79% in 1999 and 8.18% in 1998, a decline of 39 basis points. Premium amortization associated with Security purchase accounting adjustments for fixed rate mortgage and home equity loans amounted to $4.0 million in 1999 compared to $11.2 million in 1998 which reflects a slowing of prepayments beginning in the second quarter of 1999. Loan and lease growth offset the yield decline and netted approximately $42 million or 64% of the increase in interest on earning assets on a FTE basis. The remaining increase in interest on earning assets is primarily attributable to investment securities. The total yield on the investment security portfolio, excluding securitized ARMs, decreased by approximately 17 19 7 basis points in 1999 compared to 1998. Premium amortization associated with Security purchase accounting adjustments for investment securities was $2.8 million in 1999 compared to $7.6 million in 1998. Excluding the effects of purchase accounting premium amortization, the yields on investment securities would have been 6.54% in 1999 and 6.72% in 1998, a decline of 18 basis points. Average investment securities, excluding Securitized ARM loans and fair market adjustments for available for sale securities, increased $456 million or 10.3%. The increase in volume offset the decline in yield and contributed $27 million or 41% of the increase in interest on earning assets on a FTE basis. The increase in the volume of interest bearing liabilities, primarily deposits and short-term borrowings accounted for the increase in interest paid on interest bearing liabilities in 1999. In addition to the use of wholesale deposits to fund earning asset growth, interest expense was adversely affected by the costs of acquisitions and the repurchase of treasury shares. The Corporation estimates that approximately $9.3 million of interest expense is attributable to the $317 million spent to repurchase common shares in 1999. During 1999, eight of the Corporation's banking affiliates began issuing bank notes. At December 31, 1999, bank notes, which are included in short-term borrowings, amounted to $550 million. See Note 11, Short-term Borrowings in Notes to Consolidated Financial Statements contained in Item 8 herein for further discussion regarding bank notes. During 1999, the Corporation issued $75 million of Series D medium-term notes which were used, in part, to refinance maturities of medium-term notes in 1999. No additional borrowings may occur under the existing medium-term note program and the Corporation anticipates filing a shelf registration in 2000 to be able to increase its capacity to issue additional debt. At December 31, 1999, the Corporation had receive fixed/pay floating interest rate swaps and interest rate floors designated as hedges against the interest rate volatility associated with variable rate loans, brokered callable CDs, brokered callable step-up CDs, retail callable CDs and equity index CDs. See Note 17, Financial Instruments with Off-Balance Sheet Risk in Notes to Consolidated Financial Statements contained in Item 8 herein for further discussion regarding the Corporation's use of derivative financial instruments. For 1999, the effect on net interest income resulting from the derivative financial instruments designated as hedges was a positive $7.1 million compared with a positive $5.1 million in 1998. In late December, 1998, the Corporation purchased $400 million of single premium bank-owned life insurance policies which insure the lives of certain officers of the Corporation and its affiliates. The Corporation is utilizing this vehicle to fund future employee benefit obligations. These purchases were funded by the maturities and sales of investment securities classified as available for sale. The net realizable values of bank-owned life insurance policies are a component of other assets in the consolidated balance sheets and periodic increases in the values are included as a component of other income. These transactions have the effect of reducing the Corporation's net interest income (and margin) and increasing its other income. Excluding the Security purchase accounting premium amortization, the effect of derivative financial instruments and the treasury common share repurchases in 1999, the net yield on interest earning assets was 3.62% in 1999 and 3.77% in 1998, a decline of 15 basis points. As previously discussed, the use of higher cost funding sources in lieu of core deposit growth and lower yielding assets all contributed to the decline. The Corporation's net interest margin will also continue to be negatively impacted by rising interest rates. In addition to continuing to seek less costly sources of funds, the Corporation may, among other things, consider divesting of lower yielding assets through sale or securitization in the future. Net interest income in 1998 amounted to $676.1 million, an increase of $81.6 million or 13.7% compared with net interest income of $594.5 million in 1997. Average earning assets in 1998 amounted to $19.1 billion compared to $15.7 billion in 1997, an increase of $3.4 billion or 21.5%. Average loans and leases, including securitized ARMs, increased $2.7 billion or 23.5% of which, approximately $1.7 billion was attributable to the Security merger. The remaining growth in average earning assets was primarily attributable to investment securities. Approximately $840 million of the growth is attributable to the Security merger. 18 20 Average interest bearing liabilities increased $2.9 billion or 22.5% in 1998 compared to 1997. Average interest bearing deposits increased $2.3 billion or 22.9%. Average short-term borrowings increased $339 million while average long-term borrowings increased $259 million. Average noninterest bearing deposits increased $245 million or 10.6% in 1998 compared to the prior year. The Security merger accounted for approximately $1.8 billion of the growth in average deposits, $129 million of the growth in average short-term borrowings and increased average long-term borrowings by approximately $348 million. In 1998, $132 million of FHLB advances matured. Approximately $75 million was refinanced with new FHLB advances. During 1997, the remaining $130.0 million of the Corporation's banking subsidiaries' bank notes matured and were refinanced primarily with short-term borrowings and brokered certificates of deposit. In addition, $104.3 million of the Corporation's Medium Term Notes Series B and C matured and were refinanced with Medium Term Notes Series C and D. Medium Term Note maturities amounted to $1.8 million in 1998. Average loans associated with commercial banking increased $1.5 billion while average loans associated with retail banking increased $1.3 billion in 1998 compared to 1997. As previously discussed, the annual loan growth is largely attributable to the Security merger. Adjusting for Security's 1997 pre-merger average balances total consolidated average loans, leases and ARMs grew approximately $618 million or 4.5% in 1998, with commercial loans growing approximately $574 million or 18.1%, commercial real estate loans increasing approximately $187 million or 5.6%, lease financing receivables growing approximately $125 million or 30.6%, and construction loans growing approximately $16 million or 3.9%. Partially offsetting those increases were reductions of approximately $270 million or 5.2% in residential real estate loans and ARMs and approximately $13 million or 1.1% for personal loans. The decrease in residential real estate and ARM loans reflects the effect of increased prepayments associated with customer refinancings to fixed rate loans in response to declining interest rates. Generally, the Corporation sells fixed rate residential real estate loans in the secondary market. One to four family residential real estate loans sold to investors amounted to $2.2 billion in 1998 compared to $0.8 billion in 1997. During 1998, approximately $259 million of ARM loans were converted into government guaranteed agency pool securities. ARM loans totaling approximately $218 million were securitized in 1997. Approximately $580 million of securitized ARMs were acquired in the Security merger. Money market savings exhibited the greatest growth when comparing average deposits in 1998 to average deposits in 1997. Average money market savings increased $1.1 billion in 1998 over 1997, of which, approximately $0.6 billion of the increase is attributable to the Security merger. The increase in Other CDs & Time in 1998 compared with 1997 reflects, in part, issuance of Callable CDs to customers and a $300 million or 121.4% increase in foreign time deposits, primarily eurodollar deposits. The Corporation has a brokered CD program to acquire longer-term CDs with maturities of one year or more in order to provide a stable source of funds that over time is less costly than Bank Notes. During the second quarter of 1997, the Corporation began issuing brokered CDs that are callable at the option of the Corporation. Concurrently with the callable issues, the Corporation entered into receive fixed interest rate swaps which are callable at the option of the counterparties. The call provisions are generally exercisable one year after issuance. Brokered callable CDs averaged $255 million and $34 million in 1998 and 1997, respectively, and amounted to $278.2 million and $124.8 million at December 31 for those years. The brokered callable CDs together with the interest rate swaps, provide term liquidity at rates below LIBOR. During 1997, M&I disposed of seven branches. Deposits and loans aggregating approximately $64 million and $5 million, respectively were divested in 1997. The net interest margin (FTE) as a percent of average earning assets was 3.69% in 1998 compared to 3.94% in 1997, a decrease of 25 basis points. The yield on earning assets decreased 26 basis points from 7.94% in 1997 to 7.68% in 1998 while the cost of interest bearing liabilities decreased 6 basis points from 4.91% in 1997 to 4.85% in 1998. 19 21 The yield on loans, leases and securitized ARMs was 8.09% in 1998 compared to 8.36% in 1997, a decrease of 27 basis points. The decline in yield reflects, in part, continued run-off of higher yielding loans and securitized ARMs as well as accelerated amortization of purchase accounting premiums assigned to fixed rate loans acquired from Security due to prepayments and refinancings in response to declining interest rates. Premium amortization for fixed rate mortgage loans and fixed rate home equity loans amounted to $11.2 million in 1998 compared to $0.7 million in 1997. Excluding the effects of the premium amortization, the yields on loans, leases and securitized ARMs would have been 8.18% and 8.38% in 1998 and 1997, respectively, a decrease of 20 basis points. The remaining increase in interest on earning assets is primarily attributable to investment securities. The total yield on the investment security portfolio, excluding securitized ARMs, decreased by approximately 27 basis points in 1998 compared to 1997 and the average balance of such investment securities, excluding fair value adjustments for available for sale securities, increased $585 million or 15.3%. The increase in the volume of interest bearing deposits accounted for $107 million or 81% of the increase in interest paid on interest bearing liabilities in 1998. The decrease in cost of borrowings was offset by the increase in average balance resulting in an increase in interest expense of $28.1 million. At December 31, 1998, the Corporation had $1.0 billion in notional amount of standard receive fixed/pay floating interest rate swaps, an interest rate floor with $25 million in notional amount and $25 million in notional amount of an interest rate cap. These derivative financial instruments were designated as hedges against interest rate volatility associated with variable rate loans, variable rate deposits, variable rate debt and fixed rate callable CDs. The effect on net interest income was a positive $5.1 million in 1998 compared to $2.6 million in 1997. Excluding the Security purchase accounting premium amortization and the effect of derivative financial instruments the net yield on interest earning assets was 3.77% in 1998 and 3.94% in 1997, a decline of 17 basis points. 20 22 AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME The Corporation's consolidated average balance sheets, interest earned and interest paid, and the average interest rates earned and paid for each of the last three years are presented in the following table. Securitized ARM loans that are classified as investment securities available for sale are included with loans and leases to provide a more meaningful comparison ($ in thousands):
1999 1998 1997 ----------------------------------- ----------------------------------- ------------------------ INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE EARNED/ YIELD OR AVERAGE EARNED/ YIELD OR AVERAGE EARNED/ BALANCE PAID COST(3) BALANCE PAID COST(3) BALANCE PAID ----------- ---------- -------- ----------- ---------- -------- ----------- ---------- Loans, leases, and securitized ARMs(1)(2)............. $15,445,809 $1,198,505 7.77% $14,322,551 $1,156,569 8.09% $11,597,804 $ 968,788 Investment securities: Taxable................ 3,671,914 229,909 6.26 3,398,414 211,562 6.26 2,952,034 194,481 Tax exempt(1).......... 1,217,847 85,552 7.13 1,078,333 77,212 7.44 913,130 66,372 Interest bearing deposits in other banks......... 21,566 1,184 5.49 28,704 1,466 5.11 28,838 1,527 Funds sold and security resale agreements...... 68,764 3,758 5.47 38,738 2,218 5.73 89,809 5,091 Trading securities(1).... 37,277 1,894 5.08 43,404 2,225 5.13 40,822 2,046 Other short-term investments............ 95,775 4,515 4.71 179,607 8,982 5.00 87,648 4,880 ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- Total interest earning assets......... 20,558,952 1,525,317 7.43% 19,089,751 1,460,234 7.68% 15,710,085 1,243,185 Cash and demand deposits due from banks......... 638,399 652,988 614,824 Premises and equipment, net.................... 360,624 357,040 334,617 Other assets............. 1,371,488 906,850 516,413 Allowance for loan and lease losses........... (228,500) (216,456) (174,525) ----------- ----------- ----------- Total assets..... $22,700,963 $20,790,173 $17,001,414 =========== =========== =========== Money market savings deposits............... $ 4,830,159 $ 205,148 4.25% $ 4,135,143 $ 184,621 4.46% $ 3,022,944 $ 130,549 Savings and interest bearing demand deposits............... 2,027,658 33,525 1.65 2,140,380 43,174 2.02 1,915,888 40,962 Other time deposits...... 4,941,175 254,965 5.16 4,388,152 246,800 5.62 3,665,334 209,651 CDs greater than $100, brokered and callable CDs.................... 1,694,301 92,226 5.44 1,547,816 89,945 5.81 1,334,532 79,256 ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- Total interest bearing deposits............... 13,493,293 585,864 4.34 12,211,491 564,540 4.62 9,938,698 460,418 Short-term borrowings.... 2,803,834 142,294 5.07 2,357,161 126,624 5.37 2,017,829 111,193 Long-term borrowings..... 1,009,132 63,145 6.26 1,046,321 66,810 6.39 787,819 54,175 ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- Total interest bearing liabilities.... 17,306,259 791,303 4.57% 15,614,973 757,974 4.85% 12,744,346 625,786 Noninterest bearing deposits............... 2,663,609 2,545,724 2,301,097 Other liabilities........ 558,978 496,439 399,605 Shareholders' equity..... 2,172,117 2,133,037 1,556,366 ----------- ----------- ----------- Total liabilities and shareholders' equity......... $22,700,963 $20,790,173 $17,001,414 =========== =========== =========== Net interest income...... $ 734,014 $ 702,260 $ 617,399 ========== ========== ========== Net yield on interest earning assets......... 3.58% 3.69% ==== ==== 1997 -------- AVERAGE YIELD OR COST(3) -------- Loans, leases, and securitized ARMs(1)(2)............. 8.36% Investment securities: Taxable................ 6.62 Tax exempt(1).......... 7.40 Interest bearing deposits in other banks......... 5.30 Funds sold and security resale agreements...... 5.67 Trading securities(1).... 5.01 Other short-term investments............ 5.57 ---- Total interest earning assets......... 7.94% Cash and demand deposits due from banks......... Premises and equipment, net.................... Other assets............. Allowance for loan and lease losses........... Total assets..... Money market savings deposits............... 4.32% Savings and interest bearing demand deposits............... 2.14 Other time deposits...... 5.72 CDs greater than $100, brokered and callable CDs.................... 5.94 ---- Total interest bearing deposits............... 4.63 Short-term borrowings.... 5.51 Long-term borrowings..... 6.88 ---- Total interest bearing liabilities.... 4.91% Noninterest bearing deposits............... Other liabilities........ Shareholders' equity..... Total liabilities and shareholders' equity......... Net interest income...... Net yield on interest earning assets......... 3.94% ====
- --------------- Notes: (1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35% for all years presented, and excluding disallowed interest expense. (2) Loans and leases on nonaccrual status have been included in the computation of average balances. (3) Based on average balances excluding fair value adjustments for available for sale securities. 21 23 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE The effect on interest income and interest expense due to volume and rate changes in 1999 and 1998 are outlined in the following table. Changes not due solely to either volume or rate are allocated to rate ($ in thousands):
1999 VERSUS 1998 1998 VERSUS 1997 --------------------------------- --------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGE IN DUE TO CHANGE IN -------------------- -------------------- AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE VOLUME(2) RATE (DECREASE) VOLUME(2) RATE (DECREASE) --------- -------- ---------- --------- -------- ---------- Interest on earning assets: Loans, leases, and securitized ARMs(1)..... $ 91,738 $(49,802) $41,936 $227,138 $(39,357) $187,781 Investment securities: Taxable.................... 18,372 (25) 18,347 29,393 (12,312) 17,081 Tax-exempt(1).............. 12,065 (3,725) 8,340 10,469 371 10,840 Interest bearing deposits in other banks................ (365) 83 (282) (7) (54) (61) Funds sold and security resale agreements.......... 1,720 (180) 1,540 (2,896) 23 (2,873) Trading securities(1)........ (314) (17) (331) 129 50 179 Other short-term investments................ (4,192) (275) (4,467) 5,122 (1,020) 4,102 -------- -------- ------- -------- -------- -------- Total interest income change.... $119,024 $(53,941) $65,083 $269,348 $(52,299) $217,049 ======== ======== ======= ======== ======== ======== Expense on interest bearing liabilities: Money market savings deposits................ $ 30,998 $(10,471) $20,527 $ 48,047 $ 6,025 $ 54,072 Savings and interest bearing demand deposits................ (2,277) (7,372) (9,649) 4,804 (2,592) 2,212 Other time deposits........ 31,080 (22,915) 8,165 41,345 (4,228) 37,117 CDs greater than $100, brokered and callable CDs..................... 8,511 (6,230) 2,281 12,669 (1,948) 10,721 -------- -------- ------- -------- -------- -------- Total interest bearing deposits................ 68,312 (46,988) 21,324 106,865 (2,743) 104,122 Short-term borrowings...... 23,986 (8,316) 15,670 18,697 (3,266) 15,431 Long-term borrowings....... (2,376) (1,289) (3,665) 17,785 (5,150) 12,635 -------- -------- ------- -------- -------- -------- Total interest expense change... $ 89,922 $(56,593) $33,329 $143,347 $(11,159) $132,188 ======== ======== ======= ======== ======== ========
- --------------- Notes: (1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35% for all years presented, and excluding disallowed interest expense. (2) Based on average balances excluding fair value adjustments for available for sale securities. 22 24 SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE AND CREDIT QUALITY The following tables present comparative credit quality information as of and for the year ended December 31, 1999 as well as the preceding four years: CONSOLIDATED CREDIT QUALITY INFORMATION DECEMBER 31, ($000'S)
1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- NONPERFORMING ASSETS BY TYPE Loans and Leases: Nonaccrual............................ $106,387 $101,346 $ 66,945 $ 63,459 $ 52,972 Renegotiated.......................... 708 978 1,338 1,819 3,087 Past Due 90 Days or More.............. 9,975 7,631 8,238 7,366 8,184 -------- -------- -------- -------- -------- Total Nonperforming Loans and Leases............................. 117,070 109,955 76,521 72,644 64,243 Other Real Estate Owned................. 6,230 8,751 15,573 8,052 11,103 -------- -------- -------- -------- -------- Total Nonperforming Assets.... $123,300 $118,706 $ 92,094 $ 80,696 $ 75,346 ======== ======== ======== ======== ======== Allowance for Loan and Lease Losses..... $225,862 $226,052 $208,651 $161,659 $166,815 ======== ======== ======== ======== ======== CONSOLIDATED STATISTICS Net Charge-offs to Average Loans and Leases................................ 0.17% 0.07% 0.12% 0.21% 0.10% Total Nonperforming Loans and Leases to Total Loans and Leases................ 0.72 0.79 0.58 0.74 0.68 Total Nonperforming Assets to Total Loans and Leases and Other Real Estate Owned................................. 0.75 0.85 0.70 0.82 0.80 Allowance for Loan and Lease Losses to Total Loans and Leases................ 1.38 1.62 1.59 1.64 1.78 Allowance for Loan and Lease Losses to Nonperforming Loans and Leases........ 193 206 273 223 260
MAJOR CATEGORIES OF NONACCRUAL LOANS AND LEASES ($000'S)
DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------------------ ------------------------------ % OF % OF LOAN % OF LOAN % OF NONACCRUAL TYPE NONACCRUAL NONACCRUAL TYPE NONACCRUAL ---------- ---- ---------- ---------- ---- ---------- COMMERCIAL AND LEASE FINANCING...... $ 56,806 1.1% 53.4% $ 42,026 1.0% 41.5% REAL ESTATE Construction and Land Development... 2,609 0.5 2.5 1,952 0.5 1.9 Commercial Real Estate.............. 19,668 0.5 18.5 21,586 0.6 21.3 Residential Real Estate............. 25,901 0.5 24.3 33,117 0.8 32.7 -------- --- ----- -------- --- ----- Total Real Estate................. 48,178 0.5 45.3 56,655 0.7 55.9 PERSONAL AND LEASE FINANCING........ 1,403 0.1 1.3 2,665 0.2 2.6 -------- --- ----- -------- --- ----- Total..................... $106,387 0.7% 100.0% $101,346 0.7% 100.0% ======== === ===== ======== === =====
23 25 RECONCILIATION OF CONSOLIDATED ALLOWANCE FOR LOAN AND LEASE LOSSES ($000'S)
1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Allowance for Loan and Lease Losses at Beginning of Year..................... $226,052 $208,651 $161,659 $166,815 $159,506 Provision for Loan and Lease Losses..... 25,419 27,090 17,633 15,634 16,558 Allowance of Banks Acquired............. -- -- 42,773 -- 2,843 Allowance Transfer for Loan Securitizations....................... -- -- -- (440) (2,275) Loans and Leases Charged-off: Commercial............................ 17,275 6,401 8,474 16,294 5,225 Real Estate -- Construction........... 157 352 87 13 407 Real Estate -- Mortgage............... 5,719 5,115 3,907 3,446 2,914 Personal.............................. 7,121 7,886 7,868 6,390 5,783 Leases................................ 2,285 1,191 1,166 2,397 875 -------- -------- -------- -------- -------- Total Charge-offs....................... 32,557 20,945 21,502 28,540 15,204 Recoveries on Loans and Leases: Commercial............................ 2,696 6,708 4,176 3,231 2,123 Real Estate -- Construction........... 6 164 53 9 39 Real Estate -- Mortgage............... 1,413 1,369 1,097 2,483 1,035 Personal.............................. 2,244 2,690 2,501 2,355 2,167 Leases................................ 589 325 261 112 23 -------- -------- -------- -------- -------- Total Recoveries........................ 6,948 11,256 8,088 8,190 5,387 -------- -------- -------- -------- -------- Net Loans and Leases Charged-off........ 25,609 9,689 13,414 20,350 9,817 -------- -------- -------- -------- -------- Allowance for Loan and Lease Losses at End of Year........................... $225,862 $226,052 $208,651 $161,659 $166,815 ======== ======== ======== ======== ========
Nonperforming assets consist of nonperforming loans and other real estate owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of problem loans and branch premises held for sale. OREO acquired in satisfaction of debts amounted to $5.1 million, $5.6 million and $3.8 million at December 31, 1999, 1998 and 1997 respectively. Branch premises held for sale amounted to $1.1 million, $3.2 million and $11.7 million at the end of 1999, 1998 and 1997, respectively. The majority of Security's branch and operations facilities were closed due to customer service and operating overlap resulting in the increase in branch premises held for sale at December 31, 1997. Nonperforming loans and leases consist of nonaccrual, renegotiated or restructured loans, and loans and leases that are delinquent 90 days or more and still accruing interest. The balance of nonperforming loans and leases can fluctuate widely based on the timing of cash collections, renegotiations and renewals. Maintaining nonperforming assets at an acceptable level is important to the ongoing success of a financial services institution. The Corporation's comprehensive credit review and approval process is critical to ensuring that the amount of nonperforming assets on a long-term basis is minimized within the overall framework of acceptable levels of credit risk. In addition to the negative impact on net interest income and credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts. At December 31, 1999, nonperforming loans and leases amounted to $117.1 million or 0.72% of consolidated loans and leases compared to $110.0 million or 0.79% at December 31, 1998 and $76.5 million or 0.58% at December 31, 1997. Nonaccrual loans increased $5.0 million at year end 1999 compared to year end 1998. The increase in nonaccrual commercial loans and leases of $14.8 million was offset by a decrease in nonaccrual real estate loans of $8.5 million. Three larger commercial loans aggregating $37.7 million, including one loan of $24.7 million placed on nonaccrual in the fourth quarter of 1998, accounted for 35% of total nonaccrual loans at December 31, 1999. Loans past due ninety days and still accruing amounted to $10.0 million at December 31, 1999 compared to $7.6 million at December 31, 1998, an increase of 24 26 $2.4 million or 30.7%. Personal loans including residential real estate, credit card, student loans and other personal loans accounted for $1.5 million of the increase. Net charge-offs amounted to $25.6 million or 0.17% of average loans and leases in 1999 compared with $9.7 million or 0.07% of average loans and leases in 1998 and $13.4 million or 0.12% of average loans and leases in 1997. Net charge-offs in 1998 include one large commercial recovery. Excluding that recovery, net charge-offs in 1998 would have been $14.0 million or 0.10% of average loans and leases. Partial charge-offs on two larger commercial loans and leases accounted for $12.3 million or 48% of net charge-offs in 1999. The remaining balances were placed on nonaccrual as previously discussed. Excluding the two larger partial charge-offs, net charge-offs in 1999 would have been $13.3 million or 0.09% of average loans. The allowance for loan and lease losses represents management's estimate of probable inherent losses which have occurred as of the date of the financial statements. In determining the adequacy of the reserve the Corporation evaluates the reserves necessary for specific nonperforming loans and also estimates losses inherent in other loans and leases. As a result, the allowance for loans and leases contains the following components: Specific Reserve. The amount of specific reserves is determined through a loan-by-loan analysis of nonperforming loans that considers expected future cash flows, the value of collateral and other factors that may impact the borrower's ability to make payments when due. Included in this group are those nonaccrual or renegotiated loans which 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. Allocated inherent reserve. The amount of the allocated portion of the inherent loss reserve is determined by reserving factors assigned to loans and leases based on the Corporation's internal loan grading system. Line officers and loan committees are responsible for continually assigning grades to commercial loan types based on standards established in the Corporation's loan policies and adherence to the standards is closely monitored by the Corporation's Loan Review Group. Loan grades are similar to, but generally more conservative than, regulatory classifications. In addition, reserving factors are applied to retail and smaller balance ungraded credits as well as specialty loan products such as credit card, student loans and mortgages. Reserving factors are derived and are determined based on such factors as historical charge-off experience, remaining life, and industry practice for reserve levels. The use of industry practice is intended to prevent an understatement of reserves based upon an over-reliance on historical charge-offs during favorable economic conditions. Unallocated inherent reserve. Management determines the unallocated portion of the inherent loss reserve based on factors that cannot be associated with a specific credit or loan categories. These factors include management's subjective evaluation of local, national and international economic and business conditions, changes to underwriting standards and marketing channels such as use of centralized retail and small business credit centers, trends towards higher advance rates and longer amortization periods and the impact of acquisitions on the Corporation's credit risk profile. The unallocated portion of the inherent loss reserve also reflects management's attempt to ensure that the overall reserve appropriately reflects a margin for the imprecision necessarily inherent in estimates of expected credit losses. Management's evaluation of the factors described above resulted in an allowance for loan and lease losses of $225.9 million at December 31, 1999 compared to $226.1 million at December 31, 1998 and $208.7 million at December 31, 1997. The level of reserve reflects management's belief that losses inherent in the loan and lease portfolio were larger than would otherwise be suggested by the Corporation's favorable charge-off experience in recent years; the Corporation's experience, as most recently evidenced in the current year, of larger losses in commercial and commercial real estate loans in brief periods at particular points in economic cycles; and the view that the absolute level of the allowance should not decline appreciably given continuing loan growth and the potential for the unprecedented period of economic prosperity to come to an end. 25 27 The resulting provision for loan and lease losses amounted to $25.4 million for the twelve months ended December 31, 1999, while net charge-offs totaled $25.6 million. Charge-offs for 2000 will continue to be affected by the various factors previously discussed. The Corporation anticipates charge-off levels more closely matching historical levels instead of the higher than normal level experienced in 1999. However, negative economic events, adverse developments in industry segments within the portfolio, or deterioration of a large loan or loans could have significant adverse impacts on the loss levels. There are no known material loans believed to be in imminent danger of deteriorating or defaulting which would give rise to a large near-term charge-off. OTHER INCOME Total other income amounted to $845.8 million in 1999 compared to $756.3 million in 1998, an increase of $89.5 million or 11.8%. Total data processing services revenue increased $73.3 million or 17.8% from $412.6 million in 1998 to $485.9 million in the current year. Processing revenue which includes processing, conversions, contract buyouts, equipment sales and card personalization increased $25.4 million. Processing revenue increased $32.6 million while revenues from conversions and buyout fees, which vary from period to period, decreased $9.8 million. Revenue from software and consulting decreased $13.0 million of which software accounted for $11.6 million of the decline. Revenue from E-commerce which includes electronic funds distribution, electronic banking, cash management, home banking, internet banking, electronic payment services and a mortgage solution joint venture increased $60.8 million or 75.5% in 1999 compared to 1998. Revenue associated with acquisitions and the joint venture accounted for $43.1 million of the increase. Internet banking revenue is primarily revenue from internet mortgage lending and discount brokerage. Internet mortgage lending began in the fourth quarter of 1998. During the third and fourth quarters of 1999, internet product offerings were expanded to include deposit (CDs) and home equity lending. Fees from trust services were $101.0 million in 1999 compared to $88.5 million in 1998, an increase of $12.5 million or 14.1%. Personal trust fees increased $3.7 million, commercial trust fees increased $2.5 million and revenue from outsourcing services increased $2.7 million over the prior year. Service charges on deposits increased $8.0 million or 12.9% from $61.7 million in 1998 to $69.7 million in 1999. Service charges on commercial demand accounted for $6.6 million of the increase. Mortgage banking revenue was $27.3 million in 1999 compared with $53.7 million in 1998, a decrease of $26.4 million. Gains from sales of mortgages to the secondary market and mortgage related fees declined $23.0 million and loan servicing fees decreased $3.4 million. As previously discussed, declining interest rates throughout 1998 resulted in refinancings at record levels in 1998 and early 1999. Capital markets revenue decreased $12.4 million in 1999 compared to the prior year. Net gains from the sale of investments, which vary from period to period, accounted for $11.9 million of the decline. The Corporation anticipates investment sale activity will increase in 2000. Life insurance revenue represents the increase in net realizable value primarily associated with the purchase of $400 million of single premium bank-owned life insurance policies late in 1998 which insure the lives of certain officers of the Corporation and its affiliate banks. This vehicle is being used to fund future employee benefit obligations. Net securities losses in 1999 amounted to $4.1 million and principally represent write-offs of investments in housing equity partnerships. The Corporation does not anticipate further write-downs or write-offs will be necessary. Other noninterest income amounted to $125.9 million in 1999 compared to $103.9 million in 1998, an increase of $22.0 million. Commissions and fees increased $8.1 million. Deposit premiums from the sale of eight branches amounted to $7.8 million. Death benefit gains from life insurance policies amounted to $6.0 million. 26 28 Total other income amounted to $756.3 million in 1998 compared to $608.5 million in 1997, an increase of $147.8 million or 24.3%. Total data processing services revenue increased $68.8 million or 20.0% from $343.8 million in 1997 to $412.6 million in 1998. Processing revenue which includes processing, conversions, contract buyouts and equipment sales increased $29.4 million. Processing revenue increased $25.9 million while revenues from conversions and buyout fees, which vary from period to period, increased $2.4 million. Revenue from software and consulting increased $16.6 million of which software accounted for $17.3 million of the increase. Revenue from E-commerce which includes electronic funds distribution, cash management, home banking and internet banking, increased $22.8 million or 39.5% in 1998 compared to 1997. Revenue from electronic funds distribution increased $16.5 million or 36.6% and all other products exhibited individual growth in excess of 40%. Fees from trust services were $88.5 million in 1998 compared to $78.6 million in 1997, an increase of $9.9 million or 12.6%. Personal trust fees increased $2.8 million and commercial trust fees increased $3.8 million while all other major categories experienced revenue growth over the prior year. Service charges on deposits increased $3.8 million or 6.5% from $57.9 million in 1997 to $61.7 million in 1998. Service charges on commercial demand accounted for $1.8 million of the increase. Mortgage banking revenue was $53.7 million in 1998 compared with $25.6 million in 1997, an increase of $28.1 million. Gains from sales of mortgages to the secondary market and mortgage related fees increased $25.7 million and loan servicing fees increased $2.4 million. As previously discussed, declining interest rates throughout 1998 resulted in refinancings at record levels during the year. Capital markets revenue amounted to $24.9 million in 1998 an increase of $16.9 million compared to the prior year. Net gains from the sale of investments, which vary from period to period, amounted to $23.6 million in 1998 compared to $6.7 million in 1997. Net securities gains in 1998 amounted to $7.1 million. Gains from the sale of equity securities by the Corporation amounted to $3.9 million and gains from the sale of available for sale securities by the Corporation's banking affiliates amounted to $3.2 million. During 1998 proceeds from the maturities and sale of securities were used to purchase bank-owned life insurance as previously discussed. Net securities losses in 1997 amounted to $2.6 million. Gains from the sale of equity securities by the Corporation amounted to $1.8 million. Losses due to repositioning of available for sale securities by the Corporation's banking affiliates amounted to $4.4 million. Other noninterest income amounted to $103.9 million in 1998 compared to $96.4 million in 1997, an increase of $7.5 million. Deposit premiums from the sale of branches decreased $7.2 million. Loan and lease prepayment fees increased $5.0 million, other commissions and fees increased $4.6 million, and gains on sales of fixed assets increased $2.2 million. OTHER EXPENSE Total other expense amounted to $997.7 million in 1999, an increase of $81.0 million or 8.8% from $916.7 million, before merger/restructuring expense in 1998. Including these charges, total other expense for 1998 amounted to $940.0 million. The merger/restructuring expense of $23.4 million in 1998 relates to the merger with Advantage. The increase in expenses is primarily attributable to the Corporation's nonbanking businesses, particularly its data processing business segment ("Data Services"). Data Services expense growth of $62.2 million or 14.2% in 1999 compared to 1998 represents approximately 77% of the Corporations total operating expense growth and reflects the cost of adding processing capacity and other related costs associated with increased revenue growth including the impact of acquisitions as well as continued work on 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 special charges) divided by the sum of total other income (excluding securities gains or losses other than Capital Markets revenue) and net 27 29 interest income on a fully taxable equivalent basis. The Corporation's efficiency ratios for the years ended December 31, 1999, 1998, and 1997 were:
EFFICIENCY RATIOS 1999 1998 1997 - ----------------- ---- ---- ---- Consolidated Corporation.................................... 63.0% 63.2% 64.9% Consolidated Corporation Excluding Data Services: Including Intangible Amortization......................... 52.1% 53.1% 56.1% Excluding Intangible Amortization......................... 49.3% 48.5% 54.3%
Total salaries and benefits expense amounted to $583.7 million for 1999 compared to $523.6 million in 1998, an increase of $60.1 million or 11.5%. The data processing segment contributed approximately $36.5 million or 61% of the increase. During 1999, Data Services had average full-time equivalent employees and contract programmers of 4,310 compared to 3,926 in the prior year. Salaries and benefits of the Corporation's banking segment increased $10.2 million or 5.6%. Incentive compensation based on the Corporation's common stock performance increased $11.0 million. Net occupancy and equipment expenses increased $9.5 million in 1999 when compared to 1998. Data Services activity resulted in approximately $5.9 million or 62% of the 1999 increase. Software expense amounted to $27.0 million in 1999 compared to $22.2 million in 1998, an increase of $4.8 million or 21.6%. This increase is primarily related to Data Services growth which accounted for $3.5 million of the increase. Data Services growth consisted of additional and more costly operating software associated with CPU upgrades, additional application software and software acquired from acquisitions. Professional services increased $9.8 million or 38.5% over 1998. Data Services accounted for $5.8 million of the increase. Banking and all others which includes internet lending and deposit software development and enhancements and fees associated with the moving from NASDAQ to the New York Stock Exchange accounted for the remainder of the increase. Amortization of intangibles decreased $4.4 million. Amortization of core deposit premiums decreased $3.8 million. Amortization of mortgage servicing rights decreased $8.5 million which reflects the slowing of prepayment activity in 1999. Goodwill amortization increased $8.0 million. Other expenses amounted to $107.4 million in 1999 compared to $111.8 million in the prior year, a decrease of $4.4 million or 3.9%. Other expense is affected by the capitalization of costs, net of amortization, associated with software development and data processing conversions. The amount of capitalized software development costs and capitalized conversion costs net of their respective amortization increased $6.0 million and $2.0 million in 1999 compared to 1998. During 1999, capitalized software impairment write-downs amounted to $1.1 million. Total other expense before merger/restructuring charges amounted to $916.7 million in 1998, an increase of $119.5 million or 15.0% from $797.2 million in 1997. Including these charges, total other expense for 1998 amounted to $940.0 million. The increase in expenses is primarily attributable to the Corporation's nonbanking businesses, particularly its data processing business segment. Data Services expense growth of $70.6 million or 19.3% in 1998 compared to 1997 represents approximately 59% of the Corporations total operating expense growth and reflects the cost of adding processing capacity and other related costs associated with increased revenue growth as well as continued work on Year 2000. Expenses of the Corporation's banking business in 1997 included the cost of integrating Security into M&I. M&I added approximately 400 full-time equivalent employees as a direct result of the merger excluding job opportunities offered former Security employees for open job positions that existed prior to the merger. In total, it is estimated that 570 M&I positions were filled by former Security employees. At the time of merger, Security employed approximately 850 employees on a full-time equivalent basis. During the fourth quarter of 1997, many former Security employees were temporarily retained to assist in implementing systems and 28 30 operations conversions, attending to special customers needs and other issues to ensure that the integration was as effective and efficient as possible. The merger with Security was an in-market acquisition which entailed a significant amount of customer service and operating overlap. The Corporation closed the majority of Security's branch and operating facilities in addition to the reduction in work force described above resulting in lower operating expenses. Total salaries and benefits expense amounted to $523.6 million for 1998 compared to $460.2 million in 1997, an increase of $63.4 million or 13.8%. The data processing business contributed approximately $42.5 million or 67% of the increase. During 1998, Data Services had average full-time equivalent employees and contract programmers of 3,926 compared to 3,496 in the prior year. Salaries and benefits of the Corporation's residential mortgage banking group increased $3.7 million or 41.9%. Loan production in 1998 was $3.4 billion, an increase of 120% from last year. Salaries and benefits for Trust Services increased $5.5 million or 16.6% compared to 1997 which reflects increased costs to provide outsourcing and other services associated with revenue growth. Net occupancy and equipment expenses increased $17.8 million in 1998 when compared to 1997. Data Services activity resulted in approximately $13.7 million or 77% of the 1998 increase in occupancy and equipment costs. Additional depreciation and maintenance associated with equipment additions and telecommunications equipment and charges accounted for $11.9 million of Data Services' increase. Software expense amounted to $22.2 million in 1998 compared to $19.7 million in 1997, an increase of $2.5 million or 12.6%. This increase is primarily related to Data Services growth which accounted for $1.4 million of the increase. Data Services growth consisted of additional and more costly operating software associated with CPU upgrades as well as additional application software including software used for the Year 2000 project. Professional services increased $8.0 million or 46% over 1997. Data Services accounted for $2.6 million of the increase. Banking and all others accounted for the remainder of the increase. Amortization of intangibles increased $22.1 million primarily as a result of the Security transaction and accelerated amortization of mortgage servicing rights due to prepayments associated with refinancings. Other expenses amounted to $111.8 million in 1998 compared to $107.7 million in the prior year, an increase of $4.1 million or 3.8%. Other expense is also affected by the capitalization of costs, net of amortization, associated with software development and data processing conversions. The amount of capitalized software development costs and capitalized conversion costs net of their respective amortization declined $3.3 million and $1.4 million in 1998 compared to 1997. During 1997, capitalized software impairment write-downs amounted to $2.4 million. INCOME TAX PROVISION The provision for income taxes was $173.4 million in 1999, $164.0 million in 1998 and $131.5 million in 1997. The effective tax rate in 1999 was 32.9% compared to 35.2% in 1998 and 33.9% in 1997. The decrease in the effective rate in 1999 is due to the increase in tax-exempt income, primarily life insurance related revenue and gains and the completion of income tax audits with favorable results. The increase in the effective tax rate in 1998 compared to 1997 is due, in part, to the increase in amortization and elements of the merger/restructuring charge which are not deductible for income tax purposes. CAPITAL RESOURCES Shareholders' equity was $2.12 billion or 8.7% of total consolidated assets at December 31, 1999, compared to $2.24 billion or 10.4% of total consolidated assets at December 31, 1998. The increase associated with earnings, net of dividends paid, was offset by the effect of treasury share repurchases and the decline in the fair value of securities available for sale which amounted to $90.9 million net of related tax effects. 29 31 The Corporation and its affiliates continue to have a strong capital base and the Corporation's regulatory capital ratios continue to be significantly above the defined minimum regulatory ratios. See Note 13 to the Consolidated Financial Statements contained in Item 8 herein for the Corporation's comparative capital ratios and the capital ratios of its significant subsidiaries. The Corporation's subsidiaries, primarily its banking subsidiaries, are restricted by regulations from making distributions above prescribed amounts. In addition, banking subsidiaries are limited in making loans and advances to the Corporation. At December 31, 1999, approximately $140.8 million and $66.5 million were available for distribution without regulatory approval from the Corporation's banking and nonbanking subsidiaries, respectively. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each subsidiary bank in circumstances when it might not do so absent such policy. The Corporation had a Stock Repurchase Program under which up to 6 million shares could be repurchased annually. In connection with the acquisition of Advantage Bancorp, Inc., the Company rescinded its stock repurchase program effective March 16, 1998. The total shares purchased in 1998 were 0.6 million shares. On January 12, 1999, the Corporation announced its intentions to purchase up to 6 million shares annually. The shares will be acquired to have treasury shares available for issuance pursuant to employee benefit plans and for other corporate needs. During 1999, the Corporation repurchased 5.1 million shares at an aggregate cost of $317.1 million. During 1999, the holder of the Corporation's Series A convertible preferred stock converted 348,944 shares of Series A into 3,832,957 shares of common stock which were issued from the Corporation's treasury stock. YEAR 2000 Year 2000 (Y2K) was the term used to describe the fact that many existing computer programs used only two digits to identify a year in a date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could have failed or created erroneous results by or at the year 2000. The term also refers to devices with imbedded technology that are time sensitive and may fail to recognize year 2000 correctly. This issue affected virtually all companies and organizations. Since 1996, the Corporation has reported the status of its actions and plans for the transition to year 2000. The Corporation is pleased to report that the transition to Year 2000, as of the present time, was successful and that there have been no material adverse consequences during the transition to its systems or customers. The majority of Data Services' contracts did not provide for additional reimbursement over and above the previously contracted maintenance amounts. The Corporation estimates that the total net direct cost for the year 2000 effort through December 31, 1999 was approximately $37.4 million with Data Services representing approximately 94% of that amount. Approximately $12.1 million was expensed in 1999. The cost for the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $7.6 million, and $2.7 million, respectively. Replacement equipment and software were capitalized or expensed in accordance with the Corporation's normal accounting policies. The effect of writing off the net book value of equipment or software that was not Year 2000 compliant is included in the above estimates. Y2K related costs incurred in 2000 are estimated to be insignificant. ITEM 7A. 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. For additional information on the 30 32 Corporation's derivative financial instruments and foreign exchange position, see Note 17 to the Consolidated Financial Statements contained in Item 8 herein. 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 confine 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 across the array of assets and liabilities held by the Corporation. Policies are in place to assure that neither earnings nor fair value at risk exceed appropriate limits. The use of a limited array of derivative financial instruments has allowed the Corporation to achieve the desired balance sheet repricing structure while simultaneously meeting the desired objectives of both its borrowing and depositing customers. The models used include measures of the expected repricing characteristics of administered rate (NOW, savings and money market accounts) and non-rate related products (demand deposit accounts, other assets and other liabilities). These measures recognize the relative insensitivity of these accounts to changes in market interest rates, as demonstrated through current and historical experiences. In addition to information about 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 result into the Corporation's budgeted pre-tax income 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 December 31, 1999:
IMPACT TO HYPOTHETICAL CHANGE 2000 IN INTEREST RATES PRETAX INCOME ------------------- ------------- 100 basis point gradual rise in rates.................. (8.6%) 100 basis point gradual decline in rates............... 8.6%
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, the changes in spread between key market rates, or accounting recognition for impairment of certain intangibles. These results are also considered to be conservative estimates due to the fact that they 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 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 31 33 market discount rate. The net change in the present value of the assets and liability cash flows in different market rate environments is the amount of fair value at risk from those rate movements. As of December 31, 1999 the fair value of equity at risk for a gradual 100bp shift in rates was less than 2.0% of the market value of the Corporation. In addition to using derivatives to manage interest rate exposure, the Corporation also uses derivatives to create synthetic financial instruments that more closely match desired rate and liquidity characteristics than would otherwise be available on cash instruments directly. Such derivatives consisted of interest rate swaps and amounted to $417 million in notional value as of December 31, 1999. A small amount of derivatives are sold to customers where the Corporation acts as an intermediary. These instruments are matched off by the Corporation through its trading accounts in order to minimize exposure to market risks. Customer interest rate derivatives held for trading amounted to $95 million of notional value, consisting of $47.5 million in notional value of received fixed and $47.5 million in notional value of pay fixed interest rate swaps as of December 31, 1999. 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 and, to a lessor extent, invests in publicly traded equity securities. Exposure to the change in equity values for the nonpublic 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 $57 billion in assets and directly manages a portfolio of more than $11 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. 32 34 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 CONSOLIDATED BALANCE SHEETS DECEMBER 31 ($000'S EXCEPT SHARE DATA) Assets
1999 1998 ----------- ----------- Cash and Cash Equivalents: Cash and Due from Banks................................... $ 705,293 $ 760,405 Federal Funds Sold and Security Resale Agreements......... 101,922 34,616 Money Market Funds........................................ 72,641 111,717 ----------- ----------- Total Cash and Cash Equivalents.................... 879,856 906,738 Investment Securities: Trading Securities, at Market Value....................... 40,334 34,046 Short-term Investments, at Cost which Approximates Market Value................................................... 6,828 51,971 Available for Sale, at Market Value....................... 4,357,196 4,049,421 Held to Maturity, Market Value $1,137,126 ($1,095,048 in 1998)................................................... 1,170,734 1,056,233 ----------- ----------- Total Investment Securities........................ 5,575,092 5,191,671 Loans and Leases, Net of Unearned Income of $157,499 ($128,680 in 1998)........................................ 16,335,061 13,996,166 Less: Allowance for Loan and Lease Losses................... 225,862 226,052 ----------- ----------- Net Loans and Leases............................... 16,109,199 13,770,114 Premises and Equipment...................................... 370,534 360,345 Goodwill and Core Deposit Intangibles....................... 347,489 317,414 Other Intangibles........................................... 18,927 18,119 Accrued Interest and Other Assets........................... 1,068,626 1,001,892 ----------- ----------- Total Assets....................................... $24,369,723 $21,566,293 =========== =========== Liabilities and Shareholders' Equity Deposits: Noninterest Bearing....................................... $ 2,830,960 $ 2,929,195 Interest Bearing.......................................... 13,604,222 12,990,724 ----------- ----------- Total Deposits..................................... 16,435,182 15,919,919 Short-term Borrowings....................................... 4,540,255 2,077,285 Accrued Expenses and Other Liabilities...................... 612,336 530,828 Long-term Borrowings........................................ 665,024 794,482 ----------- ----------- Total Liabilities.................................. 22,252,797 19,322,514 Shareholders' Equity: Series A Convertible Preferred Stock, $1.00 par value, 2,000,000 Shares Authorized; 336,370 Shares Issued (685,314 in 1998); Liquidation Preference $33,637 ($68,531 in 1998)....................................... 336 685 Common Stock, $1.00 par value, 160,000,000 Shares Authorized; 112,757,546 Shares Issued................... 112,757 112,757 Additional Paid-in Capital................................ 457,097 621,795 Retained Earnings......................................... 1,914,128 1,664,123 Net Unrealized Securities (Losses)/Gains, Net of Taxes.... (32,749) 58,102 Less: Treasury Stock, at Cost, 6,941,684 shares (6,654,170 in 1998)................................................ 314,513 194,046 Deferred Compensation.............................. 20,130 19,637 ----------- ----------- Total Shareholders' Equity......................... 2,116,926 2,243,779 ----------- ----------- Total Liabilities and Shareholders' Equity......... $24,369,723 $21,566,293 =========== ===========
The accompanying notes are an integral part of the Consolidated Financial Statements. 33 35 CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31 ($000'S EXCEPT SHARE DATA)
1999 1998 1997 ---------- ---------- ---------- INTEREST INCOME Loans and Leases............................................ $1,156,775 $1,085,829 $ 921,161 Investment Securities: Taxable................................................... 269,668 280,377 240,238 Exempt from Federal Income Taxes.......................... 58,820 52,969 45,420 Trading Securities.......................................... 1,864 2,203 2,016 Short-term Investments...................................... 9,457 12,666 11,498 ---------- ---------- ---------- Total Interest Income.............................. 1,496,584 1,434,044 1,220,333 INTEREST EXPENSE Deposits.................................................... 585,864 564,540 460,418 Short-term Borrowings....................................... 142,294 126,624 111,193 Long-term Borrowings........................................ 63,145 66,810 54,175 ---------- ---------- ---------- Total Interest Expense............................. 791,303 757,974 625,786 ---------- ---------- ---------- Net Interest Income......................................... 705,281 676,070 594,547 Provision for Loan and Lease Losses......................... 25,419 27,090 17,633 ---------- ---------- ---------- Net Interest Income After Provision for Loan and Lease Losses.................................................... 679,862 648,980 576,914 OTHER INCOME Data Processing Services: Processing................................................ 262,641 237,197 207,841 Software and Consulting................................... 81,920 94,871 78,263 E-commerce................................................ 141,380 80,564 57,742 ---------- ---------- ---------- Total Data Processing Services..................... 485,941 412,632 343,846 Internet Banking............................................ 1,861 59 -- Trust Services.............................................. 100,963 88,496 78,595 Service Charges on Deposits................................. 69,699 61,730 57,937 Mortgage Banking............................................ 27,317 53,655 25,566 Capital Markets Revenue..................................... 12,439 24,860 7,918 Life Insurance Revenue...................................... 25,767 3,893 761 Net Investment Securities (Losses)/Gains.................... (4,099) 7,145 (2,578) Other....................................................... 125,886 103,863 96,424 ---------- ---------- ---------- Total Other Income................................. 845,774 756,333 608,469 OTHER EXPENSE Salaries and Employee Benefits.............................. 583,659 523,606 460,164 Net Occupancy............................................... 49,225 44,181 41,252 Equipment................................................... 107,670 103,180 88,358 Software Expenses........................................... 26,972 22,181 19,702 Processing Charges.......................................... 30,324 25,286 25,295 Supplies and Printing....................................... 19,364 18,679 16,990 Professional Services....................................... 35,086 25,326 17,348 Amortization of Intangibles................................. 38,046 42,457 20,388 Merger/Restructuring........................................ -- 23,373 -- Other....................................................... 107,351 111,759 107,714 ---------- ---------- ---------- Total Other Expense................................ 997,697 940,028 797,211 ---------- ---------- ---------- Income Before Income Taxes.................................. 527,939 465,285 388,172 Provision for Income Taxes.................................. 173,428 163,962 131,487 ---------- ---------- ---------- NET INCOME.................................................. $ 354,511 $ 301,323 $ 256,685 ========== ========== ========== NET INCOME PER COMMON SHARE Basic..................................................... $ 3.32 $ 2.79 $ 2.62 Diluted................................................... 3.14 2.61 2.43
The accompanying notes are an integral part of the Consolidated Financial Statements. 34 36 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 ($000'S)
1999 1998 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income.............................................. $ 354,511 $ 301,323 $ 256,685 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization......................... 86,156 111,392 63,935 Provision for Loan and Lease Losses................... 25,419 27,090 17,633 Gains on Sales of Assets.............................. (42,522) (77,183) (33,585) Proceeds from Sales of Trading Securities and Loans Held for Resale.................................... 4,766,956 5,211,992 4,220,597 Purchases of Trading Securities and Loans Held for Resale............................................. (4,606,316) (5,245,240) (4,237,853) Other................................................. 40,011 (59,464) (12,638) ----------- ----------- ----------- Total Adjustments............................. 269,704 (31,413) 18,089 ----------- ----------- ----------- Net Cash Provided by Operating Activities............... 624,215 269,910 274,774 CASH FLOWS FROM INVESTING ACTIVITIES: Net (Increase) Decrease in Shorter Term Securities...... 21,400 (14,450) 6,050 Proceeds from Maturities of Longer Term Securities...... 1,026,967 1,461,553 789,324 Proceeds from Sales of Securities Available for Sale.... 116,823 160,474 797,270 Purchases of Longer Term Securities..................... (1,681,037) (1,054,290) (1,373,780) Decrease in Loans Due to Divestitures................... 30,817 -- 4,546 Net Increase in Loans................................... (2,342,319) (1,016,336) (978,960) Purchases of Assets to be Leased........................ (429,345) (317,862) (295,185) Principal Payments on Lease Receivables................. 294,891 242,227 197,372 Purchases of Premises and Equipment, Net................ (66,899) (60,811) (68,829) Acquisitions Accounted for as Purchases, Net of Cash Equivalents Acquired and Investments in Joint Ventures.............................................. (84,408) (5,170) (236,399) Purchase of Bank-Owned Life Insurance................... -- (400,000) -- Other................................................... 12,751 14,997 11,741 ----------- ----------- ----------- Net Cash Used in Investing Activities................... (3,100,359) (989,668) (1,146,850) CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in Deposits Due to Divestitures................ (84,191) -- (56,294) Net Increase in Deposits................................ 607,243 899,591 1,064,439 Proceeds from Issuance of Commercial Paper.............. 1,926,791 779,653 455,726 Principal Payments on Commercial Paper.................. (1,740,439) (829,077) (360,374) Net Increase (Decrease) in Other Short-term Borrowings............................................ 2,226,463 41,210 (46,517) Proceeds from Issuance of Long-term Debt................ 288,526 87,573 182,371 Payment of Long-term Debt............................... (371,832) (159,963) (346,064) Dividends Paid.......................................... (104,490) (97,241) (79,272) Purchase of Common Stock................................ (317,149) (29,633) (64,430) Proceeds from the Issuance of Common Stock.............. 18,359 15,086 23,538 Other................................................... (19) 1,234 -- ----------- ----------- ----------- Net Cash Provided by Financing Activities............... 2,449,262 708,433 773,123 ----------- ----------- ----------- Net Decrease in Cash and Cash Equivalents............... (26,882) (11,325) (98,953) Cash and Cash Equivalents, Beginning of Year............ 906,738 918,063 1,017,016 ----------- ----------- ----------- Cash and Cash Equivalents, End of Year.................. $ 879,856 $ 906,738 $ 918,063 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash Paid During the Year for: Interest.............................................. $ 775,065 $ 759,231 $ 607,614 Income Taxes.......................................... 125,841 141,553 103,716
The accompanying notes are an integral part of the Consolidated Financial Statements. 35 37 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000'S EXCEPT SHARE DATA)
UNREALIZED COMPRE- ADDITIONAL TREASURY DEFERRED SECURITIES HENSIVE PREFERRED COMMON PAID-IN RETAINED COMMON COMPEN- GAINS NET INCOME STOCK STOCK CAPITAL EARNINGS STOCK SATION OF TAXES -------- --------- -------- ---------- ---------- --------- -------- ---------- Balance, December 31, 1996.... -- $517 $103,424 $218,323 $1,283,273 $(279,143) $(3,374) $28,350 Comprehensive Income: Net Income.................. $256,685 -- -- -- 256,685 -- -- -- Unrealized Gains on Securities: Unrealized Securities Gains Net of Taxes of $14,254................. 24,945 -- -- -- -- -- -- -- Reclassification Adjustment for Gains Included in Net Income Net of Taxes of $600.... (1,197) -- -- -- -- -- -- -- -------- Total Unrealized Gains on Securities....... 23,748 -- -- -- -- -- -- 23,748 -------- Comprehensive Income.......... $280,433 -- -- -- -- -- -- -- ======== Transactions by Affiliates Prior to Combination........ -- -- -- -- (1,297) -- -- -- Issuance of 9,808,255 Common Shares and 2,515,955 Treasury Common Shares in the Acquisition of Security Capital Corporation ("Security")................ -- -- 9,809 406,726 -- 66,806 -- -- Common Shares Held for Deferred Compensation and Retirement Plans Assumed in the Acquisition of Security--148,997 Common Shares...................... -- -- -- -- -- -- (5,559) -- Issuance of 1,922,114 Treasury Common Shares on Conversion of Convertible Notes........ -- -- -- (33,868) -- 50,725 -- -- Issuance of 168,185 Preferred Shares on Conversion of 1,922,114 Common Shares..... -- 168 -- 50,557 -- (50,725) -- -- Issuance of 1,880,929 Common and Treasury Common Shares Under Stock Option and Restricted Stock Plans...... -- -- 18 (24,623) (40) 48,800 (155) -- Acquisition of 1,298,633 Common Shares............... -- -- (66) (12,075) -- (52,250) -- -- Dividends Declared on Preferred Stock--$8.78 per Share....................... -- -- -- -- (5,671) -- -- -- Dividends Declared on Common Stock--$0.785 per Share..... -- -- -- -- (72,304) -- -- -- Repayment of ESOP Loan........ -- -- -- -- -- -- 332 -- Net Change in Deferred Compensation................ -- -- -- 155 -- -- (541) -- Income Tax Benefit for Compensation Expense for Tax Purposes in Excess of Amounts Recognized for Financial Reporting Purposes.................... -- -- -- 15,704 -- -- -- -- ---- -------- -------- ---------- --------- ------- ------- Balance, December 31, 1997.... $685 $113,185 $620,899 $1,460,646 $(215,787) $(9,297) $52,098 ==== ======== ======== ========== ========= ======= =======
The accompanying notes are an integral part of the Consolidated Financial Statements. 36 38 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000'S EXCEPT SHARE DATA)
UNREALIZED COMPRE- ADDITIONAL TREASURY DEFERRED SECURITIES HENSIVE PREFERRED COMMON PAID-IN RETAINED COMMON COMPEN- GAINS NET INCOME STOCK STOCK CAPITAL EARNINGS STOCK SATION OF TAXES -------- --------- -------- ---------- ---------- --------- -------- ---------- Balance, December 31, 1997....... -- $685 $113,185 $620,899 $1,460,646 $(215,787) $ (9,297) $52,098 Comprehensive Income: Net Income..................... $301,323 -- -- -- 301,323 -- -- -- Unrealized Gains on Securities: Unrealized Securities Gains Net of Taxes of $6,367..... 11,262 -- -- -- -- -- -- -- Reclassification Adjustment for Gains Included in Net Income Net of Taxes of $2,940..................... (5,258) -- -- -- -- -- -- -- -------- Total Unrealized Gains on Securities............. 6,004 -- -- -- -- -- -- 6,004 -------- Comprehensive Income............. $307,327 -- -- -- -- -- -- -- ======== Transactions by Affiliates Prior to Combination................. -- -- -- -- (327) -- -- -- Issuance of 526,200 Treasury Common Shares in the 1998 Business Combination........... -- -- (526) (14,255) -- 14,781 -- -- Issuance of 1,133,564 Common and Treasury Common Shares Under Stock Option and Restricted Stock Plans.................... -- -- 139 (10,830) (592) 28,151 (1,728) -- Acquisition of 697,247 Common Shares......................... -- -- (41) 821 -- (33,799) 486 -- Dividends Declared on Preferred Stock -- $9.63 Per Share....... -- -- -- -- (6,603) -- -- -- Dividends Declared on Common Stock -- $0.86 Per Share....... -- -- -- -- (90,311) -- -- -- Repayment of ESOP Loan........... -- -- -- 1,246 -- -- 1,373 -- Merger/Restructuring Charge...... -- -- -- 9,893 -- -- -- -- Transfer of 246,854 Treasury Common Shares to Directors' Deferred Compensation Trust.... -- -- -- -- -- 12,608 (12,608) -- Net Change in Deferred Compensation................... -- -- -- 175 (10) -- 2,136 -- Income Tax Benefit for Compensation Expense for Tax Purposes in Excess of Amounts Recognized for Financial Reporting Purposes............. -- -- -- 13,846 -- -- -- -- Other............................ -- -- -- -- (3) -- 1 -- ---- -------- -------- ---------- --------- -------- ------- Balance, December 31, 1998....... $685 $112,757 $621,795 $1,664,123 $(194,046) $(19,637) $58,102 ==== ======== ======== ========== ========= ======== =======
The accompanying notes are an integral part of the Consolidated Financial Statements. 37 39 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($000'S EXCEPT SHARE DATA)
UNREALIZED SECURITIES COMPRE- ADDITIONAL TREASURY DEFERRED GAINS/ HENSIVE PREFERRED COMMON PAID-IN RETAINED COMMON COMPEN- (LOSSES) NET INCOME STOCK STOCK CAPITAL EARNINGS STOCK SATION OF TAXES -------- --------- -------- ---------- ---------- --------- -------- ------------ Balance, December 31, 1998.... -- $ 685 $112,757 $621,795 $1,664,123 $(194,046) $(19,637) $ 58,102 Comprehensive Income: Net Income.................. $354,511 -- -- -- 354,511 -- -- -- Unrealized Gains/(Losses) on Securities: Unrealized Securities Losses Net of Taxes of $51,914................. (91,851) -- -- -- -- -- -- -- Reclassification Adjustment for Gains Included in Net Income Net of Taxes of $538.... 1,000 -- -- -- -- -- -- -- -------- Total Unrealized Losses on Securities.......... (90,851) -- -- -- -- -- -- (90,851) -------- Comprehensive Income.......... $263,660 -- -- -- -- -- -- -- ======== Issuance of 3,832,957 Treasury Common Shares on Conversion of 348,944 Shares of Preferred Stock............. -- (349) -- (160,635) -- 160,984 -- -- Issuance of 988,557 Treasury Common Shares Under Stock Option and Restricted Stock Plans....................... -- -- -- (16,806) -- 36,503 (1,332) -- Acquisition of 5,109,028 Common Shares............... -- -- -- (82) -- (317,954) 198 -- Dividends Declared on Preferred Stock -- $10.58 Per Share................... -- -- -- -- (6,297) -- -- -- Dividends Declared on Common Stock -- $0.94 Per Share.... -- -- -- -- (98,193) -- -- -- Net Change in Deferred Compensation................ -- -- -- -- -- -- 641 -- Income Tax Benefit for Compensation Expense for Tax Purposes in Excess of Amounts Recognized for Financial Reporting Purposes.................... -- -- -- 12,764 -- -- -- -- Other......................... -- -- -- 61 (16) -- -- -- ----- -------- -------- ---------- --------- -------- -------- Balance, December 31, 1999.... $ 336 $112,757 $457,097 $1,914,128 $(314,513) $(20,130) $(32,749) ===== ======== ======== ========== ========= ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. 38 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Marshall & Ilsley Corporation ("M&I" or the "Corporation") is a bank and savings and loan holding company that provides financial services to a wide variety of corporate, institutional, government and individual customers. The Corporation's principal activities consist of banking and data processing services. Banking services, lending and accepting deposits from retail and commercial customers, are provided through 26 banks located in Wisconsin, one federally chartered thrift located in Nevada with branches in Illinois and Florida and one bank in Arizona. Financial and data processing services and software sales are provided through the Data Services Division of the Corporation and two other nonbank subsidiaries. Other financial services provided by M&I include personal property lease financing; investment management and advisory services; commercial and residential mortgage banking; venture capital and financial advisory services; trust services to residents of Wisconsin, Arizona and Florida; and brokerage and insurance services. M&I's largest affiliates and principal operations are in Wisconsin; however, it has activities in other markets, particularly in certain neighboring Midwestern states, and in Arizona, Nevada and Florida. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Consolidation principles -- The Consolidated Financial Statements include the accounts of Marshall & Ilsley Corporation and all subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. Certain amounts in the 1998 and 1997 Consolidated Financial Statements have been reclassified to conform with the 1999 presentation. Cash and cash equivalents -- For purposes of the Consolidated Financial Statements, the Corporation defines cash equivalents as short-term investments which have an original maturity of three months or less and are readily convertible into cash. Securities -- Securities, when purchased, are designated as Trading, Investment Securities Held to Maturity, or Investment Securities Available for Sale and remain in that category until they are sold or mature. The specific identification method is used in determining the cost of securities sold. Investment Securities Held to Maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts. The Corporation designates investment securities as held to maturity only when it has the positive intent and ability to hold them to maturity. Investment Securities Available for Sale are carried at fair value with fair value adjustments net of the related income tax effects reported as a separate component of shareholders' equity. Short-term Investments, other than Trading Securities, are carried at cost, which approximates market value. Trading Securities are carried at fair value, with adjustments to the carrying value reflected in the Consolidated Statements of Income. Loans and leases -- Interest on loans, other than direct financing leases, is recognized as income based on the loan principal outstanding during the period. Unearned income on financing leases is recognized over the lease term on a basis that results in an approximate level rate of return on the lease investment. Loans are generally placed on nonaccrual status when they are past due 90 days as to either interest or principal. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged to interest income on loans. A nonaccrual loan may be restored to an accrual basis when interest and principal payments are brought current and collectibility of future payments is not in doubt. The Corporation defers and amortizes fees and certain incremental direct costs, primarily salary and employee benefit expenses, over the contractual term of the loan or lease as an adjustment to the yield. The unamortized net fees and costs are reported as part of the loan or lease balance outstanding. 39 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Allowance for loan and lease losses -- The allowance for loan and lease losses is maintained at a level believed adequate by management to absorb estimated probable losses in the loan and lease portfolio. Management's determination of the adequacy of the allowance is based on a continual review of the loan and lease portfolio, loan and lease loss experience, economic conditions, growth and composition of the portfolio, and other relevant factors. As a result of management's continual review, the allowance is adjusted through provisions for loan and lease losses charged against income. Premises and equipment -- Land is recorded at cost. Premises and equipment are recorded at cost and depreciated principally on the straight-line method with annual rates varying from 10 to 50 years for buildings and 3 to 10 years for equipment. Long-lived assets which are considered impaired are carried at fair value and long-lived assets to be disposed of are carried at the lower of the carrying amount or fair value less cost to sell. Maintenance and repairs are charged to expense and betterments are capitalized. Other real estate owned -- Other real estate owned includes assets that have been acquired in satisfaction of debts and bank branch premises held for sale. Other real estate acquired in satisfaction of debts is recorded at fair value, less estimated selling costs, and bank branch premises are recorded at the lower of cost or fair value, less estimated selling costs, at the date of transfer. Valuation adjustments required at the date of transfer for assets acquired in satisfaction of debts are charged to the allowance for loan and lease losses, whereas any valuation adjustments on premises are reported in other expense. Subsequent to transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, based upon periodic evaluations. Rental income from properties and gains on sales are included in other income, and property expenses, which include carrying costs, required valuation adjustments and losses on sales, are recorded in other expense. At December 31, 1999 and 1998, other real estate amounted to $6,230 and $8,751, respectively. Mortgage servicing -- Fees related to the servicing of mortgage loans are recorded as income when payments are received from mortgagors. Mortgage loans held for sale to investors are carried at the lower of cost or market, determined on an aggregate basis, based on outstanding firm commitments received for such loans or on current market prices. Mortgage loans held for sale amounted to $15,956 at December 31, 1999 and $137,295 at December 31, 1998. Data processing services -- Data processing and related revenues are accrued and recognized when earned. Revenues attributable to the licensing of software are generally recognized upon delivery and performance of certain contractual obligations, provided that no significant vendor obligations remain and collection of the resulting receivable is deemed probable. Service revenues from customer maintenance fees for ongoing customer support and product updates are recognized ratably over the term of the maintenance period. Service revenues from training and consulting are recognized when the services are performed. Conversion revenue is recognized ratably over the contract period, which may exceed one year. Direct costs associated with the production of computer software which will be marketed or used in data processing operations are capitalized and amortized on the straight-line method over the estimated economic life of the product, generally four years. Such capitalized costs are periodically evaluated for impairment and adjusted to net realizable value when impairment is indicated. Direct costs associated with customer system conversions to the data services operations are capitalized and amortized on the straight-line method over the terms, generally five to seven years, of the related servicing contract. Routine maintenance of software products including maintenance required for the year 2000, design costs and development costs incurred prior to establishment of a product's technological feasibility for software to be sold, are expensed as incurred. 40 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Net unamortized costs at December 31 were:
1999 1998 ------- ------- Software.................................................... $70,904 $55,655 Conversions................................................. 11,788 12,359 ------- ------- Total............................................. $82,692 $68,014 ======= =======
Amortization expense was $23,915, $18,340 and $15,020, for 1999, 1998 and 1997, respectively. Intangibles -- Unamortized intangibles resulting from acquisitions consists of goodwill, core deposit premiums, purchased data processing contract rights and mortgage servicing rights. The Corporation recognizes as separate assets rights to service mortgage loans when the loans are purchased or originated and sold with servicing retained. Mortgage servicing rights are amortized over the periods during which the corresponding mortgage servicing revenues are anticipated to be generated. Purchased data processing contract rights represent the costs to acquire the rights to data processing and software distribution. Such costs are generally amortized over the average contract lives. Goodwill is amortized on the straight-line basis over periods ranging from 15 to 25 years while core deposit premiums are amortized principally on an accelerated basis over periods ranging up to 10 years. The Corporation continually evaluates whether later events and circumstances have occurred to indicate that the carrying value of intangibles should be reduced for possible impairment and utilizes estimates of undiscounted net income over the remaining life to measure recoverability. A valuation allowance is established through a charge to income to the extent that the fair value of any stratum of its mortgage servicing rights is less than its carrying value. The Corporation also has negative goodwill included in other liabilities, the majority of which arose from an acquisition in 1992. Negative goodwill amounted to $4,371 and $5,932 at December 31, 1999 and 1998, respectively. The negative goodwill is being accreted on a straight-line basis over a period of 10 years and amounted to $1,562 in 1999, 1998, and 1997, respectively. Long-term borrowings -- The guaranteed preferred beneficial interest of the Corporation's special purpose finance subsidiary which holds as its sole asset, junior subordinated deferrable interest debentures issued by the Corporation, is classified as long-term borrowings and shown net of its related discount. The distributions, including the related accretion of discount, are classified as interest expense for purposes of the Consolidated Financial Statements. Interest risk management instruments -- As a service to customers and as part of its asset/liability management activities, the Corporation may enter into interest rate futures, forwards, swaps, floors, caps and option contracts. These derivative financial instruments are carried at fair value unless the instrument qualifies for hedge accounting treatment. Fair value adjustments on risk management instruments carried at fair value are reflected in other income. Gains and losses realized on futures and forward contracts qualifying as hedges are deferred and amortized over the terms of the related assets or liabilities and are included as adjustments to interest income or expense. Settlement on interest rate swaps and option contracts are recognized over the lives of the agreements as adjustments to interest income or expense. The hedge accounting method is applied to interest rate swaps that meet the hedge criteria which is discussed below. Under this method, accrued income or expense associated with the swap is recognized as a component of the interest income or expense of the hedged asset or liability. Unrealized gains and losses are recognized on a basis that is consistent with the method of accounting for the hedged asset or liability. Unrealized gains or losses are not recognized for hedged assets or liabilities carried at amortized cost. Unrealized gains and losses on derivative financial instruments which hedge investment securities available for sale are reported as a component of shareholders' equity, net of applicable income tax effects. 41 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) The criteria to qualify an interest rate swap for the hedge accounting method is as follows: 1. The swap must be designated as a hedge and reduce the interest rate risk of the designated asset or liability. 2. The notional amount of the swap must be less than or equal to the amortized cost of the asset or liability to be hedged. 3. The swap must achieve its intended objective of converting the yield on the hedged asset or liability to the desired rate. This criteria is assumed to have been met if the interest rate on the hedged asset or liability is identical to the offsetting rate on the swap. If the two rates are not identical, the correlation between the levels of the two rates since inception of the swap must be measured to ensure that the swap is meeting its intended objective. If an interest risk management instrument is terminated or ceases to qualify for the hedge accounting method, any realized or unrealized gain or loss at that time is deferred and amortized over the remaining period of the original hedge. Any subsequent realized or unrealized gains or losses on instruments that no longer meet the hedge criteria are included in the determination of net income. If the item being hedged is sold, any deferred or unrealized gain or loss on the interest risk management instrument at the time of sale is considered in the determination of the gain or loss on the sale. If the interest risk management instrument is not terminated, it must be carried at fair value on a prospective basis, with changes in fair value included in the determination of periodic net income. Cash flows from interest risk management instruments are reported in the Consolidated Statements of Cash Flows as operating activities. Foreign exchange contracts -- Foreign exchange contracts include such commitments as foreign currency spot, forward, future and option contracts. Foreign exchange contracts and the premiums on options written or sold are carried at market value, with realized and unrealized gains and losses included in other income. Earnings per share -- In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement established new standards for computing and presenting earnings per share which was adopted by the Corporation in the fourth quarter of 1997. Comparative earnings per share for the years and interim periods presented conform with the computational requirements of SFAS 128. Treasury stock -- Treasury stock acquired is recorded at cost and is shown as a reduction of shareholders' equity in the Consolidated Balance Sheets. Treasury stock issued is valued based on average cost. The difference between the consideration received upon issuance and the average cost is charged or credited to additional paid-in capital. New accounting pronouncement -- In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, the FASB issued SFAS 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS 133. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. 42 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Statement 133, as amended, is effective for fiscal years beginning after June 15, 2000. A company may also implement the Statement as of the beginning of any quarter after issuance. Statement 133 cannot be applied retroactively. Statement 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts. With respect to hybrid instruments, a company may elect to apply SFAS 133, as amended, to (1) all hybrid contracts, (2) only those hybrid instruments that were issued, acquired or substantively modified after December 31, 1997, or (3) only those hybrid instruments that were issued, acquired or substantively modified after December 31, 1998. The Corporation has not determined the timing of adoption. Note 18, Fair Value of Financial Instruments presents the fair value of the freestanding derivatives held by the Corporation. Statement 133 would require that those derivative instruments be recognized in the Corporation's Consolidated Balance Sheets as assets or liabilities at their fair value. The Corporation has not yet completed quantifying the other effects of adopting Statement 133 on its consolidated financial statements. However, the Statement could increase volatility in earnings and other comprehensive income. 2. EARNINGS PER SHARE 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):
YEAR ENDED DECEMBER 31, 1999 ------------------------------------ AVERAGE PER INCOME SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ Net income........................................... $354,511 Convertible preferred dividends...................... (6,297) -------- Basic earnings per share Income available to common shareholders............ $348,214 104,859 $3.32 ===== Effect of dilutive securities Convertible preferred stock........................ 6,297 6,543 Stock option, restricted stock and performance plans........................................... -- 1,603 -------- ------- Diluted earnings per share Income available to common shareholders plus assumed conversions............................. $354,511 113,005 $3.14 =====
YEAR ENDED DECEMBER 31, 1998 ------------------------------------ AVERAGE PER INCOME SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ Net income........................................... $301,323 Convertible preferred dividends...................... (6,603) -------- Basic earnings per share Income available to common shareholders............ $294,720 105,810 $2.79 ===== Effect of dilutive securities Convertible preferred stock........................ 6,603 7,677 Stock option, restricted stock and performance plans........................................... -- 1,753 -------- ------- Diluted earnings per share Income available to common shareholders plus assumed conversions............................. $301,323 115,240 $2.61 =====
43 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, 1997 ------------------------------------ AVERAGE PER- INCOME SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ Net income........................................... $256,685 Convertible preferred dividends...................... (5,671) -------- Basic earnings per share Income available to common shareholders............ $251,014 95,651 $2.62 ===== Effect of dilutive securities Convertible preferred stock........................ 5,671 7,208 8.5% Convertible debt.............................. 233 469 Stock option, restricted stock and performance plans........................................... -- 2,099 Forward repurchase contract........................ -- 120 -------- ------- Diluted earnings per share Income available to common shareholders plus assumed conversions............................. $256,918 105,547 $2.43 =====
Options to purchase shares of common stock not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares for the year ended December 31, are as follows:
GRANT DATE EXERCISE PRICE 1999 1998 1997 - ---------- -------------- ------ --------- ------- 10/01/97..................................... $50.125 -- -- 3,500 12/11/97..................................... 57.000 -- 954,350 996,450 04/28/98..................................... 57.625 -- 59,000 -- 06/11/98..................................... 53.719 -- 8,000 -- 04/27/99..................................... 67.000 60,000 -- -- 05/10/99..................................... 70.063 1,500 -- -- 05/20/99..................................... 67.875 2,500 -- -- 10/29/99..................................... 67.125 2,000 -- -- ------ --------- ------- Total options excluded from earnings per share............... 66,000 1,021,350 999,950 ====== ========= =======
3. BUSINESS COMBINATIONS The Corporation has consummated the following business combinations during the three years ended December 31, 1999:
CONSIDERATION --------------------- COMMON METHOD OF ORGANIZATION DATE CONSUMMATED CASH STOCK ACCOUNTING - ------------ ----------------- -------- ---------- ---------- Cardpro Services, Inc. ......... October 1, 1999 $ 13,110 -- Purchase Electronic Banking Services..... April 1, 1999 67,120 -- Purchase Moneyline Express............... December 31, 1998 6,750 -- Purchase Advantage Bancorp, Inc. ........ April 1, 1998 -- 3,981,152 Pooling Security Capital Corporation.... October 1, 1997 375,806 12,324,210 Purchase
On October 1, 1999, the Corporation through its Data Services Division acquired certain assets of Cardpro Services, Inc., a provider of plastic card personalization and procurement services located in Illinois. The assets were acquired for cash in a transaction accounted for using the purchase method of accounting. 44 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Initial goodwill, subject to the completion of appraisals and valuations of the assets acquired and liabilities assumed, amounted to $10.1 million and is being amortized on a straight-line basis over ten years. Additional payments, contingent upon earnings, may be made through 2005. The total cumulative maximum payout over the contingency period is $2.16 million. Contingency payments, if made, will be charged to goodwill. There was no in-process research and development acquired in this transaction. On April 1, 1999, the Corporation, through its Data Services Division, completed the acquisition of the assets, operational processes and customer relationships of the Electronic Banking Services business unit of ADP in a cash transaction using the purchase method of accounting. The acquired software products and outsourcing solutions are designed to provide businesses with access to their banking information and transactions through a spectrum of delivery methods. The total purchase price amounted to $67.12 million. Initial goodwill, subject to the completion of appraisals and valuations of the assets acquired and liabilities assumed, amounted to $52.3 million and is being amortized on a straight-line basis over twenty five years. There was no in-process research and development acquired in this transaction. Moneyline Express, Inc. ("Moneyline"), was a wholly-owned subsidiary of Travelers Express Company, Inc. that specializes in electronic bill payment. Moneyline provides consumer bill-payment processing to financial institution customers including M&I's home-banking customers. On December 31, 1998, the Corporation, through its Data Services Division, acquired certain assets of Moneyline in a cash transaction accounted for as a purchase. Goodwill recorded in this transaction amounted to $5.4 million and is being amortized on a straight-line basis over fifteen years. There was no in-process research and development acquired in this transaction. The April 1, 1998 merger of Advantage Bancorp, Inc. ("Advantage") with and into the Corporation was a tax-free reorganization accounted for as a pooling of interests. In accordance with the terms of the merger, each share of Advantage Common Stock was converted into a right to receive 1.2 shares of the Corporation's Common Stock. The accompanying consolidated financial statements have been restated to give effect to the merger with Advantage. Certain adjustments have been made to conform the presentation of Advantage's information with that of the Corporation. A reconciliation of net interest income and net income of the Corporation as previously reported for the year ended December 31, 1997, to the accompanying Consolidated Financial Statements as restated for the 1998 pooling of interests is as follows: NET INTEREST INCOME: (UNAUDITED) Corporation, as previously reported....................... $564,047 Advantage Bancorp, Inc. .................................. 30,500 -------- Combined.................................................. $594,547 ======== NET INCOME: Corporation, as previously reported....................... $245,144 Advantage Bancorp, Inc. .................................. 11,541 -------- Combined.................................................. $256,685 ========
In conjunction with this transaction the Corporation recorded a merger/restructuring charge of $23.4 million ($16.3 million after-tax). During 1999, the remaining obligation associated with a closed facility was satisfied and the merger/restructuring has been completed. There were no material adjustments to the initial amount recorded. On October 1, 1997 the Corporation completed the merger with Security Capital Corporation ("Security"), the parent of Security Bank S.S.B., a community-oriented financial institution. This merger was accounted for using the purchase method of accounting. Total consideration to Security shareholders was 45 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) approximately $860 million consisting of cash and Common Stock of the Corporation. Identifiable intangibles recorded in the transaction amounted to $48.7 million and consisted of core deposit premiums which are being amortized on an accelerated basis over approximately ten years and mortgage servicing rights. The amount of goodwill recorded in the transaction amounted to $255.0 million and is being amortized on a straight-line basis over twenty five years. In conjunction with this transaction, $18.6 million of exit costs were recorded as liabilities assumed in the acquisition. As of December 31, 1999, the remaining liability amounted to $0.5 million which consists of unpaid severance. Periodic severance payments will continue through 2002. The results of operations for the acquired companies accounted for as purchases are included in the Consolidated Financial Statements from the dates of acquisition. The information below presents, on a pro forma basis, certain historical information for the Corporation, adjusted for the Security transaction, as if the transaction had been consummated on January 1, 1997.
1997 ---------- Pro Forma Corporation and Security (Unaudited) Total Revenues (Interest Income plus Other Income)..... $2,042,753 Net Income............................................. 218,829 Net Income Per Share Basic............................................... $ 2.03 Diluted............................................. 1.90
The pro forma net income shown above for 1997 includes certain merger related expenses incurred by Security prior to consummation of the merger. Merger related expenses, net of gains from required branch divestitures, incurred by Security in 1997, prior to the merger, were approximately $47.5 million on an after tax basis or approximately $0.41 on a diluted per share basis. 4. CASH AND DUE FROM BANKS At December 31, 1999, $8,697 of cash and due from banks was restricted, primarily due to requirements of the Federal Reserve System to maintain certain reserve balances. 5. OTHER SHORT-TERM INVESTMENTS Other short-term investments at December 31 were:
1999 1998 ------ ------- Commercial paper............................................ $ -- $21,400 Interest bearing deposits in other banks.................... 6,828 30,571 ------ ------- Total other short-term investments................ $6,828 $51,971 ====== =======
46 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) 6. SECURITIES The book and market values of securities at December 31 were:
1999 1998 ----------------------- ----------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies........................ $3,924,183 $3,852,731 $3,658,730 $3,723,703 States and political subdivisions.................... 111,882 109,971 147 148 Mortgage backed securities......... 179,677 176,780 153,892 154,306 Other.............................. 192,643 217,714 145,614 171,264 ---------- ---------- ---------- ---------- Total...................... $4,408,385 $4,357,196 $3,958,383 $4,049,421 ========== ========== ========== ========== Investment Securities Held to Maturity: U.S. Treasury and government agencies........................ $ 9 $ 9 $ -- $ -- States and political subdivisions.................... 1,165,756 1,132,148 1,051,565 1,090,380 Other.............................. 4,969 4,969 4,668 4,668 ---------- ---------- ---------- ---------- Total...................... $1,170,734 $1,137,126 $1,056,233 $1,095,048 ========== ========== ========== ==========
The unrealized gains and losses of securities at December 31 were:
1999 1998 ----------------------- ----------------------- UNREALIZED UNREALIZED UNREALIZED UNREALIZED GAINS LOSSES GAINS LOSSES ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies.... $ 9,199 $80,651 $72,791 $7,818 States and political subdivisions........ 5 1,916 1 -- Mortgage backed securities............... 124 3,021 489 75 Other.................................... 25,257 186 25,831 181 ------- ------- ------- ------ Total............................ $34,585 $85,774 $99,112 $8,074 ======= ======= ======= ====== Investment Securities Held to Maturity: U.S. Treasury and government agencies.... $ -- $ -- $ -- $ -- States and political subdivisions........ 3,477 37,085 38,906 91 Other.................................... -- -- -- -- ------- ------- ------- ------ Total............................ $ 3,477 $37,085 $38,906 $ 91 ======= ======= ======= ======
The book value and market value of securities by contractual maturity at December 31, 1999 were:
INVESTMENT SECURITIES INVESTMENT SECURITIES AVAILABLE FOR SALE HELD TO MATURITY ----------------------- ----------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---------- ---------- ---------- ---------- Within one year...................... $ 956,436 $ 941,809 $ 52,427 $ 52,516 From one through five years.......... 2,469,425 2,425,324 325,907 326,701 From five through ten years.......... 692,223 677,305 283,191 281,149 After ten years...................... 290,301 312,758 509,209 476,760 ---------- ---------- ---------- ---------- Total...................... $4,408,385 $4,357,196 $1,170,734 $1,137,126 ========== ========== ========== ==========
47 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) The gross realized gains and losses amounted to $12,074 and $4,398 in 1999, $31,421 and $638 in 1998, and $14,976 and $10,849 in 1997, respectively. Net securities gains of $11,775, $23,638, and $6,705 in 1999, 1998 and 1997, respectively, are included in the line Capital Markets Revenue in the Consolidated Statements of Income. At December 31, 1999, securities with a value of approximately $871,914 were pledged to secure public deposits, short-term borrowings, and for other purposes required by law. Approximately $259 million of adjustable rate mortgage loans (ARMs) were securitized and transferred to investment securities available for sale during 1998. There were no ARMs securitized during 1999. The Corporation has agreed to guarantee the first 4% of the loan pools securitized through government agencies against potential loss. Since inception of the program, approximately $1.2 billion of ARMs have been securitized by M&I and no losses have been incurred. These are noncash transactions for purposes of the Consolidated Statements of Cash Flows. 7. LOANS AND LEASES Loans and Leases at December 31 were:
1999 1998 ----------- ----------- Commercial, financial and agricultural..................... $ 4,754,857 $ 4,077,837 Real estate: Construction............................................. 494,558 425,442 Residential mortgage..................................... 4,941,450 4,045,022 Commercial mortgage...................................... 4,034,771 3,667,924 Personal................................................... 1,299,416 1,166,541 Lease financing............................................ 810,009 613,400 ----------- ----------- Total loans and leases........................... $16,335,061 $13,996,166 =========== ===========
The Corporation's lending activities are concentrated primarily in the Midwest. Approximately 4% of its portfolio consists of loans granted to customers located in Arizona. The Corporation had $0.4 million in foreign credits at December 31, 1999. The Corporation's loan portfolio consists of business loans extending across many industry types, as well as loans to individuals. As of December 31, 1999, total loans to any group of customers engaged in similar activities and having similar economic characteristics, as defined by standard industrial classifications, did not exceed 10% of total loans. The Corporation evaluates the credit risk of each customer on an individual basis and, where deemed appropriate, collateral is obtained. Collateral varies by individual loan customer but may include accounts receivable, inventory, real estate, equipment, deposits, personal and government guaranties, and general security agreements. Access to collateral is dependent upon the type of collateral obtained. On an on-going basis, the Corporation monitors its collateral and the collateral value related to the loan balance outstanding. An analysis of loans outstanding to directors and officers, including their related interests, of the Corporation and its significant subsidiaries for 1999 is presented in the following table. All of these loans were made in the ordinary course of business with normal credit terms, including interest rates and collateral. The beginning balance has been adjusted to reflect the activity of newly-appointed directors and executive officers. 48 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Loans to directors and executive officers: Balance, beginning of year................................ $238,983 New loans................................................. 147,197 Repayments................................................ (99,056) -------- Balance, end of year...................................... $287,124 ========
8. ALLOWANCE FOR LOAN AND LEASE LOSSES An analysis of the allowance for loan and lease losses follows:
1999 1998 1997 -------- -------- -------- Balance, beginning of year........................... $226,052 $208,651 $161,659 Allowance of banks acquired.......................... -- -- 42,773 Provision charged to expense......................... 25,419 27,090 17,633 Charge-offs.......................................... (32,557) (20,945) (21,502) Recoveries........................................... 6,948 11,256 8,088 -------- -------- -------- Balance, end of year................................. $225,862 $226,052 $208,651 ======== ======== ========
As of December 31, 1999 and 1998, nonaccrual loans and leases totaled $106,387 and $101,346, respectively. At December 31, 1999 and 1998 the Corporation's recorded investment in impaired loans and leases and the related valuation allowance are as follows:
1999 1998 ---------------------- ---------------------- RECORDED VALUATION RECORDED VALUATION INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE ---------- --------- ---------- --------- Total impaired loans and leases (Nonaccrual and renegotiated)......................... $107,095 $102,324 Loans and leases excluded from individual evaluation................................ (32,255) (39,655) -------- -------- Impaired loans evaluated.................... $ 74,840 $ 62,669 ======== ======== Valuation allowance required................ $ 3,533 $980 $ 4,132 $836 No valuation allowance required............. 71,307 -- 58,537 -- -------- ---- -------- ---- Impaired loans evaluated.................... $ 74,840 $980 $ 62,669 $836 ======== ==== ======== ====
The recorded investment in impaired loans for which no allowance is required is net of applications of cash interest payments and net of previous direct writedowns of $13,862 in 1999 and $4,813 in 1998 against the loan balance outstanding. The required valuation allowance is included in the allowance for loan and lease losses in the Consolidated Balance Sheets. The average recorded investment in total impaired loans and leases for the years ended December 31, 1999 and 1998 amounted to $116,835 and $81,154, respectively. Interest payments received on impaired loans and leases are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions of principal. Interest income recognized on total impaired loans and leases amounted to $6,253 in 1999, $6,808 in 1998, and $3,678 in 1997. The gross income that would have been recognized had such loans and leases 49 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) been performing in accordance with their original terms would have been $9,980 in 1999, $8,795 in 1998, and $6,328 in 1997. 9. PREMISES AND EQUIPMENT The composition of premises and equipment at December 31 was:
1999 1998 -------- -------- Land........................................................ $ 46,896 $ 46,557 Buildings and leasehold improvements........................ 325,889 312,349 Furniture and equipment..................................... 421,028 405,303 -------- -------- 793,813 764,209 Less accumulated depreciation............................... 423,279 403,864 -------- -------- Total premises and equipment...................... $370,534 $360,345 ======== ========
Depreciation expense was $62,845 in 1999, $66,107 in 1998, and $59,254 in 1997. The Corporation leases certain of its facilities and equipment. Rent expense under such operating leases was $50,200 in 1999, $39,338 in 1998, and $30,723 in 1997, respectively. The future minimum lease payments under operating leases that have initial or remaining noncancellable lease terms in excess of one year for 2000 through 2004 are $18,653, $16,640, $13,569, $11,928, and $10,630, respectively. 10. DEPOSITS The composition of deposits at December 31 was:
1999 1998 ----------- ----------- Noninterest bearing demand................................. $ 2,830,960 $ 2,929,195 Savings and NOW............................................ 6,966,423 6,768,523 CDs $100,000 and over...................................... 1,885,933 1,497,315 Other time deposits........................................ 3,419,333 3,544,614 Foreign deposits........................................... 1,332,533 1,180,272 ----------- ----------- Total deposits................................... $16,435,182 $15,919,919 =========== ===========
At December 31, 1999, the scheduled maturities for CDs $100,000 and over, other time deposits, and foreign deposits were: 2000..................................................... $4,331,258 2001..................................................... 1,212,337 2002..................................................... 610,480 2003..................................................... 102,026 2004 and thereafter...................................... 381,698 ---------- $6,637,799 ==========
50 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) 11. SHORT-TERM BORROWINGS Short-term borrowings at December 31 were:
1999 1998 ---------- ---------- Funds purchased and security repurchase agreements.......... $1,402,077 $1,712,165 U.S. Treasury demand notes.................................. 169,615 58,618 U.S. Treasury demand notes -- special direct................ 1,874,714 -- Senior bank notes........................................... 549,825 -- Commercial paper............................................ 246,514 60,162 Current maturities of long-term borrowings.................. 292,890 242,735 Other....................................................... 4,620 3,605 ---------- ---------- Total short-term borrowings....................... $4,540,255 $2,077,285 ========== ==========
U.S. Treasury demand notes -- special direct represent secured borrowings of three banking affiliates with a maximum term of 21 days. In September, 1999, eight of the Corporation's affiliate banking subsidiaries began offering bank notes. Bank notes may be senior or subordinated in ranking, have maturities ranging from 7 days to 30 years at a fixed or floating rate up to a maximum of $5.0 billion aggregate principal amount outstanding at any time. The bank notes are offered through certain designated agents and are offered and sold only to institutional investors. The bank notes are sole obligations of the respective issuing banks and are not obligations of or guaranteed by the Corporation. The amount outstanding at December 31, 1999, represents the aggregate borrowings of four banking subsidiaries and mature in September and October of 2000. Each bank note outstanding has a fixed rate which ranged from 6.07% to 6.36%. Interest will be paid at maturity. Unused lines of credit, primarily to support commercial paper borrowings, were $70.0 million at December 31, 1999 and $40.0 million at December 31, 1998. 12. LONG-TERM BORROWINGS Long-term borrowings at December 31 were:
1999 1998 -------- ---------- CORPORATION: 6.375% subordinated notes due in 2003....................... $ 99,722 $ 99,654 Medium-term Series C and D notes............................ 151,130 101,930 7.65% cumulative company-obligated mandatorily redeemable capital trust pass-through securities..................... 199,128 199,096 Other....................................................... 9,628 13,090 SUBSIDIARIES: Borrowings from Federal Home Loan Bank (FHLB): Floating rate advances.................................... 250,000 300,000 Fixed rate advances....................................... 208,795 281,837 Nonrecourse notes........................................... 24,999 26,830 9.75% obligation under capital lease due through 2006....... 3,472 3,825 Other....................................................... 11,040 10,955 -------- ---------- 957,914 1,037,217 Less current maturities..................................... 292,890 242,735 -------- ---------- Total long-term borrowings........................ $665,024 $ 794,482 ======== ==========
51 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) The 6.375% subordinated notes are not redeemable prior to maturity and qualify as "Tier 2" or supplementary capital for regulatory capital purposes. Interest is payable semiannually. At December 31, 1999, there were $27,130 of medium-term Series C notes outstanding. The medium-term Series C notes have fixed interest rates of 6.26% to 6.75% and mature at various amounts and times through 2002. No additional borrowings may occur under the Series C notes. At December 31, 1999, medium-term Series D notes outstanding amounted to $124,000 with fixed interest rates of 6.18% to 7.20%. Series D notes mature at various times and amounts in 2000 through 2004. No additional borrowings may occur under the Series D notes. In December 1996, the Corporation formed M&I Capital Trust A (the "Trust") and issued $200 million in liquidation or principal amount of cumulative preferred capital securities. Holders of the capital securities are entitled to receive cumulative cash distributions at an annual rate of 7.65% payable semiannually. Concurrently with the issuance of the capital securities, the Trust invested the proceeds, together with the consideration paid by the Corporation for the common interest in the Trust, in junior subordinated deferrable interest debentures ("subordinated debt") issued by the Corporation. The subordinated debt, which represents the sole asset of the Trust, bears interest at an annual rate of 7.65% payable semiannually and matures on December 1, 2026. The subordinated debt is junior in right of payment to all present and future senior indebtedness of the Corporation. The Corporation may redeem the subordinated debt in whole or in part at any time on or after December 1, 2006 at specified call premiums, and at par on or after December 1, 2016. In addition, in certain circumstances the subordinated debt may be redeemed at par upon the occurrence of certain events. The Corporation's right to redeem the subordinated debt is subject to regulatory approval. The Corporation has the right, subject to certain conditions, to defer payments of interest on the subordinated debt for extension periods, each period not exceeding ten consecutive semiannual periods. As a consequence of the Corporation's extension of the interest payment period, distributions on the capital securities would be deferred. In the event the Corporation exercises its right to extend an interest payment period, the Corporation is prohibited from making dividend or any other equity distributions during such extension period. The payment of distributions, liquidation of the Trust or payment upon the redemption of the capital securities are guaranteed by the Corporation. The Corporation, as owner of the common interest in the Trust, has the right at any time to terminate the Trust, subject to certain conditions. In circumstances other than maturity or redemption of the subordinated debt, the subordinated debt would be distributed to the holders of the Trust securities on a pro rata basis in liquidation of the holders' interests in the Trust. The capital securities qualify as "Tier 1" capital for regulatory capital purposes. Fixed rate FHLB advances were assumed in conjunction with the April 1, 1998 Advantage merger and mature at various times in 2000 through 2007. A portion of the advances are subject to periodic principal payments. $28.5 million may be repaid without penalty at six month intervals. All other advances are subject to a prepayment penalty if they are repaid prior to maturity. Borrowings from FHLB were also assumed in conjunction with the October 1, 1997 Security merger. The floating rate advances mature in increments of $50 million at various times in 2000 through 2001. The interest rate is reset monthly based on the London Interbank Offered Rate (LIBOR). One floating rate advance in the amount of $50 million is callable by FHLB semiannually after November 1997 upon ten days notice. The fixed rate advances have interest rates which range from 5.03% to 8.86% and mature at various times in 2000 through 2012. A portion of the fixed rate advances are subject to periodic principal payments. 52 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Fixed rate advances in the amount of $100 million are callable every three months beginning in February 1998 upon five days notice. A portion of the FHLB borrowings can be prepaid. The Corporation is required to maintain unencumbered first mortgage loans and mortgage-related securities such that the outstanding balance of FHLB advances does not exceed 60% of the book value of this collateral. In addition, a portion of these advances are collateralized by all FHLB stock. The nonrecourse notes are reported net of prepaid interest and represent borrowings by the leasing subsidiary from banks and other financial institutions. These notes have a weighted average interest rate of 8.25% at December 31, 1999 and are due in installments over varying periods through 2005. Lease financing receivables at least equal to the amount of the notes are pledged as collateral. Scheduled maturities of long-term borrowings are: $279,772, $56,564, $116,701, and $2,646 for 2001 through 2004, respectively. 13. SHAREHOLDERS' EQUITY 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 purposes. Series A is nonvoting preferred stock. The same cash dividends will be paid on Series A as would have been paid on the common stock exchanged for Series A. Except under limited circumstances, the holder may not sell, transfer or otherwise dispose of stock acquired by conversion, and then, only under prescribed conditions and subject to the Corporation's right of first refusal. The holder has the option to convert Series A into common stock at the same ratio that the common stock was exchanged for Series A. During 1999, the holder of Series A converted 348,944 shares of Series A into 3,832,957 shares of common stock which were issued out of the Corporation's treasury common stock. This is a noncash transaction for purposes of the Consolidated Statements of Cash Flows. At December 31, 1999, there were 336,370 shares of Series A outstanding which are convertible into 3,844,228 shares of common stock. The preferred stock is treated as a common stock equivalent in all applicable per share calculations. In 1998, the Corporation began sponsoring a deferred compensation plan for its non-employee directors and the non-employee directors of its affiliates. Participants may elect to have their deferred fees used to purchase M&I common stock with dividend reinvestment. Such shares will be distributed to plan participants in accordance with the plan provisions. At December 31, 1999 and 1998, 267,535 and 246,854 shares of M&I common stock, respectively, were held in a grantor trust. The aggregate cost of such shares is included in Deferred Compensation as a reduction of shareholders' equity in the Consolidated Balance Sheets and amounted to $13,525 at December 31, 1999 and $12,608 at December 31, 1998. In conjunction with the Security merger, the Corporation assumed certain deferred compensation and nonqualified retirement plans for former directors and executive officers of Security. At December 31, 1999 and 1998, 106,333 and 119,069 common shares of M&I Stock, respectively, were maintained in a grantor trust with such shares to be distributed to plan participants in accordance with the provisions of the plans. The aggregate cost of such shares of $4,218 and $5,065 at December 31, 1999 and 1998, respectively, is included in Deferred Compensation as a reduction of shareholders' equity in the Consolidated Balance Sheets. The Corporation issues treasury common stock in conjunction with exercises of stock option and restricted stock, acquisitions, and conversions of convertible securities. Treasury shares are acquired from restricted stock forfeitures, shares tendered to cover tax withholding associated with stock option exercises and vesting of key restricted stock, mature shares tendered for stock option exercises in lieu of cash and open market purchases in accordance with approved share repurchase programs. The Corporation is currently 53 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) authorized to repurchase up to 6.0 million shares per year. During 1999, shares repurchased in accordance with the approved plan, amounted to 5.1 million shares with an aggregate cost of $317.1 million. Federal banking regulatory agencies have established capital adequacy rules which take into account risk attributable to balance sheet assets and off-balance sheet activities. All banks and bank holding companies must meet a minimum total risk-based capital ratio of 8%. Of the 8% required, at least half must be comprised of core capital elements defined as Tier 1 capital. The federal banking agencies also have adopted leverage capital guidelines which banking organizations must meet. Under these guidelines, the most highly rated banking organizations must meet a minimum leverage ratio of at least 3% Tier 1 capital to total assets, while lower rated banking organizations must maintain a ratio of at least 4% to 5%. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. At December 31, 1999 and 1998, the most recent notification from the Federal Reserve Board categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Corporation's category. To be well capitalized under the regulatory framework, the Tier 1 capital ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%. The Corporation's risk-based capital and leverage ratios are as follows ($ in millions):
RISK-BASED CAPITAL RATIOS --------------------------------------------------------- AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998 -------------------------- ---------------------------- AMOUNT RATIO AMOUNT RATIO -------------- --------- ---------------- --------- Tier 1 capital........................ $ 1,992.8 11.11% $ 2,059.9 12.78% Tier 1 capital adequacy minimum requirement......................... 717.5 4.00 644.8 4.00 -------------- --------- ---------------- --------- Excess................................ $ 1,275.3 7.11% $ 1,415.1 8.78% ============== ========= ================ ========= Total capital......................... $ 2,277.0 12.69% $ 2,341.7 14.53% Total capital adequacy minimum requirement......................... 1,435.0 8.00 1,289.6 8.00 -------------- --------- ---------------- --------- Excess................................ $ 842.0 4.69% $ 1,052.1 6.53% ============== ========= ================ ========= Risk-adjusted assets.................. $ 17,937.1 $ 16,120.5 ============== ================
LEVERAGE RATIO --------------------------------------------------------- AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998 -------------------------- ---------------------------- AMOUNT RATIO AMOUNT RATIO -------------- --------- ---------------- --------- Tier 1 capital to adjusted total assets.............................. $ 1,992.8 8.49% $ 2,059.9 9.86% Minimum leverage adequacy requirement......................... 704.4-1,174.1 3.00-5.00 626.9-1,044.8 3.00-5.00 -------------- --------- ---------------- --------- Excess................................ $1,288.4-818.7 5.49-3.49% $1,433.0-1,015.1 6.86-4.86% ============== ========= ================ ========= Adjusted average total assets......... $ 23,481.0 $ 20,896.2 ============== ================
54 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) All of the Corporation's banking subsidiaries' risk-based capital and leverage ratios meet or exceed the defined minimum requirements, and have been deemed well capitalized as of December 31, 1999 and 1998. The following table presents the risk-based capital ratios for the Corporation's significant banking subsidiaries:
SUBSIDIARY TIER 1 TOTAL LEVERAGE - ---------- ------ ----- -------- M&I Marshall & Ilsley Bank December 31, 1999......................................... 9.11% 10.28% 6.93% December 31, 1998......................................... 9.42 10.67 7.14 M&I Bank of Southern Wisconsin December 31, 1999......................................... 9.35 10.60 7.20 December 31, 1998......................................... 9.23 10.48 7.47
Banking subsidiaries are restricted by banking regulations from making dividend distributions above prescribed amounts and are limited in making loans and advances to the Corporation. At December 31, 1999, the retained earnings of subsidiaries available for distribution as dividends without regulatory approval was approximately $207.3 million. 14. INCOME TAXES Total income tax expense for the years ended December 31, 1999, 1998, and 1997 was allocated as follows:
1999 1998 1997 -------- -------- -------- Income before income taxes........................... $173,428 $163,962 $131,487 Shareholders' Equity: Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes........................................ (12,764) (13,846) (15,704) Unrealized (losses)/gains on investment securities available for sale.............................. (51,376) 3,427 13,654 -------- -------- -------- $109,288 $153,543 $129,437 ======== ======== ========
The current and deferred portions of the provision for income taxes were:
1999 1998 1997 -------- -------- -------- Current: Federal............................................ $126,358 $140,649 $109,942 State.............................................. 7,059 20,556 9,766 -------- -------- -------- 133,417 161,205 119,708 Deferred: Federal............................................ 31,860 3,565 4,847 State.............................................. 8,151 (808) 6,932 -------- -------- -------- 40,011 2,757 11,779 -------- -------- -------- Total provision for income taxes........... $173,428 $163,962 $131,487 ======== ======== ========
55 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) The following is a reconciliation between the amount of the provision for income taxes and the amount of tax computed by applying the statutory Federal income tax rate (35%):
1999 1998 1997 -------- -------- -------- Tax computed at statutory rates...................... $184,779 $162,850 $135,860 Increase (decrease) in taxes resulting from: Federal tax-exempt income.......................... (18,145) (15,836) (13,224) State income taxes, net of Federal tax benefit..... 10,050 13,082 10,853 Other.............................................. (3,256) 3,866 (2,002) -------- -------- -------- Total provision for income taxes........... $173,428 $163,962 $131,487 ======== ======== ========
The tax effects of temporary differences that give rise to significant elements of the deferred tax assets and deferred tax liabilities at December 31, are as follows:
1999 1998 -------- -------- Deferred tax assets: Deferred compensation..................................... $ 28,069 $ 29,856 Allowance for loan and lease losses....................... 83,945 82,922 Accrued postretirement benefits........................... 26,016 23,830 Unrealized gains and losses............................... 18,440 -- State NOLs and Other...................................... 66,353 44,229 -------- -------- Total deferred tax assets before valuation allowance... 222,823 180,837 Valuation allowance....................................... (25,727) (11,341) -------- -------- Net deferred tax assets................................ 197,096 169,496 Deferred tax liabilities: Lease revenue reporting................................... 99,518 61,317 Deferred expense, net of unearned income.................. 30,596 22,339 Premises and equipment, principally due to depreciation... 13,064 15,090 Pension funding versus expense............................ 5,234 5,234 Purchase accounting adjustments........................... 14,841 21,039 Unrealized gains and losses............................... -- 32,936 Other..................................................... 38,237 28,282 -------- -------- Total deferred tax liabilities.................... 201,490 186,237 -------- -------- Net deferred tax liability........................ $ 4,394 $ 16,741 ======== ========
The valuation allowance has been provided to reduce certain state deferred tax assets to the amount of tax benefit management believes it will more likely than not realize. At December 31, 1999, the Corporation recognized a $15,061 deferred tax asset related to state net operating losses that may be offset against future taxable income through 2014. At December 31, 1999, the Corporation believes there is at least a 50% chance that the carryforward may expire unused however, as time passes the Corporation will be able to better assess the amount of tax benefit it will realize from using the carryforward. Accordingly, the $15,061 tax benefit of the carryforward has been offset by a $15,061 valuation allowance which is the primary cause of the change in valuation allowance compared to December 31, 1998. The amount of income tax expense related to net securities gains or losses amounted to $3,286, $11,136, and $1,630, in 1999, 1998, and 1997, respectively. 56 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) 15. STOCK OPTION AND RESTRICTED STOCK PLANS The Corporation has Executive Stock Option and Restricted Stock Plans which provide for the grant of nonqualified and incentive stock options, stock appreciation rights and rights to purchase restricted shares to key employees at prices ranging from not less than the par value of the common shares to the market value of the shares at the date of grant. The nonqualified and incentive stock option plans generally provide for the grant of options to purchase shares of the Corporation's common stock for a period of ten years from the date of grant. Options granted generally become exercisable over a period of two or three years from the date of grant however, options granted to Directors of the Corporation vest immediately and options granted after 1996 provide accelerated or immediate vesting for grants to individuals who meet certain age and years of service criteria at the date of grant. Activity relating to nonqualified and incentive stock options was:
WEIGHTED AVERAGE NUMBER OPTION PRICE EXERCISE OF SHARES PER SHARE PRICE ---------- ------------ -------- Shares under option at December 31, 1996......... 6,361,614 $ 5.19-31.88 $18.93 Options granted.................................. 1,635,755 11.56-57.00 40.10 Options lapsed or surrendered.................... (35,338) 19.25-31.88 28.97 Options exercised................................ (1,862,429) 5.19-31.88 13.53 ---------- ------------ ------ Shares under option at December 31, 1997......... 6,099,602 $ 7.67-57.00 $26.19 Options granted.................................. 1,312,150 45.88-57.63 52.06 Options lapsed or surrendered.................... (59,003) 7.67-57.63 49.57 Options exercised................................ (1,102,814) 7.67-40.13 15.01 ---------- ------------ ------ Shares under option at December 31, 1998......... 6,249,935 $ 7.67-57.63 $33.38 Options granted.................................. 1,606,725 57.09-70.06 61.72 Options lapsed or surrendered.................... (81,789) 10.92-62.25 52.15 Options exercised................................ (967,557) 7.67-57.63 19.01 ---------- ------------ ------ Shares under option at December 31, 1999......... 6,807,314 $ 7.68-70.06 $41.88 ========== ============ ======
The range of options outstanding at December 31, 1999 were:
WEIGHTED- WEIGHTED-AVERAGE AVERAGE NUMBER OF SHARES EXERCISE PRICE REMAINING ------------------------- ------------------------- CONTRACTUAL PRICE RANGE OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE LIFE (IN YEARS) - ----------- ----------- ----------- ----------- ----------- --------------- $7-18.......................... 756,784 756,784 $15.81 $15.81 2.0 19-29.......................... 1,648,566 1,648,566 22.37 22.37 4.8 30-40.......................... 641,563 641,563 32.08 32.08 7.0 41-52.......................... 1,190,875 714,099 51.75 51.75 8.9 53-61.......................... 985,801 867,176 57.06 57.02 8.0 Over $61....................... 1,583,725 403,400 61.75 62.28 9.9 --------- --------- ------ ------ --- 6,807,314 5,031,588 $41.88 $35.96 7.1 ========= ========= ====== ====== ===
Options exercisable at December 31, 1998 and 1997 were 4,759,535 and 4,845,927, respectively. The weighted average exercise price for options exercisable was $27.10 at December 31, 1998 and $20.26 at December 31, 1997. 57 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," establishes financial accounting and reporting standards for stock based employee compensation plans. SFAS 123 defines a fair value based method of accounting for employee stock option or similar equity instruments. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, expected dividends and the risk-free interest rate over the expected life of the option. The resulting compensation cost is recognized over the service period, which is usually the vesting period. Compensation cost can also be measured and accounted for using the intrinsic value based method of accounting prescribed in Accounting Principles Board Opinion No. 25 (APBO 25), "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount paid to acquire the stock. The largest difference between SFAS 123 and APBO 25 as it relates to the Corporation is the amount of compensation cost attributable to the Corporation's fixed stock option plans. 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. As permitted by SFAS 123, the Corporation continues to measure compensation cost for such plans using the accounting method prescribed by APBO 25. Had compensation cost for the Corporation's options granted after January 1, 1995 been determined consistent with SFAS 123, the Corporation's net income and earnings per share would have been reduced to the following pro forma amounts:
1999 1998 1997 -------- -------- -------- Net income: As reported........................................ $354,511 $301,323 $256,685 Pro forma.......................................... 332,283 292,227 251,310 Basic earnings per share: As reported........................................ $ 3.32 $ 2.79 $ 2.62 Pro forma.......................................... 3.11 2.70 2.57 Diluted earnings per share: As reported........................................ $ 3.14 $ 2.61 $ 2.43 Pro forma.......................................... 2.95 2.54 2.39
The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option pricing model. The resulting compensation cost was amortized over the vesting period. The fair value of options assumed in the Security merger were included in the determination of total consideration. No compensation cost associated with such options was included in determining pro forma net income. 58 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) The grant date fair values and assumptions used to determine such value are as follows:
1999 1998 1997 ------------ ------------ ------------ Weighted-average grant date fair value..... $ 19.54 $ 13.31 $ 14.80 Assumptions: Risk-free interest rates................. 4.75-6.45% 4.53-5.88% 5.75-6.81% Expected volatility...................... 22.00-24.62% 18.38-22.01% 17.03-18.47% Expected term (in years)................. 6.0 6.0 6.0 Expected dividend yield.................. 1.56% 1.69% 1.42%
Activity relating to the Corporation's Restricted Purchase Rights was:
DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- Restricted stock purchase rights outstanding -- Beginning of Year.................................. -- 10,500 15,000 Restricted stock purchase rights granted............. 21,000 20,250 14,000 Restricted stock purchase rights exercised........... (21,000) (30,750) (18,500) -------- -------- -------- Restricted stock purchase rights outstanding -- End of Year........................................ -- -- 10,500 Weighted-average grant date market value............. $ 64.41 $ 56.40 $ 54.08 Aggregate compensation expense....................... $ 534 $ 556 $ 474 Unamortized deferred compensation.................... $ 2,387 $ 1,964 $ 966
Restrictions on stock issued pursuant to the exercise of stock purchase rights lapse within a seven year period. Accordingly, the compensation related to issuance of the rights is deferred and amortized over the vesting period. Unamortized deferred compensation is reflected as a reduction of shareholders' equity. Shares reserved for the granting of options and stock purchase rights at December 31, 1999 were 1,812,192. The Corporation also has a Long-term Incentive Plan. Under the plan, performance units may be awarded from time to time. Once awarded, additional performance units will be credited to each participant based on dividends paid by the Corporation on its common stock. At the end of a designated vesting period, participants will receive an amount equal to some percent (0%-275%) of the initial performance units credited plus those additional units credited as dividends based on the established performance criteria. Units awarded to certain executives of the Corporation were 50,000 in 1999, 103,250 in 1998, and 104,750 in 1997. The vesting period is three years from the date the performance units were awarded. At December 31, 1999, based on the performance criteria, approximately $12,674 would be due to the participants under the 1998 and 1999 awards. In addition, the amount payable to participants under the 1997 award which was fully vested, was $10,377 at December 31, 1999. Compensation expense in 1998 associated with the accelerated vesting of Advantage's stock options outstanding amounted to $10,372 which is included in Merger/Restructuring in the Consolidated Statements of Income. 16. EMPLOYEE RETIREMENT AND HEALTH PLANS The Corporation has a defined contribution retirement plan and an incentive savings plan for substantially all employees. The retirement plan provides for a guaranteed contribution to eligible participants equal to 2% of compensation. At the Corporation's option, a profit sharing amount may also be contributed and may vary from year to year up to a maximum of 6% of eligible compensation. Under the incentive savings plan, 59 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) employee contributions up to 6% of eligible compensation are matched up to 50% by the Corporation based on the Corporation's return on equity as defined by the plan. Total expense relating to these plans was $37,378, $32,108, and $31,804 in 1999, 1998, and 1997, respectively. The Corporation also has supplemental retirement plans to provide retirement benefits to certain of its key executives. Total expense relating to these plans amounted to $174 in 1999, $1,393 in 1998, and $1,567 in 1997. Security sponsored a trusteed defined benefit pension plan, and defined contribution ESOP plan for substantially all of its employees. In conjunction with the merger, such plans were terminated for accounting purposes. During 1998, distributions of approximately $91.1 million were made to former participants of the plans in the form of lump sum payments and annuity purchases. Final distributions to former participants in the plan are in the process of being completed. Security also sponsored a defined contribution 401(k) plan that merged with the Corporation's incentive savings plan in October of 1998. Advantage also sponsored a defined contribution ESOP plan for substantially all of its employees. In conjunction with the merger, such plan was terminated and distributions were made to the former participants in the plan. Advantage sponsored a defined contribution 401(k) plan that merged with the Corporation's incentive savings plan at October 1, 1998. Total expense relating to these plans amounted to $127 and $319 in 1998 and 1997, respectively. In addition, expense associated with the termination of the ESOP in 1998 amounted to $1,246 which is included in Merger/Restructuring in the Consolidated Statements of Income. 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 the plan was amended. Employees hired or retained from mergers after September 1, 1997 will be granted access to the Corporation's plan upon retirement 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. The plan is not funded. The changes during the year of the accumulated postretirement benefit obligation (APBO) for retiree health benefits are as follows:
1999 1998 ------- ------- APBO, beginning of year..................................... $49,176 $51,702 Service cost................................................ 3,044 3,475 Interest cost on APBO....................................... 3,381 3,804 Actuarial gains............................................. (7,132) (8,268) Change due to acquisitions/divestitures..................... 64 (58) Benefits paid............................................... (1,666) (1,479) ------- ------- APBO, end of year........................................... 46,867 49,176 Unrecognized net gain....................................... 12,215 5,100 Unrecognized prior service cost............................. 1,788 1,992 ------- ------- Accrued postretirement benefit cost......................... $60,870 $56,268 ======= ======= Weighted average discount rate used in determining APBO..... 7.75% 7.00% ======= =======
The assumed health care cost trend for 2000 was 6.50%. The rate was assumed to decrease gradually to 5.00% in 2006 and remain at that level thereafter. 60 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Net periodic postretirement benefit cost for the years ended December 31, 1999, 1998, and 1997 includes the following components:
1999 1998 1997 ------ ------ ------ Service cost............................................... $3,044 $3,475 $2,794 Interest on APBO........................................... 3,381 3,804 3,158 Net amortization and deferral.............................. (157) (263) (89) ------ ------ ------ $6,268 $7,016 $5,863 ====== ====== ======
The assumed health care cost trend rate has a significant effect on the amounts reported for the health care plans. A one percentage point change on assumed health care cost trend rates would have the following effects:
ONE ONE PERCENTAGE PERCENTAGE POINT POINT INCREASE DECREASE ---------- ---------- Effect on total of service and interest cost components..... $1,391 $(1,032) Effect on postretirement benefit obligation................. 6,957 (5,878)
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Financial instruments with off-balance sheet risk at December 31 were:
1999 1998 ---------- ---------- Financial instruments whose amounts represent credit risk: Commitments to extend credit: To commercial customers................................ $6,042,131 $5,684,137 To individuals......................................... 1,529,355 1,368,879 Standby letters of credit, net of participations.......... 536,466 426,905 Commercial letters of credit.............................. 22,423 16,361 Mortgage loans sold with recourse......................... 1,972 2,502 Financial instruments whose amounts exceed the amount of credit risk: Foreign exchange contracts: Commitments to purchase foreign exchange............... 382,528 506,191 Commitments to deliver foreign exchange................ 383,118 510,690 Options written/purchased.............................. 9,715 7,603 Interest risk management instruments: Interest rate swaps....................................... 1,007,000 1,017,000 Interest rate floor....................................... 275,000 25,000 Interest rate cap......................................... -- 25,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. The majority of the Corporation's commitments to extend credit generally provide for the interest rate to be determined at the time the commitment is utilized. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's credit worthiness on an individual basis. Collateral obtained, if any, upon extension of credit, is based upon management's credit evaluation of the customer. Collateral 61 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) requirements and the ability to access collateral is generally similar to that required on loans outstanding as discussed in Note 7. Standby and commercial letters of credit are contingent commitments issued by the Corporation to support the financial obligations of a customer to a third party. Standby letters of credit are issued to support public and private financing, and other financial or performance obligations of customers. Commercial letters of credit are issued to support payment obligations of a customer as buyer in a commercial contract for the purchase of goods. Letters of credit have maturities which generally reflect the maturities of the underlying obligations. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers. If deemed necessary, the Corporation holds various forms of collateral to support letters of credit. Certain mortgage loans sold to government agencies have limited recourse provisions. Foreign exchange contracts are commitments to purchase or deliver foreign currency at a specified exchange rate. The Corporation enters into foreign exchange contracts primarily in connection with trading activities to enable customers involved in international trade to hedge their exposure to foreign currency fluctuations and to minimize the Corporation's own exposure to foreign currency fluctuations resulting from the above. Foreign exchange contracts include such commitments as foreign currency spot, forward, future and, to a much lesser extent, option contracts. The risks in these transactions arise from the ability of the counterparties to perform under the terms of the contracts and the risk of trading in a volatile commodity. The Corporation actively monitors all transactions and positions against predetermined limits established on traders and types of currency to ensure reasonable risk taking. The Corporation's market risk from unfavorable movements in currency exchange rates is minimized by essentially matching commitments to deliver foreign currencies with commitments to purchase foreign currencies. At December 31, 1999, the Corporation's foreign currency position resulting from foreign exchange contracts by major currency was as follows ($000's US):
COMMITMENTS COMMITMENTS TO DELIVER TO PURCHASE FOREIGN FOREIGN EXCHANGE EXCHANGE ----------- ----------- CURRENCY Euros....................................................... $141,726 $142,610 English Pound Sterling...................................... 95,068 94,965 Japanese Yen................................................ 67,080 65,779 Canadian Dollars............................................ 22,034 21,771 Deutsche Mark............................................... 20,824 21,421 Swiss Franc................................................. 17,731 17,570 Australian Dollar........................................... 9,476 9,413 Danish Kronor............................................... 3,053 2,987 Italian Lire................................................ 3,010 2,981 All Other................................................... 3,116 3,031 -------- -------- Total............................................. $383,118 $382,528 ======== ======== Average amount of contracts to deliver/purchase foreign exchange.................................................. $670,287 $665,341 ======== ========
These amounts do not represent the actual credit or market exposure. Interest rate swaps are contractual agreements between counterparties to exchange interest payment streams based on notional principal amounts over a set period of time. Swap agreements normally involve the 62 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) exchange of fixed and floating rate payment obligations without the exchange of the underlying principal amounts. The Corporation enters into interest rate swaps to manage the interest rate volatility associated with variable rate loans, brokered callable CDs, brokered callable step-up CDs, retail callable time deposits and equity indexed CDs at the Corporation's affiliate banks. The Corporation also enters into interest swaps in connection with trading activities to enable customers to manage their interest rate risks. The Corporation's market risk from unfavorable movements in interest rates associated with trading swaps is minimized by concurrently entering into offsetting positions with nearly identical notional values, terms and indexes. Interest rate swaps held for trading consisted of $47.5 million in notional amount of received fixed and $47.5 million in notional amount of pay fixed at December 31, 1999. By comparison interest rate swaps held for trading consisted of $35.0 million in notional amount of received fixed and $35.0 million in notional amount of pay fixed at December 31, 1998. At December 31, 1999, the Corporation's interest rate swap portfolio held for other than trading consisted of the following ($ in millions):
REMAINING MATURITY IN YEARS ---------------------------------------------------------------- OVER OTHER 0-1 YRS 1-2 YRS 2-3 YRS 3-4 YRS 4-5 YRS 5 YRS TOTAL - ----- ------- ------- ------- ------- ------- ----- ------ Notional value.............. $120 $170 $ 75 $204 $121 $317 $1,007 Weighted average receive rate...................... 6.13% 6.43% 5.38% 5.65% 5.74% 6.36% 6.06% Weighted average pay rate (variable)................ 6.17% 6.16% 6.09% 6.15% 5.79% 5.97% 6.03%
The impact on net interest income from interest rate swaps in 1999 and 1998 was a positive $7.20 million and $5.21 million, respectively. Interest caps and floors are contracts with notional principal amounts that require the seller, in exchange for a fee, to make payments to the purchaser if a specified market rate rises/falls above/below the fixed ceiling or floor or index rate on specified future dates. The Corporation purchases standard interest rate caps and floors to manage the interest volatility associated with variable rate loans. At December 31, 1999, the Corporation's interest rate floor portfolio held for other than trading consisted of the following ($ in millions):
WEIGHTED-AVERAGE ----------------------------- NOTIONAL STRIKE REMAINING TYPE AMOUNT RATE INDEX TERM (YEARS) - ---- -------- ------ ----- ------------ Floors.......................................... $275.0 6.386% 6.674% 6.38
No payments were received in 1999 and the effect of amortization of the fee premiums were not material. At December 31, 1999, unamortized premium associated with floors amounted to $5,402. The market risk due to potential fluctuations in interest rates is inherent in swap, cap and floor agreements. Credit risk arises from the potential failure of counterparties to perform in accordance with the terms of the contracts. The Corporation maintains risk management policies that define parameters of acceptable market risk within the framework of its overall asset/liability management strategies and monitor and limit exposure to credit risk. The Corporation believes its credit and settlement procedures serve to minimize its exposure to credit risk. Credit exposure resulting from swaps, caps and floors is represented by their fair value amounts, increased by an estimate of potential adverse position exposure arising from changes over time in interest rates, maturities and other relevant factors. At December 31, 1999 the estimated credit exposure arising from swaps, caps and floors was approximately $0.7 million. 63 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The book values and estimated fair values for on and off-balance sheet financial instruments as of December 31, 1999 and 1998 are reflected below: BALANCE SHEET FINANCIAL INSTRUMENTS ($ IN MILLIONS)
1999 1998 --------------------- --------------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE --------- --------- --------- --------- Financial Assets: Cash and short-term investments........ $ 886.7 $ 886.7 $ 958.7 $ 958.7 Trading securities..................... 40.3 40.3 34.0 34.0 Investment securities available for sale................................ 4,357.2 4,357.2 4,049.4 4,049.4 Investment securities held to maturity............................ 1,170.7 1,137.1 1,056.2 1,095.0 Net loans.............................. 16,109.2 16,201.0 13,770.1 14,338.5 Interest receivable.................... 146.4 146.4 179.3 179.3 Financial Liabilities: Deposits............................... 16,435.2 16,496.0 15,919.9 16,061.5 Short-term borrowings.................. 4,247.4 4,247.4 1,834.6 1,834.6 Long-term borrowings................... 957.9 961.8 1,037.2 1,100.4 Interest payable....................... 113.4 113.4 97.2 97.2
Where readily available, quoted market prices were utilized by the Corporation. If quoted market prices were not available, fair values were based on estimates using present value or other valuation techniques. These techniques were significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The calculated fair value estimates, therefore, cannot be substantiated by comparison to independent markets and, in many cases, could not be realized upon immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the entire Corporation. The following methods and assumptions were used in estimating the fair value for financial instruments. Cash and Short-term Investments The carrying amounts reported for cash and short-term investments approximates the fair values for those assets. Trading and Investment Securities Fair value is based on quoted market prices or dealer quotes. See Note 6, Securities, for additional information. Loans Loans that reprice or mature within three months of December 31 were assigned fair values based on their book value. Market values were used on performing loans where available. Most remaining loan balances were assigned fair values based on a discounted cash flow analysis. The discount rate was based on the treasury yield curve, with rate adjustments for credit quality, cost and profit factors. 64 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Deposits The fair value for demand deposits or any interest bearing deposits with no fixed maturity date was considered to be equal to the carrying value. Time deposits with defined maturity dates were considered to have a fair value equal to the book value if the maturity date was within three months of December 31. The remaining time deposits were assigned fair values based on a discounted cash flow analysis using discount rates which approximate interest rates currently being offered on time deposits with comparable maturities. Borrowings Short-term borrowings are carried at cost which approximates fair value. Long-term debt was generally valued using a discounted cash flow analysis with a discount rate based on current incremental borrowing rates for similar types of arrangements or, if not readily available, based on a build up approach similar to that used for loans and deposits. Long-term borrowings include their related current maturities. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS ($ IN MILLIONS) Fair values of loan commitments and letters of credit have been estimated based on the equivalent fees, net of expenses, that would be charged for similar contracts and customers at December 31.
1999 1998 ---- ---- Loan commitments............................................ $3.8 $1.3 Letters of credit........................................... 4.2 3.3
Foreign exchange contracts are carried at market value (U.S. dollar equivalent of the underlying contract). The fair value of options written/purchased are based on the market value as of the reporting date.
1999 1998 ------ ------ Commitments to purchase foreign exchange.................... $382.5 $506.2 Commitments to deliver foreign exchange..................... 383.1 510.7 Options written/purchased................................... 2.1 1.8
Interest rate swaps, caps and floors are assigned a value based on a discounted cash flow analysis utilizing the forward yield curve.
1999 1998 ------ ----- Interest rate swaps......................................... $(31.9) $13.1 Interest rate floor......................................... 4.0 0.4 Interest rate cap........................................... -- 0.0
See Note 17 for additional information on off-balance sheet financial instruments. 19. BUSINESS SEGMENTS Effective January 1, 1998, M&I adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 superseded SFAS 14, Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not affect results of operations or financial position, but did affect the disclosure of segment information. 65 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) Generally, the Corporation organizes its segments based on legal entities and segregates the Data Services Division of the Corporation. Each entity offers a variety of products and services to meet the needs of its customers and the particular market served. Each entity or division has its own president and is separately managed subject to adherence to Corporate policies. Discrete financial information is reviewed by senior management to assess performance on a monthly basis. Certain segments are combined and consolidated for purposes of assessing financial performance. The Corporation evaluates the profit or loss performance of its segments based on operating income. Operating income is after-tax income excluding nonrecurring charges and charges for services from the holding company, excluding its Data Services Division. Operating income for the banking entities and certain other entities also excludes certain assets, liabilities, equity, revenues and expenses associated with adjustments, charges or credits arising from acquisitions accounted for as purchases (hereinafter called acquisition costs). The accounting policies of the Corporation's segments are the same as those described in Note 1. Intersegment revenues may be based on cost, current market prices or negotiated prices between the providers and receivers of services. Based on the way the Corporation organizes its segments and the requirements of SFAS 131 the Corporation has determined that it has two reportable segments. Information with respect to M&I's segments is as follows: BANKING Banking represents the aggregation of twenty-six separately chartered banks located in Wisconsin, one bank in Arizona, one federally chartered thrift headquartered in Nevada with branches in Illinois and Florida and an operational support subsidiary. Banking consists of accepting deposits, making loans and providing other services such as cash management, foreign exchange and correspondent banking to a variety of commercial and retail customers. Products and services are provided through a variety of delivery channels including traditional branches, supermarket branches, telephone centers, ATMs and the Internet. In addition, the Corporation's larger affiliate banks provide numerous services such as cash management, regional credit, and centralized accounting to M&I's community banking affiliates. Intrasegment revenues, expenses and assets have been eliminated in the following information. ($ in millions)
1999 1998 1997 --------- --------- --------- Revenue: Net interest income............................... $ 701.6 $ 664.8 $ 579.6 Other revenues: Unaffiliated customers......................... 181.9 167.4 133.3 Affiliated customers........................... 15.1 13.5 8.4 --------- --------- --------- Total revenues............................ 898.6 845.7 721.3 Expenses: Intersegment charges.............................. 91.9 91.1 77.5 Other operating expense........................... 314.3 297.6 278.8 --------- --------- --------- Total expenses............................ 406.2 388.7 356.3 Provision for loan and lease losses................. 25.0 26.1 16.7 Income tax expense.................................. 148.6 145.9 117.5 --------- --------- --------- Operating income.................................... $ 318.8 $ 285.0 $ 230.8 ========= ========= ========= Identifiable assets................................. $22,847.1 $20,215.8 $19,270.1 ========= ========= ========= Net purchases of premises and equipment............. $ 25.2 $ 28.3 $ 29.9 ========= ========= ========= Return on tangible equity........................... 19.9% 18.2% 18.9% ========= ========= =========
66 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) The following tables present revenue and operating income by line of business for Banking. This information is based on the Corporation's product profitability measurement system and is an aggregation of the revenues and expenses associated with the products and services within each line of business. Net interest income is derived from the Corporation's internal funds transfer pricing system, expenses are allocated based on available transaction volumes and the provision for loan and lease losses is allocated based on credit risk. Equity is assigned to products and services on a basis that considers market, operational and reputation risk. ($ in millions)
COMMERCIAL RETAIL INVESTMENTS TOTAL BANKING BANKING AND OTHER BANKING ---------- ------- ----------- ------- 1999 Revenue: Net interest income........................ $337.0 $323.2 $ 41.4 $701.6 Other revenue.............................. 54.6 60.0 82.4 197.0 ------ ------ ------ ------ Total revenues..................... $391.6 $383.2 $123.8 $898.6 ====== ====== ====== ====== Percent of total............................. 43.6% 42.6% 13.8% 100.0% ====== ====== ====== ====== Operating income............................. $157.4 $ 94.1 $ 67.3 $318.8 ====== ====== ====== ====== Percent of total........................... 49.4% 29.5% 21.1% 100.0% ====== ====== ====== ====== Return on tangible equity.................. 23.3% 20.3% 19.9% ====== ====== ====== 1998 Revenue: Net interest income........................ $303.7 $289.4 $ 71.7 $664.8 Other revenue.............................. 49.0 70.3 61.6 180.9 ------ ------ ------ ------ Total revenues..................... $352.7 $359.7 $133.3 $845.7 ====== ====== ====== ====== Percent of total............................. 41.7% 42.5% 15.8% 100.0% ====== ====== ====== ====== Operating income............................. $148.5 $ 91.2 $ 45.3 $285.0 ====== ====== ====== ====== Percent of total............................. 52.1% 32.0% 15.9% 100.0% ====== ====== ====== ====== Return on tangible equity.................... 23.1% 20.1% 18.2% ====== ====== ====== 1997 Revenue: Net interest income........................ $266.9 $254.5 $ 58.2 $579.6 Other revenue.............................. 45.1 55.5 41.1 141.7 ------ ------ ------ ------ Total revenues..................... $312.0 $310.0 $ 99.3 $721.3 ====== ====== ====== ====== Percent of total............................. 43.3% 43.0% 13.7% 100.0% ====== ====== ====== ====== Operating income............................. $132.7 $ 75.0 $ 23.1 $230.8 ====== ====== ====== ====== Percent of total............................. 57.5% 32.5% 10.0% 100.0% ====== ====== ====== ====== Return on tangible equity.................... 24.5% 20.4% 18.9% ====== ====== ======
67 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) DATA SERVICES Data Services includes the Data Services Division of the Corporation as well as two nonbank subsidiaries. Data Services provides data processing services, develops and sells software and provides consulting services to M&I affiliates as well as banks, thrifts, credit unions, trust companies and other financial services companies throughout the world although its activities are primarily domestic. In addition, Data Services derives revenue from the Corporation's credit card merchant operations. The majority of Data Services revenue is derived from internal and external processing. Intrasegment revenues, expenses and assets have been eliminated in the following information. ($ in millions)
1999 1998 1997 ------ ------ ------ Revenue: Net interest expense..................................... $ (4.2) $ (2.5) $ (2.8) Other revenues: Unaffiliated customers................................ 500.1 424.8 354.3 Affiliated customers.................................. 87.4 85.1 77.7 ------ ------ ------ Total revenues................................... 583.3 507.4 429.2 Expenses: Intersegment charges..................................... 2.9 2.3 2.0 Other operating expense.................................. 499.4 437.2 366.6 ------ ------ ------ Total expenses................................... 502.3 439.5 368.6 Income tax expense......................................... 35.4 28.2 24.9 ------ ------ ------ Operating income........................................... $ 45.6 $ 39.7 $ 35.7 ====== ====== ====== Identifiable assets........................................ $493.0 $361.0 $327.3 ====== ====== ====== Net purchases of premises and equipment.................... $ 38.5 $ 29.2 $ 33.4 ====== ====== ====== Return on equity........................................... 19.5% 20.5% 21.8% ====== ====== ======
68 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) ALL OTHERS M&I's primary other operating segments includes Trust Services, Mortgage Banking (residential and commercial), Capital Markets Group, Brokerage and Insurance Services and Commercial Leasing. Trust Services provide investment management and advisory services as well as personal, commercial and corporate trust services in Wisconsin, Florida and Arizona. Capital Markets Group provide venture capital and advisory services. Intrasegment revenues, expenses and assets for the entities that comprise Trust Services and Capital Markets Group have been eliminated in the following information. ($ in millions)
1999 1998 1997 ------ ------ ------ Revenue: Net interest income...................................... $ 22.9 $ 34.6 $ 28.1 Other revenues: Unaffiliated customers................................ 152.5 157.8 116.1 Affiliated customers.................................. 15.7 23.0 13.6 ------ ------ ------ Total revenues................................... 191.1 215.4 157.8 Expenses: Intersegment charges..................................... 23.8 28.3 20.5 Other operating expense.................................. 101.0 104.9 81.8 ------ ------ ------ Total expenses................................... 124.8 133.2 102.3 Provision for loan and lease losses........................ 0.4 1.0 0.9 Income tax expense......................................... 25.9 31.9 21.0 ------ ------ ------ Operating income........................................... $ 40.0 $ 49.3 $ 33.6 ====== ====== ====== Identifiable assets........................................ $641.9 $647.9 $592.2 ====== ====== ====== Net purchases of premises and equipment.................... $ 2.1 $ 1.3 $ 4.2 ====== ====== ====== Return on tangible equity.................................. 19.2% 26.2% 20.1% ====== ====== ======
Total Revenues by type in All Others consist of the following:
1999 1998 1997 ------ ------ ------ Trust Services............................................. $103.7 $ 90.4 $ 78.9 Residential Mortgage Banking............................... 35.6 48.6 28.3 Capital Markets............................................ 14.7 33.4 14.9 Brokerage and Insurance.................................... 20.2 18.1 15.0 Commercial Leasing......................................... 10.9 13.7 12.5 Commercial Mortgage Banking................................ 1.6 7.3 4.7 Others..................................................... 4.4 3.9 3.5 ------ ------ ------ Total............................................ $191.1 $215.4 $157.8 ====== ====== ======
69 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA)
Segment information reconciled to the Consolidated Financial Statements is as follows ($ in millions): 1999 1998 1997 ------------- ------------- ------------- Revenues: Banking............................................. $ 898.6 $ 845.7 $ 721.3 Data Services....................................... 583.3 507.4 429.2 All Others.......................................... 191.1 215.4 157.8 Corporate overhead.................................. (4.4) (4.9) (8.0) Acquisition costs................................... 0.7 (10.2) 1.2 Intersegment eliminations........................... (118.3) (121.0) (98.5) --------- --------- --------- Consolidated revenues................................. $ 1,551.0 $ 1,432.4 $ 1,203.0 ========= ========= ========= Expenses: Banking............................................. $ 406.2 $ 388.7 $ 356.3 Data Services....................................... 502.3 439.5 368.6 All Others.......................................... 124.8 133.2 102.3 Corporate overhead.................................. 60.0 49.5 57.6 Acquisition costs................................... 22.7 26.7 10.9 Merger/restructuring................................ -- 23.4 -- Intersegment eliminations........................... (118.3) (121.0) (98.5) --------- --------- --------- Consolidated expenses................................. $ 997.7 $ 940.0 $ 797.2 ========= ========= ========= Provision for loan and lease losses: Banking............................................. $ 25.0 $ 26.1 $ 16.7 All Others.......................................... 0.4 1.0 0.9 --------- --------- --------- Consolidated provision for loan and lease losses...... $ 25.4 $ 27.1 $ 17.6 ========= ========= ========= Income tax expense (benefit): Banking............................................. $ 148.6 $ 145.9 $ 117.5 Data Services....................................... 35.4 28.2 24.9 All Others.......................................... 25.9 31.9 21.0 Corporate overhead.................................. (32.3) (24.9) (29.7) Acquisition costs................................... (4.2) (10.0) (2.2) Merger/restructuring................................ -- (7.1) -- --------- --------- --------- Consolidated income tax expense....................... $ 173.4 $ 164.0 $ 131.5 ========= ========= ========= Net income (loss): Operating income: Banking.......................................... $ 318.8 $ 285.0 $ 230.8 Data Services.................................... 45.6 39.7 35.7 All Others....................................... 40.0 49.3 33.6 Corporate overhead.................................. (32.1) (29.5) (35.9) Acquisition costs................................... (17.8) (26.9) (7.5) Merger/restructuring................................ -- (16.3) -- --------- --------- --------- Consolidated net income............................... $ 354.5 $ 301.3 $ 256.7 ========= ========= =========
70 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA)
Segment information reconciled to the Consolidated Financial Statements (continued) ($ in millions) 1999 1998 1997 ------------ ------------ ------------ Assets: Banking............................................ $22,847.1 $20,215.8 $19,270.1 Data Services...................................... 493.0 361.0 327.3 All Others......................................... 641.9 647.9 592.2 Corporate overhead................................. 199.0 196.6 160.5 Acquisition costs.................................. 268.9 290.7 303.8 Intersegment eliminations.......................... (80.2) (145.7) (151.7) --------- --------- --------- Consolidated assets.................................. $24,369.7 $21,566.3 $20,502.2 ========= ========= ========= Depreciation and amortization: Banking............................................ $ 0.7 $ 19.1 $ 12.2 Data Services...................................... 78.4 67.6 62.2 All Others......................................... (18.3) (15.6) (23.8) Corporate overhead................................. 3.7 3.2 3.7 Acquisition costs.................................. 21.7 37.1 9.6 --------- --------- --------- Consolidated depreciation and amortization........... $ 86.2 $ 111.4 $ 63.9 ========= ========= ========= Purchases of premises and equipment, net: Banking............................................ $ 25.2 $ 28.3 $ 29.9 Data Services...................................... 38.5 29.2 33.4 All Others......................................... 2.1 1.3 4.2 Corporate overhead................................. 1.1 2.0 1.3 --------- --------- --------- Consolidated purchases of premises and equipment, net................................................ $ 66.9 $ 60.8 $ 68.8 ========= ========= =========
71 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) 20. CONDENSED FINANCIAL INFORMATION -- PARENT CORPORATION ONLY CONDENSED BALANCE SHEETS DECEMBER 31 Assets
1999 1998 ---------- ---------- Cash and cash equivalents................................... $ 33,850 $ 77,040 Data processing services receivables........................ 132,572 103,771 Commercial loans purchased from affiliates.................. 75,000 -- Indebtedness of nonbank affiliates.......................... 315,965 328,892 Investments in affiliates: Banks..................................................... 1,848,189 1,825,131 Nonbanks.................................................. 263,544 258,771 Premises and equipment, net................................. 137,246 125,955 Other assets................................................ 281,899 206,467 ---------- ---------- Total assets...................................... $3,088,265 $2,926,027 ========== ========== Liabilities and Shareholders' Equity Commercial paper issued..................................... $ 246,514 $ 60,162 Other liabilities........................................... 259,031 202,130 Long-term borrowings: 7.65% Junior Subordinated Deferrable Interest Debentures due to M&I Capital Trust A............................. 205,314 205,282 Other..................................................... 260,480 214,674 ---------- ---------- Total Long-term borrowings........................ 465,794 419,956 ---------- ---------- Total liabilities................................. 971,339 682,248 Shareholders' equity........................................ 2,116,926 2,243,779 ---------- ---------- Total liabilities and shareholders' equity........ $3,088,265 $2,926,027 ========== ==========
Scheduled maturities of long-term borrowings are $25,486 in 2000, $71,153 in 2001, $50,047 in 2002, $113,073 in 2003, and $1,000 in 2004. See Note 12 for a description of the junior subordinated debt due to M&I Capital Trust A. 72 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31
1999 1998 1997 -------- -------- -------- INCOME Cash dividends: Bank affiliates........................................... $172,920 $186,149 $255,670 Nonbank affiliates........................................ 49,729 67,114 37,034 Interest from affiliates.................................... 22,530 19,019 16,809 Data processing income...................................... 568,269 482,567 413,802 Service fees and other...................................... 70,197 64,406 52,995 -------- -------- -------- Total income...................................... 883,645 819,255 776,310 EXPENSE Interest.................................................... 41,143 32,979 33,416 Salaries and employee benefits.............................. 322,399 274,929 241,983 Administrative and general.................................. 215,039 217,469 175,361 -------- -------- -------- Total expense..................................... 578,581 525,377 450,760 Income before income taxes and equity in undistributed net income of affiliates...................................... 305,064 293,878 325,550 Provisions for income taxes................................. 27,904 16,296 10,349 -------- -------- -------- Income before equity in undistributed net income of affiliates................................................ 277,160 277,582 315,201 Equity in undistributed net income of affiliates, net of dividends paid: Banks..................................................... 103,114 44,611 (54,404) Nonbanks.................................................. (25,763) (20,870) (4,112) -------- -------- -------- Net income........................................ $354,511 $301,323 $256,685 ======== ======== ========
73 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998, AND 1997 ($000'S EXCEPT SHARE DATA) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31
1999 1998 1997 ----------- ----------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................. $ 354,511 $ 301,323 $ 256,685 Noncash items included in income: Equity in undistributed net income of affiliates..... (77,351) (23,741) 58,516 Depreciation and amortization........................ 72,343 68,957 64,082 Merger/Restructuring................................. -- 11,615 -- Other................................................ (32,605) (57,085) (2,930) ----------- ----------- --------- Net cash provided by operating activities.............. 316,898 301,069 376,353 CASH FLOWS FROM INVESTING ACTIVITIES Increases in indebtedness of affiliates.............. (1,356,937) (1,462,564) (822,662) Decreases in indebtedness of affiliates.............. 1,294,864 1,409,058 730,476 Increases in investments in affiliates............... (399) (5,434) (24) Net capital expenditures............................. (36,739) (30,874) (22,210) Acquisitions accounted for as purchases, net of cash equivalents acquired and investments in joint ventures.......................................... (84,408) (5,170) (259,462) Purchase of Bank-Owned Life Insurance................ -- (32,625) -- Other................................................ 1,135 14,416 17,910 ----------- ----------- --------- Net cash used in investing activities.................. (182,484) (113,193) (355,972) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid....................................... (104,490) (97,241) (79,272) Proceeds from issuance of commercial paper........... 1,926,791 779,653 455,726 Principal payments on commercial paper............... (1,740,439) (829,077) (360,374) Proceeds from issuance of long-term debt............. 75,200 -- 101,131 Payments on long-term debt........................... (35,857) (13,913) (114,414) Purchase of common stock............................. (317,149) (29,633) (64,430) Proceeds from exercise of stock options.............. 18,359 15,086 23,538 Other................................................ (19) (25) 960 ----------- ----------- --------- Net cash used in financing activities.................. (177,604) (175,150) (37,135) ----------- ----------- --------- Net increase (decrease) in cash and cash equivalents... (43,190) 12,726 (16,754) Cash and cash equivalents, beginning of year........... 77,040 64,314 81,068 ----------- ----------- --------- Cash and cash equivalents, end of year................. $ 33,850 $ 77,040 $ 64,314 =========== =========== =========
74 76 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Following is unaudited financial information for each of the calendar quarters during the years ended December 31, 1999 and 1998.
QUARTER ENDED ------------------------------------------------ DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ----------- ------------ -------- -------- 1999 Total Interest Income.......................... $398,819 $380,477 $364,702 $352,586 Net Interest Income............................ 176,919 177,803 177,742 172,817 Provision for Loan and Lease Losses............ 10,938 4,797 4,811 4,873 Income before Income Taxes..................... 130,038 135,379 133,513 129,009 Net Income..................................... 90,626 90,836 87,518 85,531 Net Income Per Share:* Basic........................................ $ 0.84 $ 0.86 $ 0.82 $ 0.79 Diluted...................................... 0.81 0.81 0.77 0.75 1998 Total Interest Income.......................... $358,701 $362,509 $358,747 $354,087 Net Interest Income............................ 173,989 169,467 168,013 164,601 Provision for Loan and Lease Losses............ 12,588 4,769 4,868 4,865 Income before Income Taxes..................... 128,153 122,613 96,645 117,874 Net Income..................................... 83,470 80,155 62,192 75,506 Net Income Per Share:* Basic........................................ $ 0.77 $ 0.74 $ 0.57 $ 0.70 Diluted...................................... 0.72 0.70 0.54 0.66
1999 1998 1997 1996 1995 ----- ----- ------ ------ ------ COMMON DIVIDENDS DECLARED First Quarter....................................... $0.22 $0.20 $0.185 $0.165 $0.150 Second Quarter...................................... 0.24 0.22 0.200 0.185 0.165 Third Quarter....................................... 0.24 0.22 0.200 0.185 0.165 Fourth Quarter...................................... 0.24 0.22 0.200 0.185 0.165 ----- ----- ------ ------ ------ $0.94 $0.86 $0.785 $0.720 $0.645 ===== ===== ====== ====== ======
- --------------- * May not add due to rounding PRICE RANGE OF STOCK (LOW AND HIGH CLOSE)
1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ First Quarter Low................................... $55 3/8 $53 1/4 $32 3/4 $24 5/8 $18 1/8 High.................................. 59 1/4 59 1/2 40 1/4 26 1/4 21 3/4 Second Quarter Low................................... 54 3/4 50 7/16 35 1/16 24 7/8 19 7/8 High.................................. 71 15/16 61 5/8 42 1/2 28 1/8 22 3/4 Third Quarter Low................................... 55 7/8 44 40 7/8 25 1/2 22 1/8 High.................................. 69 3/4 59 52 5/8 30 1/8 26 1/4 Fourth Quarter Low................................... 57 13/16 40 1/2 50 1/16 30 24 High.................................. 69 5/16 58 7/16 62 1/8 35 3/8 26 3/8
75 77 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of Marshall & Ilsley Corporation: We have audited the accompanying consolidated balance sheets of Marshall & Ilsley Corporation (a Wisconsin corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1999, 1998 and 1997. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marshall & Ilsley Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, January 12, 2000 76 78 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 25, 2000, except for information as to executive officers which is set forth in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 25, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 25, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference to M&I's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 25, 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Consolidated Financial Statements: Balance Sheets -- December 31, 1999 and 1998 Statements of Income -- years ended December 31, 1999, 1998, and 1997 Statements of Cash Flows -- years ended December 31, 1999, 1998, and 1997 Statements of Shareholders' Equity -- years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Report of Independent Public Accountants 2. Financial Statement Schedules All schedules are omitted because they are not required, not applicable or the required information is contained elsewhere. 3. Exhibits See Index to Exhibits of this Form 10-K which is incorporated herein by reference. (b) Reports on Form 8-K Not applicable. 77 79 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/ J.B. WIGDALE ---------------------------------- J.B. Wigdale Chairman of the Board Date: March 9, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ J.B. WIGDALE - ----------------------------------------------------- J.B. Wigdale Chairman of the Board and a Director (Chief Executive Officer) Date: March 9, 2000 /s/ G.H. GUNNLAUGSSON - ----------------------------------------------------- G.H. Gunnlaugsson Executive Vice President and a Director (Chief Financial Officer) Date: March 9, 2000 /s/ P.R. JUSTILIANO - ----------------------------------------------------- P.R. Justiliano Senior Vice President and Corporate Controller (Principal Accounting Officer) Date: March 9, 2000
Directors: Richard A. Abdoo, Oscar C. Boldt, Wendell F. Bueche, Jon F. Chait, G.H. Gunnlaugsson, Timothy E. Hoeksema, Burleigh E. Jacobs, Jack F. Kellner, James F. Kress, D.J. Kuester, Katharine C. Lyall, Edward L. Meyer, Jr., Don R. O'Hare, San W. Orr, Jr., Peter M. Platten, III, Robert A. Schaefer, John S. Shiely, Stuart W. Tisdale, George E. Wardeberg, J.B. Wigdale, James O. Wright and Gus A. Zuehlke. By /s/ M.A. HATFIELD Date: March 9, 2000 - ---------------------------------------------------- M.A. Hatfield As Attorney-In-Fact*
- --------------- * Pursuant to authority granted by powers of attorney, copies of which are filed herewith. 78 80 MARSHALL & ILSLEY CORPORATION INDEX TO EXHIBITS (ITEM 14(A)3) ITEM (3) (a) Restated Articles of Incorporation, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, SEC File No. 0-1220 (b) By-laws, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-1220 (4) (a) Indenture between M&I and Chemical Bank (as successor to Manufacturers Hanover Trust Company) dated as of November 15, 1985 ("Senior Indenture"), incorporated by reference to M&I's Registration Statement on Form S-3 (Registration No. 33-21377), as supplemented by the First Supplemental Indenture to the Senior Indenture dated as of May 31, 1990, incorporated by reference to M&I's Current Report on Form 8-K dated May 31, 1990, and as supplemented by the Second Supplemental Indenture to the Senior Indenture dated as of July 15, 1993, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, SEC File No. 0-1220 (b) Form of Medium Term Notes, Series C, and Series D issued pursuant to the Senior Indenture, included in Exhibit 4(a) (c) Indenture between M&I and Chemical Bank dated as of July 15, 1993 ("Subordinated Indenture"), incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, SEC File No. 0-1220 (d) Form of Subordinated Note issued pursuant to the Subordinated Indenture, included in Exhibit 4(d) (e) Designation of Rights and Preferences of holders of Series A Preferred Stock, incorporated by reference to M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-1220 (f) Amended and Restated Declaration of Trust dated as of December 9, 1996 among Marshall & Ilsley Corporation, as Sponsor, The Chase Manhattan Bank, as Institutional Trustee, Chase Manhattan Bank Delaware, as Delaware Trustee, the Regular Trustees identified thereon, and the holders from time to time of undivided interests in the assets of the Trust, incorporated by reference to M&I's Registration Statement on Form S-4 dated January 15, 1997, SEC Reg. No. 333-19809 (g) Indenture, dated as of December 9, 1996, between Marshall & Ilsley Corporation and The Chase Manhattan Bank, as Indenture Trustee, incorporated by reference to M&I's Registration Statement on Form S-4 dated January 15, 1997, SEC Reg. No. 333-19809 (h) First Supplemental Indenture, dated as of December 9, 1996, between Marshall & Ilsley Corporation and The Chase Manhattan Bank, as Indenture Trustee, incorporated by reference to M&I's Registration Statement on Form S-4 dated January 15, 1997, SEC Reg. No. 333-19809 (i) Form of Capital Security Certificate for M&I Capital Trust A, included as Exhibit A-2 to Exhibit 4(h) 81 (j) Capital Securities Guarantee Agreement, dated as of December 9, 1996, between Marshall & Ilsley Corporation and The Chase Manhattan Bank, as Guarantee Trustee, incorporated by reference to M&I's Registration Statement on Form S-4 dated January 15, 1997, SEC Reg. No. 333-19809 (k) Registration Rights Agreement dated December 2, 1996, by and among Marshall & Ilsley Corporation, M&I Capital Trust A and Salomon Brothers Inc, as Representative of the Initial Purchasers, incorporated by reference to M&I's Registration Statement on Form S-4 dated January 15, 1997, SEC Reg. No. 333-19809 (l) Form of Subordinated Debt Security, included as part of Exhibit 4(j) (10) (a) 1983 Executive Stock Option and Restricted Stock Plan, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, SEC File No. 0-1220* (b) 1985 Executive Stock Option and Restricted Stock Plan, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, SEC File No. 0-1220* (c) M&I Marshall & Ilsley Bank Supplementary Retirement Benefits Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1983, SEC File No. 0-1220* (d) Deferred Compensation Trust between Marshall & Ilsley Corporation and Bessemer Trust Company dated April 28, 1987, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, SEC File No. 0-1220* (e) Form of employment agreements, dated November 5, 1990, between M&I and Messrs. Gunnlaugsson, Kuester, Strelow and Wigdale incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, SEC File No. 0-1220* (f) Employment agreement, dated November 5, 1990, between M&I and Mr. Michael A. Hatfield incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, SEC File No. 0-1220* (g) 1989 Executive Stock Option and Restricted Stock Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, as amended by M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, SEC File No. 0-1220* (h) Marshall & Ilsley Corporation Nonqualified Retirement Benefit Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, SEC File No. 0-1220* (i) Marshall & Ilsley Corporation Supplemental Retirement Benefits Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, SEC File No. 0-1220* (j) Marshall & Ilsley Trust Company Supplemental Retirement Benefits Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, SEC File No. 0-1220* (k) Marshall & Ilsley Corporation 1993 Executive Stock Option Plan, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, SEC File No. 0-1220.* 2 82 (l) Marshall & Ilsley Corporation 1995 Directors Stock Option Plan, incorporated by reference to M&I's Proxy Statement for the 1995 Annual Meeting of Shareholders, SEC File No. 0-1220* (m) Marshall & Ilsley Corporation Assumption Agreement dated May 31, 1994 assuming rights, obligations and interests of Valley Bancorporation under various stock option plans, incorporated by reference to M&I's Registration Statement on Form S-8 (Reg. No. 33-53897)* (n) Valley Bancorporation 1992 Outside Directors' Stock Option Plan, incorporated by reference to the Valley 1992 Proxy Statement* (o) Employment agreement between M&I and Mr. Peter M. Platten, III, incorporated by reference to M&I's Registration Statement on Form S-4 (Reg. No. 33-51753)* (p) Letter agreement dated January 25, 1994 between Valley Bancorporation and Mr. Peter M. Platten, III incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, SEC File No. 0-1220* (q) Employment agreement, dated as of December 14, 1995, between M&I and Ms. Patricia R. Justiliano incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, SEC File No. 0-1220* (r) Marshall & Ilsley Corporation 1997 Executive Stock Option and Restricted Stock Plan, incorporated by reference to M&I's Proxy Statement for the 1997 Annual Meeting of Shareholders* (s) Marshall & Ilsley Corporation Executive Deferred Compensation Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220* (t) Deferred Compensation Trust II between Marshall & Ilsley Corporation and Marshall & Ilsley Trust Company, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220* (u) Marshall & Ilsley Corporation Annual Executive Incentive Compensation Plan, incorporated by reference to M&I's Proxy Statement for the 1997 Annual Meeting of Shareholders* (v) Marshall & Ilsley Corporation Amended and Restated Supplementary Retirement Benefits Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 0-1220* (w) Security Capital Corporation 1993 Incentive Stock Option Plan, incorporated by reference to M&I's Registration Statement on Form S-8 (Reg. No. 333-36909)* (x) Security Bank S.S.B. Deferred Compensation Plans for Key Executive Officers and Directors, incorporated by reference to Security Capital Corporation's Registration Statement on Form S-1 (Reg. No. 33-68982)* (y) Security Bank S.S.B. Supplemental Pension Plan, incorporated by reference to Security Capital Corporation's Registration Statement on Form S-1 (Reg. No. 33-68982)* (z) Directors Deferred Compensation Plan, incorporated by reference to M&I's Proxy Statement for the 1998 Annual Meeting of Shareholders* (aa) Marshall & Ilsley Corporation 1994 Long-Term Incentive Plan for Executives, as amended, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File No. 0-1220* 3 83 (bb) Employment agreement, dated December 11, 1997, between M&I and Mr. Delgadillo, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File No. 0-1220* (cc) Employment agreement, dated November 5, 1990, between M&I and Mr. D.R. Jones, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File No. 0-1220* (dd) Amendment to Employment Agreement dated April 3, 1995, between M&I and Mr. D.R. Jones, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File No. 0-1220* (ee) Employment agreement, dated October 16, 1997, between M&I and Mr. D.H. Wilson, incorporated by reference to M&I's Annul Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File No. 0-1220* (ff) Employment agreement, dated January 12, 1999, between M&I and Mr. T.M. Bolger, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, SEC File No. 0-1220* (gg) Form of Employment agreements between M&I and Messrs. O'Neill and Williams, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, SEC File No. 0-1220* (hh) Marshall & Ilsley Corporation Amended and Restated Executive Deferred Compensation Plan, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, SEC File No. 1-15403* (ii) Marshall & Ilsley Corporation Amended and Restated 1997 Executive Stock Option and Restricted Stock Plan, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, SEC File No. 1-15403* (jj) Marshall & Ilsley Corporation Amended and Restated 1994 Long-Term Incentive Plan for Executives, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, SEC File No. 1-15403* (kk) Marshall & Ilsley Corporation Amended and Restated Annual Executive Compensation Plan, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, SEC File No. 1-15403* (ll) Form of Employment agreements between M&I and Messrs. Sherman, Roberts and Root* (11) Computation of Net Income Per Common Share, incorporated by reference to Note 2 of Notes to Consolidated Financial Statements included in Item 8, Consolidated Financial Statements. (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries (23) Consent of Arthur Andersen LLP (24) Powers of Attorney (27) Financial Data Schedule 4 84 M&I will provide a copy of any instrument defining the rights of holders of long-term debt to the Commission upon request. - ------------- * Management contract or compensatory plan or arrangement. 5 EX-10.(LL) 2 FORM OF EMPLOYMENT AGREEMENTS 1 EXHIBIT 10 (ll) FORM OF EMPLOYMENT AGREEMENTS BETWEEN M&I AND MESSRS. SHERMAN, ROBERTS, AND ROOT 2 EMPLOYMENT AGREEMENT THIS AGREEMENT, entered into as of the ___ day of ___________, 1999, by and between MARSHALL & ILSLEY CORPORATION (the "Company"), and _______________ the "Executive") (hereinafter collectively referred to as "the parties"). W I T 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 l(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 (I ) 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; and provided, further, that the Employment Term shall not be automatically extended beyond the first day of the month following the month in which the Executive attains age sixty-five (65). (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. 3 (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. Chance 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 1 4(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 1 3d-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 or consolidation which would not be a Change of Control under subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened "election contest" or other actual or threatened "solicitation" (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) of proxies or consents by or on behalf of a person other than the Incumbent Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, unless, following such reorganization, merger 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 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 2 4 Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation m substantially the same proportions as their ownership, immediately prior to such reorganization, merger 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 or consolidation and any person beneficially owning, immediately prior to such reorganization, merger 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 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 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) Approval by the shareholders of the Company 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 elect on 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 as _____________________ of M&I Corporation or in such other executive capacity as may be mutually agreed to in writing by the parties. During the Employment Term, Executive's position 3 5 (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 ( t 2) month period immediately preceding the Effective Date, and Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective Date or at any office or location less than thirty-five (35) miles from such location, unless mutually agreed to in writing by the parties. (b) Excluding periods of vacation and sick leave to which the Executive is entitled, during the Employment Term the Executive agrees to devote full time attention to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, provided that the Executive may take reasonable amounts of time to (i) serve on corporate, civil or charitable boards or committees, and (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, if such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of Executive's responsibilities hereunder. 4. Compensation. (a) Base Salary. During the Employment Term, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve (12) times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve (12) month period immediately preceding the month in which the Effective Date occurs. 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 4 6 defer the receipt of such Annual Bonus under any plan or arrangement of the Company allowing therefor. (c) Incentive. Savings and Retirement Plans. During the Employment Term, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the twelve ( 12) month period immediately preceding the Effective Date, or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (d) Benefit Plans. During the Employment Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription drug, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies and their families; but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive and his family at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies and their families. (e) Expenses. During the Employment Term, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the twelve ( 12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (f) Fringe Benefits. During the Employment Term, the Executive shall be entitled to fringe benefits (including but not limited to Company cars, club dues and physical examinations) in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5 7 (g) 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. (h) 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 such right or property failing to qualify for favorable tax treatment under the particular section of the Internal Revenue Code for which it was designed to qualify, or 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 resumed 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 6 8 felony, as determined by a final judgment or order of a court of competent jurisdiction, and resulting or intended to result in gain to or personal enrichment of the Executive at the Company's expense, provided, however, that no termination of the Executive's employment shall be for Cause as set forth in (i), above, until (a) Executive shall have had at least sixty (60) days to cure any conduct or act alleged to provide Cause for termination after a written notice of demand has been delivered to the Executive specifying in detail the manner in which the Executive's conduct violates this Agreement, and (b) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, or failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act in bad faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (c) Good Reason. (1) The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change of Control of any of the events or conditions described in Subsections (i) through (vi) hereof: (i) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with his status, title, position or responsibilities in effect immediately prior to such assignment; or any removal of the Executive from or failure to reappoint or reelect him to any position, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (ii) Any failure by the Company to comply with any of the provisions of Section 4 of this Agreement. (iii) The insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company; (iv) Any material breach by the Company of any provision of this Agreement; (v) Any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 5 of this Agreement; and (vi) The failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company, to assume and agree to perform this Agreement, as contemplated in Section I O hereof. 7 9 (2) Any event or condition described in Section 5(c) ( I ) which occurs prior to the Effective Date but which the Executive reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise arose in connection with or in anticipation of a Change of Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Effective Date. (3) The Executive's right to terminate his employment pursuant to this Section 5(c) shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment or failure to give Notice of Termination shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (4) For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive. (d) Voluntary Termination. The Executive may voluntarily terminate his employment hereunder at any time. (e) Notice of Termination. Any purported termination by the Company or by the Executive (other than by death of the Executive) shall be communicated by Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) the Termination Date. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (f) Termination Date, Etc. "Termination Date" shall mean in the case of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company, the date specified in the Notice of Termination shall be at least thirty (30) days after the date the Notice of Termination is given to the Executive, provided, however, that in the case of Disability, the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days; (2) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days after the date the Notice of Termination is given to the Company; and (3) In the event that within thirty (30) days following the date of receipt of the Notice of Termination, one party notifies the other that a dispute exists concerning the basis for termination, the Executive's employment hereunder shall not be terminated except after the dispute is finally resolved and a Termination Date is determined either by a mutual written agreement of the parties, or by a binding and final judgment order or decree of a court of 8 10 competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 6. Obligations of the Company Upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Term, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Termination Date the aggregate of the following amounts: A. The sum of: (1) The Executive's Annual Base Salary through the Termination Date to the extent not theretofore paid. (2) The product of (x) the higher of (1) the Recent Average Bonus and (11) 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 Period, 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; and (3) Any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid. The sum of the amounts described in Clauses ( I ), (2) and (3 ) 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 ( I ) 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 9 11 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 m existence today as follows: (i) with respect to the Retirement Growth Plan of the Company, the Executive would receive no less than two times eight percent (8%) of the maximum compensation that can be taken into account under the Plan assuming Executive's compensation is as set forth above, and (ii) with respect to the Incentive Savings Plan of the Company, the Executive would receive no less than two times an annual Company match of fifty percent (50%) of Employee's maximum allowable contribution to the Plan assuming Executive's compensation is as set forth above; 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, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(d) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives and their families 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 and their families; 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 benefits pursuant to such plans, practices, programs and policies, 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. (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 (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. 10 12 (iv) 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"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Term, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, except that the Company shall pay or provide the Accrued Obligations, six (6) months of Annual Base Salary, and the Other Benefits. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within thirty (30) days of the Termination Date. The six (6) months of Annual Base Salary shall be paid during the six (6) month period following the Termination Date on a monthly basis. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, and the Executive's family shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and any of its affiliated companies to surviving families of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to family death benefits, if any, as in effect with respect to other peer executives and their families at any time during the twelve ( 12) month period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their families. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Term, this Agreement shall terminate without further obligations to the Executive, except that the Company shall pay or provide the Accrued Obligations and the Other Benefits. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Termination Date. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other Than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Term, or if the Executive voluntarily terminates employment during the Employment Term for other than Good Reason, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination, any other amounts earned or accrued through the Termination Date, and the amount of any compensation previously deferred 11 13 by the Executive, 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) 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 8L Ilsley Bank, or its successor, compounded monthly. 7. No Mitigation. In no event shall the Executive be obligated to seek other employment to take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced (except to the extent set forth in Section 6(a)(ii)) whether or not the Executive obtains other employment. 8. Unauthorized Disclosure. 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 8) or any information not otherwise considered confidential by a reasonable person engaged in the same business as that conducted by the Company. In no event shall an asserted violation of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 9. 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. 12 14 (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. 10. 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. 11. 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. 12. 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. 13. 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. 14. 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. 13 15 15. 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 then the Executive shall have no further rights under this Agreement. 16. 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. 17. 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. 18. 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. 19. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. 20. Modification. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by both the Executive and the Company. 21. 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. 14 16 22. Limitation on Payments. (a) Within fifteen (15) business days of the Termination Date, an independent national accounting hum designated by the Company (the "Accounting Firm") shall compute whether there would be any "excess parachute payments" payable to the Executive, within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), taking into account the total "parachute payments," within the meaning of Section 280G of the Code, payable to the Executive by the Company or any successor thereto under this Agreement and any other plan, agreement or otherwise. If there would be any excess parachute payments, the Accounting Firm will compute the net after-tax proceeds to the Executive, taking into account the excise tax imposed by Section 4999 of the Code, if (i) the payments hereunder were reduced, but not below zero, such that the total parachute payments payable to the Executive would not exceed 299% of the "base amount" as defined in Section 280G of the Code, or (ii) the payments hereunder were not reduced. If reducing the payments hereunder would result in a greater after-tax amount to the Executive, such lesser amount shall be paid to the Executive. If not reducing the payments hereunder would result in a greater after-tax amount to the Executive, such payments shall not be reduced. The determination by the Accounting Firm shall be binding upon the Company and the Executive subject to the application of Section 22(b) hereof. (b) As a result of the uncertainty m the application of Sections 280G of the Code, it is possible that excess parachute payments will be paid when such payment would result in a lesser after-tax amount to the Executive; this is not the intent hereof. In such cases, the payment of any excess parachute payments will be void ab initio as regards any such excess. Any excess will be treated as a loan by the Company to the Executive. The Executive will return the excess to the Company, within fifteen (I 5) business days of any determination by the Accounting Firm that excess parachute payments have been paid when not so intended, with interest at an annual rate equal to the rate provided in Section 1274(b)(2)(B) of the Code (or 120% of such rate if the Accounting Firm determines that such rate is necessary to avoid an excise tax under Section 4999 of the Code) from the date the Executive received the excess until it is repaid to the Company. (c) 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. In performing the computations required hereunder, the Accounting Firm shall assume that taxes will be paid for state and federal purposes at the highest possible marginal tax rates which could be applicable to the Executive in the yeah of receipt of the payments, unless the Executive agrees otherwise." 15 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: -------------------------------- James B. Wigdale, Chairman ATTEST: - ------------------------------- Michael A. Hatfield, Secretary EXECUTIVE: ----------------------------------- Signature Address: --------------------------- --------------------------- 16 EX-12 3 COMPUTATION RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 MARSHALL & ILSLEY CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($000'S)
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- -------- -------- EARNINGS: Earnings before income taxes and extraordinary items.................... $ 527,939 $ 465,285 $ 388,172 $317,949 $312,938 Fixed charges, excluding interest on deposits............................... 222,172 206,546 175,609 126,261 119,412 ---------- ---------- ---------- -------- -------- Earnings including fixed charges but excluding interest on deposits......... 750,111 671,831 563,781 444,210 432,350 Interest on deposits..................... 585,864 564,540 460,418 392,473 363,488 ---------- ---------- ---------- -------- -------- Earnings including fixed charges and interest on deposits................... $1,335,975 $1,236,371 $1,024,199 $836,683 $795,838 ========== ========== ========== ======== ======== FIXED CHARGES: Interest Expense: Short-term borrowings.................. $ 142,294 $ 126,624 $ 111,193 $ 63,892 $ 48,390 Long-term borrowings................... 63,145 66,810 54,175 53,615 63,701 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor)............................. 16,733 13,112 10,241 8,754 7,321 ---------- ---------- ---------- -------- -------- Fixed charges excluding interest on deposits............................... 222,172 206,546 175,609 126,261 119,412 Interest on deposits..................... 585,864 564,540 460,418 392,473 363,488 ---------- ---------- ---------- -------- -------- Fixed charges including interest on deposits............................... $ 808,036 $ 771,086 $ 636,027 $518,734 $482,900 ========== ========== ========== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES: Excluding interest on deposits........... 3.38x 3.25x 3.21x 3.52x 3.62x Including interest on deposits........... 1.65x 1.60x 1.61x 1.61x 1.65x
EX-21 4 SUBSIDIARIES 1 EXHIBIT 21 MARSHALL & ILSLEY CORPORATION SUBSIDIARIES February 29, 2000 Subsidiaries Organized in Wisconsin - ----------------------------------- Customers Forever, LLC M&I Community State Bank M&I Bank (Ashland) M&I First American Bank M&I Bank (Superior) M&I Lake Country Bank M&I Bank of Burlington M&I Lakeview Bank M&I Bank of Eagle River M&I Marshall & Ilsley Bank M&I Bank of LaCrosse M&I Merchants Bank M&I Bank of Mayville M&I Mid-State Bank M&I Bank of Menomonee Falls M&I Northern Bank M&I Bank of Racine M&I Brokerage Services, Inc. M&I Bank of Shawano M&I Bank of Southern Wisconsin M&I Dealer Finance, Inc. M&I Bank Fox Valley M&I Financial Corp. M&I Bank Northeast M&I First National Leasing Corp. M&I Bank South M&I Insurance Services, Inc. M&I Bank South Central M&I Investment Management Corp. M&I Central Bank & Trust M&I Mortgage Corp. M&I Central State Bank M&I Support Services Corp. M&I Citizens American Bank Marshall & Ilsley Trust Company Richter-Schroeder Company, Inc. Subsidiaries Incorporated in Arizona Subsidiaries Incorporated in Florida - ------------------------------------ ------------------------------------ M&I Thunderbird Bank Marshall & Ilsley Trust Company of Florida M&I Insurance Company of Arizona, Inc. M&I Marshall & Ilsley Trust Company of Arizona Subsidiaries Organized in Delaware Subsidiaries Incorporated in Michigan - ---------------------------------- ------------------------------------- M&I Capital Markets Group L.L.C. M&I Ventures L.L.C. M&I Leasing Corp. of Michigan Subsidiaries Incorporated in Nevada - -----------------------------------
The registrant has 87 subsidiaries which primarily hold, manage and service investment and mortgage portfolios. Subsidiaries Incorporated in New Hampshire Subsidiaries Incorporated in Malaysia - ------------------------------------------ ------------------------------------- M&I EastPoint Technology, Inc. M&I Asia Pacific Sdn. Bhd. Subsidiaries Incorporated in Vermont Subsidiaries Organized Under the Laws of the United States - ------------------------------------ ---------------------------------------------------------- M&I Mortgage Reinsurance Corporation M&I Bank FSB M&I First National Bank (West Bend) M&I National Trust Company
EX-23 5 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the inclusion in this Form 10-K for the year ended December 31, 1999, of our report dated January 12, 2000. It should be noted that we have not audited any financial statements of Marshall & Ilsley Corporation and subsidiaries subsequent to December 31, 1999, or performed any audit procedures subsequent to the date of our report. We also consent to the incorporation by reference of such report in the following Registration Statements of Marshall & Ilsley Corporation ("M&I"): No. 2-89605 (Form S-8) pertaining to the M&I 1983 Executive Stock Option and Restricted Stock Plan, No. 33-2642 (Form S-8) pertaining to the M&I 1985 Executive Stock Option and Restricted Stock Plan, No. 33-3415 (Form S-8) pertaining to the M&I Retirement Growth Plan, No. 33-33090 (Form S-8) pertaining to the M&I 1988 Restricted Stock Plan, No. 33-33153 (Form S-8) pertaining to the M&I 1989 Executive Stock Option and Restricted Stock Plan, No. 33-53155 (Form S-8) pertaining to the M&I 1993 Executive Stock Option Plan, No. 33-53897 (Form S-8) pertaining to the stock option plans of Valley Bancorporation assumed by M&I, No. 33-55317 (Form S-8) pertaining to the M&I 1994 Long-Term Incentive Plan for Executives, No. 33-58787 (Form S-8) pertaining to the M&I 1995 Directors Stock Option Plan, No. 333-02017 (Form S-8) pertaining to the M&I 1986 Non-qualified Stock Option Plan, No. 333-36909 (Form S-8) pertaining to the M&I 1997 Executive Stock Option and Restricted Stock Plan and to the Security Capital Corporation 1993 Incentive Stock Option Plan assumed by M&I, No. 333-49195 (Form S-8) pertaining to the M&I Amended and Restated 1994 Long-Term Incentive Plan for Executives, the M&I Amended and Restated Directors Deferred Compensation Plan and to the stock option plans of Advantage Bancorp, Inc. assumed by M&I, No. 2-80293 (Form S-3) pertaining to shares of M&I held by those persons named in such Registration Statement, No. 33-21377 (Form S-3) pertaining to the issuance by M&I of Debt Securities, No. 33-64054 (Form S-3) pertaining to the issuance by M&I of Debt Securities, and No. 33-64425 (Form S-3) pertaining to the issuance by M&I of Debt Securities.
Milwaukee, Wisconsin, ARTHUR ANDERSEN LLP March 9, 2000 EX-24 6 POWERS OF ATTORNEY 1 EXHIBIT 24 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ George E. Wardeberg ---------------------------------- George E. Wardeberg 2 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ James O. Wright ---------------------------------- James O. Wright 3 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Wendell F. Bueche ---------------------------------- Wendell F. Bueche 4 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Robert A. Schaefer ---------------------------------- Robert A. Schaefer 5 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Jack F. Kellner ---------------------------------- Jack F. Kellner 6 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ D.J. Kuester ---------------------------------- D.J. Kuester 7 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Oscar C. Boldt ----------------------------------- Oscar C. Boldt 8 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director and executive officer of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director and executive officer to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ G.H. Gunnlaugsson ----------------------------------- G.H. Gunnlaugsson 9 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Gus A. Zuehlke ----------------------------------- Gus A. Zuehlke 10 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Burleigh E. Jacobs ----------------------------------- Burleigh E. Jacobs 11 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Jon F. Chait ----------------------------------- Jon F. Chait 12 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Stuart W. Tisdale ----------------------------------- Stuart W. Tisdale 13 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Richard A. Abdoo ----------------------------------- Richard A. Abdoo 14 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director and executive officer of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director and executive officer to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ J.B. Wigdale ----------------------------------- J.B. Wigdale 15 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Don R. O'Hare ----------------------------------- Don R. O'Hare 16 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as her true and lawful attorney-in-fact for the purpose of: (i) executing in her name and on her behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in her name and on her behalf in her capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming her signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Katharine C. Lyall ----------------------------------- Katharine C. Lyall 17 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ John S. Shiely ----------------------------------- John S. Shiely 18 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2000. /s/ Timothy E. Hoeksema ----------------------------------- Timothy E. Hoeksema 19 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Peter M. Platten, III ----------------------------------- Peter M. Platten, III 20 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ James F. Kress ----------------------------------- James F. Kress 21 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ San W. Orr, Jr. ----------------------------------- San W. Orr, Jr. 22 DIRECTOR'S POWER OF ATTORNEY (1999 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of J.B. Wigdale and M.A. Hatfield, with the power of substitution, as his true and lawful attorney-in-fact for the purpose of: (i) executing in his name and on his behalf Marshall & Ilsley Corporation's Form 10-K for the fiscal year ended December 31, 1999 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 10th day of February, 2000. /s/ Edward L. Meyer, Jr. ----------------------------------- Edward L. Meyer, Jr. EX-27 7 FINANCIAL DATA SCHEDULE
9 12-MOS DEC-31-1999 DEC-31-1999 705,293 79,469 101,922 40,334 4,357,196 1,170,734 1,137,126 16,335,061 225,862 24,369,723 16,435,182 4,540,255 612,336 665,024 0 336 112,757 2,003,833 24,369,723 1,156,775 328,488 11,321 1,496,584 585,864 791,303 705,281 25,419 7,676 997,697 527,939 354,511 0 0 354,511 3.32 3.14 3.57 106,387 9,975 708 117,070 226,052 32,557 6,948 225,862 225,862 0 0
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