-----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, T+TYcxg+jEsBUIfXlGtgK1RrH1rsE2PK2Jow4DM2O+VjskIxWw9tsGL/tXhxwh6O Kc1OBqVf3VsURcAIBn859Q== 0000950131-01-500067.txt : 20010312 0000950131-01-500067.hdr.sgml : 20010312 ACCESSION NUMBER: 0000950131-01-500067 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010309 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-K SEC ACT: SEC FILE NUMBER: 001-15403 FILM NUMBER: 1565174 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-K 1 d10k.txt FORM 10-K 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, 2000 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 53202 Milwaukee, Wisconsin (Zip Code) (Address of principal executive offices) 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. [_] The aggregate market value of the voting stock held by nonaffiliates of the registrant is approximately $5,549,736,000 as of February 28, 2001. The number of shares of common stock outstanding as of February 28, 2001 is 102,868,135. 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 24, 2001. 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, 2000, M&I had consolidated total assets of approximately $26.1 billion and consolidated total deposits of approximately $19.2 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. M&I's subsidiaries include Metavante Corporation ("Metavante") (formerly its M&I Data Services Division), 20 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 and Tucson, Arizona metropolitan areas, Las Vegas, Nevada and Naples, Florida. These subsidiaries offer retail, institutional, international, business and correspondent banking, investment and trust services through the operation of over 200 banking offices in Wisconsin, 14 offices in Arizona, one office in Florida and one 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 interests 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, 2000 of approximately $12.7 billion. Metavante and two other nonbank subsidiaries are major suppliers of financial and data processing services and software to banking, financial and related organizations. Metavante provides integrated products and services to financial services providers that enable them to initiate and process a broad range of financial transactions electronically, including through the Internet. Metavante's integrated financial transaction processing, outsourcing, software and consulting products and services provide virtually all of the technology that a financial services provider needs to run its operations. As of December 31, 2000, Metavante had over 3,300 clients in the United States and abroad, including large banks, mid-tier and community banks, Internet banks and non-traditional financial services providers. In 2000, Metavante's products and services were used to originate and/or process nearly 7.2 billion transactions for consumer and business customer bank accounts. In July 2000, M&I transferred its M&I Data Services business to a wholly- owned subsidiary and renamed that subsidiary Metavante Corporation. This transfer was made in connection with a proposed public offering of Metavante's common stock. The proposed public offering was withdrawn in November 2000 due to adverse market conditions and a near term slow down in financial account processing markets. M&I expects to continue to invest in and grow Metavante's business, and will evaluate future growth strategies for Metavante as circumstances permit. M&I's other 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, Nevada, North Carolina and Illinois. M&I First National Leasing 2 Corp. leases a variety of equipment and machinery to large and small businesses. M&I Dealer Finance, Inc. provides retail vehicle lease financing. M&I Mortgage Corp. originates, purchases, sells and services residential mortgages. M&I Mortgage Reinsurance Corporation 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. and M&I Ventures L.L.C. provide 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. M&I Support Services Corp. operates an extensive multi- media customer service center that provides banking customers with 24-hour phone access to personal bankers and other customer services. 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 Fees for Data Interest on Investment Processing Loans and Leases Securities 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 - ----------- ---------- --------- -------- --------- -------- --------- ---------- 2000.................... $1,391,651 52.0% $354,823 13.3% $546,041 20.4% $2,676,334 1999.................... 1,156,775 48.7 337,945 14.2 494,816 20.8 2,375,129 1998.................... 1,085,829 48.7 346,012 15.5 421,945 18.9 2,228,544
M&I business segment information is contained in Note 20 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 nonbank 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 markets for the financial products and services offered by Metavante are intensely competitive. Metavante competes with a variety of companies in various segments of the financial services industry, and its competitors vary in size and in the scope and breadth of products and services they offer. Certain segments of the financial services industry tend to be highly fragmented with numerous companies competing for market share. Highly fragmented segments currently include online banking, financial account processing, customer relationship management solutions and electronic funds transfer and card solutions. Other segments of the 3 financial services industry are relatively new with limited competition, including private label banking and trust and investment solutions. Currently, the electronic bill payment and presentment market is highly centralized. In this market, Metavante faces one dominant competitor and a small number of other primary competitors. Metavante also faces competition from in-house technology departments of existing and potential clients who may develop their own product offerings. Employees As of December 31, 2000, M&I and its subsidiaries employed in the aggregate 11,753 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. In addition, all of M&I's bank subsidiaries are subject to examination by the Federal Deposit Insurance Corporation (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 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, 2000 can be found in Note 14 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. In November 1999, Congress enacted the Gramm-Leach-Bliley Act of 1999 (the "Act"), which eliminates certain barriers to and restrictions on affiliations between banks and securities firms, insurance companies and other financial services organizations. Among other things, the Act repealed certain Glass-Steagall Act restrictions on affiliations between banks and securities firms, and amended the BHCA to permit bank holding companies that qualify as "financial holding companies" to engage in a broad list of "financial activities," and any non- financial activity that the FRB, in consultation with the Secretary of the Treasury, determines is "complementary" to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system. The Act treats various lending, insurance underwriting, insurance company portfolio investment, financial advisory, securities underwriting, dealing and market-making, and merchant banking activities as financial in nature for this purpose. 4 Under the Act, a bank holding company may become certified as a financial holding company by filing a notice with the FRB, together with a certification that the bank holding company meets certain criteria, including capital, management, and Community Reinvestment Act requirements. M&I has not yet determined whether or when it may elect to become a financial holding company. The Act also imposes strict new privacy restrictions on the transfer and use by financial institutions of nonpublic personal information about their customers. On June 1, 2000, the federal banking regulatory agencies issued final regulations implementing the Act's consumer privacy protections. Among other things, the new privacy regulations give customers the right to "opt- out" of having their nonpublic personal information shared by a financial institution with nonaffiliated third parties, bars financial institutions from disclosing customer account numbers or other such access codes to nonaffiliated third parties for direct marketing purposes, and requires disclosures by financial institutions of their policies and procedures for protecting customers' nonpublic personal information. 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. 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):
2000 1999 1998 ---------- ---------- ---------- U.S. Treasury and government agencies......... $3,303,366 $3,924,192 $3,658,730 States and political subdivisions............. 1,251,359 1,277,638 1,051,712 Other......................................... 1,235,156 377,289 304,174 ---------- ---------- ---------- $5,789,881 $5,579,119 $5,014,616 ========== ========== ==========
5 The maturities, at amortized cost, and weighted average yields (for tax- exempt obligations on a fully taxable basis assuming a 35% tax rate) of investment securities at December 31, 2000 are ($ in thousands):
After One but Within Five After Five but After Ten Within One Year Years Within Ten Years Years Total ---------------- ---------------- ------------------ -------------- ---------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ---------- ----- ---------- ----- ---------- ------- -------- ----- ---------- ----- U.S. Treasury and government agencies.... $ 903,429 7.11% $2,132,712 7.16% $ 256,126 7.30% $ 11,099 7.32% $3,303,366 7.15% States and political subdivisions........... 46,494 6.78 375,651 6.85 232,173 7.19 597,041 7.43 1,251,359 7.19 Other................... 644,074 7.33 409,133 7.10 33,057 7.94 148,892 3.82 1,235,156 6.85 ---------- ---- ---------- ---- ---------- ------ -------- ---- ---------- ---- $1,593,997 7.19% $2,917,496 7.11% $ 521,356 7.29% $757,032 6.72% $5,789,881 7.09% ========== ==== ========== ==== ========== ====== ======== ==== ========== ====
Types of Loans and Leases M&I's consolidated loans and leases, classified by type, at December 31 of each year are ($ in thousands):
2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ---------- Commercial, financial and agricultural....... $ 5,230,795 $ 4,691,996 $ 4,025,663 $ 3,346,101 $2,904,341 Industrial development revenue bonds.......... 58,742 62,861 52,174 49,126 32,241 Real estate: Construction.......... 619,281 494,558 425,442 458,670 394,228 Mortgage: Residential......... 5,049,557 4,941,450 4,045,022 4,146,416 2,560,936 Commercial.......... 4,359,812 4,034,771 3,667,924 3,450,897 2,477,652 ----------- ----------- ----------- ----------- ---------- Total mortgage.... 9,409,369 8,976,221 7,712,946 7,597,313 5,038,588 Personal................ 1,174,248 1,299,416 1,166,541 1,161,608 1,181,846 Lease financing......... 1,094,652 810,009 613,400 489,094 331,505 ----------- ----------- ----------- ----------- ---------- 17,587,087 16,335,061 13,996,166 13,101,912 9,882,749 Less: Allowance for loan and lease losses......... 235,115 225,862 226,052 208,651 161,659 ----------- ----------- ----------- ----------- ---------- Net loans and leases.... $17,351,972 $16,109,199 $13,770,114 $12,893,261 $9,721,090 =========== =========== =========== =========== ==========
Loan and Lease Balances and Maturities The analysis of selected loan and lease maturities at December 31, 2000 and the rate structure for the categories indicated are ($ in thousands):
Rate Structure of Loans and Maturity Leases Due After One Year ----------------------------------------- --------------------------------- Over One Year Over With With One Year Through Five Predetermined Floating Or Less Five Years Years Total Rate Rate Total ---------- ---------- -------- ---------- ------------- -------- ---------- Commercial, financial and agricultural....... $3,643,241 $1,459,954 $127,600 $5,230,795 $1,308,740 $278,814 $1,587,554 Industrial development revenue bonds.......... 13,929 11,527 33,286 58,742 28,156 16,657 44,813 Real estate-- construction........... 315,475 303,806 -- 619,281 193,559 110,247 303,806 Lease financing......... 193,387 839,686 61,579 1,094,652 901,265 -- 901,265 ---------- ---------- -------- ---------- ---------- -------- ---------- $4,166,032 $2,614,973 $222,465 $7,003,470 $2,431,720 $405,718 $2,837,438 ========== ========== ======== ========== ========== ======== ==========
- -------- 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. 6 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 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, 2000 the Corporation had $11.5 million of loans for which payments are presently current, but the borrowers are experiencing serious financial problems. These loans are subject to constant management attention and their classification is reviewed on a quarterly basis. Deposits The average amount of and the average rate paid on selected deposit categories for each of the years ended December 31 is as follows ($ in thousands):
2000 1999 1998 ---------------- ---------------- ---------------- Amount Rate Amount Rate Amount Rate ----------- ---- ----------- ---- ----------- ---- Noninterest bearing demand deposits......... $ 2,648,419 $ 2,663,609 $ 2,545,724 Interest bearing demand deposits................ 1,069,958 1.66% 1,116,919 1.54% 1,129,725 1.85% Savings deposits......... 6,017,730 4.82 5,740,898 3.86 5,145,798 4.02 Time deposits............ 7,761,676 5.98 6,635,476 5.23 5,935,968 5.67 ----------- ----------- ----------- Total deposits........... $17,497,783 $16,156,902 $14,757,215 =========== =========== ===========
The maturity distribution of time deposits (CDs $100,000 and over and other time) issued in amounts of $100,000 and over and outstanding at December 31, 2000 ($ in thousands) is: Three months or less............................................. $ 446,597 Over three and through six months................................ 456,818 Over six and through twelve months............................... 656,270 Over twelve months............................................... 1,113,056 ---------- $2,672,741 ==========
At December 31, 2000, time deposits issued by foreign offices totaled $2.44 billion. Short-Term Borrowings Information related to M&I's funds purchased and security repurchase agreements for the last three years is as follows ($ in thousands):
2000 1999 1998 ---------- ---------- ---------- Amount outstanding at year end.......... $1,092,723 $1,402,077 $1,712,165 Average amount outstanding during the year................................... 2,211,537 2,276,978 2,042,371 Maximum amount outstanding at any month's end............................ 2,767,114 2,609,501 2,541,006 Weighted average interest rate at year end.................................... 5.91% 3.95% 4.39% Weighted average interest rate during the year............................... 6.28% 5.00% 5.36%
7 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. 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 and industry conditions, either nationally or in the states in which M&I does business, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability; . Legislation or regulatory changes which adversely affect the businesses in which M&I is engaged; . Changes in the interest rate environment; . 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 technological developments, new product introductions, evolving industry standards, industry consolidation, increased availability of financial services from non-banks, 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; . M&I's success in implementing its business strategy; . Changes in consumer spending, borrowing and saving habits; . M&I's ability to attract and retain senior management; . 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. In addition to the factors discussed above, the following factors concerning Metavante's business may cause M&I's results to differ from the results discussed in the forward-looking statements: . Operational difficulties with Metavante's information technology systems and unauthorized access, computer viruses and other disruptive problems that may compromise the integrity and security of Metavante's information technology systems and the data Metavante processes; . Damage to Metavante's data centers due to fire, power loss, telecommunications failure and other disasters; 8 . Metavante's ability to protect its intellectual property, including without limitation, its proprietary software; . Metavante's success in attracting and retaining senior management and skilled technical employees; and . Metavante's ability to adapt to potential industry changes in information technology systems, on which Metavante is highly dependent, and which may present operational issues or require significant capital spending. 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 19 subsidiary banks throughout Wisconsin. M&I Thunderbird Bank, a wholly-owned bank subsidiary of M&I, is located in Phoenix, Arizona and has 14 offices in the Phoenix and Tucson, Arizona metropolitan areas. M&I Bank FSB, a federal savings bank subsidiary of M&I, is located in Las Vegas, Nevada and has a branch in Naples, Florida and Milwaukee, Wisconsin. The subsidiary banks and savings association occupy modern facilities which are owned or leased. Metavante owns a data processing facility located in Brown Deer, a suburb of Milwaukee, from which Metavante conducts data processing activities. Metavante owns an 160,000 square foot facility in Milwaukee that houses its software development teams. Properties leased by Metavante 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. 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. 9 Executive Officers of the Registrant Name of Officer Office ------- ------ J.B. Wigdale Age 64 Chairman of the Board since December 1992, Chief Executive 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 Mortgage Corp., Metavante Corporation, M&I Brokerage Services, Inc., M&I Capital Markets Group L.L.C., Marshall & Ilsley Trust Company and M&I Ventures, L.L.C. D.J. Kuester Age 59 Director since February 1994, President since 1987, Marshall & Ilsley Corporation; President and Director since January 1989, M&I Marshall & Ilsley Bank; Chairman of the Board and Director, Metavante Corporation; Director, M&I Support Services Corp.; Director and President, M&I Insurance Company of Arizona, Inc. T.M. Bolger Age 51 Senior Vice President and Chief Credit Officer since 1994, Marshall & Ilsley Corporation; Executive Vice President since 1997, M&I Marshall & Ilsley Bank; Director, Richter-Schroeder Company, Inc., M&I First National Leasing Corp. and M&I Support Services Corp. J.L. Delgadillo Age 48 Senior Vice President of Marshall & Ilsley Corporation since 1993; Chief Executive Officer since January 1998 and Director of Metavante Corporation since 1994; President and Chief Operating Officer of Metavante Corporation since 1993; Senior Vice President of Metavante Corporation from 1989 to 1993; Director and Executive Vice President, M&I EastPoint Technology, Inc. since 1996. S.T. Happ Age 39 Senior Vice President since April 1999, Marshall & Ilsley 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. M.A. Hatfield Age 55 Senior Vice President since 1993, Secretary since 1981 and Treasurer from 1986 to May 1995, Marshall & Ilsley Corporation; Vice President and Secretary, M&I Marshall & Ilsley Bank; Director, M&I Support Services Corp.; Director and Secretary, M&I First National Leasing Corp., M&I Insurance Company of Arizona, Inc., Richter-Schroeder Company, Inc., M&I Bank FSB and M&I Dealer Finance, Inc.; Secretary and Treasurer, M&I Mortgage Corp.; Secretary, M&I Capital Markets Group L.L.C., Marshall & Ilsley Trust Company, M&I Investment Management Corp., Marshall & Ilsley Trust Company of Florida, M&I Insurance Services, Inc. and M&I Brokerage Services, Inc. P.R. Justiliano Age 50 Senior Vice President since 1994 and Corporate Controller since April 1989, Vice President, 1986 to 1994, Marshall & Ilsley Corporation; Controller, M&I Marshall & Ilsley Bank, since September 1998; Director and Treasurer, M&I Insurance Company of Arizona, Inc.; Director, M&I Bank FSB. T.J. O'Neill Age 40 Senior Vice President since April 1997, Marshall & Ilsley Corporation; Executive Vice President since 2000, Senior Vice President since 1997, Vice President since 1990, M&I Marshall & Ilsley Bank; President and Director, M&I Bank FSB, M&I Dealer Finance, Inc.; Director, M&I Support Services Corp., M&I Brokerage Services, Inc. and M&I Insurance Services, Inc. P.J. Renard Age 40 Senior Vice President, Director of Human Resources since 2000, Vice President and Manager since 1994, Marshall & Ilsley Corporation. J. L. Roberts Age 48 Senior Vice President, Marshall & Ilsley Corporation since 1994; Senior Vice President since 1994, Vice President and Controller from 1986 to 1995, M&I Marshall & Ilsley Bank; President and Director, M&I Support Services Corp. since 1995; Director, M&I Bank FSB. T.A. Root Age 44 Senior Vice President since 1998, Audit Director since May 1996, Vice President from 1991 to 1998, Marshall & Ilsley Corporation; Vice President and Auditor since 1993, M&I Marshall & Ilsley Bank. 10 Name of Officer Office ------- ------ L.I. Sherman Age 52 Senior Vice President, Director of Marketing, Marshall & Ilsley Corporation since 1996; Senior Vice President, Director of Marketing from 1989 to 1995, Old Kent Financial Corp. J.V. Williams Age 56 Senior Vice President since December 1997, Marshall & Ilsley Corporation; Executive Vice President and Chief Operating Officer since January 1999, Marshall & Ilsley Trust Company; Chief Executive Officer and Director since January 1996, M&I Insurance Services, Inc.; Senior Vice President since 1994, M&I Marshall & Ilsley Bank; Chief Executive Officer and Director, M&I Brokerage Services, Inc.; Executive Vice President, Chief Operating Officer and Director, M&I Investment Management Corp.; Director, M&I Capital Markets Group L.L.C., M&I Portfolio Services, Inc. and M&I National Trust Company. D.H. Wilson Age 41 Senior Vice President and Treasurer since December 1996, Vice President and 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. and M&I Bank FSB. 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 14 in Item 8, Consolidated Financial Statements. Holders of Common Equity At December 31, 2000, M&I had approximately 19,660 record holders of its Common Stock. 11 ITEM 6. SELECTED FINANCIAL DATA Consolidated Summary of Operating Earnings Years Ended December 31 ($000's except share data)
2000 1999 1998 1997 1996 ---------- ---------- ---------- --------- --------- Interest Income: Loans and Leases...... $1,391,651 $1,156,775 $1,085,829 $ 921,161 $ 804,951 Investment Securities. Taxable............. 272,536 269,668 280,377 240,238 198,787 Tax Exempt.......... 65,429 58,820 52,969 45,420 30,718 Other Short-term Investments.......... 18,366 11,321 14,869 13,514 11,365 ---------- ---------- ---------- --------- --------- Total Interest Income............. 1,747,982 1,496,584 1,434,044 1,220,333 1,045,821 Interest Expense: Deposits.............. 772,016 585,864 564,540 460,418 392,473 Short-term Borrowings. 224,187 142,294 126,624 111,193 63,892 Long-term Borrowings.. 78,773 63,145 66,810 54,175 53,615 ---------- ---------- ---------- --------- --------- Total Interest Expense............ 1,074,976 791,303 757,974 625,786 509,980 ---------- ---------- ---------- --------- --------- Net Interest Income..... 673,006 705,281 676,070 594,547 535,841 Provision for Loan and Lease Losses........... 30,352 25,419 27,090 17,633 15,634 ---------- ---------- ---------- --------- --------- Net Interest Income After Provision for Loan and Lease Losses.. 642,654 679,862 648,980 576,914 520,207 Other Income: Data Processing Services............. 546,041 494,816 421,945 344,362 273,287 Trust Services........ 117,680 100,963 88,496 78,595 70,190 Net Securities Gains (Losses)............. 1,051 (4,083) 7,145 (2,578) (4,803) Other................. 314,146 286,849 276,914 213,732 199,659 ---------- ---------- ---------- --------- --------- Total Other Income.. 978,918 878,545 794,500 634,111 538,333 Other Expense: Salaries and Benefits. 623,360 583,659 523,606 460,164 392,711 Other................. 460,618 446,809 431,216 362,689 323,936 ---------- ---------- ---------- --------- --------- Total Other Expense. 1,083,978 1,030,468 954,822 822,853 716,647 ---------- ---------- ---------- --------- --------- Income Before Income Taxes.................. 537,594 527,939 488,658 388,172 341,893 Provision for Income Taxes.................. 175,958 173,428 171,067 131,487 119,983 ---------- ---------- ---------- --------- --------- Operating Income........ $ 361,636 $ 354,511 $ 317,591 $ 256,685 $ 221,910 ========== ========== ========== ========= ========= Accounting Changes & Special Charges........ (46,513) -- (16,268) -- (15,275) ---------- ---------- ---------- --------- --------- Net Income.............. $ 315,123 $ 354,511 $ 301,323 $ 256,685 $ 206,635 ========== ========== ========== ========= ========= Per Share: Basic Operating Income............... $ 3.44 $ 3.32 $ 2.94 $ 2.62 $ 2.28 Basic Net Income...... 2.99 3.32 2.79 2.62 2.12 Diluted Operating Income............... 3.32 3.14 2.76 2.43 2.12 Diluted Net Income.... 2.89 3.14 2.61 2.43 1.98 Common Dividends Declared............. 1.035 0.940 0.860 0.785 0.720 Other Significant Data: Year-End Common Stock Price................ $ 50.83 $ 62.81 $ 58.44 $ 62.13 $ 34.63 Return on Average Shareholders' Equity*.............. 16.84% 16.32% 14.89% 16.49% 16.14% Return on Average Assets*.............. 1.44 1.56 1.53 1.51 1.52 Dividend Payout Ratio. 35.81 29.94 32.95 32.30 36.36 Average Equity to Average Assets Ratio. 8.58 9.57 10.26 9.15 9.39 Ratio of Earnings to Fixed Charges** Excluding Interest on Deposits........ 2.46x 3.38x 3.25x 3.21x 3.52x Including Interest on Deposits........ 1.43x 1.65x 1.60x 1.61x 1.61x
- -------- *Based on Operating Income **See Exhibit 12 for detailed computation of these ratios. 12 Consolidated Average Balance Sheets Years ended December 31 ($000's except share data)
2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- Assets: Cash and Due from Banks................. $ 615,015 $ 638,399 $ 652,988 $ 614,824 $ 586,985 Short-term Investments........... 265,487 186,105 247,049 206,295 188,082 Trading Securities..... 30,926 37,277 43,404 40,822 25,264 Investment Securities: Taxable.............. 4,063,774 4,208,498 4,317,668 3,570,225 3,104,010 Tax Exempt........... 1,327,159 1,217,847 1,078,333 913,130 668,913 Loans and Leases: Commercial............. 4,975,482 4,359,880 3,749,518 3,128,568 2,947,631 Real Estate............ 9,958,164 8,639,360 7,967,626 6,309,818 5,139,926 Personal............... 1,245,738 1,204,931 1,154,110 1,147,203 1,148,511 Lease Financing........ 938,525 705,054 532,043 394,024 293,448 ----------- ----------- ----------- ----------- ----------- Total Loans and Leases.. 17,117,909 14,909,225 13,403,297 10,979,613 9,529,516 Allowance for Loan and Lease Losses........... 233,466 228,500 216,456 174,525 166,886 ----------- ----------- ----------- ----------- ----------- Net Loans and Leases.... 16,884,443 14,680,725 13,186,841 10,805,088 9,362,630 Other Assets............ 1,854,973 1,732,112 1,263,890 851,030 709,803 ----------- ----------- ----------- ----------- ----------- Total Assets....... $25,041,777 $22,700,963 $20,790,173 $17,001,414 $14,645,687 =========== =========== =========== =========== =========== Liabilities and Shareholders' Equity: Noninterest Bearing Deposits.............. $ 2,648,419 $ 2,663,609 $ 2,545,724 $ 2,301,097 $ 2,116,197 Interest Bearing Deposits: Savings and NOW...... 1,845,916 2,027,658 2,140,380 1,915,888 1,905,775 Money Market Savings. 5,241,772 4,830,159 4,135,143 3,022,944 2,597,732 CDs of $100 or more.. 2,303,442 1,694,301 1,547,816 1,334,532 933,164 Other................ 5,458,234 4,941,175 4,388,152 3,665,334 3,344,644 ----------- ----------- ----------- ----------- ----------- Total Deposits......... 17,497,783 16,156,902 14,757,215 12,239,795 10,897,512 Short-term Borrowings.. 3,538,846 2,803,834 2,357,161 2,017,829 1,218,177 Long-term Borrowings... 1,178,805 1,009,132 1,046,321 787,819 823,397 Accrued Expenses and Other Liabilities..... 678,269 558,978 496,439 399,605 331,743 Shareholders' Equity... 2,148,074 2,172,117 2,133,037 1,556,366 1,374,858 ----------- ----------- ----------- ----------- ----------- Total Liabilities and Shareholders' Equity............ $25,041,777 $22,700,963 $20,790,173 $17,001,414 $14,645,687 =========== =========== =========== =========== =========== Other Significant Data: Book Value Per Share at Year End........... $21.19 $19.47 $19.88 $17.94 $13.75 Average Common Shares Outstanding........... 104,100,652 104,940,787 105,918,139 95,831,283 95,895,547 Employees at Year End*.................. 11,753 11,433 10,756 10,227 8,995 Historically Reported Credit Quality Ratios:* Net Loan and Lease Charge-offs to Average Loans and Leases................ 0.12% 0.17% 0.07% 0.13% 0.23% Total Nonperforming Loans and Leases** & OREO to End of Period Loans and Leases & OREO.................. 0.76 0.75 0.85 0.70 0.81 Allowance for Loan and Lease Losses to End of Period Loans and Leases................ 1.34 1.38 1.62 1.62 1.68 Allowance for Loan and Lease Losses to Total Nonperforming Loans and Leases**.......... 182 193 206 275 225
- -------- *Not restated for acquisitions accounted for as pooling of interests. **Loans and leases nonaccrual, restructured, and past due 90 days or more. 13 Yield & Cost Analysis Years ended December 31 (Tax equivalent basis)
2000 1999 1998 1997 1996 ----- ----- ----- ----- ----- Average Rates Earned: Loans & Securitized ARMs.................. 8.13% 7.77% 8.09% 8.36% 8.41% Investment Securities--Taxable............ 6.49 6.26 6.26 6.62 6.29 Investment Securities--Tax Exempt......... 7.16 7.13 7.44 7.40 6.76 Trading Securities........................ 4.92 5.08 5.13 5.01 4.83 Short-term Investments.................... 6.35 5.08 5.13 5.57 5.40 Average Rates Paid: Interest Bearing Deposits................. 5.20% 4.34% 4.62% 4.63% 4.47% Short-term Borrowings..................... 6.34 5.07 5.37 5.51 5.24 Long-term Borrowings...................... 6.68 6.26 6.39 6.88 6.51 M&I Marshall & Ilsley Bank Average Prime Rate...................... 9.24 8.02 8.35 8.44 8.27 Summary Yield and Cost Analysis: (As a % of Average Assets) Average Yield............................. 7.10% 6.72% 7.02% 7.31% 7.25% Average Cost.............................. 4.29 3.49 3.64 3.68 3.48 ----- ----- ----- ----- ----- Net Interest Income....................... 2.81 3.23 3.38 3.63 3.77 Provision for Loan and Lease Losses....... 0.12 0.11 0.13 0.10 0.11 ----- ----- ----- ----- ----- Net Interest Income After Provision for Loan and Lease Losses.................... 2.69 3.12 3.25 3.53 3.66 Net Securities Gains (Losses)............. -- (0.02) 0.03 (0.02) (0.03) Other Income.............................. 3.90 3.89 3.79 3.75 3.71 Other Expense............................. 4.32 4.54 4.59 4.84 4.89 ----- ----- ----- ----- ----- Income Before Income Taxes................ 2.27 2.45 2.48 2.42 2.45 Provision for Income Taxes................ 0.83 0.89 0.95 0.91 0.93 ----- ----- ----- ----- ----- Operating Income.......................... 1.44% 1.56% 1.53% 1.51% 1.52% ===== ===== ===== ===== ===== Accounting Changes & Special Charges...... (0.18) -- (0.08) -- (0.11) ----- ----- ----- ----- ----- Net Income.............................. 1.26% 1.56% 1.45% 1.51% 1.41% ===== ===== ===== ===== =====
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Net income in 2000 amounted to $315.1 million or $2.89 per share on a diluted basis. The return on average assets and return on average equity were 1.26% and 14.67%, respectively. By comparison, 1999 net income was $354.5 million, diluted earnings per share was $3.14, the return on average assets was 1.56% and the return on average equity was 16.32%. For the year ended December 31, 1998, net income was $301.3 million or $2.61 per share diluted and the returns on average assets and average equity were 1.45% and 14.13%, respectively. 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. The results of operations and financial position for the periods presented also include the effects of the acquisitions of certain assets and liabilities by the Metavante subsidiary of the Corporation from the dates of merger. All three transactions were accounted for as purchases. Cash consideration in the three transactions aggregated $86 million. The results of operations for the year ended December 31, 2000, include the effects of losses from investment security and loan sales to realign the investment portfolio and dispose of lower yielding assets, costs associated with the planned Initial Public Offering (IPO) of the Corporation's Metavante subsidiary and costs incurred in connection with the plan to consolidate the Corporation's banking charters into a single charter as announced in the second quarter. In addition, in 2000, the Corporation adopted SAB 101 which changed the way conversion revenue and cost is recognized as more fully described in Note 2 to the Consolidated Financial Statements in Item 8. The following is a summary of the unusual items reported in 2000 and 1998 and the comparative operating income, earnings per share and return on average equity based on operating income for 2000, 1999, and 1998.
Pre-tax effect 2000 1999 1998 -------------- ------ ------ ------ ($ in millions, except per share data) Net income.............................. $315.1 $354.5 $301.3 Special charges Investment portfolio realignment-- securities losses.................... $50.6 32.9 -- -- Balance sheet management--losses on sale of ARM loans.................... 3.1 2.0 -- -- Metavante IPO......................... 4.5 3.1 -- -- Banking charter consolidation......... 9.1 6.2 -- -- Merger/Restructuring charges.......... 23.4 -- -- 16.3 ------ ------ ------ Total special charges................... 44.2 -- 16.3 ------ ------ ------ Change in accounting.................... 3.8 2.3 -- -- ------ ------ ------ Operating income........................ $361.6 $354.5 $317.6 ====== ====== ====== Operating income per share Basic................................. $ 3.44 $ 3.32 $ 2.94 Diluted............................... 3.32 3.14 2.76 Operating income to average equity...... 16.84% 16.32% 14.89%
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. 15 Summary Consolidated Tangible Operating Income and Financial Statistics ($ in millions, except per share data)
2000 1999 1998 ------ ------ ------ Operating income........................................ $361.6 $354.5 $317.6 Amortization, net of tax................................ 19.2 23.8 21.0 ------ ------ ------ Tangible operating income............................... $380.8 $378.3 $338.6 ====== ====== ====== Tangible operating income per share Basic................................................. $ 3.62 $ 3.55 $ 3.14 Diluted............................................... 3.50 3.35 2.94 Return on average tangible assets....................... 1.54% 1.69% 1.65% Return on average tangible equity....................... 20.78 20.49 18.48
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, 2000, 1999 and 1998. 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 2000 and 1998 as previously discussed.
2000 1999 1998 ----- ----- ----- Interest Income............................................ 7.10% 6.72% 7.02% Interest Expense........................................... (4.29) (3.49) (3.64) ----- ----- ----- Net Interest Income........................................ 2.81 3.23 3.38 Provision for Loan and Lease Losses........................ (0.12) (0.11) (0.13) Net Securities (Losses) / Gains............................ -- (0.02) 0.03 Other Income............................................... 3.90 3.89 3.79 Other Expense.............................................. (4.32) (4.54) (4.59) ----- ----- ----- Income Before Income Taxes................................. 2.27 2.45 2.48 Income Taxes............................................... (0.83) (0.89) (0.95) ----- ----- ----- Operating Income To Average Assets......................... 1.44% 1.56% 1.53% ===== ===== =====
Net Interest Income Net interest income in 2000 amounted to $673.0 million compared with net interest income of $705.3 million in 1999, a decrease of $32.3 million. Average earning assets in 2000 amounted to $22.8 billion compared to $20.6 billion in 1999, an increase of $2.2 billion or 10.9%. Average loans and leases, including securitized adjustable rate mortgage loans (ARMs), increased $2.1 billion or 13.6%. The remainder of the increase was distributed evenly between investment securities and short-term investments. During the latter part of the third quarter of 2000, the Corporation realigned its available for sale investment securities portfolio through the sale and purchase of approximately $1.6 billion of U.S. Government Agency securities. The full benefit of these transactions was realized beginning in the fourth quarter of 2000 and will have a more significant impact in 2001. Average interest bearing liabilities increased $2.3 billion or 13.1% in 2000 compared to 1999. Average interest bearing deposits increased $1.4 billion or 10.0%. Average short-term borrowings increased $735 million 16 while average long-term borrowings increased $170 million. The increase in borrowings reflects, in part, greater use of senior and subordinated notes by the banking affiliates. Average noninterest bearing deposits were relatively unchanged compared to the prior year. The increase in average interest bearing liabilities in 2000 reflects funding of earning asset growth along with the effect of treasury share repurchases. The growth and composition of the Corporation's average loan and lease portfolio for the current year and prior two years are reflected in the following table. The securitized ARM loans that are classified as investment securities available for sale are included to provide a more meaningful comparison ($ in millions):
Percent Growth ------------ 2000 1999 vs vs 2000 1999 1998 1999 1998 --------- --------- --------- ----- ----- Commercial Loans................... $ 4,975.5 $ 4,359.9 $ 3,749.5 14.1% 16.3% Real Estate Loans: Construction..................... 547.8 430.1 421.3 27.4 2.1 Commercial Mortgages............. 4,182.6 3,845.3 3,545.1 8.8 8.5 Residential Mortgages............ 5,227.8 4,363.9 4,001.3 19.8 9.1 Securitized ARM Loans............ 431.4 536.6 919.3 (19.6) (41.6) --------- --------- --------- ----- ----- Total Real Estate Loans & ARMs..... 10,389.6 9,175.9 8,887.0 13.2 3.3 Personal Loans: Student Loans.................... 185.2 257.9 268.8 (28.2) (4.1) Other Personal Loans............. 1,060.5 947.0 885.3 12.0 7.0 --------- --------- --------- ----- ----- Total Personal Loans............... 1,245.7 1,204.9 1,154.1 3.4 4.4 Lease Financing Receivables: Commercial....................... 353.2 335.0 329.6 5.4 1.6 Personal......................... 585.3 370.1 202.4 58.2 82.8 --------- --------- --------- ----- ----- Total Lease Financing Receivables.. 938.5 705.1 532.0 33.1 32.5 --------- --------- --------- ----- ----- Total Consolidated Average Loans, Leases & ARMs..................... $17,549.3 $15,445.8 $14,322.6 13.6% 7.8% ========= ========= ========= ===== ===== Total Consolidated Average Loans, Leases & ARMs Total Commercial Banking......... $ 9,944.6 $ 8,870.0 $ 7,910.5 12.1% 12.1% Total Retail Banking............. 7,604.7 6,575.8 6,412.1 15.6% 2.6% --------- --------- --------- ----- ----- Total Consolidated Average Loans, Leases & ARMs..................... $17,549.3 $15,445.8 $14,322.6 13.6% 7.8% ========= ========= ========= ===== ===== Total Consolidated Average Loans and Leases........................ $17,117.9 $14,909.2 $13,403.3 14.8% 11.2% ========= ========= ========= ===== =====
Compared to 1999, average loans, leases and ARMs increased $2.1 billion or 13.6%. Total loan growth in commercial banking amounted to $1.1 billion or 12.1% and was driven by commercial loan growth of $616 million and commercial real estate loan and commercial real estate construction growth of $441 million. Retail banking loan growth amounted to $1.0 billion or 15.6 %. Home equity loans and lines accounted for $380 million, residential mortgages accounted for $484 million and lease financing receivables accounted for $215 million of the growth in retail loans. In the fourth quarter of 2000, the Corporation acquired $341 million of home equity loans and lines in support of its private-label banking services. Generally, the Corporation sells fixed rate residential real estate loans and in 2000 began selling a portion of ARM loan production in the secondary market. Residential real estate loans originated and sold to investors amounted to $0.6 billion in 2000 compared to $1.1 billion in 1999. As part of its announced balance sheet management restructuring, the Corporation sold $300.8 million of portfolio ARM loans. ARM loans transferred to available for sale securities late in 2000 amounted to $511 million. During the third quarter of 2000, the 17 Corporation began securitizing indirect automobile loans. Auto loans securitized and sold in 2000 amounted to $223 million. In addition, $149.9 million of student loans were sold in 2000. The Corporation anticipates that it will continue to divest of lower yielding assets through sale or securitization in future periods. The growth and composition of the Corporation's consolidated average deposits for the current year and prior two years are reflected below ($ in millions):
Percent Growth ----------- 2000 1999 vs vs 2000 1999 1998 1999 1998 --------- --------- --------- ---- ---- Noninterest Bearing Commercial.............. $ 1,693.5 $ 1,720.3 $ 1,658.2 (1.6)% 3.7% Personal................ 580.2 558.7 508.9 3.8 9.8 Other................... 374.7 384.6 378.6 (2.6) 1.6 --------- --------- --------- ---- ---- Total Noninterest Bearing Deposits................. 2,648.4 2,663.6 2,545.7 (0.6) 4.6 Interest Bearing Savings and NOW......... 1,845.9 2,027.6 2,140.4 (9.0) (5.3) Money Market............ 5,241.8 4,830.2 4,135.1 8.5 16.8 Other CDs & Time........ 5,458.3 4,941.2 4,388.2 10.5 12.6 CDs Greater than $100,000............... 872.8 817.9 816.5 6.7 0.2 Brokered CDs............ 1,430.6 876.4 731.3 63.2 19.8 --------- --------- --------- ---- ---- Total Interest Bearing Deposits................. 14,849.4 13,493.3 12,211.5 10.1 10.5 --------- --------- --------- ---- ---- Total Consolidated Average Deposits................. $17,497.8 $16,156.9 $14,757.2 8.3% 9.5% ========= ========= ========= ==== ==== Total Bank Issued Deposits................. $13,775.6 $13,513.5 $13,194.5 1.9% 2.4% Total Wholesale Deposits.. 3,722.2 2,643.4 1,562.7 40.8 69.2 --------- --------- --------- ---- ---- Total Consolidated Average Deposits................. $17,497.8 $16,156.9 $14,757.2 8.3% 9.5% ========= ========= ========= ==== ====
Due to strong earning asset growth, particularly loan growth, the Corporation continued to make greater use of wholesale deposits in 2000. Wholesale deposits increased $1.1 billion or 40.8%, of which, eurodollar term and overnight deposits, which are included in Other CDs & Time, accounted for $0.5 billion of the increase while brokered CDs increased $0.6 billion. Money market savings, especially money market index accounts exhibited the greatest growth in bank issued deposits in 2000 compared to 1999. Average bank issued money market savings increased $343 million or 8.1%. Average bank issued eurodollar activity and bank issued time deposits increased $80 million and $36 million, respectively while average savings and NOW decreased $182 million in 2000 compared to the prior year. As previously discussed, noninterest bearing deposits were relatively unchanged year over year. During 2000, M&I disposed of three branches. Deposits and loans aggregating approximately $111 million and $8 million, respectively were divested in 2000. As part of its private-label banking services, the Corporation acquired $354 million of deposits late in 2000. The net interest margin (FTE) as a percent of average earning assets was 3.08% in 2000 compared to 3.58% in 1999, a decrease of 50 basis points. The yield on earning assets increased 36 basis points from 7.43% in 1999 to 7.79% in 2000 while the cost of interest bearing liabilities increased 92 basis points from 4.57% in 1999 to 5.49% in 2000. The continued reliance on higher- cost funding sources and lower loan spreads resulted in the margin decline. Premium amortization associated with purchase accounting adjustments arising primarily from the 1997 acquisition of Security Capital Corporation (Security) was $3.9 million less in 2000 compared to the prior year due to slower prepayments. 18 The yield on loans, leases and securitized ARMs was 8.13% in 2000 compared to 7.77% in 1999, an increase of 36 basis points. The increase in yield and the strong loan growth previously discussed contributed 90% of the increase in interest income on an FTE basis. The remaining increase in interest on earning assets was primarily attributable to investment securities. The total yield on the investment security portfolio, excluding securitized ARMs, increased by approximately 19 basis points in 2000 compared to 1999. The increase in the rates paid on interest bearing liabilities contributed approximately $161 million and the increase in volume accounted for approximately $122 million of the increase in interest paid on interest bearing liabilities in 2000 compared to the prior year. In addition to the use of higher-cost funds for earning asset growth, interest expense was adversely affected by the repurchase of treasury shares. The Corporation estimates that approximately $26.4 million of interest expense was attributable to the $471 million spent to repurchase common shares in 2000 and 1999. During 1999, the Corporation's banking affiliates began issuing bank notes. At December 31, 2000, bank notes, which are included in short-term borrowings and long-term borrowings, amounted to $1.4 billion. See Note 12, Short-term Borrowings, and Note 13, Long-term Borrowings, in Notes to Consolidated Financial Statements contained in Item 8 herein for further discussion regarding bank notes. During 2000, the Corporation filed a registration statement to issue up to $500 million of medium-term Series E notes. Approximately $21.2 million of the Corporation's other series medium-term notes matured in 2000. Throughout 2000 the Corporation employed a variety of derivative financial instruments in the form of receive fixed/pay floating interest rate swaps and interest rate floors designated as hedges against the interest rate volatility associated with variable rate assets and liabilities. See Note 18, 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 2000, the effect on net interest income resulting from the derivative financial instruments designated as hedges was a negative $3.5 million compared with a positive $7.0 million in 1999. On January 1, 2001, the Corporation adopted the new accounting standard for accounting for derivative financial instruments and hedging activities as explained in Note 1 in Notes to Consolidated Financial Statements contained in Item 8 herein. The new standard requires that those derivative instruments be recognized in the Corporation's Consolidated Balance Sheets as assets or liabilities at their fair value. The Corporation has determined that those freestanding derivatives previously designated as hedges will continue to be eligible for the special hedge accounting prescribed by the new standard. The impact resulting from the transition adjustment of adopting the new standard will be a charge to accumulated other comprehensive income (equity) of $10.2 million and a decrease to net income of $0.4 million which will be presented as a cumulative-type change in accounting. The Corporation does not expect that applying the new standard will result in a material difference to income compared to current accounting. The Corporation anticipates that the net interest margin will stabilize in 2001. 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. 19 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 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. 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. 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. 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 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. 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. 20 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, the costs of acquisitions and the repurchase of treasury shares adversely affected interest expense. The Corporation estimates that approximately $9.3 million of interest expense is attributable to common shares repurchased 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. 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. 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 18, 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 $7.0 million compared with a positive $5.1 million in 1998. In late December, 1998, the Corporation purchased $400 million of single premium bank-owned life insurance policies which insure the lives of certain officers of the Corporation and its affiliates. The Corporation is utilizing this vehicle to fund future employee benefit obligations. These purchases were funded by the maturities and sales of investment securities classified as available for sale. The net realizable values of bank-owned life insurance policies are a component of other assets in the consolidated balance sheets and periodic increases in the values are included as a component of other income. These transactions have the effect of reducing the Corporation's net interest income (and margin) and increasing its other income. 21 Average Balance Sheets and Analysis of Net Interest Income The Corporation's consolidated average balance sheets, interest earned and interest paid, and the average interest rates earned and paid for each of the last three years are presented in the following table. Securitized ARM loans that are classified as investment securities available for sale are included with loans and leases to provide a more meaningful comparison ($ in thousands):
2000 1999 1998 -------------------------------- -------------------------------- -------------------------------- Interest Average Interest Average Interest Average Average Earned/ Yield or Average Earned/ Yield or Average Earned/ Yield or Balance Paid Cost (3) Balance Paid Cost (3) Balance Paid Cost (3) ----------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Loans, leases, and securitized ARMs (1,2)................. $17,549,271 $1,426,750 8.13% $15,445,809 $1,198,505 7.77% $14,322,551 $1,156,569 8.09% Investment securities: Taxable............... 3,632,411 239,509 6.49 3,671,914 229,909 6.26 3,398,414 211,562 6.26 Tax exempt (1)........ 1,327,159 94,371 7.16 1,217,847 85,552 7.13 1,078,333 77,212 7.44 Interest bearing deposits in other banks................. 24,850 2,066 8.31 21,566 1,184 5.49 28,704 1,466 5.11 Funds sold and security resale agreements..... 99,126 6,429 6.49 68,764 3,758 5.47 38,738 2,218 5.73 Trading securities (1). 30,926 1,523 4.92 37,277 1,894 5.08 43,404 2,225 5.13 Other short-term investments........... 141,511 8,363 5.91 95,775 4,515 4.71 179,607 8,982 5.00 ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ---- Total interest earning assets..... 22,805,254 1,779,011 7.79% 20,558,952 1,525,317 7.43% 19,089,751 1,460,234 7.68% Cash and demand deposits due from banks................. 615,015 638,399 652,988 Premises and equipment, net................... 376,286 360,624 357,040 Other assets........... 1,478,688 1,371,488 906,850 Allowance for loan and lease losses.......... (233,466) (228,500) (216,456) ----------- ----------- ----------- Total assets........ $25,041,777 $22,700,963 $20,790,173 =========== =========== =========== Money market savings deposits.............. $ 5,241,772 $ 277,813 5.30% $ 4,830,159 $ 205,148 4.25% $ 4,135,143 $ 184,621 4.46% Savings and interest bearing demand deposits.............. 1,845,916 29,812 1.62 2,027,658 33,525 1.65 2,140,380 43,174 2.02 Other time deposits.... 5,458,234 318,229 5.83 4,941,175 254,965 5.16 4,388,152 246,800 5.62 CDs greater than $100, brokered and callable CDs................... 2,303,442 146,162 6.35 1,694,301 92,226 5.44 1,547,816 89,945 5.81 ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ---- Total interest bearing deposits.............. 14,849,364 772,016 5.20 13,493,293 585,864 4.34 12,211,491 564,540 4.62 Short-term borrowings.. 3,538,846 224,187 6.34 2,803,834 142,294 5.07 2,357,161 126,624 5.37 Long-term borrowings... 1,178,805 78,773 6.68 1,009,132 63,145 6.26 1,046,321 66,810 6.39 ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ---- Total interest bearing liabilities........ 19,567,015 1,074,976 5.49% 17,306,259 791,303 4.57% 15,614,973 757,974 4.85% Noninterest bearing deposits.............. 2,648,419 2,663,609 2,545,724 Other liabilities...... 678,269 558,978 496,439 Shareholders' equity... 2,148,074 2,172,117 2,133,037 ----------- ----------- ----------- Total liabilities and shareholders' equity............. $25,041,777 $22,700,963 $20,790,173 =========== =========== =========== Net interest income. $ 704,035 $ 734,014 $ 702,260 ========== ========== ========== Net yield on interest earning assets............. 3.08% 3.58% 3.69% ==== ==== ====
- -------- 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. 22 Analysis of Changes in Interest Income and Interest Expense The effect on interest income and interest expense due to volume and rate changes in 2000 and 1999 are outlined in the following table. Changes not due solely to either volume or rate are allocated to rate ($ in thousands):
2000 versus 1999 1999 versus 1998 ------------------------------- ------------------------------- 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). $163,952 $ 64,293 $228,245 $ 91,738 $(49,802) $41,936 Investment securities: Taxable............... 1,066 8,534 9,600 18,372 (25) 18,347 Tax-exempt (1)........ 8,421 398 8,819 12,065 (3,725) 8,340 Interest bearing deposits in other banks.................. 180 702 882 (365) 83 (282) Funds sold and security resale agreements...... 1,661 1,010 2,671 1,720 (180) 1,540 Trading securities (1).. (323) (48) (371) (314) (17) (331) Other short-term investments............ 2,154 1,694 3,848 (4,192) (275) (4,467) -------- -------- -------- -------- -------- ------- Total interest income change...... $177,111 $ 76,583 $253,694 $119,024 $(53,941) $65,083 ======== ======== ======== ======== ======== ======= Expense on interest bearing liabilities: Money market savings deposits............. $ 17,494 $ 55,171 $ 72,665 $ 30,998 $(10,471) $20,527 Savings and interest bearing demand deposits............. (2,999) (714) (3,713) (2,277) (7,372) (9,649) Other time deposits... 26,680 36,584 63,264 31,080 (22,915) 8,165 CDs greater than $100, brokered and callable CDs.................. 33,137 20,799 53,936 8,511 (6,230) 2,281 -------- -------- -------- -------- -------- ------- Total interest bearing deposits............. 74,312 111,840 186,152 68,312 (46,988) 21,324 Short-term borrowings. 37,265 44,629 81,894 23,986 (8,316) 15,670 Long-term borrowings.. 10,622 5,005 15,627 (2,376) (1,289) (3,665) -------- -------- -------- -------- -------- ------- Total interest expense change..... $122,199 $161,474 $283,673 $ 89,922 $(56,593) $33,329 ======== ======== ======== ======== ======== =======
- -------- 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. 23 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, 2000, as well as the preceding four years: Consolidated Credit Quality Information December 31, ($000's)
2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Nonperforming Assets by Type Loans and Leases: Nonaccrual................. $121,425 $106,387 $101,346 $ 66,945 $ 63,459 Renegotiated............... 614 708 978 1,338 1,819 Past Due 90 Days or More... 7,371 9,975 7,631 8,238 7,366 -------- -------- -------- -------- -------- Total Nonperforming Loans and Leases................ 129,410 117,070 109,955 76,521 72,644 Other Real Estate Owned...... 3,797 6,230 8,751 15,573 8,052 -------- -------- -------- -------- -------- Total Nonperforming Assets.................. $133,207 $123,300 $118,706 $ 92,094 $ 80,696 ======== ======== ======== ======== ======== Allowance for Loan and Lease Losses...................... $235,115 $225,862 $226,052 $208,651 $161,659 ======== ======== ======== ======== ======== Consolidated Statistics Net Charge-offs to Average Loans and Leases............ 0.12% 0.17% 0.07% 0.12% 0.21% Total Nonperforming Loans and Leases to Total Loans and Leases...................... 0.74 0.72 0.79 0.58 0.74 Total Nonperforming Assets to Total Loans and Leases and Other Real Estate Owned..... 0.76 0.75 0.85 0.70 0.82 Allowance for Loan and Lease Losses to Total Loans and Leases...................... 1.34 1.38 1.62 1.59 1.64 Allowance for Loan and Lease Losses to Nonperforming Loans and Leases............ 182 193 206 273 223
Major Categories of Nonaccrual Loans and Leases ($000's)
December 31, 2000 December 31, 1999 ------------------------------- ------------------------------- % of % of % of % of Nonaccrual Loan Type Nonaccrual Nonaccrual Loan Type Nonaccrual ---------- --------- ---------- ---------- --------- ---------- Commercial and Lease Financing.............. $ 51,886 0.9% 42.7% $ 56,806 1.1% 53.4% Real Estate Construction and Land Development............ 2,896 0.5 2.4 2,609 0.5 2.5 Commercial Real Estate.. 35,011 0.7 28.9 19,668 0.5 18.5 Residential Real Estate. 29,895 0.7 24.6 25,901 0.5 24.3 -------- --- ----- -------- --- ----- Total Real Estate... 67,802 0.7 55.9 48,178 0.5 45.3 Personal and Lease Financing.............. 1,737 0.1 1.4 1,403 0.1 1.3 -------- --- ----- -------- --- ----- Total............... $121,425 0.7% 100.0% $106,387 0.7% 100.0% ======== === ===== ======== === =====
24 Reconciliation of Consolidated Allowance for Loan and Lease Losses ($000's)
2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Allowance for Loan and Lease Losses At Beginning of Year........... $225,862 $226,052 $208,651 $161,659 $166,815 Provision for Loan and Lease Losses......................... 30,352 25,419 27,090 17,633 15,634 Allowance of Banks and Loans Acquired....................... 1,270 -- -- 42,773 -- Allowance Transfer for Loan Securitizations................ (1,022) -- -- -- (440) Loans and Leases Charged-off: Commercial.................... 10,623 17,275 6,401 8,474 16,294 Real Estate--Construction..... 4 157 352 87 13 Real Estate--Mortgage......... 9,848 5,719 5,115 3,907 3,446 Personal...................... 8,216 7,121 7,886 7,868 6,390 Leases........................ 1,327 2,285 1,191 1,166 2,397 -------- -------- -------- -------- -------- Total Charge-offs............... 30,018 32,557 20,945 21,502 28,540 Recoveries on Loans and Leases: Commercial.................... 4,696 2,696 6,708 4,176 3,231 Real Estate--Construction..... 57 6 164 53 9 Real Estate--Mortgage......... 1,458 1,413 1,369 1,097 2,483 Personal...................... 2,199 2,244 2,690 2,501 2,355 Leases........................ 261 589 325 261 112 -------- -------- -------- -------- -------- Total Recoveries................ 8,671 6,948 11,256 8,088 8,190 -------- -------- -------- -------- -------- Net Loans and Leases Charged- off............................ 21,347 25,609 9,689 13,414 20,350 -------- -------- -------- -------- -------- Allowance for Loan and Lease Losses at End of Year................. $235,115 $225,862 $226,052 $208,651 $161,659 ======== ======== ======== ======== ========
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 $2.7 million, $5.1 million and $5.6 million at December 31, 2000, 1999 and 1998 respectively. Branch premises held for sale amounted to $1.1 million, $1.1 million and $3.2 million at the end of 2000, 1999 and 1998, respectively. 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, 2000, nonperforming loans and leases amounted to $129.4 million or 0.74% of consolidated loans and leases compared to $117.1 million or 0.72% at December 31, 1999 and $110.0 million or 0.79% at December 31, 1998. Nonaccrual loans increased $15.0 million at year end 2000 compared to year end 1999. Nonaccrual commercial mortgages accounted for $15.3 million of the increase. Nonaccrual loans associated with the cranberry industry amounted to $13.8 million or approximately 11% of total nonaccrual loans at December 31, 2000. Nonaccrual residential real estate and other nonaccrual personal loans were $31.6 million at December 31, 2000, an increase of $4.3 million over the prior year. This increase was offset by a decline in commercial loans and leases of $4.9 million. 25 Net charge-offs amounted to $21.3 million or 0.12% of average loans and leases in 2000 compared with $25.6 million or 0.17% of average loans and leases in 1999 and $9.7 million or 0.07% of average loans and leases in 1998. Cranberry industry related net charge-offs amounted to $6.2 million or 29% of total net charge-offs in 2000. The Corporation does not anticipate further losses in this sector. 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 $235.1 million at December 31, 2000 compared to $225.9 million at December 31, 1999 and $226.1 million at December 31, 1998. 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 slowing of economic prosperity. The resulting provision for loan and lease losses amounted to $30.4 million for the twelve months ended December 31, 2000, while net charge-offs totaled $21.3 million. Charge-offs for 2001 will continue to be affected by the various factors previously discussed. The Corporation anticipates charge-off levels will continue at recent historical levels. 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. 26 Other Income Total other income amounted to $928.3 million in 2000 compared to $878.5 million in 1999. Excluding securities losses of $50.6 million associated with the realignment of investment securities previously discussed, total other income in 2000 amounted to $978.9 million or an increase of $100.4 million or 11.4%. In July 2000, the Corporation created an independent subsidiary Metavante Corporation ("Metavante") which consisted of the former Data Services Division of the Corporation except for the payment services or item processing line of business which was transferred to its banking segment. Metavante was created in contemplation of a planned IPO and organized to better reflect its technology-focused business. Data processing services revenue in the Consolidated Statements of Income contained in Item 8 herein have been reclassified to reflect the organizational change and to conform data processing services revenue types to the way it was presented in Metavante's initial registration statement. Total data processing services revenue amounted to $546.0 million in 2000 compared to $494.8 million in 1999, an increase of $51.2 million or 10.4%. Account processing fees increased $50.8 million or 15.0% and reflects a full year of revenue from the electronic banking services and plastic card personalization and procurement services acquisitions in 1999 as well as growth in electronic payment services and electronic funds transfer services. Other data services revenue increased $2.2 million. Buyout fees, which vary period to period, increased $13.5 million primarily due to one large fee recognized in the third quarter of 2000 as a result of an acquisition. Equipment sales were $10.4 million lower in 2000 compared to 1999. Item processing revenue increased $11.2 million due to the addition of a large customer that converted its item processing in the fourth quarter of 1999. Fees from trust services were $117.7 million in 2000 compared to $101.0 million in 1999, an increase of $16.7 million or 16.6%. All product lines reflected revenue growth. At December 31, 2000 total trust assets were $1.2 billion higher than the previous year. Assets under management increased $1.0 billion or 9% and proprietary mutual fund balances increased $0.5 billion or 11%. Mortgage banking revenue was $16.7 million in 2000 compared with $27.3 million in 1999, a decrease of $10.6 million. Gains from sales of mortgages to the secondary market and mortgage related fees declined $9.6 million and loan servicing fees decreased $1.0 million. Capital markets revenue increased $7.6 million in 2000 compared to the prior year. Net gains from the sale of investments, which vary from period to period, accounted for $7.8 million of the increase. In addition to the increase in net realizable value, life insurance revenue in 2000 includes death benefit gains of $0.6 million. Net securities gains in 2000 excluding the effect of the losses incurred from the investment security portfolio re-alignment previously discussed, amounted to $1.1 million and principally represents gains from the sale of certain equity securities by the banking segment. Other noninterest income amounted to $121.7 million in 2000 compared to $109.6 million in 1999, an increase of $12.1 million. Revenue associated with auto securitizations which began in 2000 amounted to $3.9 million. Gains from the sale of branches and other assets sales were $7.2 million greater in 2000 compared to 1999. Other increases in commissions and fees in 2000 offset the death benefit gain on life insurance policies of $6.0 million recognized in 1999. Total other income amounted to $878.5 million in 1999 compared to $794.5 million in 1998, an increase of $84.0 million or 10%. Total data processing services revenue increased $72.9 million or 17.3% from $421.9 million in 1998 to $494.8 million in the current year. Account processing fees increased $90.7 million. Revenues associated with 27 acquisitions and a joint venture accounted for $46.6 million of the increase. Revenue from electronic funds distribution increased $11.6 million while revenue from other e-commerce related activities increased $6.0 million. The remainder of the increase in revenue was attributable to traditional processing. 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. 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. Other noninterest income amounted to $109.6 million in 1999 compared to $91.7 million in 1998, an increase of $17.9 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. Other Expense Total other expense amounted to $1,100.7 million in 2000, an increase of $70.2 million or 6.8% from $1,030.5 million in 1999. In July, 2000, the Corporation announced the planned IPO of Metavante, its plan to reduce the number of banking charters under which it operates and the sale of assets and investment portfolio realignment. Losses from the investment portfolio realignment of $50.6 million were previously discussed in Other Income. The line Single Charter / IPO / Arm Loan Sales in the Consolidated Statements of Income contained in Item 8 reflect the costs incurred for these initiatives and include the following: Losses from the sale of portfolio ARM loans amounted to $3.1 million. IPO expenses amounted to $4.5 million. Such expenses included registration costs and professional fees incurred in preparation of an initial registration statement as well as professional fees for tax and benefit plan consulting, market assessments, other strategic consulting and name change. Such expenses also included costs that normally would be netted against the IPO proceeds had it proceeded as originally planned. 28 Single Charter expenses amounted to $9.1 million and consist of the cost of programming changes required to support operations and processes to achieve the scale required in the single charter environment, consulting fees and other professional fees, costs incurred to eliminate duplicate loan and deposit customer's accounts and other affiliate shareholder matters and costs associated with employee relocation, retention and severance. The first charter merger was completed in the fourth quarter of 2000. Total costs for the single charter and IPO were originally estimated to be approximately $19.0 million (after-tax) beginning in the third quarter of 2000 and in subsequent quarters throughout 2001 as incurred. The Corporation continues to believe the estimate is reasonable. Excluding the above, operating expenses amounted to $1,084.0 in 2000 compared to $1,030.5 in 1999, an increase of $53.5 million or 5.2%. The increase in expenses is primarily attributable to the Corporation's nonbanking businesses, particularly its data processing business segment ("Metavante"). Metavante's expense growth of approximately $30.3 million or 6.4% in 2000 compared to 1999 represents approximately 57% of the Corporations total operating expense growth. 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 interest income on a fully taxable equivalent basis. The Corporation's efficiency ratios for the years ended December 31, 2000, 1999, and 1998 were:
Efficiency Ratios 2000 1999 1998 ----------------- ----- ----- ----- Consolidated Corporation................................ 64.4% 63.7% 64.1% Consolidated Corporation Excluding Data Services: Including Intangible Amortization..................... 54.8% 53.5% 54.7% Excluding Intangible Amortization..................... 52.6% 50.8% 49.9%
Total salaries and benefits expense amounted to $623.4 million for 2000 compared to $583.7 million in 1999, an increase of $39.7 million or 6.8%. Metavante contributed approximately $40.5 million to the increase. Compared to 1999, Metavante had over 500 more full-time equivalent employees and contract programmers in 2000 in response to the continued growth in the electronic banking and electronic payment services businesses. Salaries and benefits of the Corporation's banking segment increased $10.3 million or 4.5%. Incentive compensation based on the Corporation's common stock performance decreased $11.3 million. Metavante's expense growth, driven in part by continued investment in infrastructure, accounted for $16.5 million or all of the corporate-wide expense growth in net occupancy, equipment, software, processing, supplies and printing and professional services. The increase in shipping and handling reflects the increase in item processing revenue especially from a large new customer as previously discussed. Amortization of intangibles decreased $5.6 million. Amortization of core deposit premiums decreased $2.9 million. A decrease in goodwill and other amortization associated with acquisitions by Metavante were partially offset by increases in amortization of mortgage loan and auto loan servicing rights. Other expenses amounted to $101.6 million in 2000 compared to $104.9 million in the prior year, a decrease of $3.3 million or 3.2%. Auto lease residual impairment and off-lease inventory write-downs in 2000 amounted to $8.6 million. 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 29 capitalized conversion costs net of their respective amortization increased $11.4 million and $1.6 million in 2000 compared to 1999. Total other expense amounted to $1,030.5 million in 1999, an increase of $75.6 million or 7.9% from $954.8 million, before merger/restructuring expense in 1998. Including these charges, total other expense for 1998 amounted to $978.2 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. Metavante's expense growth of $53.2 million or 12.8% in 1999 compared to 1998 represents approximately 69% 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. 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 $33.5 million or 56% of the increase. Salaries and benefits of the Corporation's banking segment increased $11.9 million or 5.5%. Incentive compensation based on the Corporation's common stock performance increased $10.7 million. Metavante's expense growth accounted for $16.6 million or 69% of the corporate-wide expense growth in net occupancy, equipment, software, processing, supplies and printing and shipping and handling. Professional services increased $9.8 million or 38.5% over 1998. Metavante accounted for $5.5 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 $104.9 million in 1999 compared to $118.9 million in the prior year, a decrease of $14.0 million or 11.7%. Cost of equipment sales declined $8.0 million while the cost of card plastic sales increased $2.2 million. 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. Income Tax Provision The provision for income taxes was $152.9 million in 2000, $173.4 million in 1999 and $164.0 million in 1998. The effective tax rate in 2000 was 32.5% compared to 32.9% in 1999 and 35.2% in 1998. The decrease in the effective rate in 1999 is due to the increase in tax-exempt income. Capital Resources Shareholders' equity was $2.24 billion or 8.6% of total consolidated assets at December 31, 2000, compared to $2.12 billion or 8.7% of total consolidated assets at December 31, 1999. The increase associated with earnings, 30 net of dividends paid, and the increase in the fair value of securities available for sale net of related tax effects was offset by the effect of treasury share repurchases. The increase in the fair value of securities available for sale net of related tax effects of $70.9 million reflects, in part, the securities investment portfolio realignment previously discussed. 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 14 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, 2000, approximately $222.8 million and $114.8 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 has a Stock Repurchase Program under which up to 6 million shares can be repurchased annually. During 2000 and 1999, the Corporation repurchased 3.2 and 5.1 million shares at an aggregate cost of $156.3 and $317.1 million, respectively. 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. Metavante IPO In July 2000, the Corporation announced that it had filed a registration statement with the Securities and Exchange Commission for the IPO of its Metavante subsidiary. In November 2000, the Corporation withdrew the IPO due to adverse market conditions and the near term slow down in financial account processing markets. 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. The transition to Year 2000 was successful and there were no material adverse consequences to its systems or customers during the transition. The majority of Metavante's 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 was approximately $37.4 million with Metavante representing approximately 94% of that amount. Approximately $12.1 million was expensed in 1999. 31 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 Corporation's derivative financial instruments and foreign exchange position, see Note 18 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, 2000:
Hypothetical Change in Interest Impact to 2001 Rates Pretax Income ------------------------------- -------------- 100 basis point gradual rise in rates..................... (6.4%) 100 basis point gradual decline in rates.................. 5.3%
These results are based solely on the modeled parallel changes in market rates, and do not reflect the earnings sensitivity that may arise from other factors such as changes in the shape of the yield curve, the changes in spread between key market rates, or accounting recognition for impairment of certain intangibles. These results 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 32 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 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, 2000 the fair value of equity at risk for a gradual 100bp shift in rates was less than 0.5% of the market value of the Corporation. The Corporation uses derivative financial instruments to manage interest rate exposure. Such derivatives consisted of $1.5 billion in notional amount of interest rate swaps and $275 million in notional amount of interest rate floors at December 31, 2000, respectively. A small amount of derivatives are sold to customers where the Corporation acts as an intermediary. The Corporation through its trading accounts matches off these instruments in order to minimize exposure to market risks. Customer interest rate derivatives held for trading amounted to $126 million of notional value, consisting of $63 million in notional value of receive fixed and $63 million in notional value of pay fixed interest rate swaps as of December 31, 2000. As part of its auto securitization activities, the Corporation has entered into a balance guaranteed receive fixed / pay floating interest rate swap which is designated as a trading activity for accounting purposes. At December 31, 2000, the notional value and fair value were $202.9 million and $1.9 million, respectively. 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 nearly $59 billion in assets and directly manages a portfolio of more than $12 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. 33 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 Consolidated Balance Sheets December 31 ($000's except share data)
2000 1999 ----------- ----------- Assets Cash and Cash Equivalents: Cash and Due from Banks............................. $ 760,103 $ 705,293 Federal Funds Sold and Security Resale Agreements... 54,443 101,922 Money Market Funds.................................. 50,147 72,641 ----------- ----------- Total Cash and Cash Equivalents................... 864,693 879,856 Investment Securities: Trading Securities, at Market Value................. 15,317 40,334 Interest Bearing Deposits at Other Banks............ 43,528 6,828 Available for Sale, at Market Value................. 4,735,722 4,357,196 Held to Maturity, Market Value $1,124,756 ($1,137,126 in 1999)............................... 1,112,545 1,170,734 ----------- ----------- Total Investment Securities....................... 5,907,112 5,575,092 Loans and Leases, Net of Unearned Income of $215,125 ($157,499 in 1999)................................... 17,587,087 16,335,061 Less: Allowance for Loan and Lease Losses............. 235,115 225,862 ----------- ----------- Net Loans and Leases.............................. 17,351,972 16,109,199 Premises and Equipment................................ 392,995 370,534 Goodwill and Core Deposit Intangibles................. 310,930 347,489 Other Intangibles..................................... 34,354 18,927 Accrued Interest and Other Assets..................... 1,215,683 1,068,626 ----------- ----------- Total Assets...................................... $26,077,739 $24,369,723 =========== =========== Liabilities and Shareholders' Equity Deposits: Noninterest Bearing................................. $ 3,129,834 $ 2,830,960 Interest Bearing.................................... 16,118,793 13,604,222 ----------- ----------- Total Deposits.................................... 19,248,627 16,435,182 Short-term Borrowings................................. 2,814,731 4,540,255 Accrued Expenses and Other Liabilities................ 850,916 612,336 Long-term Borrowings.................................. 921,276 665,024 ----------- ----------- Total Liabilities................................. 23,835,550 22,252,797 Shareholders' Equity: Series A Convertible Preferred Stock, $1.00 par value, 2,000,000 Shares Authorized; 336,370 Shares Issued; Liquidation Preference $33,637............. 336 336 Common Stock, $1.00 par value, 320,000,000 (160,000,000 in 1999) Shares Authorized; 112,757,546 Shares Issued.......................... 112,757 112,757 Additional Paid-in Capital.......................... 452,212 457,097 Retained Earnings................................... 2,117,759 1,914,128 Net Unrealized Securities Gains/(Losses), Net of Taxes.............................................. 38,127 (32,749) Less: Treasury Stock, at Cost, 9,910,839 Shares (6,941,684 in 1999)................................ 458,472 314,513 Deferred Compensation............................. 20,530 20,130 ----------- ----------- Total Shareholders' Equity........................ 2,242,189 2,116,926 ----------- ----------- Total Liabilities and Shareholders' Equity........ $26,077,739 $24,369,723 =========== ===========
The accompanying notes are an integral part of the Consolidated Financial Statements. 34 Consolidated Statements of Income Years ended December 31 ($000's except share data)
2000 1999 1998 ---------- ---------- ---------- Interest Income Loans and Leases............................ $1,391,651 $1,156,775 $1,085,829 Investment Securities: Taxable.................................... 272,536 269,668 280,377 Exempt from Federal Income Taxes........... 65,429 58,820 52,969 Trading Securities.......................... 1,508 1,864 2,203 Short-term Investments...................... 16,858 9,457 12,666 ---------- ---------- ---------- Total Interest Income.................... 1,747,982 1,496,584 1,434,044 Interest Expense Deposits.................................... 772,016 585,864 564,540 Short-term Borrowings....................... 224,187 142,294 126,624 Long-term Borrowings........................ 78,773 63,145 66,810 ---------- ---------- ---------- Total Interest Expense................... 1,074,976 791,303 757,974 ---------- ---------- ---------- Net Interest Income......................... 673,006 705,281 676,070 Provision for Loan and Lease Losses......... 30,352 25,419 27,090 ---------- ---------- ---------- Net Interest Income After Provision for Loan and Lease Losses........................... 642,654 679,862 648,980 Other Income Data Processing Services: Account Processing Fees.................... 390,760 339,914 249,210 Professional Services Fees................. 74,032 79,127 80,893 Software Revenues.......................... 38,061 34,806 36,420 Other Revenues............................. 43,188 40,969 55,422 ---------- ---------- ---------- Total Data Processing Services.............. 546,041 494,816 421,945 Item Processing............................. 51,409 40,169 41,003 Internet Banking............................ 2,481 1,861 59 Trust Services.............................. 117,680 100,963 88,496 Service Charges on Deposits................. 73,866 69,699 61,730 Mortgage Banking............................ 16,695 27,317 53,655 Capital Markets Revenue..................... 20,005 12,439 24,860 Net Investment Securities (Losses)/Gains.... (49,515) (4,083) 7,145 Life Insurance Revenue...................... 27,993 25,767 3,893 Other....................................... 121,697 109,597 91,714 ---------- ---------- ---------- Total Other Income....................... 928,352 878,545 794,500 Other Expense Salaries and Employee Benefits.............. 623,360 583,659 523,606 Net Occupancy............................... 55,226 49,225 44,181 Equipment................................... 113,373 107,670 103,180 Software Expenses........................... 30,011 26,972 22,181 Processing Charges.......................... 32,093 30,324 25,286 Supplies and Printing....................... 19,891 19,364 18,679 Professional Services....................... 33,966 35,086 25,326 Shipping and Handling....................... 41,964 35,181 31,066 Amortization of Intangibles................. 32,478 38,046 42,457 Single Charter/IPO/Arm Loan Sales........... 16,678 -- -- Merger/Restructuring........................ -- -- 23,373 Other....................................... 101,616 104,941 118,860 ---------- ---------- ---------- Total Other Expense...................... 1,100,656 1,030,468 978,195 ---------- ---------- ---------- Income Before Income Taxes and Cumulative Effect of Changes in Accounting Principles. 470,350 527,939 465,285 Provision for Income Taxes.................. 152,948 173,428 163,962 ---------- ---------- ---------- Income Before Cumulative Effect of Changes in Accounting Principles................... 317,402 354,511 301,323 Cumulative Effect of Changes in Accounting Principles, Net of Income Taxes............ (2,279) -- -- ---------- ---------- ---------- Net Income.................................. $ 315,123 $ 354,511 $ 301,323 ========== ========== ========== Net Income Per Common Share Basic: Income Before Cumulative Effect of Changes in Accounting Principles.................. $ 3.01 $ 3.32 $ 2.79 Cumulative Effect of Changes in Accounting Principles................................ (0.02) -- -- ---------- ---------- ---------- Net Income................................. $ 2.99 $ 3.32 $ 2.79 ========== ========== ========== Diluted: Income Before Cumulative Effect of Changes in Accounting Principles.................. $ 2.91 $ 3.14 $ 2.61 Cumulative Effect of Changes in Accounting Principles................................ (0.02) -- -- ---------- ---------- ---------- Net Income................................. $ 2.89 $ 3.14 $ 2.61 ========== ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements. 35 Consolidated Statements of Cash Flows Years ended December 31 ($000's)
2000 1999 1998 ----------- ----------- ----------- Cash Flows From Operating Activities: Net Income.............................. $ 315,123 $ 354,511 $ 301,323 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization......... 69,197 86,156 111,392 Provision for Loan and Lease Losses... 30,352 25,419 27,090 Losses/(Gains) on Sales of Assets..... 7,047 (42,522) (77,183) Proceeds from Sales of Trading Securities and Loans Held for Resale. 4,529,322 4,766,956 5,211,992 Purchases of Trading Securities and Loans Held for Resale................ (3,952,604) (4,606,316) (5,245,240) Other................................. 30 40,011 (59,464) ----------- ----------- ----------- Total Adjustments................... 683,344 269,704 (31,413) ----------- ----------- ----------- Net Cash Provided by Operating Activities............................. 998,467 624,215 269,910 Cash Flows From Investing Activities: Net (Increase) Decrease in Shorter Term Securities............................. -- 21,400 (14,450) Proceeds from Maturities of Longer Term Securities............................. 735,750 1,026,967 1,461,553 Proceeds from Sales of Securities Available for Sale..................... 1,538,995 116,823 160,474 Purchases of Longer Term Securities..... (2,030,760) (1,681,037) (1,054,290) Decrease in Loans Due to Divestitures... 8,352 30,817 -- Net Increase in Loans................... (1,721,384) (2,342,319) (1,016,336) Purchases of Assets to be Leased........ (573,833) (429,345) (317,862) Principal Payments on Lease Receivables. 360,992 294,891 242,227 Purchases of Premises and Equipment, Net.................................... (78,817) (66,899) (60,811) Acquisitions Accounted for as Purchases, Net of Cash Equivalents Acquired and Investments in Joint Ventures.......... -- (84,408) (5,170) Purchase of Bank-Owned Life Insurance... -- -- (400,000) Other................................... 18,163 12,751 14,997 ----------- ----------- ----------- Net Cash Used in Investing Activities... (1,742,542) (3,100,359) (989,668) Cash Flows From Financing Activities: Decrease in Deposits Due to Divestitures........................... (100,791) (84,191) -- Net Increase in Deposits................ 2,565,584 607,243 899,591 Proceeds from Issuance of Commercial Paper.................................. 3,190,712 1,926,791 779,653 Principal Payments on Commercial Paper.. (3,115,064) (1,740,439) (829,077) Net Increase (Decrease) in Other Short- term Borrowings........................ (1,717,077) 2,226,463 41,210 Proceeds from Issuance of Long-term Debt................................... 536,587 288,526 87,573 Payment of Long-term Debt............... (368,469) (371,832) (159,963) Dividends Paid.......................... (111,379) (104,490) (97,241) Purchase of Common Stock................ (156,319) (317,149) (29,633) Proceeds from the Issuance of Common Stock.................................. 5,241 18,359 15,086 Other................................... (113) (19) 1,234 ----------- ----------- ----------- Net Cash Provided by Financing Activities............................. 728,912 2,449,262 708,433 ----------- ----------- ----------- Net Decrease in Cash and Cash Equivalents............................ (15,163) (26,882) (11,325) Cash and Cash Equivalents, Beginning of Year................................... 879,856 906,738 918,063 ----------- ----------- ----------- Cash and Cash Equivalents, End of Year.. $ 864,693 $ 879,856 $ 906,738 =========== =========== =========== Supplemental Cash Flow Information: Cash Paid During the Year for: Interest.............................. $ 984,883 $ 775,065 $ 759,231 Income Taxes.......................... 116,363 125,841 141,553
The accompanying notes are an integral part of the Consolidated Financial Statements. 36 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 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/(Losses) Income Stock Stock Capital Earnings Stock sation Net 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 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/(Losses) Income Stock Stock Capital Earnings Stock sation Net of Taxes -------- --------- -------- ---------- ---------- --------- -------- -------------- Balance, December 31, 1999.................. $ 336 $112,757 $457,097 $1,914,128 $(314,513) $(20,130) $(32,749) Comprehensive Income: Net Income............ $315,123 -- -- -- 315,123 -- -- -- Unrealized Gains/(Losses) on Securities: Unrealized Securities Gains Net of Taxes of $56,790............ 104,469 -- -- -- -- -- -- -- Reclassification Adjustment For Losses Included in Net Income Net of Taxes of $18,091... (33,593) -- -- -- -- -- -- -- -------- Total Unrealized Gains on Securities....... 70,876 -- -- -- -- -- -- 70,876 -------- Comprehensive Income... $385,999 -- -- -- -- -- -- -- ======== Issuance of 270,531 Treasury Common Shares Under Stock Option and Restricted Stock Plans................. -- -- (6,897) -- 12,496 (355) -- Acquisition of 3,239,686 Common Shares................ -- -- (67) -- (156,455) 156 -- Dividends Declared on Preferred Stock-- $11.83 Per Share...... -- -- -- (3,979) -- -- -- Dividends Declared on Common Stock--$1.035 Per Share............. -- -- -- (107,400) -- -- -- Net Change in Deferred Compensation.......... -- -- -- -- -- (201) -- Income Tax Benefit for Compensation Expense for Tax Purposes in Excess of Amounts Recognized for Financial Reporting Purposes.............. -- -- 2,486 -- -- -- -- Other.................. -- -- (407) (113) -- -- -- ----- -------- -------- ---------- --------- -------- -------- Balance, December 31, 2000.................. $ 336 $112,757 $452,212 $2,117,759 $(458,472) $(20,530) $ 38,127 ===== ======== ======== ========== ========= ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. 39 Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 ($000's except share data) Marshall & Ilsley Corporation ("M&I" or the "Corporation") is a bank and savings and loan association 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 19 banks located in Wisconsin, one federally chartered thrift located in Nevada with a branch in Florida and one bank in Arizona. Financial and data processing services and software sales are provided through the Corporation's Metavante Corporation subsidiary ("Metavante"), formerly known as M&I's Data Services Division, and its two 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 1999 and 1998 Consolidated Financial Statements have been reclassified to conform to the 2000 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. 40 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 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. 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. Receivable sales--The Corporation regularly sells receivables in securitizations of automobile loans and retains interests in the securitized receivables in the form of servicing rights, interest-only strips, interest rate swaps and a cash reserve account. Gain or loss on sale of the receivables depends in part on the carrying amount assigned to the assets sold and the retained interests. The value of the retained interests is based on the present value of future expected cash flows. Future expected cash flows represent management's best estimates of the key assumptions--credit losses, prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. 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, 2000 and 1999, other real estate amounted to $3,797 and $6,230, 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 $38,762 at December 31, 2000 and $15,956 at December 31, 1999. Data processing services--Data processing and related revenues are recognized as services performed based on amounts billable under the contracts. Processing services performed that have not been billed to customers are accrued. Revenue includes shipping and handling costs associated with such income producing activities as prescribed by Emerging Issues Task Force Issue No. 00-10, ("EITF 00-10"), "Accounting for Shipping and Handling Fees and Costs". Previously, amounts charged to customers for shipping and handling were netted against the related cost for financial statement purposes. Consolidated Statements of Income for the years ended December 31, 1999 and 1998 have been restated in accordance with EITF 00-10. 41 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 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 revenues associated with the conversion of customers' processing systems to Metavante's processing systems are deferred and amortized over the period of the related processing contract, generally five years. See Note 2 regarding the change in accounting for conversion revenues. 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 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. Net unamortized costs at December 31 were:
2000 1999 -------- ------- Software................................................. $ 98,666 $70,904 Conversions.............................................. 56,142 11,788 -------- ------- Total.................................................... $154,808 $82,692 ======== =======
See Note 2 for the effect on conversion costs due to the change in accounting. Amortization expense was $40,731, $23,836 and $18,308, for 2000, 1999 and 1998, respectively. Intangibles--Unamortized intangibles resulting from acquisitions consist of goodwill, core deposit premiums, purchased data processing contract rights and loan servicing rights. The Corporation recognizes as separate assets rights to service loans when the loans are purchased or originated and sold with servicing retained. Servicing rights are amortized over the periods during which the corresponding loan 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 10 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 loan servicing rights are 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 $2,809 and $4,371 at December 31, 2000 and 1999, respectively. The negative goodwill is being accreted on a straight-line basis over a period of 10 years and amounted to $1,562 in 2000, 1999, and 1998, 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 42 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 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. 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. 43 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 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 pronouncements-- 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. Statement 133, as amended, is effective for fiscal years beginning after June 15, 2000. 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 adopted SFAS 133 effective January 1, 2001. Note 19, Fair Value of Financial Instruments, presents the fair value of the freestanding derivatives held by the Corporation. Statement 133 requires that those derivative instruments be recognized in the Corporation's Consolidated Balance Sheets as assets or liabilities at their fair value. The Corporation has determined that those freestanding derivatives previously designated as hedges will continue to be eligible for the special hedge accounting prescribed by SFAS 133. The impact resulting from the transition adjustment of adopting SFAS 133 will be a charge to accumulated other comprehensive income (equity) of $10.2 million and an decrease to net income of $0.4 million which will be presented as a cumulative-type change in accounting. The Corporation does not expect that SFAS 133 will result in a material difference to income compared to current accounting. In September, 2000, the FASB issued SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS replaces SFAS 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. SFAS 140 is generally effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The disclosure requirements are effective for financial statements for fiscal years ending after December 15, 2000. See Note 9. The Corporation does not anticipate the adoption of SFAS 140 will materially impact its present securitization activities. 2. Change in Method of Accounting During the fourth quarter of 2000, the Corporation adopted the Securities and Exchange Commission's Staff Accounting Bulletin No. 101--Revenue Recognition in Financial Statements (SAB 101). SAB 101 provides guidance on a variety of revenue recognition matters. Under SAB 101, certain conversion services provided by 44 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) Metavante did not qualify as discrete earnings events. As a result, the revenue and the cost of providing those services should be deferred and recognized on a straight-line basis over the term of the total processing contract. The cumulative change in accounting represents the impact of applying the guidance to services provided in previous years and resulted in the following: Conversion revenue deferred...................................... $46,224 Conversion cost deferred......................................... 42,413 ------- Net revenue deferred............................................. 3,811 Income tax benefit............................................... 1,532 ------- Cumulative effect of change in accounting principles............. $ 2,279 =======
The cumulative effect of change in accounting principles was retroactively recorded as of January 1, 2000, and Quarterly Financial Information (Unaudited) has been restated to reflect application of the guidance contained in SAB 101. The impact of restating quarterly financial information was not material. 3. 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, 2000 ------------------------------------ Income Average Shares Per Share (Numerator) (Denominator) Amount ----------- -------------- --------- Net income................................ $315,123 Convertible preferred dividends........... (3,979) -------- Basic earnings per share Income available to common shareholders. $311,144 104,027 $2.99 ===== Effect of dilutive securities Convertible preferred stock............. 3,979 3,844 Stock option, restricted stock and performance plans...................... -- 1,012 -------- ------- Diluted earnings per share Income available to common shareholders plus assumed conversions............... $315,123 108,883 $2.89 ===== Year Ended December 31, 1999 ------------------------------------ Income Average Shares Per 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 =====
45 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data)
Year Ended December 31, 1998 ------------------------------------ Income Average Shares Per 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 =====
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 2000 1999 1998 - ---------- -------------- --------- ------ --------- 09/18/2000............................ 48.125 2,500 -- -- 03/20/2000............................ 49.688 1,500 -- -- 10/01/1997............................ 50.125 3,500 -- -- 04/25/2000............................ 50.438 37,500 -- -- 12/27/2000............................ 50.960 1,500 -- -- 08/13/1998............................ 51.063 4,500 -- -- 12/10/1998............................ 51.813 1,137,079 -- -- 06/11/1998............................ 53.719 -- -- 8,000 04/03/2000............................ 55.313 1,500 -- -- 12/11/1997............................ 57.000 865,576 -- 954,350 02/16/1999............................ 57.094 3,000 -- -- 01/11/2000............................ 57.188 3,000 -- -- 04/28/1998............................ 57.625 57,000 -- 59,000 02/01/1999............................ 59.125 1,500 -- -- 10/04/1999............................ 60.000 3,000 -- -- 10/14/1999............................ 60.188 6,000 -- -- 10/11/1999............................ 60.531 4,500 -- -- 12/16/1999............................ 61.500 1,430,458 -- -- 12/14/1999............................ 62.188 500 -- -- 08/12/1999............................ 62.250 27,500 -- -- 04/27/1999............................ 67.000 59,500 60,000 -- 10/29/1999............................ 67.125 2,000 2,000 -- 05/20/1999............................ 67.875 2,500 2,500 -- 05/10/1999............................ 70.063 1,500 1,500 -- --------- ------ --------- Total options excluded from earnings per share............... 3,657,113 66,000 1,021,350 ========= ====== =========
46 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 4. Business Combinations The Corporation has consummated the following business combinations during the three years ended December 31, 2000:
Consideration -------------------- Method of Organization Date Consummated Cash Common Stock Accounting - ------------ ----------------- ------- ------------ ---------- Cardpro Services, Inc......... October 1, 1999 $13,110 -- Purchase Electronic Banking Services... April 1, 1999 66,153 -- Purchase Moneyline Express............. December 31, 1998 6,750 -- Purchase Advantage Bancorp, Inc........ April 1, 1998 -- 3,981,152 Pooling
On October 1, 1999, the Corporation through its Metavante subsidiary 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. Goodwill amounted to $2.9 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 Metavante subsidiary, 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. Goodwill amounted to $44.0 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. Moneyline Express, Inc. ("Moneyline") 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 Metavante subsidiary, 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. 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. 5. Cash and Due from Banks At December 31, 2000, $3,147 of cash and due from banks was restricted, primarily due to requirements of the Federal Reserve System to maintain certain reserve balances. 47 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 6. Securities The book and market values of securities at December 31 were:
2000 1999 --------------------- --------------------- Amortized Market Amortized Market Cost Value Cost Value ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies....................... $3,303,366 $3,342,952 $3,924,183 $3,852,731 States and political subdivisions................... 143,883 151,041 111,882 109,971 Mortgage backed securities...... 342,385 342,171 179,677 176,780 Other........................... 887,702 899,558 192,643 217,714 ---------- ---------- ---------- ---------- Total......................... $4,677,336 $4,735,722 $4,408,385 $4,357,196 ========== ========== ========== ========== Investment Securities Held to Maturity: U.S. Treasury and government agencies....................... $ -- $ -- $ 9 $ 9 States and political subdivisions................... 1,107,476 1,119,687 1,165,756 1,132,148 Other........................... 5,069 5,069 4,969 4,969 ---------- ---------- ---------- ---------- Total......................... $1,112,545 $1,124,756 $1,170,734 $1,137,126 ========== ========== ========== ==========
The unrealized gains and losses of securities at December 31 were:
2000 1999 --------------------- --------------------- Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies....................... $42,371 $2,785 $ 9,199 $80,651 States and political subdivisions................... 7,158 -- 5 1,916 Mortgage backed securities...... 786 1,000 124 3,021 Other........................... 11,940 84 25,257 186 ------- ------ ------- ------- Total......................... $62,255 $3,869 $34,585 $85,774 ======= ====== ======= ======= Investment Securities Held to Maturity: States and political subdivisions................... $17,850 $5,639 $ 3,477 $37,085 Other........................... -- -- -- -- ------- ------ ------- ------- Total......................... $17,850 $5,639 $ 3,477 $37,085 ======= ====== ======= =======
The book value and market value of securities by contractual maturity at December 31, 2000 were:
Investment Securities Investment Securities Available for Sale Held to Maturity --------------------- --------------------- Amortized Market Amortized Market Cost Value Cost Value ---------- ---------- ---------- ---------- Within one year..................... $ 998,525 $ 999,103 $ 47,268 $ 47,388 From one through five years......... 2,769,078 2,801,326 376,080 380,663 From five through ten years......... 504,663 514,198 217,545 223,018 After ten years..................... 405,070 421,095 471,652 473,687 ---------- ---------- ---------- ---------- Total........................... $4,677,336 $4,735,722 $1,112,545 $1,124,756 ========== ========== ========== ==========
The gross realized gains and losses amounted to $22,876 and $52,861 in 2000, $12,074 and $4,382 in 1999, and $31,421 and $638 in 1998, respectively. Net securities gains of $19,530, $11,775, and $23,638 in 2000, 1999 48 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) and 1998, respectively, are included in the line Capital Markets Revenue in the Consolidated Statements of Income. At December 31, 2000, securities with a value of approximately $586,536 were pledged to secure public deposits, short-term borrowings, and for other purposes required by law. Approximately $511 million of adjustable rate mortgage loans (ARMs) were transferred to investment securities available for sale during 2000. There were no ARMs transferred during 1999. The Corporation has agreed to guarantee the first 4% of the loan pools securitized through government agencies against potential loss for transfers occurring prior to 2000. These are noncash transactions for purposes of the Consolidated Statements of Cash Flows. 7. Loans and Leases Loans and Leases at December 31 were:
2000 1999 ----------- ----------- Commercial, financial and agricultural................. $ 5,289,537 $ 4,754,857 Real estate: Construction......................................... 619,281 494,558 Residential mortgage................................. 5,049,557 4,941,450 Commercial mortgage.................................. 4,359,812 4,034,771 Personal............................................... 1,174,248 1,299,416 Lease financing........................................ 1,094,652 810,009 ----------- ----------- Total loans and leases............................. $17,587,087 $16,335,061 =========== ===========
The Corporation's lending activities are concentrated primarily in the Midwest. Approximately 5% of its portfolio consists of loans granted to customers located in Arizona. The Corporation had $0.2 million in foreign credits at December 31, 2000. The Corporation's loan portfolio consists of business loans extending across many industry types, as well as loans to individuals. As of December 31, 2000, 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 2000 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. Loans to directors and executive officers: Balance, beginning of year..................................... $ 285,178 New loans...................................................... 173,861 Repayments..................................................... (176,034) --------- Balance, end of year........................................... $ 283,005 =========
49 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 8. Allowance for Loan and Lease Losses An analysis of the allowance for loan and lease losses follows:
2000 1999 1998 -------- -------- -------- Balance, beginning of year................. $225,862 $226,052 $208,651 Allowance of loans acquired................ 1,270 -- -- Allowance of loans transferred to Investment Securities..................... (1,022) -- -- Provision charged to expense............... 30,352 25,419 27,090 Charge-offs................................ (30,018) (32,557) (20,945) Recoveries................................. 8,671 6,948 11,256 -------- -------- -------- Balance, end of year....................... $235,115 $225,862 $226,052 ======== ======== ========
During 2000, the Corporation acquired approximately $341 million of home equity loans and lines of credit. The allowance of loans acquired is consistent with the estimate of probable losses as determined by the seller financial institution. As of December 31, 2000 and 1999, nonaccrual loans and leases totaled $121,425 and $106,387, respectively. At December 31, 2000 and 1999 the Corporation's recorded investment in impaired loans and leases and the related valuation allowance are as follows:
2000 1999 -------------------- -------------------- Recorded Valuation Recorded Valuation Investment Allowance Investment Allowance ---------- --------- ---------- --------- Total impaired loans and leases (nonaccrual and renegotiated)....... $122,039 $107,095 Loans and leases excluded from individual evaluation............... (34,167) (32,255) -------- -------- Impaired loans evaluated............. $ 87,872 $ 74,840 ======== ======== Valuation allowance required......... $ 5,727 $2,137 $ 3,533 $ 980 No valuation allowance required...... 82,145 -- 71,307 -- -------- ------ -------- ----- Impaired loans evaluated............. $ 87,872 $2,137 $ 74,840 $ 980 ======== ====== ======== =====
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 $21,332 in 2000 and $13,862 in 1999 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, 2000 and 1999 amounted to $118,832 and $116,835, 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 $6,410 in 2000, $6,253 in 1999, and $6,808 in 1998. The gross income that would have been recognized had such loans and leases been performing in accordance with their original terms would have been $11,415 in 2000, $9,980 in 1999, and $8,795 in 1998. 9. Sales of Receivables During 2000, automobile loans were sold in securitization transactions. Servicing responsibilities and subordinated interests were retained. The Corporation receives annual servicing fees equal to 1% of the outstanding balance and rights to future cash flows arising after investors in the securitization trust have received 50 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) their contractual return and after certain administrative costs of operating the trust. The investors and the securitization trust have no recourse to the Corporation's other assets for failure of debtors to pay when due. The Corporation's retained interests are subordinate to investor's interests. Their value is subject to credit, prepayment and interest rate risks on the transferred financial assets. During 2000, the Corporation recognized gains and trading income of $3,155 on the securitization of automobile loans. Key economic assumptions used in measuring the retained interests at the date of securitization resulting from securitizations completed during the year were as follows (rate per annum): Prepayment speed...................... 28.4% Weighted average life (in months)..... 20.8 Expected credit losses................ 0.16% Residual cash flow discount rate...... 12.0% Variable returns to transferees....... Forward one month LIBOR yield curve
At December 31, 2000, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions are as follows ($ in millions):
Adverse Change in Assumptions -------------------------- 10% 20% -------------------------- Carrying amount retained interests-- automobile loans........................ $13.7 Weighted average life (in months)........ 21.4 Prepayment speed (per annum)............. 28.4% Impact on fair value of adverse change... $ 0.2 $ 0.5 Expected credit losses (annual rate)..... 0.16% Impact on fair value of adverse change... 0.0 0.1 Residual cash flows discount rate (annual)................................ 12.0% Impact on fair value of adverse change... 0.1 0.2 Interest rate returns to transferees..... Forward one month LIBOR yield curve Impact on fair value of adverse change... 1.6 3.2
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent adverse variation in assumptions generally can not be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. Realistically, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. Actual and projected credit losses represented 0.15% of total automobile loans securitized in 2000. The following table summarizes certain cash flows received from and paid to the securitization trust for the year ended December 31, 2000: Proceeds from new securitizations............................... $223,098 Servicing fees received......................................... 533 Net charge-offs................................................. (31) Cash collateral account transfers, net.......................... (5,071) Other cash flows received on retained interests, net............ 600
51 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) At December 31, 2000, securitized automobile loans and other automobile loans managed together with them along with delinquency and credit loss information consisted of the following:
Securitized Portfolio Total Managed ----------- --------- ------------- Loan balances........................ $197,306 $303,702 $501,008 Principal amounts of loans 60 days or more past due....................... 104 1,034 1,138 Net credit losses.................... 31 651 682
10. Premises and Equipment The composition of premises and equipment at December 31 was:
2000 1999 -------- -------- Land................................................... $ 47,893 $ 46,896 Buildings and leasehold improvements................... 347,566 325,889 Furniture and equipment................................ 458,242 421,028 -------- -------- 853,701 793,813 Less accumulated depreciation.......................... 460,706 423,279 -------- -------- Total premises and equipment....................... $392,995 $370,534 ======== ========
Depreciation expense was $62,018 in 2000, $62,845 in 1999, and $66,107 in 1998. The Corporation leases certain of its facilities and equipment. Rent expense under such operating leases was $56,555 in 2000, $50,200 in 1999, and $39,338 in 1998. The future minimum lease payments under operating leases that have initial or remaining noncancellable lease terms in excess of one year for 2001 through 2005 are $24,013, $20,815, $18,100, $15,097, and $12,831, respectively. 11. Deposits The composition of deposits at December 31 was:
2000 1999 ----------- ----------- Noninterest bearing demand....................... $ 3,129,834 $ 2,830,960 Savings and NOW.................................. 7,486,094 6,966,423 CDs $100,000 and over............................ 2,663,050 1,885,933 Other time deposits.............................. 3,532,310 3,419,333 Foreign deposits................................. 2,437,339 1,332,533 ----------- ----------- Total deposits............................... $19,248,627 $16,435,182 =========== ===========
At December 31, 2000, the scheduled maturities for CDs $100,000 and over, other time deposits, and foreign deposits were: 2001........................................................... $6,556,858 2002........................................................... 1,126,562 2003........................................................... 193,583 2004........................................................... 166,670 2005 and thereafter............................................ 589,026 ---------- $8,632,699 ==========
52 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 12. Short-term Borrowings Short-term borrowings at December 31 were:
2000 1999 ---------- ---------- Funds purchased and security repurchase agreements....................................... $1,092,723 $1,402,077 U.S. Treasury demand notes........................ 81,930 169,615 U.S. Treasury demand notes--special direct........ -- 1,874,714 Senior bank notes--Puttable Reset Securities...... 1,008,060 -- Senior bank notes................................. 99,988 549,825 Commercial paper.................................. 322,161 246,514 Current maturities of long-term borrowings........ 209,355 292,890 Other............................................. 514 4,620 ---------- ---------- Total short-term borrowings................... $2,814,731 $4,540,255 ========== ==========
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 senior bank notes--Puttable Reset Securities ("PRS") will mature on December 1, 2007. In certain circumstances, the notes will be put back to the issuing bank at par prior to final maturity by the noteholders and the notes are subject to exercise of a call option by certain broker/dealers. Beginning December 3, 2001 and each December 1 thereafter until and including December 1, 2006, certain broker/dealers have the right to purchase all of the outstanding notes from the noteholders at a price equal to 100% of the principal amount of the notes and then remarket the notes at an interest rate that was previously agreed upon. However, if the broker/ dealers do not purchase the notes on the aforementioned date(s), each holder of outstanding notes will be deemed to have put all of the holder's notes to the issuing bank at a price equal to 100% of the principal amount of the notes and the notes will be completely retired. The initial interest rate is 6.75% and, to the extent the notes are purchased and remarketed, the interest rate will reset each date the notes are remarketed at 6% plus an applicable credit spread as defined in the offering circular. The call and put are considered clearly and closely related for purposes of recognition and measurement under SFAS 133. The amount of other senior bank notes outstanding at December 31, 2000, represents the borrowing of one banking subsidiary at a fixed rate of 6.81% and matures in March of 2001. Senior bank notes outstanding at December 31, 1999, represent the aggregate borrowing of four banking subsidiaries that matured in September and October of 2000. Each bank note outstanding had a fixed rate, which ranged from 6.07% to 6.36%. Interest is paid at maturity. Unused lines of credit, primarily to support commercial paper borrowings, were $75.0 million at December 31, 2000 and $ 70.0 million at December 31, 1999. 53 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 13. Long-term Borrowings Long-term borrowings at December 31 were:
2000 1999 --------- -------- Corporation: 6.375% subordinated notes due in 2003................. $ 99,794 $ 99,722 Medium-term Series C, D and E notes................... 130,900 151,130 7.65% cumulative company-obligated mandatorily redeemable capital trust pass-through securities..... 199,160 199,128 Other................................................. -- 9,628 Subsidiaries: Borrowings from Federal Home Loan Bank (FHLB): Floating rate advances.............................. 100,000 250,000 Fixed rate advances................................. 260,151 208,795 Senior bank notes..................................... 199,628 -- Subordinated bank note................................ 98,854 -- Nonrecourse notes..................................... 29,008 24,999 9.75% obligation under capital lease due through 2006. 3,083 3,472 Other................................................. 10,053 11,040 --------- -------- 1,130,631 957,914 Less current maturities............................... 209,355 292,890 --------- -------- Total long-term borrowings........................ $ 921,276 $665,024 ========= ========
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, 2000, there were $16,900 of medium-term Series C notes outstanding. The medium-term Series C notes have fixed interest rates of 6.35% 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, 2000, medium- term Series D notes outstanding amounted to $89,300 with fixed interest rates of 6.27% to 7.20% and $23,700 at three month LIBOR plus 26 basis points. Series D notes mature at various times and amounts in 2001 through 2004. No additional borrowings may occur under the Series D notes. In May, 2000, the Corporation filed a registration statement with the Securities and Exchange Commission to issue up to $500 million of medium-term Series E notes. These issues may have maturities ranging from 9 months to 30 years and may be at fixed or floating rates. At December 31, 2000, series E notes outstanding amounted to $1,000 with fixed rates of 6.90% to 7.19%. Series E notes outstanding mature in 2002 and 2005. 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 54 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 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 have interest rates, which range from 5.23% to 8.47% and mature at various times in 2001 through 2012. 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. Fixed rate advances in the amount of $100 million are callable every three months beginning in February 1998 upon five days notice. The floating rate advances mature in 2001. The interest rate is reset monthly based on the London Interbank Offered Rate (LIBOR). 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 collaterized by all FHLB stock. Senior Bank notes represent the aggregate borrowings of two banking affiliates at December 31, 2000. The senior bank notes have a fixed interest rate of 7.25% and pay interest semi-annually. The notes mature in 2002. The subordinated bank note has a fixed rate of 7.875% and matures in 2010. Interest is paid semi-annually. The subordinated bank note qualifies as Tier 2 or supplementary capital for regulatory capital purposes. The nonrecourse notes are reported net of prepaid interest and represent borrowings by the commercial leasing subsidiary from banks and other financial institutions. These notes have a weighted average interest rate of 8.42% at December 31, 2000 and are due in installments over varying periods through 2007. Lease financing receivables at least equal to the amount of the notes are pledged as collateral. Scheduled maturities of long-term borrowings are: $460,712, $120,210, $5,156, and $3,549 for 2002 through 2005, respectively. 55 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 14. 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, 2000 and 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, 2000 and 1999, 288,858 and 267,535 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 $14,940 at December 31, 2000 and $13,525 at December 31, 1999. In conjunction with previous acquisitions, the Corporation assumed certain deferred compensation and nonqualified retirement plans for former directors and executive officers of acquired companies. At December 31, 2000 and 1999, 93,552 and 106,333 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 $3,731 and $4,218 at December 31, 2000 and 1999, 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 authorized to repurchase up to 6.0 million shares per year. Shares repurchased in accordance with the approved plan amounted to 3.2 million shares with an aggregate cost of $156.3 million in 2000 and 5.1 million shares with an aggregate cost of $317.1 million in 1999. 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 56 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. At December 31, 2000 and 1999, the most recent notification from the Federal Reserve Board categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Corporation's category. To be well capitalized under the regulatory framework, the Tier 1 capital ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%. The Corporation's risk-based capital and leverage ratios are as follows ($ in millions):
Risk-Based Capital Ratios -------------------------------------------------- As of December 31, 2000 As of December 31, 1999 ------------------------ ------------------------ Amount Ratio Amount Ratio -------------- --------- -------------- --------- Tier 1 capital............. $ 2,070.8 10.20% $ 1,992.8 11.11% Tier 1 capital adequacy minimum requirement....... 811.7 4.00 717.5 4.00 -------------- --------- -------------- --------- Excess..................... $ 1,259.1 6.20% $ 1,275.3 7.11% ============== ========= ============== ========= Total capital.............. $ 2,444.6 12.05% $ 2,277.0 12.69% Total capital adequacy minimum requirement....... 1,623.5 8.00 1,435.0 8.00 -------------- --------- -------------- --------- Excess..................... $ 821.1 4.05% $ 842.0 4.69% ============== ========= ============== ========= Risk-adjusted assets....... $ 20,293.6 $ 17,937.1 ============== ============== Leverage Ratio -------------------------------------------------- As of December 31, 2000 As of December 31, 1999 ------------------------ ------------------------ Amount Ratio Amount Ratio -------------- --------- -------------- --------- Tier 1 capital to adjusted total assets.............. $ 2,070.8 8.25% $ 1,992.8 8.49% Minimum leverage adequacy requirement............... 752.9-1,254.8 3.00-5.00 704.4-1,174.1 3.00-5.00 -------------- --------- -------------- --------- Excess..................... $1,317.9-816.0 5.25-3.25% $1,288.4-818.7 5.49-3.49% ============== ========= ============== ========= Adjusted average total assets.................... $ 25,096.4 $ 23,481.0 ============== ==============
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, 2000 and 1999. 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, 2000............................... 8.46% 10.42% 7.12% December 31, 1999............................... 9.11 10.28 6.93 M&I Bank of Southern Wisconsin December 31, 2000............................... 9.88 11.13 7.61 December 31, 1999............................... 9.35 10.60 7.20
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, 2000, the retained earnings of subsidiaries available for distribution as dividends without regulatory approval was approximately $337.6 million. 57 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 15. Income Taxes Total income tax expense for the years ended December 31, 2000, 1999, and 1998 was allocated as follows:
2000 1999 1998 -------- -------- -------- Income before income taxes and cumulative effect of changes in accounting principles................................ $152,948 $173,428 $163,962 Cumulative effect of changes in accounting principles................... (1,532) -- -- Shareholders' Equity: Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.......... (2,486) (12,764) (13,846) Unrealized (losses)/gains on investment securities available for sale......... 38,699 (51,376) 3,427 -------- -------- -------- $187,629 $109,288 $153,543 ======== ======== ========
The current and deferred portions of the provision for income taxes were:
2000 1999 1998 -------- -------- -------- Current: Federal.................................... $115,789 $126,358 $140,649 State...................................... 22,652 7,059 20,556 -------- -------- -------- 138,441 133,417 161,205 Deferred: Federal.................................... 20,618 31,860 3,565 State...................................... (6,111) 8,151 (808) -------- -------- -------- 14,507 40,011 2,757 -------- -------- -------- Total provision for income taxes......... $152,948 $173,428 $163,962 ======== ======== ========
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%):
2000 1999 1998 -------- -------- -------- Tax computed at statutory rates............ $164,623 $184,779 $162,850 Increase (decrease) in taxes resulting from: Federal tax-exempt income................ (19,428) (18,145) (15,836) State income taxes, net of Federal tax benefit................................. 10,824 10,050 13,082 Bank owned life insurance................ (9,837) (9,018) (1,362) Other.................................... 6,766 5,762 5,228 -------- -------- -------- Total provision for income taxes....... $152,948 $173,428 $163,962 ======== ======== ========
58 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 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:
2000 1999 -------- -------- Deferred tax assets: Deferred compensation.............................. $ 29,356 $ 28,069 Allowance for loan and lease losses................ 93,507 83,945 Accrued postretirement benefits.................... 27,430 26,016 Conversion revenue deferred........................ 19,414 -- Unrealized gains and losses........................ -- 18,440 State NOLs and other............................... 90,311 66,353 -------- -------- Total deferred tax assets before valuation allowance....................................... 260,018 222,823 Valuation allowance................................ (40,653) (25,727) -------- -------- Net deferred tax assets.......................... 219,365 197,096 Deferred tax liabilities: Lease revenue reporting............................ 134,373 99,518 Deferred expense, net of unearned income........... 61,647 30,596 Premises and equipment, principally due to depreciation...................................... 12,216 13,064 Pension funding versus expense..................... -- 5,234 Purchase accounting adjustments.................... 8,750 14,841 Unrealized gains and losses........................ 20,259 -- Other.............................................. 38,859 38,237 -------- -------- Total deferred tax liabilities................... 276,104 201,490 -------- -------- Net deferred tax liability....................... $ 56,739 $ 4,394 ======== ========
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, 2000 and 1999, the Corporation recognized $14,558 and $15,061, respectively of deferred tax assets related to state net operating losses that may be offset against future taxable income through 2015 and 2014, respectively. At December 31, 2000, 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 tax benefit of the carryforward has been offset by a valuation allowance which is the primary cause of the change in valuation allowance compared to December 31, 1999. The amount of income tax expense or (benefit) related to net securities gains or losses amounted to ($9,512), $3,292, and $11,136, in 2000, 1999, and 1998, respectively. 16. 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. 59 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) Activity relating to nonqualified and incentive stock options was:
Weighted Number of Option Price Average Shares Per Share Exercise Price ---------- ------------ -------------- 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 Options granted................. 1,756,350 41.52-62.19 44.26 Options lapsed or surrendered... (185,613) 13.38-67.00 48.72 Options exercised............... (262,531) 7.68-57.00 19.95 ---------- ------------ ------ Shares under option at December 31, 2000....................... 8,115,520 $11.56-70.06 $42.95 ========== ============ ======
The range of options outstanding at December 31, 2000 were:
Weighted-Average Weighted-Average Number of Shares Exercise Price Remaining Price ----------------------- ----------------------- Contractual Life Range Outstanding Exercisable Outstanding Exercisable (In Years) ----- ----------- ----------- ----------- ----------- ---------------- $ 7-18 624,779 624,779 $16.14 $16.14 1.1 19-29 1,504,181 1,504,181 22.36 22.36 3.8 30-40 615,097 615,097 32.08 32.08 6.0 41-52 2,902,429 1,542,779 47.22 50.13 9.0 53-61 945,076 928,449 57.09 57.05 7.0 Over $61 1,523,958 771,297 61.75 61.96 8.9 --------- --------- ------ ------ --- 8,115,520 5,986,582 $42.95 $40.35 7.0 ========= ========= ====== ====== ===
Options exercisable at December 31, 1999 and 1998 were 5,031,588 and 4,759,535, respectively. The weighted average exercise price for options exercisable was $35.96 at December 31, 1999 and $27.10 at December 31, 1998. 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 60 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 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:
2000 1999 1998 -------- -------- -------- Net income: As reported................................. $315,123 $354,511 $301,323 Pro forma................................... 300,793 341,355 292,227 Basic earnings per share: As reported................................. $ 2.99 $ 3.32 $ 2.79 Pro forma................................... 2.85 3.20 2.70 Diluted earnings per share: As reported................................. $ 2.89 $ 3.14 $ 2.61 Pro forma................................... 2.78 3.03 2.54
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. No compensation cost associated with such options was included in determining pro forma net income. The grant date fair values and assumptions used to determine such value are as follows:
2000 1999 1998 ----------- ----------- ----------- Weighted-average grant date fair value........................... $13.82 $19.54 $13.31 Assumptions: Risk-free interest rates....... 5.14-6.79% 4.75-6.45% 4.53-5.88% Expected volatility............ 24.36-31.33% 22.00-24.62% 18.38-22.01% Expected term (in years)....... 6.0 6.0 6.0 Expected dividend yield........ 2.11% 1.56% 1.69%
Activity relating to the Corporation's Restricted Purchase Rights was:
December 31 ------------------------ 2000 1999 1998 ------ ------- ------- Restricted stock purchase rights outstanding-- Beginning of Year............................ -- -- 10,500 Restricted stock purchase rights granted...... 8,000 21,000 20,250 Restricted stock purchase rights exercised.... (8,000) (21,000) (30,750) ------ ------- ------- Restricted stock purchase rights outstanding-- End of Year -- -- -- Weighted-average grant date market value...... $45.35 $ 64.41 $ 56.40 Aggregate compensation expense................ $ 726 $ 534 $ 556 Unamortized deferred compensation............. $1,859 $ 2,387 $ 1,964
61 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 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, 2000 were 5,208,605. 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 46,850 in 2000, 50,000 in 1999, and 103,250 in 1998. The vesting period is three years from the date the performance units were awarded. At December 31, 2000, based on the performance criteria, approximately $3,841 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 $6,019 at December 31, 2000. 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. 17. 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, 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 $40,016, $37,378, and $32,108 in 2000, 1999, and 1998, 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 $1,174 in 2000, $174 in 1999, and $1,393 in 1998. Advantage 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 in 1998. 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. 62 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) The changes during the year of the accumulated postretirement benefit obligation (APBO) for retiree health benefits are as follows:
2000 1999 ------- ------- APBO, beginning of year................................ $46,867 $49,176 Service cost........................................... 2,593 3,044 Interest cost on APBO.................................. 3,601 3,381 Actuarial losses/(gains)............................... 9,042 (7,132) Change due to acquisitions/divestitures................ -- 64 Benefits paid.......................................... (1,853) (1,666) ------- ------- APBO, end of year...................................... 60,250 46,867 Unrecognized net gain.................................. 2,432 12,215 Unrecognized prior service cost........................ 1,584 1,788 ------- ------- Accrued postretirement benefit cost.................... $64,266 $60,870 ======= ======= Weighted average discount rate used in determining APBO.................................................. 8.00% 7.75% ======= =======
The assumed health care cost trend for 2001 was 6.25%. The rate was assumed to decrease gradually to 5.00% in 2006 and remain at that level thereafter. Net periodic postretirement benefit cost for the years ended December 31, 2000, 1999, and 1998 includes the following components:
2000 1999 1998 ------ ------ ------ Service cost...................................... $2,593 $3,044 $3,475 Interest on APBO.................................. 3,601 3,381 3,804 Net amortization and deferral..................... (944) (157) (263) ------ ------ ------ $5,250 $6,268 $7,016 ====== ====== ======
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 Point Percentage Point Increase Decrease ---------------- ---------------- Effect on total of service and interest cost components............. $1,103 $ (853) Effect on postretirement benefit obligation........................... 8,738 (7,176)
63 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 18. Financial Instruments with Off-Balance Sheet Risk Financial instruments with off-balance sheet risk at December 31 were:
2000 1999 ---------- ---------- Financial instruments whose amounts represent credit risk: Commitments to extend credit: To commercial customers....................... $6,397,068 $6,042,131 To individuals................................ 1,778,514 1,529,355 Standby letters of credit, net of participations................................. 606,539 536,466 Commercial letters of credit.................... 38,090 22,423 Mortgage loans sold with recourse............... 1,613 1,972 Financial instruments whose amounts exceed the amount of credit risk: Foreign exchange contracts: Commitments to purchase foreign exchange...... 758,407 382,528 Commitments to deliver foreign exchange....... 760,593 383,118 Options written/purchased..................... -- 9,715 Interest risk management instruments: Interest rate swaps............................. 1,530,000 1,007,000 Interest rate floors............................ 275,000 275,000
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 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 64 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 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, 2000, the Corporation's foreign currency position resulting from foreign exchange contracts by major currency was as follows ($000's US):
Commitments To Commitments To Deliver Purchase Foreign Exchange Foreign Exchange ---------------- ---------------- Currency Euros.................................. $313,939 $314,028 English Pound Sterling................. 240,411 240,527 Japanese Yen........................... 96,967 95,434 Swiss Franc............................ 33,388 33,304 Deutsche Mark.......................... 25,150 24,502 Australian Dollars..................... 12,551 12,640 Danish Kronor.......................... 11,611 11,572 Canadian Dollars....................... 10,017 9,716 New Zealand Dollars.................... 5,536 5,536 Italian Lire........................... 3,865 3,970 Norwegian Kronor....................... 3,917 3,916 All Other.............................. 3,241 3,262 -------- -------- Total.............................. $760,593 $758,407 ======== ======== Average amount of contracts to deliver/purchase foreign exchange..... $600,581 $595,504 ======== ========
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 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 generally minimized by concurrently entering into offsetting positions with nearly identical notional values, terms and indexes. Interest rate swaps held for trading consisted of $63.0 million in notional amount of receive fixed and $63.0 million in notional amount of pay fixed at December 31, 2000. By comparison interest rate swaps held for trading consisted of $47.5 million in notional amount of receive fixed and $47.5 million in notional amount of pay fixed at December 31, 1999. In addition to the above, as part of its auto securitization activities which began in 2000, the Corporation has entered into a balance guaranteed receive fixed pay floating interest rate swap which has been designated as 65 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) trading. The floating leg index is based on the cost of commercial paper used to fund the purchase of the collateral. The receive index is fixed at 6.60%. As of December 31, 2000 there was $202.9 million in notional value outstanding. The fair value at December 31, 2000 was $1,877. Net trading gains amounted to $2,111 in 2000. At December 31, 2000, the Corporation's interest rate swap portfolio held for other than trading consisted of the following ($ 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.......... $ 171 $ 75 $ 219 $ 122 $ 145 $ 798 $1,530 Weighted average receive rate................... 6.42% 5.38% 5.74% 5.75% 6.38% 6.95% 6.49% Weighted average pay rate (variable)........ 6.65% 6.70% 6.68% 6.57% 6.55% 6.68% 6.65%
The impact on net interest income from interest rate swaps was a negative $2.64 million in 2000 and a positive $7.19 and $5.21 million in 1999 and 1998, respectively. Interest caps and floors are contracts with notional principal amounts that require the seller, in exchange for a fee, to make payments to the purchaser if a specified market rate rises/falls above/below the fixed ceiling or floor or index rate on specified future dates. The Corporation purchases standard interest rate caps and floors to manage the interest volatility associated with variable rate loans and the risk associated with embedded prepayment options in asset-backed available for sale investment securities. At December 31, 2000, the Corporation's interest rate floor portfolio held for other than trading consisted of the following ($ in millions):
Weighted-Average -------------------------- Notional Strike Remaining Type Amount Rate Index Term (years) ---- -------- ------ ------ ------------ Floors................................ $275.0 6.386% 6.661% 5.38
No payments were received in 2000 or 1999. The effect of amortization of the fee premiums were $833 in 2000, $227 in 1999 and $117 in 1998, respectively. Unamortized premium associated with floors amounted to $4,569 at December 31, 2000 and $5,402 at December 31, 1999. 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, 2000 the estimated credit exposure arising from swaps and floors was approximately $14.6 million. 66 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 19. Fair Value of Financial Instruments The book values and estimated fair values for on and off-balance sheet financial instruments as of December 31, 2000 and 1999 are reflected below: Balance Sheet Financial Instruments ($ in millions)
2000 1999 ------------------- ------------------- Book Fair Book Fair Value Value Value Value --------- --------- --------- --------- Financial Assets: Cash and short-term investments...... $ 908.2 $ 908.2 $ 886.7 $ 886.7 Trading securities................... 15.3 15.3 40.3 40.3 Investment securities available for sale................................ 4,735.7 4,735.7 4,357.2 4,357.2 Investment securities held to maturity............................ 1,112.5 1,124.8 1,170.7 1,137.1 Net loans and leases................. 17,352.0 17,877.1 16,109.2 16,201.0 Interest receivable.................. 211.1 211.1 146.4 146.4 Financial Liabilities: Deposits............................. 19,248.6 19,496.3 16,435.2 16,496.0 Short-term borrowings................ 2,605.4 2,605.4 4,247.4 4,247.4 Long-term borrowings................. 1,130.6 1,252.8 957.9 961.8 Interest payable..................... 203.5 203.5 113.4 113.4
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 where available. See Note 6, Securities, for additional information. Estimated fair values for residual interests in the form of interest-only strips from automobile loan securitizations are based on discounted cash analysis as described in Note 9. 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. 67 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) Deposits The fair value for demand deposits or any interest bearing deposits with no fixed maturity date was considered to be equal to the carrying value. Time deposits with defined maturity dates were considered to have a fair value equal to the book value if the maturity date was within three months of December 31. The remaining time deposits were assigned fair values based on a discounted cash flow analysis using discount rates which approximate interest rates currently being offered on time deposits with comparable maturities. Borrowings Short-term borrowings are carried at cost which approximates fair value. Long-term debt was generally valued using a discounted cash flow analysis with a discount rate based on current incremental borrowing rates for similar types of arrangements or, if not readily available, based on a build up approach similar to that used for loans and deposits. Long-term borrowings include their related current maturities. Off-Balance Sheet Financial Instruments ($ 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.
2000 1999 ---- ---- Loan commitments................................................ $6.8 $3.8 Letters of credit............................................... 4.8 4.2
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.
2000 1999 ------ ------ Commitments to purchase foreign exchange................... $758.4 $382.5 Commitments to deliver foreign exchange.................... 760.6 383.1 Options written/purchased.................................. -- 2.1
Interest rate swaps and floors are assigned a value based on a discounted cash flow analysis utilizing the forward yield curve.
2000 1999 ----- ------ Interest rate swaps........................................ $(6.2) $(31.9) Interest rate floors....................................... 10.2 4.0
See Note 18 for additional information on off-balance sheet financial instruments. 20. Business Segments Generally, the Corporation organizes its segments based on legal entities. Each entity offers a variety of products and services to meet the needs of its customers and the particular market served. Each entity 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 Metavante Corporation ("Metavante") subsidiary, formerly the Data Services Division of the Corporation, was created on July 1, 2000. Certain assets and liabilities of the Data Services Division which 68 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) represent the payment services or item processing line of business, were transferred to the Banking segment. Current year information and all prior periods presented have been restated for the transfer for the Banking segment and the Data Services Segment. 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. 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, 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 nineteen separately chartered banks located in Wisconsin, one bank in Arizona, one federally chartered thrift headquartered in Nevada with a branch in Florida and an operational support subsidiary which beginning in the third quarter of 2000, includes item processing as previously discussed. 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 and prior periods have been restated to include the item processing line of business. ($ in millions)
2000 1999 1998 --------- --------- --------- Revenue: Net interest income......... $ 679.4 $ 701.5 $ 664.8 Other revenues: Unaffiliated customers.... 255.8 222.0 208.4 Affiliated customers...... 22.0 16.5 13.5 --------- --------- --------- Total revenues.......... 957.2 940.0 886.7 Expenses: Intersegment charges........ 61.9 61.3 65.5 Other operating expense..... 407.6 376.4 356.9 --------- --------- --------- Total expenses.......... 469.5 437.7 422.4 Provision for loan and lease losses....................... 29.9 25.0 26.1 Income tax expense............ 139.3 152.7 149.0 --------- --------- --------- Operating income.............. $ 318.5 $ 324.6 $ 289.2 ========= ========= ========= Identifiable assets........... $24,626.5 $22,860.4 $20,239.4 ========= ========= ========= Net purchases of premises and equipment.................... $ 28.9 $ 28.3 $ 31.8 ========= ========= ========= Return on tangible equity..... 18.4% 20.1% 18.3% ========= ========= =========
69 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) The following tables present revenue and operating income by line of business for Banking. This information is based on the Corporation's product profitability measurement system and is an aggregation of the revenues and expenses associated with the products and services within each line of business. Net interest income is derived from the Corporation's internal funds transfer pricing system, expenses are allocated based on available transaction volumes and the provision for loan and lease losses is allocated based on credit risk. Equity is assigned to products and services on a basis that considers market, operational and reputation risk. ($ in millions)
Commercial Retail Investments Total 2000 Banking Banking and Other Banking ---- ---------- ------- ----------- ------- Revenue: Net interest income............. $352.8 $344.6 $(18.0) $679.4 Other revenue................... 56.2 71.4 150.2 277.8 ------ ------ ------ ------ Total revenues................ $409.0 $416.0 $132.2 $957.2 ====== ====== ====== ====== Percent of total.................. 42.7% 43.5% 13.8% 100.0% ====== ====== ====== ====== Operating income.................. $159.5 $ 98.5 $ 60.5 $318.5 ====== ====== ====== ====== Percent of total.................. 50.1% 30.9% 19.0% 100.0% ====== ====== ====== ====== Return on tangible equity......... 20.8% 19.1% 18.4% ====== ====== ====== 1999 ---- Revenue: Net interest income............. $337.0 $323.2 $ 41.3 $701.5 Other revenue................... 54.6 60.0 123.9 238.5 ------ ------ ------ ------ Total revenues................ $391.6 $383.2 $165.2 $940.0 ====== ====== ====== ====== Percent of total.................. 41.6% 40.8% 17.6% 100.0% ====== ====== ====== ====== Operating income.................. $157.5 $ 94.1 $ 73.0 $324.6 ====== ====== ====== ====== Percent of total.................. 48.5% 29.0% 22.5% 100.0% ====== ====== ====== ====== Return on tangible equity......... 23.3% 20.3% 20.1% ====== ====== ====== 1998 ---- Revenue: Net interest income............. $303.8 $292.4 $ 68.6 $664.8 Other revenue................... 48.9 70.3 102.7 221.9 ------ ------ ------ ------ Total revenues................ $352.7 $362.7 $171.3 $886.7 ====== ====== ====== ====== Percent of total.................. 39.8% 40.9% 19.3% 100.0% ====== ====== ====== ====== Operating income.................. $148.5 $ 91.2 $ 49.5 $289.2 ====== ====== ====== ====== Percent of total.................. 51.3% 31.6% 17.1% 100.0% ====== ====== ====== ====== Return on tangible equity......... 23.1% 20.1% 18.3% ====== ====== ======
Data Services Data Services includes Metavante as well as its two nonbank subsidiaries. Metavante 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, Metavante derives revenue from the Corporation's 70 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) credit card merchant operations. The majority of Metavante's revenue is derived from internal and external processing. Intrasegment revenues, expenses and assets have been eliminated in the following information and prior periods have been restated to exclude the item processing business. ($ in millions)
2000 1999 1998 ------ ------ ------ Revenue: Net interest expense........................... $ (2.8) $ (4.1) $ (2.4) Other revenues: Unaffiliated customers....................... 542.4 492.8 422.1 Affiliated customers......................... 64.1 56.1 59.4 ------ ------ ------ Total revenues............................. 603.7 544.8 479.1 Expenses: Intersegment charges........................... 8.5 3.5 2.2 Other operating expense........................ 499.7 469.4 416.2 ------ ------ ------ Total expenses............................. 508.2 472.9 418.4 Income tax expense............................... 39.6 31.6 25.2 ====== ====== ====== Operating income................................. $ 55.9 $ 40.3 $ 35.5 ====== ====== ====== Identifiable assets.............................. $636.3 $475.1 $340.4 ====== ====== ====== Net purchases of premises and equipment.......... $ 45.9 $ 35.2 $ 25.7 ====== ====== ====== Return on equity................................. 21.5% 18.2% 19.6% ====== ====== ======
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)
2000 1999 1998 ------ ------ ------ Revenue: Net interest income............................. $ 21.5 $ 22.8 $ 34.6 Other revenues: Unaffiliated customers........................ 175.0 152.5 157.8 Affiliated customers.......................... 14.2 17.8 23.0 ------ ------ ------ Total revenues.............................. 210.7 193.1 215.4 Expenses: Intersegment charges............................ 28.2 26.2 28.3 Other operating expense......................... 105.5 101.6 104.9 ------ ------ ------ Total expenses.............................. 133.7 127.8 133.2 Provision for loan and lease losses............... 0.5 0.4 1.0 Income tax expense................................ 30.3 25.5 31.9 ====== ====== ====== Operating income.................................. $ 46.2 $ 39.4 $ 49.3 ====== ====== ====== Identifiable assets............................... $633.1 $650.3 $647.9 ====== ====== ====== Net purchases of premises and equipment........... $ 2.8 $ 2.3 $ 1.3 ====== ====== ====== Return on tangible equity......................... 20.5% 18.9% 26.2% ====== ====== ======
71 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) Total Revenues by type in All Others consist of the following:
2000 1999 1998 ------ ------ ------ Trust Services....................................... $120.1 $103.6 $ 90.4 Residential Mortgage Banking......................... 25.8 33.5 48.6 Capital Markets...................................... 22.7 16.8 33.4 Brokerage and Insurance.............................. 22.1 20.2 18.1 Commercial Leasing................................... 10.3 10.9 13.7 Commercial Mortgage Banking.......................... 2.2 1.6 7.3 Others............................................... 7.5 6.5 3.9 ------ ------ ------ Total.......................................... $210.7 $193.1 $215.4 ====== ====== ======
Segment information reconciled to the Consolidated Financial Statements is as follows ($ in millions):
2000 1999 1998 -------- -------- -------- Revenues: Banking........................................ $ 957.2 $ 940.0 $ 886.7 Data Services.................................. 603.7 544.8 479.1 All Others..................................... 210.7 193.1 215.4 Corporate overhead............................. (20.9) (4.4) (4.9) Acquisition costs.............................. 1.4 0.8 (10.3) Nonrecurring securities losses................. (50.6) -- -- Intersegment eliminations...................... (100.1) (90.5) (95.4) -------- -------- -------- Consolidated revenues............................ $1,601.4 $1,583.8 $1,470.6 ======== ======== ======== Expenses: Banking........................................ $ 469.5 $ 437.7 $ 422.4 Data Services.................................. 508.2 472.9 418.4 All Others..................................... 133.7 127.8 133.2 Corporate overhead............................. 53.2 60.0 49.5 Acquisition costs.............................. 19.5 22.6 26.7 Merger/restructuring........................... -- -- 23.4 Single Charter/IPO/Arm loan sales.............. 16.7 -- -- Intersegment eliminations...................... (100.1) (90.5) (95.4) -------- -------- -------- Consolidated expenses............................ $1,100.7 $1,030.5 $ 978.2 ======== ======== ======== Provision for loan and lease losses: Banking........................................ $ 29.9 $ 25.0 $ 26.1 All Others..................................... 0.5 0.4 1.0 -------- -------- -------- Consolidated provision for loan and lease losses. $ 30.4 $ 25.4 $ 27.1 ======== ======== ======== Income tax expense (benefit): Banking........................................ $ 139.3 $ 152.7 $ 149.0 Data Services.................................. 39.6 31.6 25.2 All Others..................................... 30.3 25.5 31.9 Corporate overhead............................. (30.6) (32.3) (25.0) Acquisition costs.............................. (2.6) (4.1) (10.0) Merger/restructuring........................... -- -- (7.1) Securities losses/Single charter/IPO/Arm loan sales......................................... (23.1) -- -- -------- -------- -------- Consolidated income tax expense.................. $ 152.9 $ 173.4 $ 164.0 ======== ======== ========
72 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) Segment information reconciled to the Consolidated Financial Statements (continued) ($ in millions)
2000 1999 1998 --------- --------- --------- Net income (loss) before change in accounting: Operating income: Banking................................... $ 318.5 $ 324.6 $ 289.2 Data Services............................. 55.9 40.3 35.5 All Others................................ 46.2 39.4 49.3 Corporate overhead.......................... (43.5) (32.1) (29.4) Acquisition costs........................... (15.5) (17.7) (27.0) Merger/restructuring........................ -- -- (16.3) Securities losses/Single charter/IPO/Arm loan sales................................. (44.2) -- -- --------- --------- --------- Consolidated net income before change in accounting................................... $ 317.4 $ 354.5 $ 301.3 ========= ========= ========= Assets: Banking..................................... $24,626.5 $22,860.4 $20,239.4 Data Services............................... 636.3 475.1 340.4 All Others.................................. 633.1 650.3 647.9 Corporate overhead.......................... 241.7 174.6 196.7 Acquisition costs........................... 249.7 269.0 290.7 Intersegment eliminations................... (309.6) (59.7) (148.8) --------- --------- --------- Consolidated assets........................... $26,077.7 $24,369.7 $21,566.3 ========= ========= ========= Depreciation and amortization: Banking..................................... $ (20.9) $ 5.4 $ 23.6 Data Services............................... 86.6 73.8 63.2 All Others.................................. (18.7) (18.3) (15.7) Corporate overhead.......................... 4.2 3.7 3.2 Acquisition costs........................... 18.0 21.6 37.1 --------- --------- --------- Consolidated depreciation and amortization.... $ 69.2 $ 86.2 $ 111.4 ========= ========= ========= Purchases of premises and equipment, net: Banking..................................... $ 28.9 $ 28.3 $ 31.8 Data Services............................... 45.9 35.2 25.7 All Others.................................. 2.8 2.3 1.3 Corporate overhead.......................... 1.2 1.1 2.0 --------- --------- --------- Consolidated purchases of premises and equipment, net............................... $ 78.8 $ 66.9 $ 60.8 ========= ========= =========
73 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) 21. Condensed Financial Information--Parent Corporation Only On July 1, 2000, the Corporation contributed certain assets and liabilities of its Data Services division as well as its investment in two related nonbank subsidiaries into a new subsidiary, Metavante, and contributed the remainder of the division's assets and liabilities (consisting of the payment services or item processing business) to its banking support subsidiary. These are noncash transactions for purposes of the Condensed Statements of Cash Flows. The Condensed Statements of Income reflect the operating activity of the Data Services division through the six months ended June 30, 2000. Condensed Balance Sheets December 31
2000 1999 ---------- ---------- Assets Cash and cash equivalents................................ $ 145,480 $ 33,850 Data processing services receivables..................... -- 132,572 Commercial loans purchased from affiliates............... -- 75,000 Indebtedness of nonbank affiliates....................... 249,408 315,965 Investments in affiliates: Banks.................................................. 2,062,316 1,848,189 Nonbanks............................................... 558,278 263,544 Premises and equipment, net.............................. 7,281 137,246 Other assets............................................. 115,222 281,899 ---------- ---------- Total assets......................................... $3,137,985 $3,088,265 ========== ==========
Liabilities and Shareholders' Equity Commercial paper issued.................................. $ 322,161 $ 246,514 Other liabilities........................................ 137,595 259,031 Long-term borrowings: 7.65% Junior Subordinated Deferrable Interest Debentures due to M&I Capital Trust A................. 205,346 205,314 Other.................................................. 230,694 260,480 ---------- ---------- Total long-term borrowings........................... 436,040 465,794 ---------- ---------- Total liabilities.................................... 895,796 971,339 Shareholders' equity..................................... 2,242,189 2,116,926 ---------- ---------- Total liabilities and shareholders' equity........... $3,137,985 $3,088,265 ========== ==========
Scheduled maturities of long-term borrowings are $67,950 in 2001, $48,450 in 2002, $113,000 in 2003, $1,000 in 2004, and $500 in 2005. See Note 13 for a description of the junior subordinated debt due to M&I Capital Trust A. 74 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) Condensed Statements of Income Years Ended December 31
2000 1999 1998 -------- -------- -------- Income Cash dividends: Bank affiliates................................ $117,812 $172,920 $186,149 Nonbank affiliates............................. 22,961 49,729 67,114 Interest from affiliates......................... 30,320 22,530 19,019 Data processing income........................... 304,365 568,269 482,567 Service fees and other........................... 67,794 70,197 64,406 -------- -------- -------- Total income................................. 543,252 883,645 819,255 Expense Interest......................................... 57,409 41,143 32,979 Salaries and employee benefits................... 186,075 322,399 274,929 Administrative and general....................... 128,653 215,039 217,469 Single Charter................................... 2,960 -- -- -------- -------- -------- Total expense................................ 375,097 578,581 525,377 Income before income taxes, cumulative effect of changes in accounting principles and equity in undistributed net income of affiliates.......... 168,155 305,064 293,878 Provisions for income taxes...................... 10,893 27,904 16,296 -------- -------- -------- Income before cumulative effect of changes in accounting principles and equity in undistributed net income of affiliates.......... 157,262 277,160 277,582 Cumulative effect of changes in accounting principles, net of income taxes................. (2,279) -- -- -------- -------- -------- Income before equity in undistributed net income of affiliates................................... 154,983 277,160 277,582 Equity in undistributed net income of affiliates, net of dividends paid: Banks.......................................... 113,368 103,114 44,611 Nonbanks....................................... 46,772 (25,763) (20,870) -------- -------- -------- Net income................................... $315,123 $354,511 $301,323 ======== ======== ========
75 Notes to Consolidated Financial Statements--(Continued) December 31, 2000, 1999, and 1998 ($000's except share data) Condensed Statements of Cash Flows Years Ended December 31
2000 1999 1998 ----------- ----------- ----------- Cash Flows From Operating Activities Net income.............................. $ 315,123 $ 354,511 $ 301,323 Noncash items included in income: Equity in undistributed net income of affiliates........................... (160,140) (77,351) (23,741) Depreciation and amortization......... 35,526 72,343 68,957 Merger/Restructuring.................. -- -- 11,615 Other................................. (26,682) (32,605) (57,085) ----------- ----------- ----------- Net cash provided by operating activities............................. 163,827 316,898 301,069 Cash Flows From Investing Activities Increases in indebtedness of affiliates........................... (1,906,477) (1,356,937) (1,462,564) Decreases in indebtedness of affiliates........................... 2,125,433 1,294,864 1,409,058 Increases in investments in affiliates........................... (36,177) (399) (5,434) Net capital expenditures.............. (19,500) (36,739) (30,874) Acquisitions accounted for as purchases, net of cash equivalents acquired and investments in joint ventures............................. -- (84,408) (5,170) Purchase of Bank-Owned Life Insurance. -- -- (32,625) Other................................. (5,993) 1,135 14,416 ----------- ----------- ----------- Net cash provided by (used) in investing activities............................. 157,286 (182,484) (113,193) Cash Flows From Financing Activities Dividends paid........................ (111,379) (104,490) (97,241) Proceeds from issuance of commercial paper................................ 3,190,712 1,926,791 779,653 Principal payments on commercial paper................................ (3,115,064) (1,740,439) (829,077) Proceeds from issuance of long-term debt................................. 1,000 75,200 -- Payments on long-term debt............ (23,561) (35,857) (13,913) Purchase of common stock.............. (156,319) (317,149) (29,633) Proceeds from exercise of stock options.............................. 5,241 18,359 15,086 Other................................. (113) (19) (25) ----------- ----------- ----------- Net cash used in financing activities... (209,483) (177,604) (175,150) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents............................ 111,630 (43,190) 12,726 Cash and cash equivalents, beginning of year................................... 33,850 77,040 64,314 ----------- ----------- ----------- Cash and cash equivalents, end of year.. $ 145,480 $ 33,850 $ 77,040 =========== =========== ===========
76 Quarterly Financial Information (Unaudited) Following is unaudited financial information for each of the calendar quarters during the years ended December 31, 2000 and 1999. Quarterly financial information for the year ended December 31, 2000, has been restated for the change in accounting as discussed in Note 2 to the Consolidated Financial Statements.
Quarter Ended ----------------------------------- Dec. 31 Sept. 30 June 30 March 31 -------- -------- -------- -------- 2000 Total Interest Income..................... $457,503 $443,265 $432,589 $414,625 Net Interest Income....................... 174,765 164,065 165,055 169,121 Provision for Loan and Lease Losses....... 8,979 5,938 9,616 5,819 Income before Income Taxes and Change in Accounting............................... 125,104 74,634 133,882 136,730 Income before Change in Accounting........ 84,330 51,610 90,747 90,715 Change in Accounting, Net of Income Taxes. -- -- -- (2,279) Net Income................................ 84,330 51,610 90,747 88,436 Net Income Per Share:* Basic Before Change in Accounting....... $ 0.80 $ 0.49 $ 0.86 $ 0.86 Basic................................... 0.80 0.49 0.86 0.84 Diluted Before Change in Accounting..... 0.78 0.47 0.83 0.83 Diluted................................. 0.78 0.47 0.83 0.81 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
2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Common Dividends Declared First Quarter............................... $0.240 $0.220 $0.200 $0.185 $0.165 Second Quarter.............................. 0.265 0.240 0.220 0.200 0.185 Third Quarter............................... 0.265 0.240 0.220 0.200 0.185 Fourth Quarter.............................. 0.265 0.240 0.220 0.200 0.185 ------ ------ ------ ------ ------ $1.035 $0.940 $0.860 $0.785 $0.720 ====== ====== ====== ====== ======
- -------- * May not add due to rounding Price Range of Stock (Low and High Close)
2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ First Quarter Low........................................ $43.88 $55.38 $53.25 $32.75 $24.63 High....................................... 60.44 59.25 59.50 40.25 26.25 Second Quarter Low........................................ 41.52 54.75 50.44 35.06 24.88 High....................................... 55.31 71.94 61.63 42.50 28.13 Third Quarter Low........................................ 43.56 55.88 44.00 40.88 25.50 High....................................... 51.63 69.75 59.00 52.63 30.13 Fourth Quarter Low........................................ 38.63 57.81 40.50 50.06 30.00 High....................................... 51.49 69.31 58.44 62.13 35.38
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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of their operations and their cash flows for the years ended December 31, 2000, 1999 and 1998, in conformity with auditing principles generally accepted in the United States. As discussed in Note 2 to the Consolidated Financial Statements, effective January 1, 2000, the Corporation changed its method of accounting for certain conversion services. /s/ Arthur Andersen LLP Milwaukee, Wisconsin, January 12, 2001 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 24, 2001, 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 24, 2001. 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 24, 2001. 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 24, 2001. 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, 2000 and 1999 Statements of Income--years ended December 31, 2000, 1999 and 1998 Statements of Cash Flows--years ended December 31, 2000, 1999 and 1998 Statements of Shareholders' Equity--years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Quarterly Financial Information (Unaudited) 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 On November 6, 2000, the Company reported Items 5 and 7 in a Current Report on Form 8-K in connection with the withdrawal of the initial public offering for its Metavante Corporation subsidiary. An Exhibit in the Form 8-K consists of a Press Release dated November 1, 2000. No financial statements were required to be filed. 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 /s/ J.B. Wigdale By: _________________________________ J.B. Wigdale Chairman of the Board Date: March 5, 2001 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 5, 2001 /s/ D.J. Kuester ________________________________________________ D.J. Kuester President and a Director (Acting Chief Financial Officer) Date: March 5, 2001 /s/ P.R. Justiliano ___________________________________________ P.R. Justiliano Senior Vice President and Corporate Controller (Principal Accounting Officer) Date: March 5, 2001
Directors: Oscar C. Boldt, Wendell F. Bueche, Timothy E. Hoeksema, Burleigh E. Jacobs, Ted D. Kellner, D.J. Kuester, Katharine C. Lyall, Don R. O'Hare, San W. Orr, Jr., Peter M. Platten, III, Robert A. Schaefer, Stuart W. Tisdale, George E. Wardeberg and J.B. Wigdale. /s/ M.A. Hatfield Date: March 5, 2001 By: _________________________________ M.A. Hatfield As Attorney-In-Fact* - -------- *Pursuant to authority granted by powers of attorney, copies of which are filed herewith. 80 MARSHALL & ILSLEY CORPORATION INDEX TO EXHIBITS (Item 14(a)3) ITEM ---- (3) (a) Restated Articles of Incorporation, as amended, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, SEC File No. 1-15403 (b) By-laws, as amended, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, SEC File No. 1-15403 (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. 1-15403 (b) Form of Medium Term Notes, Series C, Series D and Series E 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. 1-15403 (d) Form of Subordinated Note issued pursuant to the Subordinated Indenture, included in Exhibit 4(c) (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. 1-15403 (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) (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) (m) Issuing and Paying Agency Agreement, dated as of September 17, 1999, between M&I Marshall & Ilsley Bank, M&I Bank of Southern Wisconsin, M&I Bank Northeast, M&I Bank Fox Valley, M&I Thunderbird Bank, M&I Bank South, M&I Mid-State Bank and M&I Community State Bank and The Chase Manhattan Bank (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. 1-15403* (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. 1-15403* (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. 1-15403* (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. 1-15403* (e) 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. 1-15403* (f) 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. 1-15403* (g) 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. 1-15403* (h) 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. 1- 15403* (i) 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. 1-15403* (j) 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)* 2 (k) Valley Bancorporation 1992 Outside Directors' Stock Option Plan, incorporated by reference to the Valley 1992 Proxy Statement* (l) 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)* (m) 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. 1-15403* (n) 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* (o) 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. 1-15403* (p) 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. 1-15403* (q) Marshall & Ilsley Corporation Annual Executive Incentive Compensation Plan, incorporated by reference to M&I's Proxy Statement for the 1997 Annual Meeting of Shareholders* (r) 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. 1-15403* (s) 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)* (t) 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)* (u) 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)* (v) Directors Deferred Compensation Plan, incorporated by reference to M&I's Proxy Statement for the 1998 Annual Meeting of Shareholders* (w) 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. 1-15403* (x) 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* (y) 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* (z) 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* 3 (aa) 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* (bb) Marshall & Ilsley Corporation 2000 Executive Stock Option and Restricted Stock Plan, incorporated by reference to M&I's Proxy Statement for the 2000 Annual Meeting of Shareholders* (cc) Early Retirement and Consulting Agreements dated as of September 18, 2000 between Marshall & Ilsley Corporation and G.H. Gunnlaugsson, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-15403* (dd) Form of Change of Control Agreements between M&I and Messrs. Wigdale, Kuester, Bolger and Delgadillo* (ee) Change of Control Agreement, dated August 12, 1999, between M&I and Mr. Hatfield* (ff) Form of Change of Control Agreements between M&I and Ms. Justiliano and Messrs. O'Neill, Renard, Roberts, Root, Sherman, Williams and Wilson* (gg) Amended and Restated Marshall & Ilsley Corporation Nonqualified Retirement Benefit Plan* (11) Computation of Net Income Per Common Share, incorporated by reference to Note 3 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 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. 4 EX-4.M 2 dex4m.txt ISSUING AND PAYING AGENCY AGREEMENT Exhibit 4(m) ISSUING AND PAYING AGENCY AGREEMENT Senior and Subordinated Bank Notes Due 7 Days to 30 Years from Date of Issue THIS AGREEMENT is made as of September 17, 1999, between M&I Marshall & Ilsley Bank, M&I Bank of Southern Wisconsin, M&I Bank Northeast, M&I Bank Fox Valley, M&I Thunderbird Bank, M&I Bank South, M&I Mid-State Bank and M&I Community State Bank (each, an "Issuing Bank" and collectively, the "Issuing Banks") and The Chase Manhattan Bank, as issuing and paying agent (the "Issuing and Paying Agent," which term shall also refer to any duly appointed successor thereto). WITNESSETH: Section 1. Appointment of Issuing and Paying Agent. The Issuing Banks propose to - -------------------------------------------------- issue from time to time, their Senior and Subordinated Bank Notes (each, a "Bank Note" and collectively, the "Bank Notes") in such amounts as may be duly authorized by the Issuing Banks pursuant to the Distribution Agreement, dated September 17, 1999 (the "Distribution Agreement"), among the Issuing Banks and the agents named therein (the "Agents"). Each Bank Note will be issued in book-entry form and will be represented by a global certificate (each, a "Global Bank Note" and collectively, the "Global Bank Notes") registered in the name of The Depository Trust Company, as depositary ("DTC", which term includes any successor thereof), or a nominee thereof (which successor shall be a clearing agency registered under the Securities Exchange Act of 1934, as amended, if so required by applicable law), or a nominee thereof (each beneficial interest in a Global Bank Note, a "Book-Entry Bank Note" and collectively, the "Book-Entry Bank Notes"). The Issuing Banks hereby appoint the Issuing and Paying Agent to act, on the terms and conditions specified herein, as issuing and paying agent for the Global Bank Notes and as registrar, transfer agent and authenticating agent for the Global Bank Notes and to perform such other responsibilities as are described herein and in the Administrative Procedures attached as Exhibit B to the Distribution Agreement as such Administrative Procedures may be amended from time to time by agreement of the Issuing Banks and the Agents with notice of such amendments to the Issuing and Paying Agent, and the Issuing and Paying Agent hereby accepts such appointments. The aggregate principal amount of the Global Bank Notes which may be issued pursuant to this Agreement is unlimited. The Issuing and Paying Agent shall exercise due care in the performance of its obligations hereunder and shall perform such obligations in a manner consistent with industry standards. 1 Section 2. Global Bank Note Forms; Terms; Execution. - --------------------------------------------------- (a) The Global Bank Notes shall be substantially (i) in the form set forth in Exhibit A-1 hereto if such Global Bank Note is a Senior Bank Note (each, a - ----------- "Senior Bank Note" and collectively, the "Senior Bank Notes") and bears interest at a fixed rate of interest (each such Global Bank Note, a "Fixed Rate Global Senior Bank Note" and collectively, the "Fixed Rate Global Senior Bank Notes"), (ii) in the form of Exhibit A-2 hereto if such Global Bank Note is a Senior Bank ----------- Note and bears interest at a floating rate of interest determined by reference to an interest rate basis specified therein (each such Global Bank Note, a "Floating Rate Global Senior Bank Note" and collectively, the "Floating Rate Global Senior Bank Notes"), (iii) in the form of Exhibit A-3 hereto if such ----------- Global Bank Note is a Subordinated Bank Note (each, a "Subordinated Bank Note" and collectively, the "Subordinated Bank Notes") and bears interest at a fixed rate of interest (each such Global Bank Note, a "Fixed Rate Global Subordinated Bank Note" and collectively, the "Fixed Rate Global Subordinated Bank Notes"), (iv) in the form of Exhibit A-4 hereto if such Global Bank Note is a ----------- Subordinated Bank Note and bears interest at a floating rate of interest determined by reference to an interest rate basis specified therein (each such Global Bank Note, a "Floating Rate Global Subordinated Bank Note" and collectively, the "Floating Rate Global Subordinated Bank Notes"), or (v) in such other form as the Issuing Bank may from time to time designate. (b) Each Senior Bank Note issued by an Issuing Bank shall have a maturity of 7 days to 30 years from its original date of issuance, and each Subordinated Bank Note shall have a maturity of five years or more from its original date of issue. The Bank Notes shall be issued in minimum denominations of $250,000 and in integral multiples of $1,000 in excess thereof. The interest rate borne by any particular Global Bank Note may vary from the interest rates borne by any other Global Bank Notes. Any such variation shall not affect the interest rate borne by any other Global Bank Notes previously issued hereunder. (c) Each Issuing Bank will from time to time deliver or cause to be delivered to the Issuing and Paying Agent a supply of blank Global Bank Notes in such quantities as such Issuing Bank shall determine, bearing consecutive control numbers. Each Global Bank Note will have been executed by the manual or facsimile signature of an Authorized Representative (as defined in Section 3 hereof) of such Issuing Bank. The Issuing and Paying Agent will acknowledge receipt of the Global Bank Notes delivered to it and will hold such blank Global Bank Notes in safekeeping in accordance with its customary practice and shall complete, authenticate and deliver such Global Bank Notes in accordance with the provisions hereof. Section 3. Authorized Representatives. From time to time, each Issuing Bank will - ------------------------------------- furnish the Issuing and Paying Agent with a certificate executed by an officer of the Issuing Bank certifying the incumbency and specimen signatures of those officers of such Issuing Bank authorized to execute Global Bank Notes on behalf of such Issuing Bank by manual or facsimile signature and to give instructions and notices on behalf of such Issuing Bank hereunder (the "Authorized Representatives"). Until the Issuing and Paying Agent receives a subsequent certificate, the Issuing and Paying Agent shall be entitled to rely on the last such certificate delivered to it for the purposes of determining the identities of Authorized Representatives of such Issuing Bank. 2 Any Global Bank Note bearing the manual or facsimile signatures of persons who are Authorized Representatives of such Issuing Bank on the date such signatures are affixed shall bind such Issuing Bank after the completion, authentication and delivery thereof by the Issuing and Paying Agent, notwithstanding that such persons shall have ceased to hold office on the date such Global Bank Note is so completed, authenticated and delivered by the Issuing and Paying Agent. Section 4. Issuance Instructions; Completion, Authentication and Delivery of - ---------------------------------------------------------------------------- Global Bank Notes. - ----------------- (a) All instructions regarding the completion, authentication and delivery of Global Bank Notes shall be given by an Authorized Representative of an Issuing Bank by telephone (confirmed in writing), by facsimile transmission or by other acceptable written means by such Authorized Representative. (b) Upon receipt of the instructions described above, the Issuing and Paying Agent shall cause to be withdrawn the necessary and applicable Global Bank Notes from safekeeping and, in accordance with such instructions, shall: (i) complete each Global Bank Note; (ii) record each Global Bank Note in the applicable Bank Note Register (as defined in Section 10 hereof); (iii) cause each Global Bank Note to be manually authenticated by any one of the signatories of the Issuing and Paying Agent duly authorized and designated by it for such purpose; and (iv) hold each Global Bank Note in safekeeping on behalf of the registered holder thereof; provided that instructions regarding the completion and authentication of a Global Bank Note, whether delivered by facsimile transmission or by other written means, are received by the Issuing and Paying Agent by 11:00 A.M., New York City time, on the Business Day immediately preceding the date of settlement relating to such Global Bank Note (or 9:00 A.M., New York City time, on the date of settlement relating to such Bank Note if the trade date and the date of settlement relating to such Bank Note are the same day). As used in this Agreement, the term "Business Day" shall mean any day that is not a Saturday or Sunday and that is not a day on which banking institutions in The City of New York or the city in which the Issuing Bank is headquartered are authorized or required by law, regulation or executive order to close, and with respect to LIBOR Notes (as defined in the applicable Floating Rate Global Bank Note) only, any day that is also a London Business Day. As used in this Agreement, "London Business Day" means any day on which commercial banks are open for business (including dealings in the Designated LIBOR Currency (as defined in the applicable Floating Rate Global Bank Note)) in London. Section 5. Reliance on Instructions; Request for Instructions. The Issuing and - ------------------------------------------------------------- Paying Agent shall incur no liability to any Issuing Bank in acting hereunder upon instructions contemplated hereby that the Issuing and Paying Agent reasonably believed in good faith to have been given by an Authorized Representative of any Issuing Bank. In the event a discrepancy exists between the instructions as 3 originally received by the Issuing and Paying Agent and any subsequent written confirmation thereof, such original instructions will be deemed controlling; provided that the Issuing and Paying Agent gives notice to any Issuing Bank of such discrepancy promptly upon the receipt of such written confirmation. Any application by the Issuing and Paying Agent for written instructions from an Issuing Bank may, at the option of the Issuing and Paying Agent, set forth in writing any action proposed to be taken or omitted by the Issuing and Paying Agent under this Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Issuing and Paying Agent shall not be liable for any action taken by, or omission of, the Issuing and Paying Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three Business Days after the date any officer of such Issuing Bank actually receives such application, unless any such officer shall have consented in writing to any earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Issuing and Paying Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. Section 6. The Issuing Bank's Representations and Warranties. Each instruction - ------------------------------------------------------------ given to the Issuing and Paying Agent in accordance with Section 4 hereof shall constitute a representation and warranty to the Issuing and Paying Agent by the Issuing Bank that the issuance and delivery of the Global Bank Notes have been duly and validly authorized by the Issuing Bank and that the Global Bank Notes, when completed and authenticated pursuant hereto, will constitute the valid and legally binding obligations of the Issuing Bank subject to applicable bankruptcy, liquidation, insolvency, reorganization, moratorium and similar laws of general applicability relating to, or affecting, creditors' rights and to general equity principles. The Issuing Bank further warrants that it is free to enter into this Agreement and to perform the terms hereof. Section 7. Payments of Interest; Interest Payment Dates; Record Dates. Interest - --------------------------------------------------------------------- payments on Global Bank Notes with maturities of greater than one year will be made: (a) in the case of the Fixed Rate Global Senior Bank Notes and Fixed Rate Global Subordinated Bank Notes (collectively, the "Fixed Rate Global Bank Notes"), semi-annually on March 31 and September 30 of each year (unless otherwise specified in any applicable Fixed Rate Global Bank Notes) and (b) in the case of Floating Rate Global Senior Bank Notes and Floating Rate Global Subordinated Bank Notes (collectively, the "Floating Rate Global Bank Notes"), on such dates as are specified therein (collectively, the "Interest Payment Dates") and, in each case, at maturity or upon earlier redemption or repayment if so indicated in the applicable Global Bank Note. All such interest payments (other than interest due at maturity or upon earlier redemption or repayment) will be made to the Holders (as defined in Section 10 hereof) in whose names Fixed Rate Global Bank Notes are registered at the close of business on the March 15 or September 15 (unless otherwise specified in any applicable Fixed Rate Global Bank Notes) (whether or not a Business Day) next preceding such Interest Payment Dates and in whose names Floating Rate Global Bank Notes are registered at the close of business on the fifteenth calendar day (whether or not a Business Day) prior to each such Interest Payment Date (each such March 15, September 15 and fifteenth calendar day, a "Record Date"). Notwithstanding the foregoing, if the Original Issue Date of any Global Bank Note with a maturity of greater than one year occurs between a Record Date and the next succeeding Interest Payment Date, the first payment of interest on any such Global Bank 4 Note will be made on the second Interest Payment Date succeeding the Original Issue Date (as defined in the Global Bank Notes). Interest payments will be calculated and made in the manner provided in the applicable Global Bank Note. If an Issuing Bank does not deposit adequate funds pursuant to Section 9 hereof with respect to the interest due on a Global Bank Note with a maturity of greater than one year on an Interest Payment Date, such interest will cease to be due to the Holder of such Global Bank Note as of the close of business on the Record Date relating to such Interest Payment Date and will be paid to the Holder of such Global Bank Note as of the close of business on a special record date to be fixed by the Issuing and Paying Agent when funds for the payment of such interest have been deposited pursuant to Section 9 hereof. Notice of such special record date shall be given by the Issuing and Paying Agent, at such Issuing Bank's expense, to the registered Holder of such Global Bank Note not less than 10 calendar days prior to such special record date. Interest payments on Fixed Rate Global Bank Notes with maturities of one year or less will be made only upon maturity upon presentation and surrender of the applicable Fixed Rate Global Bank Note (unless otherwise specified in the applicable Fixed Rate Global Bank Note). Interest payments on Fixed Rate Global Bank Notes with maturities of one year or less will be calculated in the manner provided in the applicable Fixed Rate Global Bank Note. Interest payments on Floating Rate Global Bank Notes with maturities of one year or less will be made on the Interest Payment Dates specified in such Floating Rate Global Bank Note and, in each case, at maturity or upon earlier redemption or repayment. Interest payments on Floating Rate Global Bank Notes with maturities of one year or less will be calculated in the manner provided in the applicable Floating Rate Global Bank Note. Section 8. Payment of Principal. The Issuing and Paying Agent will pay the - ------------------------------- Holder of each Global Bank Note the principal amount of each such Global Bank Note, together with accrued interest and premium, if any, at maturity or upon earlier redemption or repayment. Section 9. Deposit of Funds. The total amount of any principal of, premium, if - --------------------------- any, and interest due on Global Bank Notes on any Interest Payment Date or any maturity date or date of redemption or repayment shall be paid by the applicable Issuing Bank to the Issuing and Paying Agent as of 11:00 A.M., New York City time, in funds available for use by the Issuing and Paying Agent on such date. Such Issuing Bank will make such payment on such Global Bank Notes via Fedwire to an account specified by the Issuing and Paying Agent. Upon receipt of funds from an Issuing Bank with respect to any Global Bank Note, on such date or as soon as possible thereafter, the Issuing and Paying Agent will pay by separate wire transfer (using message entry instructions in a form previously specified by DTC) to an account previously specified by DTC, in funds available for immediate use by DTC, each payment of principal of, premium, if any, and interest due on a Global Bank Note on such date. The Issuing and Paying Agent shall hold such amounts paid to it by the Issuing Banks in trust for the Holders but shall, pending payment by it to the account specified above, not be under any liability for interest on monies at any time received by it pursuant to any of the terms of this Agreement or of the Global Bank Notes, nor shall the Issuing and Paying Agent be required to invest such monies. 5 Section 10. Bank Note Registers; Registration, Transfer and Exchange; Persons - ------------------------------------------------------------------------------ Deemed Owners. - ------------- (a) The Issuing and Paying Agent shall maintain at its offices the Senior Note Register and Subordinated Note Register (together, the "Bank Note Registers"). The Issuing and Paying Agent is hereby appointed as Registrar for the purpose of registering each Global Bank Note and transfers of such Global Bank Note as herein provided. The terms "Senior Note Register" and "Subordinated Note Register" shall mean the definitive records in which shall be recorded the names, addresses and taxpayer identifying numbers of the holders of the Global Senior Bank Notes and Global Subordinated Bank Notes, respectively (collectively, the "Holders"), the serial and CUSIP numbers of each such Global Bank Note and the Original Issue Date thereof and details with respect to the transfer and exchange of each Global Bank Note. (b) Upon surrender for registration of transfer of any Global Bank Note at the offices of the Issuing and Paying Agent, the applicable Issuing Bank shall execute, and the Issuing and Paying Agent shall complete, authenticate and deliver, in the name of the designated transferee or transferees, one or more new Global Bank Notes of any authorized denominations and having identical terms and provisions and for an equal aggregate principal amount. (c) At the option of the Holder of a Global Bank Note, such Global Bank Note maybe be exchanged for other Global Bank Notes of any authorized denominations of an equal aggregate principal amount and having identical terms and provisions, upon surrender of the Global Bank Notes to be exchanged at the designated offices of the Issuing and Paying Agent. Whenever any Global Bank Notes are so surrendered for exchange, the applicable Issuing Bank shall execute, and the Issuing and Paying Agent shall complete, authenticate and deliver, the Global Bank Notes that the Holder of the Global Bank Note making the exchange is entitled to receive. Except as provided below, owners of beneficial interests in a Global Bank Note representing Book-Entry Bank Notes will not be entitled to have such Book-Entry Bank Notes registered in their names, will not receive or be entitled to receive physical delivery of Bank Notes in certificated form and will not be considered the owners or holders thereof under this Agreement. However, if DTC notifies the Issuing Bank that it is unwilling or unable to continue as depositary or if at any time DTC ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor depositary is not appointed by the Issuing Bank within 60 days, or an Issuing Bank in its sole discretion determines not to have Book- Entry Bank Notes represented by one or more Global Bank Notes, then Global Bank Notes representing Book-Entry Bank Notes may be exchanged in whole for definitive Bank Notes in registered form, of like tenor and of an equal aggregate principal amount, in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof, upon surrender of the Global Bank Notes to be exchanged at the offices of the Issuing and Paying Agent. (d) Notwithstanding the foregoing, the Issuing and Paying Agent shall not register the transfer of or exchange (i) any Global Bank Note that has been called for redemption in whole or in part, except the unredeemed portion of Global Bank Notes being redeemed in part, (ii) any Global Bank Note during the period beginning at the opening of business 15 days before the mailing of a notice of such redemption and ending at the close of business on the day of such mailing, or (iii) any Global Bank Note in violation of the legend contained on the face of such Global Bank Note. 6 (e) All Global Bank Notes issued upon any registration of transfer or exchange of Global Bank Notes shall be the valid obligations of the Issuing Banks, evidencing the same debt, and entitled to the same benefits as the Global Bank Notes surrendered upon such registration of transfer or exchange. (f) Every Global Bank Note presented or surrendered for registration of transfer or for exchange shall be duly endorsed, or be accompanied by a written instrument of transfer with such evidence of due authorization and guaranty of signature as may reasonably be required by the Issuing and Paying Agent, in form satisfactory to the Issuing and Paying Agent, duly executed by the Holder thereof or his attorney duly authorized in writing. (g) No service charge shall be made to a Holder of Global Bank Notes for any transfer or exchange of Global Bank Notes, but the Issuing Bank may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (h) The Issuing Banks and the Issuing and Paying Agent, and any agent of the Issuing Banks or the Issuing and Paying Agent may treat the Holder in whose name a Global Bank Note is registered as the owner of such Global Bank Note for all purposes, whether or not such Global Bank Note be overdue, and neither the Issuing Banks , the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary except as required by applicable law. Section 11. Mutilated, Destroyed, Lost, or Stolen Global Bank Notes. In case - -------------------------------------------------------------------- any Global Bank Note shall at any time become mutilated, destroyed, lost or stolen, and such Global Bank Note or evidence of the loss, theft or destruction thereof satisfactory to the Issuing Bank and the Issuing and Paying Agent (together with indemnity hereinafter referred to and such other documents or proof as may be required by the Issuing Bank and the Issuing and Paying Agent) shall be delivered to the Issuing and Paying Agent, the Issuing Bank shall execute a new Global Bank Note, of like tenor and principal amount, having a serial number not contemporaneously outstanding, in exchange and substitution for the mutilated Global Bank Note or in lieu of the Global Bank Note destroyed, lost or stolen but, in the case of any destroyed, lost or stolen Global Bank Note, only upon receipt of evidence satisfactory to the Issuing and Paying Agent and the Issuing Bank that such Global Bank Note was destroyed, stolen or lost, and, if required, upon receipt of indemnity satisfactory to each of them. The Issuing and Paying Agent shall authenticate any such substituted Global Bank Note and deliver the same upon the written request or authorization of any Authorized Representative of the Issuing Bank. Upon the issuance of any substituted Global Bank Note, the Issuing Bank and the Issuing and Paying Agent may require the payment of a sum sufficient to cover all expenses and reasonable charges connected with the preparation, authentication and delivery of a new Global Bank Note. If any Global Bank Note that has matured or has been redeemed or repaid or is about to mature or to be redeemed or repaid, as the case may be, shall become mutilated, destroyed, lost or stolen, the Issuing Bank may, instead of issuing a substitute Global Bank Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Global Bank Note) upon compliance by the Holder with the provisions of this Section. Section 12. Cancellation. All Global Bank Notes surrendered for payment, - ------------------------- registration of transfer or exchange shall, if surrendered to any person other than the Issuing and Paying Agent, be 7 delivered to the Issuing and Paying Agent and shall be promptly cancelled by it. The Issuing Banks may at any time deliver to the Issuing and Paying Agent for cancellation any Global Bank Notes previously authenticated and delivered hereunder which the Issuing Banks may have acquired in any manner whatsoever, and all Global Bank Notes so delivered shall be promptly cancelled by the Issuing and Paying Agent. No Global Bank Note shall be authenticated in lieu of or in exchange for any Global Bank Note cancelled as provided in this Section, except as expressly permitted by this Agreement. All cancelled Global Bank Notes held by the Issuing and Paying Agent shall be returned to the Issuing Banks upon request. Section 13. Redemption of Global Bank Notes. - -------------------------------------------- (a) If any Global Bank Notes redeemable at the option of the Issuing Bank are to be redeemed prior to maturity, the Issuing Bank shall notify the Issuing and Paying Agent not more than 60 nor less than 45 calendar days prior to the date fixed by the Issuing Bank for such redemption (the "Redemption Date") of the Issuing Bank's election to redeem such Global Bank Notes in whole or in part in increments of $1,000 (provided that any remaining principal amount of such Global Bank Notes shall be at least $250,000). (b) Whenever less than all the Global Bank Notes at any time outstanding are to be redeemed in accordance with their terms, the Global Bank Notes to be so redeemed shall be selected by the Issuing Bank. If less than all the Global Bank Notes with identical terms, as evidenced by a like CUSIP number, at any time outstanding are to be redeemed, the Global Bank Notes to be so redeemed shall be selected by the Issuing and Paying Agent by lot or in any usual manner approved by it. The Issuing and Paying Agent shall promptly notify the Issuing Bank in writing of the Global Bank Notes selected for redemption and, in the case of Global Bank Notes selected for partial redemption, the principal amount thereof to be redeemed. (c) Unless otherwise specified in the applicable Global Bank Note, notice of redemption shall be given by the Issuing and Paying Agent, at the Issuing Bank's expense, by first-class mail, postage prepaid, mailed not more than 60 nor less than 30 calendar days prior to the Redemption Date, to each Holder of such Global Bank Note to be redeemed, at its address appearing in the Bank Note Register. All notices of redemption shall identify the Global Bank Notes to be redeemed (including CUSIP number) and shall state: (i) the Redemption Date; (ii) the redemption price, which shall be determined in accordance with the terms of the Global Bank Note (the "Redemption Price"), (iii) if less than all of the Global Bank Notes at any time outstanding are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Global Bank Notes to be redeemed; (iv) that on the Redemption Date the Redemption Price plus accrued interest, if any, to the Redemption Date will become due and payable with respect to each Global Bank Note to be redeemed and that interest thereon will cease to accrue on and after said date; and (v) the place or places where such Global Bank Notes are to be surrendered for payment. (d) Notice of redemption having been given as described above, the Global Bank Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price, and from and after such date such Global Bank Notes shall cease to bear interest. The Issuing Bank shall deposit funds with the Issuing and Paying Agent prior to the Redemption Date that are 8 sufficient to redeem such Global Bank Notes which are scheduled to be so redeemed. Upon surrender of any such Global Bank Notes for redemption in accordance with such notice, the Issuing and Paying Agent shall pay such Global Bank Notes at the Redemption Price, together with unpaid interest accrued on such Global Bank Notes at the applicable rate borne by such Global Bank Notes to the Redemption Date. (e) Any Global Bank Note that is to be redeemed only in part shall be surrendered to the Issuing and Paying Agent, and the Issuing and Paying Agent shall complete, authenticate and deliver to the Holder of such Global Bank Note, without service charge, a new Global Bank Note or Global Bank Notes, of any authorized denomination as requested by such Holder (which shall be $250,000 or an integral multiple of $1,000 in excess thereof), in an aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Global Bank Note so surrendered. (f) The Issuing Banks, in issuing the Global Bank Notes, may use "CUSIP" numbers (if then generally in use) and, if so, the Issuing and Paying Agent shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made - ----------------- as to the correctness of such numbers either as printed on the Global Bank Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Global Bank Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. Section 14. Repayment of Global Bank Notes. - ------------------------------------------- (a) In order for any Global Bank Note to be repaid in whole or in part at the option of the Holder thereof, such Global Bank Note must be delivered by the Holder thereof, with the form entitled "Option to Elect Repayment" (set forth in such Global Bank Note) duly completed, to the Issuing and Paying Agent at its offices located at the address set forth in Section 21 hereof, or such other place or places of which the Issuing Bank shall from time to time notify the Holders of the Global Bank Notes, not more than 60 nor less than 30 calendar days prior to any date fixed for such repayment of such Global Bank Notes (the "Optional Repayment Date"). Unless otherwise specified in the applicable Global Bank Note, no Subordinated Bank Note will specify a Holder's Optional Repayment Date that is less than five years from the date of issue of such Subordinated Bank Note. (b) Upon surrender of any Global Bank Note for repayment in accordance with the provisions set forth above, the Global Bank Note to be repaid shall, on the Optional Repayment Date, become due and payable, and the Issuing and Paying Agent shall pay such Global Bank Note on the Optional Repayment Date at a price equal to 100% of the principal amount thereof, together with accrued interest to the Optional Repayment Date. (c) If less than the entire principal amount of any Global Bank Note is to be repaid, the Holder thereof shall specify the portion thereof (which shall be in increments of $1,000) which such Holder elects to have repaid and shall surrender such Global Bank Note to the Issuing and Paying Agent, and the Issuing and Paying Agent shall complete, authenticate and deliver to the Holder of such Global Bank Note, without service charge, a new Global Bank Note or Global 9 Bank Notes in an aggregate principal amount equal to and in exchange for the unrepaid portion of the principal of the Global Bank Note so surrendered and in such denominations as shall be specified by such Holder (which shall be $250,000 or an integral multiple of $1,000 in excess thereof). Section 15. Acceleration of Maturity. If an Event of Default (as defined in the - ------------------------------------- applicable Global Bank Note) with respect to a Senior Bank Note or a Subordinated Bank Note, as the case may be, issued by an Issuing Bank shall occur, then the Holder of the applicable Senior Bank Note or Subordinated Bank Note may declare the principal amount of, and accrued interest and premium, if any, on such Senior Bank Note or Subordinated Bank Note due and payable by written notice to the Issuing Bank. Upon such declaration and notice, such principal amount, accrued interest and premium, if any, shall become immediately due and payable. The Issuing Bank shall promptly notify, and provide copies of any such notice to, the Issuing and Paying Agent, and the Issuing and Paying Agent shall promptly mail by first-class mail, postage prepaid, copies of such notice to the Holders of the Senior Bank Notes or the Subordinated Bank Notes, as the case may be, upon the occurrence of an Event of Default or of the curing or waiver of an Event of Default. Any Event of Default with respect to a Bank Note may be waived by the Holder thereof. In the event of a failure by the Issuing Bank to make payment of the principal of, premium, if any, or interest on, the Subordinated Notes (and, in the case of payment of interest, such failure to pay continues for two Business Days), the Issuing Bank will, upon written demand of the Holder thereof, pay to such Holder the whole amount then due and payable on the Subordinated Note, with interest on the overdue amount at the rate borne by the Subordinated Note to the extent such interest is legally enforceable. If the Issuing Bank fails to pay such amount upon such demand, the Holder may, among other things, institute a judicial proceeding for the collection thereof. 10 Section 16. Application of Funds; Return of Unclaimed Funds. Any monies paid by - ------------------------------------------------------------ an Issuing Bank and held by the Issuing and Paying Agent in trust for payment of principal of, premium, if any, or interest on, any Global Bank Notes that remain unclaimed for two years following the date on which such principal, premium or interest shall have become due and payable shall be returned upon request to the Issuing Bank by the Issuing and Paying Agent and the Issuing and Paying Agent shall inform the Issuing Bank as to the specific Global Bank Notes to which such monies related, and any Holder shall thereafter look, as an unsecured general creditor, only to the Issuing Bank for the payment thereof and all liability of the Issuing and Paying Agent with respect to such trust monies shall thereupon cease. Any funds deposited by an Issuing Bank with the Issuing and Paying Agent for the payment of principal of, premium, if any, or interest on, any Bank Note shall be held in trust on behalf of the Issuing Bank by the Issuing and Paying Agent for the payment of principal of, premium, if any, or interest on, any Bank Note until paid or returned to such Issuing Bank. Section 17. Cancellation of Unissued Notes. Upon the written request of the - ------------------------------------------- Issuing Banks, the Issuing and Paying Agent promptly shall cancel and return to the Issuing Banks all unissued Bank Notes in its possession. Section 18. Liability. Neither the Issuing and Paying Agent nor its directors, - ---------------------- officers, employees or agents shall be liable to the Issuing Banks for any act or omission hereunder except in the case of gross negligence or willful misconduct or breach of the Issuing and Paying Agent's obligations under this Agreement. The duties and obligations of the Issuing and Paying Agent, its directors, officers and employees shall be determined by the express provisions of this Agreement and no implied covenants shall be read into this Agreement against any of them. Notwithstanding any other provision elsewhere contained in this Agreement, the Issuing and Paying Agent is acting solely as agent of the Issuing Banks and does not assume any obligation or relationship of trust or agency for or with any Holders. Neither the Issuing and Paying Agent nor any of its directors, officers or employees shall be required to ascertain whether any issuance or sale of Bank Notes (or any amendment or termination of this Agreement) has been duly authorized (provided that the Issuing and Paying Agent in good faith has determined that the facsimile or manual signature of the Authorized Representative or any person who has been designated by the Authorized Representative in writing to the Issuing and Paying Agent reasonably resembles the specimen signatures filed with the Issuing and Paying Agent) or is in compliance with any other agreement to which the Issuing Bank is a party (whether or not the Issuing and Paying Agent is also a party to such other agreement), and the Issuing and Paying Agent and each of its officers and employees shall be entitled to rely upon any instructions reasonably believed (in accordance with Section 3 hereof) by the Issuing and Paying Agent and its officers and employees to be given on behalf of the Issuing Bank by an Authorized Representative or by any person who has been designated by an Authorized Representative in writing to the Issuing and Paying Agent as a person authorized to give such instructions hereunder, whether or not in fact given by the Authorized Representative or such designated person. The Issuing and Paying Agent may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, and the Issuing and Paying Agent shall not be responsible for any misconduct or gross negligence on the part of any agent or attorney appointed with due care by it hereunder; provided the Issuing and Paying Agent shall 11 remain responsible for compliance with the terms of this Agreement. The Issuing and Paying Agent may consult with counsel of its selection and the advice of such counsel or any opinion of counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. The Issuing and Paying Agent shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement. Section 19. Indemnification, Risk of Funds. Each Issuing Bank shall indemnify - ------------------------------------------- and hold harmless the Issuing and Paying Agent, its directors, officers, employees and agents from and against all actions, claims, losses, damages, liabilities, losses and expenses (including reasonable legal fees and expenses) relating to or arising out of their actions or inactions taken or omitted to be taken by the Issuing and Paying Agent in good faith in connection with its performance under this Agreement including, but not limited to, any actions taken or omitted upon instructions by such Issuing Bank (in accordance with Section 3) or the issuance, delivery, payment or non-payment of any Bank Note or interest thereon, or other receipt or other funds for the payment of the Bank Notes or interest or premium thereon; provided, however, that the Issuing and Paying Agent shall be liable for any liabilities, losses, claims, damages, costs and expenses (including reasonable legal fees and expenses) caused by the gross negligence, bad faith or willful misconduct of its directors, officers, employees or agents or breach of the Issuing and Paying Agent's obligations under this Agreement. The Issuing and Paying Agent shall promptly notify the Issuing Banks of any action or claim by any third party for which it is entitled to indemnification hereunder and shall allow the Issuing Banks to assume the defense of any such action or claim with counsel reasonably acceptable to the Issuing and Paying Agent. The Issuing and Paying Agent will not settle any action or claim without the consent of the Issuing Banks, which consent shall not be unreasonably withheld. In no event shall the Issuing and Paying Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Issuing and Paying Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. This indemnity shall survive the termination of this Agreement. No provision of this Agreement shall require the Issuing and Paying Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Section 20. Compensation of the Issuing and Paying Agent. Each Issuing Bank - --------------------------------------------------------- agrees to pay the compensation of the Issuing and Paying Agent, at such rates as shall be mutually agreed upon in writing between such Issuing Bank and the Issuing and Paying Agent from time to time. Each Issuing Bank shall reimburse upon demand the Issuing and Paying Agent for all reasonable out-of-pocket expenses (including reasonable legal fees and expenses), disbursements and advances incurred or made by the Issuing and Paying Agent with respect to such Issuing Bank in accordance with any provisions of this Agreement, except any such expense, disbursement or advance proven to be attributable to the breach of this Agreement or the gross negligence, bad faith or willful misconduct of the Issuing and Paying Agent, upon receipt of such invoices as the 12 Issuing Bank may reasonably require. The provisions of this Section 20 shall survive the termination of this Agreement. Section 21. Notices. - -------------------- (a) All communications by or on behalf of the Issuing Banks relating to the issuance, transfer, exchange or payment of Bank Notes or interest thereon shall be directed to the offices of the Issuing and Paying Agent located at 450 West 33rd Street, New York, New York 10001, Telecopy: (212) 946-8154/8155, Attention: Agency Administration, or to such other offices as the Issuing and Paying Agent shall specify in writing to the Issuing Banks. The Issuing Banks will send all Global Bank Notes to be completed and delivered by the Issuing and Paying Agent to such offices or such other offices as the Issuing and Paying Agent shall specify in writing to the Issuing Banks. (b) All other notices and communications hereunder shall be in writing and shall be addressed as follows: if to the Issuing Banks: [Issuing Bank] c/o Marshall & Ilsley Corporation 770 North Water Street Milwaukee, Wisconsin 53202 Attention: Dave Urban Assistant Vice President Telecopy: (414) 765-8097 With a copy to: Michael A. Hatfield Senior Vice President and Secretary Facsimile Number: (414) 765-7899 if to the Issuing and Paying Agent: The Chase Manhattan Bank 450 West 33rd Street New York, New York 10001 Attention: Agency Administration Telecopy: (212) 946-8154/8155 Section 22. Resignation or Removal of Issuing and Paying Agent and Appointment - ------------------------------------------------------------------------------- of Successor Issuing and Paying Agent; Merger, Conversion and Consolidation. - --------------------------------------------------------------------------- The Issuing Banks agree, for the benefit of the Holders from time to time of the Bank Notes, that there shall at all times be an Issuing and Paying Agent hereunder which shall be a bank or trust company organized and doing business under the laws of the United States or any state thereof authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $10,000,000 and subject 13 to supervision and examination by federal or state authority, until all the Global Bank Notes authenticated and delivered hereunder (a) shall have been delivered to the Issuing and Paying Agent for cancellation or (b) shall have become due and payable and funds sufficient to pay the principal of, premium, if any, and interest on, the Global Bank Notes shall have been made available for payment and either paid or returned to the Issuing Banks, whichever event occurs earlier. The foregoing capital and surplus requirements shall not be applicable if any of the Issuing Banks or an affiliate of the Issuing Banks is appointed as successor Issuing and Paying Agent. The Issuing and Paying Agent may resign at any time as such agent upon written notice to the Issuing Bank of such intention on its part, specifying the date on which its desired resignation shall become effective; provided, however, that such date shall be not less than 90 days after the - -------- ------- giving of such notice by the Issuing and Paying Agent to the Issuing Banks. The Issuing and Paying Agent may be removed at any time as such agent by the filing with it of an instrument in writing signed by duly authorized officers of each Issuing Bank and specifying such removal and the date, which shall be at least 30 calendar days following receipt of such written notice, upon which it is intended to become effective. Any such resignation or removal shall take effect on the date of the appointment by the Issuing Banks of a successor issuing and paying agent and the acceptance of such appointment by such successor issuing and paying agent that qualifies as such under the first paragraph of this Section. In the event of the resignation or removal of the Issuing and Paying Agent, if a successor issuing and paying agent has not been appointed by the Issuing Banks within 90 calendar days after the giving of notice of resignation or within 30 calendar days after receipt of notice of removal, the Issuing and Paying Agent may, at the expense of the Issuing Banks, petition any court of competent jurisdiction for appointment of a successor Issuing and Paying Agent. Upon any such resignation or removal, the Issuing and Paying Agent shall transfer to the successor Issuing and Paying Agent (or, if none shall have been appointed, to the respective Issuing Banks) all monies held by the Issuing and Paying Agent on behalf of the Issuing Banks in respect of any Global Bank Notes, any unissued Global Bank Notes and all books and records or copies thereof related to Global Bank Notes maintained by the Issuing and Paying Agent, including a copy of the Bank Note Registers. Any resignation or removal hereunder shall not affect the Issuing and Paying Agent's rights to the payment of fees earned or charges incurred through the effective date of such resignation or removal. Any corporation or bank into which the Issuing and Paying Agent hereunder may be merged or converted, or any corporation or bank with which the Issuing and Paying Agent may be consolidated, or any corporation or bank resulting from any merger, conversion or consolidation to which the Issuing and Paying Agent shall be a party, or any corporation or bank to which the Issuing and Paying Agent shall sell or otherwise transfer all or substantially all of the assets and business of the Issuing and Paying Agent, provided that it shall be qualified under the first paragraph of this Section, shall be the successor Issuing and Paying Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto. Section 23. Benefit of Agreement. This Agreement is solely for the benefit of - --------------------------------- the parties hereto, Holders of Bank Notes, and their successors and assigns, and nothing herein, express or implied, shall give to any other persons any benefits or any legal or equitable right, remedy or claim under or by 14 virtue of this Agreement. No party hereto may assign any of its rights or obligations hereunder except with the prior written consent of all the parties hereto. Section 24. Bank Notes Held by the Issuing and Paying Agent. The Issuing and - ------------------------------------------------------------ Paying Agent, in its individual or other capacity, may become the owner or pledgee of the Bank Notes with the same rights it would have if it were not acting as an issuing and paying agent hereunder. Section 25. Amendment. This Agreement shall not be amended by any party hereto - ---------------------- except in writing executed by the duly authorized officers of all parties. Section 26. Governing Law. This Agreement shall be governed by, construed and - -------------------------- enforced in accordance with, the laws of the State of New York applicable to agreements made and to be performed in such State, without regard to conflicts of laws principles. Section 27. Counterparts. This Agreement may be executed by the parties hereto - ------------------------- in any number of counterparts, and by each of the parties hereto in separate counterparts, and each such counterpart, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by their officers thereunto duly authorized, all as of the day and year first above written. M&I MARSHALL & ILSLEY BANK By: /s/ Michael J. Flaherty ----------------------- Michael J. Flaherty Vice President M&I BANK OF SOUTHERN WISCONSIN By: /s/ Michael J. Flaherty ----------------------- Michael J. Flaherty Vice President M&I BANK NORTHEAST By: /s/ Michael J. Flaherty ----------------------- Michael J. Flaherty Vice President M&I BANK FOX VALLEY By: /s/ Michael J. Flaherty ----------------------- Michael J. Flaherty Vice President M&I THUNDERBIRD BANK By: /s/ Michael J. Flaherty ----------------------- Michael J. Flaherty Vice President 16 M&I BANK SOUTH By: /s/ Michael J. Flaherty ---------------------------------- Michael J. Flaherty Vice President M&I MID-STATE BANK By: /s/ Michael J. Flaherty ---------------------------------- Michael J. Flaherty Vice President M&I COMMUNITY STATE BANK By: /s/ Michael J. Flaherty ---------------------------------- Michael J. Flaherty Vice President THE CHASE MANHATTAN BANK, as Issuing and Paying Agent By: /s/ Guy Marzella ---------------------------------- Guy Marzella Assistant Vice President 17 EX-10.DD 3 dex10dd.txt CHANGE OF CONTROL AGREEMENT Exhibit 10(dd) CHANGE OF CONTROL 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 N E S S E T H: WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change of Control (as hereinafter defined in Section 2) exists and that the threat of or the occurrence of a Change of Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; and WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its shareholders to retain the services of the Executive in the event of a threat or occurrence of a Change of Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat of or the occurrence of a Change of Control, the Company desires to enter into this Agreement with the Executive. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Employment Term. (a) The "Employment Term" shall commence on the --------------- first date during the Protected Period (as defined in Section 1(c), below) on which a Change of Control (as defined in Section 2, below) occurs (the "Effective Date") and shall expire on the third anniversary of the Effective Date; provided, however, that at the end of each day of the Employment Term the -------- ------- Employment Term shall automatically be extended for one (1) day unless either the Company or the Executive shall have given written notice to the other at least thirty (30) days prior thereto that the Employment Term shall not be so extended. (b) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to the Effective Date and the Executive reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise occurred in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, the Effective Date shall mean the date immediately prior to the date of such termination of the Executive's employment. (c) For purposes of this Agreement, the "Protected Period" shall be the three (3) year period commencing on the date hereof; provided, however, that at -------- ------- the end of each day the 1 Protected Period shall be automatically extended for one (1) day unless at least thirty (30) days prior thereto the Company shall have given written notice to the Executive that the Protected Period shall not be so extended; and provided, -------- further, that notwithstanding any such notice by the Company not to extend, the - ------- Protected Period shall not end if prior to the expiration thereof any third party has indicated an intention or taken steps reasonably calculated to effect a Change of Control, in which event the Protected Period shall end only after such third party publicly announces that it has abandoned all efforts to effect a Change of Control. 2. Change of Control. For purposes of this Agreement, a "Change of ----------------- Control" shall mean the first to occur of the following: (a) The acquisition by any individual, entity or "group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty-three percent (33%) or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions of common stock shall not - -------- ------- constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege or by one person or a group of persons acting in concert), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger, statutory share exchange or consolidation which would not be a Change of Control under subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to -------- ------- the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened "election contest" or other actual or threatened "solicitation" (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) of proxies or consents by or on behalf of a person other than the Incumbent Board; or (c) Consummation of a reorganization, merger, statutory share exchange or consolidation, unless, following such reorganization, merger, statutory share exchange or consolidation, (i) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and 2 Outstanding Company Voting Securities immediately prior to such reorganization, merger, statutory share exchange or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, statutory share exchange or consolidation, (ii) no person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger, statutory share exchange or consolidation and any person beneficially owning, immediately prior to such reorganization, merger, statutory share exchange or consolidation, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Consummation of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. Employment. (a) Subject to the provisions of Section 3, hereof, the ---------- Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed in such executive capacity as may be mutually agreed to by the parties. During the Employment Term, Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material 3 respects with the most significant of those held or assigned at any time during the twelve (12) month period immediately preceding the Effective Date, and Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective Date or at any office or location less than thirty-five (35) miles from such location, unless mutually agreed to in writing by the parties. (b) Excluding periods of vacation and sick leave to which the Executive is entitled, during the Employment Term the Executive agrees to devote full time attention to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, provided that the Executive may take reasonable amounts of time to (i) serve on corporate, civil or charitable boards or committees, and (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, if such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of Executive's responsibilities hereunder. 4. Compensation. (a) Base Salary. During the Employment Term, the ------------ ----------- Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve (12) times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve (12) month period immediately preceding the month in which the Effective Date occurs, including any amounts which were deferred under any plans of the Company and its affiliated companies. During the Employment Term, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (b) Annual Bonus. In addition to Annual Base Salary, the Executive ------------ shall be awarded, for each fiscal year ending during the Employment Term, an annual bonus (the "Annual Bonus") in cash at least equal to the average annualized (for any fiscal year consisting of less than twelve (12) full months or with respect to which the Executive has been employed by the Company for less than twelve (12) full months) bonuses paid or payable, including any amounts which were deferred under any plans of the Company and its affiliated companies, to the Executive by the Company and its affiliated companies in respect of the three (3) fiscal years immediately preceding the fiscal year in which the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus shall be paid no later than seventy-five (75) days after the end of the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus under any plan or arrangement of the Company allowing therefor. 4 (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. (g) Office and Support Staff. During the Employment Term, the Executive ------------------------ shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the 5 foregoing provided to the Executive by the Company and its affiliated companies at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (h) Vacation and Sick Leave. During the Employment Term, the Executive ----------------------- shall be entitled to paid vacation and sick leave (without loss of pay) in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (i) Restrictions. As of the Effective Date, all restrictions limiting ------------ the exercise, transferability or other incidents of ownership of any outstanding award, including but not limited to restricted stock, options, stock appreciation rights, or other property or rights of the Company granted to the Executive shall lapse, and such awards shall become fully vested and be held by the Executive free and clear of all such restrictions. This provision shall apply to all such property or rights notwithstanding the provisions of any other plan or agreement, unless the effect of the application of this provision to a particular right or property would result in the loss of favorable securities law treatment for participants under the plan pursuant to which the award was granted. 5. Termination of Employment. During the Employment Term, the ------------------------- Executive's employment hereunder may be terminated under the following circumstances: (a) Death or Disability. The Executive's employment shall terminate ------------------- automatically upon the Executive's death during the Employment Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 5 of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for one hundred eighty (180) consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative, provided if the parties are unable to agree, the parties shall request the Dean of the Medical College of Wisconsin to choose such physician. (b) Cause. The Company may terminate the Executive's employment for ----- "Cause." A termination for Cause is a termination evidenced by a resolution adopted in good faith by a majority of the Board that the Executive (i) willfully, deliberately and continually failed to substantially perform his duties under Section 3, above (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure constitutes gross 6 misconduct, and results in and was intended to result in demonstrable material injury to the Company, monetary or otherwise, or (ii) committed acts of fraud and dishonesty constituting a felony, as determined by a final judgment or order of a court of competent jurisdiction, and resulting or intended to result in gain to or personal enrichment of the Executive at the Company's expense, provided, however, that no termination of the Executive's employment shall be - -------- ------- for Cause as set forth in (i), above, until (a) Executive shall have had at least sixty (60) days to cure any conduct or act alleged to provide Cause for termination after a written notice of demand has been delivered to the Executive specifying in detail the manner in which the Executive's conduct violates this Agreement, and (b) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, or failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act in bad faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (c) Good Reason. ----------- (1) The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change of Control of any of the events or conditions described in Subsections (i) through (vi) hereof: (i) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with his status, title, position or responsibilities in effect immediately prior to such assignment; or any removal of the Executive from or failure to reappoint or reelect him to any position, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (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 7 (vi) The failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company, to assume and agree to perform this Agreement, as contemplated in Section 10 hereof. (2) Any event or condition described in Section 5(c)(1) which occurs prior to the Effective Date but which the Executive reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise arose in connection with or in anticipation of a Change of Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Effective Date. (3) The Executive's right to terminate his employment pursuant to this Section 5(c) shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment or failure to give Notice of Termination shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (4) For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason or for no reason during the sixty (60) day period commencing on the date six (6) months after the Effective Date shall be deemed to be a termination by the Executive for Good Reason for all purposes of this Agreement. (d) Voluntary Termination. The Executive may voluntarily terminate --------------------- his employment hereunder at any time. (e) Notice of Termination. Any purported termination by the Company or --------------------- by the Executive (other than by death of the Executive) shall be communicated by Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) the Termination Date. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (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; 8 (2) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days after the date the Notice of Termination is given to the Company; and (3) In the event that within thirty (30) days following the date of receipt of the Notice of Termination, one party notifies the other that a dispute exists concerning the basis for termination, the Executive's employment hereunder shall not be terminated except after the dispute is finally resolved and a Termination Date is determined either by a mutual written agreement of the parties, or by a binding and final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 6. Obligations of the Company Upon Termination. ------------------------------------------- (a) Good Reason; Other Than for Cause, Death or Disability. If, during ------------------------------------------------------ the Employment Term, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Termination Date the aggregate of the following amounts: A. The sum of: (1) The Executive's Annual Base Salary through the Termination Date to the extent not theretofore paid; and (2) The product of (x) the higher of (I) the Recent Average Bonus and (II) the Annual Bonus paid or payable, including any amount deferred, (and annualized for any fiscal year consisting of less than twelve (12) full months or for which the Executive has been employed for less than twelve (12) full months) for the most recently completed fiscal year during the Employment Term, if any (such higher amount being referred to as the "Highest Annual Bonus.) and (y) a fraction, the numerator of which is the number of days completed in the current fiscal year through the Termination Date, and the denominator of which is 365. The sum of the amounts described in Clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"; B. The amount equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary (increased for this purpose by any Section 401(k) deferrals, cafeteria plan elections, or other deferrals that would have increased Executive's Annual Base Salary if paid in cash to Executive when earned) and (y) the Executive's Highest Annual Bonus; C. A separate lump-sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the most 9 favorable to the Executive actuarial assumptions and Company contribution history with respect to the applicable retirement plan, incentive plans, savings plans and other plans described in Section 4(c) (or any successor plan thereto) (the "Retirement Plans") during the twelve (12) month period immediately preceding the Effective Date) of the benefit payable under the Retirement Plans and any supplemental and/or excess retirement plan providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued for an additional three (3) years after the Termination Date with annual compensation equal to the sum of the Annual Base Salary and Highest Annual Bonus, assuming for this purpose that all accrued benefits and contributions are fully vested and that benefit accrual formulas and Company contributions are no less advantageous to the Executive than those in effect during the twelve (12) month period immediately preceding the Effective Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plans during the twelve (12) month period immediately preceding the Effective Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plans and the SERP. For example, if there were a termination today this supplemental retirement benefit would be interpreted with respect to two plans in existence today as follows: (i) with respect to the Retirement Growth component of the retirement program of the Company, the Executive would receive three times eight percent (8%) (or twenty-four percent (24%)) of the sum of the Executive's Annual Base Salary (determined in accordance with subsection C of Section 6(a)(i)) and the Executive's Highest Annual Bonus; and (ii) with respect to the Incentive Savings component of the retirement plan of the Company, the Executive would receive three times the annual Company match of fifty percent (50%) of the Executive's maximum allowable contribution to the Plan assuming Executive's compensation is as set forth above; and D. The amount equal to the product of (i) three and (ii) the sum of (x) the imputed income reflected on Executive's W-2 attributable to the car provided to Executive by the Company or its affiliates for the last calendar year ending before the Effective Date and (y) the club dues for Executive paid by the Company or its affiliates attributable to such year. (ii) For thirty-six (36) months after the Termination Date, the Company shall continue to provide medical and dental benefits to the Executive and/or the Executive's family in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their families as in effect from time to time thereafter; provided, however, that if the Executive becomes reemployed -------- ------- with another employer and is eligible to receive medical or other benefits under another employer provided plan, the medical and other benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility, provided that the aggregate coverage of the combined benefit plans is no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage required hereunder. For purposes of 10 determining eligibility of the Executive for retiree health insurance, the Executive shall be considered to have remained employed until the end of such thirty-six (36) month period and to have retired on the last day of such period. If the Executive would qualify at the end of such thirty-six (36) month period for retiree health insurance under the Company's plan guidelines as in existence on the Effective Date, the Company shall provide to the Executive and his or her spouse, for life, retiree health insurance, subsidized to at least the same percentage extent as under the Company's plan as in existence on the Effective Date. Such retiree health insurance shall provide medical benefits to the Executive and/or the Executive's spouse in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their spouses as in effect from time to time thereafter; provided, however, that if the Executive -------- ------- and/or the Executive's spouse qualifies for coverage by Medicare or any successor program, the Company may require that the Executive and/or the Executive's spouse fully participate in Medicare and pay the premiums therefor personally. (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. (iv) The Executive shall have the right to use reasonable office and secretarial assistance for a period of twelve (12) months after the Termination Date. (v) The Executive shall have the option of purchasing any life insurance owned by the Company or its affiliates on the life of Executive for the Company's investment in the contract, exercisable at any time within thirty (30) days after the Termination Date; and the Company agrees during the Employment Term not to terminate, sell, transfer or otherwise dispose of any such insurance without first allowing Executive the opportunity to exercise such option. For the thirty-six (36) month period after the Termination Date, the Company shall continue to provide group term life insurance (or comparable term coverage) in the same face amount and on substantially the same terms as in effect for the Executive just prior to the Effective Time. At the end of the thirty-six (36) month period, the Executive shall have any conversion rights as regards such coverage as are provided by law. (vi) 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). 11 Notwithstanding anything herein contained to the contrary, the payments and benefits provided in this Section 6(a) (other than the Accrued Obligations) shall not be paid or provided to the Executive unless and until he executes a Complete and Permanent Release (the "Release") in the form attached hereto, and the applicable period for rescission of the Release has expired. The parties agree that the Release may be expanded to include any company acquiring the Company and its affiliates as "Released Parties" as defined in the Release. (b) Death. If the Executive's employment is terminated by reason of the ----- Executive's death during the Employment Term, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, except that the Company shall pay or provide the Accrued Obligations, six (6) months of Annual Base Salary, and the Other Benefits. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within thirty (30) days of the Termination Date. The six (6) months of Annual Base Salary shall be paid during the six (6) month period following the Termination Date on a monthly basis. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, and the Executive's family shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and any of its affiliated companies to surviving families of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to family death benefits, if any, as in effect with respect to other peer executives and their families at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their families. (c) Disability. If the Executive's employment is terminated by reason ---------- of the Executive's Disability during the Employment Term, this Agreement shall terminate without further obligations to the Executive, except that the Company shall pay or provide the Accrued Obligations and the Other Benefits. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Termination Date. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other Than for Good Reason. If the Executive's employment --------------------------------- shall be terminated for Cause during the Employment Term, or if the Executive voluntarily terminates employment during the Employment Term for other than Good Reason, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination and any other amounts earned or accrued through the Termination Date, in each case to the extent theretofore unpaid; provided 12 that if Executive voluntarily terminates, Executive shall receive the benefits normally provided upon normal or early retirement with respect to other peer Executives and their families to the extent he qualifies therefore All salary or compensation hereunder shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination. (e) Delinquent Payments. If any of the payments referred to in this ------------------- Section 6 are not paid within the time specified after the Termination Date (hereinafter a "Delinquent Payment"), in addition to such principal sum, the Company will pay to the Executive interest on all such Delinquent Payments computed at the prime rate as announced from time to time by M&I Marshall & Ilsley Bank, or its successor, compounded monthly. Notwithstanding the foregoing, no interest shall be due and owing as regards payments which are delayed because of Executive's failure to execute the Release or the recission thereof. (f) Vacation Pay. In consideration of all payments made by the Company ------------ to the Executive pursuant to this Agreement, the Executive hereby waives any claim he may have for accrued and unpaid vacation pay as of the Termination Date. 7. No Mitigation. In no event shall the Executive be obligated to seek ------------- other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced (except to the extent set forth in Section 6(a)(ii)) whether or not the Executive obtains other employment. 8. Excise Tax Payments. ------------------- (a) Notwithstanding anything contained in this Agreement to the contrary, in the event that any payment or distribution to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code")), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any interest and penalties, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) A determination shall be made as to whether and when a Gross-Up Payment is required pursuant to this Section 8 and the amount of such Gross-Up Payment, such determination to be made within fifteen (15) business days of the Termination Date, or such other time as requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax). Such determination shall be made by a national independent accounting firm selected by the Executive (the "Accounting Firm"). All fees, costs and expenses (including, but not limited to, the cost of retaining experts) of the Accounting Firm shall be borne by the Company and the Company shall pay such fees, costs and expenses as they become due. The Accounting Firm shall provide detailed supporting 13 calculations, acceptable to the Executive, both to the Company and the Executive. The Gross-Up Payment, if any, as determined pursuant to this Section 8(b) shall be paid by the Company to the Executive or paid by the Company on behalf of the Executive to the applicable government taxing authorities by means of payroll tax withholding if required by law or if timely requested by the Executive within five (5) business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it shall furnish the Executive with an unqualified opinion that no Excise Tax will be imposed with respect to any such Payment or Payments. Any such initial determination by the Accounting Firm of the Gross-Up Payment shall be binding upon the Company and the Executive subject to the application of Section 8(c). (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Overpayment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred upon notice (formal or informal) to the Executive from any governmental taxing authority that the tax liability of the Executive (whether in respect of the then current taxable year of the Executive or in respect of any prior taxable year of the Executive) may be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment. An Overpayment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Payment or Payments with respect to which the Executive had previously received a Gross-Up Payment. A Final Determination shall be deemed to have occurred when the Executive has received from the applicable governmental taxing authority a refund of taxes or other reduction in his tax liability by reason of the Overpayment and upon either (i) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (ii) the expiration of the statute of limitations with respect to the Executive's applicable tax return. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall pay to the Executive at least five (5) business days prior to the date on which the applicable governmental taxing authority has requested payment, an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties imposed on the Underpayment. If an Overpayment occurs, the amount of the Overpayment shall be treated as a loan by the Company to the Executive and the Executive shall, within ten (10) business days of the occurrence of such Overpayment, pay to the Company the amount of the Overpayment plus interest at an annual rate equal to the rate provided for in Section 1274(b)(2)(B) of the Code from the date the Gross-Up Payment (to which the Overpayment relates) was paid to the Executive. 9. Unauthorized Disclosure. During the term of the Executive's ----------------------- employment with the Company, and during the two-year period following the Termination Date, the Executive shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean disclosure by the Executive without the consent of the Board to any 14 person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or as may be legally required, of any confidential information obtained by the Executive while in the employ of the Company (including, but not limited to, any confidential information with respect to any of the Company's customers or methods of operation) the disclosure of which he knows or has reason to believe will be materially injurious to the Company; provided, however, that such term shall not -------- ------- include the use or disclosure by the Executive, without consent, of any information known generally to the public (other than as a result of disclosure by him in violation of this Section 9) or any information not otherwise considered confidential by a reasonable person engaged in the same business as that conducted by the Company. Notwithstanding the foregoing, the Executive's obligation hereunder not to make any Unauthorized Disclosure shall continue after the end of the two-year period following his termination of employment with the Company as regards any information which is a trade secret as defined in Section 134.90 of the Wisconsin Statutes. In no event shall an asserted violation of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 10. Successors and Assigns. ---------------------- (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representative. 11. Fees and Expenses. From and after the Effective Date, the Company ----------------- shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) reasonably incurred by the Executive as they become due as a result of (i) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (ii) the Executive's hearing before the Board as contemplated in Section 5(b) of this Agreement, (iii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits or (iv) a dispute between the Executive and the Internal Revenue Service (or any other taxing authority) with regard to an "Underpayment" (as defined in Section 8 of this Agreement). 15 12. Notice. For the purposes of this Agreement, notices and all other ------ communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, if to the Company, to Marshall & Ilsley Corporation, 770 North Water Street, Milwaukee, Wisconsin 53202, or if to Executive, to the address set forth below Executive's signature, or to such other address as the party may be notified, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 13. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent ------------------------- or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries for which the Executive may qualify. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 14. Settlement of Claims. The Company's obligation to make the payments -------------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 15. Miscellaneous. No provision of this Agreement may be modified, ------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 16. Employment. The Executive and the Company acknowledge that the ---------- employment of the Executive by the Company is "at will" and prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the company terminates, the Executive shall have no further rights under this Agreement. 17. Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the laws of the State of Wisconsin without giving effect to the conflict of law principles thereof. 18. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16 19. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. In consideration of the terms, conditions and benefits to be provided under this Agreement, the Executive hereby expressly waives all rights under those certain Employment Agreements between the Executive and the Company dated ____________ and ___________________. 20. Headings. The headings herein contained are for reference only -------- and shall not affect the meaning or interpretation of any provision of this Agreement. 21. Modification. No provision of this Agreement may be modified or ------------ amended unless such modification or amendment is agreed to in writing signed by both the Executive and the Company. 22. Withholding. The Company shall be entitled to withhold from amounts ----------- paid to the Executive hereunder any federal, estate or local withholding or other taxes or charges which it is, from time to time, required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. 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: ________________________________ ATTEST: Title: __________________________________ Secretary EXECUTIVE: ____________________________________ Address: __________________________ __________________________ 17 EX-10.EE 4 dex10ee.txt CHANGE OF CONTROL AGREEMENT Exhibit 10(ee) CHANGE OF CONTROL AGREEMENT --------------------------- THIS AGREEMENT, entered into as of the 12/th/ day of August, 1999, by and between MARSHALL & ILSLEY CORPORATION (the "Company"), and Michael A. Hatfield (the "Executive") (hereinafter collectively referred to as "the parties"). WITNESSETH: 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 I (c), below) on which a Change of Control (as defined in Section 2, below) occurs (the "Effective Date") and shall expire on the second anniversary of the Effective Date; provided, however, that at the end of each day of the Employment Term the -------- ------- Employment Term shall automatically be extended for one (1) day unless either the Company or the Executive shall have given written notice to the other at least thirty (30) days prior thereto that the Employment Term shall not be so extended. (b) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to the Effective Date and the Executive reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise occurred in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, the Effective Date shall mean the date immediately prior to the date of such termination of the Executive's employment. (c) For purposes of this Agreement, the "Protected Period" shall be the two (2) year period commencing on the date hereof; provided, however, that at -------- ------- the end of each day the Protected Period shall be automatically extended for one (1) day unless at least thirty (30) days 1 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 the Company not to extend, the Protected Period shall not end if prior to the expiration thereof any third party has indicated an intention or taken steps reasonably calculated to effect a Change of Control, in which event the Protected Period shall end only after such third party publicly announces that it has abandoned all efforts to effect a Change of Control. 2. Change of Control. For purposes of this Agreement, a "Change of ----------------- Control" shall mean the first to occur of the following: (a) The acquisition by any individual, entity or "group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty-three percent (33%) or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions of common stock shall not - -------- ------- constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege or by one person or a group of persons acting in concert), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger, statutory share exchange or consolidation which would not be a Change of Control under subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to -------- ------- the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened "election contest" or other actual or threatened "solicitation" (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) of proxies or consents by or on behalf of a person other than the Incumbent Board; or (c) Consummation of a reorganization, merger, statutory share exchange or consolidation, unless, following such reorganization, merger, statutory share exchange or consolidation, (i) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and 2 Outstanding Company Voting Securities immediately prior to such reorganization, merger, statutory share exchange or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, statutory share exchange or consolidation, (ii) no person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger, statutory share exchange or consolidation and any person beneficially owning, immediately prior to such reorganization, merger, statutory share exchange or consolidation, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Consummation of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. Employment. (a) Subject to the provisions of Section 3, hereof, the ---------- Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed in such executive capacity as may be mutually agreed to by the parties. During the Employment Term, Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material 3 respects with the most significant of those held or assigned at any time during the twelve (12) month period immediately preceding the Effective Date, and Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective Date or at any office or location less than thirty-five (35) miles from such location, unless mutually agreed to in writing by the parties. (b) Excluding periods of vacation and sick leave to which the Executive is entitled, during the Employment Term the Executive agrees to devote full time attention to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, provided that the Executive may take reasonable amounts of time to (i) serve on corporate, civil or charitable boards or committees, and (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, if such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of Executive's responsibilities hereunder. 4. Compensation. (a) Base Salary. During the Employment Term, the ------------ ----------- Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve (12) times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve (12) month period immediately preceding the month in which the Effective Date occurs, including any amounts which were deferred under any plans of the Company and its affiliated companies. During the Employment Term, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (b) Annual Bonus. In addition to Annual Base Salary, the Executive ------------ shall be awarded, for each fiscal year ending during the Employment Term, an annual bonus (the "Annual Bonus") in cash at least equal to the average annualized (for any fiscal year consisting of less than twelve (12) full months or with respect to which the Executive has been employed by the Company for less than twelve (12) full months) bonuses paid or payable, including any amounts which were deferred under any plans of the Company and its affiliated companies, to the Executive by the Company and its affiliated companies in respect of the three (3) fiscal years immediately preceding the fiscal year in which the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus shall be paid no later than seventy-five (75) days after the end of the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus under any plan or arrangement of the Company allowing therefor. 4 (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. (g) Office and Support Staff. During the Employment Term, the Executive ------------------------ shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, in accordance with the most favorable of the 5 foregoing provided to the Executive by the company and its affiliated companies at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (h) Vacation and Sick Leave. During the Employment Term, the Executive ----------------------- shall be entitled to paid vacation and sick leave (without loss of pay) in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (i) Restrictions. As of the Effective Date, all restrictions limiting ------------ the exercise, transferability or other incidents of ownership of any outstanding award, including but not limited to restricted stock, options, stock appreciation rights, or other property or rights of the Company granted to the Executive shall lapse, and such awards shall become fully vested and be held by the Executive free and clear of all such restrictions. This provision shall apply to all such property or rights notwithstanding the provisions of any other plan or agreement, unless the effect of the application of this provision to a particular right or property would result in the loss of favorable securities law treatment for participants under the plan pursuant to which the award was granted. 5. Termination of Employment. During the Employment Term, the ------------------------- Executive's employment hereunder may be terminated under the following circumstances: (a) Death or Disability. The Executive's employment shall terminate ------------------- automatically upon the Executive's death during the Employment Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 5 of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for one hundred eighty (180) consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative, provided if the parties are unable to agree, the parties shall request the Dean of the Medical College of Wisconsin to choose such physician. (b) Cause. The Company may terminate the Executive's employment for ----- "Cause." A termination for Cause is a termination evidenced by a resolution adopted in good faith by a majority of the Board that the Executive (i) willfully, deliberately and continually failed to substantially perform his duties under Section 3, above (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure constitutes gross 6 misconduct, and results in and was intended to result in demonstrable material injury to the Company, monetary or otherwise, or (ii) committed acts of fraud and dishonesty constituting a felony, as determined by a final judgment or order of a court of competent jurisdiction, and resulting or intended to result in gain to or personal enrichment of the Executive at the Company's expense, provided, however, that no termination of the Executive's employment shall be - -------- ------- for Cause as set forth in (i), above, until (a) Executive shall have had at least sixty (60) days to cure any conduct or act alleged to provide Cause for termination after a written notice of demand has been delivered to the Executive specifying in detail the manner in which the Executive's conduct violates this Agreement, and (b) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, or failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act in bad faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (c) Good Reason. ----------- (1) The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change of Control of any of the events or conditions described in Subsections (i) through (vi) hereof: (i) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, tide, 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 7 (vi) The failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company, to assume and agree to perform this Agreement, as contemplated in Section 10 hereof. (2) Any event or condition described in Section 5(c)(1) which occurs prior to the Effective Date but which the Executive reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise arose in connection with or in anticipation of a Change of Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Effective Date. (3) The Executive's right to terminate his employment pursuant to this Section 5(c) shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment or failure to give Notice of Termination shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (4) For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason or for no reason during the sixty (60) day period commencing on the date six (6) months after the Effective Date shall be deemed to be a termination by the Executive for Good Reason for all purposes of this Agreement. (d) Voluntary Termination. The Executive may voluntarily terminate his --------------------- employment hereunder at any time. (e) Notice of Termination. Any purported termination by the Company or --------------------- by the Executive (other than by death of the Executive) shall be communicated by Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) the Termination Date. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (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; 8 (2) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days after the date the Notice of Termination is given to the Company; and (3) In the event that within thirty (30) days following the date of receipt of the Notice of Termination, one party notifies the other that a dispute exists concerning the basis for termination, the Executive's employment hereunder shall not be terminated except after the dispute is finally resolved and a Termination Date is determined either by a mutual written agreement of the parties, or by a binding and final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 6. Obligations of the Company Upon Termination. ------------------------------------------- (a) Good Reason; Other Than for Cause, Death or Disability. If, during ------------------------------------------------------ the Employment Term, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Termination Date the aggregate of the following amounts: A. The sum of: (1) The Executive's Annual Base Salary through the Termination Date to the extent not theretofore paid; and (2) The product of (x) the higher of (I) the Recent Average Bonus and (II) the Annual Bonus paid or payable, including any amount deferred, (and annualized for any fiscal year consisting of less than twelve (12) full months or for which the Executive has been employed for less than twelve (12) full months) for the most recently completed fiscal year during the Employment Term, if any (such higher amount being referred to as the "Highest Annual Bonus.) and (y) a fraction, the numerator of which is the number of days completed in the current fiscal year through the Termination Date, and the denominator of which is 365. The sum of the amounts described in Clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"; B. The amount equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary (increased for this purpose by any Section 401(k) deferrals, cafeteria plan elections, or other deferrals that would have increased Executive's Annual Base Salary if paid in cash to Executive when earned) and (y) the Executive's Highest Annual Bonus; C. A separate lump-sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the most 9 favorable to the Executive actuarial assumptions and Company contribution history with respect to the applicable retirement plan, incentive plans, savings plans and other plans described in Section 4(c) (or any successor plan thereto) (the "Retirement Plans") during the twelve (12) month period immediately preceding the Effective Date) of the benefit payable under the Retirement Plans and any supplemental and/or excess retirement plan providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued for an additional two (2) years after the Termination Date with annual compensation equal to the sum of the Annual Base Salary and Highest Annual Bonus, assuming for this purpose that all accrued benefits and contributions are fully vested and that benefit accrual formulas and Company contributions are no less advantageous to the Executive than those in effect during the twelve (12) month period immediately preceding the Effective Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plans during the twelve (12) month period immediately preceding the Effective Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plans and the SERP. For example, if there were a termination today this supplemental retirement benefit would be interpreted with respect to two plans in existence today as follows: (i) with respect to the Retirement Growth component of the retirement program of the Company, the Executive would receive two times eight percent (8%) (or twenty-four percent (24%)) of the sum of the Executive's Annual Base Salary (determined in accordance with subsection C of Section 6(a)(i)) and the Executive's Highest Annual Bonus; and (ii) with respect to the Incentive Savings component of the retirement plan of the Company, the Executive would receive two times the annual Company match of fifty percent (50%) of the Executive's maximum allowable contribution to the Plan assuming Executive's compensation is as set forth above; and D. The amount equal to the product of (i) two and (ii) the sum of (x) the imputed income reflected on Executive's W-2 attributable to the car provided to Executive by the Company or its affiliates for the last calendar year ending before the Effective Date and (y) the club dues for Executive paid by the Company or its affiliates attributable to such year. (ii) For twenty-four (24) months after the Termination Date, the Company shall continue to provide medical and dental benefits to the Executive and/or the Executive's family in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their families as in effect from time to time thereafter; provided, however, that if the Executive becomes reemployed -------- ------- with another employer and is eligible to receive medical or other benefits under another employer provided plan, the medical and other benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility, provided that the aggregate coverage of the combined benefit plans is no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage required hereunder. For purposes of 10 determining eligibility of the Executive for retiree health insurance, the Executive shall be considered to have remained employed until the end of such twenty-four (24) month period and to have retired on the last day of such period. If the Executive would qualify at the end of such twenty-four (24) month period for retiree health insurance under the Company's plan guidelines as in existence on the Effective Date, the Company shall provide to the Executive and his or her spouse, for life, retiree health insurance, subsidized to at least the same percentage extent as under the Company's plan as in existence on the Effective Date. Such retiree health insurance shall provide medical benefits to the Executive and/or the Executive's spouse in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their spouses as in effect from time to time thereafter; provided, however, that if the Executive -------- ------- and/or the Executive's spouse qualifies for coverage by Medicare or any successor program, the Company may require that the Executive and/or the Executive's spouse fully participate in Medicare and pay the premiums therefor personally. (iii) The Executive shall have the right to purchase the car provided to him by the Company or its affiliates during the twelve (12) month period immediately preceding the Effective Date, if applicable, (or a comparable car acceptable to the Executive if such car is no longer owned by the Company or its affiliates), at the book value thereof on the Termination Date, exercisable within thirty (30) days after the Termination Date; and if the car is not purchased, Executive shall return the car to the Company. (iv) For the twenty-four (24) month period after the Termination Date, the Company shall continue to provide group term life insurance (or comparable term coverage) in the same face amount and on substantially the same terms as in effect for the Executive just prior to the Effective Time. At the end of the twenty-four (24) month period, the Executive shall have any conversion rights as regards such coverage as are provided by law. (v) To the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive pursuant to this Agreement under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits). Notwithstanding anything herein contained to the contrary, the payments and benefits provided in this; Section 6(a) (other than the Accrued Obligations) shall not be paid or provided to the Executive unless and until he executes a Complete and Permanent Release (the "Release") in the form attached hereto, and the applicable period for rescission of the Release has expired. The parties agree that the Release may be expanded to include any company acquiring the Company and its affiliates as "Released Parties" as defined in the Release. (b) Death. If the Executive's employment is terminated by reason of the ----- Executive's death during the Employment Term, this Agreement shall terminate without further obligations 11 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 and any other amounts earned or accrued through the Termination Date, in each case to the extent theretofore unpaid; provided that if Executive voluntarily terminates, Executive shall receive the benefits normally provided upon normal or early retirement with respect to other peer Executives and their families to the extent he qualifies therefore All salary or compensation hereunder shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination. (e) Delinquent Payments. If any of the payments referred to in this ------------------- Section 6 are not paid within the time specified after the Termination Date (hereinafter a "Delinquent Payment"), in addition to such principal sum, the Company will pay to the Executive interest on all such Delinquent Payments computed at the prime rate as announced from time to time by M&I 12 Marshall & Ilsley Bank, or its successor, compounded monthly. Notwithstanding the foregoing, no interest shall be due and owing as regards payments which are delayed because of Executive's failure to execute the Release or the recession thereof. (f) Vacation Pay. In consideration of all payments made by the Company ------------ to the Executive pursuant to this Agreement, the Executive hereby waives any claim he may have for accrued and unpaid vacation pay as of the Termination Date. 7. No Mitigation. In no event shall the Executive be obligated to seek ------------- other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced (except to the extent set forth in Section 6(a)(ii)) whether or not the Executive obtains other employment. 8. Excise Tax Payments. ------------------- (a) Notwithstanding anything contained in this Agreement to the contrary, in the event that any payment or distribution to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code")), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any interest and penalties, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) A determination shall be made as to whether and when a Gross-Up Payment is required pursuant to this Section 8 and the amount of such Gross-Up Payment, such determination to be made within fifteen (15) business days of the Termination Date, or such other time as requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax). Such determination shall be made by a national independent accounting firm selected by the Executive (the "Accounting Firm"). All fees, costs and expenses (including, but not limited to, the cost of retaining experts) of the Accounting Firm shall be borne by the Company and the Company shall pay such fees, costs and expenses as they become due. The Accounting Firm shall provide detailed supporting calculations, acceptable to the Executive, both to the Company and the Executive. The Gross-Up Payment, if any, as determined pursuant to this Section 8(b) shall be paid by the Company to the Executive or paid by the Company on behalf of the Executive to the applicable government taxing authorities by means of payroll tax withholding if required by law or if timely requested by the Executive within five (5) business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it shall furnish the Executive with an unqualified opinion that no Excise Tax will be imposed with respect to any such Payment or 13 Payments. Any such initial determination by the Accounting Firm of the Gross-Up Payment shall be binding upon the Company and the Executive subject to the application of Section 8(c). (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Overpayment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred upon notice (formal or informal) to the Executive from any governmental taxing authority that the tax liability of the Executive (whether in respect of the then current taxable year of the Executive or in respect of any prior taxable year of the Executive) may be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment. An Overpayment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Payment or Payments with respect to which the Executive had previously received a Gross-Up Payment. A Final Determination shall be deemed to have occurred when the Executive has received from the applicable governmental taxing authority a refund of taxes or other reduction in his tax liability by reason of the Overpayment and upon either (i) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (ii) the expiration of the statute of limitations with respect to the Executive's applicable tax return. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall pay to the Executive at least five (5) business days prior to the date on which the applicable governmental taxing authority has requested payment, an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties imposed on the Underpayment. If an Overpayment occurs, the amount of the Overpayment shall be treated as a loan by the Company to the Executive and the Executive shall, within ten (10) business days of the occurrence of such Overpayment, pay to the Company the amount of the Overpayment plus interest at an annual rate equal to the rate provided for in Section 1274(b)(2)(B) of the Code from the date the Gross-Up Payment (to which the Overpayment relates) was paid to the Executive. 9. Unauthorized Disclosure. During the term of the Executive's ----------------------- employment with the Company, and during the two-year period following the Termination Date, the Executive shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean disclosure by the Executive without the consent of the Board to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or as may be legally required, of any confidential information obtained by the Executive while in the employ of the Company (including, but not limited to, any confidential information with respect to any of the Company's customers or methods of operation) the disclosure of which he knows or has reason to believe will be materially injurious to the Company; provided, however, that such term shall not include -------- ------- the use or disclosure by the Executive, without consent, of any information known generally to the public (other than as a 14 result of disclosure by him in violation of this Section 9) or any information not otherwise considered confidential by a reasonable person engaged in the same business as that conducted by the Company. Notwithstanding the foregoing, the Executive's obligation hereunder not to make any Unauthorized Disclosure shall continue after the end of the two-year period following his termination of employment with the Company as regards any information which is a trade secret as defined in Section 134.90 of the Wisconsin Statutes. In no event shall an asserted violation of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 10. Successors and Assigns. ---------------------- (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representative. 11. Fees and Expenses. From and after the Effective Date, the Company ----------------- shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) reasonably incurred by the Executive as they become due as a result of (i) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (ii) the Executive's hearing before the Board as contemplated in Section 5(b) of this Agreement, (iii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits or (iv) a dispute between the Executive and the Internal Revenue Service (or any other taxing authority) with regard to an "Underpayment" (as defined in Section 8 of this Agreement). 12. Notice. For the purposes of this Agreement, notices and all other ------ communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, if to the Company, to Marshall & Ilsley Corporation, 770 North Water Street, Milwaukee, Wisconsin 53202, or if to Executive, to the address set forth below Executive's signature, or to such other address as the party may be notified, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been 15 received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 13. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent ------------------------- or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries for which the Executive may qualify. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 14. Settlement of Claims. The Company's obligation to make the payments -------------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 15. Miscellaneous. No provision of this Agreement may be modified, ------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 16. Employment. The Executive and the Company acknowledge that the ---------- employment of the Executive by the Company is "at will" and prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the company terminates, the Executive shall have no further rights under this Agreement. 17. Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the laws of the State of Wisconsin without giving effect to the conflict of law principles thereof. 18. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 19. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. In consideration of the terms, conditions and benefits to be provided under this Agreement, the Executive hereby expressly waives all rights under that certain Employment Agreement between the Executive and the Company dated November 5, 1990. 20. Headings. The headings herein contained are for reference only -------- and shall not affect the meaning or interpretation of any provision of this Agreement. 16 21. Modification. No provision of this Agreement may be modified or ------------ amended unless such modification or amendment is agreed to in writing signed by both the Executive and the Company. 22. Withholding. The Company shall be entitled to withhold from amounts ----------- paid to the Executive hereunder any federal, estate or local withholding or other taxes or charges which it is, from lime to time, required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. MARSHALL & ILSLEY CORPORATION By: /s/ J.B. Wigdale -------------------------------- James B. Wigdale, Chairman ATTEST: /s/ Gary D. Strelow - ------------------------------------- Gary D. Strelow, Sr. Vice President EXECUTIVE: /s/ M.A. Hatfield ----------------------------------- Michael A. Hatfield Address: 6031 N. Lake Drive ---------------------------- Whitefish Bay, WI 53217 ---------------------------- 17 EX-10.FF 5 dex10ff.txt CHANGE OF CONTROL AGREEMENT Exhibit 10(ff) CHANGE OF CONTROL 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 N E S S E T H : WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change of Control (as hereinafter defined in Section 2) exists and that the threat of or the occurrence of a Change of Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; and WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its shareholders to retain the services of the Executive in the event of a threat or occurrence of a Change of Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat of or the occurrence of a Change of Control, the Company desires to enter into this Agreement with the Executive. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Employment Term. (a) The "Employment Term" shall commence on the --------------- first date during the Protected Period (as defined in Section 1(c), below) on which a Change of Control (as defined in Section 2, below) occurs (the "Effective Date") and shall expire on the second anniversary of the Effective Date; provided, however, that at the end of each day of the Employment Term the -------- ------- Employment Term shall automatically be extended for one (1) day unless either the Company or the Executive shall have given written notice to the other at least thirty (30) days prior thereto that the Employment Term shall not be so extended. (b) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to the Effective Date and the Executive reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise occurred in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, the Effective Date shall mean the date immediately prior to the date of such termination of the Executive's employment. (c) For purposes of this Agreement, the "Protected Period" shall be the two (2) year period commencing on the date hereof; provided, however, that at -------- ------- the end of each day the 1 Protected Period shall be automatically extended for one (1) day unless at least thirty (30) days prior thereto the Company shall have given written notice to the Executive that the Protected Period shall not be so extended; and provided, -------- further, that notwithstanding any such notice by the Company not to extend, the - ------- Protected Period shall not end if prior to the expiration thereof any third party has indicated an intention or taken steps reasonably calculated to effect a Change of Control, in which event the Protected Period shall end only after such third party publicly announces that it has abandoned all efforts to effect a Change of Control. 2. Change of Control. For purposes of this Agreement, a "Change of ----------------- Control" shall mean the first to occur of the following: (a) The acquisition by any individual, entity or "group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty-three percent (33%) or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions of common stock shall not - -------- ------- constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege or by one person or a group of persons acting in concert), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger, statutory share exchange or consolidation which would not be a Change of Control under subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to -------- ------- the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened "election contest" or other actual or threatened "solicitation" (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) of proxies or consents by or on behalf of a person other than the Incumbent Board; or (c) Consummation of a reorganization, merger, statutory share exchange or consolidation, unless, following such reorganization, merger, statutory share exchange or consolidation, (i) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and 2 Outstanding Company Voting Securities immediately prior to such reorganization, merger, statutory share exchange or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, statutory share exchange or consolidation, (ii) no person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger, statutory share exchange or consolidation and any person beneficially owning, immediately prior to such reorganization, merger, statutory share exchange or consolidation, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Consummation of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. Employment. (a) Subject to the provisions of Section 3, hereof, the ---------- Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed in such executive capacity as may be mutually agreed to by the parties. During the Employment Term, Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material 3 respects with the most significant of those held or assigned at any time during the twelve (12) month period immediately preceding the Effective Date, and Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective Date or at any office or location less than thirty-five (35) miles from such location, unless mutually agreed to in writing by the parties. (b) Excluding periods of vacation and sick leave to which the Executive is entitled, during the Employment Term the Executive agrees to devote full time attention to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, provided that the Executive may take reasonable amounts of time to (i) serve on corporate, civil or charitable boards or committees, and (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, if such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of Executive's responsibilities hereunder. 4. Compensation. (a) Base Salary. During the Employment Term, the ------------ ----------- Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve (12) times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve (12) month period immediately preceding the month in which the Effective Date occurs, including any amounts which were deferred under any plans of the Company and its affiliated companies. During the Employment Term, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (b) Annual Bonus. In addition to Annual Base Salary, the Executive ------------ shall be awarded, for each fiscal year ending during the Employment Term, an annual bonus (the "Annual Bonus") in cash at least equal to the average annualized (for any fiscal year consisting of less than twelve (12) full months or with respect to which the Executive has been employed by the Company for less than twelve (12) full months) bonuses paid or payable, including any amounts which were deferred under any plans of the Company and its affiliated companies, to the Executive by the Company and its affiliated companies in respect of the three (3) fiscal years immediately preceding the fiscal year in which the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus shall be paid no later than seventy-five (75) days after the end of the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus under any plan or arrangement of the Company allowing therefor. 4 (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. (g) Office and Support Staff. During the Employment Term, the Executive ------------------------ shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the 5 foregoing provided to the Executive by the Company and its affiliated companies at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (h) Vacation and Sick Leave. During the Employment Term, the Executive ----------------------- shall be entitled to paid vacation and sick leave (without loss of pay) in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the twelve (12) month period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (i) Restrictions. As of the Effective Date, all restrictions limiting ------------ the exercise, transferability or other incidents of ownership of any outstanding award, including but not limited to restricted stock, options, stock appreciation rights, or other property or rights of the Company granted to the Executive shall lapse, and such awards shall become fully vested and be held by the Executive free and clear of all such restrictions. This provision shall apply to all such property or rights notwithstanding the provisions of any other plan or agreement, unless the effect of the application of this provision to a particular right or property would result in the loss of favorable securities law treatment for participants under the plan pursuant to which the award was granted. 5. Termination of Employment. During the Employment Term, the ------------------------- Executive's employment hereunder may be terminated under the following circumstances: (a) Death or Disability. The Executive's employment shall terminate ------------------- automatically upon the Executive's death during the Employment Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 5 of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for one hundred eighty (180) consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative, provided if the parties are unable to agree, the parties shall request the Dean of the Medical College of Wisconsin to choose such physician. (b) Cause. The Company may terminate the Executive's employment for ----- "Cause." A termination for Cause is a termination evidenced by a resolution adopted in good faith by a majority of the Board that the Executive (i) willfully, deliberately and continually failed to substantially perform his duties under Section 3, above (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure constitutes gross 6 misconduct, and results in and was intended to result in demonstrable material injury to the Company, monetary or otherwise, or (ii) committed acts of fraud and dishonesty constituting a felony, as determined by a final judgment or order of a court of competent jurisdiction, and resulting or intended to result in gain to or personal enrichment of the Executive at the Company's expense, provided, however, that no termination of the Executive's employment shall be - -------- ------- for Cause as set forth in (i), above, until (a) Executive shall have had at least sixty (60) days to cure any conduct or act alleged to provide Cause for termination after a written notice of demand has been delivered to the Executive specifying in detail the manner in which the Executive's conduct violates this Agreement, and (b) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, or failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act in bad faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (c) Good Reason. ----------- (1) The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change of Control of any of the events or conditions described in Subsections (i) through (vi) hereof: (i) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with his status, title, position or responsibilities in effect immediately prior to such assignment; or any removal of the Executive from or failure to reappoint or reelect him to any position, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (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 7 (vi) The failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company, to assume and agree to perform this Agreement, as contemplated in Section 10 hereof. (2) Any event or condition described in Section 5(c)(1) which occurs prior to the Effective Date but which the Executive reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control, or (ii) otherwise arose in connection with or in anticipation of a Change of Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Effective Date. (3) The Executive's right to terminate his employment pursuant to this Section 5(c) shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment or failure to give Notice of Termination shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (4) For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive. (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 8 (3) In the event that within thirty (30) days following the date of receipt of the Notice of Termination, one party notifies the other that a dispute exists concerning the basis for termination, the Executive's employment hereunder shall not be terminated except after the dispute is finally resolved and a Termination Date is determined either by a mutual written agreement of the parties, or by a binding and final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 6. Obligations of the Company Upon Termination. ------------------------------------------- (a) Good Reason; Other Than for Cause, Death or Disability. If, during ------------------------------------------------------ the Employment Term, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Termination Date the aggregate of the following amounts: A. The sum of: (1) The Executive's Annual Base Salary through the Termination Date to the extent not theretofore paid; and (2) The product of (x) the higher of (I) the Recent Average Bonus and (II) the Annual Bonus paid or payable, including any amount deferred, (and annualized for any fiscal year consisting of less than twelve (12) full months or for which the Executive has been employed for less than twelve (12) full months) for the most recently completed fiscal year during the Employment Term, if any (such higher amount being referred to as the "Highest Annual Bonus.) and (y) a fraction, the numerator of which is the number of days completed in the current fiscal year through the Termination Date, and the denominator of which is 365. The sum of the amounts described in Clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"; B. The amount equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary (increased for this purpose by any Section 401(k) deferrals, cafeteria plan elections, or other deferrals that would have increased Executive's Annual Base Salary if paid in cash to Executive when earned) and (y) the Executive's Highest Annual Bonus; C. A separate lump-sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the most favorable to the Executive actuarial assumptions and Company contribution history with respect to the applicable retirement plan, incentive plans, savings plans and other plans described in Section 4(c) (or any successor plan thereto) (the "Retirement Plans") during the twelve (12) month period immediately 9 preceding the Effective Date) of the benefit payable under the Retirement Plans and any supplemental and/or excess retirement plan providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued for an additional two (2) years after the Termination Date with annual compensation equal to the sum of the Annual Base Salary and Highest Annual Bonus, assuming for this purpose that all accrued benefits and contributions are fully vested and that benefit accrual formulas and Company contributions are no less advantageous to the Executive than those in effect during the twelve (12) month period immediately preceding the Effective Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plans during the twelve (12) month period immediately preceding the Effective Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plans and the SERP. For example, if there were a termination today this supplemental retirement benefit would be interpreted with respect to two plans in existence today as follows: (i) with respect to the Retirement Growth component of the retirement program of the Company, the Executive would receive two times eight percent (8%) (or sixteen percent (16%)) of the sum of the Executive's Annual Base Salary (determined in accordance with subsection C of Section 6(a)(i)) and the Executive's Highest Annual Bonus; and (ii) with respect to the Incentive Savings component of the retirement program of the Company, the Executive would receive two times the annual Company match of fifty percent (50%) of the Executive's maximum allowable contribution to the Plan assuming Executive's compensation is as set forth above; and D. The amount equal to the product of (i) two and (ii) the sum of (x) the imputed income reflected on Executive's W-2 attributable to the car provided to Executive by the Company or its affiliates for the last calendar year ending before the Effective Date and (y) the club dues for Executive paid by the Company or its affiliates attributable to such year. (ii) For twenty-four (24) months after the Termination Date, the Company shall continue to provide medical and dental benefits to the Executive and/or the Executive's family in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their families as in effect from time to time thereafter; provided, however, that if the Executive becomes reemployed -------- ------- with another employer and is eligible to receive medical or other benefits under another employer provided plan, the medical and other benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility, provided that the aggregate coverage of the combined benefit plans is no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage required hereunder. For purposes of determining eligibility of the Executive for retiree health insurance, the Executive shall be considered to have remained employed until the end of such twenty-four (24) month period and to have retired on the last day of such period. If the Executive would qualify at the end of such twenty-four (24) month period for retiree health insurance under the 10 Company's plan guidelines as in existence on the Effective Date, the Company shall provide to the Executive and his or her spouse, for life, retiree health insurance, subsidized to at least the same percentage extent as under the Company's plan as in existence on the Effective Date. Such retiree health insurance shall provide medical benefits to the Executive and/or the Executive's spouse in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives who are active employees and their spouses as in effect from time to time thereafter; provided, however, that if the Executive and/or the -------- ------- Executive's spouse qualifies for coverage by Medicare or any successor program, the Company may require that the Executive and/or the Executive's spouse fully participate in Medicare and pay the premiums therefor personally. (iii) The Executive shall have the right to purchase the car provided to him by the Company or its affiliates during the twelve (12) month period immediately preceding the Effective Date (or a comparable car acceptable to the Executive if such car is no longer owned by the Company or its affiliates), at the book value thereof on the Termination Date, exercisable within thirty (30) days after the Termination Date; and if the car is not purchased, Executive shall return the car to the Company. (iv) For the twenty-four (24) month period after the Termination Date, the Company shall continue to provide group term life insurance (or comparable term coverage) in the same face amount and on substantially the same terms as in effect for the Executive just prior to the Effective Time. At the end of the twenty-four (24) month period, the Executive shall have any conversion rights as regards such coverage as are provided by law. (v) To the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive pursuant to this Agreement under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). Notwithstanding anything herein contained to the contrary, the payments and benefits provided in this Section 6(a) (other than the Accrued Obligations) shall not be paid or provided to the Executive unless and until he executes a Complete and Permanent Release (the "Release") in the form attached hereto, and the applicable period for rescission of the Release has expired. The parties agree that the Release may be expanded to include any company acquiring the Company and its affiliates as "Released Parties," as defined in the Release. (b) Death. If the Executive's employment is terminated by reason of the ----- Executive's death during the Employment Term, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, except that the Company shall pay or provide the Accrued Obligations, six (6) months of Annual Base Salary, and the Other Benefits. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within thirty (30) days of the Termination Date. The six (6) 11 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 and any other amounts earned or accrued through the Termination Date, in each case to the extent theretofore unpaid; provided that if Executive voluntarily terminates, Executive shall receive the benefits normally provided upon normal or early retirement with respect to other peer Executives and their families to the extent he qualifies therefore All salary or compensation hereunder shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination. (e) Delinquent Payments. If any of the payments referred to in this ------------------- Section 6 are not paid within the time specified after the Termination Date (hereinafter a "Delinquent Payment"), in addition to such principal sum, the Company will pay to the Executive interest on all such Delinquent Payments computed at the prime rate as announced from time to time by M&I Marshall & Ilsley Bank, or its successor, compounded monthly. Notwithstanding the foregoing, no interest shall be due and owing as regards payments which are delayed because of Executive's failure to execute the Release or the recission thereof. 12 (f) Vacation Pay. In consideration of all payments made by the Company ------------ to the Executive pursuant to this Agreement, the Executive hereby waives any claim he may have for accrued and unpaid vacation pay as of the Termination Date. 7. No Mitigation. In no event shall the Executive be obligated to seek ------------- other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced (except to the extent set forth in Section 6(a)(ii)) whether or not the Executive obtains other employment. 8. Limitation on Payments. ---------------------- (a) Notwithstanding anything contained herein to the contrary, prior to the payment of any amounts pursuant to Section 6(a) hereof, an independent national accounting firm 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 tot the Executive would not exceed three (3) times the "base amount" as defined in Section 280G of the Code, less One Dollar ($1.00), 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 8(b) hereof. (b) As a result of the uncertainty in 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 (15) 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(d) 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 year of receipt of the payments, unless the Executive agrees otherwise. 13 9. Unauthorized Disclosure. During the term of the Executive's ----------------------- employment with the Company, and during the two-year period following the Termination Date, the Executive shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean disclosure by the Executive without the consent of the Board to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or as may be legally required, of any confidential information obtained by the Executive while in the employ of the Company (including, but not limited to, any confidential information with respect to any of the Company's customers or methods of operation) the disclosure of which he knows or has reason to believe will be materially injurious to the Company; provided, however, that such term shall not include -------- ------- the use or disclosure by the Executive, without consent, of any information known generally to the public (other than as a result of disclosure by him in violation of this Section 9) or any information not otherwise considered confidential by a reasonable person engaged in the same business as that conducted by the Company. Notwithstanding the foregoing, the Executive's obligation hereunder not to make any Unauthorized Disclosure shall continue after the end of the two-year period following his termination of employment with the Company as regards any information which is a trade secret as defined in Section 134.90 of the Wisconsin Statutes. In no event shall an asserted violation of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 10. Successors and Assigns. ---------------------- (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representative. 11. Fees and Expenses. From and after the Effective Date, the Company ----------------- shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) reasonably incurred by the Executive as they become due as a result of (i) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (ii) the Executive's hearing before the Board as contemplated in Section 5(b) of this Agreement or (iii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits. 14 12. Notice. For the purposes of this Agreement, notices and all other ------ communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, if to the Company, to Marshall & Ilsley Corporation, 770 North Water Street, Milwaukee, Wisconsin 53202, or if to Executive, to the address set forth below Executive's signature, or to such other address as the party may be notified, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 13. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent ------------------------- or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries for which the Executive may qualify. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 14. Settlement of Claims. The Company's obligation to make the payments -------------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 15. Miscellaneous. No provision of this Agreement may be modified, ------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 16. Employment. The Executive and the Company acknowledge that the ---------- employment of the Executive by the Company is "at will" and prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the company terminates, the Executive shall have no further rights under this Agreement. 17. Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the laws of the State of Wisconsin without giving effect to the conflict of law principles thereof. 18. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 15 19. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. In consideration of the terms, conditions and benefits to be provided under this Agreement, the Executive hereby expressly waives all rights under those certain Employment Agreements between the Executive and the Company dated _____________________ and ___________________. 20. Headings. The headings herein contained are for reference only -------- and shall not affect the meaning or interpretation of any provision of this Agreement. 21. Modification. No provision of this Agreement may be modified or ------------ amended unless such modification or amendment is agreed to in writing signed by both the Executive and the Company. 22. Withholding. The Company shall be entitled to withhold from amounts ----------- paid to the Executive hereunder any federal, estate or local withholding or other taxes or charges which it is, from time to time, required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. 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: ________________________________ ATTEST: Title: _______________________________ Secretary EXECUTIVE: ____________________________________ Address: ___________________________ ___________________________ 16 EX-10.GG 6 dex10gg.txt NONQUALIFIED RETIREMENT BENEFIT PLAN Exhibit 10(gg) AMENDED AND RESTATED -------------------- MARSHALL & ILSLEY CORPORATION ----------------------------- NONQUALIFIED RETIREMENT BENEFIT PLAN ------------------------------------ ARTICLE I General ------- 1.1 Preamble. When Marshall & Ilsley Corporation (the "Corporation" or -------- "M&I") terminated its defined benefit plan (the "DBP") in 1985, it instituted a new defined contribution plan, the Retirement Growth Plan. The funding goal of the DBP was to provide every employee of the Corporation and its subsidiaries, within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), (hereinafter jointly referred to as "M&I") with a yearly retirement benefit which, when supplemented by Social Security, equaled 60 percent of the employee's average salary for his last five full years of employment. As a result of the termination of the DBP and (i) its replacement by the Retirement Growth Plan and (ii) limits on qualified retirement benefits imposed by the Internal Revenue Code, certain of M&I's highly-compensated and longer tenure employees of a certain age as of 1985 will receive retirement benefits, from (a) the Retirement Growth Plan, (b) the Corporation's Amended and Restated Supplementary Retirement Benefits Plan, (c) the SERP Account of the Corporation's Amended and Restated Deferred Compensation Plan and (d) Social Security, which are less than this annual goal of 60 percent of average salary (defined as base salary and annual short-term incentive before any deferral elections) for the last five full years of employment. In order to remedy this situation for certain highly-compensated, key employees, this plan is adopted to provide the benefits set forth herein to those employees identified herein. 1.2 Effective Date. This Amended and Restated Nonqualified Retirement -------------- Benefit Plan was originally effective as of the 12th day of December, 1991, was amended on August 10, 1995 and June 13, 1996, and is amended and restated effective February 22, 2001. ARTICLE II Eligibility ----------- The persons eligible to receive benefits under this Plan are the individuals set forth on Exhibit A hereto (individually, a "Participant" and collectively, "Participants"). In the event the death of a Participant prior to receiving payout of all benefits owed to him hereunder, his designated beneficiaries (individually, a "Beneficiary" and collectively, "Beneficiaries") shall receive the benefits owing to him hereunder. A Participant's beneficiary designation under the Retirement Growth Plan from time to time will govern the identity of his Beneficiaries under this Plan unless a Participant makes a separate beneficiary designation for this Plan. 1 ARTICLE III Benefits -------- 3.1 Supplemental Retirement Benefits. The monthly benefit to which each -------------------------------- Participant is entitled, assuming retirement from the employ of M&I or death at age 62 or older, is as set forth on Exhibit B hereto. In the event that any of the contingencies set forth below occurs, the benefit to which the affected Participant is entitled will be adjusted. The monthly benefit set forth on Exhibit B, or as adjusted below, is hereinafter referred to as the "Monthly Benefit." The Monthly Benefit shall continue until each Participant's death, but in all events will be paid to the Participant and/or his Beneficiaries for a total of 120 months, except as provided in Section 3.3 below. (a) Supplement for Shortfall in Monthly Benefit. If the fixed ------------------------------------------- monthly benefit set forth on Exhibit B hereto does not meet the goal of ensuring that a Participant will receive retirement benefits from (a) the Retirement Growth Plan ("Retirement Growth"), (b) the Corporation's Amended and Restated Supplementary Retirement Benefits Plan (the "SERP"), (c) the SERP Account of the Corporation's Amended and Restated Deferred Compensation Plan ("the Deferred Compensation Plan"), (d) Social Security and (e) this Plan, which are equal to 60 percent of average base salary and annual short-term incentive (before any deferrals) earned for the last five full calendar years of employment ending prior to the Participant's 66/th/ birthday, the monthly benefit shall be increased to achieve such goal for those Participants who are active employees of M&I as of February 22, 2001. In arriving at the amount of the increase, if any, to which a Participant will be entitled under this subparagraph (a), the Participant's anticipated future benefits under the Retirement Growth, the SERP, the SERP Account of the Deferred Compensation Plan and Social Security will be determined. The following methodology will be employed in making such computations. The calculation will begin with the Participant's balances in the Retirement Growth, SERP and SERP Account of the Deferred Compensation Plan for the quarter ending with or immediately prior to the Participant's retirement date, but in no case later than the December 31/st/ prior to the Participant's 66/th/ birthday ("the Determination Date"), and shall add in the remaining contributions to be made by the Corporation on the Participant's behalf if any, for the period ending on the earlier of the Participant's retirement date or the December 31/st/ prior to the Participant's 66/th/ birthday. For Participants retiring prior to obtaining age 65, the future value of these balances will be computed as of the date on which payments will commence pursuant to Section 3.2 hereof using the average of the Moody's A Long- Term Corporate Bond Rate as determined under the Deferred Compensation Plan for the five full calendar years ending on or prior to the Determination Date, but in no event greater than eight percent. The balances will be annuitized on a single life basis using then current actuarial assumptions and the same interest rate determined in the prior sentence, in order to determine a monthly amount payable from the Retirement Growth, SERP and SERP Account of the Deferred Compensation Plan. To determine the monthly amount for Social Security, the age 65 monthly Social Security benefit at the time of the Determination Date will be increased by three percent per annum for the number of full years between termination of employment and when the Participant would reach age 65. 2 The Social Security amount, along with the amounts determined as regards the Retirement Growth, SERP and SERP Account of the Deferred Compensation Plan shall be added with the amount set forth on Exhibit B for the Participant. If this total is less than 60% of the average of the base salary and annual short-term incentive (before any deferrals) for the last five full calendar years of employment ending prior to the Participant's 66/th/ birthday, such shortfall shall be added to the monthly benefit on Exhibit B. This increased amount shall then be adjusted, if required under the remainder of this Section 3.1, to determine the Monthly Benefit. If necessary, the Committee may direct the use of any other reasonable actuarial or other assumptions in making such computations. The computations shall be final and binding on the Corporation and the affected Participant. (b) Death prior to Age 62. If a Participant dies prior to age --------------------- 62 while still in M&I's employ, the monthly benefit set forth opposite his name on Exhibit B hereto, as and if adjusted pursuant to subparagraph (a) hereof, shall be adjusted from the date he would have attained age 62 to his date of death using a 6 percent discount rate, compounded annually. This reduced figure shall be his Monthly Benefit. (c) Disability prior to Age 62. If a Participant is disabled -------------------------- (within the meaning of the Corporation's long-term disability plan) while in M&I's employ prior to attaining age 62, his Monthly Benefit will be as set forth opposite his name on Exhibit B hereto, as and if adjusted pursuant to subparagraph (a) hereof, unless he dies prior to age 62 in which event his Monthly Benefit will be determined under Section 3.1(b) hereof. (d) Retirement after Age 55 and prior to Age 62. If a ------------------------------------------- Participant retires from M&I's employ after attaining age 55 and prior to attaining age 62, and if the sum of his age at retirement plus the number of full years during which he has been employed by M&I equals or exceeds 85 (the "Rule of 85"), his monthly benefit, as set forth on Exhibit B hereto, as and if adjusted pursuant to subparagraph (a) hereof, will be adjusted from the date he would have attained age 62 to the date of his retirement using a 4 percent discount rate, compounded annually. This reduced figure shall be his Monthly Benefit. If the Participant does not satisfy the Rule of 85, his benefit will be adjusted from the date he would have attained age 62 to the date of his retirement using a 6 percent discount rate, compounded annually. This reduced figure shall be his Monthly Benefit under this Plan. (e) Termination of Employment. If a Participant leaves the ------------------------- employ of M&I for any reason other than death, disability or a Change in Control (as defined in Section 5.2 hereof) prior to attaining age 55, he will be entitled to no benefit whatsoever under this Plan. (f) Change in Control. Notwithstanding anything herein ----------------- contained to the contrary, in the event of a Change in Control as defined in Section 5.2 hereof, if a Participant is still in the active employ of the Corporation immediately prior to the Change in Control, the Monthly Benefit hereunder will be as set forth in Exhibit B hereto, adjusted only for any increases determined pursuant to subsection (a) hereof, 3 regardless of (i) his age when a Change in Control occurs and (ii) whether he remains in the employ of M&I until age 55. 3.2 Distributions. A Participant's Monthly Benefit shall be distributed ------------- to a Participant commencing on the later of (a) the first day of the month after the Participant's 65/th/ birthday or (b) the first day of the month following the Participant's retirement date, but in no case later than the January following the Participant's 65th birthday. If a Participant dies prior to attaining his 65th birthday, the Monthly Benefit shall be distributed starting on the first day of the month after the Participant's death. Further, in the event of a Change in Control, a Participant who has made a timely election on the form provided by the Corporation will receive the benefits to which he is entitled hereunder in a lump sum, computed as provided herein, within 60 days after the Change in Control. The lump sum payment shall be determined (i) assuming that the Monthly Benefit would be distributed for life beginning at age 65 with a 120-month certain payout, or, if the Participant's Monthly Benefit has already been determined because of his death, retirement or other termination of employment, using the Monthly Benefit and method of distribution then in effect as regards such Participant, (ii) using actuarial assumptions contained in the most recent group annuity table adopted by the Society of Actuaries as provided by the actuaries William M. Mercer, or any successors thereto, and (iii) using a discount rate of 6 percent, compounded annually. 3.3 Joint and Survivor Election. If a Participant elects, prior to --------------------------- commencement of distributions pursuant to Section 3.2 hereof, in the manner provided by the Compensation Committee of the Corporation's Board of Directors, his Monthly Benefit shall continue until his death at which point his Spouse, as hereinafter defined, shall receive 50 percent of the Monthly Benefit until her death, except if the Spouse is more than three years younger than the Participant. If this is the case, the Monthly Benefit shall be reduced by one percent for each year or partial year that the Spouse is more than three years younger than a Participant, and the surviving Spouse shall receive 50 percent of such lesser amount. For purposes hereof, the "Spouse" is the person to whom a Participant is married when benefit payments hereunder commence pursuant to Section 3.2 hereof. If the Participant and Spouse are later divorced, she loses her status as the Spouse hereunder and is entitled to no benefits under this Section 3.3. All payments made in accordance with this Section 3.3 shall cease upon the last to die of the Participant and his Spouse. ARTICLE IV Amendment and Termination ------------------------- 4.1 Amendment and Termination. The Board of Directors of the ------------------------- Corporation may amend or terminate this Plan at any time; provided, however, -------- ------- that the Board of Directors of the Corporation or any successor thereto may not amend this Plan if a Change in Control (as defined in Section 5.2 hereof) occurs without the unanimous written consent of the Participants then living. In situations other than a Change in Control, amendment or termination may not result in a reduction in the benefits of a Participant (or his Beneficiary) who is already receiving benefits hereunder, nor may amendment or termination result in a Participant who is still in active service (or his Beneficiary) receiving a benefit hereunder smaller than that to which he would have been 4 entitled had the Participant terminated employment on the day prior to the effective date of such amendment or termination, unless necessary to conform to any present or future Federal law or regulation. 4.2 Notice of Amendment or Termination. M&I shall notify Participants ---------------------------------- or Beneficiaries currently receiving benefits under the Plan of any amendment, affecting their benefits under, or terminating, the Plan within a reasonable time after such action. ARTICLE V Miscellaneous ------------- 5.1 No Guarantee of Employment, etc. Neither the creation of the Plan ------------------------------- nor anything contained herein shall be construed as giving any Participant hereunder or other employees of M&I any right to remain in the employ of M&I. 5.2 Change in Control. For purposes of this Plan, a Change in Control ----------------- shall be the first to occur of the following: (a) The acquisition by any individual, entity or "group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty-three percent (33%) or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that the following -------- ------- acquisitions of common stock shall not constitute a Change of Control: (i) any acquisition directly from the Corporation (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 Corporation, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation or (iv) any acquisition by any corporation pursuant to a reorganization, merger, statutory share exchange or consolidation which would not be a Change of Control under subsection (c) of this Section 5.2; 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 Corporation'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 5 (c) Consummation of a reorganization, merger, statutory share exchange or consolidation, unless, following such reorganization, merger, statutory share exchange or consolidation, (i) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such reorganization, merger, statutory share exchange or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, statutory share exchange or consolidation, (ii) no person (excluding the Corporation, any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such reorganization, merger, statutory share exchange or consolidation and any person beneficially owning, immediately prior to such reorganization, merger, statutory share exchange or consolidation, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Corporation Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Consummation of (i) a complete liquidation or dissolution of the Corporation or (ii) the sale or other disposition of all or substantially all of the assets of the Corporation, 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 Corporation Common Stock and Outstanding Corporation 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 Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (B) no person (excluding the Corporation and any employee benefit plan (or related trust) of the Corporation 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 Corporation Common Stock or Outstanding Corporation Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at 6 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 Corporation. 5.3 Rights of Participants and Beneficiaries. Payment of benefits ---------------------------------------- hereunder to Participants or Beneficiaries shall be made only to them and upon their personal receipts or endorsements, and there shall be no interest in any benefits to be made prospectively, or any part thereof, nor shall the expectation of such benefits be assignable in or by operation of law, or be subject to reduction for the debts or defaults of such Participants or Beneficiaries whether to M&I or to others. Notwithstanding the foregoing, M&I shall withhold from any amounts payable hereunder any taxes or other amounts required by any governmental authority to be withheld. 5.4 No Requirement to Fund. No provision in this Plan, either directly ---------------------- or indirectly, shall be construed to require M&I to reserve, or otherwise set aside, funds for the payment of benefits hereunder. Nothing contained in this Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Plan and a Participant, his Beneficiary or any other person. To the extent that any person acquires a right to receive payment from M&I under this Plan, such right shall be no greater than the right of any unsecured general creditor of M&I. 5.5 Controlling Law. To the extent not preempted by the laws of the --------------- United States of America, the laws of the State of Wisconsin, without regard to its conflict of law provisions, shall be the controlling state law in all matters relating to the Plan and shall apply. 5.6 Severability. If any provisions of the Plan shall be held illegal ------------ or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of the Plan, but this Plan shall be construed and enforced as if said illegal and invalid provisions had never been included herein. 5.7 Gender and Number. Masculine gender shall include the feminine, and ----------------- the singular shall include the plural, unless the context clearly indicates otherwise. 5.8 Status of Plan under ERISA. This Plan is intended to be an unfunded -------------------------- plan maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, as described in Section 201(2), Section 301(a)(3), Section 401(a)(1) and Section 4021(b)(6) of the Employee Retirement Income Security Act of 1974, as amended. 5.9 Facility of Payment. If, in M&I's judgement, any person entitled to ------------------- make an election or to receive payment of a benefit is physically, mentally, or legally prevented from so doing, M&I may make such election or may authorize payment of such benefit to any person who, or institution which, in M&I's judgment, is responsible for caring for the person entitled to the benefit. If an amount becomes distributable to a minor or a person under legal disability, M&I may direct that such distribution may be made to such person without the intervention of any legal guardian or conservator, to a relative of such person for the benefit of such person or to the legal guardian or conservator of such person. Any such distributions shall constitute a full 7 discharge with respect to M&I, and M&I shall not be required to see to the application of any distribution so made. 5.10 Identity of Payee. If at any time any doubt exists as to the ----------------- identity of any person entitled to payment of any benefit hereunder or as to the amount or time of any such payment, such sum shall be held by M&I until the final order of a court of competent jurisdiction or M&I may pay such sum into a court of competent jurisdiction in accordance with any lawful procedure in such case made and provided. 5.11 Claims Procedure. The Participant or his Beneficiary (a ---------------- "Claimant") may file a written request for benefits or claim with M&I under this Plan. In the event of any dispute with respect to such a claim, the following claim procedures shall apply: (1) M&I, acting as the administrator under this Plan, shall notify the Claimant within 90 days of receipt by M&I of a written claim of its allowance or denial, unless the Claimant receives written notice from M&I prior to the end of the initial 90-day period indicating that special circumstances require an extension of time (by not more than 90 days) for decision. A written notice of decision shall be provided to the Claimant and if the claim is denied in whole or in part, the notice shall contain the following information: the specific reasons for the denial; specific reference to pertinent provisions of the Plan on which the denial is based; if applicable, a description of any additional material information necessary to perfect the claim and an explanation of which such material or information is necessary; and an explanation of the claim review procedure. (2) A Claimant is entitled to request a review of any denial of his claim by M&I. The request for review must be submitted in writing within 60 days of mailing of notice of the denial. Absent a request for review within the 60-day period, the claim will be deemed to be conclusively denied. The Claimant or the Claimant's representative shall be entitled to review all pertinent documents, and to submit issues and comments orally and in writing. M&I shall render a review decision in writing, within 60 days after receipt of a request for a review, provided that, in special circumstances (such as the necessity of holding a hearing) M&I may extend the time for decision by not more than 60 days upon written notice to the Claimant. The Claimant shall receive written notice of the separate review decision of M&I together with specific reasons for the decision and reference to the pertinent provisions of this Plan. 5.12. Administration. The Plan shall be administered by the M&I -------------- Executive Compensation Committee (the "Committee) which shall have full and exclusive power to interpret the Plan and to adopt such rules, regulations and guidelines for carrying out the Plan as it may deem necessary or proper. The Committee may delegate any of its administrative duties to any M&I employee. Actions by the Committee hereunder shall be final and binding on the Participants and M&I. 8 EXHIBIT A James B. Wigdale Dennis J. Kuester Michael J. Revane Gordon H. Gunnlaugsson Gary D. Strelow Michael A. Hatfield 9 EXHIBIT B Name Monthly Benefit - ---- --------------- Wigdale $24,167 Kuester $23,167 Gunnlaugsson $14,958 Revane $ 8,333 Strelow $ 5,167 Hatfield $ 3,292 10 EX-12 7 dex12.txt COMPUTATION OF RATIOS Exhibit 12 Marshall & Ilsley Corporation Computation of Ratio of Earnings to Fixed Charges ($000's)
Years Ended December 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- Earnings: Earnings before income taxes and extraordinary items ............... $ 470,350 $ 527,939 $ 465,285 $ 388,172 $ 317,949 Fixed charges, excluding interest on deposits........................ 321,812 222,172 206,546 175,609 126,261 ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges but excluding interest on deposits .......................... 792,162 750,111 671,831 563,781 444,210 Interest on deposits ................ 772,016 585,864 564,540 460,418 392,473 ----------- ----------- ----------- ----------- ----------- Earnings including fixed charges and interest on deposits .......... $1,564,178 $1,335,975 $1,236,371 $1,024,199 $ 836,683 =========== =========== =========== =========== =========== Fixed Charges: Interest Expense: Short-term borrowings ........... $ 224,187 $ 142,294 $ 126,624 $ 111,193 $ 63,892 Long-term borrowings ............ 78,773 63,145 66,810 54,175 53,615 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor) .............. 18,852 16,733 13,112 10,241 8,754 ----------- ----------- ----------- ----------- ----------- Fixed charges excluding interest on deposits ....................... 321,812 222,172 206,546 175,609 126,261 Interest on deposits ................ 772,016 585,864 564,540 460,418 392,473 ----------- ---------- ----------- ----------- ----------- Fixed charges including interest on deposits ....................... $1,093,828 $ 808,036 $ 771,086 $ 636,027 $ 518,734 =========== =========== =========== =========== =========== Ratio of Earnings to Fixed Charges: Excluding interest on deposits ...... 2.46x 3.38x 3.25x 3.21x 3.52x Including interest on deposits ...... 1.43x 1.65x 1.60x 1.61x 1.61x
11 EX-21 8 dex21.txt SUBSIDIARIES OF MARSHALL & ILSLEY CORP Exhibit 21 MARSHALL & ILSLEY CORPORATION SUBSIDIARIES February 28, 2001 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 Marshall & Ilsley Bank M&I Bank of Eagle River M&I Merchants Bank M&I Bank of LaCrosse M&I Mid-State Bank M&I Bank of Mayville M&I Brokerage Services, Inc. M&I Bank of Shawano M&I Dealer Finance, Inc. M&I Bank of Southern Wisconsin M&I First National Leasing Corp. M&I Bank Fox Valley M&I Insurance Services, Inc. M&I Bank Northeast M&I Investment Management Corp. M&I Bank South M&I Mortgage Corp. M&I Bank South Central M&I Support Services Corp. M&I Central Bank & Trust Marshall & Ilsley Trust Company M&I Central State Bank Metavante Corporation M&I Citizens American Bank Richter-Schroeder Company, Inc. Subsidiaries Incorporated in Arizona Subsidiaries Organized in Delaware - ------------------------------------ ---------------------------------- M&I Thunderbird Bank M&I Capital Markets Group L.L.C. M&I Insurance Company of Arizona, Inc. M&I Capital Trust A M&I Marshall & Ilsley Trust Company of M&I Northwoods I LLC Arizona M&I Northwoods II LLC M&I Ventures L.L.C. Subsidiaries Incorporated in Florida - ------------------------------------ Marshall & Ilsley Trust Company of Florida Subsidiaries Incorporated in Nevada - ----------------------------------- The registrant has 66 subsidiaries which primarily hold, manage and service investment and mortgage portfolios. Subsidiaries Incorporated in New Subsidiaries Incorporated in Malaysia - -------------------------------- ------------------------------------- Hampshire - --------- 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 National Trust Company EX-23 9 dex23.txt CONSENT OF ARTHUR ANDERSEN 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, 2000, of our report dated January 12, 2001. It should be noted that we have not audited any financial statements of Marshall & Ilsley Corporation and subsidiaries subsequent to December 31, 2000, 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. 333-36846 (Form S-8) pertaining to the M&I 2000 Employee Stock Purchase Plan and M&I 2000 Executive Stock Option and Restricted Stock plan, 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, No. 33-64425 (Form S-3) pertaining to the issuance by M&I of Debt Securities, and No. 333-33814 (Form S-3) pertaining to the issuance by M&I of Debt Securities. Milwaukee, Wisconsin, /s/ ARTHUR ANDERSEN LLP March 8, 2001 EX-24 10 dex24.txt POWERS OF ATTORNEY Exhibit 24 DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ George E. Wardeberg ------------------------------------------ George E. Wardeberg DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Ted D. Kellner ------------------------------------------ Ted D. Kellner DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Wendell F. Bueche ------------------------------------------ Wendell F. Bueche DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Robert A. Schaefer ------------------------------------------ Robert A. Schaefer DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ D.J. Kuester ------------------------------------------ D.J. Kuester DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Oscar C. Boldt ------------------------------------------ Oscar C. Boldt DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Burleigh E. Jacobs ------------------------------------------ Burleigh E. Jacobs DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Stuart W. Tisdale ------------------------------------------ Stuart W. Tisdale DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ J.B. Wigdale ------------------------------------------ J.B. Wigdale DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Don R. O'Hare ------------------------------------------ Don R. O'Hare DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Katharine C. Lyall ------------------------------------------ Katharine C. Lyall DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Timothy E. Hoeksema ------------------------------------------ Timothy E. Hoeksema DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ Peter M. Platten, III ------------------------------------------ Peter M. Platten, III DIRECTOR'S POWER OF ATTORNEY (2000 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, 2000 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 22nd day of February, 2001. /s/ San W. Orr, Jr. ------------------------------------------ San W. Orr, Jr. -----END PRIVACY-ENHANCED MESSAGE-----