-----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, JtSwRLaEo4WUB/6LEy0HtbxspwjLAoKEJtZQsZ/tJ7rjfpuwBKtF8bCKK0eNRzXp SHBz2FXSD0SxnKyvFno+QQ== 0000950131-02-000848.txt : 20020415 0000950131-02-000848.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950131-02-000848 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020311 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: 1934 Act SEC FILE NUMBER: 001-15403 FILM NUMBER: 02572471 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, 2001 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-15403 MARSHALL & ILSLEY CORPORATION (Exact name of registrant as specified in its charter)
Wisconsin 39-0968604 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 770 North Water Street Milwaukee, Wisconsin 53202 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-7801 Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class: on Which Registered: -------------------- ----------------------- Common Stock--$1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X__ No______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by nonaffiliates of the registrant is approximately $6,089,554,000 as of February 28, 2002. The number of shares of common stock outstanding as of February 28, 2002 is 103,913,315. 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 23, 2002. 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, 2001, M&I had consolidated total assets of approximately $27.3 billion and consolidated total deposits of approximately $16.5 billion, making M&I the 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, which, as of December 31, 2001, included Metavante Corporation ("Metavante") (formerly its M&I Data Services Division), two commercial banks, one federal savings bank and a number of companies engaged in businesses that the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") 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, Naples, Florida and the Minneapolis, Minnesota metropolitan area. These subsidiaries offer retail, institutional, international, business and correspondent banking, investment and trust services through the operation of 215 banking offices in Wisconsin, 25 offices in Arizona, one office in Florida, one office in Nevada and two offices in Minnesota. The M&I bank and saving association subsidiaries hold a significant portion of their mortgage loan 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, 2001 of approximately $25.8 billion. Metavante is a major supplier 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, 2001, Metavante had over 3,500 clients in the United States and abroad, including large banks, mid-tier and community banks and other financial services providers. In 2001, Metavante's products and services were used to originate and/or process nearly 7.8 billion transactions for consumer and business customer bank accounts. 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 Marshall & Ilsley Trust Company N.A., the Marshall Funds and other individual, business and institutional customers. Marshall & Ilsley Trust Company N.A., provides trust and employee benefit plan services to customers throughout the United States with offices in Wisconsin, Arizona, Minnesota, Florida, Nevada, North Carolina and Illinois. Diversified Business Credit, Inc. provides working capital loans to commercial borrowers secured by accounts receivable, inventory and other marketable assets. 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 2 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 Community Development Corporation makes investments designed primarily to promote the public welfare in markets and communities served by affiliates and subsidiaries of M&I. M&I Dealer Finance, Inc. provides retail vehicle lease and installment sale financing. M&I First National Leasing Corp. leases a variety of equipment and machinery to large and small businesses. M&I Insurance Services, Inc. provides life, long-term care and disability income insurance products and annuities to retail clients and business owners. M&I Mortgage Corp. originates, purchases, sells and services residential mortgage loans. 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, Inc. originates and services long-term commercial real estate loans for institutional investors. M&I Support Services Corp. provides bank operation support for loan and deposit account processing and maintenance, item processing and other banking services. In recent years, M&I has consolidated many operational activities as part of a continuing process to strengthen its business lines, its products and customer service. In 2001, M&I substantially reduced the number of banking charters under which it operates. Certain subsidiaries of M&I that primarily hold, manage and service investment and mortgage portfolios were also consolidated. M&I expects to continue to consolidate its banking charters to the extent new banks are acquired. Acquisitions M&I has recently expanded its operations into the Minneapolis/St. Paul, Minnesota metropolitan area through a series of acquisitions. On August 1, 2001, M&I acquired National City Bancorporation ("National City"), a bank holding company based in Minneapolis, Minnesota. National City's subsidiaries included National City Bank of Minneapolis, a commercial bank that was subsequently merged into M&I Bank, and Diversified Business Credit, Inc. a commercial finance company. As of June 30, 2001, National City had consolidated total assets of $1.2 billion and consolidated total deposits of $590.2 million. On March 1, 2002, M&I completed a merger with Richfield State Agency, Inc. ("Richfield State Agency"), a bank holding company with offices located in the Minneapolis/St. Paul, Minnesota metropolitan area. Richfield State Agency is the holding company of Richfield Bank and Trust Co. As of December 31, 2001, Richfield State Agency had consolidated total assets of $735.5 million and consolidated total deposits of $547.8 million. Also on March 1, 2002, M&I completed a merger with Century Bancshares, Inc. ("Century Bancshares"), the holding company for Century Bank, National Association, located in the Minneapolis, Minnesota metropolitan area. As of December 31, 2001, Century Bancshares had consolidated total assets of $326.2 million and consolidated total deposits of $280.4 million. Following the acquisitions of National City, Richfield State Agency and Century Bancshares, the number of M&I's banking offices in Minnesota totals twelve. M&I also significantly added to its banking presence in Arizona during 2001 through the purchase of twelve branch offices. These branch acquisitions added approximately $455 million of deposits and $345 million of loans to M&I Bank's Arizona banking operations. During 2001, Metavante strengthened its electronic banking, electronic bill presentment and payment and wealth management businesses through acquisitions. On June 1, 2001, Metavante acquired Derivion Corporation, a provider of electronic bill presentment and payment technology and services. On June 20, 2001, Metavante acquired substantially all of the assets of CyberBills, Inc., a provider of electronic bill presentment and payment technology and services. On September 19, 2001, Metavante acquired substantially all of the assets of the North American Internet banking unit of Brokat Technologies AG, a provider of financial software and services. On 3 December 20, 2001, Metavante acquired 401kservices.com, inc., a third-party administrator of employee benefit plans. M&I continues to evaluate opportunities to acquire banking institutions and other financial service providers and frequently conducts due diligence activities in connection with possible transactions. As a result, M&I may engage in discussions, and in some cases, negotiations with prospective targets and may make future acquisitions for cash, equity or debt securities. The issuance of additional shares of M&I common stock would dilute a shareholder's ownership interest in M&I. In addition, M&I's acquisitions may involve the payment of a premium over book value, and therefore, some dilution of book value may occur with any future acquisition. Generally, it is M&I's policy not to comment on such discussions or possible acquisitions until a definitive agreement has been signed. M&I's strategy for growth includes strengthening its presence in core markets, expanding into contiguous markets and broadening its product offerings. Principal Sources of Revenue The table below shows the amount and percentages of M&I's total consolidated revenues resulting from interest on loans and leases, interest on investment securities and fees for data processing services for each of the last three years ($ in thousands):
Interest on Interest on Fees for Data Loans and Leases Investment Securities Processing Services -------------------- --------------------- ------------------- Percent Percent Percent of Total of Total of Total Total Year Ended Operating Operating Operating Operating December 31 Amount Revenues Amount Revenues Amount Revenues Revenues - ----------- ---------- --------- -------- --------- -------- --------- ---------- 2001.... $1,358,802 50.1% $349,421 12.9% $559,816 20.6% $2,711,919 2000.... 1,391,651 51.9 354,823 13.2 546,041 20.4 2,681,138 1999.... 1,156,775 48.6 337,945 14.2 494,816 20.8 2,379,660
M&I business segment information is contained in Note 22 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 financial services industry are relatively new with limited competition, including private label banking and 4 wealth management solutions. Metavante faces a number of competitors in the electronic bill presentment and payment market. 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, 2001, M&I and its subsidiaries employed in the aggregate 11,657 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 Federal Reserve Board under the BHCA. M&I's two Wisconsin state bank subsidiaries are subject to regulation and examination by the Wisconsin Department of Financial Institutions, as well as by the Federal Reserve Board. M&I's Minnesota state bank subsidiary is subject to regulation and examination by the Minnesota Department of Commerce, as well as by the Federal Deposit Insurance Corporation (the "FDIC"). M&I's federal savings bank subsidiary is subject to regulation and examination by the Office of Thrift Supervision. M&I's national bank and trust company subsidiaries are subject to regulation and examination by the Office of the Comptroller of the Currency. In addition, all of M&I's bank subsidiaries are subject to examination by the FDIC. Under Federal Reserve Board 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, consumer protection laws, privacy of financial information, predatory lending, fair lending, 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, 2001 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 1999, Congress enacted the Gramm-Leach-Bliley Act (the "Act"), which eliminated 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 Federal Reserve Board, 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. 5 Under the Act, a bank holding company may become certified as a financial holding company by filing a notice with the Federal Reserve Board, together with a certification that the bank holding company meets certain criteria, including capital, management, and Community Reinvestment Act requirements. M&I has determined not to become certified as a financial holding company at this time. M&I may reconsider this determination in the future. 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 Federal Reserve Board 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):
2001 2000 1999 ---------- ---------- ---------- U.S. Treasury and government agencies....... $2,268,681 $3,303,366 $3,924,192 States and political subdivisions........... 1,198,685 1,251,359 1,277,638 Other....................................... 850,980 1,235,156 377,289 ---------- ---------- ---------- $4,318,346 $5,789,881 $5,579,119 ========== ========== ==========
6 The maturities, at amortized cost, and weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 35% tax rate) of investment securities at December 31, 2001 are ($ in thousands):
After Five but After One but Within Ten Within One Year Within Five Years Years After Ten Years Total ---------------- ----------------- -------------- --------------- ---------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ---------- ----- ---------- ----- -------- ----- -------- ----- ---------- ----- U.S. Treasury and government agencies.... $ 711,100 6.82% $1,349,328 6.80% $202,473 6.93% $ 5,780 6.93% $2,268,681 6.82% States and political subdivisions........... 70,093 6.76 354,576 6.97 236,214 7.30 537,802 7.45 1,198,685 7.24 Other................... 414,121 7.55 247,654 7.29 59,268 5.87 129,937 3.11 850,980 6.68 ---------- ---- ---------- ---- -------- ---- -------- ---- ---------- ---- $1,195,314 7.07% $1,951,558 6.89% $497,955 6.98% $673,519 6.61% $4,318,346 6.91% ========== ==== ========== ==== ======== ==== ======== ==== ========== ====
Types of Loans and Leases M&I's consolidated loans and leases, classified by type, at December 31 of each year are ($ in thousands):
2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- Commercial, financial and agricultural.................. $ 5,656,384 $ 5,230,795 $ 4,691,996 $ 4,025,663 $ 3,346,101 Industrial development revenue bonds..................... 71,892 58,742 62,861 52,174 49,126 Real estate: Construction....................... 730,864 619,281 494,558 425,442 458,670 Mortgage: Residential...................... 5,563,975 5,049,557 4,941,450 4,045,022 4,146,416 Commercial....................... 5,099,093 4,359,812 4,034,771 3,667,924 3,450,897 ----------- ----------- ----------- ----------- ----------- Total mortgage............... 10,663,068 9,409,369 8,976,221 7,712,946 7,597,313 Personal............................ 1,210,808 1,174,248 1,299,416 1,166,541 1,161,608 Lease financing..................... 962,356 1,094,652 810,009 613,400 489,094 ----------- ----------- ----------- ----------- ----------- 19,295,372 17,587,087 16,335,061 13,996,166 13,101,912 Less: Allowance for loan and lease losses 268,198 235,115 225,862 226,052 208,651 ----------- ----------- ----------- ----------- ----------- Net loans and leases................ $19,027,174 $17,351,972 $16,109,199 $13,770,114 $12,893,261 =========== =========== =========== =========== ===========
7 Loan and Lease Balances and Maturities The analysis of selected loan and lease maturities at December 31, 2001 and the rate structure for the categories indicated are ($ in thousands):
Rate Structure of Loans and Leases Maturity Due After One Year -------------------------------------------- ---------------------------------- Over One With Pre- With One Year Year Through Over Five determined Floating Or Less Five Years Years Total Rate Rate Total ---------- ------------ --------- ---------- ---------- ---------- ---------- Commercial, financial and agricultural...... $3,654,314 $1,816,766 $185,304 $5,656,384 $1,249,732 $ 752,338 $2,002,070 Industrial development revenue bonds......... 2,609 12,907 56,376 71,892 48,694 20,589 69,283 Real estate-construction 274,626 456,238 -- 730,864 187,697 268,541 456,238 Lease financing......... 222,273 659,789 80,294 962,356 740,083 -- 740,083 ---------- ---------- -------- ---------- ---------- ---------- ---------- $4,153,822 $2,945,700 $321,974 $7,421,496 $2,226,206 $1,041,468 $3,267,674 ========== ========== ======== ========== ========== ========== ==========
Notes: (1) Scheduled repayments are reported in the maturity category in which the payments are due based on the terms of the loan agreements. Demand loans, loans having no stated schedule of repayments and no stated maturity, and over-drafts are reported as due in one year or less. (2) Amounts shown for the rate structure of loans and leases due after one year include the estimated effect arising from the use of interest rate swaps. Nonaccrual, Past Due and Restructured Loans and Leases Generally, a loan is placed on nonaccrual if payment of interest is more than 60 days delinquent and the loan has been determined by management to be a "problem" loan. In addition, loans which are past due 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, 2001 the Corporation had $67.1 million of loans for which payments are presently current, but the borrowers are experiencing financial problems. These loans are subject to constant management attention and their classification is reviewed on a quarterly basis. Deposits The average amount of and the average rate paid on selected deposit categories for each of the years ended December 31 is as follows ($ in thousands):
2001 2000 1999 ---------------- ---------------- ---------------- Amount Rate Amount Rate Amount Rate ----------- ---- ----------- ---- ----------- ---- Noninterest bearing demand deposits $ 2,895,083 $ 2,648,419 $ 2,663,609 Interest bearing demand deposits... 1,088,186 1.21% 1,069,958 1.66% 1,116,919 1.54% Savings deposits................... 6,419,204 3.21 6,017,730 4.82 5,740,898 3.86 Time deposits...................... 6,788,118 5.12 7,761,676 5.98 6,635,476 5.23 ----------- ----------- ----------- Total deposits..................... $17,190,591 $17,497,783 $16,156,902 =========== =========== ===========
8 The maturity distribution of time deposits (CDs $100,000 and over and other time) issued in amounts of $100,000 and over and outstanding at December 31, 2001 ($ in thousands) is: Three months or less.................................. $ 450,453 Over three and through six months..................... 274,020 Over six and through twelve months.................... 250,439 Over twelve months.................................... 351,224 ---------- $1,326,136 ==========
At December 31, 2001, time deposits issued by foreign offices totaled $0.8 billion. Short-Term Borrowings Information related to M&I's funds purchased and security repurchase agreements for the last three years is as follows ($ in thousands):
2001 2000 1999 ---------- ---------- ---------- Amount outstanding at year end................ $1,090,150 $1,092,723 $1,402,077 Average amount outstanding during the year.... 2,076,787 2,211,537 2,276,978 Maximum amount outstanding at any month's end. 2,760,183 2,767,114 2,609,501 Weighted average interest rate at year end.... 1.20% 5.91% 3.95% Weighted average interest rate during the year 3.93 6.28 5.00
Information relating to the Corporation's other short-term borrowings is included in Note 12 to the Consolidated Financial Statements in Item 8. 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 the following: M&I's earnings are significantly affected by general business and economic conditions. M&I's business and earnings are sensitive to general business and economic conditions in the United States and, in particular, the states where it has significant operations, including Wisconsin, Minnesota and Arizona. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, the strength of the U.S. and local economies and consumer spending, borrowing and saving habits. For example, an economic downturn or higher interest rates could decrease the demand for loans and other products and services and/or result in a deterioration in credit quality and/or loan performance 9 and collectability. Higher interest rates also could increase M&I's cost to borrow funds and increase the rate M&I pays on deposits. The long-term economic and political effects of recent terrorist attacks on the United States and an economic slowdown could negatively affect M&I's financial condition. On September 11, 2001, New York City and Washington, D.C. suffered serious terrorist attacks. The long-term economic and political impact of these acts has yet to be determined, and the ultimate cost associated with these attacks and related incidents may place significant burdens on the United States economy as a whole. The potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility have created many economic and political uncertainties. These events could adversely affect M&I's business and operating results in other ways that presently cannot be predicted. In addition, an overall economic slowdown could negatively impact the purchasing and decision making activities of Metavante's financial institution customers. If these prior acts or additional terrorist attacks or other factors cause an overall economic decline, the financial condition and operating results of M&I could be materially adversely affected. M&I earnings also are significantly affected by the fiscal and monetary policies of the federal government and its agencies. The policies of the Federal Reserve Board impact M&I significantly. The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest paid on interest-bearing deposits and can also affect the value of financial instruments M&I holds. Those policies determine to a significant extent M&I's cost of funds for lending and investing. Changes in those policies are beyond M&I's control and are difficult to predict. Federal Reserve Board policies can affect M&I's borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve Board could reduce the demand for a borrower's products and services. This could adversely affect the borrower's earnings and ability to repay its loan. The banking and financial services industry is highly competitive. M&I operates in a highly competitive environment in the products and services M&I offers and the markets in which M&I operates. The competition among financial services providers to attract and retain customers is intense. Customer loyalty can be easily influenced by a competitor's new products, especially offerings that provide cost savings to the customer. Some of M&I's competitors may be better able to provide a wider range of products and services over a greater geographic area. M&I believes the banking and financial services industry will become even more competitive as a result of legislative, regulatory and technological changes and the continued consolidation of the industry. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Also, investment banks and insurance companies are competing in more banking businesses such as syndicated lending and consumer banking. Many of M&I's competitors are subject to fewer regulatory constraints and have lower costs structures. M&I expects the consolidation of the banking and financial services industry to result in larger, better-capitalized companies offering a wide array of financial services and products. The Gramm-Leach-Bliley Act permits banks, securities firms and insurance companies to merge by creating a new type of financial services company called a financial holding company. Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Under the Act, securities firms and insurance companies that elect to become a financial holding company can acquire banks and other financial institutions. The Act may significantly change M&I's competitive environment. 10 M&I is heavily regulated by federal and state agencies. The holding company, its subsidiary banks and many of its non-bank subsidiaries are heavily regulated at the federal and state levels. This regulation is designed primarily to protect consumers, depositors and the banking system as a whole, not stockholders. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect M&I in substantial and unpredictable ways including limiting the types of financial services and products M&I may offer, increasing the ability of non-banks to offer competing financial services and products and/or increasing M&I's cost structures. Also, M&I's failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies and damage to its reputation. Consumers may decide not to use banks to complete their financial transactions. Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, consumers can now pay bills and transfer funds directly without banks. The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. Maintaining or increasing M&I's market share depends on market acceptance and regulatory approval of new products and services and other factors. M&I's success depends in part on its ability to adapt its products and services to evolving industry standards and to control expenses. There is increasing pressure on financial services companies to provide products and services at lower prices. This can reduce M&I's net interest margin and revenues from its fee-based products and services. In addition, M&I's success depends in part on its ability to generate significant levels of new business in its existing markets and in identifying and penetrating markets. Further, the widespread adoption of new technologies, including Internet-based services, could require M&I to make substantial expenditures to modify or adapt its existing products and services. M&I may not successfully introduce new products and services, achieve market acceptance of its products and services, develop and maintain loyal customers and/or break into targeted markets. The holding company relies on dividends from its subsidiaries for most of its revenue, and the banking subsidiaries hold a significant portion of their assets indirectly. The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the holding company's common stock and interest on its debt. The payment of dividends by a subsidiary is subject to federal law restrictions as well as to the laws of the subsidiary's state of incorporation. Also, a parent company's right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. In addition, the M&I bank and savings association subsidiaries hold a significant portion of their mortgage loan and investment portfolios indirectly through their ownership interests in direct and indirect subsidiaries. M&I has an active acquisition program. M&I regularly explores opportunities to acquire banking institutions and other financial services providers. M&I cannot predict the number, size or timing of future acquisitions. M&I typically does not publicly comment on a possible acquisition or business combination until it has signed a definitive agreement for the transaction. Difficulty in integrating an acquired company many cause M&I not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition. 11 Specifically, the integration process could result in higher than expected deposit attrition (run-off), loss of key employees, the disruption of M&I's business or the business of the acquired company, or otherwise adversely affect M&I's ability to maintain existing relationships with clients, employees and suppliers or to enter into new business relationships. These factors could contribute to M&I not achieving the anticipated benefits of the acquisition within the desired time frames, if at all. Future acquisitions could require M&I to use substantial cash or liquid assets or to incur debt. In such cases, M&I could become more susceptible to economic downturns and competitive pressures. M&I is dependent on senior management. M&I's continued success depends to a significant extent upon the continued services of its senior management. The loss of services of any of M&I's senior executive officers could cause M&I's business to suffer. In addition, M&I's success depends in part upon senior management's ability to implement M&I's business strategy. M&I's stock price can be volatile. M&I's stock price can fluctuate widely in response to a variety of factors including: . actual or anticipated variations in M&I's quarterly operating results; . new technology or services by M&I's competitors; . significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving M&I or its competitors; . changes in accounting policies or practices; . failure to integrate M&I's acquisitions or realize anticipated benefits from M&I's acquisitions; or . changes in government regulations. General market fluctuations, industry factors and general economic and political conditions, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, also could cause M&I's stock price to decrease regardless of its operating results. M&I may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on its business, operating results and financial condition. M&I and its subsidiaries may be involved from time to time in a variety of litigation arising out of M&I's business. M&I's insurance may not cover all claims that may be asserted against it, and any claims asserted against M&I, regardless of merit or eventual outcome, may harm M&I's reputation. Should the ultimate judgements or settlements in any litigation exceed M&I's insurance coverage, they could have a material effect on M&I's business, operating results and financial condition. In addition, M&I may not be able to obtain appropriate types or levels of insurance in the future, nor may M&I be able to obtain adequate replacement policies with acceptable terms, if at all. 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 forward-looking statements: Metavante relies on the continued functioning of its data centers and the integrity of the data it processes. Metavante's data centers are an integral part of its business. Damage to Metavante's data centers, particularly its Wisconsin data centers, due to fire, power loss, telecommunications failure and other disasters 12 could have a material adverse effect on Metavante's business, operating results and financial condition. In addition, because Metavante relies on the integrity of the data it processes, if this data is incorrect or somehow tainted, client relations and confidence in Metavante's services could be impaired, which would harm Metavante's business. Network operational difficulties or security problems could damage Metavante's reputation and business. Metavante depends on the reliable operation of network connections from its clients and its clients' end users to its systems. Any operational problems or outages in these systems would cause Metavante to be unable to process transactions for its clients and its clients' end users, resulting in decreased revenues. In addition, any system delays, failures or loss of data, whatever the cause, could reduce client satisfaction with Metavante's products and services and harm Metavante's financial results. Metavante also depends on the security of its systems. Metavante's networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Metavante transmits confidential financial information in providing its services. A material security problem affecting Metavante could damage its reputation, deter financial services providers from purchasing its products, deter their customers from using its products or result in liability to Metavante. Any material security problem affecting Metavante's competitors could affect the marketplace's perception of Internet banking and electronic commerce service in general and have the same effects. Metavante may not be able to protect its intellectual property, and Metavante may be subject to infringement claims. Metavante relies on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect its proprietary technology. Despite Metavante's efforts to protect its intellectual property, third parties may infringe or misappropriate Metavante's intellectual property or may develop software or technology competitive to Metavante's. Metavante's competitors may independently develop similar technology, duplicate its products or services or design around Metavante's intellectual property rights. Metavante may have to litigate to enforce and protect its intellectual property rights, trade secrets and know-how or to determine their scope, validity or enforceability, which is expensive, could cause a diversion of resources and may not prove successful. The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm Metavante's business and ability to compete. Metavante also may be subject to costly litigation in the event its products or technology infringe upon another party's proprietary rights. Third parties may have, or may eventually be issued, patents that would be infringed by Metavante's products or technology. Any of these third parties could make a claim of infringement against Metavante with respect to its products or technology. Any such claims and any resulting litigation could subject Metavante to significant liability for damages. An adverse determination in any litigation of this type could require Metavante to design around a third party's patent or to license alternative technology from another party. In addition, litigation is time consuming and expensive to defend and could result in the diversion of Metavante's time and attention. Any claims from third parties may also result in limitations on Metavante's ability to use the intellectual property subject to these claims. Metavante's business could suffer if it fails to attract and retain key technical people. Metavante's success depends in large part upon Metavante's ability to attract and retain highly skilled technical, management and sales and marketing personnel. Because the development of Metavante's products and services requires knowledge of computer hardware, operating system software, system management software and application software, key technical personnel must be proficient in a number of disciplines. Competition for the best people--in particular individuals with technology experience--is intense. Metavante may not be able to hire key people or pay them enough to keep them. 13 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 throughout Wisconsin, 25 offices in the Phoenix and Tucson, Arizona metropolitan areas and two offices in the Minneapolis, Minnesota metropolitan area. M&I Bank of Mayville, a special limited purpose subsidiary of M&I located in Mayville, Wisconsin, and M&I Bank FSB, a federal savings bank subsidiary of M&I located in Las Vegas, Nevada with branches in Naples, Florida and Milwaukee, Wisconsin, occupy modern facilities which are leased. Metavante owns a data processing facility located in Brown Deer, a suburb of Milwaukee, from which Metavante conducts data processing activities and a facility in Milwaukee that houses its software development teams. Properties leased by Metavante also include commercial office space in Brown Deer and Milwaukee, a data processing site in Oak Creek, Wisconsin, and processing centers and sales offices in various cities throughout the United States. The foregoing paragraph describes M&I's properties as of December 31, 2001. ITEM 3. LEGAL PROCEEDINGS M&I is not currently involved in any material pending legal proceedings other than litigation of a routine nature and various legal matters which are being defended and handled in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. Executive Officers of the Registrant
Name of Officer Office --------------- ------ James B. Wigdale Chairman of the Board since December 1992, Chief Executive Officer from October Age 65 1992 to December 2001, Director since December 1988, Vice Chairman of the Board, December 1988 to December 1992, Marshall & Ilsley Corporation; Chairman of the Board from January 1989 to October 2001, Chief Executive Officer from 1987 to October 2001, Director since 1981, M&I Marshall & Ilsley Bank; Director and President, M&I Ventures L.L.C. and M&I Capital Markets Group L.L.C.; Director, Metavante Corporation, M&I Brokerage Services, Inc., Marshall & Ilsley Trust Company N.A., M&I Investment Management Corp. and M&I Insurance Services, Inc. Dennis J. Kuester Chief Executive Officer since January 2002, President since 1987, Director since Age 60 February 1994, Marshall & Ilsley Corporation; Chairman and Chief Executive Officer since October 2001, President from January 1989 to October 2001, Director since January 1989, M&I Marshall & Ilsley Bank; Chairman of the Board and Director, Metavante Corporation; Director, M&I Support Services Corp., Marshall & Ilsley Trust Company N.A. and M&I Investment Management Corp.; Director and President, M&I Insurance Company of Arizona, Inc.; Director and Treasurer, M&I Ventures L.L.C. and M&I Capital Markets Group L.L.C.
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Name of Officer Office --------------- ------ Thomas M. Bolger Executive Vice President since October 2001, Senior Vice President and Chief Credit Age 51 Officer from 1994 to October 2001, Marshall & Ilsley Corporation; President and Director since October 2001, Executive Vice President from 1997 to October 2001, M&I Marshall & Ilsley Bank; Director, M&I First National Leasing Corp., M&I Support Services Corp., Metavante Corporation, Marshall & Ilsley Trust Company N.A., M&I Bank of Mayville, Diversified Business Credit, Inc. and M&I Investment Management Corp. Joseph L. Delgadillo Senior Vice President of Marshall & Ilsley Corporation since 1993; Chief Executive Age 49 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, Metavante International, Inc. since 1996; Director, Metavante 401kservices, Inc. and Customers Forever, LLC. Mark F. Furlong Executive Vice President, Chief Financial Officer and Secretary of Marshall & Ilsley Age 44 Corporation since 2001; Director, Marshall & Ilsley Trust Company N.A., Metavante Corporation and M&I Investment Management Corp.; Executive Vice President and Chief Financial Officer of Old Kent Financial Corporation from 1998 to 2001; First Vice President/Director of Corporate Development/Commercial Banking of H.F. Ahmanson & Co. from 1992 to 1998. Mark R. Hogan Senior Vice President and Chief Credit Officer since October 2001, Marshall & Ilsley Age 47 Corporation; Senior Vice President and Chief Credit Officer since November 1995, M&I Marshall & Ilsley Bank; Director, M&I First National Leasing Corp. and Diversified Business Credit, Inc. Patricia R. Justiliano Senior Vice President since 1994 and Corporate Controller since April 1989, Vice Age 51 President from 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. and M&I Mortgage Reinsurance Corporation; Director, M&I Bank FSB, M&I Mortgage Corp. and M&I Bank of Mayville. Thomas J. O'Neill Senior Vice President since April 1997, Marshall & Ilsley Corporation; Executive Vice Age 41 President since 2000, Senior Vice President since 1997, Vice President since 1990, M&I Marshall & Ilsley Bank; President and Director, M&I Mortgage Corp., M&I Bank FSB, M&I Dealer Finance, Inc. and M&I Mortgage Reinsurance Corporation; Director, M&I Support Services Corp., M&I Brokerage Services, Inc., M&I Insurance Services, Inc., M&I Bank of Mayville and M&I Community Development Corporation. Paul J. Renard Senior Vice President, Director of Human Resources since 2000, Vice President and Age 41 Manager since 1994, Marshall & Ilsley Corporation. John L. Roberts Senior Vice President, Marshall & Ilsley Corporation since 1994; Senior Vice President Age 49 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 and M&I Mortgage Corp,; President and Director, M&I Bank of Mayville. Thomas A. Root Senior Vice President since 1998, Audit Director since May 1996, Vice President from Age 45 1991 to 1998, Marshall & Ilsley Corporation; Vice President and Auditor since 1993, M&I Marshall & Ilsley Bank. Leigh I. Sherman Senior Vice President, Director of Marketing since 1996, Marshall & Ilsley Age 53 Corporation.
15
Name of Officer Office --------------- ------ Jeffrey V. Williams Senior Vice President since December 1997, Marshall & Ilsley Corporation; Executive Age 57 Vice President and Chief Operating Officer since January 1999, Marshall & Ilsley Trust Company N.A.; 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, Marshall & Ilsley Trust Company N.A.; Director, M&I Capital Markets Group L.L.C., M&I Portfolio Services, Inc., M&I Investment Management Corp., M&I Ventures L.L.C. and M&I Insurance Services, Inc. Donald H. Wilson Senior Vice President and Treasurer since December 1996, Vice President and Age 42 Treasurer since 1995, Marshall & Ilsley Corporation; Director, M&I Custody of Nevada, Inc., M&I Bank FSB, M&I Community Development Corporation and M&I Mortgage Corp.
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, 2001 M&I had approximately 19,311 record holders of its common stock. 16 ITEM 6. SELECTED FINANCIAL DATA Consolidated Summary of Operating Earnings Years Ended December 31 ($000's except share data)
2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- Interest Income: Loans and Leases........................ $1,358,798 $1,391,651 $1,156,775 $1,085,829 $ 921,161 Investment Securities Taxable.............................. 270,336 272,536 269,668 280,377 240,238 Tax Exempt........................... 62,273 65,429 58,820 52,969 45,420 Other Short-term Investments............ 17,696 18,366 11,321 14,869 13,514 ---------- ---------- ---------- ---------- ---------- Total Interest Income................ 1,709,103 1,747,982 1,496,584 1,434,044 1,220,333 Interest Expense: Deposits................................ 566,899 772,016 585,864 564,540 460,418 Short-term Borrowings................... 188,587 224,187 142,294 126,624 111,193 Long-term Borrowings.................... 110,814 78,773 63,145 66,810 54,175 ---------- ---------- ---------- ---------- ---------- Total Interest Expense............... 866,300 1,074,976 791,303 757,974 625,786 ---------- ---------- ---------- ---------- ---------- Net Interest Income......................... 842,803 673,006 705,281 676,070 594,547 Provision for Loan and Lease Losses......... 54,115 30,352 25,419 27,090 17,633 ---------- ---------- ---------- ---------- ---------- Net Interest Income After Provision for Loan and Lease Losses.......................... 788,688 642,654 679,862 648,980 576,914 Other Income: Data Processing Services.................. 559,816 546,041 494,816 421,945 344,362 Trust Services............................ 120,827 117,680 100,963 88,496 78,595 Net Securities Gains (Losses)............. (1,113) 1,051 (4,083) 7,145 (2,578) Other..................................... 339,339 318,950 291,380 276,914 213,732 ---------- ---------- ---------- ---------- ---------- Total Other Income................... 1,018,869 983,722 883,076 794,500 634,111 Other Expense: Salaries and Benefits..................... 678,493 627,394 587,711 523,606 460,164 Other..................................... 518,934 461,388 447,288 431,216 362,689 ---------- ---------- ---------- ---------- ---------- Total Other Expense.................. 1,197,427 1,088,782 1,034,999 954,822 822,853 ---------- ---------- ---------- ---------- ---------- Income Before Income Taxes.................. 610,130 537,594 527,939 488,658 388,172 Provision for Income Taxes.................. 204,509 175,958 173,428 171,067 131,487 ---------- ---------- ---------- ---------- ---------- Operating Income............................ $ 405,621 $ 361,636 $ 354,511 $ 317,591 $ 256,685 ========== ========== ========== ========== ========== Accounting Changes & Special Charges........ (68,136) (46,513) -- (16,268) -- ---------- ---------- ---------- ---------- ---------- Net Income.................................. $ 337,485 $ 315,123 $ 354,511 $ 301,323 $ 256,685 ========== ========== ========== ========== ========== Per Share: Basic Operating Income.................... $ 3.85 $ 3.44 $ 3.32 $ 2.94 $ 2.62 Basic Net Income.......................... 3.20 2.99 3.32 2.79 2.62 Diluted Operating Income.................. 3.72 3.32 3.14 2.76 2.43 Diluted Net Income........................ 3.09 2.89 3.14 2.61 2.43 Common Dividends Declared................. 1.135 1.035 0.940 0.860 0.785 Other Significant Data: Year-End Common Stock Price............... $ 63.28 $ 50.83 $ 62.81 $ 58.44 $ 62.13 Return on Average Shareholders' Equity*... 16.70% 16.84% 16.32% 14.89% 16.49% Return on Average Assets*................. 1.54 1.44 1.56 1.53 1.51 Dividend Payout Ratio..................... 36.73 35.81 29.94 32.95 32.30 Average Equity to Average Assets Ratio.... 9.21 8.58 9.57 10.26 9.15 Ratio of Earnings to Fixed Charges** Excluding Interest on Deposits.......... 2.56x 2.46x 3.38x 3.25x 3.21x Including Interest on Deposits.......... 1.56x 1.43x 1.65x 1.60x 1.61x
- -------- * Based on Operating Income ** See Exhibit 12 for detailed computation of these ratios. 17 Consolidated Average Balance Sheets Years ended December 31 ($000's except share data)
2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ----------- Assets: Cash and Due from Banks.................. $ 651,367 $ 615,015 $ 638,399 $ 652,988 $ 614,824 Short-term Investments................... 503,857 265,487 186,106 247,049 206,295 Trading Securities....................... 21,284 30,926 37,276 43,404 40,822 Investment Securities:................... Taxable............................... 3,926,737 4,063,774 4,208,498 4,317,668 3,570,225 Tax Exempt............................ 1,269,175 1,327,159 1,217,847 1,078,333 913,130 Loans and Leases: Commercial............................ 5,478,342 4,975,482 4,359,880 3,749,518 3,128,568 Real Estate........................... 10,514,536 9,958,164 8,639,360 7,967,626 6,309,818 Personal.............................. 1,182,049 1,245,738 1,204,931 1,154,110 1,147,203 Lease Financing....................... 1,026,215 938,525 705,054 532,043 394,024 ------------ ------------ ------------ ------------ ----------- Total Loans and Leases................... 18,201,142 17,117,909 14,909,225 13,403,297 10,979,613 Allowance for Loan and Lease Losses...... 253,089 233,466 228,500 216,456 174,525 ------------ ------------ ------------ ------------ ----------- Net Loans and Leases..................... 17,948,053 16,884,443 14,680,725 13,186,841 10,805,088 Other Assets............................. 2,049,836 1,854,973 1,732,112 1,263,890 851,030 ------------ ------------ ------------ ------------ ----------- Total Assets....................... $ 26,370,309 $ 25,041,777 $ 22,700,963 $ 20,790,173 $17,001,414 ============ ============ ============ ============ =========== Liabilities and Shareholders' Equity: Noninterest Bearing Deposits............. $ 2,895,083 $ 2,648,419 $ 2,663,609 $ 2,545,724 $ 2,301,097 Interest Bearing Deposits: Savings and NOW accounts.............. 1,775,596 1,845,916 2,027,658 2,140,380 1,915,888 Money Market Savings.................. 5,731,794 5,241,772 4,830,159 4,135,143 3,022,944 CDs of $100 or more................... 2,237,243 2,303,442 1,694,301 1,547,816 1,334,532 Other................................. 4,550,875 5,458,234 4,941,175 4,388,152 3,665,334 ------------ ------------ ------------ ------------ ----------- Total Deposits........................... 17,190,591 17,497,783 16,156,902 14,757,215 12,239,795 Short-term Borrowings.................... 3,944,160 3,538,846 2,803,834 2,357,161 2,017,829 Long-term Borrowings..................... 1,962,801 1,178,805 1,009,132 1,046,321 787,819 Accrued Expenses and Other Liabilities... 843,198 678,269 558,978 496,439 399,605 Shareholders' Equity..................... 2,429,559 2,148,074 2,172,117 2,133,037 1,556,366 ------------ ------------ ------------ ------------ ----------- Total Liabilities and Shareholders' Equity.............. $ 26,370,309 $ 25,041,777 $ 22,700,963 $ 20,790,173 $17,001,414 ============ ============ ============ ============ =========== Other Significant Data: Book Value Per Share at Year End......... $ 23.30 $ 21.19 $ 19.47 $ 19.88 $ 17.94 Average Common Shares Outstanding........ 104,293,908 104,100,652 104,940,787 105,918,139 95,831,283 Employees at Year End*................... 11,657 11,753 11,433 10,756 10,227 Historically Reported Credit Quality Ratios:* Net Loan and Lease Charge-offs to Average Loans and Leases................ 0.22% 0.12% 0.17% 0.07% 0.13% Total Nonperforming Loans and Leases** & OREO to End of Period Loans and Leases & OREO................. 0.94 0.76 0.75 0.85 0.70 Allowance for Loan and Lease Losses to End of Period Loans and Leases.......... 1.39 1.34 1.38 1.62 1.62 Allowance for Loan and Lease Losses to Total Nonperforming Loans and Leases**................................ 154 182 193 206 275
- -------- * Not restated for acquisitions accounted for as pooling of interests. ** Loans and leases nonaccrual, restructured, and past due 90 days or more. 18 Yield & Cost Analysis Years ended December 31 (Tax equivalent basis)
2001 2000 1999 1998 1997 ----- ----- ----- ----- ----- Average Rates Earned: Loans........................................................ 7.48% 8.14% 7.77% 8.12% 8.41% Investment Securities--Taxable............................... 7.05 6.62 6.42 6.52 6.79 Investment Securities--Tax Exempt............................ 7.26 7.16 7.13 7.44 7.40 Trading Securities........................................... 4.21 4.92 5.08 5.13 5.01 Short-term Investments....................................... 3.34 6.35 5.08 5.13 5.57 Average Rates Paid: Interest Bearing Deposits.................................... 3.97% 5.20% 4.34% 4.62% 4.63% Short-term Borrowings........................................ 4.78 6.34 5.07 5.37 5.51 Long-term Borrowings......................................... 5.65 6.68 6.26 6.39 6.88 M&I Marshall & Ilsley Bank Average Prime Rate................ 6.91 9.24 8.02 8.35 8.44 Summary Yield and Cost Analysis: (As a % of Average Assets) Average Yield................................................ 6.60% 7.10% 6.72% 7.02% 7.31% Average Cost................................................. 3.29 4.29 3.49 3.64 3.68 ----- ----- ----- ----- ----- Net Interest Income.......................................... 3.31 2.81 3.23 3.38 3.63 Provision for Loan and Lease Losses.......................... 0.21 0.12 0.11 0.13 0.10 ----- ----- ----- ----- ----- Net Interest Income After Provision for Loan and Lease Losses 3.10 2.69 3.12 3.25 3.53 Net Securities Gains (Losses)................................ -- -- (0.02) 0.03 (0.02) Other Income................................................. 3.87 3.93 3.91 3.79 3.75 Other Expense................................................ 4.54 4.35 4.56 4.59 4.84 ----- ----- ----- ----- ----- Income Before Income Taxes................................... 2.43 2.27 2.45 2.48 2.42 Provision for Income Taxes................................... 0.89 0.83 0.89 0.95 0.91 ----- ----- ----- ----- ----- Operating Income............................................. 1.54% 1.44% 1.56% 1.53% 1.51% ===== ===== ===== ===== ===== Accounting Changes & Special Charges......................... (0.26) (0.18) -- (0.08) -- ----- ----- ----- ----- ----- Net Income................................................. 1.28% 1.26% 1.56% 1.45% 1.51% ===== ===== ===== ===== =====
19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Net income in 2001 amounted to $337.5 million or $3.09 per share on a diluted basis. The return on average assets and return on average equity were 1.28% and 13.89%, respectively. By comparison, 2000 net income was $315.1 million, diluted earnings per share was $2.89, the return on average assets was 1.26% and the return on average equity was 14.67%. For the year ended December 31, 1999, net income was $354.5 million or $3.14 per share diluted and the returns on average assets and average equity were 1.56% and 16.32%, respectively. The results of operations and financial position for the periods presented include the effects of the six acquisitions by the Metavante subsidiary of the Corporation as well as the two banking related acquisitions from the dates of merger. All transactions were accounted for as purchases. Net income for the year ended December 31, 2001 includes certain losses and expenses incurred in connection with the previously announced structural changes and acquisitions at the Corporation's Metavante subsidiary, auto lease residual value write-downs, the cumulative effect of the change in accounting for derivatives and hedging activities and the final charges for the banking charter consolidation completed during the second quarter. Net income for the year ended December 31, 2000 includes the cumulative effect of the change in accounting for certain conversion services provided by Metavante, securities losses and losses from the sale of ARM loans, single charter expenses and expenses incurred for the withdrawn IPO of Metavante. The following is a summary of the unusual items reported in 2001 and 2000 and the comparative operating income, earnings per share and return on average equity based on operating income for 2001, 2000, and 1999.
Pre-tax effect 2001 2000 1999 -------------- ------ ------ ------ ($ in millions, except per share data) Income as reported........................ $337.5 $315.1 $354.5 Nonoperating losses and expenses: Metavante: Reduction in force and realignment... $11.0 Investment losses.................... 16.0 Acquisition related.................. 45.0 IPO expenses--2000................... 4.5 ----- ------ ------ ------ Total Metavante........................ 76.5 43.4 3.1 -- Balance Sheet Management: Investment losses.................... 50.6 32.9 Losses from sale of ARM loans........ 3.1 2.0 Auto lease residual value write-downs.. 25.0 15.8 Charter Consolidation: 2001................................. 12.0 8.5 2000................................. 9.1 6.2 Change in accounting: Derivative and hedging activities.... 0.7 0.4 Conversion services--Metavante....... 3.8 2.3 ------ ------ ------ Total nonoperating losses and expenses... 68.1 46.5 -- ------ ------ ------ Operating income.......................... $405.6 $361.6 $354.5 ====== ====== ====== Operating income per share: Basic.................................... $ 3.85 $ 3.44 $ 3.32 Diluted.................................. 3.72 3.32 3.14 Operating income to average equity........ 16.70% 16.84% 16.32%
20 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. As more fully discussed in Note 1 to the Consolidated Financial Statements in Item 8, beginning January 1, 2002, intangibles with indefinite lives including certain goodwill will no longer be amortized in accordance with SFAS 142. The effect of SFAS 142 is depicted as pro forma operating income in the following table: Summary Consolidated Tangible Operating Income and Financial Statistics ($ in millions, except per share data)
2001 2000 1999 ------ ------ ------ Operating income................... $405.6 $361.6 $354.5 SFAS142 amortization, net of tax... 15.4 14.7 18.1 ------ ------ ------ Pro forma operating income......... 421.0 376.3 372.6 Other amortization, net of tax..... 5.6 4.5 5.7 ------ ------ ------ Tangible operating income.......... $426.6 $380.8 $378.3 ====== ====== ====== Tangible operating income per share Basic........................... $ 4.05 $ 3.62 $ 3.55 Diluted......................... 3.91 3.50 3.35 Return on average tangible assets.. 1.64% 1.54% 1.69% Return on average tangible equity.. 20.90 20.78 20.49
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, 2001, 2000 and 1999. 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 2001 and 2000 as previously discussed.
2001 2000 1999 ----- ----- ----- Interest income.................... 6.60% 7.10% 6.72% Interest expense................... (3.29) (4.29) (3.49) ----- ----- ----- Net interest income................ 3.31 2.81 3.23 Provision for loan and lease losses (0.21) (0.12) (0.11) Net securities losses.............. -- -- (0.02) Other income....................... 3.87 3.93 3.91 Other expense...................... (4.54) (4.35) (4.56) ----- ----- ----- Income before income taxes......... 2.43 2.27 2.45 Income taxes....................... (0.89) (0.83) (0.89) ----- ----- ----- Operating income to average assets. 1.54% 1.44% 1.56% ===== ===== =====
21 Net Interest Income Net interest income in 2001 amounted to $842.8 million compared with net interest income of $673.0 million in 2000, an increase of $169.8 million or 25.2%. Average earning assets in 2001 amounted to $23.9 billion compared to $22.8 billion in 2000, an increase of $1.1 billion or 4.9%. Average loans and leases accounted for all of the growth in earning assets. 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. Average interest bearing liabilities increased $0.6 billion or 3.2% in 2001 compared to 2000. Average interest bearing deposits decreased $0.6 billion. Average short-term borrowings increased $405 million while average long-term borrowings increased $784 million. Average noninterest bearing deposits increased $247 million or 9.3% compared to the prior year. The growth and composition of the Corporation's average loan and lease portfolio for the current year and prior two years are reflected in the following table ($ in millions):
Percent Growth ------------ 2001 2000 vs vs 2001 2000 1999 2000 1999 --------- --------- --------- ----- ----- Commercial: Commercial.............................. $ 5,478.3 $ 4,975.5 $ 4,359.9 10.1% 14.1% Commercial real estate: Commercial mortgages.................. 4,740.7 4,182.6 3,845.3 13.3 8.8 Construction.......................... 521.9 433.3 329.8 20.4 31.4 --------- --------- --------- ----- ----- Total commercial real estate............ 5,262.6 4,615.9 4,175.1 14.0 10.6 Commercial lease financing.............. 390.3 353.2 335.0 10.5 5.4 --------- --------- --------- ----- ----- Total commercial.......................... 11,131.2 9,944.6 8,870.0 11.9 12.1 Personal: Residential real estate: Residential mortgages................. 2,384.9 2,945.2 2,461.6 (19.0) 19.6 Construction.......................... 127.6 114.5 100.2 11.4 14.2 --------- --------- --------- ----- ----- Total residential real estate........... 2,512.5 3,059.7 2,561.8 (17.9) 19.4 Consumer loans: Student............................... 116.0 185.2 257.9 (37.3) (28.2) Credit card........................... 177.5 165.6 139.2 7.2 19.0 Home equity loans and lines........... 2,739.4 2,282.6 1,902.4 20.0 20.0 Other................................. 888.6 894.9 807.9 (0.7) 10.8 --------- --------- --------- ----- ----- Total consumer loans.................... 3,921.5 3,528.3 3,107.4 11.1 13.5 Personal lease financing................ 635.9 585.3 370.0 8.7 58.2 --------- --------- --------- ----- ----- Total personal............................ 7,069.9 7,173.3 6,039.2 (1.4) 18.8 --------- --------- --------- ----- ----- Total consolidated average loans and leases $18,201.1 $17,117.9 $14,909.2 6.3% 14.8% ========= ========= ========= ===== =====
Compared to 2000, average loans and leases increased $1.1 billion or 6.3%. Approximately 44% or $0.5 billion of average loan growth was due to the acquisitions of National City Bancorporation in Minnesota and branch acquisitions in Arizona, which were all accounted for using the purchase method of accounting. At the time of purchase, over $1 billion in loans were acquired. Excluding the acquisitions, total commercial loan 22 growth amounted to $0.8 billion and was driven by commercial real estate loan and commercial real estate construction loan growth of $0.6 billion. Average personal loans declined $0.2 billion, excluding acquisitions, largely due to accelerated prepayments combined with the strategy to sell new production of residential mortgages. For the second year in a row, home equity loans and lines exhibited double digit growth fueled in part by the acquisition of home equity loans and lines in support of its private-label banking services in the fourth quarter of 2000. Generally, the Corporation sells residential real estate loan production in the secondary market. Residential real estate loans originated and sold to investors amounted to $2.4 billion in 2001 compared to $0.6 billion in 2000. At December 31, 2001, the Corporation had approximately $0.3 billion of mortgage loans held for sale. During the third quarter of 2000, the Corporation began securitizing its monthly production of indirect automobile loans. Auto loans securitized and sold in 2001 amounted to $382 million. Approximately $46 million and $150 million of student loans were sold in 2001 and 2000, respectively. The Corporation anticipates that it will continue to divest of lower yielding assets through sale or securitization in future periods. The growth and composition of the Corporation's consolidated average deposits for the current year and prior two years are reflected below ($ in millions):
Percent Growth ------------ 2001 2000 vs vs 2001 2000 1999 2000 1999 --------- --------- --------- ----- ---- Bank issued deposits: Noninterest bearing: Commercial...................... $ 1,909.3 $ 1,693.5 $ 1,720.3 12.7% (1.6)% Personal........................ 606.8 580.2 558.7 4.6 3.8 Other........................... 379.0 374.7 384.6 1.1 (2.6) --------- --------- --------- ----- ---- Total noninterest bearing......... 2,895.1 2,648.4 2,663.6 9.3 (0.6) Interest bearing: Activity accounts: Savings & NOW................. 1,775.6 1,845.9 2,027.6 (3.8) (9.0) Money market.................. 5,468.9 4,575.5 4,232.8 19.5 8.1 Foreign activity.............. 588.6 414.8 334.6 41.9 24.0 --------- --------- --------- ----- ---- Total activity accounts......... 7,833.1 6,836.2 6,595.0 14.6 3.7 Time deposits: Other CDs & time.............. 3,213.9 3,415.2 3,433.9 (5.9) (0.5) CDs greater than $100......... 761.4 875.8 821.0 (13.1) 6.7 --------- --------- --------- ----- ---- Total time deposits............. 3,975.3 4,291.0 4,254.9 (7.4) 0.8 --------- --------- --------- ----- ---- Total interest bearing............ 11,808.4 11,127.2 10,849.9 6.1 2.6 --------- --------- --------- ----- ---- Total bank issued deposits......... 14,703.5 13,775.6 13,513.5 6.7 1.9 Wholesale deposits: Money market...................... 262.9 666.4 597.3 (60.5) 11.6 Brokered CDs...................... 1,478.4 1,430.6 876.5 3.3 63.2 Foreign time...................... 745.8 1,625.2 1,169.6 (54.1) 39.0 --------- --------- --------- ----- ---- Total wholesale deposits........... 2,487.1 3,722.2 2,643.4 (33.2) 40.8 --------- --------- --------- ----- ---- Total consolidated average deposits $17,190.6 $17,497.8 $16,156.9 (1.8)% 8.3% ========= ========= ========= ===== ====
Average bank issued deposits increased $0.9 billion or 6.7% in 2001 compared with 2000. Approximately $0.4 billion or 38% of the growth was attributable to acquisitions. Excluding the impact of acquisitions, average 23 noninterest bearing deposits increased $0.2 billion and interest bearing activity accounts increased $0.4 billion. Money market savings, especially money market index accounts exhibited the greatest growth in bank issued deposits in 2001 compared to 2000. Average bank issued money market index savings increased $1.0 billion or 23.3% excluding acquisitions while other interest bearing activity accounts declined $0.1 billion. Average bank issued time deposits declined $0.5 billion. M&I's markets have experienced some irrational pricing on single service time deposit relationships to the extent of pricing time deposits above comparable wholesale levels which the Corporation elected not to pursue. 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 growth in bank issued deposits and shift in deposit mix provided a benefit to the net interest margin in 2001. Both commercial and retail banking contributed to the success experienced in growing bank issued deposits. The Corporation believes additional deposit growth can be achieved by continuing to focus on developing deeper relationships through the sale of treasury management products and services, continued use of customer and prospect lists modeled for successful cross selling, successfully implementing newly developed retention strategies and continuing to provide incentive plans focused on growing deposits and deepening relationships. Average wholesale deposits declined $1.3 billion or 34%, excluding acquisitions. The decline reflects, in part, the Corporation's greater use of borrowings which is a part of its overall strategy to reduce interest rate risk as well as not renewing a contractual institutional relationship that would have re-priced to levels above comparable funding alternatives. During 2001, the Corporation's banking segment issued $547 million of debt under its bank note program consisting of $250 million of senior bank notes--Extendible Liquidity Securities ("EXLs") and $297 million of subordinated debt. 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. At December 31, 2001, bank notes, which are included in short-term borrowings and long-term borrowings, amounted to $1.8 billion. In addition, the banking segment increased its borrowings from the Federal Home Loan Bank in 2001 by obtaining $685 million of floating and fixed rate advances. During 2001, the Corporation issued $250 million of Series E medium-term notes. Approximately $68.0 million of the Corporation's other series medium-term notes matured in 2001. The net interest margin (FTE) as a percent of average earning assets was 3.67% in 2001 compared to 3.08% in 2000, an increase of 59 basis points. The yield on earning assets decreased 48 basis points from 7.79% in 2000 to 7.31% in 2001 while the cost of interest bearing liabilities decreased 120 basis points from 5.49% in 2000 to 4.29% in 2001. Less reliance on higher-cost funding sources, growth in lower-cost bank issued deposits, improved loan spreads and the liability sensitive repricing characteristics of the Corporation's balance sheet in the declining rate environment experienced in 2001 all contributed to the margin improvement. Offsetting this improvement was the impact of the common stock acquired in conjunction with the Corporation's treasury buyback program. The yield on loans and leases was 7.48% in 2001 compared to 8.14% in 2000, a decrease of 66 basis points. Despite the loan growth and wider spreads previously discussed, interest income on a FTE basis declined $32.7 million in 2001 compared to 2000. The increase in the yield on the investment security portfolio reflects the realignment of the portfolio previously discussed, however, balance run-off in the portfolio, which reflects in part increased prepayment activity, resulted in a decline in interest income on a FTE basis of $5.4 million. 24 The decrease in the rates paid on interest bearing liabilities contributed approximately $252.0 million of the decrease in interest expense while the increase in volume offset the benefit by approximately $43.3 million in 2001 compared to the prior year. On January 1, 2001, the Corporation adopted the new accounting standard for accounting for derivative financial instruments and hedging activities as explained in Notes 2 and 20 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. For 2001, the effect on net interest income resulting from the derivative financial instruments designated as hedges was a positive $2.7 million compared with a negative $3.5 million in 2000. The Corporation anticipates that the net interest margin will continue to expand into the first quarter of 2002, however, the rate of growth is expected to slow as the Corporation continues to manage its balance sheet interest rate sensitivity. In addition, the amount of growth is dependent on loan and deposit growth, spreads and the general interest rate environment. 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 increased $2.2 billion or 14.8% . 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 benefit of these transactions was realized beginning in the fourth quarter of 2000. 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 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. Compared to 1999, average loans and leases increased $2.2 billion or 14.8%. Total commercial loan growth 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. Average personal loan growth amounted to $1.1 billion or 18.8%. 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. 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 securitized and recorded as available for sale securities late in 2000 amounted to $511 million. Auto loans securitized and sold in 2000 amounted to $223 million. Due to strong earning asset growth, particularly loan growth, the Corporation made greater uses of wholesale deposits in 2000 compared to the prior year. Wholesale deposits increased $1.1 billion or 40.8%, of which, foreign time deposits 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 25 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 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. 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. 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. The yield on loans and leases was 8.14% in 2000 compared to 7.77% in 1999, an increase of 37 basis points. The increase in yield and the strong loan growth previously discussed contributed over 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 taxable investment security portfolio increased by approximately 20 basis points in 2000 compared to 1999. The increase in the rates paid on interest bearing liabilities contributed approximately $161.5 million and the increase in volume accounted for approximately $122.2 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. 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 $7.0 million in 1999. 26 Average Balance Sheets and Analysis of Net Interest Income The Corporation's consolidated average balance sheets, interest earned and interest paid, and the average interest rates earned and paid for each of the last three years are presented in the following table ($ in thousands):
2001 2000 1999 ------------------------------- ------------------------------- --------------------------------- 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 and leases (1,2).......... $18,201,142 $1,361,048 7.48% $17,117,909 $1,393,723 8.14% $14,909,225 $1,158,746 7.77% Investment securities: Taxable....................... 3,926,737 270,336 7.05 4,063,773 272,536 6.62 4,208,498 269,668 6.42 Tax exempt (1)................ 1,269,175 91,206 7.26 1,327,159 94,371 7.16 1,217,847 85,552 7.13 Interest bearing deposits in other banks.................... 35,535 1,614 4.54 24,850 2,066 8.31 21,566 1,184 5.49 Funds sold and security resale agreements.............. 52,401 2,529 4.83 99,126 6,429 6.49 68,764 3,758 5.47 Trading securities (1).......... 21,284 896 4.21 30,926 1,523 4.92 37,277 1,894 5.08 Other short-term investments.................... 415,921 12,669 3.05 141,511 8,363 5.91 95,775 4,515 4.71 ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ---- Total interest earning assets........... 23,922,195 1,740,298 7.31% 22,805,254 1,779,011 7.79% 20,558,952 1,525,317 7.43% Cash and demand deposits due from banks................. 651,367 615,015 638,399 Premises and equipment, net..... 391,633 376,286 360,624 Other assets.................... 1,658,203 1,478,688 1,371,488 Allowance for loan and lease losses................... (253,089) (233,466) (228,500) ----------- ----------- ----------- Total assets.............. $26,370,309 $25,041,777 $22,700,963 =========== =========== =========== Money market savings deposits....................... $ 5,731,794 $ 198,341 3.46% $ 5,241,772 $ 277,813 5.30% $ 4,830,159 $ 205,148 4.25% Savings and interest bearing demand deposits................ 1,775,596 20,733 1.17 1,845,916 29,812 1.62 2,027,658 33,525 1.65 Other time deposits............. 5,023,701 244,345 4.86 5,458,234 318,229 5.83 4,941,175 254,965 5.16 CDs greater than $100, brokered and callable CDs............................ 1,764,417 103,480 5.86 2,303,442 146,162 6.35 1,694,301 92,226 5.44 ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ---- Total interest bearing deposits............... 14,295,508 566,899 3.97 14,849,364 772,016 5.20 13,493,293 585,864 4.34 Short-term borrowings........... 3,944,160 188,587 4.78 3,538,846 224,187 6.34 2,803,834 142,294 5.07 Long-term borrowings............ 1,962,801 110,842 5.65 1,178,805 78,773 6.68 1,009,132 63,145 6.26 ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ---- Total interest bearing liabilities.............. 20,202,469 866,328 4.29% 19,567,015 1,074,976 5.49% 17,306,259 791,303 4.57% Noninterest bearing deposits.... 2,895,083 2,648,419 2,663,609 Other liabilities............... 843,198 678,269 558,978 Shareholders' equity............ 2,429,559 2,148,074 2,172,117 ----------- ----------- ----------- Total liabilities and shareholders' equity................... $26,370,309 $25,041,777 $22,700,963 =========== =========== =========== Net interest income....... $ 873,970 $ 704,035 $ 734,014 ========== ========== ========== Net yield on interest earning assets........... 3.67% 3.08% 3.58% ==== ==== ====
- -------- 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. 27 Analysis of Changes in Interest Income and Interest Expense The effect on interest income and interest expense due to volume and rate changes in 2001 and 2000 are outlined in the following table. Changes not due solely to either volume or rate are allocated to rate ($ in thousands):
2001 versus 2000 2000 versus 1999 ------------------------------- ------------------------------ 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 and leases (1)..................... $ 88,175 $(120,850) $ (32,675) $171,615 $ 63,362 $234,977 Investment securities: Taxable............................... (18,563) 16,363 (2,200) (5,238) 8,106 2,868 Tax-exempt (1)........................ (4,511) 1,346 (3,165) 8,421 398 8,819 Interest bearing deposits in other banks. 888 (1,340) (452) 180 702 882 Funds sold and security resale agreements............................. (3,032) (868) (3,900) 1,661 1,010 2,671 Trading securities (1)................... (474) (153) (627) (323) (48) (371) Other short-term investments............. 16,218 (11,912) 4,306 2,154 1,694 3,848 -------- --------- --------- -------- -------- -------- Total interest income change...... $ 78,701 $(117,414) $ (38,713) $178,470 $ 75,224 $253,694 ======== ========= ========= ======== ======== ======== Expense on interest bearing liabilities: Money market savings deposits......... $ 25,971 $(105,443) $ (79,472) $ 17,494 $ 55,171 $ 72,665 Savings and interest bearing demand deposits..................... (1,139) (7,940) (9,079) (2,999) (714) (3,713) Other time deposits................... (25,333) (48,551) (73,884) 26,680 36,584 63,264 CDs greater than $100, brokered and callable CDs.................... (34,228) (8,454) (42,682) 33,137 20,799 53,936 -------- --------- --------- -------- -------- -------- Total interest bearing deposits.......... (34,729) (170,388) (205,117) 74,312 111,840 186,152 Short-term borrowings.................... 25,697 (61,297) (35,600) 37,265 44,629 81,894 Long-term borrowings..................... 52,371 (20,302) 32,069 10,622 5,005 15,627 -------- --------- --------- -------- -------- -------- Total interest expense change..... $ 43,339 $(251,987) $(208,648) $122,199 $161,474 $283,673 ======== ========= ========= ======== ======== ========
- -------- 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. 28 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, 2001, as well as selected comparative years: Consolidated Credit Quality Information December 31, ($000's)
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Nonperforming Assets by Type Loans and Leases: Nonaccrual..................................... $166,434 $121,425 $106,387 $101,346 $ 66,945 Renegotiated................................... 378 614 708 978 1,338 Past Due 90 Days or More....................... 6,982 7,371 9,975 7,631 8,238 -------- -------- -------- -------- -------- Total Nonperforming Loans and Leases........... 173,794 129,410 117,070 109,955 76,521 Other Real Estate Owned........................... 6,796 3,797 6,230 8,751 15,573 -------- -------- -------- -------- -------- Total Nonperforming Assets................. $180,590 $133,207 $123,300 $118,706 $ 92,094 ======== ======== ======== ======== ======== Allowance for Loan and Lease Losses............... $268,198 $235,115 $225,862 $226,052 $208,651 ======== ======== ======== ======== ======== Consolidated Statistics Net Charge-offs to Average Loans and Leases....... 0.22% 0.12% 0.17% 0.07% 0.12% Total Nonperforming Loans and Leases to Total Loans and Leases................................ 0.90 0.74 0.72 0.79 0.58 Total Nonperforming Assets to Total Loans and Leases and Other Real Estate Owned.............. 0.94 0.76 0.75 0.85 0.70 Allowance for Loan and Lease Losses to Total Loans and Leases...................................... 1.39 1.34 1.38 1.62 1.59 Allowance for Loan and Lease Losses to Nonperforming Loans and Leases.................. 154 182 193 206 273
Major Categories of Nonaccrual Loans and Leases ($000's)
December 31, 2001 December 31, 2000 ------------------------------- ------------------------------- % of % of % of % of Nonaccrual Loan Type Nonaccrual Nonaccrual Loan Type Nonaccrual ---------- --------- ---------- ---------- --------- ---------- Commercial and Lease Financing... $ 82,297 1.3% 49.4% $ 51,886 0.9% 42.7% Real Estate Construction and Land Development 720 0.1 0.4 2,896 0.5 2.4 Commercial Real Estate........... 34,546 0.7 20.8 35,011 0.7 28.9 Residential Real Estate.......... 47,783 0.9 28.7 29,895 0.7 24.6 -------- --- ----- -------- --- ----- Total Real Estate............. 83,049 0.7 49.9 67,802 0.7 55.9 Personal and Lease Financing..... 1,088 0.1 0.7 1,737 0.1 1.4 -------- --- ----- -------- --- ----- Total......................... $166,434 0.9% 100.0% $121,425 0.7% 100.0% ======== === ===== ======== === =====
29 Reconciliation of Consolidated Allowance for Loan and Lease Losses ($000's)
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Allowance for Loan and Lease Losses At Beginning of Year......................................... $235,115 $225,862 $226,052 $208,651 $161,659 Provision for Loan and Lease Losses............... 54,115 30,352 25,419 27,090 17,633 Allowance of Banks and Loans Acquired............. 19,151 1,270 -- -- 42,773 Allowance Transfer for Loan Securitizations....... -- (1,022) -- -- -- Loans and Leases Charged-off: Commercial..................................... 22,773 10,623 17,275 6,401 8,474 Real Estate--Construction...................... 186 4 157 352 87 Real Estate--Mortgage.......................... 11,795 9,848 5,719 5,115 3,907 Personal....................................... 10,965 8,216 7,121 7,886 7,868 Leases......................................... 2,890 1,327 2,285 1,191 1,166 -------- -------- -------- -------- -------- Total Charge-offs................................. 48,609 30,018 32,557 20,945 21,502 Recoveries on Loans and Leases: Commercial..................................... 4,135 4,696 2,696 6,708 4,176 Real Estate--Construction...................... 43 57 6 164 53 Real Estate--Mortgage.......................... 1,419 1,458 1,413 1,369 1,097 Personal....................................... 2,567 2,199 2,244 2,690 2,501 Leases......................................... 262 261 589 325 261 -------- -------- -------- -------- -------- Total Recoveries.................................. 8,426 8,671 6,948 11,256 8,088 -------- -------- -------- -------- -------- Net Loans and Leases Charged-off.................. 40,183 21,347 25,609 9,689 13,414 -------- -------- -------- -------- -------- Allowance for Loan and Lease Losses at End of Year $268,198 $235,115 $225,862 $226,052 $208,651 ======== ======== ======== ======== ========
Nonperforming assets consist of nonperforming loans and leases 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 $6.5 million, $2.7 million and $5.1 million at December 31, 2001, 2000 and 1999, respectively. Branch premises held for sale amounted to $0.3 million, $1.1 million and $1.1 million at the end of 2001, 2000 and 1999, 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, 2001, nonperforming loans and leases amounted to $173.8 million or 0.90% of consolidated loans and leases compared to $129.4 million or 0.74% at December 31, 2000 and $117.1 million or 0.72% at December 31, 1999. Acquisitions increased nonperforming loans by $26.5 million at the time the acquisitions were completed, which was in the third quarter of 2001. Excluding acquisitions, nonperforming loans were relatively unchanged during the second half of the current year. Nonaccrual loans increased $45.0 million at year end 2001 compared to year end 2000. Nonaccrual commercial loans and leases accounted for $30.4 million of the increase and nonaccrual residential real estate loans accounted for $17.9 million of the 30 increase. Nonaccrual commercial mortgages were relatively unchanged while nonaccrual construction and land development and personal loans declined $2.2 million and $0.6 million, respectively. Net charge-offs amounted to $40.2 million or 0.22% of average loans and leases in 2001 compared with $21.3 million or 0.12% of average loans and leases in 2000 and $25.6 million or 0.17% of average loans and leases in 1999. The allowance for loan and lease losses is determined using a methodology which reserves currently for those loans and leases in which it is determined that a loss is probable based on characteristics of the individual loan, historical loss patterns of similar, "homogeneous" loans and environmental factors unique to each measurement date. This reserving methodology has the following components: Specific reserve. The amount of specific reserves is determined through a loan-by-loan analysis of problem loans over a minimum size 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. Problem loans also include those credits that have been internally classified as credits requiring management's attention due to underlying problems in the borrower's business or collateral concerns. Ranges of loss are determined based on best- and worst- case scenarios for each loan. Reserves for homogeneous loan pools. The Corporation makes a significant number of loans and leases which, due to their underlying similar characteristics, are assessed for loss as "homogeneous" pools. Included in the homogeneous pools are loans and leases from the retail sector and commercial loans under a certain size, which have been excluded from the specific reserve allocation previously discussed. The Corporation segments the pools by type of loan or lease and using historical loss information estimates a loss reserve for each pool. Special reserve. The Corporation's senior lending management also allocates reserves for special situations, which are unique to the measurement period. These include environmental factors, such as economic conditions in certain geographical or industry segments of the portfolio, economic trends in the retail lending sector and peer-group loss history. Reserves allocated are based on estimates of loss that senior lending management has isolated based on these economic trends or conditions. At December 31, 2001, special reserves have been established for exposures to the airline and travel industries due to the significant uncertainties brought about by the terrorism of this past September and reduction in business travel in response to the slower economy. The Corporation, given its geographic marketplace, also has exposure to the manufacturing, paper and allied products and dairy sectors, all of which have been impacted more significantly by the economic slowdown than other sectors and for which the Corporations has allocated additional reserves. While most loans in these categories are still performing, the current economic slowdown has resulted in deteriorating operating results and reduced collateral values that could adversely impact recoveries in the event the loans or leases were liquidated. Based on the above loss estimates, senior lending and financial management determine their best estimate of the required reserve. Management's evaluation of the factors described above resulted in an allowance for loan and lease losses of $268.2 million at December 31, 2001 compared to $235.1 million at December 31, 2000 and $225.9 million at December 31, 1999. The resulting provisions for loan and lease losses are the amounts required to establish the allowance for loan and lease losses to the required level after taking into consideration charge-offs and recoveries. Management recognizes there are significant estimates in the process and the ultimate losses could be significantly different from those currently estimated. Charge-offs for 2002 will continue to be affected by the factors previously discussed. The Corporation anticipates nonperforming loans will increase and charge-off levels will continue to be at the upper end of recent 31 historical levels for at least six months, and possibly longer depending on the economy, but below the level experienced in the fourth quarter of 2001 (0.35%). 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 actual loss levels. There are no other known specific issues or industry of concern or material loans believed to be in imminent danger of deteriorating or defaulting which would give rise to a large near-term charge-off. Other Income Total other income amounted to $1,002.8 million in 2001 compared to $933.2 million in 2000. Other income in 2001 includes approximately $16.0 million of investment securities losses associated with equity investments held by Metavante relating to the mortgage origination business as well as an equity investment whose technology was replaced by Metavante's acquisitions of Derivion and CyberBills. Other income in 2000 includes $50.6 million of investment securities losses resulting from the realignment of the Corporation's investment security portfolio as previously discussed. Excluding these nonoperating items, total other income in 2001 amounted to $1,018.9 million compared to $983.7 million in 2000, an increase of $35.2 million or 3.6%. Total data processing services revenue amounted to $559.8 million in 2001 compared to $546.0 million in 2000, an increase of $13.8 million or 2.5%. Excluding one large buyout fee recognized in the third quarter of 2000, total data processing services revenue increased $27.5 million or 5.2%. e-Finance revenue increased $29.2 million or 32.1%, excluding the 2000 buyout fee, which reflects the impact of acquisitions as well as growth in electronic bill presentment and payment and electronic banking products for businesses and consumers. Financial technology solutions, the traditional outsourcing business, increased $10.1 million or 2.4% primarily due to buyout fees. This largest source of data processing services revenue is not expected to grow much faster in the near term due to continued bank consolidation and the weaker economy. Other data processing revenue declined primarily due to lower professional services revenue. Item processing revenue decreased $3.8 million. During 2001 the Corporation sold certain item processing relationships and also sold four Midwest item processing centers. Fees from trust services were $120.8 million in 2001 compared to $117.7 million in 2000, an increase of $3.1 million or 2.7%. Trust revenues have continued to remain flat throughout each quarter this year due to the impact of volatile equity markets and continued movement of funds from high fee equity funds to lower fee fixed income and money market funds. New sales and the impact of the National City acquisition resulted in an increase in assets under management of 7.1% which served to stabilize this source of revenue in 2001. Service charges on deposits increased $12.1 million or 16.4% and amounted to $86.0 million in 2001 compared to $73.9 million in 2000. Service charges on commercial demand accounts were the primary driver of the increase and reflect the Corporation's focus on deposit growth as well as the impact from acquisitions. The Corporation has implemented initiatives to produce higher absolute levels of service charge fee income, but believes it is unlikely that the growth will be at levels comparable to the year-over-year growth reflected in 2001. Mortgage banking revenue was $46.2 million in 2001 compared with $18.9 million in 2000, an increase of $27.3 million. Gains from sales of mortgages to the secondary market and mortgage related fees accounted for the increase. As previously discussed, mortgage loans originated and sold in 2001 were four times the volume originated and sold in 2000. Capital markets revenue decreased $9.4 million in 2001 compared to the prior year. Net gains from the sale of investments, which vary from period to period, accounted for the decline. 32 In addition to the increase in net realizable value, life insurance revenue in 2000 includes death benefit gains of $0.6 million. Net securities losses in 2001, excluding the effect of the losses previously discussed, amounted to $1.1 million and principally represent losses by the banking segment. Other noninterest income amounted to $121.8 million in 2001 compared to $126.7 million in 2000, a decrease of $4.9 million. Revenue associated with the monthly securitization of auto loans increased $9.9 million. Gains from the sale of branches and other assets sales were $14.5 million less in 2001 compared to the prior year. Total other income amounted to $933.2 million in 2000 compared to $883.1 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 $983.8 million or an increase of $100.7 million or 11.4%. 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%. e-Finance fees increased $40.3 million or 62.5% and reflect a full year of revenue from the electronic banking services acquisitions in 1999 as well as growth in electronic bill payment services. e-Finance fees also include a $13.7 million buyout fee due to one large fee recognized in the third quarter of 2000. Financial technology solutions increased $14.6 million or 3.5% and reflect a full year of revenue from the plastic card personalization and procurement services acquisition in 1999 as well as revenue associated with increased volumes in electronic funds distribution. Other revenues decreased $3.6 million due to a decrease in professional services. 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 $18.9 million in 2000 compared with $29.1 million in 1999, a decrease of $10.2 million. Gains from sales of mortgages to the secondary market and mortgage related fees declined $9.2 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. 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 $126.7 million in 2000 compared to $114.2 million in 1999, an increase of $12.5 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. 33 Other Expense Total other expense amounted to $1,290.4 million in 2001, an increase of $184.9 million or 16.7% from $1,105.5 million in 2000. Both 2001 and 2000 contain certain nonoperating charges which consisted of the following: 2001 Charges $12.0 million was spent to complete the single charter initiative. Such costs consisted 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 accounts and other affiliate shareholder matters and costs associated with employee relocation, retention and severance. This initiative was completed in the second quarter of 2001. The total cost incurred for this initiative, which began in the third quarter of 2000, was approximately $21.1 million which was approximately $3.0 million less than originally estimated. A special $25.0 million charge was taken to write-down residual values associated with the Corporation's indirect auto lease portfolio. Although there are no guarantees that there will not be further residual value write-downs, the Corporation believes it has taken the necessary steps to reduce the likelihood of material future write-downs. $11.0 million of charges were taken for Metavante's reduction in force and realignment which consisted of the closing of selected regional offices in Idaho, Maryland, Virginia and Green Bay, Wisconsin, and a general reduction in force across all classes of employees in the Milwaukee metropolitan area. Approximately 400 positions were eliminated. Total costs consisted primarily of severance of $9.6 million, lease termination and other occupancy exit costs of $0.7 million and professional fees including outplacement services of $0.4 million. Approximately $10.5 million of the costs were paid in 2001. $9.8 million in charges were taken in conjunction with the acquisitions of Derivion and CyberBills by Metavante. $2.8 million of prepaid maintenance fees and capitalized software costs associated with other technologies that were replaced by the new and enhanced bill presentment and payment technology obtained in the acquisitions were written-off in the second quarter of 2001. Transition costs associated with the integration totaled approximately $7.0 million and were recognized as incurred in the third and fourth quarters of 2001. $34.5 million in charges were taken in conjunction with Metavante's acquisition of Brokat's North American Internet banking operations. Four locations and five technology platforms were consolidated resulting in severance of $3.8 million and facility closure charges of approximately $10.2 million. Write-offs of existing technology and software which will be replaced by Brokat's software amounted to $20.5 million. The remaining loss recognized was primarily due to the disposal of a subsidiary of Metavante. 2000 Charges $3.1 million loss resulted from the sale of portfolio ARM loans. $4.5 million of Metavante IPO expenses. 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. $9.1 million of single charter expenses as previously discussed. 34 The following table shows other expense as reported in the Consolidated Statements of Income contained in Item 8 and operating expenses for the years ended December 31, 2001 and 2000. Operating expenses exclude the nonoperating items previously discussed.
Operating Expense Growth Year Ended December 31, 2001 Year Ended December 31, 2000 2001 vs 2000 ---------------------------- ---------------------------- ------------- Non- Non- As operating Operating As operating Operating Reported Items Expenses Reported Items Expenses Amount Pct -------- --------- --------- -------- --------- --------- ------ ---- ($ in millions) ($ in millions) Other Expense: Salaries and employee benefits. $ 694.1 $15.6 $ 678.5 $ 627.4 $ -- $ 627.4 $ 51.1 8.1% Net occupancy.................. 71.3 7.5 63.8 54.8 -- 54.8 9.0 16.4 Equipment...................... 118.2 1.5 116.7 114.0 -- 114.0 2.7 2.4 Software expenses.............. 39.8 -- 39.8 30.0 -- 30.0 9.8 32.6 Processing charges............. 40.0 2.0 38.0 32.1 -- 32.1 5.9 18.5 Supplies and printing.......... 20.6 -- 20.6 19.9 -- 19.9 0.7 3.3 Professional services.......... 31.6 0.8 30.8 34.0 -- 34.0 (3.2) (9.4) Shipping and handling.......... 44.8 0.2 44.6 41.9 -- 41.9 2.7 6.4 Amortization of intangibles.... 38.5 1.3 37.2 32.5 -- 32.5 4.7 14.5 Other.......................... 191.5 64.1 127.4 118.9 16.7 102.2 25.2 24.7 -------- ----- -------- -------- ----- -------- ------ ---- Total Other Expense.............. $1,290.4 $93.0 $1,197.4 $1,105.5 $16.7 $1,088.8 $108.6 10.0% ======== ===== ======== ======== ===== ======== ====== ====
Excluding the above, operating expenses amounted to $1,197.4 million in 2001 compared to $1,088.8 million in 2000, an increase of $108.6 million or 10.0%. 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, 2001, 2000, and 1999 were:
Efficiency Ratios 2001 2000 1999 ----------------- ---- ---- ---- Consolidated Corporation........................... 63.2% 64.6% 63.8% Consolidated Corporation Excluding Metavante: Including Intangible Amortization........ 53.3% 55.0% 53.7% Excluding Intangible Amortization........ 51.1% 53.3% 51.3%
Operating salaries and benefits expense amounted to $678.5 million for 2001 compared to $627.4 million in 2000, an increase of $51.1 million or 8.1%. The expense for providing healthcare benefits to employees and retirees increased 34.6% in 2001 compared to the prior year and accounted for $13.2 million of the growth in salaries and benefits. Incentive commissions and compensation increased $11.8 million or 19.4% due to increased loan production, deposit growth and compensation based on other performance measures including the Corporation's common stock performance. Excluding these items, salary and benefit expense increased 4.9% in the current year and was driven by the banking segment which reflects, in part, the impact of the National City acquisition in August. The increase due to acquisitions was offset by the reduction in force and realignment announced in June and as a result, Metavante's year over year salaries and benefits expense was relatively unchanged. Metavante's operating expense growth, driven in part by acquisitions, accounted for $19.9 million or approximately 71% of the corporate-wide operating expense growth in net occupancy, equipment, software, processing and supplies and printing. The decline in professional services operating expense was also driven by Metavante. This area was specifically identified for cost-savings as part of Metavante's reduction in force and realignment implemented during the second quarter of 2001 and reflects the focus on acquisitions and in-house resources for technology development. 35 Amortization of intangibles excluding nonoperating items, increased $4.7 million. Amortization of loan servicing rights, especially mortgage servicing rights which are sensitive to the increased prepayment and refinancing activity experienced during 2001, accounted for $4.1 million of the increase. The remainder was attributable to acquisitions. See Note 1 to the Consolidated Financial Statements contained in Item 8 for a discussion of the new accounting standard on goodwill and intangibles that went into effect on January 1, 2002. Other operating expenses amounted to $127.4 million in 2001 compared to $102.2 million in the prior year, an increase of $25.2 million or 24.7%. Other expense is affected by the capitalization of costs, net of amortization, associated with software development and data processing conversions. A lower amount of capitalized software development costs and capitalized conversion costs net of their respective amortization resulted in an increase in other operating expense and accounted for approximately $18.6 million of the total increase in other operating expense. Advertising and customer related expense in the banking segment increased $6.8 million which reflects the impact of acquisitions as well as programs to enhance deposit and loan growth. Total other expense amounted to $1,105.5 million in 2000, an increase of $70.5 million or 6.8% from $1,035.0 million in 1999. Other expense in 2000 includes $16.7 million of nonoperating items as previously discussed. Excluding those items, operating expenses amounted to $1,088.8 million in 2000 compared to $1,035.0 million in 1999, an increase of $53.8 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 over half of the Corporation's total operating expense growth. Total salaries and benefits expense amounted to $627.4 million for 2000 compared to $587.7 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 4.4%. 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 was offset by increases in amortization of mortgage loan and auto loan servicing rights. Other operating expenses amounted to $102.2 million in 2000 compared to $105.4 million in the prior year, a decrease of $3.2 million or 3.1%. Auto lease residual impairment and off-lease inventory write-downs 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 capitalized conversion costs net of their respective amortization increased resulting in a decrease in other operating expenses of $13.0 million in 2000 compared to 1999. 36 Income Tax Provision The provision for income taxes was $163.1 million in 2001, $152.9 million in 2000 and $173.4 million in 1999. The effective tax rate in 2001 was 32.6% compared to 32.5% in 2000 and 32.9% in 1999 and was relatively unchanged. Liquidity & Capital Resources M&I manages its liquidity to ensure that funds are available to each of its banks to satisfy the cash flow requirements of depositors and borrowers and to ensure the Corporation's own cash requirements are met. M&I maintains liquidity by obtaining funds from several sources. The Corporation's most readily available source of liquidity is its investment portfolio. Investment securities available for sale, which totaled $3.4 billion at December 31, 2001, represent a highly accessible source of liquidity. The Corporation's portfolio of held-to-maturity investment securities, which totaled $1.0 billion at December 31, 2001, provides liquidity from maturities and amortization payments. The Corporation's mortgages held-for-sale provide additional liquidity. These loans, which aggregated $0.3 billion at December 31, 2001, represent recently funded home mortgage loans that are prepared for delivery to investors, which generally occurs within thirty to ninety days after the loan has been funded. Depositors within M&I's defined markets are another source of liquidity. Core deposits (demand, savings, money market and consumer time deposits) averaged $13.9 billion in 2001. The Corporation's banking affiliates may also access the federal funds markets or utilize collateralized borrowings such as treasury demand notes or FHLB advances. Additionally, the banking affiliates may use brokered deposits. As discussed in Note 9 to the Consolidated Financial Statements contained in Item 8, the Corporation's banking affiliates make limited use of off-balance sheet structures as an alternate source of liquidity. The Corporation's lead bank ("Bank") has implemented a bank note program which permits it to issue up to $5.0 billion of short-term and medium-term notes which are offered and sold only to institutional investors. This program is intended to enhance liquidity by enabling the Bank to sell its debt instruments in private markets in the future without the delays which would otherwise be incurred. As shown and discussed in Notes 12 and 13 in the Notes to the Consolidated Financial Statements contained in Item 8, short-term and longer-term bank notes outstanding at December 31, 2001, amounted to $1.8 billion. The national capital markets represent a further source of liquidity to M&I. M&I has filed a shelf registration which is intended to permit M&I to raise funds through sales of Corporate medium-term notes with a relatively short lead time. Under the shelf registration, the Corporation may issue up to $0.5 billion of medium-term Series E notes with maturities ranging from 9 months to 30 years and at fixed or floating rates. At December 31, 2001, Series E notes outstanding amounted to $0.3 billion. Additionally, the Corporation has a commercial paper program. At December 31, 2001, commercial paper outstanding amounted to $0.3 billion. Short-term borrowings represent contractual debt obligations with maturities of one year or less and amounted to $5.9 billion at December 31, 2001. Other obligations include maturities of longer-term borrowings as described in Note 13, future minimum lease payments on facilities and equipment as described in Note 10 and commitments to extend credit and letters of credit as described in Note 18 of the Notes to Consolidated Financial Statements contained in Item 8, respectively. Since many commitments to extend credit expire without being drawn upon and letters of credit are contingent commitments, the amounts outstanding at any time do not necessarily represent future cash requirements. 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. 37 Shareholders' equity was $2.49 billion or 9.1% of total consolidated assets at December 31, 2001, compared to $2.24 billion or 8.6% of total consolidated assets at December 31, 2000. The increase associated with earnings, net of dividends paid, and the increase due to common stock issued in the National City acquisition was offset by the effect of treasury share repurchases. 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. Federal and state banking laws place certain restrictions on the amount of dividends and loans which a bank may make to its parent company. Such restrictions have not had, and are not expected to have, any material effect on the Corporation's ability to meet its cash obligations. The Corporation has a Stock Repurchase Program under which up to 6 million shares can be repurchased annually. During 2001 and 2000, the Corporation repurchased 4.7 million and 3.2 million shares at an aggregate cost of $273.3 million and $156.3 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. The Corporation has generally financed its growth through the retention of earnings and the issuance of long-term debt. It is expected that future growth can be financed through internal earnings retention, additional long-term debt offerings, or the issuance of additional common or preferred stock or other capital instruments. 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 Metvante'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. 38 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 Notes 19 and 20 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, 2001:
Impact to 2002 Hypothetical Change in Interest Rates Pretax Income ------------------------------------- -------------- 100 basis point gradual rise in rates........... (3.9%) 100 basis point gradual decline in rates........ 3.1%
These results are based solely on the modeled parallel changes in market rates, and do not reflect the earnings sensitivity that may arise from other factors such as changes in the shape of the yield curve, the changes in spread between key market rates, or accounting recognition for impairment of certain intangibles. These results are also considered to be conservative estimates due to the fact that they do not include any management action to mitigate potential income variances within the simulation process. Such action could potentially include, but would not be limited to, adjustments to the repricing characteristics of any on- or off-balance sheet item with regard to short-term rate projections and current market value assessments. 39 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, 2001 the fair value of equity at risk for a gradual 100bp shift in rates was less than 6.0% of the market value of the Corporation. Equity Risk In addition to interest rate risk, the Corporation incurs market risk in the form of equity risk. 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 over $57 billion in assets and directly manages a portfolio of almost $13 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. 40 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 Consolidated Balance Sheets December 31 ($000's except share data)
2001 2000 ----------- ----------- Assets Cash and Cash Equivalents: Cash and Due from Banks................................................. $ 617,183 $ 760,103 Federal Funds Sold and Security Resale Agreements....................... 119,561 54,443 Money Market Funds...................................................... 827,021 50,147 ----------- ----------- Total Cash and Cash Equivalents..................................... 1,563,765 864,693 Investment Securities: Trading Securities, at Market Value..................................... 6,119 15,317 Interest Bearing Deposits at Other Banks................................ 41,668 43,528 Available for Sale, at Market Value..................................... 3,383,632 4,735,722 Held to Maturity, Market Value $1,049,952 ($1,124,756 in 2000).......... 1,032,093 1,112,545 ----------- ----------- Total Investment Securities......................................... 4,463,512 5,907,112 Loans and Leases, Net of Unearned Income of $178,734 ($215,125 in 2000).... 19,295,372 17,587,087 Less: Allowance for Loan and Lease Losses.................................. 268,198 235,115 ----------- ----------- Net Loans and Leases................................................ 19,027,174 17,351,972 Premises and Equipment..................................................... 393,030 392,995 Goodwill and Core Deposit Intangibles...................................... 555,189 310,930 Other Intangibles.......................................................... 32,896 34,354 Accrued Interest and Other Assets.......................................... 1,218,168 1,215,683 ----------- ----------- Total Assets........................................................ $27,253,734 $26,077,739 =========== =========== Liabilities and Shareholders' Equity Deposits: Noninterest Bearing..................................................... $ 3,558,571 $ 3,129,834 Interest Bearing........................................................ 12,934,476 16,118,793 ----------- ----------- Total Deposits...................................................... 16,493,047 19,248,627 Short-term Borrowings...................................................... 5,857,242 2,814,731 Accrued Expenses and Other Liabilities..................................... 850,300 850,916 Long-term Borrowings....................................................... 1,560,177 921,276 ----------- ----------- Total Liabilities................................................... 24,760,766 23,835,550 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 Shares Authorized; 117,301,755 Shares Issued (112,757,546 in 2000)....................... 117,302 112,757 Additional Paid-in Capital.............................................. 698,289 452,212 Retained Earnings....................................................... 2,331,776 2,117,759 Accumulated Other Comprehensive Income, Net of Related Taxes............ 40,600 38,127 Less: Treasury Stock, at Cost, 13,352,817 Shares (9,910,839 in 2000).... 673,494 458,472 Deferred Compensation............................................. 21,841 20,530 ----------- ----------- Total Shareholders' Equity........................................ 2,492,968 2,242,189 ----------- ----------- Total Liabilities and Shareholders' Equity........................ $27,253,734 $26,077,739 =========== ===========
The accompanying notes are an integral part of the Consolidated Financial Statements. 41 Consolidated Statements of Income Years ended December 31 ($000's except share data)
2001 2000 1999 ---------- ---------- ---------- Interest Income Loans and Leases.......................................................... $1,358,802 $1,391,651 $1,156,775 Investment Securities: Taxable................................................................ 270,336 272,536 269,668 Exempt from Federal Income Taxes....................................... 62,273 65,429 58,820 Trading Securities........................................................ 884 1,508 1,864 Short-term Investments.................................................... 16,812 16,858 9,457 ---------- ---------- ---------- Total Interest Income............................................... 1,709,107 1,747,982 1,496,584 Interest Expense Deposits.................................................................. 566,899 772,016 585,864 Short-term Borrowings..................................................... 188,587 224,187 142,294 Long-term Borrowings...................................................... 110,842 78,773 63,145 ---------- ---------- ---------- Total Interest Expense.............................................. 866,328 1,074,976 791,303 ---------- ---------- ---------- Net Interest Income....................................................... 842,779 673,006 705,281 Provision for Loan and Lease Losses....................................... 54,115 30,352 25,419 ---------- ---------- ---------- Net Interest Income After Provision for Loan and Lease Losses............. 788,664 642,654 679,862 Other Income Data Processing Services: e-Finance Solutions.................................................... 120,147 104,681 64,404 Financial Technology Solutions......................................... 435,700 425,589 411,029 Other Revenues......................................................... 3,969 15,771 19,383 ---------- ---------- ---------- Total Data Processing Services...................................... 559,816 546,041 494,816 Item Processing........................................................... 47,638 51,409 40,169 Trust Services............................................................ 120,827 117,680 100,963 Service Charges on Deposits............................................... 85,980 73,872 69,699 Mortgage Banking.......................................................... 46,188 18,946 29,117 Capital Markets Revenue................................................... 10,642 20,022 12,470 Net Investment Securities Losses.......................................... (17,170) (49,515) (4,083) Life Insurance Revenue.................................................... 27,053 27,993 25,767 Other..................................................................... 121,838 126,708 114,158 ---------- ---------- ---------- Total Other Income.................................................. 1,002,812 933,156 883,076 Other Expense Salaries and Employee Benefits............................................ 694,089 627,394 587,711 Net Occupancy............................................................. 71,322 54,788 48,965 Equipment................................................................. 118,199 113,962 107,786 Software Expenses......................................................... 39,790 30,013 26,974 Processing Charges........................................................ 40,058 32,104 30,365 Supplies and Printing..................................................... 20,591 19,932 19,387 Professional Services..................................................... 31,583 33,974 35,143 Shipping and Handling..................................................... 44,792 41,965 35,181 Amortization of Intangibles............................................... 38,466 32,478 38,046 Other..................................................................... 191,541 118,850 105,441 ---------- ---------- ---------- Total Other Expense................................................. 1,290,431 1,105,460 1,034,999 ---------- ---------- ---------- Income Before Income Taxes and Cumulative Effect of Changes in Accounting Principles............................................................... 501,045 470,350 527,939 Provision for Income Taxes................................................ 163,124 152,948 173,428 ---------- ---------- ---------- Income Before Cumulative Effect of Changes in Accounting Principles....... 337,921 317,402 354,511 Cumulative Effect of Changes in Accounting Principles, Net of Income Taxes (436) (2,279) -- ---------- ---------- ---------- Net Income................................................................ $ 337,485 $ 315,123 $ 354,511 ========== ========== ========== Net Income Per Common Share Basic: Income Before Cumulative Effect of Changes in Accounting Principles.... $ 3.20 $ 3.01 $ 3.32 Cumulative Effect of Changes in Accounting Principles.................. -- (0.02) -- ---------- ---------- ---------- Net Income............................................................. $ 3.20 $ 2.99 $ 3.32 ========== ========== ========== Diluted: Income Before Cumulative Effect of Changes in Accounting Principles.... $ 3.09 $ 2.91 $ 3.14 Cumulative Effect of Changes in Accounting Principles.................. -- (0.02) -- ---------- ---------- ---------- Net Income............................................................. $ 3.09 $ 2.89 $ 3.14 ========== ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements. 42 Consolidated Statements of Cash Flows Years ended December 31 ($000's)
2001 2000 1999 ----------- ----------- ----------- Cash Flows From Operating Activities: Net Income...................................................... $ 337,485 $ 315,123 $ 354,511 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization................................ 61,894 69,197 86,156 Provision for Loan and Lease Losses.......................... 54,115 30,352 25,419 (Gains) Losses on Sales of Assets............................ (23,292) 7,047 (42,522) Proceeds from Sales of Trading Securities and Loans Held for Resale..................................................... 5,412,432 4,529,322 4,766,956 Purchases of Trading Securities and Loans Held for Resale.... (5,549,128) (3,952,604) (4,606,316) Other........................................................ (57,823) 30 40,011 ----------- ----------- ----------- Total Adjustments........................................ (101,802) 683,344 269,704 ----------- ----------- ----------- Net Cash Provided by Operating Activities....................... 235,683 998,467 624,215 Cash Flows From Investing Activities: Net Decrease in Shorter Term Securities......................... -- -- 21,400 Proceeds from Sales of Securities Available for Sale............ 196,664 1,538,995 116,823 Proceeds from Maturities of Securities Available for Sale....... 1,818,294 677,075 954,959 Proceeds from Maturities of Securities Held to Maturity......... 79,040 58,675 72,008 Purchases of Securities Available for Sale...................... (282,481) (2,030,511) (1,381,481) Purchases of Securities Held to Maturity........................ (55) (249) (299,556) Decrease in Loans Due to Divestitures........................... 3,186 8,352 30,817 Net Increase in Loans........................................... (698,316) (1,721,384) (2,342,319) Purchases of Assets to be Leased................................ (576,150) (573,833) (429,345) Principal Payments on Lease Receivables......................... 761,164 360,992 294,891 Purchases of Premises and Equipment, Net........................ (44,620) (78,817) (66,899) Acquisitions Accounted for as Purchases, Net of Cash Equivalents Acquired and Investments...................................... (64,752) (265) (84,408) Other........................................................... 16,664 18,428 12,751 ----------- ----------- ----------- Net Cash Provided by (Used in) Investing Activities............. 1,208,638 (1,742,542) (3,100,359) Cash Flows From Financing Activities: Decrease in Deposits Due to Divestitures........................ (10,059) (100,791) (84,191) Net (Decrease) Increase in Deposits............................. (3,788,763) 2,565,584 607,243 Proceeds from Issuance of Commercial Paper...................... 3,472,573 3,190,712 1,926,791 Principal Payments on Commercial Paper.......................... (3,499,459) (3,115,064) (1,740,439) Net Increase (Decrease) in Other Short-term Borrowings.......... 2,280,201 (1,717,077) 2,226,463 Proceeds from Issuance of Long-term Debt........................ 1,487,373 536,587 288,526 Payment of Long-term Debt....................................... (319,839) (368,469) (371,832) Dividends Paid.................................................. (122,777) (111,379) (104,490) Purchase of Common Stock........................................ (267,438) (156,319) (317,149) Proceeds from the Issuance of Common Stock...................... 23,630 5,241 18,359 Other........................................................... (691) (113) (19) ----------- ----------- ----------- Net Cash (Used in) Provided by Financing Activities............. (745,249) 728,912 2,449,262 ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents............ 699,072 (15,163) (26,882) Cash and Cash Equivalents, Beginning of Year.................... 864,693 879,856 906,738 ----------- ----------- ----------- Cash and Cash Equivalents, End of Year.......................... $ 1,563,765 $ 864,693 $ 879,856 =========== =========== =========== Supplemental Cash Flow Information: Cash Paid During the Year for: Interest..................................................... $ 972,354 $ 984,883 $ 775,065 Income Taxes................................................. 148,864 116,363 125,841
The accompanying notes are an integral part of the Consolidated Financial Statements. 43 Consolidated Statements of Shareholders' Equity ($000's except share data)
Accum- ulated Other Compre- Additional Treasury Deferred Compre- hensive Preferred Common Paid-in Retained Common Compen- hensive Income Stock Stock Capital Earnings Stock sation Income -------- --------- -------- ---------- ---------- --------- -------- -------- 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. 44 Consolidated Statements of Shareholders' Equity ($000's except share data)
Accumulated Additional Treasury Deferred Other Comprehensive Preferred Common Paid-in Retained Common Compen- Comprehensive Income Stock Stock Capital Earnings Stock sation Income ------------- --------- -------- ---------- ---------- --------- -------- ------------- 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. 45 Consolidated Statements of Shareholders' Equity ($000's except share data)
Accumulated Other Additional Treasury Deferred Compre- Comprehensive Preferred Common Paid-in Retained Common Compen- hensive Income Stock Stock Capital Earnings Stock sation Income ------------- --------- -------- ---------- ---------- --------- -------- ----------- Balance, December 31, 2000...... $336 $112,757 $452,212 $2,117,759 $(458,472) $(20,530) $ 38,127 Comprehensive Income: Net Income................... $337,485 -- -- -- 337,485 -- -- -- Unrealized Gains (Losses) on Securities: Arising During the Period Net of Taxes of $18,646............... 34,004 -- -- -- -- -- -- -- Reclassification for Securities Transactions Included in Net Income Net of Taxes of $4,781...... (8,878) -- -- -- -- -- -- -- -------- Unrealized Gains (Losses).... 25,126 -- -- -- -- -- -- 25,126 -------- Net Gains (Losses) on Derivatives Hedging Variability of Cash Flows: Transition Adjustment Net of Taxes of $5,483.......... (10,182) Arising During the Period Net of Taxes of $10,940............... (20,317) -- -- -- -- -- -- -- Reclassification Adjustments For Hedging Activities Included in Net Income Net of Taxes of $4,225................. 7,846 -- -- -- -- -- -- -- -------- Net Gains (Losses)........... (22,653) -- -- -- -- -- -- (22,653) -------- Other Comprehensive Income...................... 2,473 -- -- -- -- -- -- -- -------- Comprehensive Income............ $339,958 -- -- -- -- -- -- -- ======== Issuance of 4,544,209 Common Shares in the 2001 Business Combination........... -- 4,545 263,110 -- -- -- -- Issuance of 1,335,284 Treasury Common Shares Under Stock Option and Restricted Stock Plans.......................... -- -- (27,683) -- 62,975 (2,206) -- Acquisition of 4,777,262 Common Shares.................. -- -- (52) -- (277,997) 160 -- Dividends Declared on Preferred Stock--$12.97 Per Share........ -- -- -- (4,363) -- -- -- Dividends Declared on Common Stock--$1.135 Per Share........ -- -- -- (118,414) -- -- -- Net Change in Deferred Compensation................... -- -- -- -- -- 735 -- Income Tax Benefit for Compensation Expense for Tax Purposes in Excess of Amounts Recognized for Financial Reporting Purposes... -- -- 13,334 -- -- -- -- Other........................... -- -- (2,632) (691) -- -- -- ---- -------- -------- ---------- --------- -------- -------- Balance, December 31, 2001...... $336 $117,302 $698,289 $2,331,776 $(673,494) $(21,841) $ 40,600 ==== ======== ======== ========== ========= ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. 46 Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 ($000 except share data) Marshall & Ilsley Corporation ("M&I" or the "Corporation") is a bank holding company that provides diversified financial services to a wide variety of corporate, institutional, government and individual customers. 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. 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 its lead bank M&I Marshall & Ilsley Bank which is headquartered in Wisconsin and one federally chartered thrift headquartered in Nevada. In addition to branches located throughout Wisconsin and Las Vegas, Nevada, banking services are provided in branches located throughout Arizona, the Minneapolis/St. Paul, Minnesota metropolitan area, and Naples, Florida, as well as on the Internet. Financial and data processing services and software sales are provided through the Corporation's subsidiary Metavante Corporation ("Metavante") and its 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, Minnesota, Florida, North Carolina, Illinois and Nevada; and brokerage and insurance services. 1. Summary of Significant Accounting Policies Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 2000 and 1999 Consolidated Financial Statements have been reclassified to conform to the 2001 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. 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 47 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) placed on nonaccrual status, previously accrued and uncollected interest is charged to interest income on loans. A nonaccrual loan may be restored to an accrual basis when interest and principal payments are brought current and collectibility of future payments is not in doubt. The Corporation defers and amortizes fees and certain incremental direct costs, primarily salary and employee benefit expenses, over the contractual term of the loan or lease as an adjustment to the yield. The unamortized net fees and costs are reported as part of the loan or lease balance outstanding. The Corporation periodically reviews the residual values associated with its leasing portfolio. Declines in residual values that are judged to be other than temporary are recognized as a loss resulting in a reduction in the net investment in the lease. During 2001 and 2000, the Corporation determined that declines in residual values associated with its direct financing consumer automobile leases were other than temporary. Total residual value losses recognized amounted to $35,132 in 2001 and $12,143 in 2000. 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. Asset sales--The Corporation sells assets to unconsolidated entities that securitize the assets. The Corporation retains interests in the securitized assets in the form of servicing rights, interest-only strips, interest rate swaps and a cash reserve account. Gain or loss on sale of the assets depends in part on the carrying amount assigned to the assets sold 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, 2001 and 2000, other real estate amounted to $6,796 and $3,797, 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, 48 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) 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 $289,667 at December 31, 2001 and $38,762 at December 31, 2000. Data processing services--Data processing and related revenues are recognized as services are 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. 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, 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:
2001 2000 -------- -------- Software............................ $110,791 $ 98,666 Conversions......................... 43,477 56,142 -------- -------- Total............................... $154,268 $154,808 ======== ========
See Note 2 for the effect on conversion costs due to the change in accounting. Amortization expense was $57,397, $40,731 and $23,836, for 2001, 2000 and 1999, respectively. Intangibles--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. The Corporation evaluates and measures impairment of its capitalized mortgage servicing rights using stratifications based on the risk characteristics of the underlying loans. 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 fair value of the Corporation's loan servicing rights is determined based on quoted market prices for comparable transactions, if available, or a valuation model that calculates the present value of expected future cash flows. Loan servicing rights amounted to $12,932 and $15,265 at December 31, 2001 and 2000, respectively. Amortization expense amounted to $6,678, $2,598 and $1,431 in 2001, 2000 and 1999. 49 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Identifiable intangibles resulting from acquisitions primarily consist of core deposit premiums and other identifiable intangibles arising from purchase acquisitions by the Corporation's Metavante subsidiary, such as purchased data processing contract rights or customer lists. 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. These identifiable intangibles amounted to $19,964 and $19,089 at December 31, 2001 and 2000, respectively. Amortization expense amounted to $3,935 in 2001, $5,112 in 2000 and $4,394 in 1999. Core deposit premiums are amortized in proportion to acquired deposit run-off which generally results in an accelerated basis over periods ranging up to 15 years. Core deposit premiums amounted to $30,441 and $15,146 at December 31, 2001 and 2000, respectively. Amortization expense amounted to $6,541, $6,487 and $9,407 in 2001, 2000 and 1999, respectively. Goodwill arising from business combinations consummated prior to June 30, 2001 is amortized on the straight-line basis over periods ranging from 10 to 25 years. Goodwill arising from business combinations consummated after June 30, 2001 is not amortized. Goodwill arising from certain banking acquisitions, in which the fair value of the liabilities assumed exceed the fair value of the assets acquired, is amortized in proportion to the run-off of the acquired longer-term earning assets. Goodwill amounted to $524,748 at December 31, 2001 and $295,784 at December 31, 2000. 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. The Corporation also has negative goodwill included in other liabilities. Negative goodwill amounted to $1,247 and $2,809 at December 31, 2001 and 2000, respectively. The negative goodwill was accreted on a straight-line basis over a period of 10 years and amounted to $1,562 in 2001, 2000, and 1999, respectively. Long-term borrowings--The guaranteed preferred beneficial interest of the Corporation's special purpose finance subsidiary, which holds as its sole asset junior subordinated deferrable interest debentures issued by the Corporation, is classified as long-term borrowings and shown net of its related discount. The distributions, including the related accretion of discount, are classified as interest expense for purposes of the Consolidated Financial Statements. Derivative financial instruments--Derivative financial instruments, including certain derivative instruments embedded in other contracts, are carried in the Consolidated Balance Sheet as either an asset or liability measured at its fair value. The fair value of the Corporation's derivative financial instruments is determined based on quoted market prices for comparable transactions, if available, or a valuation model that calculates the present value of expected future cash flows. Changes in the fair value of derivative financial instruments are recognized currently in earnings unless specific hedge accounting criteria are met. For derivative financial instruments designated as hedging the exposure to changes in the fair value of a recognized asset or liability (fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. For derivative financial instruments designated as hedging the exposure to variable cash flows of a forecasted transaction (cash flow hedge), the effective portion of the derivative financial instrument's gain or loss is initially reported as a component of other comprehensive income and is subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. 50 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) At inception of a hedge, the Corporation formally documents the hedging relationship as well as the Corporation's risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged transaction, the nature of the risk being hedged, and how the hedging instrument's effectiveness in hedging the exposure will be assessed. The adjustment of the carrying amount of an interest bearing hedged asset or liability in a fair value hedge is amortized into earnings when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. If a cash flow hedge is discontinued because it is probable that the original forecasted transaction will not occur, the net gain or loss in accumulated other comprehensive income is immediately reclassified into earnings. Cash flows from derivative financial 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 changes in market value included in other income. Treasury Stock--Treasury stock acquired is recorded at cost and is carried 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 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. SFAS 141 replaces Accounting Principles Board ("APB") Opinion No. 16, Business Combinations, and SFAS 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this statement are to be accounted for using the purchase method. This statement carries forward without reconsideration portions of APB Opinion No. 16 that provide guidance related to the application of the purchase accounting method. The provisions of this statement apply to all business combinations initiated after June 30, 2001, and all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001, or later. In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible Assets. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supercedes APB Opinion No. 17, Intangible Assets. SFAS 142 prescribes the accounting and reporting for intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) upon their acquisition. SFAS 142 also prescribes how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. SFAS 142 adopts an aggregate view of goodwill and bases the accounting for goodwill on the units of the combined entity into which an acquired entity is integrated (those units are referred to as Reporting Units). A Reporting Unit is an operating segment as defined in SFAS 131 or one level below an operating segment. Goodwill and intangible assets that have indefinite useful lives will not be amortized under the new standard but rather will be tested annually for impairment. Intangible assets with finite lives will continue to be amortized over their useful lives, but without the constraint of the prescribed ceilings required under APB Opinion 17. 51 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) SFAS 142 provides specific guidance for testing goodwill and intangible assets that will not be amortized for impairment. Goodwill will be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a Reporting Unit. The first step is a screen for potential impairment and the second step measures the amount of impairment, if any. Intangible assets that will not be amortized will be tested annually by comparing the fair values of the assets with their recorded amounts. This standard also increases disclosures about goodwill and intangible assets and requires information about the changes in the carrying amount of goodwill from period to period (in the aggregate and by reportable segment), the carrying amount of intangible assets by major intangible asset class for those assets subject to amortization and for those not subject to amortization, and the estimated intangible amortization expense for the next five years. The provisions of SFAS 142 are required to be applied by the Corporation starting January 1, 2002 except goodwill and intangible assets acquired after June 30, 2001, which were subject immediately to the nonamortization and amortization provisions of the statement. In addition, the Corporation has six months from the date it initially applies this standard to complete the first step of the transitional goodwill impairment test; however, the amounts used in the transitional goodwill impairment test shall be measured as of January 1, 2002. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to initial application of this standard (resulting from a transitional impairment test) are to be reported as a change in accounting principle. Pro forma income before cumulative effect of changes in accounting principles and related earnings per share after giving effect to the nonamortization provision of SFAS 142 are as follows:
Year Ended December 31, ---------------------------- ($000's) 2001 2000 1999 -------- -------- -------- Income before cumulative effect of changes in accounting principles. $337,921 $317,402 $354,511 Adjustments: Goodwill amortization, net of taxes................................ 16,917 16,258 19,612 Negative goodwill amortization..................................... (1,562) (1,562) (1,562) -------- -------- -------- Total adjustments................................................... 15,355 14,696 18,050 -------- -------- -------- Pro forma income before cumulative effect of changes in accounting principles........................................................ $353,276 $332,098 $372,561 ======== ======== ======== Pro forma earnings per share: Income before cumulative effect of changes in accounting principles: Basic.............................................................. $ 3.35 $ 3.15 $ 3.49 Diluted............................................................ 3.24 3.05 3.30
The amount of goodwill that will continue to be amortized is $3,385 at December 31, 2001. The Corporation has not yet completed its determination of how the impairment provisions of the standard applied to the five identified Reporting Units with recorded goodwill will affect its financial statements. 2. Change in Method of Accounting On January 1, 2001, the Corporation adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance 52 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) 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. The effects of adopting SFAS 133 are as follows:
Other Consolidated Comprehensive Income Income Statement (Equity) ------------ ------------- Fair value hedges................................... $(628) $ -- Cash flow hedges.................................... (43) (15,665) ----- -------- (671) (15,665) Income tax benefit.................................. 235 5,483 ----- -------- Cumulative effect of change in accounting principles $(436) $(10,182) ===== ========
See Note 20 for additional information regarding the Corporation's use of derivative financial instruments. During 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 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 ========
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, 2001 -------------------------------- Average Per Income Shares Share (Numerator) (Denominator) Amount ----------- ------------- ------ Net income.......................................................... $337,485 Convertible preferred dividends..................................... (4,363) -------- Basic earnings per share Income available to common shareholders.......................... 333,122 104,206 $3.20 ===== Effect of dilutive securities Convertible preferred stock...................................... 4,363 3,844 Stock option, restricted stock and performance plans............. -- 1,082 -------- ------- Diluted earnings per share Income available to common shareholders plus assumed conversions. $337,485 109,132 $3.09 =====
53 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data)
Year Ended December 31, 2000 -------------------------------- Average Per Income Shares 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 -------------------------------- Average Per Income Shares Share (Numerator) (Denominator) Amount ----------- ------------- ------ Net income.......................................................... $354,511 Convertible preferred dividends..................................... (6,297) -------- Basic earnings per share Income available to common shareholders.......................... 348,214 104,859 $3.32 ===== Effect of dilutive securities Convertible preferred stock...................................... 6,297 6,543 Stock option, restricted stock and performance plans............. -- 1,603 -------- ------- Diluted earnings per share Income available to common shareholders plus assumed conversions. $354,511 113,005 $3.14 =====
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 years ended December 31, are as follows:
Years Ended December 31, Price Range Shares ------------------------ ---------------- --------- 2001.......................... $ 55.313-$70.063 4,134,543 2000.......................... 48.125- 70.063 3,657,113 1999.......................... 67.000- 70.063 66,000
4. Business Combinations On December 20, 2001, the Corporation's Metavante subsidiary acquired all of the outstanding common stock of 401kservices.com, inc., in a transaction accounted for using the purchase method of accounting. 401kservices.com, inc. is a third-party administrator of 401(k), pension and profit-sharing plans for companies located throughout the United States. The Company is headquartered in Appleton, Wisconsin with offices in Arizona and California. Metavante acquired the common stock of the Company for $17.9 million in cash subject to additional payments contingent upon certain 2002 incremental revenues. The cumulative maximum purchase price is $30.0 million. Contingency payments, if made, will be charged to goodwill. There was no in-process research and development acquired in this transaction. Initial goodwill, subject to the completion of appraisals and valuations of the assets acquired and liabilities assumed, amounted to $14.1 million. 54 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) On September 19, 2001, the Corporation's Metavante subsidiary acquired substantially all of the assets and assumed certain liabilities of the North American Internet banking unit of Brokat Technologies AG ("Brokat"), in a transaction accounted for as a purchase. The Brokat transaction added technology for consumer, business and corporate e-Banking applications. Total purchase price was approximately $18.5 million in cash. There was no in-process research and development acquired in this transaction. Initial goodwill, subject to the completion of appraisals and valuations of the assets acquired and liabilities assumed, amounted to $19.7 million. In conjunction with this acquisition, Metavante began consolidating a number of its electronic banking products onto a single technology platform. Also, certain data operations centers will be consolidated over time into one data operations center. The costs, recorded in the third quarter of 2001, associated with the consolidation of five technology platforms and consolidation of four data centers amounted to $34.5 million and consisted of severance of $3.8 million, facility closure charges of $10.2 million and write-offs of existing technology and software, which were replaced by the Brokat technology and software, of $20.5 million. On August 1, 2001, the Corporation acquired the common stock of National City Bancorporation, ("National City"), a Minneapolis, Minnesota-based bank holding company. National City, and its significant subsidiaries National City Bank of Minneapolis, with branches in Minneapolis and Edina, Minnesota, and Diversified Business Credit, Inc., had consolidated total assets of approximately $1.1 billion at completion of the merger. The Corporation issued 4.5 million shares of its common stock in exchange for the outstanding common stock of National City in a tax-free reorganization using the purchase method of accounting. The core deposit intangible recorded in this transaction amounted to $14.5 million. Initial goodwill, subject to the completion of appraisals and valuations of the assets acquired and liabilities assumed, amounted to $114.1 million. Exit liabilities recorded in this transaction amounted to $5.0 million, consisting of $2.3 million for severance of duplicative positions and $2.7 million of costs to convert National City's systems to the Corporation's systems. Also during the third quarter of 2001, the Corporation acquired for cash twelve branches located in Arizona which had total assets of $538 million, loans of approximately $345 million and deposits of approximately $455 million at the time of acquisition. These transactions were accounted for under the purchase method of accounting. The core deposit intangible recorded in these transactions amounted to $7.4 million. Total goodwill amounted to $53.1 million. On June 20, 2001, the Corporation's Metavante subsidiary acquired certain assets and assumed certain liabilities of CyberBills, Inc. for approximately $14.6 million in cash in a transaction accounted for under the purchase method of accounting. CyberBills, Inc. was an electronic bill and presentment application service provider, offering comprehensive bill management services that allow consumers and businesses to view, pay, manage and automate all of their bills-paper or electronic-online. There was no in-process research and development acquired in this transaction. Initial goodwill, subject to the completion of appraisals and valuations of the assets acquired and liabilities assumed, amounted to $25.3 million. On June 1, 2001, the Corporation's Metavante subsidiary acquired all of the outstanding common and preferred stock of Derivion Corporation ("Derivion") for approximately $12.8 million in cash in a transaction accounted for under the purchase method of accounting. Through three core electronic billing applications, Derivion enables billers of all sizes to automate and streamline bill delivery, payment and customer-care processes. There was no in-process research and development acquired in this transaction. Initial goodwill, subject to the completion of appraisals and valuations of the assets acquired and liabilities assumed, amounted to $25.7 million. In conjunction with the CyberBills and Derivion transactions, Metavante incurred approximately $7.2 million in charges to write-off other technologies and investments replaced by these acquisitions in the second quarter of 2001. In addition, approximately $3.5 million of transition related charges were incurred in each of the third and fourth quarters of 2001, respectively. 55 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) 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. 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. There was no in-process research and development acquired in this transaction. Pending Acquisitions as of December 31, 2001 On December 4, 2001, the Corporation entered into a definitive agreement to acquire Century Bancshares, Inc., of Eden Prairie, Minnesota, the privately held holding company for Century Bank, N.A. for $66 million payable in a combination of cash and shares of M&I common stock. Century Bank, N.A. has approximately $325 million in assets and has three branches in the Minneapolis area: Eden Prairie, Coon Rapids and St. Louis Park. The transaction is expected to close in the first quarter of 2002, subject to regulatory and shareholder approvals. On November 19, 2001, the Corporation entered into a definitive agreement to acquire Richfield State Agency, Inc., of Richfield, Minnesota, the privately held holding company for Richfield Bank & Trust Co. for approximately $157 million payable in a combination of cash and shares of M&I common stock. Richfield Bank & Trust Co. has approximately $695 million in assets and has seven branches throughout the Minneapolis/St. Paul metropolitan area, including Richfield, Minneapolis, St. Paul, Bloomington, Burnsville, Edina and Chanhassen. This transaction is also expected to close in the first quarter of 2002, subject to regulatory and shareholder approvals. 5. Cash and Due from Banks At December 31, 2001, $10,052 of cash and due from banks was restricted, primarily due to requirements of the Federal Reserve System to maintain certain reserve balances. 6. Securities The book and market values of securities at December 31 were:
2001 2000 --------------------- --------------------- Amortized Market Amortized Market Cost Value Cost Value ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies. $2,268,681 $2,346,566 $3,303,366 $3,342,952 States and political subdivisions..... 170,130 176,167 143,883 151,041 Mortgage backed securities............ 172,139 175,471 342,385 342,171 Other................................. 675,303 685,428 887,702 899,558 ---------- ---------- ---------- ---------- Total............................... $3,286,253 $3,383,632 $4,677,336 $4,735,722 ========== ========== ========== ========== Investment Securities Held to Maturity: States and political subdivisions..... $1,028,555 $1,046,414 $1,107,476 $1,119,687 Other................................. 3,538 3,538 5,069 5,069 ---------- ---------- ---------- ---------- Total............................... $1,032,093 $1,049,952 $1,112,545 $1,124,756 ========== ========== ========== ==========
56 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) The unrealized gains and losses of securities at December 31 were:
2001 2000 --------------------- --------------------- Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses ---------- ---------- ---------- ---------- Investment Securities Available for Sale: U.S. Treasury and government agencies. $78,089 $ 204 $42,371 $2,785 States and political subdivisions..... 6,093 56 7,158 -- Mortgage backed securities............ 3,332 -- 786 1,000 Other................................. 10,185 60 11,940 84 ------- ------ ------- ------ Total............................... $97,699 $ 320 $62,255 $3,869 ======= ====== ======= ====== Investment Securities Held to Maturity: States and political subdivisions..... $24,740 $6,881 $17,850 $5,639 Other................................. -- -- -- -- ------- ------ ------- ------ Total............................... $24,740 $6,881 $17,850 $5,639 ======= ====== ======= ======
The book value and market value of securities by contractual maturity at December 31, 2001 were:
Investment Securities Investment Securities Available for Sale Held to Maturity --------------------- --------------------- Amortized Market Amortized Market Cost Value Cost Value ---------- ---------- ---------- ---------- Within one year............ $ 796,619 $ 805,892 $ 70,135 $ 71,040 From one through five years 1,969,332 2,041,935 353,242 366,011 From five through ten years 249,257 258,025 204,002 210,212 After ten years............ 271,045 277,780 404,714 402,689 ---------- ---------- ---------- ---------- Total................... $3,286,253 $3,383,632 $1,032,093 $1,049,952 ========== ========== ========== ==========
The gross realized gains and losses amounted to $30,117 and $36,876 in 2001, $22,876 and $52,861 in 2000, and $12,074 and $4,382 in 1999, respectively. Net securities gains of $10,411, $19,530 and $11,775 in 2001, 2000 and 1999, respectively, are included in the line Capital Markets Revenue in the Consolidated Statements of Income. At December 31, 2001, securities with a value of approximately $701,226 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 securitized, resulting in the balances being transferred to investment securities available for sale during 2000. 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. 57 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) 7. Loans and Leases Loans and Leases at December 31 were:
2001 2000 ----------- ----------- Commercial, financial and agricultural..... $ 5,716,061 $ 5,289,537 Real estate: Construction............................ 730,864 619,281 Residential mortgage.................... 5,563,975 5,049,557 Commercial mortgage..................... 5,099,093 4,359,812 Personal................................... 1,210,808 1,174,248 Lease financing............................ 962,356 1,094,652 Cash flow hedging instruments at fair value 12,215 -- ----------- ----------- Total loans and leases.............. $19,295,372 $17,587,087 =========== ===========
The Corporation's lending activities are concentrated primarily in the Midwest. Approximately 6% of its portfolio consists of loans granted to customers located in Arizona. The Corporation had $1.1 million in foreign credits at December 31, 2001. The Corporation's loan portfolio consists of business loans extending across many industry types, as well as loans to individuals. As of December 31, 2001, 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 2001 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....................... $ 105,444 New loans........................................ 184,236 Repayments....................................... (195,350) --------- Balance, end of year............................. $ 94,330 =========
8. Allowance for Loan and Lease Losses An analysis of the allowance for loan and lease losses follows:
2001 2000 1999 -------- -------- -------- Balance, beginning of year................ $235,115 $225,862 $226,052 Allowance of banks and loans acquired..... 19,151 1,270 -- Allowance transfer for loan securitization -- (1,022) -- Provision charged to expense.............. 54,115 30,352 25,419 Charge-offs............................... (48,609) (30,018) (32,557) Recoveries................................ 8,426 8,671 6,948 -------- -------- -------- Balance, end of year...................... $268,198 $235,115 $225,862 ======== ======== ========
58 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) The allowance for loan and lease losses acquired in branch and bank acquisitions is consistent with the estimate of probable losses as determined by the seller financial institution. As of December 31, 2001 and 2000, nonaccrual loans and leases totaled $166,434 and $121,425, respectively. At December 31, 2001 and 2000, the Corporation's recorded investment in impaired loans and leases and the related valuation allowance are as follows:
2001 2000 -------------------- -------------------- Recorded Valuation Recorded Valuation Investment Allowance Investment Allowance ---------- --------- ---------- --------- Total impaired loans and leases (Nonaccrual and renegotiated)..................... $166,812 $122,039 Loans and leases excluded from individual evaluation (61,290) (34,167) -------- -------- Impaired loans evaluated............................ $105,522 $ 87,872 ======== ======== Valuation allowance required........................ $ 40,980 $18,268 $ 5,727 $2,137 No valuation allowance required..................... 64,542 -- 82,145 -- -------- ------- -------- ------ Impaired loans evaluated............................ $105,522 $18,268 $ 87,872 $2,137 ======== ======= ======== ======
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 $25,052 in 2001 and $21,332 in 2000 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, 2001 and 2000 amounted to $148,520 and $118,832, 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 $10,295 in 2001, $6,410 in 2000, and $6,253 in 1999. The gross income that would have been recognized had such loans and leases been performing in accordance with their original terms would have been $12,846 in 2001, $11,415 in 2000, and $9,980 in 1999. 9. Asset Sales The Corporation regularly sells assets, primarily indirect automobile loans to an unconsolidated multi-seller asset backed commercial paper conduit, in securitization transactions in accordance with SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Servicing responsibilities and subordinated interests were retained. The Corporation receives annual servicing fees based on the loan balances outstanding and rights to future cash flows arising after investors in the securitization trust have received 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. 59 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) During 2001 and 2000, the Corporation recognized gains and trading income of $11,034 and $3,155, respectively, on the securitization of loans. There was no such activity in 1999. Key economic assumptions used in measuring the retained interests at the date of securitization resulting from securitizations completed during the year were as follows (rate per annum):
2001 2000 ---- ---- Prepayment speed (CPR)........... 25.0% 25.0% Weighted average life (in months) 20.8 20.5 Expected credit losses........... 0.12% 0.10% Expected total credit losses..... 0.19 0.16 Residual cash flow discount rate. 12.0 12.0 Variable returns to transferees.. Forward one month LIBOR yield curve
At December 31, 2001, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions are as follows ($ in millions):
Adverse Change in Assumptions ---------------- 10% 20% ---- --- Carrying amount retained interests--automobile loans $32.9 Weighted average life (in months)................... 18.6 Prepayment speed (per annum)........................ 25.0% Impact on fair value of adverse change............ $0.6 $1.3 Expected credit losses (annual rate)................ 0.12% Impact on fair value of adverse change............ 0.1 0.2 Residual cash flows discount rate (annual).......... 12.0% Impact on fair value of adverse change............ 0.3 0.5 Interest rate returns to transferees................ Forward one month LIBOR yield curve Impact on fair value of adverse change............ 0.7 1.3
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 0.23% of total loans securitized as of December 31, 2001. The following table summarizes certain cash flows received from and paid to the securitization trust for the year ended December 31, 2001:
2001 2000 -------- -------- Proceeds from new securitizations................... $389,794 $223,098 Servicing fees received............................. 2,610 533 Net charge-offs..................................... (491) (31) Cash collateral account transfers, net.............. (1,771) (5,071) Other cash flows received on retained interests, net 4,747 600
60 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) At December 31, 2001, securitized automobile loans and other automobile loans managed together with them along with delinquency and credit loss information consisted of the following:
Total Securitized Portfolio Managed ----------- --------- -------- Loan balances...................................... $433,304 $224,083 $657,387 Principal amounts of loans 60 days or more past due 513 706 1,219 Net credit losses.................................. 556 1,220 1,776
The Corporation also sells, from time to time, available for sale investment securities that are highly rated and/or short-term commercial loans to an unconsolidated bankruptcy remote qualifying special purpose entity whose activities are limited to issuing highly rated asset-backed commercial paper with maturities up to 180 days which is used to finance the purchase of the investment securities and /or loans. The initial program limit is $2.0 billion. The Corporation's lead bank ("Bank") provides liquidity back-up in the form of Liquidity Purchase Agreements and credit enhancement for the loans sold in the form of a letter of credit. Under certain circumstances, these facilities would require the Bank to purchase sufficient investment securities or loans from the entity to accommodate maturing commercial paper, which could result in a loss to the Bank. However, based on the quality of the assets that were sold at no gain or loss, the Corporation believes that the probability of a purchase and recognition of loss is remote and if such a purchase would have been required at December 31, 2001, no gain or loss would have been recognized. In addition, the Bank acts as counterparty to interest rate swaps that enable the special purpose entity to hedge its interest rate risk. Such swaps are designated as trading in the Corporation's Consolidated Balance Sheet. At December 31, 2001, highly rated investment securities in the amount of $264.8 million and short-term commercial loans in the amount of $60.7 million were outstanding in the special purpose entity to support the outstanding commercial paper. 10. Premises and Equipment The composition of premises and equipment at December 31 was:
2001 2000 -------- -------- Land......................................... $ 51,243 $ 47,893 Buildings and leasehold improvements......... 368,936 347,566 Furniture and equipment...................... 466,819 458,242 -------- -------- 886,998 853,701 Less accumulated depreciation................ 493,968 460,706 -------- -------- Total premises and equipment.............. $393,030 $392,995 ======== ========
Depreciation expense was $68,331 in 2001, $63,580 in 2000, and $62,845 in 1999. The Corporation leases certain of its facilities and equipment. Rent expense under such operating leases was $64,889 in 2001, $56,555 in 2000, and $50,200 in 1999, respectively. The future minimum lease payments under operating leases that have initial or remaining noncancellable lease terms in excess of one year for 2002 through 2006 are $30,155, $26,844, $20,902, $17,646, and $12,041, respectively. 61 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) 11. Deposits The composition of deposits at December 31 was:
2001 2000 ----------- ----------- Noninterest bearing demand........................ $ 3,558,571 $ 3,129,834 Savings and NOW................................... 7,867,106 7,486,094 CDs $100,000 and over............................. 1,321,746 2,663,050 Other time deposits............................... 2,962,724 3,532,310 Foreign deposits.................................. 782,900 2,437,339 ----------- ----------- Total deposits.................................. $16,493,047 $19,248,627 =========== ===========
At December 31, 2001 and 2000, brokered deposits amounted to $774.2 million and $2,566.4 million, respectively. At December 31, 2001, the scheduled maturities for CDs $100,000 and over, other time deposits, and foreign deposits were: 2002 ......................................................... $4,281,608 2003.......................................................... 422,246 2004.......................................................... 190,913 2005.......................................................... 68,951 2006 and thereafter........................................... 103,652 ---------- $5,067,370 ==========
12. Short-term Borrowings Short-term borrowings at December 31 were:
2001 2000 ---------- ---------- Funds purchased and security repurchase agreements $1,090,150 $1,092,723 Cash flow hedge--Fed funds........................ 21,262 -- U.S. Treasury demand notes........................ 315,644 81,930 U.S. Treasury demand notes--special direct........ 2,290,606 -- Senior bank notes--Puttable Reset Securities...... 1,001,961 1,008,060 Senior bank notes................................. -- 99,988 Commercial paper.................................. 314,989 322,161 Cash flow hedge--Commercial paper................. 20,353 -- Current maturities of long-term borrowings........ 800,772 209,355 Other............................................. 1,505 514 ---------- ---------- Total short-term borrowings.................... $5,857,242 $2,814,731 ========== ==========
U.S. Treasury demand notes--special direct represent secured borrowings of the lead banking subsidiary with a maximum term of 21 days. 62 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Bank notes may be senior or subordinated in ranking and 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 issuing bank 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 a certain broker-dealer. Beginning December 3, 2001 and each December 1 thereafter until and including December 1, 2006, the broker-dealer has 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-dealer does 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 was 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. On December 3, 2001, the interest rate reset to 6.15%. If the PRS are not resold due to a failed remarketing or a market disruption event, the Corporation would be obligated to pay the broker-dealer the fair market value of the call option. 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% that matured in March of 2001. Unused lines of credit, primarily to support commercial paper borrowings, were $75.0 million at December 31, 2001 and 2000, respectively. 13. Long-term Borrowings Long-term borrowings at December 31 were:
2001 2000 ---------- ---------- Corporation: 6.375% subordinated notes due in 2003.................................. $ 99,871 $ 99,794 Medium-term Series C, D and E notes.................................... 312,950 130,900 7.65% cumulative company-obligated mandatorily redeemable capital trust pass-through securities.............................................. 199,193 199,160 Subsidiaries: Borrowings from Federal Home Loan Bank (FHLB): Floating rate advances.............................................. 310,000 100,000 Fixed rate advances................................................. 554,372 260,151 Cash flow hedge..................................................... 3,602 -- Senior bank notes...................................................... 199,929 199,628 Senior bank notes-EXLs................................................. 249,608 -- Subordinated bank note................................................. 395,977 98,854 Nonrecourse notes...................................................... 23,693 29,008 9.75% obligation under capital lease due through 2006.................. 2,655 3,083 Other.................................................................. 9,099 10,053 ---------- ---------- 2,360,949 1,130,631 Less current maturities................................................ 800,772 209,355 ---------- ---------- Total long-term borrowings...................................... $1,560,177 $ 921,276 ========== ==========
63 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) The 6.375% subordinated notes are not redeemable prior to maturity and qualify as "Tier 2" or supplementary capital for regulatory capital purposes. Interest is payable semiannually. At December 31, 2001, there were $14,000 of medium-term Series C notes outstanding. The medium-term Series C notes have fixed interest rates of 6.48% 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, 2001, medium-term Series D notes outstanding amounted to $24,250 with fixed interest rates of 6.31% to 7.20% and $23,700 at three month LIBOR plus 26 basis points. Series D notes mature at various times and amounts 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, 2001, series E notes outstanding amounted to $251,000 with fixed rates of 5.75% to 7.19%. Series E notes outstanding mature in 2002 through 2006. In December 1996, the Corporation formed M&I Capital Trust A (the "Trust") and issued $200 million in liquidation or principal amount of cumulative preferred capital securities. Holders of the capital securities are entitled to receive cumulative cash distributions at an annual rate of 7.65% payable semiannually. Concurrently with the issuance of the capital securities, the Trust invested the proceeds, together with the consideration paid by the Corporation for the common interest in the Trust, in junior subordinated deferrable interest debentures ("subordinated debt") issued by the Corporation. The subordinated debt, which represents the sole asset of the Trust, bears interest at an annual rate of 7.65% payable semiannually and matures on December 1, 2026. The subordinated debt is junior in right of payment to all present and future senior indebtedness of the Corporation. The Corporation may redeem the subordinated debt in whole or in part at any time on or after December 1, 2006 at specified call premiums, and at par on or after December 1, 2016. In addition, in certain circumstances the subordinated debt may be redeemed at par upon the occurrence of certain events. The Corporation's right to redeem the subordinated debt is subject to regulatory approval. The Corporation has the right, subject to certain conditions, to defer payments of interest on the subordinated debt for extension periods, each period not exceeding ten consecutive semiannual periods. As a consequence of the Corporation's extension of the interest payment period, distributions on the capital securities would be deferred. In the event the Corporation exercises its right to extend an interest payment period, the Corporation is prohibited from making dividend or any other equity distributions during such extension period. The payment of distributions, liquidation of the Trust or payment upon the redemption of the capital securities are guaranteed by the Corporation. The Corporation, as owner of the common interest in the Trust, has the right at any time to terminate the Trust, subject to certain conditions. In circumstances other than maturity or redemption of the subordinated debt, the subordinated debt would be distributed to the holders of the Trust securities on a pro rata basis in liquidation of the holders' interests in the Trust. The capital securities qualify as "Tier 1" capital for regulatory capital purposes. Fixed rate FHLB advances have interest rates, which range from 4.51% to 8.47% and mature at various times in 2002 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. The floating rate advances mature in 2006. The interest rate is reset monthly based on the London Interbank Offered Rate ("LIBOR"). 64 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) 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 FHLB stock. The senior bank notes have a fixed interest rate of 7.25% and pay interest semi-annually. The notes mature in 2002. The senior bank notes--EXLs are indexed to one month LIBOR plus a stated spread and mature in 2002. However, EXL noteholders have the ability to extend the maturity date through 2006. The stated spread increases annually through 2005. 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 8.40% at December 31, 2001 and are due in installments over varying periods through 2011. Lease financing receivables at least equal to the amount of the notes are pledged as collateral. Scheduled maturities of long-term borrowings are: $356,579, $5,803, $4,230, and $565,240 for 2003 through 2006, respectively. 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, 2001 and 2000, 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. The Corporation sponsors 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, 2001 and 2000, 301,693 and 288,858 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 $15,605 at December 31, 2001 and $14,940 at December 31, 2000. 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, 2001 and 2000, 81,987 and 93,552 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 $3,264 and $3,731 at December 31, 2001 and 2000, respectively, is included in Deferred Compensation as a reduction of shareholders' equity in the Consolidated Balance Sheets. 65 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) The Corporation issues treasury common stock in conjunction with exercises of stock options 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. During 2001 and 2000, shares repurchased in accordance with the approved plan amounted to 4.7 million shares with an aggregate cost of $273.3 million in 2001 and 3.2 million shares with an aggregate cost of $156.3 million in 2000. Federal banking regulatory agencies have established capital adequacy rules which take into account risk attributable to balance sheet assets and off-balance sheet activities. All banks and bank holding companies must meet a minimum total risk-based capital ratio of 8%. Of the 8% required, at least half must be comprised of core capital elements defined as "Tier 1" capital. The federal banking agencies also have adopted leverage capital guidelines which banking organizations must meet. Under these guidelines, the most highly rated banking organizations must meet a minimum leverage ratio of at least 3% "Tier 1" capital to total assets, while lower rated banking organizations must maintain a ratio of at least 4% to 5%. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. At December 31, 2001 and 2000, the most recent notification from the Federal Reserve Board categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Corporation's category. To be well capitalized under the regulatory framework, the "Tier 1" capital ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%. The Corporation's risk-based capital and leverage ratios are as follows ($ in millions):
Risk-Based Capital Ratios --------------------------------------------------- As of December 31, 2001 As of December 31, 2000 ------------------------- ------------------------ Amount Ratio Amount Ratio --------------- --------- -------------- --------- Tier 1 capital............................. $ 2,091.5 9.70% $ 2,070.8 10.20% Tier 1 capital adequacy minimum requirement 862.2 4.00 811.7 4.00 --------------- --------- -------------- --------- Excess..................................... $ 1,229.3 5.70% $ 1,259.1 6.20% =============== ========= ============== ========= Total capital.............................. $ 2,775.6 12.88% $ 2,444.6 12.05% Total capital adequacy minimum requirement. 1,724.3 8.00 1,623.5 8.00 --------------- --------- -------------- --------- Excess..................................... $ 1,051.3 4.88% $ 821.1 4.05% =============== ========= ============== ========= Risk-adjusted assets....................... $ 21,554.5 $ 20,293.6 =============== ============== Leverage Ratio --------------------------------------------------- As of December 31, 2001 As of December 31, 2000 ------------------------- ------------------------ Amount Ratio Amount Ratio --------------- --------- -------------- --------- Tier 1 capital to adjusted total assets.... $ 2,091.5 7.93% $ 2,070.8 8.25% Minimum leverage adequacy requirement...... 791.2-1,318.6 3.00-5.00 752.9-1,254.8 3.00-5.00 --------------- --------- -------------- --------- Excess..................................... $1,300.3 -772.9 4.93-2.93% $1,317.9-816.0 5.25-3.25% =============== ========= ============== ========= Adjusted average total assets.............. $ 26,371.4 $ 25,096.4 =============== ==============
66 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) All of the Corporation's banking subsidiaries' risk-based capital and leverage ratios meet or exceed the defined minimum requirements, and have been deemed well capitalized as of December 31, 2001 and 2000. The following table presents the risk-based capital ratios for the Corporation's lead banking subsidiary:
Subsidiary Tier 1 Total Leverage - ---------- ------ ----- -------- M&I Marshall & Ilsley Bank December 31, 2001............................................ 9.07% 12.30% 7.26% December 31, 2000............................................ 8.46 10.42 7.12
M&I Marshall & Ilsley Bank's risk-based capital ratios at December 31, 2000, have not been restated for the charter consolidations that occurred in the first and second quarters of 2001. 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, 2001, the retained earnings of subsidiaries available for distribution as dividends without regulatory approval was approximately $286.3 million. 15. Income Taxes Total income tax expense for the years ended December 31, 2001, 2000, and 1999 was allocated as follows:
2001 2000 1999 -------- -------- -------- Income before income taxes and cumulative effect of changes in accounting principles....................................... $163,124 $152,948 $173,428 Cumulative effect of changes in accounting principles........ (235) (1,532) -- Shareholders' Equity: Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes...... (13,334) (2,486) (12,764) Unrealized (losses) / gains on accumulated other comprehensive income..................................... 1,667 38,699 (51,376) -------- -------- -------- $151,222 $187,629 $109,288 ======== ======== ========
The current and deferred portions of the provision for income taxes were:
2001 2000 1999 -------- -------- -------- Current: Federal............................ $161,622 $115,789 $126,358 State.............................. 14,140 22,652 7,059 -------- -------- -------- 175,762 138,441 133,417 Deferred: Federal............................ (8,039) 20,618 31,860 State.............................. (4,599) (6,111) 8,151 -------- -------- -------- (12,638) 14,507 40,011 -------- -------- -------- Total provision for income taxes. $163,124 $152,948 $173,428 ======== ======== ========
67 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) The following is a reconciliation between the amount of the provision for income taxes and the amount of tax computed by applying the statutory Federal income tax rate (35%):
2001 2000 1999 -------- -------- -------- Tax computed at statutory rates................ $175,366 $164,623 $184,779 Increase (decrease) in taxes resulting from: Federal tax-exempt income..................... (19,855) (19,428) (18,145) State income taxes, net of Federal tax benefit 6,202 10,824 10,050 Bank owned life insurance..................... (9,469) (9,837) (9,018) Other......................................... 10,880 6,766 5,762 -------- -------- -------- Total provision for income taxes............ $163,124 $152,948 $173,428 ======== ======== ========
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:
2001 2000 -------- -------- Deferred tax assets: Deferred compensation........................................ $ 34,091 $ 29,356 Allowance for loan and lease losses.......................... 108,535 93,507 Accrued postretirement benefits.............................. 29,647 27,430 Conversion revenue deferred.................................. 16,233 19,414 State NOLs................................................... 61,561 48,926 Other........................................................ 71,598 41,385 -------- -------- Total deferred tax assets before valuation allowance..... 321,665 260,018 Valuation allowance.......................................... (47,709) (40,653) -------- -------- Net deferred tax assets.................................. 273,956 219,365 Deferred tax liabilities: Lease revenue reporting...................................... 166,675 134,373 Deferred expense, net of unearned income..................... 59,826 61,647 Premises and equipment, principally due to depreciation...... 9,880 12,216 Purchase accounting adjustments.............................. 14,419 8,750 Accumulated other comprehensive income....................... 21,926 20,259 Other.......................................................... 40,569 38,859 -------- -------- Total deferred tax liabilities........................... 313,295 276,104 -------- -------- Net deferred tax liability............................... $ 39,339 $ 56,739 ======== ========
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, 2001 and 2000, the Corporation recognized $6,922 and $14,942, respectively of deferred tax assets related to state net operating losses that may be offset against future taxable income through 2016 and 2015, respectively. At December 31, 2001, the Corporation believes there is a greater than 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. The amount of income tax (benefit)/expense related to net securities gains or losses amounted to $(3,201), $(9,512), and $3,292, in 2001, 2000, and 1999, respectively. 68 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) 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. Activity relating to nonqualified and incentive stock options was:
Number of Option Price Weighted Average Shares Per Share Exercise Price ---------- ------------ ---------------- 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 Options granted......................... 1,970,550 49.46-63.90 62.78 Options lapsed or surrendered........... (218,151) 13.38-67.00 54.24 Options exercised....................... (1,116,787) 11.56-61.50 23.48 ---------- ------------ ------ Shares under option at December 31, 2001 8,751,132 $12.40-70.06 $49.62 ========== ============ ======
The range of options outstanding at December 31, 2001 were:
Weighted-Average Weighted-Average Number of Shares Exercise Price Remaining ----------------------- ----------------------- Contractual Life Price Range Outstanding Exercisable Outstanding Exercisable (In Years) ----------- ----------- ----------- ----------- ----------- ---------------- $12-25... 857,025 857,025 $20.20 $20.20 2.2 26-39... 899,103 899,103 29.58 29.58 4.5 40-52... 2,841,061 1,899,099 47.29 48.68 8.1 53-57... 822,263 800,363 56.92 57.00 6.0 58-62... 1,470,330 1,089,710 61.25 61.26 7.9 Over $62.. 1,861,350 436,866 63.99 64.35 9.8 --------- --------- ------ ------ --- 8,751,132 5,982,166 $49.62 $46.28 7.3 ========= ========= ====== ====== ===
Options exercisable at December 31, 2000 and 1999 were 5,986,582 and 5,031,588, respectively. The weighted average exercise price for options exercisable was $40.35 at December 31, 2000 and $35.96 at December 31, 1999. 69 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," establishes financial accounting and reporting standards for stock based employee compensation plans. SFAS 123 defines a fair value based method of accounting for employee stock option or similar equity instruments. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, expected dividends and the risk-free interest rate over the expected life of the option. The resulting compensation cost is recognized over the service period, which is usually the vesting period. Compensation cost can also be measured and accounted for using the intrinsic value based method of accounting prescribed in Accounting Principles Board Opinion No. 25 ("APBO 25"), "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount paid to acquire the stock. The largest difference between SFAS 123 and APBO 25 as it relates to the Corporation is the amount of compensation cost attributable to the Corporation's fixed stock option plans. Under APBO 25 no compensation cost is recognized for fixed stock option plans because the exercise price is equal to the quoted market price at the date of grant and therefore there is no intrinsic value. SFAS 123 compensation cost would equal the calculated fair value of the options granted. As permitted by SFAS 123, the Corporation continues to measure compensation cost for such plans using the accounting method prescribed by APBO 25. Had compensation cost for the Corporation's options granted after January 1, 1995 been determined consistent with SFAS 123, the Corporation's net income and earnings per share would have been reduced to the following pro forma amounts:
2001 2000 1999 -------- -------- -------- Net income: As reported............. $337,485 $315,123 $354,511 Pro forma............... 322,537 300,793 341,355 Basic earnings per share: As reported............. $ 3.20 $ 2.99 $ 3.32 Pro forma............... 3.05 2.85 3.20 Diluted earnings per share: As reported............. $ 3.09 $ 2.89 $ 3.14 Pro forma............... 2.97 2.78 3.03
The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option pricing model. The resulting compensation cost was amortized over the vesting period The grant date fair values and assumptions used to determine such value are as follows:
2001 2000 1999 ----------- ----------- ----------- Weighted-average grant date fair value $20.17 $13.82 $19.54 Assumptions: Risk-free interest rates........... 3.92-5.30% 5.14-6.79% 4.75-6.45% Expected volatility................ 31.09-31.33% 24.36-31.33% 22.00-24.62% Expected term (in years)........... 6.0 6.0 6.0 Expected dividend yield............ 2.13% 2.11% 1.56%
70 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Activity relating to the Corporation's Restricted Purchase Rights was:
December 31 --------------------------- 2001 2000 1999 -------- ------- -------- Restricted stock purchase rights outstanding--Beginning of Year.................................................... -- -- -- Restricted stock purchase rights granted.................. 40,000 8,000 21,000 Restricted stock purchase rights exercised................ (40,000) (8,000) (21,000) -------- ------- -------- Restricted stock purchase rights outstanding--End of Year. -- -- -- Weighted-average grant date market value.................. $ 55.94 $ 45.35 $ 64.41 Aggregate compensation expense............................ $ 934 $ 726 $ 534 Unamortized deferred compensation......................... $ 2,972 $ 1,859 $ 2,387
Restrictions on stock issued pursuant to the exercise of stock purchase rights generally 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, 2001 were 3,414,414. 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 58,100 in 2001, 46,850 in 2000, and 50,000 in 1999. The vesting period is three years from the date the performance units were awarded. At December 31, 2001, based on the performance criteria, approximately $3,820 would be due to the participants under the 1999 and 2000 awards. In addition, the amount payable to participants under the 1998 award, which was fully vested, was $9,340 at December 31, 2001. 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 $39,942, $40,016, and $37,378 in 2001, 2000, and 1999, 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 $2,394 in 2001, $1,174 in 2000, and $174 in 1999. 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. 71 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) The changes during the year of the accumulated postretirement benefit obligation ("APBO") for retiree health benefits are as follows:
2001 2000 -------- ------- APBO, beginning of year................................ $ 60,250 $46,867 Service cost........................................... 2,843 2,593 Interest cost on APBO.................................. 4,726 3,601 Actuarial losses....................................... 24,008 9,042 Change due to acquisitions/divestitures................ 356 -- Benefits paid.......................................... (2,564) (1,853) -------- ------- APBO, end of year...................................... 89,619 60,250 Unrecognized net (loss)/gain........................... (21,575) 2,432 Unrecognized prior service cost........................ 1,380 1,584 -------- ------- Accrued postretirement benefit cost.................... $ 69,424 $64,266 ======== ======= Weighted average discount rate used in determining APBO 7.50% 8.00% ======== =======
The assumed health care cost trend for 2002 was 6.00%. 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, 2001, 2000, and 1999 includes the following components:
2001 2000 1999 ------ ------ ------ Service cost......................................... $2,843 $2,593 $3,044 Interest on APBO..................................... 4,726 3,601 3,381 Net amortization and deferral........................ 152 (944) (157) ------ ------ ------ $7,721 $5,250 $6,268 ====== ====== ======
The assumed health care cost trend rate has a significant effect on the amounts reported for the health care plans. A one percentage point change on assumed health care cost trend rates would have the following effects:
One One Percentage Percentage Point Point Increase Decrease ---------- ---------- Effect on total of service and interest cost components $ 1,311 $ (1,058) Effect on postretirement benefit obligation............ 13,267 (11,133)
18. Financial Instruments with Off-Balance Sheet Risk Financial instruments with off-balance sheet risk at December 31 were:
2001 2000 ---------- ---------- Financial instruments whose amounts represent credit risk: Commitments to extend credit: To commercial customers............................ $7,322,698 $6,397,068 To individuals..................................... 2,007,197 1,778,514 Standby letters of credit, net of participations....... 976,438 606,539 Commercial letters of credit........................... 57,605 38,090 Mortgage loans sold with recourse...................... 1,105 1,613
72 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) 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. 19. Foreign Exchange Contracts Foreign exchange contracts are commitments to purchase or deliver foreign currency at a specified exchange rate. The Corporation enters into foreign exchange contracts primarily in connection with trading activities to enable customers involved in international trade to hedge their exposure to foreign currency fluctuations and to minimize the Corporation's own exposure to foreign currency fluctuations resulting from the above. Foreign exchange contracts include such commitments as foreign currency spot, forward, future and, to a much lesser extent, option contracts. The risks in these transactions arise from the ability of the counterparties to perform under the terms of the contracts and the risk of trading in a volatile commodity. The Corporation actively monitors all transactions and positions against predetermined limits established on traders and types of currency to ensure reasonable risk taking. The Corporation's market risk from unfavorable movements in currency exchange rates is minimized by essentially matching commitments to deliver foreign currencies with commitments to purchase foreign currencies. 73 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) At December 31, 2001, the Corporation's foreign currency position resulting from foreign exchange contracts by major currency was as follows ($000's US):
Commitments Commitments To Deliver To Purchase Foreign Foreign Exchange Exchange ----------- ----------- Currency Euros........................................................... $180,895 $180,721 English Pound Sterling.......................................... 80,183 79,894 Japanese Yen.................................................... 71,895 71,788 Swiss Franc..................................................... 30,188 30,159 Canadian Dollars................................................ 10,847 10,755 Norwegian Kroner................................................ 7,077 7,083 New Zealand Dollars............................................. 4,399 4,389 Swedish Kronor.................................................. 3,351 3,323 Australian Dollars.............................................. 1,220 1,207 All Other....................................................... 354 385 -------- -------- Total........................................................ $390,409 $389,704 ======== ======== Average amount of contracts to deliver/purchase foreign exchange $514,913 $514,172 ======== ========
These amounts do not represent the actual credit or market exposure. 20. Derivative Financial Instruments and Hedging Activities Interest rate risk, the exposure of the Corporation's net interest income and net fair value of its assets and liabilities, to adverse movements in interest rates, is a significant market risk exposure that can have a material effect on the Corporation's financial position, results of operations and cash flows. The Corporation has policies to ensure that neither earnings nor fair value at risk exceed established guidelines and assesses these risks by continually identifying and monitoring changes in interest rates that may adversely impact expected future earnings and fair values. The Corporation has designed strategies to confine these risks within the established limits and indentify appropriate risk/reward trade-offs in the financial structure of its balance sheet. These strategies include the use of derivative financial instruments to help achieve the desired balance sheet repricing structure while meeting the desired objectives of its customers. Trading Instruments The Corporation enters into interest rate swaps as part of its trading activities which enable its customers to manage their exposures to interest rate risk. The Corporation's market risk from unfavorable movements in interest rates is generally minimized by concurrently entering into offsetting positions with nearly identical notional values, terms and indices. At December 31, 2001, interest rate swaps designated as trading consisted of $436.4 million in notional amount of receive-fixed/pay-floating with an aggregate positive fair value of $2.7 million and $422.1 million in notional amount of pay fixed/receive floating with an aggregate negative fair value of $2.9 million. 74 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Interest rate swaps designated as trading are recorded at fair value. Gains and losses arising from changes in fair value are recorded in other income. Fair Value Hedges The Corporation has fixed rate callable CDs and fixed rate long-term debt which expose the Corporation to variability in fair values due to changes in market interest rates. To limit the Corporation's exposure to changes in fair value due to changes in interest rates, the Corporation has entered into receive-fixed/pay-floating interest rate swaps with identical call features, thereby creating the effect of floating rate deposits and floating rate long-term debt. The Corporation has determined that the hedges on the long-term debt qualify for the special short-cut accounting prescribed by SFAS 133, resulting in no ineffectiveness. The Corporation also has Agency collateralized mortgage backed investment securities designated as available for sale. The embedded prepayment options in the underlying mortgages expose the Corporation to variability in fair value in a changing interest rate environment. To limit its exposure to changes in fair value, the Corporation had designated purchased interest rate floors as a hedge against changes in fair value attributable to the embedded prepayment option. During 2001, the Corporation sold the floors. The adjustment to the carrying amount of the hedged investment securities of $5.7 million is being accreted into earnings over the remaining life of the security using the interest method. The following table presents additional information with respect to the Corporation's fair value hedges.
Fair Value Hedges December 31, 2001 Weighted Average Notional Amount Fair Value Remaining Hedged Item Hedging Instrument ($ in millions) ($ in millions) Term (Years) - ----------- ------------------ --------------- --------------- ------------ Callable CDs........... Receive Fixed Swap $ 65.0 $(0.1) 7.3 Medium Term Notes...... Receive Fixed Swap 190.0 1.4 4.7 Long-term Borrowings... Receive Fixed Swap 200.0 17.2 24.9
The impact from fair value hedges to total net interest income for the year ended December 31, 2001 was a positive $14.8 million, of which $0.1 million was a result of ineffectiveness. Cash Flow Hedges The Corporation has variable rate loans and variable rate short-term borrowings which expose the Corporation to variability in interest payments due to changes in interest rates. The Corporation believes it is prudent to limit the variability of a portion of its interest receipts and payments. To meet this objective, the Corporation enters into various types of derivative financial instruments to manage fluctuations in cash flows 75 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) resulting from interest rate risk. At December 31, 2001, these instruments consisted of interest rate swaps. During 2001, the Corporation also employed an interest rate floor which expired at the end of the year. The interest rate swaps change the variable-rate cash flow exposure on the loans and short-term borrowings to fixed-rate cash flows through the interest rate swaps. The purchased interest rate floor protected the Corporation from decreases in interest rates that would result in decreased cash interest receipts from the variable rate loans. Under the agreement, the Corporation had the right to receive cash if interest rates decreased below a specified level. Ineffectiveness arising from differences between the critical terms of the hedging instrument and hedged item are recorded in interest income or expense based on the transaction that gave rise to the ineffectiveness. Changes in the fair value of the interest rate swaps or floor designated as cash flow hedges are reported in accumulated other comprehensive income. These amounts are subsequently reclassified to interest income or interest expense as a yield adjustment in the same period in which the related interest on the variable rate loans and short-term borrowings affects earnings. The following table summarizes the Corporation's cash flow hedges at December 31, 2001.
Weighted Cash Flow Hedges Average December 31, 2001 Remaining Notional Amount Fair Value Term Hedged Item Hedging Instrument ($ in millions) ($ in millions) (Years) - ----------- ------------------ --------------- --------------- --------- Variable Rate Loans Receive Fixed Swap $454.4 $ 12.2 1.4 Commercial Paper... Pay Fixed Swap 200.0 (20.4) 4.9 Fed Funds Purchased Pay Fixed Swap 650.0 (21.3) 3.0 FHLB Advances...... Pay Fixed Swap 310.0 (3.6) 4.6
The impact from cash flow hedges to total net interest income for the year ended December 31, 2001 was $12.1 million, of which $0.5 million was a result of ineffectiveness. The estimated reclass from accumulated other comprehensive income in the next twelve months is $27.6 million. 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 derivative financial instruments 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, 2001 the estimated credit exposure arising from derivative financial instruments was approximately $14.5 million. For the years ended December 31, 2000 and 1999, the effect on net interest income resulting from derivative financial instruments was a negative $3.5 million and a positive $7.0 million, respectively. 76 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) 21. Fair Value of Financial Instruments The book values and estimated fair values for on and off-balance sheet financial instruments as of December 31, 2001 and 2000 are reflected below: Balance Sheet Financial Instruments ($ in millions)
2001 2000 --------------------- --------------------- Book Value Fair Value Book Value Fair Value ---------- ---------- ---------- ---------- Financial Assets: Cash and short-term investments.......... $ 1,605.4 $ 1,605.4 $ 908.2 $ 908.2 Trading securities....................... 6.1 6.1 15.3 15.3 Investment securities available for sale. 3,383.6 3,383.6 4,735.7 4,735.7 Investment securities held to maturity... 1,032.1 1,050.0 1,112.5 1,124.8 Net loans and leases..................... 19,027.2 19,754.7 17,352.0 17,877.1 Interest receivable...................... 137.8 137.8 211.1 211.1 Financial Liabilities: Deposits................................. 16,493.0 16,624.3 19,248.6 19,496.3 Short-term borrowings.................... 5,056.5 5,056.5 2,605.4 2,605.4 Long-term borrowings..................... 2,360.9 2,680.8 1,130.6 1,252.8 Interest payable......................... 97.5 97.5 203.5 203.5
Where readily available, quoted market prices are utilized by the Corporation. If quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are 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 are 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. 77 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Deposits The fair value for demand deposits or any interest bearing deposits with no fixed maturity date was considered to be equal to the carrying value. Time deposits with defined maturity dates were considered to have a fair value equal to the book value if the maturity date was within three months of December 31. The remaining time deposits were assigned fair values based on a discounted cash flow analysis using discount rates which approximate interest rates currently being offered on time deposits with comparable maturities. Borrowings Short-term borrowings are carried at cost which approximates fair value. Long-term debt was generally valued using a discounted cash flow analysis with a discount rate based on current incremental borrowing rates for similar types of arrangements or, if not readily available, based on a build up approach similar to that used for loans and deposits. Long-term borrowings include their related current maturities. Off-Balance Sheet Financial Instruments ($ 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.
2001 2000 ---- ---- Loan commitments.................... $5.6 $6.8 Letters of credit................... 6.2 4.8
See Note 18 for additional information on off-balance sheet financial instruments. 22. 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 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. 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. 78 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Banking Banking represents the aggregation of two separately chartered banks headquartered in Wisconsin, one federally chartered thrift headquartered in Nevada, an asset-based lending subsidiary headquartered in Minnesota and an operational support subsidiary which includes item processing as previously discussed. Banking consists of accepting deposits, making loans and providing other services such as cash management, foreign exchange and correspondent banking to a variety of commercial and retail customers. Products and services are provided through a variety of delivery channels including traditional branches, supermarket branches, telephone centers, ATMs and the Internet. The following tables present revenue and operating income by line of business for Banking. This information is based on the Corporation's product profitability measurement system and is an aggregation of the revenues and expenses associated with the products and services within each line of business. Net interest income is derived from the Corporation's internal funds transfer pricing system, expenses are allocated based on available transaction volumes and the provision for loan and lease losses is allocated based on credit risk. Equity is assigned to products and services on a basis that considers market, operational and reputation risk. ($ in millions)
Commercial Retail Investments Total 2001 Banking Banking and Other Banking ---- ---------- ------- ----------- -------- Revenue: Net interest income......... $398.6 $353.2 $ 91.0 $ 842.8 Other revenue............... 82.0 96.3 143.1 321.4 ------ ------ ------ -------- Total revenues........... $480.6 $449.5 $234.1 $1,164.2 ====== ====== ====== ======== Percent of total................ 41.3% 38.6% 20.1% 100.0% ====== ====== ====== ======== Operating income................ $207.5 $ 86.5 $ 81.1 $ 375.1 ====== ====== ====== ======== Percent of total............ 55.3% 23.1% 21.6% 100.0% ====== ====== ====== ======== Return on tangible equity... 24.05% 15.54% 20.52% ====== ====== ======== 2000 ---- Revenue: Net interest income......... $352.8 $344.6 $(18.2) $ 679.2 Other revenue............... 56.2 71.4 156.5 284.1 ------ ------ ------ -------- Total revenues........... $409.0 $416.0 $138.3 $ 963.3 ====== ====== ====== ======== Percent of total................ 42.5% 43.2% 14.3% 100.0% ====== ====== ====== ======== Operating income................ $159.5 $ 98.5 $ 45.2 $ 303.2 ====== ====== ====== ======== Percent of total................ 52.6% 32.5% 14.9% 100.0% ====== ====== ====== ======== Return on tangible equity....... 20.76% 19.08% 18.44% ====== ====== ======== 1999 ---- Revenue: Net interest income......... $337.0 $323.2 $ 40.6 $ 700.8 Other revenue............... 54.5 60.0 130.1 244.6 ------ ------ ------ -------- Total revenues........... $391.5 $383.2 $170.7 $ 945.4 ====== ====== ====== ======== Percent of total................ 41.4% 40.5% 18.1% 100.0% ====== ====== ====== ======== Operating income................ $157.4 $ 94.1 $ 55.5 $ 307.0 ====== ====== ====== ======== Percent of total................ 51.3% 30.6% 18.1% 100.0% ====== ====== ====== ======== Return on tangible equity....... 23.29% 20.29% 20.05% ====== ====== ========
79 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Data Services--Metavante Data Services includes Metavante as well as its nonbank subsidiaries. Metavante provides data processing services, develops and sells software and provides consulting services to M&I affiliates as well as banks, thrifts, credit unions, trust companies and other financial services companies throughout the world although its activities are primarily domestic. In addition, Data Services derives revenue from the Corporation's credit card merchant operations. The majority of Data Services revenue is derived from internal and external processing. All Others M&I's primary other operating segments include Trust Services, Mortgage Banking (residential and commercial), Capital Markets Group, Brokerage and Insurance Services and Commercial Leasing. Trust Services provides investment management and advisory services as well as personal, commercial and corporate trust services in Wisconsin, Florida, Arizona, North Carolina, Minnesota, Nevada, and Illinois and Capital Markets Group provides venture capital and advisory services. Total Revenues by type in All Others consist of the following ($ in millions):
2001 2000 1999 ------ ------ ------ Trust Services............................. $121.1 $120.1 $103.6 Residential Mortgage Banking............... 43.5 26.6 33.5 Capital Markets............................ 13.1 22.7 16.8 Brokerage and Insurance.................... 21.4 22.1 20.2 Commercial Leasing......................... 13.2 10.3 10.9 Commercial Mortgage Banking................ 3.1 2.2 1.6 Others..................................... 5.7 6.6 6.4 ------ ------ ------ Total............................... $221.1 $210.6 $193.0 ====== ====== ======
80 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) The following represents the Corporation's operating segments as of and for the years ended December 31, 2001, 2000 and 1999. Intrasegment revenues, expenses and assets have been eliminated.
Year Ended December 31, 2001 ($ in millions) ---------------------------------------------------------------------------------- Consolidated Reclass- Consol- Income ifications idated Non- Before Corporate Elim- Operating Operating Accounting Banking Metavante Others Overhead inations Income Charges Change --------- --------- ------ --------- ---------- --------- --------- ------------ Net Interest Income.......... $ 842.8 $ (3.7) $ 27.4 $ (23.7) $ -- $ 842.8 $ -- $ 842.8 Fees-unaffiliated customers.. 287.9 557.6 171.7 2.7 (1.0) 1,018.9 (16.1) 1,002.8 Fees-affiliated customers.... 33.5 61.4 22.0 -- (116.9) -- -- -- --------- ------ ------ ------- ------- --------- ------- --------- Total revenue................ 1,164.2 615.3 221.1 (21.0) (117.9) 1,861.7 (16.1) 1,845.6 Expenses-unaffiliated customers................... 481.1 518.1 111.8 87.2 (0.7) 1,197.5 93.0 1,290.5 Expenses-affiliated customers 75.5 17.0 29.8 (5.1) (117.2) -- -- -- --------- ------ ------ ------- ------- --------- ------- --------- Total expenses............... 556.6 535.1 141.6 82.1 (117.9) 1,197.5 93.0 1,290.5 Provision for loan and lease losses...................... 51.9 -- 2.2 -- -- 54.1 -- 54.1 --------- ------ ------ ------- ------- --------- ------- --------- Operating income before taxes....................... 555.7 80.2 77.3 (103.1) -- 610.1 (109.1) 501.0 Income tax expense........... 180.6 33.1 29.3 (38.5) -- 204.5 (41.4) 163.1 --------- ------ ------ ------- ------- --------- ------- --------- Operating income............. $ 375.1 $ 47.1 $ 48.0 $ (64.6) $ -- $ 405.6 $ (67.7) $ 337.9 ========= ====== ====== ======= ======= ========= ======= ========= Identifiable assets.......... $26,256.7 $754.6 $832.1 $ 359.4 $(949.1) $27,253.7 $ -- $27,253.7 ========= ====== ====== ======= ======= ========= ======= ========= Depreciation and amortization................ $ (15.7) $ 92.7 $(19.5) $ 4.4 $ -- $ 61.9 $ -- $ 61.9 ========= ====== ====== ======= ======= ========= ======= ========= Purchase of premises and equipment, net.............. $ 21.1 $ 18.3 $ 1.5 $ 3.7 $ -- $ 44.6 $ -- $ 44.6 ========= ====== ====== ======= ======= ========= ======= ========= Return on Average Tangible Equity...................... 20.52% 23.76% 19.08% 20.90% 17.58% ========= ====== ====== ========= ========= Return on Average Equity..... 17.25% 16.39% 18.93% 16.70% 13.91% ========= ====== ====== ========= =========
81 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data)
Year Ended December 31, 2000 ($ in millions) ---------------------------------------------------------------------------------- Consolidated Reclass- Consol- Income ifications idated Non- Before Corporate Elim- Operating Operating Accounting Banking Metavante Others Overhead inations Income Charges Change --------- --------- ------ --------- ---------- --------- --------- ------------ Net Interest Income.......... $ 679.2 $ (2.8) $ 21.4 $(24.8) $ -- $ 673.0 $ -- $ 673.0 Fees-unaffiliated customers................... 262.2 542.5 175.0 3.9 0.1 983.7 (50.5) 933.2 Fees-affiliated customers.... 21.9 64.0 14.2 0.1 (100.2) -- -- -- --------- ------ ------ ------ ------- --------- ------ --------- Total revenue................ 963.3 603.7 210.6 (20.8) (100.1) 1,656.7 (50.5) 1,606.2 Expenses-unaffiliated customers................... 431.7 499.6 105.5 55.1 (3.2) 1,088.7 16.7 1,105.4 Expenses-affiliated customers 61.9 8.6 28.3 (1.9) (96.9) -- -- -- --------- ------ ------ ------ ------- --------- ------ --------- Total expenses............... 493.6 508.2 133.8 53.2 (100.1) 1,088.7 16.7 1,105.4 Provision for loan and lease losses...................... 29.9 -- 0.5 -- -- 30.4 -- 30.4 --------- ------ ------ ------ ------- --------- ------ --------- Operating income before taxes....................... 439.8 95.5 76.3 (74.0) -- 537.6 (67.2) 470.4 Income tax expense........... 136.6 39.6 30.4 (30.6) -- 176.0 (23.0) 153.0 --------- ------ ------ ------ ------- --------- ------ --------- Operating income............. $ 303.2 $ 55.9 $ 45.9 $(43.4) $ -- $ 361.6 $(44.2) $ 317.4 ========= ====== ====== ====== ======= ========= ====== ========= Identifiable assets.......... $24,874.9 $636.3 $634.4 $241.7 $(309.6) $26,077.7 $ -- $26,077.7 ========= ====== ====== ====== ======= ========= ====== ========= Depreciation and amortization $ (3.0) $ 86.6 $(18.6) $ 4.2 $ -- $ 69.2 $ -- $ 69.2 ========= ====== ====== ====== ======= ========= ====== ========= Purchase of premises and equipment, net.............. $ 28.9 $ 45.9 $ 2.8 $ 1.2 $ -- $ 78.8 $ -- $ 78.8 ========= ====== ====== ====== ======= ========= ====== ========= Return on Average Tangible Equity............. 18.44% 29.00% 20.62% 20.78% 18.37% ========= ====== ====== ========= ========= Return on Average Equity..... 15.33% 21.52% 20.45% 16.84% 14.78% ========= ====== ====== ========= =========
82 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data)
Year Ended December 31, 1999 ($ in millions) ---------------------------------------------------------------------------------- Consolidated Reclass- Consol- Income ifications idated Non- Before Corporate Elim- Operating Operating Accounting Banking Metavante Others Overhead inations Income Charges Change --------- --------- ------ --------- ---------- --------- --------- ------------ Net Interest Income.. $ 700.8 $ (4.1) $ 22.8 $(14.2) $ -- $ 705.3 $ -- $ 705.3 Fees-unaffiliated customers........... 228.1 492.7 152.4 9.8 -- 883.0 -- 883.0 Fees-affiliated customers........... 16.5 56.1 17.8 0.1 (90.5) -- -- -- --------- ------ ------ ------ ------ --------- ---- --------- Total revenue........ 945.4 544.7 193.0 (4.3) (90.5) 1,588.3 -- 1,588.3 Expenses-unaffiliated customers........... 403.4 469.4 101.6 62.4 (1.8) 1,035.0 -- 1,035.0 Expenses-affiliated customers........... 61.4 3.5 26.2 (2.4) (88.7) -- -- -- --------- ------ ------ ------ ------ --------- ---- --------- Total expenses....... 464.8 472.9 127.8 60.0 (90.5) 1,035.0 -- 1,035.0 Provision for loan and lease losses.... 25.0 -- 0.4 -- -- 25.4 -- 25.4 --------- ------ ------ ------ ------ --------- ---- --------- Operating income before taxes........ 455.6 71.8 64.8 (64.3) -- 527.9 -- 527.9 Income tax expense... 148.6 31.5 25.6 (32.3) -- 173.4 -- 173.4 --------- ------ ------ ------ ------ --------- ---- --------- Operating income..... $ 307.0 $ 40.3 $ 39.2 $(32.0) $ -- $ 354.5 $ -- $ 354.5 ========= ====== ====== ====== ====== ========= ==== ========= Identifiable assets.. $23,128.0 $475.1 $651.6 $174.6 $(59.6) $24,369.7 $ -- $24,369.7 ========= ====== ====== ====== ====== ========= ==== ========= Depreciation and amortization........ $ 26.9 $ 73.8 $(18.2) $ 3.7 $ -- $ 86.2 $ -- $ 86.2 ========= ====== ====== ====== ====== ========= ==== ========= Purchase of premises and equipment, net.. $ 28.3 $ 35.2 $ 2.3 $ 1.1 $ -- $ 66.9 $ -- $ 66.9 ========= ====== ====== ====== ====== ========= ==== ========= Return on Average Tangible Equity..... 20.05% 21.93% 18.88% 20.49% 20.49% ========= ====== ====== ========= ========= Return on Average Equity.............. 16.30% 15.52% 18.71% 16.32% 16.32% ========= ====== ====== ========= =========
Nonrecurring charges in 2001 reflect one-time charges related to changes and acquisitions at the Corporation's Metavante subsidiary, auto lease residual write-downs and charges associated with completing the consolidation of M&I's banking charters. Nonrecurring charges in 2000 reflect one-time charges related to the Corporation's Metavante subsidiary IPO, losses from the sale of available for sale investment securities and loans as part of the Corporation's balance sheet management and charges associated with the consolidation of banking charters. 23. 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. 83 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Condensed Balance Sheets December 31
2001 2000 ---------- ---------- Assets Cash and cash equivalents.......................................... $ 258,671 $ 145,480 Indebtedness of nonbank affiliates................................. 396,834 249,408 Investments in affiliates: Banks........................................................... 2,249,278 2,062,316 Nonbanks........................................................ 586,655 558,278 Premises and equipment, net........................................ 8,447 7,281 Other assets....................................................... 120,640 115,222 ---------- ---------- Total assets................................................ $3,620,525 $3,137,985 ========== ========== Liabilities and Shareholders' Equity Commercial paper issued............................................ $ 335,342 $ 322,161 Other liabilities.................................................. 174,015 137,595 Long-term borrowings: 7.65% Junior Subordinated Deferrable Interest Debentures due to M&I Capital Trust A........................................... 205,379 205,346 Other........................................................... 412,821 230,694 ---------- ---------- Total long-term borrowings.................................. 618,200 436,040 ---------- ---------- Total liabilities........................................... 1,127,557 895,796 Shareholders' equity............................................... 2,492,968 2,242,189 ---------- ---------- Total liabilities and shareholders' equity.................. $3,620,525 $3,137,985 ========== ==========
Scheduled maturities of long-term borrowings are $48,450 in 2002, $113,000 in 2003, $1,000 in 2004, $500 in 2005, and $250,000 in 2006. See Note 13 for a description of the junior subordinated debt due to M&I Capital Trust A. 84 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Condensed Statements of Income Years Ended December 31
2001 2000 1999 -------- -------- -------- Income Cash dividends: Bank affiliates........................................................ $345,900 $117,812 $172,920 Nonbank affiliates..................................................... 75,713 22,961 49,729 Interest from affiliates.................................................. 19,978 30,320 22,530 Data processing income.................................................... -- 304,365 568,269 Service fees and other.................................................... 57,632 67,794 70,197 -------- -------- -------- Total income....................................................... 499,223 543,252 883,645 Expense Interest.................................................................. 43,758 57,409 41,143 Salaries and employee benefits............................................ 46,018 186,075 322,399 Administrative and general................................................ 36,411 128,653 215,039 Single Charter............................................................ 4,695 2,960 -- -------- -------- -------- Total expense...................................................... 130,882 375,097 578,581 Income before income taxes, cumulative effect of changes in accounting principles and equity in undistributed net income of affiliates......... 368,341 168,155 305,064 Provision (benefit) for income taxes...................................... (17,800) 10,893 27,904 -------- -------- -------- Income before cumulative effect of changes in accounting principles and equity in undistributed net income of affiliates........................ 386,141 157,262 277,160 Cumulative effect of changes in accounting principles, net of income taxes -- (2,279) -- -------- -------- -------- Income before equity in undistributed net income of affiliates............ 386,141 154,983 277,160 Equity in undistributed net income of affiliates, net of dividends paid: Banks.................................................................. (16,724) 113,368 103,114 Nonbanks............................................................... (31,932) 46,772 (25,763) -------- -------- -------- Net income......................................................... $337,485 $315,123 $354,511 ======== ======== ========
85 Notes to Consolidated Financial Statements--(Continued) December 31, 2001, 2000, and 1999 ($000 except share data) Condensed Statements of Cash Flows Years Ended December 31
2001 2000 1999 ----------- ----------- ----------- Cash Flows From Operating Activities Net income.......................................................... $ 337,485 $ 315,123 $ 354,511 Noncash items included in income: Equity in undistributed net loss (income) of affiliates.......... 48,656 (160,140) (77,351) Depreciation and amortization.................................... 4,691 35,526 72,343 Other............................................................ 20,399 (26,682) (32,605) ----------- ----------- ----------- Net cash provided by operating activities........................... 411,231 163,827 316,898 Cash Flows From Investing Activities Increases in indebtedness of affiliates.......................... (3,207,948) (1,906,477) (1,356,937) Decreases in indebtedness of affiliates.......................... 3,114,987 2,125,433 1,294,864 Increases in investments in affiliates........................... (24,600) (36,177) (399) Net capital expenditures......................................... (3,376) (19,500) (36,739) Acquisitions accounted for as purchases, net of cash equivalents acquired and investments....................................... 35,018 -- (84,408) Other............................................................ (9) (5,993) 1,135 ----------- ----------- ----------- Net cash (used in) provided by investing activities................. (85,928) 157,286 (182,484) Cash Flows From Financing Activities Dividends paid................................................... (122,777) (111,379) (104,490) Proceeds from issuance of commercial paper....................... 3,472,573 3,190,712 1,926,791 Principal payments on commercial paper........................... (3,499,459) (3,115,064) (1,740,439) Proceeds from issuance of long-term debt......................... 250,000 1,000 75,200 Payments on long-term debt....................................... (67,950) (23,561) (35,857) Purchase of common stock......................................... (267,438) (156,319) (317,149) Proceeds from exercise of stock options.......................... 23,630 5,241 18,359 Other............................................................ (691) (113) (19) ----------- ----------- ----------- Net cash used in financing activities............................... (212,112) (209,483) (177,604) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents................ 113,191 111,630 (43,190) Cash and cash equivalents, beginning of year........................ 145,480 33,850 77,040 ----------- ----------- ----------- Cash and cash equivalents, end of year.............................. $ 258,671 $ 145,480 $ 33,850 =========== =========== ===========
86 Quarterly Financial Information (Unaudited) Following is unaudited financial information for each of the calendar quarters during the years ended December 31, 2001 and 2000.
Quarter Ended ----------------------------------- Dec. 31 Sept. 30 June 30 March 31 -------- -------- -------- -------- 2001 Total Interest Income.............................. $401,974 $423,252 $431,447 $452,434 Net Interest Income................................ 237,288 218,478 201,234 185,779 Provision for Loan and Lease Losses................ 20,109 12,206 10,737 11,063 Income before Income Taxes and Change in Accounting 162,168 122,158 85,818 130,901 Income before Change in Accounting................. 108,321 83,315 59,683 86,602 Change in Accounting, Net of Income Taxes.......... -- -- -- (436) Net Income......................................... 108,321 83,315 59,683 86,166 Net Income Per Share:* Basic Before Change in Accounting............... $ 1.02 $ 0.78 $ 0.57 $ 0.83 Basic........................................... 1.02 0.78 0.57 0.83 Diluted Before Change in Accounting............. 0.98 0.75 0.55 0.80 Diluted......................................... 0.98 0.75 0.55 0.80 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 - -------- *May not add due to rounding
2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ Common Dividends Declared First Quarter..................................... $0.265 $0.240 $0.220 $0.200 $0.185 Second Quarter.................................... 0.290 0.265 0.240 0.220 0.200 Third Quarter..................................... 0.290 0.265 0.240 0.220 0.200 Fourth Quarter.................................... 0.290 0.265 0.240 0.220 0.200 ------ ------ ------ ------ ------ $1.135 $1.035 $0.940 $0.860 $0.785 ====== ====== ====== ====== ======
87 Price Range of Stock (Low and High Close)
2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ First Quarter Low............................. $48.04 $43.88 $55.38 $53.25 $32.75 High............................ 55.20 60.44 59.25 59.50 40.25 Second Quarter Low............................. 48.91 41.52 54.75 50.44 35.06 High............................ 54.35 55.31 71.94 61.63 42.50 Third Quarter Low............................. 50.99 43.56 55.88 44.00 40.88 High............................ 59.56 51.63 69.75 59.00 52.63 Fourth Quarter Low............................. 52.66 38.63 57.81 40.50 50.06 High............................ 64.12 51.49 69.31 58.44 62.13
88 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, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 2001, 2000 and 1999. 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, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States. As discussed in Note 2 to the Consolidated Financial Statements, effective January 1, 2001, the Corporation changed its method of accounting for derivative instruments. 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 17, 2002 89 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 23, 2002, 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 23, 2002. 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 23, 2002. 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 23, 2002. 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, 2001 and 2000 Statements of Income--years ended December 31, 2001, 2000 and 1999 Statements of Cash Flows--years ended December 31, 2001, 2000 and 1999 Statements of Shareholders' Equity--years ended December 31, 2001, 2000 and 1999 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 Not applicable. 90 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARSHALL & ILSLEY CORPORATION By: /s/ DENNIS J. KUESTER ----------------------------------- Dennis J. Kuester Chief Executive Officer, President and a Director Date: March 6, 2002 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/ MARK F. FURLONG - --------------------------------------- Mark F. Furlong Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) Date: March 6, 2002 /s/ PATRICIA R. JUSTILIANO - --------------------------------------- Patricia R. Justiliano Senior Vice President and Corporate Controller (Principal Accounting Officer) Date: March 6, 2002 Directors: Richard A. Abdoo, David L. Andreas, Oscar C. Boldt, Wendell F. Bueche, Jon F. Chait, Timothy E. Hoeksema, Bruce E. Jacobs, Burleigh E. Jacobs, Donald R. Johnson, Ted D. Kellner, James A. Kress, Dennis J. Kuester, Katharine C. Lyall, Edward L. Meyer, Jr., San W. Orr, Jr., Peter M. Platten, III, Robert A. Schaefer, John S. Shiely, James A. Urdan, George E. Wardeberg and James B. Wigdale. By /s/ MARK F. FURLONG Date: March 6, 2002 --------------------------- Mark F. Furlong As Attorney-In-Fact* - -------- * Pursuant to authority granted by powers of attorney, copies of which are filed herewith. 91 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) 92 (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, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-15403 (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)* (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* 93 (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* (aa) Marshall & Ilsley Corporation Amended and Restated Annual Executive Incentive 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, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-15403* (ee) Form of Change of Control Agreements between M&I and Ms. Justiliano and Messrs. O'Neill, Renard, Roberts, Root, Sherman, Williams and Wilson, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-15403* 94 (ff) Amended and Restated Marshall & Ilsley Corporation Nonqualified Retirement Benefit Plan, incorporated by reference to M&I's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-15403* (gg) Change of Control Agreement, dated April 16, 2001, between M&I and Mr. Furlong, incorporated by reference to M&I's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-15403* (hh) Letter Agreement and Consulting and Noncompetition Agreement, dated October 18, 2001, between M&I and Mr. Andreas* (ii) Change of Control Agreement, dated January 10, 2001, between M&I and Mr. Hogan* (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. 95 EX-10.HH 3 dex10hh.txt LETTER AGREEMENT AND CONSULTING Exhibit 10(hh) Marshall & Ilsley Corporation 770 North Water Street/Milwaukee, WI 53202-3523/Tel 414 765-7551 Human Resources Department www.micorp.com October 18, 2001 David L. Andreas [Address] Dear David: This letter documents our understanding as to your remaining active employment with Marshall & Ilsley Corporation, or one of its subsidiaries ("M&I"). 1. Term. Your active employment will continue until December 31, 2001, ---- unless you voluntarily terminate your employment with M&I, or you die or suffer a Disability prior to that date (the "Term"). For this purpose, "Disability" shall have the same meaning as in M&I's long-term disability income plan. 2. Employment. During the Term, but excluding any periods of vacation ---------- and sick leave to which you are entitled, you shall devote substantially all of your business time, efforts and skills to the business and affairs of M&I. You agree, to the extent necessary to discharge the responsibilities assigned to you hereunder, to use your reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Term, you shall report to Dennis Kuester. 3. Compensation for Employment. The Company will pay you bi-weekly cash --------------------------- payments of base salary in the amount of $11,248 for every two-week period of the Term. If you are employed for a partial two-week period, you will receive a prorated amount. You will receive an incentive payment of $49,000 for the period beginning August 1, 2001 and ending December 31, 2001. If you terminate employment prior to year-end, your incentive payment will equal 40% of your base salary for the period beginning August 1, 2001 and ending with the last day of your employment. This incentive payment will be made in a lump-sum in January 2002. The payments of base salary and incentive will be reduced by all applicable federal and state income and employment tax withholding. 4. Board Status. Beginning January 1, 2002, you will become a non- ------------ employee director of M&I and will receive compensation consistent with that status. 5. Benefits. During your period of active employment you will continue -------- to participate in the health, welfare, and qualified retirement plans that M&I offers if you otherwise meet the eligibility criteria therefore. All benefits cease as of December 31, 2001, including your participation in the group life and disability plans, except as provided in the Consulting and Noncompetition Agreement. 6. Vested Benefits. Any vested benefits you have in the Company's --------------- qualified and non-qualified retirement benefit plans as of December 31, 2001, including your Salary Continuation Agreement, will be governed by the terms of those plans. Under the terms of your Salary Continuation Agreement, you will begin receiving payments of $3,040.92 per month, effective January 2002. 7. Your Undertakings. In exchange for the benefits provided pursuant to ----------------- this letter agreement, you agree as follows: (A) In consideration of the Consulting and Noncompetition Agreement and Salary Continuation Payments you are entitled to receive, you agree not to apply for unemployment compensation benefits either when your employment with the Company terminates or upon the termination of the consulting period. (B) As a condition to this letter agreement and the Consulting and Noncompetition Agreement, you have signed a Complete and Permanent Release. If you do not execute the Complete and Permanent Release, this letter agreement will be void and of no further effect. 8. Miscellaneous. Should you accept the terms of M&I's proposal, its ------------- terms will be governed by the following: (A) This letter agreement constitutes the complete understanding between you and M&I concerning all matters affecting your employment with M&I and the termination thereof. If you accept this proposal, this letter agreement supersedes all prior agreements, understandings and practices, concerning such matters between you and M&I and any personnel documents, handbooks, or policies and any prior customs or practices of M&I. (B) This letter agreement and its interpretation shall be governed and construed in accordance with the laws of Minnesota without regard to its principles of conflicts of laws and shall be binding upon the parties hereto and their respective successors and assigns. (C) In the event that you breach any provision of this letter agreement, you agree that the Company may suspend all additional payments under this letter agreement, recover any damages suffered as a result of such breach and recover from you any reasonable attorneys' fees or costs it incurs as a result of your breach. If you agree to the terms of this letter agreement, please sign in the space provided below. Very truly yours, MARSHALL & ILSLEY CORPORATION By: /s/ Paul J. Renard ------------------------------------- Paul J. Renard, Senior Vice President I agree with and accept the above-mentioned terms contained in this letter agreement and agree to be bound by them. Dated this 9th day of November, 2001. /s/ David L. Andreas - ------------------------------------- David L. Andreas Exhibit 10(hh) CONSULTING AND NONCOMPETITION AGREEMENT THIS CONSULTING AND NONCOMPETITION AGREEMENT, made effective as of October 18, 2001 between Marshall & Ilsley Corporation (the "Company") and DAVID L. ANDREAS ("Executive"). RECITALS Executive possesses intimate knowledge of the business and affairs of the National City Bancorporation and its affiliates (jointly, "NCB") which companies were recently acquired by the Company. By virtue of his employment, Executive has acquired certain confidential information and data with respect to NCB and the Company. The Company desires to assure the continued services of Executive following his termination of employment with the Company for the period provided in this Agreement, and Executive is willing to continue to provide certain services to the Company for such period, upon the terms and conditions hereinafter set forth. In addition, the Company wishes to prevent Executive from competing with them for the period provided in this Agreement and Executive is willing to consent to such a limitation. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties agree as follows: 1. Consulting. Commencing January 1, 2002, Executive agrees to provide ---------- the services requested by the Company for the period stated in Paragraph 2 hereof, subject to the other terms and conditions herein provided. 2. Term. The term shall commence as of January 1, 2002 and shall ---- continue until December 31, 2002, unless this Agreement is sooner terminated as hereinafter set forth (the "Term"). 3. Duties. During the Term, Executive shall devote his best efforts and ------ such of his business time, attention, skill and efforts as deemed necessary to consult with the executive officers of the Company with respect to such matters as may be reasonably requested by the Company; provided, however, that nothing -------- ------- in this Agreement shall preclude Executive from (i) devoting reasonable periods required for rendering services to any other business organization so long as Executive does not violate his covenants of confidentiality, noncompetition and nonsolicitation (the "Non-Compete") contained in Section 5 of this Agreement, (ii) engaging in charitable and community activities, and (iii) managing his personal investments. The parties hereto acknowledge and agree that (i) Executive shall be free to reside and work at the geographical location of his choice, (ii) in most circumstances, Executive may respond to the Company's requests for his services by telephone, mail, facsimile or similar means of communication, (iii) in requiring Executive's services hereunder, the Company shall consider the reasonable convenience of Executive and the demands of his other commitments and shall require his physical attendance at meetings and events remote from his residence only in matters for which Executive's presence is essential; (iv) the conduct and control of the consulting services to be performed hereunder shall be the sole responsibility of Executive, and (v) the Company shall have no power to direct or dictate Executive's schedule or the hours during which he shall be required to perform consulting services hereunder. The Company hereby acknowledges and agrees that Executive shall continue to receive compensation and benefits pursuant to this Agreement as set forth in Paragraph 4 hereof notwithstanding the failure or refusal of the Company to request the performance of consulting services by Executive hereunder in the event of death or disability prior to December 31, 2002. 4. Compensation and Benefits. As compensation for the services to be ------------------------- provided pursuant to this Agreement, Executive shall receive from the Company or its affiliates the compensation and other benefits set forth below: A. Cash Compensation. The Company will pay to Executive ----------------- Twenty-Five Thousand Dollars ($25,000.00) in each month beginning on January 1, 2002 and ending on December 31, 2002 for a total amount of Three Hundred Thousand Dollars ($300,000) for the Term. The payments hereunder will not be included as compensation for purposes of any qualified or nonqualified pension or welfare benefit plans of the Company and are in lieu of any rights Executive may have to severance under any plan, practice or arrangement of the Company or NCB. B. Health and Dental Coverage. For the Term, the Company shall -------------------------- provide to Executive, his current spouse, and eligible dependents continuation of health and dental coverage under the Company's plans, subsidized by the Company to the same extent as for active employees, provided, however, that if Executive becomes reemployed with another -------- ------- employer and chooses to receive health or other benefits under another employer-provided plan, the health and dental benefits provided hereunder shall be secondary to those provided under such other plan. The coverage period for purposes of the group health and dental continuation requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, shall commence on January 1, 2002 and shall run concurrently with the Term. C. Participation in Plans. For the Term, Executive will not be ---------------------- eligible to participate in any Company benefit plan other than set forth in subparagraph (B), above, and Executive waives any rights attendant thereto. 5. Confidentiality, Non-Solicitation and Non-Competition Provisions. ---------------------------------------------------------------- In exchange for the benefits provided to you above, you agree to act in accordance with each of the following provisions, which you acknowledge to be severable and independent of one another. References to the Company in this Paragraph also refer to Affiliates of the Company. "Affiliate" shall mean any corporation, partnership, limited liability company or other business entity which, directly or indirectly through one or more intermediaries, is controlled by M&I. The term "control" means 2 the power, directly or indirectly, to vote 50% or more of the securities which have ordinary voting power in the election of directors (or individuals filling any analogous positions). A. Confidentiality. During the Term, Executive agrees that he --------------- will not, directly or indirectly, use or disclose any Confidential Information of the Company. For purposes of this Agreement "Confidential Information" is defined as all non-Trade Secret information possessed by Executive about the Company and its business activities, which (i) is not generally known and is used or is useful in the conduct of the business of the Company, (ii) confers or tends to confer a competitive advantage over one who does not possess the information, or (iii) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means, by other persons who can obtain economic value from its disclosure or use. "Trade Secret" has the meaning assigned in Wis. Stats.(S) 134.90(1)(c). Nothing in this restriction shall be deemed to limit Executive's obligations to treat Trade Secrets of the Company in the manner contemplated by Minnesota law, and Mr. Andreas agrees to take all reasonable steps to protect such Trade Secrets in accordance with applicable law both during and after the Term. B. Non-Solicitation of Customers. During the Term, you agree ----------------------------- not to solicit, entice or encourage any Customer of the Company so as to cause or attempt to cause such Customer not to do business with the Company, to materially diminish its business with the Company, or to purchase a material amount of products or services sold by the Company from any source other than the Company. For purposes of this paragraph, "Customer" shall mean any person or business (i) which purchased a material amount of products or services from the Company during the one (1) year period preceding December 31,, 2001 (the date on which your employment terminates) (the "Termination Date") and (ii) with whom you had contact on behalf of the Company during such one (1) year period. You will not be treated as having contact with a Customer if your only interaction with that Customer was a general mailing containing your signature or other similar contact. C. Non-Solicitation of Employees. During the Term, you will not ----------------------------- induce or attempt to induce any employee of the Company to terminate his/her employment with or reduce the hours he /she works for the Company. D. General Non-Competition Provisions. During the Term, you ---------------------------------- agree not to directly or indirectly perform services of the type performed by you for the Company for any competitor of the Company where the services you provide directly relate to or benefit any of the competitor's business activities in the State of Minnesota respecting deposit taking or lending in the context of a financial services business. E. Acknowledgements/Consequences of Breach. You acknowledge that --------------------------------------- irreparable and incalculable injury will result to the Company, its business or properties, in the event of a breach by you of any of the restrictions set forth in this Section 5. You 3 therefore agree that, in the event of any such actual, impending or threatened breach, the Company will be entitled, in addition to any other remedies, to temporary and permanent injunctive relief (without the necessity of posting a bond or other security) restraining the violation or further violation of such restrictions by you. In the event of an actual breach by you of any of the provisions of this Section 5, the Company shall have the right to cease the payments to you under Section 4 hereof in addition to securing any damages and/or injunctive relief from or against you. F. Survival After Termination. You specifically agree that this -------------------------- Section 5 shall survive the termination of this Consulting and Noncompetition Agreement. 6. Early Termination and Consequences. This Consulting and ---------------------------------- Noncompetion Agreement will terminate prior to December 31, 2002 if Execute voluntarily resigns his position as a consultant. The Company shall have no further obligation to the Executive under this Consulting and Noncompetition Agreement thereafter, but the provisions of Paragraph 5 hereof shall still apply to the Executive. 7. General Provisions. ------------------ A. Successors and Assigns. This Agreement shall be binding ---------------------- upon and shall inure to the benefit of the Company, its successors and assigns. 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. Severability - Modification by Court. The sections, ------------------------------------ paragraphs and subparagraphs of this Consulting and Noncompetition Agreement are severable and are subject to lawful modification by a court of competent jurisdiction, and in the event any such section, paragraph or subparagraph may be held to be invalid by such court, this Consulting and Noncompetition Agreement shall be interpreted as if any such invalid section, paragraph or subparagraph were not contained herein, provided that with respect to Section 5, which is of the essence of this Consulting and Noncompetition Agreement, any such invalid section, paragraph or subparagraph shall be modified by the court in the manner most favorable to the Company or its Affiliates, yet acceptable to the court. C. Amendment. This Agreement may not be amended or modified --------- except by written instrument executed by the Company and Executive. D. Governing Law. This Agreement and the rights and obligations ------------- hereunder shall be governed by and construed in accordance with the laws of the State of Minnesota without giving effect to its principles of conflicts of laws. E. No Waiver. No waiver by either party at any time of any --------- breach of the other party of, or compliance with, any condition or provision of this Agreement to be 4 performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. MARSHALL & ILSLEY CORPORATION By: /s/Paul J. Renard ------------------------------------- Paul J. Renard, Senior Vice President EXECUTIVE /s/David L. Andreas -------------------------------------------- David L. Andreas EX-10.II 4 dex10ii.txt CHANGE OF CONTROL AGREEMENT Exhibit 10(ii) CHANGE OF CONTROL AGREEMENT --------------------------- THIS AGREEMENT, entered into as of the 10th day of January, 2001, by and between MARSHALL & ILSLEY CORPORATION (the "Company"), and Mark R. Hogan (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 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 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 2 consolidation, (ii) no person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger, statutory share exchange or consolidation and any person beneficially owning, immediately prior to such reorganization, merger, statutory share exchange or consolidation, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, statutory share exchange or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Consummation of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than two-thirds (2/3) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, thirty-three percent (33%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, thirty-three percent (33%) or more of, respectively, the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. Employment. (a) Subject to the provisions of Section 3, hereof, the ---------- Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed in such executive capacity as may be mutually agreed to by the parties. During the Employment Term, Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held or assigned at any time during the twelve (12) month period immediately preceding the Effective Date, and Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective 3 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. (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 4 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 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. 5 (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 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) 6 days to cure any conduct or act alleged to provide Cause for termination after a written notice of demand has been delivered to the Executive specifying in detail the manner in which the Executive's conduct violates this Agreement, and (b) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, or failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act in bad faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (c) Good Reason. ----------- (1) The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change of Control of any of the events or conditions described in Subsections (i) through (vi) hereof: (i) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with his status, title, position or responsibilities in effect immediately prior to such assignment; or any removal of the Executive from or failure to reappoint or reelect him to any position, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (ii) Any failure by the Company to comply with any of the provisions of Section 4 of this Agreement. (iii) The insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company; (iv) Any material breach by the Company of any provision of this Agreement; (v) Any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 5 of this Agreement; and (vi) The failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company, to assume and agree to perform this Agreement, as contemplated in Section 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 7 a Change of Control, or (ii) otherwise arose in connection with or in anticipation of a Change of Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Effective Date. (3) The Executive's right to terminate his employment pursuant to this Section 5(c) shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment or failure to give Notice of Termination shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (4) For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive. (d) Voluntary Termination. The Executive may voluntarily terminate --------------------- his employment hereunder at any time. (e) Notice of Termination. Any purported termination by the Company --------------------- or by the Executive (other than by death of the Executive) shall be communicated by Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) the Termination Date. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (f) Termination Date, etc. "Termination Date" shall mean in the case --------------------- of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company, the date specified in the Notice of Termination shall be at least thirty (30) days after the date the Notice of Termination is given to the Executive, provided, however, that in the case of -------- ------- Disability, the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days; (2) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days after the date the Notice of Termination is given to the Company; and (3) In the event that within thirty (30) days following the date of receipt of the Notice of Termination, one party notifies the other that a dispute exists concerning the basis for termination, the Executive's employment hereunder shall not be terminated except after the dispute is finally resolved and a Termination Date is determined either by a mutual written agreement of the parties, or by a binding and final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 8 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 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) 9 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 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 10 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 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 11 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. (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. 12 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. 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 13 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. 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 14 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 those certain Employment Agreements between the Executive and the Company dated December 16, 1993. 20. Headings. The headings herein contained are for reference only and -------- shall not affect the meaning or interpretation of any provision of this Agreement. 15 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: /s/ James B. Wigdale, -------------------------------- ATTEST: James B. Wigdale, Chairman /s/ Michael A. Hatfield - ------------------------------ Michael A. Hatfield, Secretary EXECUTIVE: /s/ Mark R. Hogan ------------------------------------ Mark R. Hogan Address: [address] --------------------------- --------------------------- 16 EX-12 5 dex12.txt COMPUTATION OF RATIO OF EARNINGS Exhibit 12 Marshall & Ilsley Corporation Computation of Ratio of Earnings to Fixed Charges ($000's)
Years Ended December 31, ---------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- Earnings: Earnings before income taxes and extraordinary items........................ $ 501,045 $ 470,350 $ 527,939 $ 465,285 $ 388,172 Fixed charges, excluding interest on deposits 321,059 321,812 222,172 206,546 175,609 ---------- ---------- ---------- ---------- ---------- Earnings including fixed charges but excluding interest on deposits............. 822,104 792,162 750,111 671,831 563,781 Interest on deposits......................... 566,899 772,016 585,864 564,540 460,418 ---------- ---------- ---------- ---------- ---------- Earnings including fixed charges and interest on deposits....................... $1,389,003 $1,564,178 $1,335,975 $1,236,371 $1,024,199 ========== ========== ========== ========== ========== Fixed Charges: Interest Expense: Short-term borrowings..................... $ 188,587 $ 224,187 $ 142,294 $ 126,624 $ 111,193 Long-term borrowings...................... 110,842 78,773 63,145 66,810 54,175 One-third of rental expense for all operating leases (the amount deemed representative of the interest factor).. 21,630 18,852 16,733 13,112 10,241 ---------- ---------- ---------- ---------- ---------- Fixed charges excluding interest on deposits. 321,059 321,812 222,172 206,546 175,609 Interest on deposits......................... 566,899 772,016 585,864 564,540 460,418 ---------- ---------- ---------- ---------- ---------- Fixed charges including interest on deposits. $ 887,958 $1,093,828 $ 808,036 $ 771,086 $ 636,027 ========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges: Excluding interest on deposits............... 2.56x 2.46x 3.38x 3.25x 3.21x Including interest on deposits............... 1.56x 1.43x 1.65x 1.60x 1.61x
EX-21 6 dex21.txt SUBSIDIARIES Exhibit 21 MARSHALL & ILSLEY CORPORATION SUBSIDIARIES February 28, 2002 Subsidiaries Organized in Wisconsin - ----------------------------------- Customers Forever, LLC M&I Insurance Services, Inc. Derivion Corporation M&I Investment Management Corp. M&I Bank of Mayville M&I Mortgage Corp. M&I Marshall & Ilsley Bank M&I Support Services Corp. M&I Brokerage Services, Inc. Metavante Corporation M&I Community Development Corporation Metavante 401kservices, Inc. M&I Dealer Finance, Inc. Richter-Schroeder Company, Inc. M&I First National Leasing Corp. Subsidiaries Incorporated in Arizona Subsidiaries Organized in Delaware - ------------------------------------ --------------------------------- M&I Insurance Company of Arizona, Inc. M&I Capital Markets Group L.L.C. M&I Capital Trust A M&I Dealer Auto Securitization, LLC Subsidiaries Incorporated in Minnesota M&I Northwoods I LLC - -------------------------------------- M&I Northwoods II LLC M&I Northwoods III LLC Diversified Business Credit, Inc. M&I Ventures L.L.C. Diversified Real Estate Holdings, Inc. Diversified Real Estate Holdings II, Inc. Subsidiaries Incorporated in Nevada - ----------------------------------- The registrant has nine subsidiaries which primarily hold, manage and service investment and mortgage portfolios. Subsidiaries Incorporated in New Hampshire Subsidiaries Organized Under the Laws of the - ------------------------------------------ -------------------------------------------- United Kingdom Metavante International, Inc. -------------- Subsidiaries Incorporated in Vermont Metavante Europe Limited - ------------------------------------ Subsidiaries Organized Under the Laws of the M&I Mortgage Reinsurance Corporation -------------------------------------------- United States ------------- Subsidiaries Organized Under the Laws of Canada - ----------------------------------------------- M&I Bank FSB Marshall & Ilsley Trust Company N.A. Metavante Canada Corporation
EX-23 7 dex23.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K for the year ended December 31, 2001, of our report dated January 17, 2002. It should be noted that we have not audited any financial statements of Marshall & Ilsley Corporation and subsidiaries subsequent to December 31, 2001, 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, No. 333-33814 (Form S-3) pertaining to the issuance by M&I of Debt Securities, and No. 333-75848 (Form S-8) pertaining to the M&I Retirement Program. Milwaukee, Wisconsin, /s/ ARTHUR ANDERSEN LLP March 6, 2002 EX-24 8 dex24.txt POWERS OF ATTORNEY Exhibit 24 DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ George E. Wardeberg ---------------------------------- George E. Wardeberg DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 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 12th day of February, 2002. /s/ Ted D. Kellner -------------------------------- Ted D. Kellner DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Wendell F. Bueche ---------------------------------- Wendell F. Bueche DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Robert A. Schaefer ----------------------------------- Robert A. Schaefer DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 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 27th day of February, 2002. /s/ D.J. Kuester ----------------------------------- D.J. Kuester DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Oscar C. Boldt ---------------------------------- Oscar C. Boldt DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Burleigh E. Jacobs ------------------------------ Burleigh E. Jacobs DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Jon F. Chait --------------------------- Jon F. Chait DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Richard A. Abdoo --------------------------- Richard A. Abdoo DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 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 26th day of February, 2002. /s/ J.B. Wigdale --------------------------- J.B. Wigdale DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 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 21st day of February, 2002. /s/ Katharine C. Lyall --------------------------- Katharine C. Lyall DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ John S. Shiely --------------------------- John S. Shiely DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Timothy E. Hoeksema --------------------------- Timothy E. Hoeksema DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Peter M. Platten, III --------------------------- Peter M. Platten, III DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ James F. Kress --------------------------- James F. Kress DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ San W. Orr, Jr. ----------------------------------- San W. Orr, Jr. DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Edward L. Meyer, Jr. --------------------------- Edward L. Meyer, Jr. DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Bruce E. Jacobs --------------------------- Bruce E. Jacobs DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ Donald R. Johnson --------------------------- Donald R. Johnson DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 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, 2002. /s/ James A. Urdan --------------------------- James A. Urdan DIRECTOR'S POWER OF ATTORNEY (2001 Form 10-K) The undersigned director of Marshall & Ilsley Corporation designates each of D.J. Kuester and M.F. Furlong, 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, 2001 and any related amendments and/or supplements; (ii) generally doing all things in his name and on his behalf in his capacity as a director to enable Marshall & Ilsley Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission; and (iii) ratifying and confirming his signature as it may be signed by the attorney-in-fact to the Form 10-K and any related amendments and/or supplements. Dated this 21st day of February, 2002. /s/ David L. Andreas --------------------------- David L. Andreas -----END PRIVACY-ENHANCED MESSAGE-----