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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-15403
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
770 North Water Street
Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-7801
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class July 31, 2002
----- ----------------
Common Stock, $1.00 Par Value 210,241,302
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
June 30, December 31, June 30,
2002 2001 2001
------------- ------------- -------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 818,715 $ 617,183 $ 873,991
Federal funds sold and security resale agreements 49,370 119,561 25,466
Money market funds 483,211 827,021 168,419
------------- ------------- -------------
Total cash and cash equivalents 1,351,296 1,563,765 1,067,876
Investment securities:
Trading securities, at market value 12,475 6,119 17,456
Short-term investments, at cost
which approximates market value 46,642 41,668 45,105
Available for sale at market value 3,736,684 3,383,632 4,186,974
Held to maturity at amortized cost, market value $1,028,904
($1,049,952 December 31, and $1,101,702 June 30, 2001) 986,684 1,032,093 1,075,242
------------- ------------- -------------
Total investment securities 4,782,485 4,463,512 5,324,777
Loans and leases 20,918,707 19,295,372 17,803,111
Less: Allowance for loan and lease losses 292,512 268,198 244,486
------------- ------------- -------------
Net loans and leases 20,626,195 19,027,174 17,558,625
Premises and equipment 414,462 393,030 390,181
Goodwill 649,731 524,748 332,111
Other intangibles 82,222 63,337 45,001
Accrued interest and other assets 1,219,280 1,218,168 1,177,084
------------- ------------- -------------
Total Assets $ 29,125,671 $ 27,253,734 $ 25,895,655
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,649,761 $ 3,558,571 $ 2,943,114
Interest bearing 14,498,279 12,934,476 13,306,539
------------- ------------- -------------
Total deposits 18,148,040 16,493,047 16,249,653
Funds purchased and security repurchase agreements 1,480,425 1,111,412 1,189,660
Other short-term borrowings 4,221,738 4,745,830 4,204,956
Accrued expenses and other liabilities 893,400 850,300 849,853
Long-term borrowings 1,675,098 1,560,177 1,044,132
------------- ------------- -------------
Total liabilities 26,418,701 24,760,766 23,538,254
Shareholders' equity:
Series A convertible preferred stock, $1.00 par value;
336,370 shares issued 336 336 336
Common stock, $1.00 par value; 240,832,522 shares issued
(117,301,755 December 31, and 112,757,546 June 30, 2001) 240,833 117,302 112,757
Additional paid-in capital 752,885 698,289 436,735
Retained earnings 2,501,735 2,331,776 2,203,803
Accumulated other comprehensive
income, net of related taxes 32,272 40,600 64,923
Less: Treasury common stock, at cost: 30,608,636 shares
(13,352,817 December 31, and 9,475,724 June 30, 2001) 799,725 673,494 440,458
Deferred compensation 21,366 21,841 20,695
------------- ------------- -------------
Total shareholders' equity 2,706,970 2,492,968 2,357,401
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 29,125,671 $ 27,253,734 $ 25,895,655
============= ============= =============
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended June 30,
----------------------------
2002 2001
------------- -------------
Interest income
---------------
Loans and leases $ 321,574 $ 341,678
Investment securities:
Taxable 49,617 70,012
Exempt from federal income taxes 15,377 15,512
Trading securities 123 341
Short-term investments 3,452 3,904
------------- -------------
Total interest income 390,143 431,447
Interest expense
----------------
Deposits 73,403 155,954
Short-term borrowings 37,806 49,291
Long-term borrowings 28,936 24,968
------------- -------------
Total interest expense 140,145 230,213
------------- -------------
Net interest income 249,998 201,234
Provision for loan and lease losses 16,980 10,737
------------- -------------
Net interest income after provision for loan and lease losses 233,018 190,497
Other income
------------
Data processing services:
e-Finance solutions 33,967 27,922
Financial technology solutions 112,328 108,948
Other -- 1,274
------------- -------------
Total data processing services 146,295 138,144
Item processing 9,070 12,048
Trust services 31,358 30,571
Service charges on deposits 25,224 20,447
Mortgage banking 7,365 12,305
Net investment securities losses (121) (13,067)
Life insurance revenue 7,407 6,694
Other 37,556 30,346
------------- -------------
Total other income 264,154 237,488
Other expense
-------------
Salaries and employee benefits 185,294 178,067
Net occupancy 18,802 15,329
Equipment 29,170 28,969
Software expenses 10,030 9,224
Processing charges 8,921 11,838
Supplies and printing 4,937 5,443
Professional services 8,790 6,642
Shipping and handling 10,842 10,926
Amortization of intangibles 4,931 8,613
Other 36,296 67,116
------------- -------------
Total other expense 318,013 342,167
------------- -------------
Income before income taxes 179,159 85,818
Provision for income taxes 58,732 26,135
------------- -------------
Net income $ 120,427 $ 59,683
============= =============
Net income per common share
Basic $ 0.56 $ 0.28
Diluted 0.54 0.28
Dividends paid per common share $ 0.160 $ 0.145
Weighted average common shares outstanding:
Basic 211,417 205,811
Diluted 221,333 215,476
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Six Months Ended June 30,
----------------------------
2002 2001
------------- -------------
Interest income
---------------
Loans and leases $ 631,556 $ 695,668
Investment securities:
Taxable 100,384 147,963
Exempt from federal income taxes 30,533 31,412
Trading securities 182 669
Short-term investments 7,895 8,169
------------- -------------
Total interest income 770,550 883,881
Interest expense
----------------
Deposits 144,318 343,137
Short-term borrowings 76,659 103,392
Long-term borrowings 59,298 50,339
------------- -------------
Total interest expense 280,275 496,868
Net interest income 490,275 387,013
Provision for loan and lease losses 32,176 21,800
------------- -------------
Net interest income after provision for loan and lease losses 458,099 365,213
Other income
------------
Data processing services:
e-Finance solutions 67,774 54,170
Financial technology solutions 223,538 213,038
Other 2 3,928
------------- -------------
Total data processing services 291,314 271,136
Item processing 19,406 24,505
Trust services 62,337 60,600
Service charges on deposits 50,798 41,273
Mortgage banking 16,741 20,100
Net investment securities losses (866) (6,961)
Life insurance revenue 14,738 13,225
Other 68,688 60,181
------------- -------------
Total other income 523,156 484,059
Other expense
Salaries and employee benefits 364,780 345,989
Net occupancy 35,892 31,226
Equipment 57,657 57,601
Software expenses 22,621 17,294
Processing charges 18,507 20,788
Supplies and printing 9,650 10,393
Professional services 18,585 13,802
Shipping and handling 22,896 22,243
Amortization of intangibles 9,230 16,227
Other 71,802 96,990
------------- -------------
Total other expense 631,620 632,553
------------- -------------
Income before income taxes and cumulative
effect of changes in accounting principle 349,635 216,719
Provision for income taxes 113,579 70,434
------------- -------------
Income before cumulative effect of changes in accounting principle 236,056 146,285
Cumulative effect of changes in accounting principle, net of income taxes -- (436)
------------- -------------
Net income $ 236,056 $ 145,849
============= =============
Net income per common share
Basic:
Income before cumulative effect of changes in accounting principle $ 1.11 $ 0.70
Cumulative effect of changes in accounting principle, net of income taxes -- --
------------- -------------
Net income $ 1.11 $ 0.70
============= =============
Diluted:
Income before cumulative effect of changes in accounting principle $ 1.07 $ 0.68
Cumulative effect of changes in accounting principle, net of income taxes -- --
------------- -------------
Net income $ 1.07 $ 0.68
============= =============
Dividends paid per common share $ 0.305 $ 0.278
============= =============
Weighted average common shares outstanding:
Basic 210,527 205,745
Diluted 220,436 215,544
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Six Months Ended June 30,
----------------------------
2002 2001
------------- -------------
Net Cash Provided by Operating Activities $ 606,105 $ 206,780
Cash Flows From Investing Activities:
-------------------------------------
Proceeds from sales of securities available for sale 1,909 21,376
Proceeds from maturities of securities available for sale 843,104 803,255
Proceeds from maturities of securities held to maturity 44,053 36,048
Purchases of securities available for sale (991,256) (216,355)
Purchases of securities held to maturity (631) --
Net increase in loans (1,335,757) (327,881)
Purchases of assets to be leased (88,561) (267,895)
Principal payments on lease receivables 221,805 360,367
Fixed asset purchases, net (20,525) (18,410)
Purchase acquisitions, net of cash equivalents acquired (10,338) (24,845)
Other 5,148 12,486
------------- -------------
Net cash (used)/provided in investing activities (1,331,049) 378,146
Cash Flows From Financing Activities:
-------------------------------------
Net increase/(decrease) in deposits 839,524 (3,001,689)
Proceeds from issuance of commercial paper 3,210,992 1,252,765
Payments for maturity of commercial paper (3,152,189) (1,258,609)
Net (decrease)/increase in other short-term borrowings (243,804) 2,144,581
Proceeds from issuance of long-term debt 318,818 627,029
Payments of long-term debt (271,756) (87,726)
Dividends paid (66,096) (59,116)
Purchases of treasury stock (139,806) (15,520)
Other 16,792 16,542
------------- -------------
Net cash provided/(used) by financing activities 512,475 (381,743)
------------- -------------
Net (decrease)/increase in cash and cash equivalents (212,469) 203,183
Cash and cash equivalents, beginning of year 1,563,765 864,693
------------- -------------
Cash and cash equivalents, end of period $ 1,351,296 $ 1,067,876
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 262,315 $ 521,879
Income taxes 105,209 66,931
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2002 & 2001 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I" or
"Corporation") 2001 Annual Report on Form 10-K. The unaudited financial
information included in this report reflects all adjustments (consisting
only of normal recurring accruals) which are necessary for a fair
statement of the financial position and results of operations as of and
for the three and six months ended June 30, 2002 and 2001. The results
of operations for the three and six months ended June 30, 2002 and 2001
are not necessarily indicative of results to be expected for the entire
year. Certain amounts in the 2001 consolidated financial statements and
analyses have been reclassified to conform with the 2002 presentation.
Common stock per share and average share information for years prior to
2002 have been restated for the 2-for-1 stock split effected in the form
of a 100% stock dividend which was effective June 17, 2002.
2. Change in Method of Accounting
On January 1, 2002, the Corporation adopted 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.
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.
The provisions of SFAS 142 are now being applied by the Corporation.
Goodwill and intangible assets acquired after June 30, 2001, are subject
immediately to the nonamortization and amortization provisions of the
statement.
During the second quarter of 2002, the Corporation completed the first
step of the transitional goodwill impairment test on its five identified
reporting units based on amounts as of January 1, 2002. With the
assistance of a nationally recognized independent appraisal firm, the
Corporation concluded that there were no impairment losses for goodwill
due to the initial application of SFAS 142.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
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 (dollars and shares in thousands,
except per share data):
Three Months Ended June 30,
----------------------------
2002 2001
------------- -------------
Income before cumulative effect of changes in accounting principle $ 120,427 $ 59,683
Adjustments:
Goodwill amortization, net of taxes -- 3,713
------------- -------------
Income before cumulative effect of changes in accounting principle $ 120,427 $ 63,396
Income before cumulative effect of changes in accounting principle:
Basic:
Reported income before cumulative
effect of changes in accounting principle $ 0.56 $ 0.28
Goodwill amortization -- 0.02
------------- -------------
$ 0.56 $ 0.30
============= =============
Diluted:
Reported income before cumulative
effect of changes in accounting $ 0.54 $ 0.28
Goodwill amortization -- 0.02
------------- -------------
$ 0.54 $ 0.30
============= =============
Six Months Ended June 30,
----------------------------
2002 2001
------------- -------------
Income before cumulative effect of changes in accounting principle $ 236,056 $ 146,285
Adjustments:
Goodwill amortization, net of taxes -- 7,295
------------- -------------
Income before cumulative effect of changes in accounting principle $ 236,056 $ 153,580
============= =============
Income before cumulative effect of changes in accounting principle:
Basic:
Reported income before cumulative
effect of changes in accounting principle $ 1.11 $ 0.70
Goodwill amortization -- 0.04
------------- -------------
$ 1.11 $ 0.74
============= =============
Diluted:
Reported income before cumulative
effect of changes in accounting principle $ 1.07 $ 0.68
Goodwill amortization -- 0.03
------------- -------------
$ 1.07 $ 0.71
============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 are as follows (dollars in thousands):
Banking Metavante Others Total
----------- ---------- ---------- ----------
Goodwill balance as of January 1, 2002 $ 367,612 $ 125,587 $ 31,549 $ 524,748
Goodwill acquired during the period 125,955 -- 2,087 128,042
Purchase accounting adjustments -- (2,265) -- (2,265)
Goodwill amortization (794) -- -- (794)
----------- ---------- ---------- ----------
Goodwill balance as of June 30, 2002 $ 492,773 $ 123,322 $ 33,636 $ 649,731
=========== ========== ========== ==========
At June 30, 2002, the Corporation's intangible assets consisted of the
following (dollars in thousands):
Amortized intangible assets:
Core deposit intangible $ 50,966
Data processing contract rights/customer lists 19,561
Loan servicing rights 10,970
Trust customers 725
----------
Total amortized intangible assets $ 82,222
==========
Goodwill:
Amortized (SFAS 72) $ 2,592
Unamortized 647,139
----------
Total goodwill $ 649,731
==========
3. Business Combinations
The following acquisitions, which were not considered material business
combinations, were completed during the first quarter of 2002.
On March 1, 2002 the Corporation acquired all of the common stock of
Richfield State Agency, Inc. ("Richfield"), a Minnesota bank holding
company. Richfield had consolidated total assets of approximately $0.8
billion at completion of the merger. The Corporation issued 2.5 million
common shares and paid cash of approximately $10.0 million in a tax-free
exchange for the outstanding common stock of Richfield using the purchase
method of accounting. The core deposit intangible and other identifiable
intangible assets recorded in this transaction amounted to $19.3 million
and $0.8 million, respectively. Initial goodwill subject to the
completion of appraisals and valuations of the assets acquired and
liabilities assumed, amounted to $94.3 million.
Also, on March 1, 2002 the Corporation acquired all of the common stock
of Century Bancshares, Inc. ("Century"), a Minnesota bank holding
company. Century had consolidated total assets of approximately $0.3
billion at completion of the merger. The Corporation issued 0.6 million
common shares and paid cash of approximately $19.9 million in a tax-free
exchange for the outstanding common stock of Century using the purchase
method of accounting. The core deposit intangible recorded in this
transaction amounted to $6.1 million. Initial goodwill subject to the
completion of appraisals and valuations of the assets acquired and
liabilities assumed, amounted to $33.7 million.
The results of operations of the acquired entities have been included in
the consolidated results since the dates the transactions were closed.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
The following acquisitions were recently announced:
On June 17, 2002, the Corporation announced it had signed a definitive
agreement to acquire Mississippi Valley Bancshares, Inc. ("Mississippi
Valley"). Mississippi Valley with eight offices located in St. Louis,
Missouri; Belleville, Illinois; and Phoenix, Arizona had consolidated
total assets of $2.1 billion as of June 30, 2002. The merger
consideration consists in the aggregate $26.25 per share in cash and
shares of M&I stock. The stock component of the transaction is variable,
based on the price of M&I's stock prior to closing. Based on the closing
price of M&I's stock as of June 14, the stock component would have been
0.8486 shares of M&I stock. The transaction is expected to be completed
by the fourth quarter of 2002, subject to shareholder and regulatory
approvals.
On July 2, 2002, the Corporation's Metavante subsidiary announced it had
signed a definitive agreement to acquire substantially all the assets of
Paytrust, Inc., a privately held online bill management company based in
Lawrenceville, New Jersey. The transaction closed in July 2002. Through
the acquisition, Metavante plans to consolidate its consumer service
provider operations onto one technology platform. Integration costs,
primarily related to operating duplicate platforms for a limited period
on time, are anticipated to be approximately $6 million after-tax, and
will be incurred over approximately nine months following the
transaction.
On July 29, 2002, the Corporation's Metavante subsidiary announced it had
signed a definitive agreement to acquire the assets of Spectrum EPB, LLC,
an open, interoperable switch for exchanging online bills and payments.
Spectrum is a privately held, Atlanta-based company that was founded in
1999 by subsidiaries of J.P. Morgan Chase & Co., Wachovia Corporation and
Wells Fargo & Company. The transaction is expected to close in August,
2002, subject to regulatory approval.
4. A reconciliation of the numerators and denominators of the basic and
diluted per share computations are as follows (dollars and shares in
thousands, except per share data):
Three Months Ended June 30, 2002
-------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- -----------
Net Income $ 120,427
Convertible Preferred Dividends (1,230)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 119,197 211,417 $ 0.56
============
Effect of Dilutive Securities
Convertible Preferred Stock 1,230 7,688
Stock Options and Restricted Stock Plans -- 2,228
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 120,427 221,333 $ 0.54
============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
Three Months Ended June 30, 2001
-------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- -----------
Net Income $ 59,683
Convertible Preferred Dividends (1,115)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 58,568 205,811 $ 0.28
============
Effect of Dilutive Securities
Convertible Preferred Stock 1,115 7,688
Stock Options and Restricted Stock Plans -- 1,977
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 59,683 215,476 $ 0.28
============
Six Months Ended June 30, 2002
-------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- -----------
Net Income $ 236,056
Convertible Preferred Dividends (2,345)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 233,711 210,527 $ 1.11
============
Effect of Dilutive Securities
Convertible Preferred Stock 2,345 7,688
Stock Options and Restricted Stock Plans -- 2,221
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 236,056 220,436 $ 1.07
============
Six Months Ended June 30, 2001
-------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- -----------
Net Income $ 145,849
Convertible Preferred Dividends (2,133)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 143,716 205,745 $ 0.70
============
Effect of Dilutive Securities
Convertible Preferred Stock 2,133 7,688
Stock Options and Restricted Stock Plans -- 2,111
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 145,849 215,544 $ 0.68
============
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 is
as follows:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- ----------------------------------------
2002 2001 2002 2001
-------------------- ------------------- ------------------- -------------------
Shares 3,793,400 7,231,862 3,833,400 7,093,862
Price Range $31.0980 - $33.9375 $25.4650 - $35.0313 $31.0450 - $33.9375 $25.9000 - $35.0313
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
5. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
June 30, December 31, June 30,
2002 2001 2001
------------- ------------- -------------
Investment securities available for sale:
U.S. treasury and government agencies $ 2,704,736 $ 2,346,566 $ 2,941,326
State and political subdivisions 234,709 176,167 151,999
Mortgage backed securities 157,188 175,471 278,779
Other 640,051 685,428 814,870
------------- ------------- -------------
Total $ 3,736,684 $ 3,383,632 $ 4,186,974
============= ============= =============
Investment securities held to maturity:
State and political subdivisions $ 983,048 $ 1,028,555 $ 1,070,665
Other 3,636 3,538 4,577
------------- ------------- -------------
Total $ 986,684 $ 1,032,093 $ 1,075,242
============= ============= =============
6. The Corporation's loan and lease portfolio consists of the following
($000's):
June 30, December 31, June 30,
2002 2001 2001
------------- ------------- -------------
Commercial, financial & agricultural $ 6,138,083 $ 5,716,061 $ 5,293,256
Real estate:
Construction 937,648 730,864 675,881
Residential mortgage 5,939,553 5,563,975 4,978,639
Commercial mortgage 5,544,479 5,099,093 4,692,009
-------------- -------------- --------------
Total real estate 12,421,680 11,393,932 10,346,529
Personal 1,490,252 1,210,808 1,129,611
Lease financing 860,936 962,356 1,018,677
Cash flow hedging instruments at fair value 7,756 12,215 15,038
-------------- -------------- --------------
Total $ 20,918,707 $ 19,295,372 $ 17,803,111
============== ============== ==============
7. Sale of Receivables
During the second quarter of 2002, $106.3 million of automobile loans
were sold in securitization transactions. Gains and trading income of
$5.4 million were recognized. Other income associated with auto
securitizations in the current quarter amounted to $0.7 million.
Key economic assumptions used in measuring the retained interests at the
date of securitization resulting from securitizations completed during
the second quarter were as follows (rate per annum):
Prepayment speed 25.0 %
Weighted average life (in months) 20.9
Expected credit losses 0.12 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one month LIBOR yield curve
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
At June 30, 2002, 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 $ 520,645 $ 211,144 $ 731,789
Principal amounts of loans 60 days or more past due 475 964 1,439
Net credit losses year to date 604 400 1,004
8. The Corporation's deposit liabilities consists of the following ($000's):
June 30, December 31, June 30,
2002 2001 2001
------------- ------------- -------------
Noninterest bearing demand $ 3,649,761 $ 3,558,571 $ 2,943,114
Savings and NOW 7,976,263 7,867,106 7,129,347
CD's $100,000 and over 2,279,449 1,321,746 2,362,332
Other time deposits 2,843,677 2,962,724 3,143,204
Foreign deposits 1,398,890 782,900 671,656
------------- ------------- -------------
$ 18,148,040 $ 16,493,047 $ 16,249,653
============= ============= =============
9. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
Three Months Ended June 30, 2002
-----------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
--------------- --------------- ---------------
Net income $ 120,427
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 26,755 $ (9,526) 17,229
Reclassification for securities
transactions included in net income -- -- --
--------------- --------------- ---------------
Unrealized gains (losses) 26,755 (9,526) 17,229
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (54,493) 19,072 (35,421)
Reclassification adjustments for
hedging activities included in net income 13,338 (4,667) 8,671
--------------- --------------- ---------------
Net gains (losses) $ (41,155)$ 14,405 (26,750)
--------------- --------------- ---------------
Other comprehensive income (9,521)
---------------
Total comprehensive income $ 110,906
===============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
Three Months Ended June 30, 2001
-----------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
--------------- --------------- ---------------
Net income $ 59,683
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 3,206 $ (353) 2,853
Reclassification for securities
transactions included in net income (3,072) 1,075 (1,997)
--------------- --------------- ---------------
Unrealized gains (losses) 134 722 856
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 5,082 (1,780) 3,302
Reclassification adjustments for
hedging activities included in net income 1,871 (654) 1,217
--------------- --------------- ---------------
Net gains (losses) $ 6,953 $ (2,434) 4,519
--------------- --------------- ---------------
Other comprehensive income 5,375
---------------
Total comprehensive income $ 65,058
===============
Six Months Ended June 30, 2002
-----------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
--------------- --------------- ---------------
Net income $ 236,056
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 12,384 $ (4,680) 7,704
Reclassification for securities
transactions included in net income -- -- --
--------------- --------------- ---------------
Unrealized gains (losses) 12,384 (4,680) 7,704
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (47,927) 16,774 (31,153)
Reclassification adjustments for
hedging activities included in net income 23,262 (8,141) 15,121
--------------- --------------- ---------------
Net gains (losses) $ (24,665)$ 8,633 (16,032)
--------------- --------------- ---------------
Other comprehensive income (8,328)
---------------
Total comprehensive income $ 227,728
===============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
Six Months Ended June 30, 2001
-----------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
--------------- --------------- ---------------
Net income $ 145,849
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 57,576 $ (20,359) 37,217
Reclassification for securities
transactions included in net income (3,072) 1,075 (1,997)
--------------- --------------- ---------------
Unrealized gains (losses) 54,504 (19,284) 35,220
Net gains (losses) on derivatives
hedging variability of cash flows:
Adoption of SFAS 133 (15,665) 5,483 (10,182)
Arising during the period (213) 74 (139)
Reclassification adjustments for
hedging activities included in net income 2,918 (1,021) 1,897
--------------- --------------- ---------------
Net gains (losses) $ (12,960)$ 4,536 (8,424)
--------------- --------------- ---------------
Other comprehensive income 26,796
---------------
Total comprehensive income $ 172,645
===============
10. Derivative Financial Instruments and Hedging Activities
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 for customer activity is generally minimized
by concurrently entering into offsetting positions with nearly identical
notional values, terms and indices.
At June 30, 2002, interest rate swaps designated as trading consisted of
$1,130.6 million in notional amount of receive fixed/pay floating with
an aggregate positive fair value of $8.8 million and $801.9 million in
notional amount of pay fixed/receive floating with an aggregate negative
fair value of $3.0 million.
Interest rate swaps designated as trading are recorded at fair value.
Gains and losses arising from changes in fair value are recorded in other
income.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
Fair Value Hedges
-----------------
The following table presents information with respect to the
Corporation's fair value hedges.
Fair Value Hedges
June 30, 2002 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------------- ------------------ ------------- ------------- ------------
Callable CDs Receive Fixed Swap $ 126.5 $ 0.5 6.8
Medium Term Notes Receive Fixed Swap 196.4 6.7 4.4
Long-term Borrowings Receive Fixed Swap 200.0 22.7 24.4
For the three and six months ended June 30, 2002, the impact from fair
value hedges to net interest income was a positive $4.5 million and a
positive $9.8 million, respectively.
Cash Flow Hedges
----------------
The following table presents information with respect to the
Corporation's cash flow hedges.
Cash Flow Hedges
June 30, 2002 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------------- ------------------ ------------- ------------- ------------
Variable Rate Loans Receive Fixed Swap $ 300.0 $ 7.8 0.8
Institutional CDs Pay Fixed Swap 320.0 (4.8) 2.9
Commercial Paper Pay Fixed Swap 200.0 (23.9) 4.4
Fed Funds Purchased Pay Fixed Swap 860.0 (21.7) 2.8
FHLB Advances Pay Fixed Swap 610.0 (17.2) 4.6
For the three and six months ended June 30, 2002, the impact from cash
flow hedges to net interest income was a negative $13.3 million and a
negative $23.3 million, respectively.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
11. 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 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 to the Corporation's Annual Report on
Form 10-K, Item 8. Intersegment revenues may be based on cost, current
market prices or negotiated prices between the providers and receivers
of services.
Based on the way the Corporation organizes its segments and the
requirements of Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
the Corporation has determined that it has two reportable segments.
Information with respect to M&I's segments is as follows:
Banking
-------
Banking consists of two banks headquartered in Wisconsin, with branches
in Wisconsin, Arizona, Nevada, Florida and Minnesota, one federally
chartered thrift headquartered in Nevada, an asset-based lending
subsidiary and an operational support subsidiary which includes item
processing. 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.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
Data Services
-------------
Data Services consists of Metavante and 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, Metavante derives revenue from the Corporation's
credit card merchant operations. The majority of Metavante revenue is
derived from internal and external processing. Intrasegment revenues,
expenses and assets have been eliminated.
All Others
----------
M&I's primary other operating segments includes Trust Services, Mortgage
Banking (residential and commercial), Capital Markets Group, Brokerage
and Insurance Services and Commercial Leasing. Trust Services 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. Capital Markets Group
provide venture capital and advisory services. Intrasegment revenues,
expenses and assets for the entities that comprise Trust Services and
Capital Markets Group have been eliminated in the following information.
($ in millions):
Total Revenues by type in All Others consist of the following:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Trust Services $ 31.1 $ 31.0 $ 62.0 $ 61.3
Residential Mortgage Banking 8.5 11.4 17.7 19.1
Capital Markets 0.2 3.8 (0.3) 10.9
Brokerage and Insurance 6.6 5.0 13.1 10.5
Commercial Leasing 3.7 3.5 7.6 6.4
Commercial Mortgage Banking 1.3 0.7 2.2 1.3
Others 0.9 1.2 2.0 3.4
---------- ---------- ---------- ----------
Total revenue $ 52.3 $ 56.6 $ 104.3 $ 112.9
========== ========== ========== ==========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
The following represents the Corporation's operating segments as of and
for the three and six months ended June 30, 2002 and 2001. Intersegment
expenses and assets have been eliminated. ($ in millions):
Three Months Ended June 30, 2002
----------------------------------------------------------------------------------------------
Consol-
Non- idated
Reclass- Consol- recurring Income
ifications idated & Before
Corporate & Elim- Operating Goodwill Accounting
Banking Metavante Others Overhead nations Income Charges Change
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenue:
Net interest income $ 249.6 $ (1.0) $ 6.7 $ (5.3) $ -- $ 250.0 $ -- $ 250.0
Fees - Unaffiliated
customers 76.5 146.3 40.1 1.3 (0.1) 264.1 -- 264.1
Fees - Affiliated
customers 11.8 16.5 5.5 -- (33.8) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 337.9 161.8 52.3 (4.0) (33.9) 514.1 -- 514.1
Expenses:
Expenses - Unaffiliated
customers 134.2 137.7 25.0 23.2 (2.1) 318.0 -- 318.0
Expenses - Affiliated
customers 18.8 5.9 8.7 (1.6) (31.8) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 153.0 143.6 33.7 21.6 (33.9) 318.0 -- 318.0
Provision for loan
and lease losses 16.7 -- 0.3 -- -- 17.0 -- 17.0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income before taxes 168.2 18.2 18.3 (25.6) -- 179.1 -- 179.1
Income tax expense 53.8 7.5 7.1 (9.7) -- 58.7 -- 58.7
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income $ 114.4 $ 10.7 $ 11.2 $ (15.9) $ -- $ 120.4 $ -- $ 120.4
========== ========== ========== ========== ========== ========== ========== ==========
Identifiable assets $ 28,089.2 $ 700.8 $ 588.1 $ 389.1 $ (641.5) $ 29,125.7 $ -- $ 29,125.7
========== ========== ========== ========== ========== ========== ========== ==========
Return on average
tangible equity 23.4% 24.2% 20.4% 24.0% 24.0%
========== ========== ========== ========== ==========
Return on average equity 18.0% 14.4% 20.1% 17.7% 17.7%
========== ========== ========== ========== ==========
Three Months Ended June 30, 2001
----------------------------------------------------------------------------------------------
Consol-
Non- idated
Reclass- Consol- recurring Income
ifications idated & Before
Corporate & Elim- Operating Goodwill Accounting
Banking Metavante Others Overhead nations Income Charges Change
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenue:
Net interest income $ 200.8 $ (0.9) $ 7.0 $ (5.7) $ -- $ 201.2 $ -- $ 201.2
Fees - Unaffiliated
customers 71.7 137.3 43.5 1.4 (0.4) 253.5 (16.0) 237.5
Fees - Affiliated
customers 6.7 15.7 6.1 -- (28.5) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 279.2 152.1 56.6 (4.3) (28.9) 454.7 (16.0) 438.7
Expenses:
Expenses - Unaffiliated
customers 111.8 126.1 27.2 25.3 1.8 292.2 50.0 342.2
Expenses - Affiliated
customers 20.2 5.0 7.1 (1.6) (30.7) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 132.0 131.1 34.3 23.7 (28.9) 292.2 50.0 342.2
Provision for loan
and lease losses 10.5 -- 0.2 -- -- 10.7 -- 10.7
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income before taxes 136.7 21.0 22.1 (28.0) -- 151.8 (66.0) 85.8
Income tax expense 43.2 8.6 8.8 (10.6) -- 50.0 (23.9) 26.1
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income $ 93.5 $ 12.4 $ 13.3 $ (17.4) $ -- $ 101.8 $ (42.1) $ 59.7
========== ========== ========== ========== ========== ========== ========== ==========
Identifiable assets $ 24,923.8 $ 687.8 $ 750.6 $ 241.5 $ (708.0) $ 25,895.7 $ -- $ 25,895.7
========== ========== ========== ========== ========== ========== ========== ==========
Return on average
tangible equity 19.4% 20.6% 21.4% 20.2% 11.9%
========== ========== ========== ========== ==========
Return on average equity 17.1% 17.2% 21.3% 17.4% 10.2%
========== ========== ========== ========== ==========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2002 & 2001 (Unaudited)
Six Months Ended June 30, 2002
----------------------------------------------------------------------------------------------
Consol-
Non- idated
Reclass- Consol- recurring Income
ifications idated & Before
Corporate & Elim- Operating Goodwill Accounting
Banking Metavante Others Overhead nations Income Charges Change
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenue:
Net interest income $ 489.4 $ (2.0) $ 13.4 $ (10.5) $ -- $ 490.3 $ -- $ 490.3
Fees - Unaffiliated
customers 149.8 291.4 79.8 2.6 (0.4) 523.2 -- 523.2
Fees - Affiliated
customers 22.0 32.4 11.1 -- (65.5) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 661.2 321.8 104.3 (7.9) (65.9) 1,013.5 -- 1,013.5
Expenses:
Expenses - Unaffiliated
customers 258.9 275.4 52.2 47.7 (2.6) 631.6 -- 631.6
Expenses - Affiliated
customers 36.4 11.3 17.3 (1.7) (63.3) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 295.3 286.7 69.5 46.0 (65.9) 631.6 -- 631.6
Provision for loan
and lease losses 31.6 -- 0.6 -- -- 32.2 -- 32.2
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income before taxes 334.3 35.1 34.2 (53.9) -- 349.7 -- 349.7
Income tax expense 105.8 14.5 13.6 (20.3) -- 113.6 -- 113.6
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income $ 228.5 $ 20.6 $ 20.6 $ (33.6) $ -- $ 236.1 $ -- $ 236.1
========== ========== ========== ========== ========== ========== ========== ==========
Identifiable assets $ 28,089.2 $ 700.8 $ 588.1 $ 389.1 $ (641.5) $ 29,125.7 $ -- $ 29,125.7
========== ========== ========== ========== ========== ========== ========== ==========
Return on average
tangible equity 23.9% 24.6% 18.9% 23.8% 23.8%
========== ========== ========== ========== ==========
Return on average equity 18.7 % 14.3% 18.6% 17.9% 17.9%
========== ========== ========== ========== ==========
Six Months Ended June 30, 2001
----------------------------------------------------------------------------------------------
Consol-
Non- idated
Reclass- Consol- recurring Income
ifications idated & Before
Corporate & Elim- Operating Goodwill Accounting
Banking Metavante Others Overhead nations Income Charges Change
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenue:
Net interest income $ 388.3 $ (1.5) $ 12.5 $ (12.3) $ -- $ 387.0 $ -- $ 387.0
Fees - Unaffiliated
customers 139.9 268.8 90.7 1.1 (0.4) 500.1 (16.0) 484.1
Fees - Affiliated
customers 14.7 31.7 9.7 0.1 (56.2) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 542.9 299.0 112.9 (11.1) (56.6) 887.1 (16.0) 871.1
Expenses:
Expenses - Unaffiliated
customers 222.7 254.2 56.1 39.4 0.2 572.6 60.0 632.6
Expenses - Affiliated
customers 35.9 8.2 14.5 (1.8) (56.8) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 258.6 262.4 70.6 37.6 (56.6) 572.6 60.0 632.6
Provision for loan
and lease losses 21.4 -- 0.4 -- -- 21.8 -- 21.8
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income before taxes 262.9 36.6 41.9 (48.7) -- 292.7 (76.0) 216.7
Income tax expense 83.2 15.1 16.7 (18.8) -- 96.2 (25.8) 70.4
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income $ 179.7 $ 21.5 $ 25.2 $ (29.9) $ -- $ 196.5 $ (50.2) $ 146.3
========== ========== ========== ========== ========== ========== ========== ==========
Identifiable assets $ 24,923.8 $ 687.8 $ 750.6 $ 241.5 $ (708.0) $ 25,895.7 $ -- $ 25,895.7
========== ========== ========== ========== ========== ========== ========== ==========
Return on average
tangible equity 19.1% 18.0% 21.0% 19.9% 14.9%
========== ========== ========== ========== ==========
Return on average equity 16.8% 15.0% 20.8% 17.1% 12.8%
========== ========== ========== ========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended June 30,
------------------------------
2002 2001
------------- -------------
Assets
------
Cash and due from banks $ 698,182 $ 602,661
Investment securities:
Trading securities 12,932 30,272
Short-term investments 907,098 402,889
Other investment securities:
Taxable 3,160,500 4,095,798
Tax-exempt 1,236,252 1,267,049
------------- -------------
Total investment securities 5,316,782 5,796,008
Total loans and leases 20,392,703 17,868,564
Less: Allowance for loan and lease losses 291,919 245,020
------------- -------------
Net loans and leases 20,100,784 17,623,544
Premises and equipment, net 415,940 385,000
Accrued interest and other assets 1,952,720 1,580,144
------------- -------------
Total Assets $ 28,484,408 $ 25,987,357
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,360,327 $ 2,727,725
Interest bearing 15,235,115 14,471,737
------------- -------------
Total deposits 18,595,442 17,199,462
Funds purchased and security repurchase agreements 2,285,523 2,343,424
Other short-term borrowings 1,577,361 1,591,153
Long-term borrowings 2,414,191 1,697,154
Accrued expenses and other liabilities 883,472 814,578
------------- -------------
Total liabilities 25,755,989 23,645,771
Shareholders' equity 2,728,419 2,341,586
------------- -------------
Total Liabilities and Shareholders' Equity $ 28,484,408 $ 25,987,357
============= =============
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Six Months Ended June 30,
------------------------------
2002 2001
------------- -------------
Assets
------
Cash and due from banks $ 674,003 $ 607,625
Investment securities:
Trading securities 11,278 30,097
Short-term investments 996,036 360,716
Other investment securities:
Taxable 3,047,285 4,291,126
Tax-exempt 1,232,808 1,280,329
------------- -------------
Total investment securities 5,287,407 5,962,268
Total loans and leases 19,924,364 17,743,695
Less: Allowance for loan and lease losses 285,961 241,425
------------- -------------
Net loans and leases 19,638,403 17,502,270
Premises and equipment, net 407,841 385,706
Accrued interest and other assets 1,909,170 1,552,615
------------- -------------
Total Assets $ 27,916,824 $ 26,010,484
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,272,763 $ 2,692,949
Interest bearing 14,545,517 14,744,553
------------- -------------
Total deposits 17,818,280 17,437,502
Funds purchased and security repurchase agreements 2,323,701 2,131,319
Other short-term borrowings 1,843,189 1,675,081
Long-term borrowings 2,420,926 1,654,637
Accrued expenses and other liabilities 846,692 799,996
------------- -------------
Total liabilities 25,252,788 23,698,535
Shareholders' equity 2,664,036 2,311,949
------------- -------------
Total Liabilities and Shareholders' Equity $ 27,916,824 $ 26,010,484
============= =============
THREE MONTHS ENDED JUNE 30, 2002 and 2001
Net income for the second quarter of 2002 amounted to $120.4 million compared
to $59.7 million for the same period in the prior year. Basic and diluted
earnings per share were $0.56 and $0.54 respectively for the three months ended
June 30, 2002, compared with $.28 for both basic and diluted earnings per share
for the three months ended June 30, 2001. The return on average assets and
average equity was 1.70% and 17.70% for the quarter ended June 30, 2002 and
0.92% and 10.22% for the quarter ended June 30, 2001.
The results of operations and financial position as of and for the three months
ended June 30, 2002, include the effects of Metavante's four acquisitions in
the second, third and fourth quarters of 2001, the Corporation's acquisitions
of National City Bancorporation ("National City") and certain Arizona branches
in the third quarter of 2001 and the acquisitions of Richfield State Agency,
Inc. ("Richfield") and Century Bancshares, Inc. ("Century") which both closed
on March 1, 2002. All acquisitions were accounted for using the purchase
method of accounting and accordingly the results of operations and financial
position are included from the dates the transactions were closed.
Net income for the prior year quarter includes certain losses and expenses
associated with organizational changes and acquisitions at the Corporation's
Metavante subsidiary, auto lease residual value write-downs, the final charges
for the charter consolidation initiative and certain goodwill amortization
which ceased on January 1, 2002 as a result of adopting Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. The impact
of these items is shown in the following table ($000's):
Three Months ended June 30,
Pre-tax --------------------------------
Effect 2002 2001
--------------- --------------- ---------------
Income as Reported $ 120,427 $ 59,683
Nonrecurring Losses and Expenses:
Metavante Subsidiary --
Reduction in force and realignment $ 11,028
Investment losses 16,057
Acquisition related 3,843
---------------
Total Metavante Subsidiary 30,928 -- 18,587
Auto Lease Residual Value Write-downs 25,000 -- 15,843
Charter Consolidation 5,972 -- 3,940
Goodwill Amortization 4,086 -- 3,713
--------------- --------------- ---------------
Total Adjustments $ 65,986 -- 42,083
=============== --------------- ---------------
Operating Income $ 120,427 $ 101,766
=============== ===============
The following tables present a summary of each of the major elements of the
consolidated operating income statement, certain financial statistics and a
summary of the major operating income statement elements stated as a percent
of average consolidated assets converted to a fully taxable equivalent basis
(FTE) where appropriate for the current quarter and previous four quarters.
Operating income for the third and fourth quarters of 2001 excludes certain
expenses incurred in connection with acquisitions at the Corporation's
Metavante subsidiary. Such expenses amounted to $37.6 million ($22.8 million
after-tax) in the third quarter of 2001 and $3.5 million ($2.0 million after-
tax) in the fourth quarter of 2001. Operating income for the second quarter
of 2001 excludes those items previously discussed. In addition, operating
income for the third and fourth quarters of 2001 exclude certain goodwill
amortization which ceased on January 1, 2002 as a result of adopting the new
accounting standard on goodwill and other intangible assets. Return on
tangible equity is based on operating income before amortization of
intangibles. Amortization includes amortization of goodwill and core deposit
premiums and is net of the income tax expense or benefit, if any, related to
each component. This calculation was specifically formulated by the
Corporation and may not be comparable to similarly titled measures reported by
other companies.
Summary Consolidated Operating Income Statements and Financial Statistics
-------------------------------------------------------------------------
($000's except per share data)
------------------------------
2002 2001
----------------------- -------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Interest income $ 390,143 $ 380,407 $ 401,974 $ 423,248 $ 431,447
Interest expense (140,145) (140,130) (164,686) (204,746) (230,213)
---------- ----------- ----------- ----------- -----------
Net interest income 249,998 240,277 237,288 218,502 201,234
Provision for loan and lease losses (16,980) (15,196) (20,109) (12,206) (10,737)
Net investment securities gains (losses) (121) (745) (572) 774 2,991
Other income 264,275 259,747 262,492 254,497 250,554
Other expense (318,013) (313,607) (308,611) (297,057) (292,239)
---------- ----------- ----------- ----------- -----------
Income before taxes 179,159 170,476 170,488 164,510 151,803
Income tax provision (58,732) (54,847) (56,274) (54,223) (50,037)
---------- ----------- ----------- ----------- -----------
Operating income $ 120,427 $ 115,629 $ 114,214 $ 110,287 $ 101,766
========== =========== =========== =========== ===========
Per Common Share
Operating income
Basic $ 0.56 $ 0.55 $ 0.54 $ 0.52 $ 0.49
Diluted 0.54 0.53 0.52 0.50 0.47
Dividends 0.160 0.145 0.145 0.145 0.145
Return on Average Equity
Operating income 17.70 % 18.04 % 17.84 % 17.16 % 17.43 %
Return on Average Tangible Equity 23.99 23.64 22.83 20.93 20.15
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
2002 2001
----------------------- -------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------- -----------
Interest income (FTE) 5.60 % 5.76 % 6.02 % 6.48 % 6.78 %
Interest expense (1.97) (2.08) (2.42) (3.08) (3.55)
---------- ----------- ----------- ----------- -----------
Net interest income 3.63 3.68 3.60 3.40 3.23
Provision for loan and lease losses (0.24) (0.23) (0.30) (0.18) (0.17)
Net investment securities gains (losses) -- (0.01) (0.01) 0.01 0.05
Other income 3.72 3.85 3.85 3.82 3.87
Other expense (4.47) (4.64) (4.52) (4.46) (4.51)
---------- ----------- ----------- ----------- -----------
Income before taxes 2.64 2.65 2.62 2.59 2.47
Income tax provision (0.94) (0.93) (0.94) (0.93) (0.90)
---------- ----------- ----------- ----------- -----------
Return on average assets
based on operating income 1.70 % 1.72 % 1.68 % 1.66 % 1.57 %
========== =========== =========== =========== ===========
Return on tangible average assets
based on tangible operating income 1.77 % 1.78 % 1.73 % 1.71 % 1.61 %
========== =========== =========== =========== ===========
NET INTEREST INCOME
-------------------
Net interest income for the second quarter of 2002 amounted to $250.0 million
compared to $201.2 million reported for the second quarter of 2001. Loan
growth and increased spreads on loan products, the impact of the banking
purchase acquisitions and the downward re-pricing of retail deposit funding
sources all contributed to the $48.8 million increase in net interest income.
Factors negatively affecting net interest income included the ongoing process
of lengthening liabilities in order to reduce future volatility in net interest
income due to interest rate movements, the cost of treasury share repurchases
and the cash expenditures for acquisitions.
Average earning assets in the second quarter of 2002 increased $2.0 billion or
8.6% compared to the same period a year ago. Average loans accounted for $2.5
billion of the growth in earning assets compared to the second quarter of last
year, while average investment securities and other short-term investments
declined $0.5 billion. The Corporation estimates that approximately $2.3
billion of average earning asset growth was attributable to the banking related
purchase acquisitions.
Average interest bearing liabilities increased $1.4 billion or 7.0% in the
second quarter of 2002 compared to the same period in 2001. Since the second
quarter of 2001, total average interest bearing deposits decreased $0.8
billion. Average total short-term borrowings were relatively unchanged while
average long-term borrowings increased $0.7 billion. The Corporation estimates
that approximately $1.8 billion of the growth in average interest bearing
liabilities in the three months ended June 30, 2002, was attributable to the
banking related purchase acquisitions.
Average noninterest bearing deposits increased $0.6 billion or 23.2% compared
to the same period last year. Approximately $0.4 billion of average noninterest
bearing deposits in the three months ended June 30, 2002 are attributable to
the banking related purchase acquisitions.
The growth and composition of the Corporation's quarterly average loan
portfolio for the current quarter and previous four quarters are reflected in
the following table. ($ in millions):
Consolidated Average Loans and Leases
-------------------------------------
2002 2001 Growth Pct.
--------------------- ------------------------------- ------------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- ---------- --------- --------- --------- --------- -------
Commercial
Commercial $ 6,087 $ 5,848 $ 5,680 $ 5,640 $ 5,328 14.2 % 4.1 %
Commercial real estate
Commercial mortgages 5,491 5,228 5,071 4,831 4,625 18.7 5.0
Construction 697 625 534 520 538 29.6 11.6
--------- ---------- --------- --------- --------- --------- -------
Total commercial real estate 6,188 5,853 5,605 5,351 5,163 19.9 5.7
Commercial lease financing 391 410 399 394 382 2.3 (4.6)
--------- ---------- --------- --------- --------- --------- -------
Total Commercial 12,666 12,111 11,684 11,385 10,873 16.5 4.6
Personal
Residential real estate
Residential mortgages 2,371 2,346 2,444 2,303 2,384 (0.5) 1.1
Construction 137 131 142 120 122 12.6 4.8
--------- ---------- --------- --------- --------- --------- -------
Total residential real estate 2,508 2,477 2,586 2,423 2,506 0.1 1.3
Personal loans
Student 116 117 105 94 133 (12.3) (0.6)
Credit card 163 164 161 174 184 (11.4) (0.4)
Home equity loans and lines 3,518 3,176 2,944 2,723 2,641 33.2 10.8
Other 934 876 912 927 864 8.1 6.6
--------- ---------- --------- --------- --------- --------- -------
Total personal loans 4,731 4,333 4,122 3,918 3,822 23.8 9.2
Personal lease financing 488 530 572 612 668 (27.0) (8.0)
--------- ---------- --------- --------- --------- --------- -------
Total personal 7,727 7,340 7,280 6,953 6,996 10.5 5.3
--------- ---------- --------- --------- --------- --------- -------
Total Consolidated Average
Loans and Leases $ 20,393 $ 19,451 $ 18,964 $ 18,338 $ 17,869 14.1 % 4.8 %
========= ========== ========= ========= ========= ========= =======
Compared with the second quarter of 2001, total consolidated average loans and
leases increased $2.5 billion or 14.1%. Approximately $1.9 billion of
average total consolidated loan and lease growth in the second quarter of 2002
is attributable to acquisitions of which, approximately $0.7 billion is the
estimated impact on average loans resulting from the Richfield and Century
acquisitions which closed March 1, 2002. Excluding the impact of acquisitions,
average commercial loans declined $0.2 billion while average commercial real
estate loans grew approximately $0.7 billion. Portfolio decreases in indirect
auto loans and leases and student loans, tighter spread products, were offset
by growth in consumer and home equity portfolios, both wider spread products.
Approximately $0.1 billion of indirect auto loan production was securitized and
sold in the current quarter. Excluding the impact of acquisitions, average
consumer loans grew approximately $0.4 billion. The decline in average
residential real estate loans, excluding acquisitions, reflects the continued
strategy of selling residential real estate loan production in the secondary
market although recently, selected loans with wider spreads and adjustable rate
characteristics have been retained in the portfolio and serve as a potential
source of liquidity in the future. From a production standpoint, loan
applications increased approximately 20% and loan closings increased
approximately 8% compared to the first quarter of this year. Residential real
estate loans sold to investors amounted to $0.4 billion in the second quarter
of 2002 compared to $0.7 billion in the second quarter of the prior year.
Commercial loan growth came from new business relationship activities. The
Corporation's commercial lending activities have historically fared well as the
economy strengthens and it anticipates loan demand will slowly strengthen
reflecting the condition of its markets in future quarters. Home equity loans
and lines, which includes M&I's wholesale activity, continue to be the primary
core consumer loan product and demand for these loans continues to be strong
across the entire organization. The Corporation anticipates these products
will continue to drive growth to the consumer side of its banking activities.
The growth and composition of the Corporation's quarterly average deposits for
the current and prior year's quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2002 2001 Growth Pct.
--------------------- ------------------------------- ------------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- ---------- --------- --------- --------- --------- -------
Bank issued deposits
Noninterest bearing deposits
Commercial $ 2,275 $ 2,160 $ 2,225 $ 1,968 $ 1,779 27.9 % 5.3 %
Personal 729 678 634 608 601 21.2 7.5
Other 357 346 388 365 347 2.6 3.0
--------- ---------- --------- --------- --------- --------- -------
Total noninterest
bearing deposits 3,361 3,184 3,247 2,941 2,727 23.2 5.5
Interest bearing deposits
Savings & NOW 2,252 1,994 1,877 1,784 1,719 31.0 13.0
Money market 5,727 5,844 5,825 5,563 5,368 6.7 (2.0)
Foreign activity 686 694 704 640 532 29.0 (1.1)
--------- ---------- --------- --------- --------- --------- -------
Total interest
bearing deposits 8,665 8,532 8,406 7,987 7,619 13.7 1.6
Time deposits
Other CDs & time deposits 2,868 2,881 3,097 3,167 3,203 (10.4) (0.4)
CDs greater than $100,000 657 651 721 751 749 (12.4) 0.8
--------- ---------- --------- --------- --------- --------- -------
Total time deposits 3,525 3,532 3,818 3,918 3,952 (10.8) (0.2)
--------- ---------- --------- --------- --------- --------- -------
Total bank issued deposits 15,551 15,248 15,471 14,846 14,298 8.8 2.0
Wholesale deposits
Money market 75 83 78 -- 222 (66.3) (9.5)
Brokered CDs 1,621 1,043 872 1,517 1,740 (6.8) 55.5
Foreign time 1,348 658 487 624 939 43.5 104.8
--------- ---------- --------- --------- --------- --------- -------
Total wholesale deposits 3,044 1,784 1,437 2,141 2,901 5.0 70.7
--------- ---------- --------- --------- --------- --------- -------
Total consolidated
average deposits $ 18,595 $ 17,032 $ 16,908 $ 16,987 $ 17,199 8.1 % 9.2 %
========= ========== ========= ========= ========= ========= =======
Average bank issued deposits increased $1.3 billion or 8.1% in the second
quarter of 2002 compared to the second quarter of 2001. Average bank issued
deposits associated with the acquisitions were approximately $1.7 billion of
which approximately $0.8 billion is the estimated impact on average bank issued
deposits resulting from the Richfield and Century acquisitions. Excluding the
effect of the acquisitions, noninterest bearing deposits increased $0.2 billion
while interest bearing activity accounts increased $0.4 billion. The growth
in transaction deposits reflects the successful sales focus on certain activity
accounts particularly in the Arizona marketplace. Excluding acquisitions,
average CDs and time deposits declined $1.1 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 has elected not to pursue. Recently the
Corporation introduced two longer-term step-up CD products that provide
consumers with an increasing rate over the term of the CD. Consumer reaction
to these products has been favorable and consumers have shown some willingness
to lengthen the terms of insured deposits as demonstrated by the slowing of
bank-issued time deposit run-off from the first to second quarter of this year.
The growth in bank issued deposits includes both commercial and retail banking.
In commercial banking, the focus remains on developing deeper relationships
through the sale of treasury management products and services along with
revised incentive plans focused on growing deposits. The retail banking
strategy continues to focus on aggressively selling the right products to meet
the needs of customers and enhance the Corporation's profitability. Specific
retail deposit initiatives include bank-at-work, single service calling, and
retention calling programs as well as an aggressive checking promotion in the
Arizona market.
Compared with the second quarter of 2001, average wholesale deposits were
relatively unchanged. The Corporation has made greater use of wholesale
funding alternatives especially institutional CDs during the first half of
2002. Average wholesale deposits were $1.6 billion greater in the current
quarter compared with the fourth quarter of 2001.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current quarter
and prior year second quarter are presented in the following table ($ in
millions):
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------------- --------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
---------- --------- ---------- ----------- --------- ----------
Loans and leases: (a)
Commercial $ 6,478.2 $ 86.3 5.35 % $ 5,710.7 $ 102.4 7.19 %
Commercial real estate 6,187.6 103.1 6.68 5,162.4 102.0 7.93
Residential real estate 2,508.2 44.3 7.08 2,505.9 46.5 7.45
Personal 5,218.7 88.4 6.80 4,489.6 91.3 8.16
---------- --------- ---------- ----------- --------- ----------
Total loans and leases 20,392.7 322.1 6.34 17,868.6 342.2 7.68
Investment securities: (a)
Taxable 3,160.5 49.6 6.47 4,095.8 70.0 7.00
Tax Exempt (a) 1,236.3 22.9 7.50 1,267.0 23.1 7.40
---------- --------- ---------- ----------- --------- ----------
Total investment securities 4,396.8 72.5 6.76 5,362.8 93.1 7.10
Other short-term investments (a) 920.0 3.5 1.56 433.2 4.3 3.93
---------- --------- ---------- ----------- --------- ----------
Total interest earning assets $ 25,709.5 $ 398.1 6.24 % $ 23,664.6 $ 439.6 7.48 %
========== ========= ========== =========== ========= ==========
Interest bearing deposits:
Bank issued deposits:
Interest bearing activity $ 8,665.4 $ 26.8 1.24 % $ 7,618.9 $ 62.2 3.28 %
Time deposits 3,525.0 28.8 3.27 3,952.0 56.3 5.72
---------- --------- ---------- ----------- --------- ----------
Total bank issued deposits 12,190.4 55.6 1.83 11,570.9 118.5 4.11
Wholesale deposits 3,044.7 17.8 2.34 2,900.8 37.5 5.17
---------- --------- ---------- ----------- --------- ----------
Total interest bearing deposits 15,235.1 73.4 1.93 14,471.7 156.0 4.32
Short-term borrowings 3,862.9 37.8 3.93 3,934.6 49.3 5.02
Long-term borrowings 2,414.2 28.9 4.81 1,697.2 24.9 5.90
---------- --------- ---------- ----------- --------- ----------
Total interest bearing liabilities $ 21,512.2 $ 140.1 2.61 % $ 20,103.5 $ 230.2 4.59 %
========== ========= ========== =========== ========= ==========
Net interest margin (FTE) as a
percent of average earning assets $ 258.0 4.04 % $ 209.4 3.56 %
========= ========== ========= ==========
Net interest spread (FTE) 3.63 % 2.89 %
========== ==========
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax rate
of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for available
for sale securities.
The yield on average earning assets decreased 124 basis points since the second
quarter of 2001, which had a negative impact on interest income (FTE) of
approximately $77.5 million. The increase in the volume of earning assets,
primarily loans and short term investments, increased interest income by
approximately $36.1 million compared with the second quarter of 2001. The cost
of interest bearing deposits decreased 239 basis points from the same quarter
of the previous year which reflects rate declines. The favorable shift in the
bank issued deposit mix also provided a benefit to the interest margin. Both
short-term and long-term borrowing costs decreased 109 basis points compared
with the second quarter of 2001. The overall decrease in the cost of interest
bearing liabilities of 198 basis points decreased interest expense by
approximately $107.9 million while the increase in the volume of interest
bearing liabilities increased interest expense by approximately $17.8 million.
The Corporation anticipates the net interest margin will decline a few basis
points in the third quarter, with net interest income growing with internal
growth and the acquisitions. The Corporation intends to continue to manage its
interest rate risk sensitivity by extending liabilities. The net interest
margin can vary depending on loan and deposit growth, lending spreads and
future interest rate changes.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of June 30, 2002 and the prior four quarters.
NONPERFORMING ASSETS
--------------------
($000's)
2002 2001
----------------------- ---------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- --------- ---------
Nonaccrual $ 160,250 $ 164,444 $ 166,434 $ 163,946 $ 137,355
Renegotiated 314 366 378 389 249
Past due 90 days or more 6,560 5,520 6,982 7,185 7,166
---------- ----------- ----------- --------- ---------
Total nonperforming loans and leases 167,124 170,330 173,794 171,520 144,770
Other real estate owned 6,296 6,736 6,796 5,842 3,671
---------- ----------- ----------- --------- ---------
Total nonperforming assets $ 173,420 $ 177,066 $ 180,590 $ 177,362 $ 148,441
========== =========== =========== ========= =========
Allowance for loan and lease losses $ 292,512 $ 284,179 $ 268,198 $ 264,736 $ 244,486
========== =========== =========== ========= =========
CONSOLIDATED STATISTICS
-----------------------
2002 2001
----------------------- ---------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- --------- ---------
Net Charge-offs to average
loans and leases annualized 0.17 % 0.23 % 0.35 % 0.24 % 0.15 %
Total nonperforming loans and leases
to total loans and leases 0.80 0.84 0.90 0.90 0.81
Total nonperforming assets to total loans
and leases and other real estate owned 0.83 0.87 0.94 0.93 0.83
Allowance for loan and lease losses
to total loans and leases 1.40 1.40 1.39 1.39 1.37
Allowance for loan and lease losses
to nonperforming loans and leases 175 167 154 154 169
NONACCRUAL LOANS AND LEASES BY TYPE
-----------------------------------
($000's)
2002 2001
----------------------- ---------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- --------- ---------
Commercial
Commercial, financial & agricultural $ 62,349 $ 65,513 $ 70,256 $ 78,623 $ 54,576
Lease financing receivables 3,993 4,876 12,041 2,022 1,892
---------- ----------- ----------- --------- ---------
Total commercial 66,342 70,389 82,297 80,645 56,468
Real estate
Construction & land development 1,399 533 720 1,063 2,590
Commercial mortgage 40,933 39,436 34,546 38,117 38,440
Residential mortgage 50,079 52,504 47,783 42,147 38,389
---------- ----------- ----------- --------- ---------
Total real estate 92,411 92,473 83,049 81,327 79,419
Personal 1,497 1,582 1,088 1,974 1,468
---------- ----------- ----------- --------- ---------
Total nonaccrual loans and leases $ 160,250 $ 164,444 $ 166,434 $ 163,946 $ 137,355
========== =========== =========== ========= =========
RECONCILIATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
-----------------------------------------------------
($000's)
2002 2001
----------------------- ---------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ----------- ----------- --------- ---------
Beginning balance $ 284,179 $ 268,198 $ 264,736 $ 244,486 $ 240,348
Provision for loan and lease losses 16,980 15,196 20,109 12,206 10,737
Allowance of banks and loans acquired -- 11,965 -- 19,151 --
Loans and leases charged-off
Commercial 3,740 4,505 11,323 5,266 3,607
Real estate 2,580 3,008 4,404 3,768 1,734
Personal 3,086 2,939 3,253 2,768 2,561
Leases 1,767 2,930 1,174 450 770
---------- ----------- ----------- --------- ---------
Total charge-offs 11,173 13,382 20,154 12,252 8,672
Recoveries on loans and leases
Commercial 542 682 2,216 362 1,042
Real estate 770 474 292 357 403
Personal 840 733 954 354 531
Leases 374 313 45 72 97
---------- ----------- ----------- --------- ---------
Total recoveries 2,526 2,202 3,507 1,145 2,073
---------- ----------- ----------- --------- ---------
Net loans and leases charge-offs 8,647 11,180 16,647 11,107 6,599
---------- ----------- ----------- --------- ---------
Ending balance $ 292,512 $ 284,179 $ 268,198 $ 264,736 $ 244,486
========== =========== =========== ========= =========
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. At
June 30, 2002, OREO acquired in satisfaction of debts amounted to $5.6 million
and branch premises held for sale amounted to $0.7 million.
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 June 30, 2002, nonperforming loans and leases amounted to $167.1 million or
0.80% of consolidated loans and leases of $20.9 billion, a decrease of $3.2
million or 1.9% since March 31, 2002. Nonaccrual loans and leases accounted
for $4.2 million of the decline. Since the first quarter, nonaccrual
commercial loans and leases declined $4.0 million while nonaccrual commercial
real estate and nonaccrual construction and land development increased $1.5
million and $0.9 million, respectively. Nonaccrual residential real estate
loans declined $2.4 million while nonaccrual consumer loans were relatively
unchanged. At June 30, 2002, approximately $34.9 million of nonperforming
loans are related to the National City, Richfield and Century acquisitions.
Net charge-offs amounted to $8.6 million or 0.17% of average loans in the
second quarter of 2002 compared with net charge-offs of $11.2 million or 0.23%
of average loans in the first quarter of 2002 and $6.6 million or 0.15% of
average loans in the second quarter of the prior year.
Net charge-offs in the second quarter moved closer to the Corporation's
historical levels. Compared to the first quarter, M&I's customers appear
somewhat more pessimistic that signs of strengthening in the economy are
evident. The Corporation believes that the communities it serves will continue
to experience stress in the near term and until the economy demonstrates clear
strengthening, some degree of uncertainty exists although it is considered very
manageable at the present time.
OTHER INCOME
------------
Total other income in the second quarter of 2002 amounted to $264.2 million
compared to $237.5 million in the same period last year, an increase of $26.7
million or 11.2%.
Total data processing services revenue amounted to $146.3 million in the
second quarter of 2002 compared to $138.1 million in the second quarter of 2001
an increase of $8.2 million or 5.9%. e-Finance solutions revenue increased
$6.0 million or 21.6% compared to the second quarter of 2001, but was
relatively unchanged when compared with the first quarter of 2002. The purging
activity of one large customer in the fourth quarter of last year and first
quarter of this year along with the transition to one technology platform built
on the Brokat technology, is expected to result in only modest linked revenue
growth in electronic banking through year-end. With respect to the transition
to one platform technology, the consumer product is now generally available
with migrations ongoing and business migrations are expected to begin in the
fall. The bill presentment and payment component of e-Finance continued to
show strong linked quarter and year over year growth in active customers and
transactions processed. Financial technology solutions revenue, the
traditional outsourcing business, increased $3.4 million or 3.1% led by
electronic funds transfer and the card solutions group. In general, growth in
this source of data processing services revenue has slowed due to continued
bank consolidation and a weaker economy. Other revenue declined primarily due
to lower professional services revenue.
Item processing revenue amounted to $9.1 million in the second quarter of 2002
compared to $12.0 million in the second quarter of 2001. During the latter
part of 2001, the Corporation sold certain item processing relationships and
also sold four Midwest item processing centers.
Trust services revenue amounted to $31.4 million in the second quarter of 2002,
an increase of $0.8 million or 2.6% compared to $30.6 million in the second
quarter of 2001 and $31.0 million in the first quarter of 2002. Acquisitions
accounted for the majority of revenue growth. Assets under management were
approximately $12.9 billion at June 30, 2002 compared to $13.0 billion at March
31, 2002, despite the poor performance of both the S&P 500 and NASDAQ in the
current quarter.
Service charges on deposits increased $4.8 million or 23.4% and amounted to
$25.2 million in the second quarter of 2002. Acquisitions accounted for
approximately $1.7 million of the revenue in the second quarter of 2002. The
remainder of the increase was primarily attributable to service charges on
commercial demand accounts.
Mortgage banking revenue decreased $4.9 million in the second quarter of 2002
compared to the second quarter of 2001. Gains on the sale of mortgage loans
accounted for the majority of the decrease which reflects the decreased sale
activity as previously discussed.
Net investment securities losses in the second quarter of 2001 amounted to
$13.1 million. Net securities gains, recognized primarily by the Corporation's
Capital Markets Group which vary from period to period, were approximately $3.0
million. Securities losses of approximately $16.0 million were recognized by
the Corporation's Metavante subsidiary and related to equity investments held
relating to the mortgage origination business as well as an equity investment
whose technology was replaced by the technology acquired as a result of
Metavante's acquisitions of Derivion and Cyberbills.
Life insurance revenue in the second quarter of 2002 includes approximately
$0.2 million from the banking related acquisitions.
Other income in the second quarter of 2002 amounted to $37.6 million compared
to $30.3 million in the second quarter of 2001, an increase of $7.3 million or
23.8%. Approximately $2.2 million of the increase was attributable to the
acquisitions. Other commissions and fees increased approximately $2.9 million.
Auto securitization income increased $3.3 million of which $3.9 million was due
to a mark-to-market on trading assets associated with auto loans sold to the
revolving conduit. The Corporation is planning a term securitization in the
third quarter which is expected to eliminate the volatility associated with the
trading asset. During the second quarter of 2001, the Corporation sold
approximately $46 million of student loans and recognized a gain of $1.7
million.
OTHER EXPENSE
-------------
Total other expense for the three months ended June 30, 2002, amounted to
$318.0 million compared to $342.2 million for the three months ended June 30,
2001.
Nonrecurring expenses in the second quarter of 2001 consisted of the following:
Single charter related expenses which are included in other expenses in
the Consolidated Statement of Income amounted to $6.0 million. As
previously discussed, this initiative was completed during the second
quarter of 2001.
Included in amortization of intangibles for the three months ended June
30, 2001, is $4.1 million of goodwill amortization which ceased to be
amortized under the new accounting standard for goodwill and intangibles
which was adopted on January 1, 2002.
During the second quarter of 2001, the Corporation's Metavante subsidiary
implemented a reduction in force and realignment which included closing
selected regional offices as well as a general reduction in force across
all classes of employees in the Milwaukee metropolitan area.
Approximately 400 positions were eliminated. Total costs were
approximately $11.0 million consisting primarily of severance of $9.6
million, lease termination and other occupancy related exit costs of $0.7
million and professional fees, including outplacement services of $0.4
million. This initiative is complete.
Expenses and write-downs incurred in conjunction with the second quarter
2001 acquisitions of Derivion and Cyberbills and the loss from the sale
of assets of a subsidiary amounted to $3.8 million. Acquisition related
costs of approximately $2.8 million consisted of prepaid maintenance fees
and capitalized software costs that were replaced by the acquired bill
presentment and payment technology.
During the second quarter of 2001, a $25.0 million charge was taken to
write-down residual values of the Corporation's indirect auto lease
portfolio.
Excluding these nonrecurring expenses, total other operating expense amounted
to $318.0 million in the second quarter of 2002 compared to $292.2 million in
the second quarter of 2001, an increase of $25.8 million or 8.8%.
Approximately $8.7 million of operating expenses, excluding salaries and
benefits, in the second quarter of 2002 were attributable to the National City,
Richfield, Century and Metavante's four purchase acquisitions which were
included in M&I's operating expenses since their merger dates.
The Corporation's nonbanking businesses, especially its Data Services segment
("Metavante"), continue to be the primary contributors to operating expense
growth. Excluding salaries and benefits expense, Metavante operating expense
growth represents almost 60% of all of the consolidated operating expense
growth and reflects the cost of its acquisitions as well as ongoing investments
in software, technology research and development and infrastructure in
potentially high-growth areas.
Expense control is sometimes measured in the financial services industry by the
efficiency ratio statistic. The efficiency ratio is calculated by taking total
other expense (excluding nonrecurring charges) divided by the sum of total
other income (including Capital Markets revenue but excluding investment
securities gains or losses) and net interest income on a fully taxable
equivalent basis. The Corporation's efficiency ratios for the three months
ended June 30, 2002 and 2001 and December 31, 2001 are:
Three Months Three Months Three Months
Ended Ended Ended
June 30, March 31, December 31,
2002 2002 2001
-------------- ------------- ------------
Consolidated Corporation 60.9 % 61.8 % 60.7 %
Consolidated Corporation Excluding Metavante
Including Intangible Amortization 50.1 % 50.7 % 51.6 %
Excluding Intangible Amortization 49.1 % 49.9 % 50.3 %
Salaries and employee benefits expense amounted to $185.3 million in the second
quarter of 2002 compared to $178.1 million in the second quarter of 2001, an
increase of $7.2 million. Excluding the severance charge of $9.6 million in
the second quarter of 2001 as previously discussed, operating salaries and
benefits expense increased $16.8 million or 10.0%. Operating salaries and
employee benefits expense associated with the National City, Richfield and
Century banking acquisitions and Metavante's four acquisitions was
approximately $15.6 million.
Occupancy and equipment expense in the second quarter of 2002 amounted to $48.0
million. Approximately $3.4 million of the expense in the current quarter was
attributable to the banking and Metavante acquisitions.
Metavante's operating expense growth accounted for approximately $1.0 million
of the increase in software expenses in the second quarter of 2002 compared to
the second quarter of 2001. Approximately $0.5 million of the increase is due
to its acquisitions.
Included in processing charges in the second quarter of 2001, are Metavante's
nonrecurring charges of approximately $1.9 million associated with prepaid
maintenance as previously discussed.
Metavante and its acquisitions accounted for approximately $1.2 million of the
increase in professional services expense in the current quarter compared to
same period last year. Banking including its related acquisitions contributed
an additional $1.0 million of expense in the second quarter of 2002 compared
to the second quarter of 2001.
Excluding the effect of the new accounting standard on accounting for goodwill
and intangibles, amortization expense increased $0.4 million and was primarily
attributable to increased core deposit intangible amortization in the current
quarter offset, in part, by accelerated mortgage servicing rights amortization
recognized in the second quarter of last year.
Other expense amounted to $36.3 million in the second quarter of 2002 compared
to $67.1 million in the second quarter of 2001. Included in this category in
the prior year quarter were nonrecurring charges aggregating $33.2 million
consisting of the single charter charges of $6.0 million, the lease residual
value write-down of $25.0 million, Metavante acquisition related software
write-downs of $0.9 million, the loss on the sale of assets of a subsidiary of
$1.0 million and other miscellaneous charges related to Metavante's reduction
in force and realignment all as previously discussed. Excluding these charges,
other expense amounted to $36.3 million in the current quarter compared to
$33.9 million in the second quarter of last year, an increase of $2.4 million
or 7.0%. An increase in litigation, environmental clean-up charges and other
losses amounted to approximately $3.8 million.
Other expense is affected by the capitalization of costs, net of amortization
and write-downs associated with software development and customer data
processing conversions. Net software and conversion capitalization was $4.7
million in the second quarter of 2001 and in the current quarter amounted to
$6.0 million resulting in a decrease of $1.3 million in other expense in the
second quarter of 2002 compared to the second quarter of 2001.
INCOME TAXES
------------
The provision for income taxes for the three months ended June 30, 2002
amounted to $58.7 million or 32.8% of pre-tax income compared to $26.1 million
or 30.5% of pre-tax income for the three months ended June 30, 2001. The
difference in the effective tax rates was primarily due to the relative
proportion of tax-exempt income to total income before taxes. The relative
proportion of tax-exempt income to total income before taxes was greater in the
second quarter of 2001 due to the effect of the nonrecurring charges that were
previously discussed.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
---------------------------------------
Net income for the six months ended June 30, 2002 amounted to $236.1 million
compared to $145.8 million in the same period of 2001. Basic and diluted
earnings per share were $1.11 and $1.07, respectively for the six months ended
June 30, 2002 compared to $0.70 and $0.68, respectively for the same period
last year. The year to date return on average equity was 17.87% in the current
period and 12.72% for the six months ended June 30, 2001.
Net income for the first six months of 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 final charge for the charter
consolidation, the cumulative effect of the change in accounting for
derivatives and hedging activities and certain goodwill amortization which
ceased on January 1, 2002 as a result of adopting the new accounting
standard for accounting for goodwill and other intangible assets. The
impact of these items is shown in the following table ($000's):
Six Months ended June 30,
Pre-tax -------------------------------
Effect 2002 2001
--------------- -------------- ---------------
Income as Reported $ 236,056 $ 145,849
Nonrecurring Losses and Expenses:
Metavante Subsidiary
Reduction in force and realignment $ 11,028
Investment losses 16,057
Acquisition related 3,843
--------------- -------------- ---------------
Total Metavante Subsidiary 30,928 -- 18,587
Auto Lease Residual Value Write-downs 25,000 15,843
Charter Consolidations 11,952 8,465
Change in Accounting:
Derivatives and Hedging Activities 671 436
Goodwill Amortization 8,040 7,295
-------------- ---------------
Total Nonrecurring Losses and Expenses -- 50,626
-------------- ---------------
Operating Income $ 236,056 $ 196,475
============== ===============
The following tables present a summary of each of the major elements of the
consolidated operating income statement, certain financial statistics and a
summary of the major operating income statement elements stated as a percent
of average consolidated assets converted to a fully taxable equivalent basis
(FTE) where appropriate for the six months ended June 30, 2002 and 2001,
respectively. Operating income for the six months ended June 30, 2001
excludes the nonrecurring items previously discussed. Return on tangible
equity is based on operating income before amortization of intangibles.
Amortization includes amortization of goodwill and core deposit premiums and
is net of the income tax expense or benefit, if any, related to each
component. These calculations were specifically formulated by the
Corporation and may not be comparable to similarly titled measures reported
by other companies.
Summary Consolidated Operating Income Statements and Financial Statistics
-------------------------------------------------------------------------
($000's except per share data)
Six Months Ended June 30,
---------------------------
2002 2001
------------ -------------
Interest income $ 770,550 $ 883,881
Interest expense (280,275) (496,868)
------------ -------------
Net interest income 490,275 387,013
Provision for loan and lease losses (32,176) (21,800)
Net investment securities (losses) (866) 9,096
Other income 524,022 491,020
Other expense (631,620) (572,691)
------------ -------------
Income before taxes 349,635 292,638
Income tax provision (113,579) (96,163)
------------ -------------
Operating income $ 236,056 $ 196,475
============ =============
Per Common Share
Operating income
Basic $ 1.11 $ 0.94
Diluted 1.07 0.91
Dividends 0.305 0.278
Return on Average Equity
Operating income 17.87 % 17.14 %
Return on Average Tangible Equity 23.83 19.88
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
Six Months Ended June 30,
---------------------------
2002 2001
------------ -------------
Interest income (FTE) 5.68 % 6.97 %
Interest expense (2.02) (3.85)
------------ -------------
Net interest income 3.66 3.12
Provision for loan and lease losses (0.23) (0.17)
Net investment securities (losses) (0.01) 0.07
Other income 3.79 3.81
Other expense (4.56) (4.45)
------------ -------------
Income before taxes 2.65 2.38
Income tax provision (0.94) (0.86)
------------ -------------
Return on average assets
based on operating income 1.71 % 1.52 %
============ =============
Return on tangible average
assets based on tangible
operating income 1.77 % 1.56 %
============ =============
The increase in operating income was primarily due to growth in net interest
income of $103.3 million or 26.7% and was driven by the same factors
enumerated in the previous discussion of quarterly results. Noninterest
operating income increased 4.6% and was driven by data processing services
revenue. The provision for loan and lease losses increased $10.4 million
and other operating expenses increased $58.9 million. As previously
discussed, the results of operations and financial position for the six
months ended June 30, 2002 includes the impact of both the banking and
Metavante related acquisitions closed since June 30, 2001.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current six
months and prior year six months are presented in the following table ($ in
millions):
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------------------------- --------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
---------- --------- ---------- ----------- --------- ----------
Loans and leases (a)
Commercial $ 6,368.6 $ 169.7 5.37 % $ 5,677.4 $ 214.1 7.60 %
Commercial real estate 6,021.2 201.9 6.76 5,043.7 201.8 8.07
Residential real estate 2,492.5 88.3 7.14 2,520.3 94.5 7.57
Personal 5,042.1 172.7 6.91 4,502.3 186.3 8.34
---------- --------- ---------- ----------- --------- ----------
Total loans and leases $ 19,924.4 $ 632.6 6.40 % $ 17,743.7 $ 696.7 7.92 %
Investment securities:
Taxable 3,047.3 100.4 6.83 4,291.1 148.0 7.08
Tax Exempt (a) 1,232.8 45.5 7.51 1,280.4 45.7 7.29
Other short-term investments (a) 1,007.3 8.1 1.62 390.8 8.8 4.56
---------- --------- ---------- ----------- --------- ----------
Total interest earning assets $ 25,211.8 $ 786.6 6.31 % $ 23,706.0 $ 899.2 7.68 %
========== ========= ========== =========== ========= ==========
Interest bearing deposits:
Bank issued deposits:
Interest bearing activity $ 8,598.9 $ 54.2 1.27 % $ 7,463.5 $ 136.8 3.70 %
Time deposits 3,528.7 61.3 3.50 4,084.0 117.8 5.82
---------- --------- ---------- ----------- --------- ----------
Total bank issued deposits 12,127.6 115.5 1.92 11,547.5 254.6 4.44
Wholesale deposits 2,417.9 28.8 2.40 3,197.1 88.5 5.58
---------- --------- ---------- ----------- --------- ----------
Total interest bearing deposits 14,545.5 144.3 2.00 14,744.6 343.1 4.69
Short-term borrowings 4,166.9 76.7 3.71 3,806.4 103.4 5.48
Long-term borrowings 2,420.9 59.3 4.94 1,654.6 50.4 6.14
---------- --------- ---------- ----------- --------- ----------
Total interest bearing liabilities $ 21,133.3 $ 280.3 2.67 % $ 20,205.6 $ 496.9 4.96 %
========== ========= ========== =========== ========= ==========
Net interest margin (FTE) as a
percent of average earning assets $ 506.3 4.07 % $ 402.3 3.44 %
========= ========== ========= ==========
Net interest spread (FTE) 3.64 % 2.72 %
========== ==========
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax
rate of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for
available for sale securities.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Shareholders' equity was $2.71 billion at June 30, 2002 compared to $2.49
billion at December 31, 2001 and $2.36 billion at June 30, 2001.
During the first quarter of 2002, the Corporation issued 6.2 million shares of
its common stock, adjusted for the two-for-one stock split, with an aggregate
value of $186.6 million in the purchase acquisitions of Richfield and Century.
During the second quarter of 2002, the Corporation issued 0.3 million shares
of treasury common stock to fund its qualified employee stock purchase plan.
The Corporation acquired 3.3 million shares of its common stock during the
second quarter of 2002 at an aggregate cost of $102.0 million and has purchased
a total of 4.8 million shares, adjusted for the two-for-one stock split, at an
aggregate cost of $150.5 million in the six months ended June 30, 2002.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in the
following tables.
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
June 30, 2002 December 31, 2001
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,165 9.19 % $ 2,091 9.70 %
Tier 1 Capital
Minimum Requirement 943 4.00 862 4.00
-------------------------------- --------------------------------
Excess $ 1,222 5.19 % $ 1,229 5.70 %
================================ ================================
Total Capital $ 2,874 12.20 % $ 2,775 12.88 %
Total Capital
Minimum Requirement 1,884 8.00 1,724 8.00
-------------------------------- --------------------------------
Excess $ 990 4.20 % $ 1,051 4.88 %
================================ ================================
Risk-Adjusted Assets $ 23,554 $ 21,555
================= =================
LEVERAGE RATIOS
---------------
($ in millions)
June 30, 2002 December 31, 2001
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,165 7.82 % $ 2,091 7.93 %
Minimum Leverage
Requirement 831 - 1,384 3.00 - 5.00 791 - 1,318 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,334 - 781 4.82 - 2.82 % $ 1,300 - 773 4.93 - 2.93 %
================================ ================================
Adjusted Average
Total Assets $ 27,680 $ 26,371
================= =================
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 $3.7
billion at June 30, 2002, represent a highly accessible source of liquidity.
The Corporation's portfolio of held-to-maturity investment securities, which
totaled $1.0 billion at June 30, 2002, provides liquidity from maturities and
amortization payments. The Corporation's mortgages held-for-sale provide
additional liquidity. These loans 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
$15.4 billion for the six months ended June 30, 2002. 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 and limited off-
balance sheet structures such as those discussed in Note 9 to the Consolidated
Financial Statements contained in Item 8 of the Corporation's Form 10-K and
updated in Note 7 herein.
The Corporation's lead bank ("Bank") has 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.
No bank notes were issued during the six months ended June 30, 2002. In
addition, the Corporation's thrift issues commercial paper which is offered and
sold only to institutional investors.
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. No Series E notes were issued during
the six months ended June 30, 2002. In May 2002, the Corporation began
offering MiNotes which are medium-term notes with maturities ranging from 9
months to 30 years and at fixed or floating rates. Up to $0.5 billion
aggregate principal amount of MiNotes may be offered from time to time on terms
determined at the time of sale. The minimum denomination of the notes will be
one thousand dollars and integral multiples of one thousand dollars. As of
June 30, 2002, $17.3 million of MiNotes have been issued. Additionally, the
Corporation has a commercial paper program. At June 30, 2002, 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 $5.7 billion at June 30, 2002. Other
obligations include maturities of longer-term borrowings, future minimum lease
payments on facilities and equipment and commitments to extend credit and
letters of credit all as described in the Notes to Consolidated Financial
Statements contained in Item 8 of the Corporations Annual Report on Form 10-K.
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.
Long-term borrowings amounted to $1.7 billion at June 30, 2002. Scheduled
maturities are: $125.7 million, $6.0 million, $10.6 million and $787.1 million
for the fiscal twelve months ended June 30, 2004, 2005, 2006 and 2007,
respectively. Scheduled maturities through June 30, 2003, of $785.6 million are
included in other short-term borrowings in the consolidated balance sheet as
of June 30, 2002.
At June 30, 2002, unused commitments to extend credit in the form of loans
amounted to $9.8 billion. At June 30, 2002, standby letters of credit amounted
to $977.1 million and commercial letters of credit amounted to $68.1 million.
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.
CRITICAL ACCOUNTING POLICIES
----------------------------
The Corporation has established various accounting policies which govern the
application of accounting principles generally accepted in the Unites States
in the preparation of the Corporation's consolidated financial statements. The
significant accounting policies of the Corporation are described in the
footnotes to the consolidated financial statements contained in the
Corporation's Annual Report on Form 10-K and updated as necessary in its
Quarterly Reports on Form 10-Q. Certain accounting policies involve
significant judgements and assumptions by management which may have a material
impact on the carrying value of certain assets and liabilities; management
considers such accounting policies to be critical accounting policies. The
judgements and assumptions used by management are based on historical
experience and other factors, which are believed to be reasonable under the
circumstances. Because of the nature of judgements and assumptions made by
management, actual results could differ from these judgements and estimates
which could have a material impact on the carrying values of assets and
liabilities and the results of the operations of the Corporation. Management
considers the following to be those accounting policies that require
significant judgements and assumptions:
Allowance for Loan and Lease Losses
-----------------------------------
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.
Collective Loan Impairment.
---------------------------
This component of the of the allowance for loan and lease losses is based
on the following:
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.
The Corporation's senior lending management also allocates
reserves for environmental conditions 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 June 30, 2002,
special reserves continue to be carried for exposures to the
airline and travel industries, manufacturing, paper and allied
products and production agriculture which includes the dairy
industry and cropping operations. While most loans in these
categories are still performing, the Corporation continues to
believe that these sectors were more adversely affected by the
economic slowdown and deteriorating operating results and the
potential for reduced collateral values, especially in a
liquidation, have not exhibited a significant improvement since
year end.
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 $292.5 million at June 30, 2002 compared to $284.2 million at
March 31, 2002 and $268.2 million at December 31, 2001. 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 considering
charge-offs and recoveries. Management recognizes there are significant
estimates in the process and the ultimate losses could be significantly
different from those currently estimated.
Capitalized Software and Conversion Costs
-----------------------------------------
Direct costs associated with the production of computer software that will be
marketed or used in data processing operations are capitalized. Capitalization
of such costs is subject to strict accounting policy criteria however, the
appropriate time to initiate capitalization requires management judgment. Once
the specific capitalized project is put into production, the software cost is
amortized over its estimated useful life, generally four years. Each quarter,
the Corporation performs net realizable value tests to ensure the assets are
recoverable. Such tests require management judgment as to the future sales and
profitability of a particular product which involves, in some cases, multi year
projections. Technology changes and changes in customer requirements can have
a significant impact on the recoverability of these assets and can be difficult
to predict. Should significant adverse changes occur, estimates of useful life
may have to be revised or write-offs would be required to recognize impairment.
The amount of software capitalized in the second quarter of 2002 and 2001
amounted to $16.1 million and $10.6 million, respectively. Amortization
expense amounted to $8.6 million and $5.8 million in the second quarter of 2002
and 2001, respectively.
Direct costs associated with customer system conversions to the data processing
operations are capitalized and amortized on a straight line basis over the
terms, generally five to seven years, of the related servicing contract.
Capitalization only occurs when management is satisfied that such costs are
recoverable through future operations or penalties in case of early
termination. The amount of conversion expenses capitalized in the second
quarter of 2002 and 2001 amounted to $2.8 million and $4.7 million,
respectively. Amortization expense amounted to $4.4 million and $4.8 million
in the second quarter of 2002 and 2001, respectively.
Net unamortized costs were ($ in millions):
June 30, June 30,
2002 2001
-------- --------
Software $ 124.8 $ 112.7
Conversions 39.0 50.9
-------- --------
$ 163.8 $ 163.6
======== ========
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 cash
reserve accounts. Gain or loss on the 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, both initially and on an on-going basis,
are based on the present value of future 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. The Corporation reviews the carrying
values of the retained interests monthly to determine if there is a decline in
value that is other than temporary and periodically reviews the propriety of
the assumptions used based on current historical experience as well as the
sensitivities of the carrying values of the retained interests to adverse
changes in the key assumptions. The Corporation believes that is estimates
result in a reasonable carrying value of the retained interests.
The Corporation regularly sells indirect automobile loans to an unconsolidated
multi-seller asset backed commercial paper conduit in securitization
transactions in which servicing responsibilities and subordinated interests are
retained. The Corporation also sells, from time to time, highly rated
available for sale investment securities 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. Liquidity back-up and credit enhancement
facilities are provided by the Corporation's lead bank. Under certain
circumstances, these facilities would require the Bank to purchase sufficient
investment securities or commercial 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.
The outstanding balances of assets sold in securitization transactions
consisted of the following ($ in millions):
June 30, June 30,
2002 2001
-------- --------
Consumer - automobile loans $ 520.6 $ 302.2
Investment securities 290.8 231.9
Commercial loans 50.7 --
-------- --------
$ 862.1 $ 534.1
======== ========
At June 30, 2002 and 2001, the carrying amount of retained interests amounted
to $36.0 million and $26.7 million, respectively.
FORWARD-LOOKING STATEMENTS
--------------------------
Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of
Financial Position and Results of Operations" and "Quantitative and Qualitative
Disclosures about Market Risk," respectively, contain forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include, without limitation, statements regarding operating activities and
results. Such statements are subject to important factors that could cause the
Corporation's actual results to differ materially than those anticipated by the
forward-looking statements. These factors include those referenced in the
Corporation's Annual Report on Form 10-K for the period ending December 31,
2001 or as may be described from time to time in the Corporation's subsequent
SEC filings, and such factors are incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following updated information should be read in conjunction with the
Corporation's 2001 Annual Report on Form 10-K. Updated information regarding
the Corporation's use of derivative financial instruments is contained in Note
10, Notes to Financial Statements contained in Item 1 herein.
Market risk arises from exposure to changes in interest rates, exchange rates,
commodity prices, and other relevant market rate or price risk. The
Corporation faces market risk through trading and other than trading
activities. While market risk that arises from trading activities in the form
of foreign exchange and interest rate risk is immaterial to the Corporation,
market risk from other than trading activities in the form of interest rate
risk is measured and managed through a number of methods.
Interest Rate Risk
------------------
The Corporation uses financial modeling techniques to identify potential
changes in income under a variety of possible interest rate scenarios.
Financial institutions, by their nature, bear interest rate and liquidity risk
as a necessary part of the business of managing financial assets and
liabilities. The Corporation has designed strategies to limit these risks
within prudent parameters and identify appropriate risk/reward tradeoffs in the
financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing and
embedded option characteristics of the assets and liabilities held by the
Corporation. Policies are in place to assure that neither earnings nor fair
value at risk exceed appropriate limits. The use of a limited array of
derivative financial instruments has allowed the Corporation to achieve the
desired balance sheet repricing structure while simultaneously meeting the
desired objectives of both its borrowing and depositing customers.
The models used include measures of the expected repricing characteristics of
administered rate (NOW, savings and money market accounts) and non-rate related
products (demand deposit accounts, other assets and other liabilities). These
measures recognize the relative insensitivity of these accounts to changes in
market interest rates, as demonstrated through current and historical
experiences. In addition to contractual payment information for most other
assets and liabilities, the models also include estimates of expected
prepayment characteristics for those items that are likely to materially change
their payment structures in different rate environments, including residential
mortgage products, certain commercial and commercial real estate loans and
certain mortgage-related securities. Estimates for these sensitivities are
based on industry assessments and are substantially driven by the differential
between the contractual coupon of the item and current market rates for similar
products.
This information is incorporated into a model that allows the projection of
future income levels in several different interest rate environments. Earnings
at risk is calculated by modeling income in an environment where rates remain
constant, and comparing this result to income in a different rate environment,
and then dividing this difference by the Corporation's budgeted operating
income before taxes for the calendar year. Since future interest rate moves
are difficult to predict, the following table presents two potential scenarios
- a gradual increase of 100bp across the entire yield curve over the course of
a year (+25bp per quarter), and a gradual decrease of 100bp across the entire
yield curve over the course of a year (-25bp per quarter) for the balance sheet
as of the indicated dates:
Impact to Annual Pretax Income as of
--------------------------------------
June 30, 2002 March 31, 2002
------------------- ----------------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (0.5)% (0.9)%
Decline in rates (0.3)% 0.2 %
These results are based solely on the modeled parallel changes in market rates,
and do not reflect the earnings sensitivity that may arise from other factors
such as changes in the shape of the yield curve, the changes in spread between
key market rates, or accounting recognition for impairment of certain
intangibles. These results are also considered to be conservative estimates
due to the fact that they do not include any management action to mitigate
potential income variances within the simulation process. Such action could
potentially include, but would not be limited to, adjustments to the repricing
characteristics of any on- or off-balance sheet item with regard to short-term
rate projections and current market value assessments.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and
management strategies.
Another component of interest rate risk is measuring the fair value at risk for
a given change in market interest rates. The Corporation also uses computer
modeling techniques to determine the present value of all asset and liability
cash flows (both on- and off-balance sheet), adjusted for prepayment
expectations, using a 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 June 30, 2002 the fair value of equity at risk for a gradual 100bp shift
in rates was less than 2.0% of the market value of the Corporation.
Equity Risk
-----------
In addition to interest rate risk, the Corporation incurs market risk in the
form of equity risk. M&I's Capital Markets Group invests in private, medium-
sized companies to help establish new businesses or recapitalize existing ones.
Exposure to the change in equity values for the companies that are held in
their portfolio exist, however, fair values are difficult to determine until
an actual sale or liquidation transaction actually occurs.
As of June 30, 2002, M&I Trust Services administered $57.4 billion in assets
and directly managed a portfolio of $12.9 billion. Exposure exists to changes
in equity values due to the fact that fee income is partially based on equity
balances. While this exposure is present, quantification remains difficult due
to the number of other variables affecting fee income. Interest rate changes
can also have an effect on fee income for the above stated reasons.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
A. The Corporation held its Annual Meeting of Shareholders on April 23,
2002.
B. Votes cast for the election of six directors to serve until the 2005
Annual Meeting of Shareholders are as follows:
Director For Withheld Abstentions Non-Vote
-------------------- ---------- --------- ----------- --------
David L. Andreas 83,939,358 1,592,667 -- --
Timothy E. Hoeksema 83,949,418 1,582,607 -- --
John A. Mellowes 83,861,704 1,670,321 -- --
Robert J. O'Toole 83,859,501 1,672,524 -- --
Robert A. Schaefer 83,932,028 1,599,997 -- --
John S. Shiely 83,940,788 1,591,237 -- --
The continuing directors of the Corporation are as follows:
Richard A. Abdoo Jon F. Chait
Wendell F. Bueche Bruce E. Jacobs
Ted D. Kellner Donald R. Johnson
Katharine C. Lyall Dennis J. Kuester
Peter M. Platten, III Edward L. Meyer, Jr.
James A. Urdan San W. Orr, Jr.
James B. Wigdale George E. Wardeberg
Votes cast for approving the Corporation's Annual Executive Incentive
Compensation Plan are as follows:
For Against Abstentions Non-Vote
---------- --------- ----------- --------
77,906,968 5,751,963 1,873,094 --
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits:
Exhibit 10.1 - Change of Control Agreement dated as of May 20, 2002
between the Corporation and Nancy A. Maas.
Exhibit 10.2 - Change of Control Agreement dated as of May 31, 2002
between the Corporation and Randall J. Erickson.
Exhibit 11 - Statements - Computation of Earnings Per Share,
Incorporated by Reference to NOTE 4 of Notes to
Financial Statements contained in Item 1 -
Financial Statements (unaudited) of Part 1 -
Financial Information herein.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
B. Reports on Form 8-K:
On May 3, 2002, the Corporation reported Items 5 and 7 in a Current
Report on Form 8-K relating to the offering of $1,500,000,000 of medium
term notes.
On May 7, 2002, the Corporation reported Items 4 and 7 in a Current
Report on Form 8-K in connection with the change to Deloitte & Touche LLP
as its new independent accountants.
On June 17 and June 20, 2002 the Corporation reported Items 5 and 7
in Current Reports on Form 8-K in connection with the Corporation's
agreement to acquire Mississippi Valley Bancshares, Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
(Registrant)
/s/ Patricia R. Justiliano
______________________________________
Patricia R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ James E. Sandy
______________________________________
James E. Sandy
Vice President
August 13, 2002
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ------------------------------------------------------------
(10.1) Change of Control Agreement dated as of May 20, 2002 between
the Corporation and Nancy A. Maas.
(10.2) Change of Control Agreement dated as of May 31, 2002 between
the Corporation and Randall J. Erickson.
(11) Statements - Computation of Earnings Per Share,
Incorporated by Reference to NOTE 4 of Notes to
Financial Statements contained in Item 1 -
Financial Statements (unaudited) of Part 1 -
Financial Information herein
(12) Computation of Ratio of Earnings to Fixed Charges