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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 September 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 is an accelerated filer
(as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
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 October 31, 2002
----- ----------------
Common Stock, $1.00 Par Value 218,346,913
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
September 30, December 31, September 30,
2002 2001 2001
------------- ------------- -------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 886,035 $ 617,183 $ 788,554
Federal funds sold and security resale agreements 15,964 119,561 33,619
Money market funds 206,440 827,021 656,396
------------- ------------- -------------
Total cash and cash equivalents 1,108,439 1,563,765 1,478,569
Investment securities:
Trading securities, at market value 27,484 6,119 11,180
Short-term investments, at cost
which approximates market 50,755 41,668 24,806
Available for sale at market value 3,821,691 3,383,632 3,863,068
Held to maturity at amortized cost,
market value $1,296,782
($1,049,952 December 31, and
$1,101,318 September 30, 2001) 1,230,989 1,032,093 1,060,015
------------- ------------- -------------
Total investment securities 5,130,919 4,463,512 4,959,069
Loans and leases 21,436,901 19,295,372 18,997,703
Less: Allowance for loan and lease losses 300,628 268,198 264,736
------------- ------------- -------------
Net loans and leases 21,136,273 19,027,174 18,732,967
Premises and equipment 408,944 393,030 400,068
Goodwill 667,467 524,748 512,252
Other intangibles 79,972 63,337 61,324
Accrued interest and other assets 1,546,768 1,218,168 1,182,397
------------- ------------- -------------
Total Assets $ 30,078,782 $ 27,253,734 $ 27,326,646
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,940,870 $ 3,558,571 $ 3,357,337
Interest bearing 13,728,288 12,934,476 13,320,289
------------- ------------- -------------
Total deposits 17,669,158 16,493,047 16,677,626
Funds purchased and security repurchase agreements 1,013,256 1,111,412 1,237,787
Other short-term borrowings 5,579,981 4,745,830 4,137,330
Accrued expenses and other liabilities 920,086 850,300 927,549
Long-term borrowings 2,174,739 1,560,177 1,760,521
------------- ------------- -------------
Total liabilities 27,357,220 24,760,766 24,740,813
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 September 30, 2001) 240,833 117,302 117,302
Additional paid-in capital 751,991 698,289 696,426
Retained earnings 2,586,191 2,331,776 2,254,916
Accumulated other comprehensive income,
net of related taxes (30,404) 40,600 53,453
Less: Treasury common stock, at cost:
30,815,860 shares
(13,352,817 December 31, and
10,795,640 September 30, 2001) 806,014 673,494 515,713
Deferred compensation 21,371 21,841 20,887
------------- ------------- -------------
Total shareholders' equity 2,721,562 2,492,968 2,585,833
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 30,078,782 $ 27,253,734 $ 27,326,646
============= ============= =============
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended September 30,
--------------------------------
2002 2001
-------------- --------------
Interest income
---------------
Loans and leases $ 325,954 $ 339,221
Investment securities:
Taxable 49,826 64,006
Exempt from federal income taxes 15,069 15,507
Trading securities 77 137
Short-term investments 1,847 4,380
------------- -------------
Total interest income 392,773 423,251
Interest expense
Deposits 69,601 129,783
Short-term borrowings 39,711 46,295
Long-term borrowings 30,660 28,695
------------- -------------
Total interest expense 139,972 204,773
------------- -------------
Net interest income 252,801 218,478
Provision for loan and lease losses 18,842 12,206
------------- -------------
Net interest income after provision for loan and lease losses 233,959 206,272
Other income
------------
Data processing services:
e-Finance solutions 36,989 32,629
Financial technology solutions 116,932 111,723
Other -- 37
------------- -------------
Total data processing services 153,921 144,389
Item processing 9,792 11,742
Trust services 28,966 30,144
Service charges on deposits 24,921 21,151
Mortgage banking 14,343 10,647
Net investment securities losses (4,282) 775
Life insurance revenue 7,463 6,844
Other 37,417 29,578
------------- -------------
Total other income 272,541 255,270
Other expense
-------------
Salaries and employee benefits 187,173 179,547
Net occupancy 20,228 22,779
Equipment 29,205 29,177
Software expenses 10,514 9,604
Processing charges 11,085 9,271
Supplies and printing 5,085 4,916
Professional services 9,048 7,104
Shipping and handling 11,962 11,195
Amortization of intangibles 7,740 10,410
Other 34,534 55,381
------------- -------------
Total other expense 326,574 339,384
------------- -------------
Income before income taxes 179,926 122,158
Provision for income taxes 60,690 38,843
------------- -------------
Net income $ 119,236 $ 83,315
============= =============
Net income per common share
Basic $ 0.56 $ 0.39
Diluted 0.54 0.38
Dividends paid per common share $ 0.160 $ 0.145
Weighted average common shares outstanding:
Basic 210,053 211,928
Diluted 219,578 221,832
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Nine Months Ended September 30,
--------------------------------
2002 2001
-------------- --------------
Interest income
---------------
Loans and leases $ 957,510 $ 1,034,889
Investment securities:
Taxable 150,210 211,969
Exempt from federal income taxes 45,602 46,919
Trading securities 259 806
Short-term investments 9,742 12,549
------------- -------------
Total interest income 1,163,323 1,307,132
Interest expense
----------------
Deposits 213,919 472,920
Short-term borrowings 116,370 149,687
Long-term borrowings 89,958 79,034
------------- -------------
Total interest expense 420,247 701,641
Net interest income 743,076 605,491
Provision for loan and lease losses 51,018 34,006
------------- -------------
Net interest income after provision for loan and lease losses 692,058 571,485
Other income
------------
Data processing services:
e-Finance solutions 104,763 86,799
Financial technology solutions 340,470 324,761
Other 2 3,965
------------- -------------
Total data processing services 445,235 415,525
Item processing 29,198 36,247
Trust services 91,303 90,744
Service charges on deposits 75,719 62,424
Mortgage banking 31,084 30,747
Net investment securities losses (5,148) (6,186)
Life insurance revenue 22,201 20,069
Other 106,105 89,759
------------- -------------
Total other income 795,697 739,329
Other expense
-------------
Salaries and employee benefits 551,953 525,536
Net occupancy 56,120 54,005
Equipment 86,862 86,778
Software expenses 33,135 26,898
Processing charges 29,592 30,059
Supplies and printing 14,735 15,309
Professional services 27,633 20,906
Shipping and handling 34,858 33,438
Amortization of intangibles 16,970 26,637
Other 106,336 152,371
------------- -------------
Total other expense 958,194 971,937
Income before income taxes and cumulative
effect of changes in accounting principle 529,561 338,877
Provision for income taxes 174,269 109,277
------------- -------------
Income before cumulative effect of
changes in accounting principle 355,292 229,600
Cumulative effect of changes in accounting
principle, net of income taxes -- (436)
------------- -------------
Net income $ 355,292 $ 229,164
============= =============
Net income per common share
Basic:
Income before cumulative effect of
changes in accounting principles $ 1.67 $ 1.09
Cumulative effect of changes in accounting
principle, net of income taxes -- --
------------- -------------
Net income $ 1.67 $ 1.09
============= =============
Diluted:
Income before cumulative effect of
changes in accounting principles $ 1.61 $ 1.05
Cumulative effect of changes in accounting
principle, net of income taxes -- --
------------- -------------
Net income $ 1.61 $ 1.05
============= =============
Dividends paid per common share $ 0.465 $ 0.423
Weighted average common shares outstanding:
Basic 210,367 207,828
Diluted 220,142 217,632
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Nine Months Ended September 30,
--------------------------------
2002 2001
-------------- --------------
Net Cash Provided by Operating Activities $ 617,546 $ 419,525
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 3,423 159,145
Proceeds from maturities of securities available for sale 1,285,798 1,375,356
Proceeds from maturities of securities held to maturity 61,023 51,436
Purchases of securities available for sale (1,532,517) (236,837)
Purchases of securities held to maturity (631) (55)
Net increase in loans (1,758,189) (570,052)
Purchases of assets to be leased (147,831) (407,836)
Principal payments on lease receivables 340,442 545,640
Fixed asset purchases, net (31,381) (34,216)
Purchase acquisitions, net of cash equivalents acquired (23,250) (46,903)
Cash deposited for Mississippi Valley
Bancshares, Inc. acquisition (255,224) --
Other 5,542 15,661
------------- -------------
Net cash (used)/provided in investing activities (2,052,795) 851,339
Cash Flows From Financing Activities:
Net increase/(decrease) in deposits 347,014 (3,613,551)
Proceeds from issuance of commercial paper 4,844,410 2,226,551
Payments for maturity of commercial paper (4,770,385) (2,279,042)
Net increase in other short-term borrowings 283,613 1,859,707
Proceeds from issuance of long-term debt 885,389 1,486,731
Payments of long-term debt (368,684) (168,263)
Dividends paid (100,877) (91,316)
Purchases of treasury stock (159,405) (101,193)
Other 18,848 23,388
------------- -------------
Net cash provided/(used) by financing activities 979,923 (656,988)
------------- -------------
Net (decrease)/increase in cash and cash equivalents (455,326) 613,876
Cash and cash equivalents, beginning of year 1,563,765 864,693
------------- -------------
Cash and cash equivalents, end of period $ 1,108,439 $ 1,478,569
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 403,239 $ 744,645
Income taxes 159,369 108,603
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
September 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 which are
necessary for a fair statement of the financial position and results of
operations as of and for the three and nine months ended September 30,
2002 and 2001. The results of operations for the three and nine months
ended September 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.
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
September 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
September 30,
------------------------------
2002 2001
-------------- -------------
Income before cumulative effect of changes in accounting principle $ 119,236 $ 83,315
Adjustments:
Goodwill amortization, net of taxes -- 4,183
------------- -------------
Income before cumulative effect of changes in accounting principle $ 119,236 $ 87,498
============= =============
Earnings per share:
Basic:
Reported income before cumulative effect
of changes in accounting principle $ 0.56 $ 0.39
Goodwill amortization -- 0.02
------------- -------------
$ 0.56 $ 0.41
============= =============
Diluted:
Reported income before cumulative effect
of changes in accounting principle $ 0.54 $ 0.38
Goodwill amortization -- 0.02
------------- -------------
$ 0.54 $ 0.40
============= =============
Nine Months Ended
September 30,
------------------------------
2002 2001
-------------- -------------
Income before cumulative effect of changes in accounting principle $ 355,292 $ 229,600
Adjustments:
Goodwill amortization, net of taxes -- 11,478
------------- -------------
Income before cumulative effect of changes in accounting principle $ 355,292 $ 241,078
============= =============
Earnings per share:
Basic:
Reported income before cumulative effect
of changes in accounting principle $ 1.67 $ 1.09
Goodwill amortization -- 0.06
------------- -------------
$ 1.67 $ 1.15
============= =============
Diluted:
Reported income before cumulative effect
of changes in accounting principle $ 1.61 $ 1.05
Goodwill amortization -- 0.05
------------- -------------
$ 1.61 $ 1.10
============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows (dollars in thousands):
Banking Metavante Others Total
-------------- -------------- -------------- --------------
Goodwill balance as
of January 1, 2002 $ 396,561 $ 125,587 $ 2,600 $ 524,748
Goodwill acquired during the period 127,782 14,303 2,087 144,172
Purchase accounting adjustments 2,579 (2,842) -- (263)
Goodwill amortization (1,190) -- -- (1,190)
------------- ------------- ------------- -------------
Goodwill balance as
of September 30, 2002 $ 525,732 $ 137,048 $ 4,687 $ 667,467
============= ============= ============= =============
At September 30, 2002, the Corporation's intangible assets consisted of
the following (dollars in thousands):
Amortized intangible assets:
Core deposit intangible $ 46,384
Data processing contract rights/customer lists 24,902
Loan servicing rights 7,980
Trust customers 706
-------------
Total amortized intangible assets $ 79,972
=============
Goodwill:
Amortized (SFAS 72) $ 2,195
Unamortized 665,272
-------------
Total goodwill $ 667,467
=============
In October 2002, the Financial Accounting Standards Board issued SFAS
147, Acquisitions of Certain Financial Institutions, an amendment of SFAS
No. 72 and SFAS No. 144 and FASB Interpretation No. 9. This statement,
which is effective October 1, 2002, removes acquisitions of financial
institutions from the scope of both SFAS 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with the
recently issued standards on business combinations (SFAS 141) and
goodwill and other intangible assets (SFAS 142). The statement clarifies
that a branch acquisition that meets the definition of a business should
be accounted for as a business combination, otherwise the transaction
should be accounted for as an acquisition of net assets that does not
result in the recognition of goodwill. The impact of this standard is
not considered material to the Corporation.
3. Business Combinations
The following acquisitions, which were not considered material business
combinations, were completed during the first nine months 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 $94.9 million.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
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 $34.9 million.
On July 29, 2002, the Corporation's Metavante subsidiary acquired
substantially all the assets of Paytrust, Inc., a privately held online
bill management company based in Lawrenceville, New Jersey for cash.
Identifiable intangible assets and initial goodwill subject to the
completion of appraisals and valuations of the assets acquired and
liabilities assumed, amounted to $18.3 million. Integration costs,
primarily related to operating duplicate platforms for a limited period
of time, are anticipated to be approximately $6 million after-tax. During
the third quarter, $2.3 million (after-tax) of integration costs were
incurred and the balance of these charges are expected to be incurred in
the fourth quarter of 2002 and the first quarter of 2003.
On August 23, 2002, the Corporation's Metavante subsidiary acquired the
assets of Spectrum EPB, LLC, an open, interoperable switch for exchanging
online bills and payments for cash. Goodwill recorded in this
transaction amounted to $2.0 million. 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 results of operations of the acquired entities have been included in
the consolidated results since the dates the transactions were closed.
The following acquisition was recently completed:
On October 1, 2002, the Corporation acquired 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. In conjunction with the merger the Corporation paid $255.2
million in cash and issued 8.25 million shares of M&I common stock in
exchange for Mississippi Valley's outstanding common stock.
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 September 30, 2002
----------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
--------------- -------------- -----------
Net Income $ 119,236
Convertible Preferred Dividends (1,230)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 118,006 210,053 $ 0.56
============
Effect of Dilutive Securities
Convertible Preferred Stock 1,230 7,688
Stock Options and Restricted Stock Plans -- 1,837
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 119,236 219,578 $ 0.54
============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
Three Months Ended September 30, 2001
----------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
--------------- -------------- -----------
Net Income $ 83,315
Convertible Preferred Dividends (1,115)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 82,200 211,928 $ 0.39
============
Effect of Dilutive Securities
Convertible Preferred Stock 1,115 7,688
Stock Options and Restricted Stock Plans -- 2,216
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 83,315 221,832 $ 0.38
============
Nine Months Ended September 30, 2002
----------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
--------------- -------------- -----------
Net Income $ 355,292
Convertible Preferred Dividends (3,575)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 351,717 210,367 $ 1.67
============
Effect of Dilutive Securities
Convertible Preferred Stock 3,575 7,688
Stock Options and Restricted Stock Plans -- 2,087
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 355,292 220,142 $ 1.61
============
Nine Months Ended September 30, 2001
----------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
--------------- -------------- -----------
Net Income $ 229,164
Convertible Preferred Dividends (3,248)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 225,916 207,828 $ 1.09
============
Effect of Dilutive Securities
Convertible Preferred Stock 3,248 7,688
Stock Options and Restricted Stock Plans -- 2,116
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 229,164 217,632 $ 1.05
============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
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 September 30, Nine months ended September 30,
-------------------------------------- --------------------------------------
2002 2001 2002 2001
----------------- ------------------- ----------------- -------------------
Shares 6,550,412 4,769,094 6,442,162 4,816,494
Price Range $29.4500 - $33.93 $28.5000 - $35.0313 $30.5850 - $33.93 $26.6950 - $35.031
5. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
September 30, December 31, September 30,
2002 2001 2001
-------------- -------------- --------------
Investment securities available for sale:
U.S. treasury and government agencies $ 2,812,461 $ 2,346,566 $ 2,681,766
State and political subdivisions 242,747 176,167 182,422
Mortgage backed securities 175,385 175,471 225,366
Other 591,098 685,428 773,514
------------- ------------- -------------
Total $ 3,821,691 $ 3,383,632 $ 3,863,068
============= ============= =============
Investment securities held to maturity:
U.S. government agencies $ 239,605 $ -- $ --
State and political subdivisions 967,751 1,028,555 1,056,425
Other 23,633 3,538 3,590
------------- ------------- -------------
Total $ 1,230,989 $ 1,032,093 $ 1,060,015
============= ============= =============
6. The Corporation's loan and lease portfolio consists of the following
($000's):
September 30, December 31, September 30,
2002 2001 2001
-------------- -------------- --------------
Commercial, financial & agricultural $ 6,047,032 $ 5,716,061 $ 5,925,830
Real estate:
Construction 964,343 730,864 610,956
Residential mortgage 6,421,572 5,563,975 5,233,197
Commercial mortgage 5,718,998 5,099,093 5,013,554
------------- ------------- -------------
Total real estate 13,104,913 11,393,932 10,857,707
Personal 1,464,412 1,210,808 1,210,485
Lease financing 814,003 962,356 991,766
Cash flow hedging instruments at fair value 6,541 12,215 11,915
------------- ------------- -------------
Total $ 21,436,901 $ 19,295,372 $ 18,997,703
============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
7. Sale of Receivables
During the third quarter of 2002, $131.0 million of automobile loans were
sold in securitization transactions. Gains and trading income of $8.7
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 third 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
At September 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 $ 582,197 $ 207,588 $ 789,785
Principal amounts of loans
60 days or more past due 709 1,029 1,738
Net credit losses year to date 882 647 1,529
8. The Corporation's deposit liabilities consists of the following ($000's):
September 30, December 31, September 30,
2002 2001 2001
-------------- -------------- --------------
Noninterest bearing demand $ 3,940,870 $ 3,558,571 $ 3,357,337
Savings and NOW 7,986,521 7,867,106 7,515,644
CD's $100,000 and over 1,916,726 1,321,746 1,737,684
Other time deposits 2,715,102 2,962,724 3,280,410
Foreign deposits 1,109,939 782,900 786,551
------------- ------------- -------------
$ 17,669,158 $ 16,493,047 $ 16,677,626
============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
9. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
Three Months Ended September 30, 2002
--------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- -------------- --------------
Net income $ 119,236
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (6,509) $ 2,611 (3,898)
Reclassification for securities
transactions included in net income -- -- --
------------- ------------- -------------
Unrealized gains (losses) (6,509) 2,611 (3,898)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (104,949) 36,732 (68,217)
Reclassification adjustments for
hedging activities included in net income 14,521 (5,082) 9,439
------------- ------------- -------------
Net gains (losses) $ (90,428) $ 31,650 (58,778)
------------- ------------- -------------
Other comprehensive income (loss) (62,676)
-------------
Total comprehensive income (loss) $ 56,560
=============
Three Months Ended September 30, 2001
--------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- -------------- --------------
Net income $ 83,315
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 25,839 $ (9,806) 16,033
Reclassification for securities
transactions included in net income (9,170) 3,210 (5,960)
------------- ------------- -------------
Unrealized gains (losses) 16,669 (6,596) 10,073
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (36,256) 12,690 (23,566)
Reclassification adjustments for
hedging activities included in net income 3,113 (1,090) 2,023
------------- ------------- -------------
Net gains (losses) $ (33,143) $ 11,600 (21,543)
------------- ------------- -------------
Other comprehensive income (loss) (11,470)
-------------
Total comprehensive income (loss) $ 71,845
=============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
Nine Months Ended September 30, 2002
--------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- -------------- --------------
Net income $ 355,292
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 5,875 $ (2,069) 3,806
Reclassification for securities
transactions included in net income -- -- --
------------- ------------- -------------
Unrealized gains (losses) 5,875 (2,069) 3,806
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (152,876) 53,506 (99,370)
Reclassification adjustments for
hedging activities included in net income 37,783 (13,223) 24,560
------------- ------------- -------------
Net gains (losses) $ (115,093) $ 40,283 (74,810)
------------- ------------- -------------
Other comprehensive income (loss) (71,004)
-------------
Total comprehensive income (loss) $ 284,288
=============
Nine Months Ended September 30, 2001
--------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- -------------- --------------
Net income $ 229,164
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 83,415 $ (30,165) 53,250
Reclassification for securities
transactions included in net income (12,242) 4,285 (7,957)
------------- ------------- -------------
Unrealized gains (losses) 71,173 (25,880) 45,293
Net gains (losses) on derivatives
hedging variability of cash flows:
Adoption of SFAS 133 (15,665) 5,483 (10,182)
Arising during the period (36,469) 12,764 (23,705)
Reclassification adjustments for
hedging activities included in net income 6,031 (2,111) 3,920
------------- ------------- -------------
Net gains (losses) $ (46,103) $ 16,136 (29,967)
------------- ------------- -------------
Other comprehensive income (loss) 15,326
-------------
Total comprehensive income (loss) $ 244,490
=============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
10. Derivative Financial Instruments and Hedging Activities
Trading Instruments
-------------------
The Corporation enters into interest rate swaps as part of its trading
and securitization activities. Interest rate swaps enable customers to
manage their exposures to interest rate risk. The Corporation's market
risk from unfavorable movements in interest rates is generally minimized
by concurrently entering into offsetting positions with nearly identical
notional values, terms and indices.
At September 30, 2002, interest rate swaps designated as trading
consisted of $583.3 million in notional amount of receive fixed/pay
floating with an aggregate positive fair value of $22.3 million and
$216.4 million in notional amount of pay fixed/receive floating with an
aggregate negative fair value of $9.3 million.
Interest rate swaps designated as trading are recorded at fair value.
Gains and losses arising from changes in fair value are recorded in other
income.
Fair Value Hedges
-----------------
The following table presents information with respect to the
Corporation's fair value hedges.
Fair Value Hedges
September 30, 2002 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
---------------------------- --------------------- -------------- -------------- -------------
Callable CDs Receive Fixed Swap $ 141.5 $ 1.7 7.3
Medium Term Notes Receive Fixed Swap 196.4 17.0 4.1
Long-term Borrowings Receive Fixed Swap 200.0 38.4 24.2
For the three and nine months ended September 30, 2002, the impact from
fair value hedges to net interest income was a positive $5.6 million and
a positive $16.7 million, respectively.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
The following table presents information with respect to the
Corporation's cash flow hedges.
Cash Flow Hedges
September 30, 2002 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
---------------------------- --------------------- -------------- -------------- -------------
Variable Rate Loans Receive Fixed Swap $ 275.0 $ 6.5 0.6
Institutional CDs Pay Fixed Swap 320.0 (15.1) 2.6
Commercial Paper Pay Fixed Swap 200.0 (35.2) 4.2
Fed Funds Purchased Pay Fixed Swap 860.0 (52.5) 2.6
FHLB Advances Pay Fixed Swap 610.0 (53.0) 4.4
During the third quarter of 2002, the Corporation entered into a forward
starting interest rate swap for the forecasted issuance of Bank notes.
Bank notes in the amount of $0.5 billion were issued during the third
quarter of 2002 and the interest rate swap was terminated. The negative
$1.3 million in accumulated other comprehensive income at termination is
being amortized into interest expense over the term of the Bank notes
using the effective interest method.
For the three and nine months ended September 30, 2002, the impact from
cash flow hedges to net interest income was a negative $14.5 million and
a negative $37.8 million, respectively.
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.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
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, and Minnesota, one federally chartered thrift
headquartered in Nevada, with branches in Wisconsin and Florida, 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.
Data Services (or Metavante)
----------------------------
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 Revenue by type in All Others consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Trust Services $ 29.0 $ 29.7 $ 91.0 $ 91.0
Residential Mortgage Banking 12.9 10.1 30.6 29.2
Capital Markets (4.2) 1.3 (4.5) 12.2
Brokerage and Insurance 5.5 5.2 18.6 15.7
Commercial Leasing 3.4 3.1 11.0 9.5
Commercial Mortgage Banking 1.2 0.7 3.4 2.0
Others 1.0 1.1 3.0 4.5
----------- ----------- ----------- -----------
Total revenue $ 48.8 $ 51.2 $ 153.1 $ 164.1
=========== =========== =========== ===========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2002 & 2001 (Unaudited)
The following represents the Corporation's operating segments as of and
for the three and nine months ended September 30, 2002 and 2001.
Intersegment expenses and assets have been eliminated. ($ in millions):
Three Months Ended September 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
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Net interest income $ 251.6 $ (1.0) $ 7.3 $ (5.1) $ -- $ 252.8 $ -- $ 252.8
Fees - Unaffiliated
customers 82.2 153.9 35.1 1.3 -- 272.5 -- 272.5
Fees - Affiliated
customers 11.4 16.1 6.4 -- (33.9) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues 345.2 169.0 48.8 (3.8) (33.9) 525.3 -- 525.3
Expenses:
Expenses - Unaffiliated
customers 132.8 139.6 33.2 16.5 0.6 322.7 3.9 326.6
Expenses - Affiliated
customers 21.9 6.2 8.1 (1.7) (34.5) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses 154.7 145.8 41.3 14.8 (33.9) 322.7 3.9 326.6
Provision for loan
and lease losses 18.5 -- 0.3 -- -- 18.8 -- 18.8
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income
before taxes 172.0 23.2 7.2 (18.6) -- 183.8 (3.9) 179.9
Income tax expense 56.8 9.5 3.2 (7.2) -- 62.3 (1.6) 60.7
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income $ 115.2 $ 13.7 $ 4.0 $ (11.4) $ -- $ 121.5 $ (2.3) $ 119.2
=========== =========== =========== =========== =========== =========== =========== ===========
Identifiable assets $ 28,743.7 $ 766.2 $ 732.1 $ 588.8 $ (752.0) $ 30,078.8 $ -- $ 30,078.8
=========== =========== =========== =========== =========== =========== =========== ===========
Return on average
tangible equity 24.6 % 30.5 % 7.6 % 24.0 % 23.6 %
=========== =========== =========== =========== ===========
Return on average equity 18.7 % 17.7 % 7.4 % 17.7 % 17.4 %
=========== =========== =========== =========== ===========
Three Months Ended September 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
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Net interest income $ 218.8 $ (0.9) $ 6.7 $ (6.1) $ -- $ 218.5 $ -- $ 218.5
Fees - Unaffiliated
customers 70.6 144.4 39.1 1.4 (0.3) 255.2 -- 255.2
Fees - Affiliated
customers 9.1 14.8 5.4 -- (29.3) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues 298.5 158.3 51.2 (4.7) (29.6) 473.7 -- 473.7
Expenses:
Expenses - Unaffiliated
customers 116.6 130.4 26.7 23.7 (0.4) 297.0 42.4 339.4
Expenses - Affiliated
customers 19.0 4.8 7.2 (1.8) (29.2) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses 135.6 135.2 33.9 21.9 (29.6) 297.0 42.4 339.4
Provision for loan
and lease losses 11.9 -- 0.3 -- -- 12.2 -- 12.2
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income
before taxes 151.0 23.1 17.0 (26.6) -- 164.5 (42.4) 122.1
Income tax expense 48.1 9.3 6.8 (10.0) -- 54.2 (15.4) 38.8
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income $ 102.9 $ 13.8 $ 10.2 $ (16.6) $ -- $ 110.3 $ (27.0) $ 83.3
=========== =========== =========== =========== =========== =========== =========== ===========
Identifiable assets $ 26,255.0 $ 678.4 $ 726.4 $ 609.2 $ (942.4) $ 27,326.6 $ -- $ 27,326.6
=========== =========== =========== =========== =========== =========== =========== ===========
Return on average
tangible equity 21.3 % 28.2 % 15.6 % 20.9 % 15.9 %
=========== =========== =========== =========== ===========
Return on average equity 18.5 % 19.1 % 15.5 % 17.2 % 13.0 %
=========== =========== =========== =========== ===========
Nine Months Ended September 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
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Net interest income $ 741.0 $ (3.0) $ 20.7 $ (15.6) $ -- $ 743.1 $ -- $ 743.1
Fees - Unaffiliated
customers 231.6 445.3 114.9 3.9 -- 795.7 -- 795.7
Fees - Affiliated
customers 33.8 48.5 17.5 -- (99.8) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues 1,006.4 490.8 153.1 (11.7) (99.8) 1,538.8 -- 1,538.8
Expenses:
Expenses - Unaffiliated
customers 392.6 415.0 84.8 63.9 (2.0) 954.3 3.9 958.2
Expenses - Affiliated
customers 57.5 17.5 25.9 (3.1) (97.8) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses 450.1 432.5 110.7 60.8 (99.8) 954.3 3.9 958.2
Provision for loan
and lease losses 50.2 -- 0.8 -- -- 51.0 -- 51.0
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income
before taxes 506.1 58.3 41.6 (72.5) -- 533.5 (3.9) 529.6
Income tax expense 162.5 24.1 16.8 (27.5) -- 175.9 (1.6) 174.3
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income $ 343.6 $ 34.2 $ 24.8 $ (45.0) $ -- $ 357.6 $ (2.3) $ 355.3
=========== =========== =========== =========== =========== =========== =========== ===========
Identifiable assets $ 28,743.7 $ 766.2 $ 732.1 $ 588.8 $ (752.0) $ 30,078.8 $ -- $ 30,078.8
=========== =========== =========== =========== =========== =========== =========== ===========
Return on average
tangible equity 24.1 % 26.2 % 15.1 % 23.9 % 23.8 %
=========== =========== =========== =========== ===========
Return on average equity 18.7 % 15.3 % 14.9 % 17.8 % 17.7 %
=========== =========== =========== =========== ===========
Nine Months Ended September 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
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Net interest income $ 607.2 $ (2.5) $ 19.2 $ (18.4) $ -- $ 605.5 $ -- $ 605.5
Fees - Unaffiliated
customers 210.5 413.3 129.8 2.5 (0.7) 755.4 (16.1) 739.3
Fees - Affiliated
customers 23.8 46.5 15.1 0.1 (85.5) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues 841.5 457.3 164.1 (15.8) (86.2) 1,360.9 (16.1) 1,344.8
Expenses:
Expenses - Unaffiliated
customers 339.3 384.6 82.8 63.2 (0.2) 869.7 102.2 971.9
Expenses - Affiliated
customers 55.0 12.9 21.7 (3.6) (86.0) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses 394.3 397.5 104.5 59.6 (86.2) 869.7 102.2 971.9
Provision for loan
and lease losses 33.3 -- 0.7 -- -- 34.0 -- 34.0
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income
before taxes 413.9 59.8 58.9 (75.4) -- 457.2 (118.3) 338.9
Income tax expense 131.3 24.4 23.5 (28.8) -- 150.4 (41.1) 109.3
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income $ 282.6 $ 35.4 $ 35.4 $ (46.6) $ -- $ 306.8 $ (77.2) $ 229.6
=========== =========== =========== =========== =========== =========== =========== ===========
Identifiable assets $ 26,255.0 $ 678.4 $ 726.4 $ 609.2 $ (942.4) $ 27,326.6 $ -- $ 27,326.6
=========== =========== =========== =========== =========== =========== =========== ===========
Return on average
tangible equity 19.9 % 20.9 % 19.1 % 20.2 % 15.2 %
=========== =========== =========== =========== ===========
Return on average equity 17.4 % 16.4 % 19.0 % 17.2 % 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 September 30,
--------------------------------
2002 2001
-------------- --------------
Assets
------
Cash and due from banks $ 705,880 $ 680,451
Investment securities:
Trading securities 21,098 13,910
Short-term investments 477,285 497,709
Other investment securities:
Taxable 3,444,294 3,753,722
Tax-exempt 1,223,370 1,268,253
------------- -------------
Total investment securities 5,166,047 5,533,594
Total loans and leases 20,940,989 18,338,194
Less: Allowance for loan and lease losses 301,127 259,083
------------- -------------
Net loans and leases 20,639,862 18,079,111
Premises and equipment, net 414,818 396,422
Accrued interest and other assets 1,999,721 1,721,717
------------- -------------
Total Assets $ 28,926,328 $ 26,411,295
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,505,620 $ 2,940,571
Interest bearing 14,780,334 14,046,651
------------- -------------
Total deposits 18,285,954 16,987,222
Funds purchased and security repurchase agreements 2,563,474 2,100,279
Other short-term borrowings 1,778,498 1,816,788
Long-term borrowings 2,633,620 2,079,704
Accrued expenses and other liabilities 938,839 877,323
------------- -------------
Total liabilities 26,200,385 23,861,316
Shareholders' equity 2,725,943 2,549,979
------------- -------------
Total Liabilities and Shareholders' Equity $ 28,926,328 $ 26,411,295
============= =============
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Nine Months Ended September 30,
-------------------------------
2002 2001
-------------- --------------
Assets
------
Cash and due from banks $ 684,745 $ 632,168
Investment securities:
Trading securities 14,587 24,642
Short-term investments 821,219 406,882
Other investment securities:
Taxable 3,181,076 4,110,023
Tax-exempt 1,229,627 1,276,259
------------- -------------
Total investment securities 5,246,509 5,817,806
Total loans and leases 20,266,963 17,944,039
Less: Allowance for loan and lease losses 291,072 247,376
------------- -------------
Net loans and leases 19,975,891 17,696,663
Premises and equipment, net 410,193 389,317
Accrued interest and other assets 1,939,685 1,609,602
------------- -------------
Total Assets $ 28,257,023 $ 26,145,556
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,351,235 $ 2,776,397
Interest bearing 14,624,650 14,509,362
------------- -------------
Total deposits 17,975,885 17,285,759
Funds purchased and security repurchase agreements 2,404,503 2,120,859
Other short-term borrowings 1,821,389 1,722,836
Long-term borrowings 2,492,603 1,797,883
Accrued expenses and other liabilities 877,745 826,055
------------- -------------
Total liabilities 25,572,125 23,753,392
Shareholders' equity 2,684,898 2,392,164
------------- -------------
Total Liabilities and Shareholders' Equity $ 28,257,023 $ 26,145,556
============= =============
Net income for the third quarter of 2002 amounted to $119.2 million compared
to $83.3 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 September 30, 2002, compared with $0.39 and $0.38 for the three months
ended September 30, 2001. The return on average assets and average equity was
1.64% and 17.35% for the quarter ended September 30, 2002 and 1.25% and 12.96%
for the quarter ended September 30, 2001.
The results of operations and financial position as of and for the three months
ended September 30, 2002, include the effects of Metavante's two acquisitions
in the current quarter, four acquisitions which occurred 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 in the current quarter and prior year quarter include charges
related to Metavante's acquisitions. In addition, net income for the prior
year quarter also includes 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 September 30,
Pre-tax --------------------------------
Effect 2002 2001
-------------- -------------- --------------
Income as Reported $ 119,236 $ 83,315
Nonrecurring Losses and Expenses:
Metavante Subsidiary
Acquisition related - 2002 $ 3,857 2,307
Acquisition related - 2001 37,661 22,789
Goodwill Amortization 4,690 -- 4,183
------------- -------------
Total Adjustments 2,307 26,972
------------- -------------
Operating Income $ 121,543 $ 110,287
============= =============
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 fourth quarter of 2001 excludes certain expenses
incurred in connection with acquisitions at the Corporation's Metavante
subsidiary. Such expenses amounted to $3.5 million ($2.0 million after-tax)
in the fourth quarter of 2001. Operating income for the third quarters of 2002
and 2001 excludes those items previously discussed. In addition, operating
income for the fourth quarter of 2001 excludes 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 average 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
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Interest income $ 392,773 $ 390,143 $ 380,407 $ 401,974 $ 423,248
Interest expense (139,972) (140,145) (140,130) (164,686) (204,746)
----------- ----------- ----------- ----------- -----------
Net interest income 252,801 249,998 240,277 237,288 218,502
Provision for loan and lease losses (18,842) (16,980) (15,196) (20,109) (12,206)
Net investment securities
gains (losses) (4,282) (121) (745) (572) 774
Other income 276,823 264,275 259,747 262,492 254,497
Other expense (322,717) (318,013) (313,607) (308,611) (297,057)
----------- ----------- ----------- ----------- -----------
Income before taxes 183,783 179,159 170,476 170,488 164,510
Income tax provision (62,240) (58,732) (54,847) (56,274) (54,223)
----------- ----------- ----------- ----------- -----------
Operating income $ 121,543 $ 120,427 $ 115,629 $ 114,214 $ 110,287
=========== =========== =========== =========== ===========
Per Common Share
Operating income
Basic $ 0.57 $ 0.56 $ 0.55 $ 0.54 $ 0.52
Diluted 0.55 0.54 0.53 0.52 0.50
Dividends 0.160 0.160 0.145 0.145 0.145
Operating income
Return on Average Equity 17.69 % 17.70 % 18.04 % 17.84 % 17.16 %
Return on Average Tangible Equity 24.04 23.99 23.64 22.83 20.93
Summary Consolidated Operating Income Statement Components as a
---------------------------------------------------------------
Percent of Average Total Assets
-------------------------------
2002 2001
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Interest income (FTE) 5.50 % 5.60 % 5.76 % 6.02 % 6.48 %
Interest expense (1.92) (1.97) (2.08) (2.42) (3.08)
----------- ----------- ----------- ----------- -----------
Net interest income 3.58 3.63 3.68 3.60 3.40
Provision for loan and lease losses (0.26) (0.24) (0.23) (0.30) (0.18)
Net investment securities
gains (losses) (0.06) -- (0.01) (0.01) 0.01
Other income 3.80 3.72 3.85 3.85 3.82
Other expense (4.43) (4.47) (4.64) (4.52) (4.46)
----------- ----------- ----------- ----------- -----------
Income before taxes 2.63 2.64 2.65 2.62 2.59
Income tax provision (0.96) (0.94) (0.93) (0.94) (0.93)
----------- ----------- ----------- ----------- -----------
Return on average assets
based on operating income 1.67 % 1.70 % 1.72 % 1.68 % 1.66 %
=========== =========== =========== =========== ===========
Return on tangible average assets
based on tangible operating income 1.73 % 1.77 % 1.78 % 1.73 % 1.71 %
=========== =========== =========== =========== ===========
Net income for the nine months ended September 30, 2002 amounted to $355.3
million compared to $229.2 million in the same period of 2001. Basic and
diluted earnings per share were $1.67 and $1.61, respectively for the nine
months ended September 30, 2002 compared to $1.09 and $1.05, respectively, for
the same period last year. The year-to-date return on average equity was
17.69% in the current period and 12.81% for the nine months ended September 30,
2001.
Net income for the first nine months of 2002 and 2001 includes charges related
to Metavante's acquisitions. In addition, net income for the first nine months
of 2001 includes certain losses and expenses incurred in connection with the
previously announced structural changes 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):
Nine Months ended September 30,
Pre-tax -------------------------------
Effect 2002 2001
-------------- -------------- --------------
Income as Reported $ 355,292 $ 229,164
Nonrecurring Losses and Expenses:
Metavante Subsidiary - 2002
Acquisition related $ 3,857 2,307
Metavante Subsidiary - 2001
Reduction in force and realignment 11,028
Investment losses 16,057
Acquisition related 41,504
------------- -------------
Total Metavante Subsidiary - 2001 68,589 41,376
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 12,730 11,478
------------- -------------
Total Nonrecurring Losses and Expenses 2,307 77,598
------------- -------------
Operating Income $ 357,599 $ 306,762
============= =============
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 nine months ended September 30, 2002 and 2001,
respectively. Operating income for the nine months ended September 30, 2002
and 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)
Nine Months Ended September 30,
-------------------------------
2002 2001
-------------- --------------
Interest income $ 1,163,323 $ 1,307,129
Interest expense (420,247) (701,614)
------------- -------------
Net interest income 743,076 605,515
Provision for loan and lease losses (51,018) (34,006)
Net investment securities gains (5,148) 9,870
Other income 800,845 745,517
Other expense (954,337) (869,749)
------------- -------------
Income before taxes 533,418 457,147
Income tax provision (175,819) (150,385)
------------- -------------
Operating income $ 357,599 $ 306,762
============= =============
Per Common Share
Operating income
Basic $ 1.68 $ 1.46
Diluted 1.62 1.41
Dividends 0.465 0.423
Return on Average Equity
Operating income 17.81 % 17.15 %
Return on Average Tangible Equity 23.90 20.24
Summary Consolidated Operating Income Statement Components as a
---------------------------------------------------------------
Percent of Average Total Assets
-------------------------------
Nine Months Ended September 30,
-------------------------------
2002 2001
-------------- --------------
Interest income (FTE) 5.62 % 6.80 %
Interest expense (1.99) (3.58)
------------- -------------
Net interest income 3.63 3.22
Provision for loan and lease losses (0.24) (0.17)
Net investment securities gains (0.02) 0.05
Other income 3.79 3.81
Other expense (4.52) (4.45)
------------- -------------
Income before taxes 2.64 2.46
Income tax provision (0.95) (0.89)
------------- -------------
Return on average assets
based on operating income 1.69 % 1.57 %
============= =============
Return on tangible average assets
based on tangible operating income 1.76 % 1.61 %
============= =============
NET INTEREST INCOME
-------------------
Net interest income for the third quarter of 2002 amounted to $252.8 million
compared to $218.5 million reported for the third quarter of 2001. For the
nine months ended September 30, 2002 net interest income amounted to $743.1
million compared to $605.5 million in the nine months ended September 30, 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 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 third quarter of 2002 increased $2.2 billion or
9.4% and on a year-to-date basis increased $1.8 billion or 7.4% compared to the
same periods a year ago. Average loans accounted for $2.6 billion of the
quarter over quarter growth and $2.3 billion of the year-to-date period over
period growth in earning assets. Average investment securities and other
short-term investments declined in both the quarterly and year-to-date periods
compared to the prior year. The Corporation estimates that approximately $1.5
billion and $1.8 billion of the average earning asset growth in the quarter and
nine months ended September 30, 2002, was attributable to the banking related
purchase acquisitions.
Average interest bearing liabilities increased $1.7 billion or 8.5% in the
third quarter of 2002 compared to the same period in 2001. For the nine months
ended September 30, 2002, average interest bearing liabilities increased $1.2
billion or 5.9% over the comparable period. Average interest bearing deposits
increased $0.7 billion or 5.2% in the third quarter of 2002 compared to the
third quarter of last year and were relatively unchanged on an average year-to-
date basis. Average borrowings increased $1.0 billion and $1.1 billion on a
quarter over quarter and year-to-date over year-to-date basis, respectively.
The Corporation estimates that approximately $1.2 billion and $1.5 billion of
the growth in average interest bearing liabilities in the three and nine months
ended September 30, 2002, respectively, was attributable to the banking related
purchase acquisitions.
Average noninterest bearing deposits in the current quarter increased $0.6
billion or 19.2% compared to the same period last year. On a year-to-date
basis, average noninterest bearing deposits increased $0.6 billion or 20.7%.
Approximately $0.3 billion of average noninterest bearing deposits in the three
and nine months ended September 30, 2002 are attributable to the banking
related purchase acquisitions.
The growth and composition of the Corporation's quarterly average loan
portfolio for the current quarter and previous four quarters are reflected in
the following table. ($ in millions):
Consolidated Average Loans and Leases
-------------------------------------
2002 2001 Growth Percent
----------------------------------- ----------------------- --------------------
Third Second First Fourth Third Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
----------- ----------- ----------- ----------- ----------- --------- ----------
Commercial
Commercial $ 5,998 $ 6,087 $ 5,848 $ 5,680 $ 5,640 6.3 % (1.5)%
Commercial real estate
Commercial mortgages 5,617 5,491 5,228 5,071 4,831 16.3 2.3
Construction 799 697 625 534 520 53.5 14.6
---------- ---------- ---------- ---------- ---------- ------- --------
Total commercial
real estate 6,416 6,188 5,853 5,605 5,351 19.9 3.7
Commercial lease
financing 384 391 410 399 394 (2.5) (1.8)
---------- ---------- ---------- ---------- ---------- ------- --------
Total Commercial 12,798 12,666 12,111 11,684 11,385 12.4 1.0
Personal
Residential real estate
Residential mortgages 2,545 2,371 2,346 2,444 2,303 10.5 7.3
Construction 150 137 131 142 120 24.9 9.3
---------- ---------- ---------- ---------- ---------- ------- --------
Total residential
real estate 2,695 2,508 2,477 2,586 2,423 11.2 7.5
Personal loans
Student 86 116 117 105 94 (8.0) (25.6)
Credit card 172 163 164 161 174 (1.4) 5.4
Home equity loans
and lines 3,543 3,518 3,176 2,944 2,723 30.1 0.7
Other 1,198 934 876 912 927 29.2 28.2
---------- ---------- ---------- ---------- ---------- ------- --------
Total personal loans 4,999 4,731 4,333 4,122 3,918 27.6 5.7
Personal lease financing 449 488 530 572 612 (26.6) (8.0)
---------- ---------- ---------- ---------- ---------- ------- --------
Total personal 8,143 7,727 7,340 7,280 6,953 17.1 5.4
---------- ---------- ---------- ---------- ---------- ------- --------
Total Consolidated Average
Loans and Leases $ 20,941 $ 20,393 $ 19,451 $ 18,964 $ 18,338 14.2 % 2.7 %
========== ========== ========== ========== ========== ======= ========
Compared with the third quarter of 2001, total consolidated average loans and
leases increased $2.6 billion or 14.2%. Approximately $1.3 billion of average
total consolidated loan and lease growth in the third 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 $0.8 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, which are both wider spread
products. Approximately $0.1 billion of indirect auto loan production was
securitized and sold in the current quarter. Approximately $0.3 billion of
indirect auto loans have been securitized and sold during the first nine months
of 2002. Excluding the impact of acquisitions, average quarterly consumer
loans grew approximately $0.2 billion. The increase in average residential
real estate loans of $0.1 billion in the current quarter, 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 109%
and loan closings increased approximately 72% compared to the second quarter
of this year. Residential real estate loans sold to investors amounted to $0.9
billion in the third quarter of 2002 compared to $0.5 billion in the third
quarter of the prior year and amounted to $1.6 billion and $1.5 billion for the
nine months ended September 30, 2002 and 2001, respectively.
The rate of growth experienced in commercial loans in the first half of the
year has diminished, at least in the near term. The Corporation's commercial
lending activities have historically fared well as the economy strengthens and
it anticipates loan demand will slowly strengthen reflecting the condition of
its markets in future quarters. Home equity loans and lines, which includes
M&I's wholesale activity, continue to be the primary core consumer loan
product. The Corporation anticipates these products will continue to drive
growth to the consumer side of its banking activities.
The growth and composition of the Corporation's quarterly average deposits for
the current and prior year's quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2002 2001 Growth Percent
----------------------------------- ----------------------- --------------------
Third Second First Fourth Third Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
----------- ----------- ----------- ----------- ----------- --------- ----------
Bank issued deposits
Noninterest bearing deposits
Commercial $ 2,432 $ 2,275 $ 2,160 $ 2,225 $ 1,968 23.6 % 6.9 %
Personal 711 729 678 634 608 16.8 (2.5)
Other 363 357 346 388 365 (0.3) 1.7
---------- ---------- ---------- ---------- ---------- ------- --------
Total noninterest
bearing deposits 3,506 3,361 3,184 3,247 2,941 19.2 4.3
Interest bearing deposits
Savings & NOW 2,421 2,252 1,994 1,877 1,784 35.7 7.5
Money market 5,555 5,727 5,844 5,825 5,563 (0.1) (3.0)
Foreign activity 733 686 694 704 640 14.6 6.8
---------- ---------- ---------- ---------- ---------- ------- --------
Total interest
bearing deposits 8,709 8,665 8,532 8,406 7,987 9.0 0.5
Time deposits
Other CDs &
time deposits 2,756 2,868 2,881 3,097 3,167 (13.0) (3.9)
CDs greater
than $100,000 634 657 651 721 751 (15.6) (3.4)
---------- ---------- ---------- ---------- ---------- ------- --------
Total time deposits 3,390 3,525 3,532 3,818 3,918 (13.5) (3.8)
---------- ---------- ---------- ---------- ---------- ------- --------
Total bank issued deposits 15,605 15,551 15,248 15,471 14,846 5.1 0.4
Wholesale deposits
Money market 74 75 83 78 0.00 100.0 (0.6)
Brokered CDs 1,606 1,621 1,043 872 1,517 5.8 (1.0)
Foreign time 1,001 1,348 658 487 624 60.5 (25.7)
---------- ---------- ---------- ---------- ---------- ------- --------
Total wholesale deposits 2,681 3,044 1,784 1,437 2,141 25.2 (12.0)
---------- ---------- ---------- ---------- ---------- ------- --------
Total consolidated
average deposits $ 18,286 $ 18,595 $ 17,032 $ 16,908 $ 16,987 7.6 % (1.7)%
========== ========== ========== ========== ========== ======= ========
Total average deposits increased $1.3 billion or 7.6% in the third quarter of
2002 compared to the third quarter of 2001. Average bank issued deposits
associated with the acquisitions were approximately $1.3 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 $0.3 billion
while interest bearing activity accounts increased $0.2 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 $1.0 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. While this may limit
apparent deposit growth in the near term, the Corporation believes this
strategy serves to help stabilize the interest margin, given the current rate
environment, both now and in future periods when market rates begin to rise and
these deposit accounts rapidly re-price.
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 third quarter of 2001, average wholesale deposits increased
$0.5 billion. The Corporation has made greater use of wholesale funding
alternatives especially institutional CDs during 2002.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current quarter
and prior year third quarter and for the nine months ended September 30, 2002
and 2001, are presented in the following tables ($ in millions):
Consolidated Yield and Cost Analysis
------------------------------------
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
------------------------------- -------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------------------------- --------------------------------
Loans and leases: (a)
Commercial $ 6,382.3 $ 84.5 5.25 % $ 6,034.2 $ 102.7 6.75 %
Commercial real estate 6,415.4 106.3 6.57 5,350.6 103.1 7.64
Residential real estate 2,695.1 46.1 6.79 2,423.6 44.9 7.35
Personal 5,448.2 89.6 6.53 4,529.8 89.2 7.81
---------- --------- --------- ---------- --------- ---------
Total loans and leases 20,941.0 326.5 6.19 18,338.2 339.9 7.35
Investment securities (b):
Taxable 3,444.3 49.9 5.89 3,753.7 64.0 6.94
Tax Exempt (a) 1,223.3 22.5 7.41 1,268.3 22.8 7.22
---------- --------- --------- ---------- --------- ---------
Total investment securities 4,667.6 72.4 6.29 5,022.0 86.8 7.01
Other short-term investments (a) 498.4 1.9 1.53 511.6 4.5 3.50
---------- --------- --------- ---------- --------- ---------
Total interest earning assets $ 26,107.0 $ 400.8 6.11 % $ 23,871.8 $ 431.2 7.20 %
========== ========= ========= ========== ========= =========
Interest bearing deposits:
Bank issued deposits:
Interest bearing activity $ 8,709.5 $ 26.9 1.22 % $ 7,987.3 $ 53.4 2.65 %
Time deposits 3,390.1 26.9 3.15 3,918.3 53.0 5.36
---------- --------- --------- ---------- --------- ---------
Total bank issued deposits 12,099.6 53.8 1.76 11,905.6 106.4 3.54
Wholesale deposits 2,680.7 15.8 2.33 2,141.1 23.4 4.34
---------- --------- --------- ---------- --------- ---------
Total interest bearing deposits 14,780.3 69.6 1.87 14,046.7 129.8 3.67
Short-term borrowings 4,342.0 39.7 3.63 3,917.0 46.3 4.69
Long-term borrowings 2,633.6 30.7 4.62 2,079.7 28.7 5.47
---------- --------- --------- ---------- --------- ---------
Total interest bearing liabilities $ 21,755.9 $ 140.0 2.55 % $ 20,043.4 $ 204.8 4.05 %
========== ========= ========= ========== ========= =========
Net interest margin (FTE) as a
percent of average earning assets $ 260.8 3.98 % $ 226.4 3.78 %
========= ========= ========= =========
Net interest spread (FTE) 3.56 % 3.15 %
========= =========
(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.
Consolidated Yield and Cost Analysis
------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------------------- -------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------------------------- --------------------------------
Loans and leases (a)
Commercial $ 6,373.2 $ 254.2 5.33 % $ 5,797.6 $ 316.8 7.30 %
Commercial real estate 6,154.1 308.2 6.70 5,147.1 304.8 7.92
Residential real estate 2,560.8 134.4 7.02 2,487.7 139.4 7.49
Personal 5,178.9 262.4 6.77 4,511.6 275.5 8.16
---------- --------- --------- ---------- --------- ---------
Total loans and leases $ 20,267.0 $ 959.2 6.33 % $ 17,944.0 $ 1,036.5 7.72 %
Investment securities (b):
Taxable 3,181.1 150.2 6.49 4,110.0 212.0 7.04
Tax Exempt (a) 1,229.6 68.0 7.48 1,276.3 68.5 7.27
Other short-term investments (a) 835.8 10.0 1.60 431.5 13.3 4.14
---------- --------- --------- ---------- --------- ---------
Total interest earning assets $ 25,513.5 $ 1,187.4 6.24 % $ 23,761.8 $ 1,330.3 7.52 %
========== ========= ========= ========== ========= =========
Interest bearing deposits:
Bank issued deposits:
Interest bearing activity $ 8,636.1 $ 81.1 1.26 % $ 7,640.0 $ 190.2 3.33 %
Time deposits 3,482.0 88.3 3.39 4,028.2 170.8 5.67
---------- --------- --------- ---------- --------- ---------
Total bank issued deposits 12,118.1 169.4 1.87 11,668.2 361.0 4.14
Wholesale deposits 2,506.5 44.5 2.38 2,841.2 111.9 5.27
---------- --------- --------- ---------- --------- ---------
Total interest bearing deposits 14,624.6 213.9 1.96 14,509.4 472.9 4.36
Short-term borrowings 4,225.9 116.4 3.68 3,843.7 149.7 5.21
Long-term borrowings 2,492.6 90.0 4.83 1,797.8 79.0 5.88
---------- --------- --------- ---------- --------- ---------
Total interest bearing liabilities $ 21,343.1 $ 420.3 2.63 % $ 20,150.9 $ 701.6 4.66 %
========== ========= ========= ========== ========= =========
Net interest margin (FTE) as a
percent of average earning assets $ 767.1 4.04 % $ 628.7 3.55 %
========= ========= ========= =========
Net interest spread (FTE) 3.61 % 2.86 %
========= =========
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax rate
of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for available
for sale securities.
The net interest margin increased 20 basis points from 3.78 percent in the
third quarter 2001 to 3.98 percent in the third quarter of 2002. For the nine-
month period the net interest margin increased 49 basis points from 3.55
percent to 4.04 percent. Compared to the prior year, the yield on average
earning assets decreased 109 basis points in the third quarter and 128 basis
points on a year-to-date basis. The cost of bank-issued interest bearing
deposits in the current quarter decreased 178 basis points from the same
quarter of the previous year and decreased 227 basis points in the comparative
nine months which reflects rate declines and a favorable shift in the deposit
mix. The increase in noninterest bearing deposits as previously discussed was
also a source of benefit to the net interest margin. The cost of other funding
sources (wholesale deposits and total borrowings) decreased 126 basis points
in the current quarter compared to the third quarter of last year and decreased
173 basis points for the nine month comparative periods.
The Corporation anticipates the net interest margin will decline a few basis
points over each of the next two quarters, with net interest income growing
with internal growth and the acquisitions. The current lower absolute level
of interest rates and increased level of prepayments has shortened the expected
life of many of the Corporation's financial assets. The Corporation intends
to continue to actively manage the re-pricing characteristics of its interest
bearing liabilities so as to minimize the long-term impact on net interest
income. 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 September 30, 2002 and the prior four quarters.
Nonperforming Assets
--------------------
($000's)
--------
2002 2001
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Nonaccrual $ 173,185 $ 160,250 $ 164,444 $ 166,434 $ 163,946
Renegotiated 305 314 366 378 389
Past due 90 days or more 7,407 6,560 5,520 6,982 7,185
----------- ----------- ----------- ----------- -----------
Total nonperforming loans and leases 180,897 167,124 170,330 173,794 171,520
Other real estate owned 8,223 6,296 6,736 6,796 5,842
----------- ----------- ----------- ----------- -----------
Total nonperforming assets $ 189,120 $ 173,420 $ 177,066 $ 180,590 $ 177,362
=========== =========== =========== =========== ===========
Allowance for loan
and lease losses $ 300,628 $ 292,512 $ 284,179 $ 268,198 $ 264,736
=========== =========== =========== =========== ===========
Consolidated Statistics
-----------------------
2002 2001
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Net charge-offs to average
loans and leases annualized 0.20 % 0.17 % 0.23 % 0.35 % 0.24 %
Total nonperforming loans and leases
to total loans and leases 0.84 0.80 0.84 0.90 0.90
Total nonperforming assets to
total loans and leases and
other real estate owned 0.88 0.83 0.87 0.94 0.93
Allowance for loan and lease losses
to total loans and leases 1.40 1.40 1.40 1.39 1.39
Allowance for loan and lease losses
to nonperforming loans and leases 166 175 167 154 154
Nonaccrual Loans and Leases By Type
-----------------------------------
($000's)
--------
2002 2001
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Commercial
Commercial, financial
& agricultural $ 78,421 $ 62,349 $ 65,513 $ 70,256 $ 78,623
Lease financing receivables 2,994 3,993 4,876 12,041 2,022
----------- ----------- ----------- ----------- -----------
Total commercial 81,415 66,342 70,389 82,297 80,645
Real estate
Construction & land development 79 1,399 533 720 1,063
Commercial mortgage 37,408 40,933 39,436 34,546 38,117
Residential mortgage 52,590 50,079 52,504 47,783 42,147
----------- ----------- ----------- ----------- -----------
Total real estate 90,077 92,411 92,473 83,049 81,327
Personal 1,693 1,497 1,582 1,088 1,974
----------- ----------- ----------- ----------- -----------
Total nonaccrual loans and leases $ 173,185 $ 160,250 $ 164,444 $ 166,434 $ 163,946
=========== =========== =========== =========== ===========
Reconciliation of Allowance for Loan and Lease Losses
-----------------------------------------------------
($000's)
--------
2002 2001
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Beginning balance $ 292,512 $ 284,179 $ 268,198 $ 264,736 $ 244,486
Provision for loan and lease losses 18,842 16,980 15,196 20,109 12,206
Allowance of banks and loans acquired -- -- 11,965 -- 19,151
Loans and leases charged-off
Commercial 6,482 3,740 4,505 11,323 5,266
Real estate 2,113 2,580 3,008 4,404 3,768
Personal 2,632 3,086 2,939 3,253 2,768
Leases 2,053 1,767 2,930 1,174 450
----------- ----------- ----------- ----------- -----------
Total charge-offs 13,280 11,173 13,382 20,154 12,252
Recoveries on loans and leases
Commercial 1,070 542 682 2,216 362
Real estate 343 770 474 292 357
Personal 667 840 733 954 354
Leases 474 374 313 45 72
----------- ----------- ----------- ----------- -----------
Total recoveries 2,554 2,526 2,202 3,507 1,145
----------- ----------- ----------- ----------- -----------
Net loans and leases charge-offs 10,726 8,647 11,180 16,647 11,107
----------- ----------- ----------- ----------- -----------
Ending balance $ 300,628 $ 292,512 $ 284,179 $ 268,198 $ 264,736
=========== =========== =========== =========== ===========
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
September 30, 2002, OREO acquired in satisfaction of debts amounted to $7.5
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 September 30, 2002, nonperforming loans and leases amounted to $180.9
million or 0.84% of consolidated loans and leases of $21.4 billion, an increase
of $13.8 million or 8.2% since June 30, 2002. Nonaccrual loans and leases
accounted for $12.9 million of the increase and was primarily due to the
addition of one larger commercial loan. Since the second quarter, nonaccrual
commercial loans and leases increased $15.1 million while nonaccrual commercial
real estate and nonaccrual construction and land development decreased $3.5
million and $1.3 million, respectively. Nonaccrual residential real estate
loans increased $2.5 million while nonaccrual consumer loans were relatively
unchanged. At September 30, 2002, approximately $38.1 million of nonperforming
loans are related to the National City, Richfield and Century acquisitions.
In addition to its nonperforming loans and leases, the Corporation has loans
and leases for which payments are presently current, but the borrowers are
experiencing financial problems. These loans are subject to constant
management attention and their classification is reviewed on an ongoing basis.
Recently an airline company has expressed interest in restructuring all of its
lease obligations including transactions involving the Corporation. Given the
airline company's expressed desire to begin discussions to restructure these
financing transactions with the Corporation, it is possible the Corporation
will not recover all of the carrying value assigned to these financing
transactions. Total credit exposure to this airline including the lease
obligations is approximately $34.6 million. Presently, the Corporation is not
able to determine the ultimate amount of loss, if any, that it may incur but
it has taken this, as well as its other exposures to the airline and travel
industries, into consideration in determining the adequacy of its allowance for
loan and lease losses.
Net charge-offs amounted to $10.7 million or 0.20% of average loans in the
third quarter of 2002 compared with net charge-offs of $8.6 million or 0.17%
of average loans in the second quarter of 2002 and $11.1 million or 0.24% of
average loans in the third quarter of the prior year. For the nine months
ended September 30, 2002, net charge-offs amounted to $30.6 million or 0.20%
of average loans compared to $23.5 million or 0.18% of average loans for the
nine months ended September 30, 2001. Although some degree of uncertainty
exists, the Corporation expects net charge-offs will continue to range in the
0.15% to 0.25% range until the economy demonstrates clear strengthening. While
this expected range is higher than the Corporation's historical net charge-off
levels, it is considered manageable.
The provision for loan and lease losses amounted to $18.8 million and $51.0
million for the three and nine months ended September 30, 2002, respectively,
compared to $12.2 million in the third quarter of 2001 and $34.0 million for
the nine months ended September 30, 2001. The Corporation has not
substantively changed any aspect to its overall approach in the determination
of the allowance for loan and lease losses. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period allowance. The allowance
for loan and lease losses at September 30, 2002 as compared to September 30,
2001 has increased from 1.39% to 1.40%, respectively, of the total loan and
lease portfolio largely as a result of the Corporation's consideration of
historical and anticipated loss rates inherent in the loan and lease portfolio.
OTHER INCOME
------------
Total other income in the third quarter of 2002 amounted to $272.5 million
compared to $255.3 million in the same period last year, an increase of $17.2
million or 6.8%. For the nine months ended September 30, 2002 total other
income amounted to $795.7 million an increase of $56.4 million or 7.6% compared
to total other income of $739.3 million for the nine months ended September 30,
2001.
Total data processing services revenue amounted to $153.9 million in the third
quarter of 2002 compared to $144.4 million in the third quarter of 2001 an
increase of $9.5 million or 6.6% and for the nine months increased $29.7
million or 7.2% from $415.5 million in 2001 to $445.2 million in the current
year. e-Finance solutions revenue increased $4.3 million or 13.4% compared to
the third quarter of 2001 and on a year-to-date basis, increased $18.0 million
or 20.7%. 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. The
bill presentment and payment component of e-Finance, which includes revenue
from the PayTrust acquisition, 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 $5.2 million or 4.7% in the third quarter compared to the third
quarter of last year and $15.7 million or 4.8% in the comparative nine-month
period. In general, growth in this source of data processing services revenue
has slowed due to continued bank consolidation and a weaker economy. Total
buyout revenue, which varies from period to period, was $2.5 million less in
the current quarter compared to the third quarter of last year and for the nine
months was $1.0 million less than the prior year nine-month period. Other
revenue declined primarily due to lower professional services revenue.
Item processing revenue amounted to $9.8 million in the third quarter of 2002
compared to $11.7 million in the third quarter of 2001. For the nine months
ended September 30, 2002, item processing revenue amounted to $29.2 million
compared to $36.2 million in the nine months of the prior year. 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 $29.0 million in the third quarter of 2002
compared to $30.1 million in the third quarter of 2001 and was relatively
unchanged over the comparative nine-month periods. The positive impact from
acquisitions and sales efforts were offset by the decline in market values of
assets under management. Assets under management were approximately $12.2
billion at September 30, 2002 and 2001, despite the poor performance of both
the S&P 500 and NASDAQ in the current quarter.
Service charges on deposits increased $3.8 million or 17.8% in the current
quarter and for the comparative nine months increased $13.3 million or 21.3%
and amounted to $24.9 million and $75.7 million for the three and nine months
ended September 30, 2002, respectively. Acquisitions accounted for
approximately $1.5 million and $3.6 million of the revenue growth in the
comparative quarters and year-to-date periods, respectively. The remainder of
the increase was primarily attributable to service charges on commercial demand
accounts.
Mortgage banking revenue increased $3.7 million in the third quarter of 2002
compared to the third quarter of 2001 and for the nine month comparative period
was relatively unchanged. Gains on the sale of mortgage loans accounted for
the majority of the quarter over quarter increase which reflects the increased
sale activity as previously discussed.
Net investment securities losses in the third quarter and for the nine months
of 2002 amounted to $4.3 million and $5.1 million, respectively, and were
primarily attributable to securities losses incurred by the Corporation's
Capital Markets Group which vary from period to period. Net investment
securities losses for the nine months ended September 30, 2001 amounted to $6.2
million. Net securities gains, recognized primarily by the Corporation's
Capital Markets Group, were approximately $10.1 million. Securities losses of
approximately $16.1 million were recognized by the Corporation's Metavante
subsidiary for 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 three and nine months ended September 30, 2002,
includes approximately $0.3 million and $0.6 million, respectively, from the
banking related acquisitions.
Other income in the third quarter of 2002 amounted to $37.4 million compared
to $29.6 million in the third quarter of 2001, an increase of $7.8 million or
26.5%. For the nine months, other income amounted to $106.1 million in the
current year compared to $89.8 million in the prior year, an increase of $16.3
million or 18.2%. For the three and nine months ended September 30, 2002,
approximately $0.7 million and $2.6 million, respectively, of the increase was
attributable to the banking acquisitions. Auto securitization income increased
$5.0 million for the quarter and $4.8 million for the nine months ended
September 30, 2002 compared to prior year periods and was primarily due to the
mark-to-market on trading assets associated with auto loans sold to the
revolving conduit. The Corporation is planning a term securitization in the
fourth quarter which is expected to eliminate the volatility associated with
the trading asset. The remainder of the increase in other income in the
comparative three and nine-month periods was primarily due to increases in loan
fees and other commission and fee income.
OTHER EXPENSE
-------------
Total other expense for the three months ended September 30, 2002, amounted to
$326.6 million compared to $339.4 million for the three months ended September
30, 2001. For the comparative nine months, total other expense amounted to
$958.2 million in the current nine-month period compared with $971.9 million
in the same period a year ago.
Nonrecurring expenses for the three and nine months ended September 30, 2002
amounted to $3.9 million and consisted of transitional expenses associated with
Metavante's acquisition of PayTrust which closed on July 29, 2002. Salaries
and employee benefits expense and occupancy and equipment expense accounted for
$1.4 million and $1.7 million, respectively, of the total. As previously
reported, the Corporation expects a total of approximately $10 million ($6
million after-tax) of charges related to the PayTrust acquisition and the
balance of these expenses are expected to be incurred in the fourth quarter of
2002 and the first quarter of 2003.
Nonrecurring expenses in the third quarter and first nine months of 2001
consisted of the following:
Single charter related expenses which are included in other expenses in
the Consolidated Statements of Income amounted to $12.0 million. As
previously discussed, this initiative was completed during the second
quarter of 2001.
Included in amortization of intangibles for the three and nine months
ended September 30, 2001, is $4.7 million and $12.7 million,
respectively, 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 $3.5 million in the third quarter
of 2001 and for the nine months ended September 30, 2001 amounted to
approximately $7.3 million.
Nonrecurring costs related to Metavante's third quarter 2001 acquisition
of Brokat's North American Internet banking operations amounted to
approximately $34.2 as a result of closing locations and consolidating
technology platforms. Severance amounted to approximately $3.8 million
and facility closure costs were approximately $10.2 million with the
balance being attributable to write-offs of existing technology and
software that was replaced by Brokat's software. The majority of the
severance will be paid in 2003.
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 $322.7 million in the third quarter of 2002 compared to $297.1 million in
the third quarter of 2001, an increase of $25.6 million or 8.6%. For the
comparative nine-month periods excluding nonrecurring expenses, total other
operating expenses amounted to $954.3 million in 2002 compared to $869.7
million in 2001, an increase of $84.6 million or 9.7%.
The Corporation estimates that approximately $18.6 million of the quarter over
quarter operating expense growth and $55.9 million of the nine month
comparative operating expense growth was attributable to the purchase
acquisitions by the Banking segment and Metavante which were included in M&I's
operating expenses since their merger dates.
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 September 30, 2002 and prior four quarters were:
Efficiency Ratios
-----------------
Three Months Ended
---------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
2002 2002 2002 2001 2001
---------------------------------------------------------------------
Consolidated Corporation 60.5 % 60.9 % 61.8 % 60.7 % 61.7 %
Consolidated Corporation Excluding Metavante
Including Intangible Amortization 50.0 % 50.1 % 50.7 % 51.6 % 51.6 %
Excluding Intangible Amortization 48.3 % 49.1 % 49.9 % 50.3 % 50.3 %
Salaries and employee benefits expense amounted to $187.2 million in the third
quarter of 2002 compared to $179.5 million in the third quarter of 2001, an
increase of $7.7 million. Excluding the nonrecurring charges, operating
salaries and benefits expense increased $11.6 million or 6.7%. Operating
salaries and employee benefits expense associated with the Banking and
Metavante acquisitions was approximately $11.5 million of the increase. For the
nine months salary and employee benefits expense amounted to $552.0 million in
the current year compared to $525.5 million for the first nine months of 2001.
Excluding the nonrecurring charges, salaries and employee benefits expense
increased $40.0 million or 7.8% in the comparative nine-month periods of which
approximately $35.8 million was due to acquisitions.
For the three and nine months ended September 30, 2002, occupancy and equipment
expense amounted to $49.4 million and $143.0 million, respectively, compared
to $52.0 million and $140.8 million in the comparative three and nine-month
periods in 2001. Compared to the prior year, the decline in nonrecurring
charges in the current quarter and nine months was offset by the impact of
acquisitions.
Metavante's operating expense growth and acquisition activity accounted for the
increase in software expenses in the comparative third quarter and nine-month
periods.
The 2002 third quarter over 2001 third quarter growth in processing charges was
evenly distributed between the Banking segment and Metavante. For the nine
months ended September 30, 2002 compared to the same period in 2001, the growth
in processing was due to the Banking segment. Included in processing charges
for the nine months ended September 30, 2001, was Metavante's nonrecurring
charge of approximately $1.9 million associated with prepaid maintenance.
The increase in professional services expense, primarily legal fees, in the
three and nine month comparative periods was incurred fairly evenly across all
of the Corporation's segments.
Excluding the effect of the new accounting standard on accounting for goodwill
and intangibles, amortization expense increased $3.3 million in the third
quarter of 2002 compared to the third quarter of 2001 and increased $4.3
million for the comparative nine-month periods. Amortization of identifiable
intangibles associated with acquisitions, primarily core deposit premium
amortization, accounted for $0.8 million and $3.4 million of the increase in
amortization expense for the three and nine months ended September 30, 2002,
respectively. Accelerated amortization and valuation reserves associated with
mortgage servicing rights increased amortization expense $2.3 million in the
third quarter of 2002 compared to the third quarter of 2001 and for the
comparative nine-month periods, increased amortization expense by $1.1 million.
The carrying value of the Corporation's mortgage servicing rights was $7.5
million at September 30, 2002.
Other expense amounted to $34.5 million in the third quarter of 2002 compared
to $55.4 million in the third quarter of 2001. Included in this line item were
nonrecurring charges aggregating $0.7 million in the current quarter for the
PayTrust acquisition and $23.9 million in the prior year third quarter
associated with Metavante's acquisitions of Brokat, Derivion and Cyberbills.
Excluding these charges, other expense amounted to $33.9 million in the current
quarter compared to $31.5 million in the third quarter of last year, an
increase of $2.4 million or 7.7%. Increased operating expenses associated with
acquisitions accounted for approximately $3.0 million of the quarter over
quarter increase. For the nine months ended September 30, 2002, other expense
amounted to $106.3 million compared to $152.4 million for the nine months ended
September 30, 2001. Included in this line item were nonrecurring charges
aggregating $0.7 million in the current period for the PayTrust acquisition and
$63.1 million in the comparative prior year nine months. In addition to the
charges in the third quarter of 2001, other nonrecurring charges aggregating
approximately $39.2 million were incurred in the first and second quarters of
2001 and consisted of single charter charges of $12.0 million, lease residual
value write-downs 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 $105.6 million in the nine months ended September 30,
2002 compared to $89.3 million for the nine months ended September 30, 2001,
an increase of $16.3 million or 18.4%. Increased operating expenses associated
with acquisitions accounted for approximately $5.8 million of the increase over
the comparative nine-month periods. An increase in litigation, environmental
clean-up and other losses was approximately $4.9 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. Excluding nonrecurring items, net software and
conversion capitalization was $2.8 million in the third quarter of 2001 and in
the current quarter amounted to $4.2 million resulting in a decrease of $1.4
million in other expense in the third quarter of 2002 compared to the third
quarter of 2001. Net software and conversion capitalization, excluding
nonrecurring items, was $13.9 million in the first nine months of 2001 and for
the current year nine months amounted to $11.4 million resulting in an increase
of $2.5 million in other expense in the nine months ended September 30, 2002
compared to the same period in the prior year.
INCOME TAXES
------------
The provision for income taxes for the three months ended September 30, 2002
amounted to $60.7 million or 33.7% of pre-tax income compared to $38.8 million
or 31.8% of pre-tax income for the three months ended September 30, 2001. The
provision for income taxes for the nine months ended September 30, 2002
amounted to $174.3 million or 32.9% of pre-tax income compared to $109.3
million or 32.2% of pre-tax income for the nine months ended September 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 2001 due to the effect of the nonrecurring charges that were
previously discussed.
In the normal course of business, the Corporation and its affiliates are
routinely subject to examinations and challenges from federal and state tax
authorities regarding the amount of taxes due in connection with investments
it has made and the businesses in which it is engaged. The challenges made by
tax authorities may result in adjustments to the timing or amount of taxable
income or deductions or the allocation of income among tax jurisdictions. At
September 30, 2002, based on challenges asserted, the Corporation believes that
these challenges will be resolved without having any material effect on the
Corporation's financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Shareholders' equity was $2.72 billion at September 30, 2002 compared to $2.49
billion at December 31, 2001 and $2.59 billion at September 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 0.3 million shares of its common stock during the
third quarter of 2002 at an aggregate cost of $8.8 million and has purchased
a total of 5.1 million shares, adjusted for the two-for-one stock split, at an
aggregate cost of $159.3 million in the nine months ended September 30, 2002.
Accumulated other comprehensive income declined $62.7 million since June 30,
2002 and declined $71.0 million since December 31, 2001 primarily due to the
change in fair value of the Corporation's pay fixed derivative financial
instruments designated as cash flow hedges in the recent low interest rate
environment.
In conjunction with the merger with Mississippi Valley Bancshares, Inc. which
closed on October 1, 2002, the Corporation issued 8.25 million shares of its
Common Stock and paid $255.2 million in cash to the shareholders of Mississippi
Valley Bancshares, Inc.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in the
following tables.
Risk-Based Capital Ratios
-------------------------
($ in millions)
September 30, 2002 December 31, 2001
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,304 9.52 % $ 2,091 9.70 %
Tier 1 Capital
Minimum Requirement 968 4.00 862 4.00
-------------------------------- --------------------------------
Excess $ 1,336 5.52 % $ 1,229 5.70 %
================================ ================================
Total Capital $ 3,248 13.42 % $ 2,775 12.88 %
Total Capital
Minimum Requirement 1,936 8.00 1,724 8.00
-------------------------------- --------------------------------
Excess $ 1,312 5.42 % $ 1,051 4.88 %
================================ ================================
Risk-Adjusted Assets $ 24,200 $ 21,555
================= =================
Leverage Ratios
---------------
($ in millions)
September 30, 2002 December 31, 2001
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,304 8.19 % $ 2,091 7.93 %
Minimum Leverage
Requirement 843 - 1,406 3.00 - 5.00 791 - 1,318 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,461 - 898 5.19 - 3.19 % $ 1,300 - 773 4.93 - 2.93 %
================================ ================================
Adjusted Average
Total Assets $ 28,120 $ 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 $3.8
billion at September 30, 2002, represent a highly accessible source of
liquidity. The Corporation's portfolio of held-to-maturity investment
securities, which totaled $1.2 billion at September 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
$15.5 billion for the nine months ended September 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.
Bank notes aggregating $0.5 billion were issued during the nine months ended
September 30, 2002. In addition, the Corporation's banking subsidiaries issue
commercial paper.
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 nine months ended September 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
September 30, 2002, $38.1 million of MiNotes have been issued. Additionally,
the Corporation has a commercial paper program. At September 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 $6.6 billion at September 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 $2.2 billion at September 30, 2002. Scheduled
maturities are: $24.9 million, $8.1 million, $622.5 million and $512.0 million
for the fiscal twelve months ended September 30, 2004, 2005, 2006 and 2007,
respectively. Scheduled maturities through September 30, 2003, of $791.4
million are included in other short-term borrowings in the consolidated balance
sheet as of September 30, 2002.
At September 30, 2002, unused commitments to extend credit in the form of loans
amounted to $9.9 billion. At September 30, 2002, standby letters of credit
amounted to $895.3 million and commercial letters of credit amounted to $50.7
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 United 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 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 September 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.
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the allowance for loan and lease losses.
There have been no material changes in assumptions or estimation techniques as
compared to prior periods that impacted the determination of the current period
allowance.
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 $300.6 million at September 30, 2002 compared to $292.5 million
at June 30, 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.
For the nine months ended September 20, 2002 and 2001, the amount of software
capitalized amounted to $42.5 million and $35.1 million, respectively.
Amortization expense amounted to $25.5 million and $31.9 million for the nine
months ended September 30, 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 contracts.
Capitalization only occurs when management is satisfied that such costs are
recoverable through future operations or penalties in case of early
termination. For the nine months ended September 20, 2002 and 2001, the amount
of conversion costs capitalized amounted to $7.6 million and $11.3 million,
respectively. Amortization expense amounted to $13.2 million and $14.5 million
for the nine months ended September 30, 2002 and 2001, respectively.
Net unamortized costs were ($ in millions):
September 30,
---------------------------
2002 2001
------------ ------------
Software $ 132.9 $ 107.1
Conversions 37.7 47.5
----------- -----------
$ 170.6 $ 154.6
=========== ===========
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the amount of costs that are capitalized for
software development or conversion activities. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the periodic amortization of such costs.
Asset Sales and Securitizations
-------------------------------
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 its estimates
result in a reasonable carrying value of the retained interests.
The Corporation regularly sells automobile loans to an unconsolidated multi-
seller special purpose entity commercial paper conduit in securitization
transactions in which servicing rights and subordinated interests are retained.
The outstanding balances of automobile loans sold in these securitization
transactions were $582.2 million and $375.7 million at September 30, 2002 and
September 30, 2001, respectively. At September 30, 2002 and 2001, the carrying
amount of retained interests amounted to $44.2 million and $24.1 million,
respectively.
The Corporation has also securitized, from time to time, highly rated available
for sale investment securities and/or short-term commercial loans to a special
purpose entity that issues highly rated asset-backed commercial paper with
maturities up to 180 days which is used to finance the investment securities
and/or loans. At September 30, 2002, the Corporation consolidated the special
purpose entity.
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
------------------------------------
September 30, June 30,
2002 2002
-------------- -------------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates 1.5 % (0.5)%
Decline in rates (2.0) % (0.3)%
These results are based solely on the modeled parallel changes in market rates,
and do not reflect the earnings sensitivity that may arise from other factors
such as changes in the shape of the yield curve, the changes in spread between
key market rates, or accounting recognition for impairment of certain
intangibles. These results also 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 September 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 September 30, 2002, M&I Trust Services administered $53.0 billion in
assets and directly managed a portfolio of $12.2 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.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in the reports filed by
us under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Within the 90 days prior to the date of this report,
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and President and our
Executive Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-14 of the Exchange Act. Based on that evaluation, our Chief Executive
Officer and President and our Executive Vice President and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
There have been no significant changes in our internal controls or other
factors that could significantly affect those controls subsequent to the
conclusion of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Audit Committee of the Board of Directors of Marshall & Ilsley
Corporation has approved the following audit and non-audit services
performed or to be performed for us by our independent accountants,
Deloitte & Touche LLP:
(1) Accounting and audit-related services, including auditing our 2002
financial statements to be included in our Annual Report on Form
10-K and reviewing our quarterly financial statements to be
included in our Quarterly Reports on Form 10-Q,
(2) Tax consulting and tax compliance services,
(3) Assistance with due diligence and acquisition planning,
(4) Assistance in the registration and issuance of securities,
including issuing consents and providing comfort letters,
(5) Assistance and consultation regarding application of accounting
principles, internal controls and securitizations,
(6) Other audits,
(7) Conducting additional or more comprehensive SAS 70 reviews of
internal controls over our data processing operations, and
(8) Financial planning services for executive officers, including tax
planning and preparation services, not to exceed $15,000 per
executive per year.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A.Exhibits:
------------
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
Exhibit 99.1 - Certification of Chief Executive Officer pursuant
to 18 U.S.C Section 1350.
Exhibit 99.2 - Certification of Chief Financial Officer pursuant
to 18 U.S.C Section 1350.
B. Reports on Form 8-K:
-----------------------
On August 13, 2002, the Corporation reported Items 7 and 9 in a Current
Report on Form 8-K relating to the certification of its Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002 pursuant to 18 U.S.C.
Section 1350.
On August 30, 2002 the Corporation reported Items 5 and 7 in Current
Reports on Form 8-K in announcing the mailing of election forms and
letters of transmittal to shareholders of Mississippi Valley Bancshares,
Inc. in connection with the pending merger between Mississippi Valley
Bancshares, Inc. and the Corporation.
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
November 13, 2002
CERTIFICATION
-------------
I, Dennis J. Kuester, Chief Executive Officer and President of Marshall &
Ilsley Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marshall &
Ilsley Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Dennis J. Kuester
____________________________________
Dennis J. Kuester
Chief Executive Officer and President
CERTIFICATION
-------------
I, Mark F. Furlong, Executive Vice President, Chief Financial Officer and
Secretary of Marshall & Ilsley Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marshall &
Ilsley Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
Mark F. Furlong
____________________________________
Mark F. Furlong
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Description of 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
(12) Computation of Ratio of Earnings to Fixed Charges
(99.1) Certification of Chief Executive Officer pursuant to
18 U.S.C Section 1350.
(99.2) Certification of Chief Financial Officer pursuant to
18 U.S.C Section 1350.