===============================================================================
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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-15403
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
770 North Water Street
Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-7801
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class October 31, 2001
----- ----------------
Common Stock, $1.00 Par Value 105,545,370
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,
2001 2000 2000
--------------- --------------- ---------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 788,554 $ 760,103 $ 644,425
Federal funds sold and security resale agreements 33,619 54,443 66,002
Money market funds 656,396 50,147 176,793
--------------- --------------- ---------------
Total cash and cash equivalents 1,478,569 864,693 887,220
Investment securities:
Trading securities, at market value 11,180 15,317 21,769
Short-term investments, at cost
which approximates market 24,806 43,528 26,403
Available for sale at market value 3,863,068 4,735,722 4,242,296
Held to maturity at amortized cost, market
value $1,101,318 ($1,124,756 December 31,
and $1,121,228 September 30, 2000) 1,060,015 1,112,545 1,128,203
--------------- --------------- ---------------
Total investment securities 4,959,069 5,907,112 5,418,671
Loans and leases 18,997,703 17,587,087 17,305,892
Less: Allowance for loan and lease losses 264,736 235,115 232,690
--------------- --------------- ---------------
Net loans and leases 18,732,967 17,351,972 17,073,202
Premises and equipment 400,068 392,995 379,277
Goodwill 512,252 295,784 295,113
Other intangibles 61,324 49,500 50,385
Accrued interest and other assets 1,182,397 1,215,683 1,193,311
--------------- --------------- ---------------
Total Assets $ 27,326,646 $ 26,077,739 $ 25,297,179
=============== =============== ===============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 3,357,337 $ 3,129,834 $ 2,787,256
Interest bearing 13,320,289 16,118,793 15,302,144
--------------- --------------- ---------------
Total deposits 16,677,626 19,248,627 18,089,400
Funds purchased and security repurchase agreements 1,237,787 1,092,723 1,756,392
Other short-term borrowings 4,137,330 1,722,008 1,520,610
Accrued expenses and other liabilities 927,549 850,916 745,736
Long-term borrowings 1,760,521 921,276 981,427
--------------- --------------- ---------------
Total liabilities 24,740,813 23,835,550 23,093,565
Shareholders' equity:
---------------------
Series A convertible preferred stock,
$1.00 par value; 336,370 shares issued 336 336 336
Common stock, $1.00 par value; 117,301,755
shares issued (112,757,546 December 31
and September 30, 2000) 117,302 112,757 112,757
Additional paid-in capital 696,426 452,212 453,710
Retained earnings 2,254,916 2,117,759 2,062,001
Accumulated other comprehensive income,
net of related taxes 53,453 38,127 1,812
Less: Treasury common stock, at cost:
10,795,640 shares (9,910,839 December 31,
and 8,773,349 September 30, 2000) 515,713 458,472 406,768
Deferred compensation 20,887 20,530 20,234
--------------- --------------- ---------------
Total shareholders' equity 2,585,833 2,242,189 2,203,614
--------------- --------------- ---------------
Total Liabilities and Shareholders' Equity $ 27,326,646 $ 26,077,739 $ 25,297,179
=============== =============== ===============
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended
September 30,
---------------------------
2001 2000
------------- -------------
Interest income
---------------
Loans and leases $ 339,221 $ 356,670
Investment securities:
Taxable 64,006 65,071
Exempt from federal income taxes 15,507 16,213
Trading securities 137 312
Short-term investments 4,380 4,999
------------- -------------
Total interest income 423,251 443,265
Interest expense
----------------
Deposits 129,783 201,869
Short-term borrowings 46,295 55,425
Long-term borrowings 28,695 21,906
------------- -------------
Total interest expense 204,773 279,200
Net interest income 218,478 164,065
Provision for loan and lease losses 12,206 5,938
------------- -------------
Net interest income after provision for loan and lease losses 206,272 158,127
Other income
------------
Data processing services:
e-Finance solutions 32,629 36,938
Financial technology solutions 111,723 105,708
Other 37 2,687
------------- -------------
Total data processing services 144,389 145,333
Item processing 11,742 13,062
Trust services 30,144 29,859
Service charges on deposits 21,151 18,644
Mortgage banking 10,647 5,349
Capital Markets revenue 762 (157)
Net investment securities (losses)/gains 24 (50,205)
Life insurance revenue 6,844 6,934
Other 29,960 28,536
------------- -------------
Total other income 255,663 197,355
Other expense
-------------
Salaries and employee benefits 179,547 162,245
Net occupancy 22,779 13,604
Equipment 29,177 28,469
Software expenses 9,604 7,653
Processing charges 9,271 8,350
Supplies and printing 4,916 4,922
Professional services 7,104 8,410
Shipping and handling 11,195 10,680
Amortization of intangibles 10,802 8,987
Single charter/IPO/ARM loan sale -- 9,306
Other 55,382 18,222
------------- -------------
Total other expense 339,777 280,848
Income before income taxes 122,158 74,634
Provision for income taxes 38,843 23,025
------------- -------------
Net income $ 83,315 $ 51,609
============= =============
Net income per common share
Basic $ 0.78 $ 0.49
Diluted 0.75 0.47
Dividends paid per common share $ 0.290 $ 0.265
Weighted average common shares outstanding:
Basic 105,964 103,904
Diluted 110,916 108,768
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Nine Months Ended
September 30,
---------------------------
2001 2000
------------- -------------
Interest income
---------------
Loans and leases $ 1,034,889 $ 1,027,833
Investment securities:
Taxable 211,969 199,186
Exempt from federal income taxes 46,919 49,183
Trading securities 806 1,323
Short-term investments 12,549 12,954
------------- -------------
Total interest income 1,307,132 1,290,479
Interest expense
----------------
Deposits 472,920 560,053
Short-term borrowings 149,687 173,044
Long-term borrowings 79,034 59,141
------------- -------------
Total interest expense 701,641 792,238
Net interest income 605,491 498,241
Provision for loan and lease losses 34,006 21,373
------------- -------------
Net interest income after provision for loan and lease losses 571,485 476,868
Other income
------------
Data processing services:
e-Finance solutions 86,799 78,063
Financial technology solutions 324,761 312,289
Other 3,965 12,718
------------- -------------
Total data processing services 415,525 403,070
Item processing 36,247 38,175
Trust services 90,744 87,634
Service charges on deposits 62,424 55,707
Mortgage banking 30,747 13,069
Capital Markets revenue 10,256 17,111
Net investment securities losses (16,275) (48,924)
Life insurance revenue 20,069 20,966
Other 90,764 97,396
------------- -------------
Total other income 740,501 684,204
Other expense
-------------
Salaries and employee benefits 525,536 478,424
Net occupancy 54,005 40,609
Equipment 86,778 83,641
Software expenses 26,898 21,551
Processing charges 30,059 23,345
Supplies and printing 15,309 14,908
Professional services 20,906 25,571
Shipping and handling 33,438 31,707
Amortization of intangibles 27,808 23,850
Single charter/IPO/ARM loan sale 11,952 9,306
Other 140,420 62,914
------------- -------------
Total other expense 973,109 815,826
Income before income taxes and cumulative effect
of changes in accounting principles 338,877 345,246
Provision for income taxes 109,277 112,175
------------- -------------
Income before cumulative effect of changes
in accounting principles 229,600 233,071
Cumulative effect of changes in accounting
principles, net of income taxes (436) (2,279)
------------- -------------
Net income $ 229,164 $ 230,792
============= =============
Net income per common share
Basic:
Income before cumulative effect of changes
in accounting principles $ 2.17 $ 2.21
Cumulative effect of changes in accounting
principles, net of income taxes -- (0.02)
------------- -------------
Net income $ 2.17 2.19
============= =============
Diluted:
Income before cumulative effect of changes
in accounting principles $ 2.11 $ 2.14
Cumulative effect of changes in accounting
principles, net of income taxes -- (0.02)
------------- -------------
Net income $ 2.11 $ 2.12
============= =============
Dividends paid per common share $ 0.845 $ 0.770
Weighted average common shares outstanding:
Basic 103,914 104,151
Diluted 108,816 109,028
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Nine Months Ended
September 30,
---------------------------
2001 2000
------------- -------------
Net Cash Provided by Operating Activities $ 419,525 $ 837,532
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 159,145 1,526,794
Proceeds from maturities of securities available for sale 1,375,356 509,080
Proceeds from maturities of securities held to maturity 51,436 42,044
Purchases of securities available for sale (236,837) (1,910,983)
Purchases of securities held to maturity (55) (217)
Net increase in loans (570,052) (1,317,170)
Purchases of assets to be leased (407,836) (439,748)
Principal payments on lease receivables 545,640 266,073
Fixed asset purchases, net (34,216) (51,308)
Acquisitions and investments in joint ventures (46,903) (265)
Other 15,661 8,205
------------- -------------
Net cash provided/(used) in investing activities 851,339 (1,367,495)
Cash Flows From Financing Activities:
Net increase/(decrease) in deposits (3,613,551) 1,664,451
Proceeds from issuance of commercial paper 2,226,551 2,606,476
Payments for maturity of commercial paper (2,279,042) (2,414,696)
Net increase /(decrease) in other short-term borrowings 1,859,707 (1,366,771)
Proceeds from issuance of long-term debt 1,486,731 534,663
Payments of long-term debt (168,263) (308,582)
Dividends paid (91,316) (82,889)
Purchases of treasury stock (101,193) (98,304)
Other 23,388 2,979
------------- -------------
Net cash provided/(used) by financing activities (656,988) 537,327
Net increase in cash and cash equivalents 613,876 7,364
Cash and cash equivalents, beginning of year 864,693 879,856
------------- -------------
Cash and cash equivalents, end of period $ 1,478,569 $ 887,220
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 744,645 $ 726,733
Income taxes 108,603 104,217
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
September 30, 2001 & 2000 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I" or
"Corporation") 2000 Annual Report on Form 10-K. The unaudited financial
information included in this report reflects all adjustments (consisting
only of normal recurring accruals) which are necessary for a fair
statement of the financial position and results of operations as of and
for the three and nine months ended September 30, 2001 and 2000. The
results of operations for the three and nine months ended September 30,
2001 and 2000 are not necessarily indicative of results to be expected
for the entire year. Certain amounts in the 2000 consolidated financial
statements and analyses have been reclassified to conform with the 2001
presentation.
2. Change in Method of Accounting
During the fourth quarter of 2000, the Corporation adopted the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 -
REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB 101). SAB 101 provides
guidance on a variety of revenue recognition matters. The cumulative
effect of change in accounting principles was retroactively recorded as
of January 1, 2000. The financial position and results of operations
as of and for the three and nine months ended September 30, 2000 have
been restated to reflect application of the guidance contained in SAB
101. See Note 2 of the Notes to Consolidated Financial Statements of
Item 8 of the Corporation's 2000 Annual Report on Form 10-K.
On January 1, 2001, the Corporation adopted the Financial Accounting
Standards Board SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES. SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The Statement requires that changes in the derivatives fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. The statement requires that a company must
formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The effects of adopting
SFAS 133 are as follows:
Other
Consolidated Comprehensive
Income Income
Statement (Equity)
-------------- --------------
Fair value hedges $ (628) $ --
Cash flow hedges (43) (15,665)
-------------- --------------
(671) (15,665)
Income tax benefit 235 5,483
-------------- --------------
Cumulative effect of change
in accounting principles $ (436) $ (10,182)
============== ==============
See Note 10 for additional information regarding the Corporation's use
of derivative financial instruments.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
3. New Accounting Pronouncements
In September, 2000, the FASB issued SFAS 140, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
SFAS 140 replaces SFAS 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. It revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but
it carries over most of SFAS 125's provisions without reconsideration.
SFAS 140 is generally effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31,
2001. The disclosure requirements are effective for financial
statements for fiscal years ending after December 15, 2000. The
adoption of SFAS 140 did not materially impact the Corporation's present
securitization activities.
In June, 2001, the FASB issued SFAS 141, BUSINESS COMBINATIONS. SFAS
141 supercedes APB Opinion No. 16, BUSINESS COMBINATIONS, and SFAS 38,
ACCOUNTING FOR PREACQUISTION CONTINGENCIES OF PURCHASED ENTERPRISES.
All business combinations in the scope of this Statement are to be
accounted for using the purchase method. This Statement carries forward
without reconsideration portions of APB Opinion No. 16 that provide
guidance related to the application of the purchase method. The
provisions of this Statement shall apply to all business combinations
initiated after June 30, 2001 and the provisions of this Statement also
shall apply to all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later.
In June 2001, the FASB also issued SFAS 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. It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the
financial statements. The provisions of this Statement are required to
be applied starting with fiscal years beginning after December 15, 2001.
Goodwill and intangible assets acquired after June 30, 2001, will be
subject immediately to the provisions of this Statement.
With respect to the acquisitions of Derivion and Cyberbills, the
provisions of SFAS 142 will be applicable beginning January 1, 2002.
The provisions of both SFAS 141 and SFAS 142 will apply to the
Corporation's merger with National City Bancorporation which was
completed on August 1, 2001, the Brokat acquisition completed on
September 21, 2001 and the acquisition of the Arizona branches. For the
three months ended September 30, 2001 and 2000, the estimated after-tax
goodwill amortization which would cease under the provisions of SFAS 142
was approximately $4.0 million and $4.1 million, respectively, and for
the nine months ended September 30, 2001 and 2000, was approximately
$11.3 million and $11.1 million, respectively. The Corporation is
assessing whether SFAS 142 will result in a reduction of amortization
of identifiable intangibles and has not yet determined how the
impairment provisions of the standard will affect its financial
statements.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
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, 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 $ 82,200 105,964 $ 0.78
===========
Effect of Dilutive Securities
Convertible Preferred Stock 1,115 3,844
Stock Options and Restricted Stock Plans -- 1,108
------------ -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 83,315 110,916 $ 0.75
===========
Three Months Ended September 30, 2000
----------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------
Net Income $ 51,609
Convertible Preferred Dividends (1,019)
------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 50,590 103,904 $ 0.49
===========
Effect of Dilutive Securities
Convertible Preferred Stock 1,019 3,844
Stock Options and Restricted Stock Plans -- 1,020
------------ -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 51,609 108,768 $ 0.47
===========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
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 $ 225,916 103,914 $ 2.17
===========
Effect of Dilutive Securities
Convertible Preferred Stock 3,248 3,844
Stock Options and Restricted Stock Plans -- 1,058
------------ -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 229,164 108,816 $ 2.11
===========
Nine Months Ended September 30, 2000
----------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------
Net Income $ 230,792
Convertible Preferred Dividends (2,960)
------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 227,832 104,151 $ 2.19
===========
Effect of Dilutive Securities
Convertible Preferred Stock 2,960 3,844
Stock Options and Restricted Stock Plans -- 1,033
------------ -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 230,792 109,028 $ 2.12
===========
5. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
September 30, December 31, September 30,
2001 2000 2000
-----------------------------------------------
Investment securities available for sale:
U.S. treasury and government agencies $ 2,681,766 $ 3,342,952 $ 3,411,285
State and political subdivisions 182,422 151,041 149,706
Mortgage backed securities 225,366 342,171 289,589
Other 773,514 899,558 391,716
--------------- --------------- ---------------
Total $ 3,863,068 $ 4,735,722 $ 4,242,296
=============== =============== ===============
Investment securities held to maturity:
State and political subdivisions $ 1,056,425 $ 1,107,476 $ 1,123,057
Other 3,590 5,069 5,146
--------------- --------------- ---------------
Total $ 1,060,015 $ 1,112,545 $ 1,128,203
=============== =============== ===============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
6. The Corporation's loan and lease portfolio consists of the following
($000's):
September 30, December 31, September 30,
2001 2000 2000
-----------------------------------------------
Commercial, financial & agricultural $ 5,925,830 $ 5,289,537 $ 5,024,258
Real estate:
Construction 610,956 619,281 582,853
Residential mortgage 5,233,197 5,049,557 5,204,020
Commercial mortgage 5,013,554 4,359,812 4,269,435
--------------- --------------- ---------------
Total real estate 10,857,707 10,028,650 10,056,308
Personal 1,210,485 1,174,248 1,183,369
Lease financing 991,766 1,094,652 1,041,957
Cash flow hedging instruments at fair value 11,915 -- --
--------------- --------------- ---------------
Total $ 18,997,703 $ 17,587,087 $ 17,305,892
=============== =============== ===============
7. Sale of Receivables
During the third quarter of 2001, $113.4 million of automobile loans
were sold in securitization transactions and gains of $2.1 million were
recognized. Other income associated with auto securitizations amounted
to $0.6 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) 30.1
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, 2001, securitized automobile loans and other automobile
loans managed together with them along with delinquency and credit loss
information consisted of the following:
Total
Securitized Portfolio Managed
-----------------------------------------------
Loan balances $ 375,622 $ 260,801 $ 636,423
Principal amounts of loans
60 days or more past due 400 663 1,063
Net credit losses 353 818 1,171
8. The Corporation's deposit liabilities consists of the following ($000's)
September 30, December 31, September 30,
2001 2000 2000
-----------------------------------------------
Noninterest bearing demand $ 3,357,337 $ 3,129,834 $ 2,787,256
Savings and NOW 7,514,748 7,486,094 7,148,368
CD's $100,000 and over 1,738,481 2,663,050 2,636,210
Other time deposits 3,281,307 3,532,310 3,395,737
Foreign deposits 786,551 2,437,339 2,121,829
Fair value hedging instruments (798) -- --
--------------- --------------- ---------------
$ 16,677,626 $ 19,248,627 $ 18,089,400
=============== =============== ===============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
9. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
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 (11,470)
--------------
Total comprehensive income $ 71,845
==============
Three Months Ended September 30, 2000
----------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
----------------------------------------------
Net income $ 51,609
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 133,778 $ (47,358) 86,420
Reclassification for securities
transactions included in net income (52,864) 18,502 (34,362)
--------------- -------------- --------------
Unrealized gains (losses) 80,914 (28,856) 52,058
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period N/A N/A N/A
Reclassification adjustments for
hedging activities included in net income N/A N/A N/A
--------------- -------------- --------------
Net gains (losses) $ N/A $ N/A N/A
Other comprehensive income 52,058
--------------
Total comprehensive income $ 103,667
==============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
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 15,326
--------------
Total comprehensive income $ 244,490
==============
Nine Months Ended September 30, 2000
----------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
----------------------------------------------
Net income $ 230,792
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 93,434 $ (33,231) 60,203
Reclassification for securities
transactions included in net income (39,449) 13,807 (25,642)
--------------- -------------- --------------
Unrealized gains (losses) 53,985 (19,424) 34,561
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period N/A N/A N/A
Reclassification adjustments for
hedging activities included in net income N/A N/A N/A
--------------- -------------- --------------
Net gains (losses) $ N/A $ N/A N/A
--------------- -------------- --------------
Other comprehensive income 34,561
--------------
Total comprehensive income $ 265,353
==============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
10. Derivative Financial Instruments and Hedging Activities
Trading Instruments
The Corporation enters into interest rate swaps as part of its trading
activities which enable its customers to manage their exposures to
interest rate risk. The Corporation's market risk from unfavorable
movements in interest rates is generally minimized by concurrently
entering into offsetting positions with nearly identical notional
values, terms and indices.
At September 30, 2001, interest rate swaps designated as trading
consisted of $311.5 million in notional amount of receive fixed/pay
floating with an aggregate positive fair value of $2.6 million and
$297.2 million in notional amount of pay fixed/receive floating with an
aggregate negative fair value of $3.4 million.
Interest rate swaps designated as trading are recorded at fair value.
Gains and losses arising from changes in fair value are recorded in
other income.
Fair Value Hedges
The following table presents information with respect to the
Corporation's fair value hedges.
Fair Value Hedges
September 30, 2001
Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
-----------------------------------------------------------------------------
Callable CDs Receive Fixed Swap $ 162.5 $ 0.8 7.0
Medium Term Notes Receive Fixed Swap 190.0 5.3 4.9
Long-term Borrowings Receive Fixed Swap 200.0 25.0 25.2
----------- -----------
$ 552.5 $ 31.1
=========== ===========
The following table presents the Corporation's fair value hedges' impact
to net income.
Fair Value Hedges Three Months Ended September 30, 2001
Impact to Net Interest Income ($000's)
--------------------------------------------------------
Components
Hedged Excluded from Net
Item Ineffectiveness Ineffectiveness Settlement Total
-----------------------------------------------------------------------------
Callable CDs $ 155 $ -- $ 1,456 $ 1,611
Medium Term Notes -- -- 315 315
Long-term Borrowings -- -- 2,152 2,152
--------------- --------------- ----------- -----------
$ 155 $ -- $ 3,923 $ 4,078
=============== =============== =========== ===========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
Cash Flow Hedges
The following table summarizes the Corporation's cash flow hedges at
September 30, 2001.
Cash Flow Hedges
September 30, 2001
Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
-----------------------------------------------------------------------------
Variable Rate Loans Receive Fixed Swap $ 391.0 $ 11.7 1.6
Commercial Paper Pay Fixed Swap 200.0 (25.6) 5.2
Fed Funds Purchased Pay Fixed Swap 500.0 (21.9) 2.3
FHLB Advances Pay Fixed Swap 310.0 (10.1) 4.9
Variable Rate Loans Interest Rate Floor 25.0 0.2 0.2
----------- -----------
$ 1,426.0 $ (45.7)
=========== ===========
The following table presents the Corporation's cash flow hedges' impact
to net income.
Cash Flow Hedges Three Months Ended September 30, 2001
Impact to Net Interest Income ($000's) Estimated
-------------------------------------------------------- Reclass From
Components Reclass AOCI in Next
Hedged Excluded from From 12 Months
Item Ineffectiveness Ineffectiveness AOCI Total ($000's)
-------------------------------------------------------------------------------------------
Variable Rate Loans $ -- $ -- $ 1,666 $ 1,666 $ 9,363
Commercial Paper (1,123) -- (1,866) (2,989) (9,281)
Fed Funds Purchased -- -- (2,296) (2,296) (14,096)
FHLB Advances -- -- (706) (706) (7,705)
Variable Rate Loans (37) -- 89 52 156
--------------- --------------- ----------- ----------- -------------
$ (1,160)$ -- $ (3,113)$ (4,273)$ (21,563)
=============== =============== =========== =========== =============
For the three and nine months ended September 30, 2000, the effect on
net interest income resulting from derivative financial instruments was
a negative $1.3 million and a negative $1.8 million, respectively.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
11. Acquisitions
The Corporation completed the following acquisitions during the third
quarter of 2001:
On September 21, 2001, the Corporation, through its Metavante
subsidiary, completed the purchase of substantially all the
assets of the Atlanta-based North American Internet Banking
division of Brokat Technologies. The Brokat Financial
Applications provide technology for consumer, business and
corporate e-banking. Initial goodwill, subject to the
completion of appraisals and valuations of the assets acquired
and liabilities assumed, amounted to $19.7 million.
On August 1, 2001 the Corporation completed it merger with
National City Bancorporation, a Minneapolis, Minnesota-based
bank holding company. National City Bancorporation had assets
of $1.1 billion and liabilities of $0.8 billion. There were
4,544,209 new shares issued in the acquisition. Initial
goodwill, subject to the completion of appraisals and valuations
of the assets acquired and liabilities assumed, amounted to
$107.9 million.
During the third quarter the Corporation completed the
acquisition of twelve branches in Arizona. Total assets
acquired amounted to $537.9 million of which loans acquired were
$344.8 million. Total deposits acquired were $455.2 million.
Initial goodwill, subject to the completion of appraisals and
valuations of the assets acquired and liabilities assumed,
recorded in this transaction amounted to $50.0 million.
12. 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.
Prior period segment information for the Banking segment and Data
Services segment have been restated for the transfer of certain assets
and liabilities of the Data Services Division, which represent the
payment services or item processing line of business.
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 10K, 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, 2001 & 2000 (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, Nevada and Florida, one bank headquartered in
Minnesota, one federally chartered thrift headquartered in Nevada, an
asset-based lending subsidiary and an operational support subsidiary
which includes item processing. Banking consists of accepting
deposits, making loans and providing other services such as cash
management, foreign exchange and correspondent banking to a variety of
commercial and retail customers. Products and services are provided
through a variety of delivery channels including traditional branches,
supermarket branches, telephone centers, ATMs and the internet.
Intrasegment revenues, expenses and assets have been eliminated in the
following information ($ in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenue:
Net interest income $ 218.8 $ 166.0 $ 607.1 $ 504.2
Other revenues:
Unaffiliated customers 71.0 62.6 211.7 197.0
Affiliated customers 9.0 5.4 23.8 14.5
------------- ------------- ------------- -------------
Total revenues 298.8 234.0 842.6 715.7
Expenses:
Intersegment charges 19.0 16.2 54.9 43.2
Other operating expense 119.7 103.8 348.8 314.5
------------- ------------- ------------- -------------
Total expenses 138.7 120.0 403.7 357.7
Provision for loan
and lease losses 11.9 5.8 33.3 21.1
Income tax expense 48.1 33.3 131.3 105.3
------------- ------------- ------------- -------------
Operating income $ 100.1 $ 74.9 $ 274.3 $ 231.6
============= ============= ============= =============
Identifiable assets $ 26,255.0 $ 24,481.4 $ 26,255.0 $ 24,481.4
============= ============= ============= =============
Return on tangible equity 21.3 % 17.9 % 19.9 % 19.1 %
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
The following tables present revenue and operating income by line of
business for Banking. This information is based on the Corporation's
product profitability measurement system and is an aggregation of the
revenues and expenses associated with the products and services within
each line of business. Net interest income is derived from the
Corporation's internal funds transfer pricing system, expenses are
allocated based on available transaction volumes and the provision for
loan and lease losses is allocated based on credit risk. Equity is
assigned to products and services on a basis that considers market,
operational and reputation risk. ($ in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Banking revenues:
Commercial Banking $ 124.0 $ 100.1 $ 338.9 $ 300.3
Retail Banking 110.0 93.3 328.4 294.3
Treasury and Other 64.8 40.6 175.3 121.1
------------- ------------- ------------- -------------
Total banking revenues $ 298.8 $ 234.0 $ 842.6 $ 715.7
============= ============= ============= =============
Percent of total
banking revenue:
Commercial Banking 41.5 % 42.8 % 40.2 % 42.0 %
Retail Banking 36.8 39.9 39.0 41.1
Treasury and Other 21.7 17.3 20.8 16.9
------------- ------------- ------------- -------------
Total banking revenues 100.0 % 100.0 % 100.0 % 100.0 %
============= ============= ============= =============
Operating banking income:
Commercial Banking $ 52.8 $ 40.7 $ 148.5 $ 123.7
Retail Banking 20.8 22.9 65.1 76.7
Treasury and Other 26.5 11.3 60.7 31.2
------------- ------------- ------------- -------------
Total operating banking income $ 100.1 $ 74.9 $ 274.3 $ 231.6
============= ============= ============= =============
Percent of total operating
banking income:
Commercial Banking 52.7 % 54.3 % 54.2 % 53.4 %
Retail Banking 20.7 30.6 23.7 33.1
Treasury and Other 26.6 15.1 22.1 13.5
------------- ------------- ------------- -------------
Total operating banking income 100.0 % 100.0 % 100.0 % 100.0 %
============= ============= ============= =============
Banking return on
tangible equity:
Commercial Banking 23.6 % 20.7 % 23.5 % 21.8 %
Retail Banking 15.1 18.1 15.7 20.1
------------- ------------- ------------- -------------
Total banking return
on tangible equity 21.3 % 17.9 % 19.9 % 19.1 %
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
Data Services
-------------
Data Services includes 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 in the
following information and prior periods have been restated to exclude
the item processing business. ($ in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenue:
Net interest expense $ (0.9) $ (0.9) $ (2.5) $ (3.3)
Other revenues:
Unaffiliated customers 144.4 144.4 413.3 400.6
Affiliated customers 14.8 16.3 46.5 46.4
------------- ------------- ------------- -------------
Total revenues 158.3 159.8 457.3 443.7
Expenses:
Intersegment charges 4.7 2.2 12.9 4.3
Other operating expense 131.8 125.8 388.0 369.4
------------- ------------- ------------- -------------
Total expenses 136.5 128.0 400.9 373.7
Income tax expense 8.9 13.0 23.3 29.0
------------- ------------- ------------- -------------
Operating income $ 12.9 $ 18.8 $ 33.1 $ 41.0
============= ============= ============= =============
Identifiable assets $ 678.4 $ 597.8 $ 678.4 $ 597.8
============= ============= ============= =============
Return on tangible equity 27.7 % 39.1 % 20.8 % 29.9 %
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
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 and Arizona. Capital Markets Group provide venture capital and
advisory services. Intrasegment revenues, expenses and assets for the
entities that comprise Trust Services and Capital Markets Group have
been eliminated in the following information. ($ in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenue:
Net interest income $ 6.7 $ 5.2 $ 19.2 $ 15.6
Other revenues:
Unaffiliated customers 39.1 38.7 129.9 132.8
Affiliated customers 5.4 3.6 15.1 10.7
------------- ------------- ------------- -------------
Total revenues 51.2 47.5 164.2 159.1
Expenses:
Intersegment charges 7.2 6.8 21.7 21.9
Other operating expense 26.7 26.5 82.9 79.1
------------- ------------- ------------- -------------
Total expenses 33.9 33.3 104.6 101.0
Provision for loan
and lease losses 0.3 0.1 0.7 0.2
Income tax expense 6.8 5.5 23.6 23.0
------------- ------------- ------------- -------------
Operating income $ 10.2 $ 8.6 $ 35.3 $ 34.9
============= ============= ============= =============
Identifiable assets $ 726.4 $ 940.3 $ 726.4 $ 940.3
============= ============= ============= =============
Return on tangible equity 15.6 % 15.1 % 19.1 % 21.1 %
============= ============= ============= =============
Total Revenues by type in All Others consist of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
All Others Revenues:
Trust Services $ 29.7 $ 30.4 $ 91.0 $ 89.5
Residential Mortgage Banking 10.1 6.7 29.2 19.6
Capital Markets 1.3 0.4 12.2 19.0
Others 10.1 10.0 31.8 31.0
------------- ------------- ------------- -------------
Total All Others revenues $ 51.2 $ 47.5 $ 164.2 $ 159.1
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2001 & 2000 (Unaudited)
Segment information reconciled to the Consolidated Financial Statements
is as follows ($ in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
Banking $ 298.8 $ 234.0 $ 842.6 $ 715.7
Data Services 158.3 159.8 457.3 443.7
All Others 51.2 47.5 164.2 159.1
Corporate overhead (4.6) (5.0) (15.8) (14.3)
Nonrecurring securities losses 0.0 (50.1) (16.1) (50.1)
Intersegment eliminations (29.6) (24.8) (86.2) (71.6)
------------- ------------- ------------- -------------
Consolidated revenues $ 474.1 $ 361.4 $ 1,346.0 $ 1,182.5
============= ============= ============= =============
Expenses:
Banking $ 138.7 $ 120.0 $ 403.7 $ 357.7
Data Services 136.5 128.0 400.9 373.7
All Others 33.9 33.3 104.6 101.0
Corporate overhead 22.2 15.1 60.3 45.7
Nonrecurring 38.0 9.3 89.8 9.3
Intersegment eliminations (29.6) (24.8) (86.2) (71.6)
------------- ------------- ------------- -------------
Consolidated expenses $ 339.7 $ 280.9 $ 973.1 $ 815.8
============= ============= ============= =============
Net income (loss):
Operating income:
Banking $ 100.1 $ 74.9 $ 274.3 $ 231.6
Data Services 12.9 18.8 33.1 41.0
All Others 10.2 8.6 35.3 34.9
Corporate overhead (16.8) (11.9) (47.2) (35.5)
Nonrecurring (23.0) (38.8) (66.3) (41.1)
------------- ------------- ------------- -------------
Consolidated net income $ 83.4 $ 51.6 $ 229.2 $ 230.9
============= ============= ============= =============
Assets:
Banking $ 26,255.0 $ 24,481.4 $ 26,255.0 $ 24,481.4
Data Services 678.4 597.8 678.4 597.8
All Others 726.4 940.3 726.4 940.3
Corporate overhead 609.2 391.9 609.2 391.9
Intersegment eliminations (942.4) (1,114.2) (942.4) (1,114.2)
------------- ------------- ------------- -------------
Consolidated assets $ 27,326.6 $ 25,297.2 $ 27,326.6 $ 25,297.2
============= ============= ============= =============
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended
September 30,
-----------------------------
2001 2000
------------- -------------
Assets
------
Cash and due from banks $ 680,451 $ 605,934
Investment securities:
Trading securities 13,910 26,255
Short-term investments 497,709 307,222
Other investment securities:
Taxable 3,753,722 3,875,469
Tax-exempt 1,268,253 1,323,791
------------- -------------
Total investment securities 5,533,594 5,532,737
Total loans and leases 18,338,194 17,302,910
Less: Allowance for loan and lease losses 259,083 236,043
------------- -------------
Net loans and leases 18,079,111 17,066,867
Premises and equipment, net 396,422 376,525
Accrued interest and other assets 1,721,717 1,488,725
------------- -------------
Total Assets $ 26,411,295 $ 25,070,788
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 2,940,571 $ 2,638,611
Interest bearing 14,046,651 14,946,173
------------- -------------
Total deposits 16,987,222 17,584,784
Funds purchased and security repurchase agreements 2,100,279 2,107,345
Other short-term borrowings 1,816,788 1,263,623
Long-term borrowings 2,079,704 1,235,052
Accrued expenses and other liabilities 877,323 708,204
------------- -------------
Total liabilities 23,861,316 22,899,008
Shareholders' equity 2,549,979 2,171,780
------------- -------------
Total Liabilities and Shareholders' Equity $ 26,411,295 $ 25,070,788
============= =============
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Nine Months Ended
September 30,
-----------------------------
2001 2000
------------- -------------
Assets
Cash and due from banks $ 632,168 $ 616,892
Investment securities:
Trading securities 24,642 35,527
Short-term investments 406,882 273,928
Other investment securities:
Taxable 4,110,023 4,008,427
Tax-exempt 1,276,259 1,332,971
------------- -------------
Total investment securities 5,817,806 5,650,853
Total loans and leases 17,944,039 17,033,536
Less: Allowance for loan and lease losses 247,376 232,978
------------- -------------
Net loans and leases 17,696,663 16,800,558
Premises and equipment, net 389,317 373,589
Accrued interest and other assets 1,609,602 1,461,475
------------- -------------
Total Assets $ 26,145,556 $ 24,903,367
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 2,776,397 $ 2,622,238
Interest bearing 14,509,362 14,648,660
------------- -------------
Total deposits 17,285,759 17,270,898
Funds purchased and security repurchase agreements 2,120,859 2,239,946
Other short-term borrowings 1,722,836 1,449,783
Long-term borrowings 1,797,883 1,185,304
Accrued expenses and other liabilities 826,055 641,105
------------- -------------
Total liabilities 23,753,392 22,787,036
Shareholders' equity 2,392,164 2,116,331
------------- -------------
Total Liabilities and Shareholders' Equity $ 26,145,556 $ 24,903,367
============= =============
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 and 2000
----------------------------------------------
Net income for the third quarter of 2001 amounted to $83.3 million compared
to $51.6 million for the same period in the prior year. Basic and diluted
earnings per share were $.78 and $.75 respectively for the three months ended
September 30, 2001, compared with $.49 and $.47 respectively for the three
months ended September 30, 2000. The return on average assets and average
equity were 1.25% and 12.96% for the quarter ended September 30, 2001 and
0.82% and 9.45% for the quarter ended September 30, 2000.
Net income for the current quarter includes certain losses and expenses
incurred in connection with the announced acquisitions at the Corporation's
Metavante subsidiary. Net income for the third quarter of 2000 includes
expenses of the withdrawn IPO of Metavante, expenses associated with the
charter consolidation and losses associated with the planned sale of lower
yielding assets and investment portfolio realignment. The impact of these
items is shown in the following table ($000's):
Three Months Ended
September 30,
Pre-tax --------------------------------
Effect 2001 2000
------------------------------------------------
Income as Reported $ 83,315 $ 51,609
Nonrecurring Losses and Expenses:
Metavante Subsidiary
Acquisition related $ 38,025 23,007
IPO expenses 1,996 1,476
Charter consolidation 4,250 2,821
Balance Sheet Management
Investment securities losses 50,095 32,562
ARM loan sale losses 3,060 1,989
--------------- ---------------
Total Nonrecurring Losses and Expenses 23,007 38,848
--------------- ---------------
Operating Income $ 106,322 $ 90,457
=============== ===============
The following tables present a summary of each of the major elements of the
consolidated operating income statement, certain financial statistics and a
summary of the major operating income statement elements stated as a percent
of average consolidated assets converted to a fully taxable equivalent basis
(FTE) where appropriate for the current quarter and previous four quarters.
Operating income for the third quarters of 2001 and 2000, excludes the items
discussed above. Operating income for the second quarter of 2001, excludes
certain losses and expenses incurred in connection with structural changes
and acquisitions at the Corporation's Metavante subsidiary, auto lease
residual value write-downs and the final charge for the charter consolidation
initiative. Operating income for the first quarter of 2001 excludes expenses
associated with charter consolidations and the cumulative effect of the
change in accounting for derivatives and hedging activities while operating
income in the fourth quarter of 2000 excludes certain nonrecurring losses and
expenses associated with balance sheet restructuring, charter consolidations
and the withdrawn Metavante IPO. "Cash operating income" and related
statistics is operating income before amortization of intangibles.
Amortization includes amortization of goodwill and core deposit premiums and
is net of negative goodwill accretion and 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)
2001 2000
---------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
---------------------------------- -----------------------
Interest income $ 423,248 $ 431,447 $ 452,434 $ 457,503 $ 443,265
Interest expense (204,746) (230,213) (266,655) (282,738) (279,200)
---------- ----------- ----------- ----------- -----------
Net interest income 218,502 201,234 185,779 174,765 164,065
Provision for loan and lease losses (12,206) (10,737) (11,063) (8,979) (5,938)
Net investment securities gains (losses) 24 (119) (123) (120) (110)
Other income 255,639 254,053 247,084 249,543 247,560
Other expense (301,776) (296,713) (284,796) (282,262) (271,542)
---------- ----------- ----------- ----------- -----------
Income before taxes 160,183 147,718 136,881 132,947 134,035
Income tax provision (53,861) (49,665) (45,754) (43,230) (43,578)
---------- ----------- ----------- ----------- -----------
Operating income $ 106,322 $ 98,053 $ 91,127 $ 89,717 $ 90,457
========== =========== =========== =========== ===========
Cash operating income $ 111,758 $ 102,802 $ 95,828 $ 94,663 $ 95,606
========== =========== =========== =========== ===========
Per Common Share
Operating income
Basic $ 0.99 $ 0.94 $ 0.88 $ 0.86 $ 0.86
Diluted 0.96 0.91 0.85 0.83 0.83
Cash Operating income
Basic $ 1.04 $ 0.99 $ 0.92 $ 0.90 $ 0.91
Diluted 1.01 0.95 0.89 0.87 0.88
Dividends 0.290 0.290 0.265 0.265 0.265
Return on Average Equity
Operating income 16.54 % 16.80 % 16.20 % 15.92 % 16.57 %
Cash Operating income 20.91 20.15 19.60 19.40 20.45
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
2001 2000
---------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
---------------------------------- -----------------------
Interest income (FTE) 6.48 % 6.78 % 7.16 % 7.27 % 7.16 %
Interest expense (3.08) (3.55) (4.15) (4.42) (4.43)
---------- ----------- ----------- ----------- -----------
Net interest income 3.40 3.23 3.01 2.85 2.73
Provision for loan and lease losses (0.18) (0.17) (0.17) (0.14) (0.10)
Net investment securities gains (losses) -- -- -- -- --
Other income 3.84 3.92 3.85 3.90 3.93
Other expense (4.53) (4.58) (4.45) (4.41) (4.31)
---------- ----------- ----------- ----------- -----------
Income before taxes 2.53 2.40 2.24 2.20 2.25
Income tax provision (0.93) (0.89) (0.82) (0.80) (0.81)
---------- ----------- ----------- ----------- -----------
Return on average assets
based on operating income 1.60 % 1.51 % 1.42 % 1.40 % 1.44 %
========== =========== =========== =========== ===========
Return on tangible average assets
based on cash operating income 1.71 % 1.61 % 1.51 % 1.50 % 1.54 %
========== =========== =========== =========== ===========
NET INTEREST INCOME
-------------------
Net interest income for the third quarter of 2001 amounted to $218.5 million
compared to $164.1 million reported for the third quarter of 2000. The
reduction in interest rates since early January along with loan growth and
increased spreads on loan products and the impact of the purchase
acquisitions of National City and the Arizona branches contributed to the
$54.4 million increase in net interest income. Factors negatively affecting
net interest income included a shift in the mix to lower spread bank-issued
deposit products, the ongoing process of lengthening liabilities in order to
reduce future volatility in net interest income due to interest rate
movements, reduced spreads on core deposits due to interest rate declines,
the cost of treasury share repurchases and the cost of acquisitions.
Average earning assets in the third quarter of 2001 increased $1.0 billion
or 4.5% compared to the same period a year ago. Average loans, including
securitized adjustable rate mortgage loans (ARMs), accounted for $1.3 billion
of the growth in earning assets compared to the third quarter of last year.
Average investment securities, excluding securitized ARMs, declined $0.4
billion while other earning assets increased $0.1 billion. The Corporation
estimates that approximately $0.8 billion of average earning assets in the
three months ended September 30, 2001, are attributable to the purchase
acquisitions of National City and the Arizona branches.
Average interest bearing liabilities increased $0.5 billion or 2.5% in the
third quarter of 2001 compared to the same period in 2000. Since the third
quarter of 2000, average interest bearing deposits decreased $0.9 billion
while average total short-term borrowings increased $0.5 billion and average
long-term borrowings increased $0.8 billion. The Corporation estimates that
approximately $0.5 billion of average interest bearing liabilities in the
three months ended September 30, 2001, are attributable to the purchase
acquisitions of National City and the Arizona branches.
Average noninterest bearing deposits increased $0.3 billion or 11.4% compared
to the same period last year. Approximately $0.1 billion of average
noninterest bearing deposits in the three months ended September 30, 2001,
are attributable to the purchase acquisitions of National City and the
Arizona branches.
The growth and composition of the Corporation's quarterly average loan
portfolio for the current quarter and previous four quarters are reflected
in the following table. Securitized ARM loans which are classified in the
consolidated balance sheets as investment securities available for sale are
included to provide a more meaningful comparison ($ in millions):
Consolidated Average Loans, Leases and Securitized ARMs
-------------------------------------------------------
2001 2000 Growth Pct.
--------------------------------- --------------------- -------------------
Third Second First Fourth Third Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------------------------------- --------------------- -------------------
Commercial
----------
Commercial $ 5,640 $ 5,328 $ 5,258 $ 5,042 $ 4,950 13.9 % 5.8 %
Commercial real estate
Commercial mortgages 4,831 4,625 4,429 4,300 4,219 14.5 4.4
Construction 520 538 495 469 450 15.6 (3.3)
---------- ---------- ---------- ---------- ---------- -------- --------
Total commercial real estate 5,351 5,163 4,924 4,769 4,669 14.6 3.6
Commercial lease financing 394 382 385 377 360 9.7 3.1
---------- ---------- ---------- ---------- ---------- -------- --------
Total Commercial 11,385 10,873 10,567 10,188 9,979 14.1 4.7
Personal
--------
Residential real estate
Residential mortgages 2,303 2,384 2,409 2,740 3,168 (27.3) (3.4)
Construction 120 122 126 123 117 2.8 (1.5)
Securitized ARM loans 638 734 828 523 375 70.1 (13.2)
---------- ---------- ---------- ---------- ---------- -------- --------
Total residential real estate 3,061 3,240 3,363 3,386 3,660 (16.4) (5.5)
Personal loans
Student 94 133 134 119 108 (13.2) (29.1)
Credit card 174 184 190 187 171 1.8 (5.3)
Home equity loans and lines 2,723 2,641 2,647 2,462 2,261 20.4 3.1
Other 927 864 850 852 883 5.0 7.2
---------- ---------- ---------- ---------- ---------- -------- --------
Total personal loans 3,918 3,822 3,821 3,620 3,423 14.5 2.5
Personal lease financing 612 668 695 698 616 (0.7) (8.4)
---------- ---------- ---------- ---------- ---------- -------- --------
Total personal 7,591 7,730 7,879 7,704 7,699 (1.4) (1.8)
---------- ---------- ---------- ---------- ---------- -------- --------
Total Consolidated Average
Loans, Leases and ARMs $ 18,976 $ 18,603 $ 18,446 $ 17,892 $ 17,678 7.3 % 2.0 %
========== ========== ========== ========== ========== ======== ========
Total Consolidated Average
Loans and Leases $ 18,338 $ 17,869 $ 17,618 $ 17,369 $ 17,303 6.0 % 2.6 %
========== ========== ========== ========== ========== ======== ========
Compared with the third quarter of 2000, total consolidated average loans,
leases and securitized ARMs increased $1.3 billion or 7.3%. Approximately
$0.7 billion of average total consolidated loans, leases and ARMs in the
third quarter of 2001 are attributable to the National City and Arizona
branch acquisitions. Other factors affecting the year to year comparison
include: the Corporation sold approximately $46 million of student loans in
the second quarter of 2001, acquired $341 million of home equity loans and
lines related to its private-label banking services in the fourth quarter of
2000 and sold $300.8 million of portfolio ARM loans in the third quarter of
2000. Also, beginning in the third quarter of 2000, the Corporation began
securitizing indirect auto loans. Indirect auto loans securitized and sold
in 2000 amounted to $223 million and for the nine months ended September 30,
2001 amounted to $274 million. The Corporation anticipates that indirect
auto loan origination will continue to be securitized and sold in future
quarters.
Compared with the second quarter of 2001 and excluding the effects of the
banking related acquisitions, total consolidated average loans, leases and
securitized ARMs decreased $0.3 billion or 1.6%. The decrease in total
average commercial loans reflects a slowing in loan demand and the
Corporation's decision to move certain relationships out of M&I and to other
institutions. Average personal loans were relatively unchanged as portfolio
decreases in auto leases and student loans, tighter spread products, were
offset by growth in consumer and home equity portfolios, both wider spread
products. The decline in average residential real estate loans reflects
increased prepayment experience as well as the continued strategy of selling
residential real estate loan production in the secondary market. Residential
real estate loans originated and sold to investors amounted to $1.5 billion
in the first nine months of 2001 compared to $393 million in the first nine
months of the prior year.
The growth and composition of the Corporation's quarterly average deposits
for the current and prior year's quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2001 2000 Growth Pct.
--------------------------------- --------------------- -------------------
Third Second First Fourth Third Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------------------------------- --------------------- -------------------
Bank issued deposits
Noninterest bearing deposits
Commercial $ 1,969 $ 1,779 $ 1,639 $ 1,716 $ 1,694 16.2 % 10.7 %
Personal 608 601 583 582 572 6.4 1.2
Other 364 347 436 428 373 (2.6) 4.6
---------- ---------- ---------- ---------- ---------- -------- --------
Total noninterest
bearing deposits 2,941 2,727 2,658 2,726 2,639 11.4 7.8
Interest bearing deposits
Savings & NOW 1,784 1,719 1,720 1,760 1,826 (2.3) 3.8
Money market 5,563 5,368 5,111 4,855 4,580 21.5 3.6
Foreign activity 640 532 476 476 402 59.1 20.2
---------- ---------- ---------- ---------- ---------- -------- --------
Total interest
bearing deposits 7,987 7,619 7,307 7,091 6,808 17.3 4.8
Time deposits
Other CDs & time deposits 3,167 3,202 3,397 3,452 3,394 (6.7) (1.1)
CDs greater than $100,000 751 750 820 856 874 (14.1) 0.1
---------- ---------- ---------- ---------- ---------- -------- --------
Total time deposits 3,918 3,952 4,217 4,308 4,268 (8.2) (0.9)
---------- ---------- ---------- ---------- ---------- -------- --------
Total bank issued deposits 14,846 14,298 14,182 14,125 13,715 8.2 3.8
Wholesale deposits
Money market -- 222 762 703 668 (100.0) (100.0)
Brokered CDs 1,517 1,740 1,795 1,780 1,653 (8.2) (12.8)
Foreign time 624 939 939 1,566 1,549 (59.7) (33.6)
---------- ---------- ---------- ---------- ---------- -------- --------
Total wholesale deposits 2,141 2,901 3,496 4,049 3,870 (44.7) (26.2)
---------- ---------- ---------- ---------- ---------- -------- --------
Total consolidated
average deposits $ 16,987 $ 17,199 $ 17,678 $ 18,174 $ 17,585 (3.4)% (1.2)%
========== ========== ========== ========== ========== ======== ========
Average bank issued deposits increased $1.1 billion or 8.2% in the third
quarter of 2001 compared to the third quarter of 2000. Average bank issued
deposits associated with the acquisitions in the third quarter of 2001 were
approximately $0.4 billion. As part of its private-label banking services,
the Corporation acquired $354 million of deposits late in 2000. Excluding the
effect of the current acquisitions, average money market index accounts
accounted for approximately $1.0 billion of the growth in average bank issued
deposits while savings and NOW and money market savings declined $71 million
and bank issued money market savings decreased $161 million. This shift in
mix had an adverse impact on the interest margin. Noninterest bearing
deposits, excluding acquisitions, increased $189 million . Excluding
acquisitions, average CDs and time deposits declined $0.5 billion. M&I's
markets have experienced some irrational pricing on single service time
deposit relationships to the extent of pricing time deposits above comparable
wholesale levels which the Corporation has elected not to pursue.
Compared with the third quarter of 2000, average wholesale deposits declined
$1.7 billion or 44.7% and were replaced, in part, with borrowings. The
decrease in wholesale deposits reflects in part, M&I electing during the
second quarter to discontinue a contractual institutional relationship that
would have repriced to levels above comparable funding alternatives.
Compared with the second quarter of 2001 and excluding the effects of the
banking related acquisitions, total consolidated average deposits decreased
$0.7 billion. Average bank issued deposits increased $0.1 billion and
consisted of growth in noninterest bearing deposits and interest bearing
activity accounts of $ 0.1 billion and $0.2 billion, respectively, and which
was offset by a decline in average time deposits of $0.2 billion. Average
wholesale deposits decreased $0.8 billion.
The Corporation's consolidated average interest earning assets and
interest bearing liabilities, interest earned and interest paid for the
current quarter and prior year second quarter are presented in the
following table. Securitized ARM loans that are classified in the balance
sheet as investment securities available for sale are included with loans
to provide a more meaningful comparison ($ in millions):
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
------------------------------ ------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------------------------ ------------------------------
Loans and leases (a) $ 18,975.7 $ 351.3 7.35 % $ 17,677.6 $ 364.5 8.20 %
Investment securities:
Taxable 3,116.2 52.6 6.89 3,500.8 57.8 6.47
Tax Exempt (a) 1,268.3 22.8 7.21 1,323.8 23.3 7.06
Other short-term investments (a) 511.6 4.5 3.50 333.4 5.3 6.34
---------- --------- --------- ---------- --------- ---------
Total interest earning assets $ 23,871.8 $ 431.2 7.20 % $ 22,835.6 $ 450.9 7.84 %
========== ========= ========= ========== ========= =========
Money market savings $ 5,563.6 $ 42.9 3.06 % $ 5,248.2 $ 72.8 5.52 %
Regular savings & NOW 1,784.1 5.1 1.14 1,826.0 7.1 1.55
Other CDs & time deposits 4,430.7 62.1 5.56 5,345.1 80.3 5.98
CDs greater than $100 & Brokered CDs 2,268.2 19.7 3.44 2,526.9 41.7 6.56
---------- --------- --------- ---------- --------- ---------
Total interest bearing deposits 14,046.6 129.8 3.67 14,946.2 201.9 5.37
Short-term borrowings 3,917.1 46.3 4.69 3,371.0 55.4 6.54
Long-term borrowings 2,079.7 28.7 5.47 1,235.0 21.9 7.06
---------- --------- --------- ---------- --------- ---------
Total interest bearing liabilities $ 20,043.4 $ 204.8 4.05 % $ 19,552.2 $ 279.2 5.68 %
========== ========= ========= ========== ========= =========
Net interest margin (FTE) as a
percent of average earning assets $ 226.4 3.78 % $ 171.7 2.99 %
========= ========= ========= =========
Net interest spread (FTE) 3.15 % 2.16 %
========= =========
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax
rate of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for
available for sale securities.
The yield on average earning assets decreased 64 basis points since the third
quarter of 2000, which had a negative impact on interest income (FTE) of
approximately $39.5 million. The increase in the yield of taxable investment
securities reflects the Corporation's realignment of its available for sale
investment securities portfolio through the sale and purchase of
approximately $1.6 billion of U.S. Government Agency securities during the
third quarter of 2000. The increase in the volume of earning assets,
primarily loans and securitized ARMs, increased interest income by
approximately $19.8 million compared with the third quarter of 2000. The
cost of interest bearing deposits decreased 170 basis points from the same
quarter of the previous year which reflects rate declines as well as less
reliance on wholesale deposits offset by the shift in the bank issued deposit
mix as previously discussed. Short-term borrowing costs decreased 185 basis
points and long-term borrowing costs decreased 159 basis points compared with
the third quarter of 2000. The overall decrease in the cost of interest
bearing liabilities of 163 basis points decreased interest expense by
approximately $82.4 million while the increase in the volume of interest
bearing liabilities increased interest expense by approximately $8.0 million.
In the recent declining interest rate environment, the Corporation has taken
certain actions and will continue to take certain actions, such as issuing
term debt, to lessen the amount of income at risk due to changes in interest
rates. As a result, net interest income will not experience the same
magnitude of benefit as it might have, absent the actions taken. In addition
to continuing to seek less costly funding sources, the Corporation may, among
other actions, continue to divest of lower yielding assets through sale or
securitization in the future.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of September 30, 2001 and the prior four quarters.
NONPERFORMING ASSETS
--------------------
($000's)
2001 2000
---------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
---------------------------------- -----------------------
Nonaccrual $ 163,946 $ 137,355 $ 130,640 $ 121,425 $ 116,682
Renegotiated 389 249 560 614 658
Past due 90 days or more 7,185 7,166 7,080 7,371 7,295
---------- ----------- ----------- ----------- -----------
Total nonperforming loans and leases 171,520 144,770 138,280 129,410 124,635
Other real estate owned 5,842 3,671 3,790 3,797 3,804
---------- ----------- ----------- ----------- -----------
Total nonperforming assets $ 177,362 $ 148,441 $ 142,070 $ 133,207 $ 128,439
========== =========== =========== =========== ===========
Allowance for loan and lease losses $ 264,736 $ 244,486 $ 240,348 $ 235,115 $ 232,690
========== =========== =========== =========== ===========
CONSOLIDATED STATISTICS
-----------------------
2001 2000
---------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
---------------------------------- -----------------------
Net Charge-offs (Recoveries) to
average loans and leases annualized 0.24 % 0.15 % 0.13 % 0.16 % 0.17 %
Total nonperforming loans and leases
to total loans and leases 0.90 0.81 0.78 0.74 0.72
Total nonperforming assets to total loans
and leases and other real estate owned 0.93 0.83 0.80 0.76 0.74
Allowance for loan and lease losses
to total loans and leases 1.39 1.37 1.35 1.34 1.34
Allowance for loan and lease losses
to nonperforming loans and leases 154 169 174 182 187
NONACCRUAL LOANS AND LEASES BY TYPE
-----------------------------------
($000's)
2001 2000
---------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
---------------------------------- -----------------------
Commercial
Commercial, financial & agricultural $ 78,623 $ 54,576 $ 50,273 $ 49,965 $ 39,203
Lease financing receivables 2,022 1,892 2,959 1,921 2,046
---------- ----------- ----------- ----------- -----------
Total commercial 80,645 56,468 53,232 51,886 41,249
Real estate
Construction & land development 1,063 2,590 2,584 2,896 2,929
Commercial mortgage 38,117 38,440 38,797 35,011 42,246
Residential mortgage 42,147 38,389 34,244 29,895 28,155
---------- ----------- ----------- ----------- -----------
Total real estate 81,327 79,419 75,625 67,802 73,330
Personal 1,974 1,468 1,783 1,737 2,103
---------- ----------- ----------- ----------- -----------
Total nonaccrual loans and leases $ 163,946 $ 137,355 $ 130,640 $ 121,425 $ 116,682
========== =========== =========== =========== ===========
RECONCILIATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
-----------------------------------------------------
($000's)
2001 2000
---------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
---------------------------------- -----------------------
Beginning balance $ 244,486 $ 240,348 $ 235,115 $ 232,690 $ 234,119
Provision for loan and lease losses 12,206 10,737 11,063 8,979 5,938
Allowance of banks and loans acquired 19,151 -- -- 1,270 --
Allowance transfer for loan securitizations -- -- -- (1,022) --
Loans and leases charged-off
Commercial 5,266 3,607 2,577 2,253 5,210
Real estate 3,768 1,734 2,075 3,267 943
Personal 2,768 2,561 2,383 2,629 2,285
Leases 450 770 496 397 193
---------- ----------- ----------- ----------- -----------
Total charge-offs 12,252 8,672 7,531 8,546 8,631
Recoveries on loans and leases
Commercial 362 1,042 515 429 436
Real estate 357 403 410 645 291
Personal 354 531 728 627 508
Leases 72 97 48 43 29
---------- ----------- ----------- ----------- -----------
Total recoveries 1,145 2,073 1,701 1,744 1,264
---------- ----------- ----------- ----------- -----------
Net loans and leases
charge-offs (recoveries) 11,107 6,599 5,830 6,802 7,367
---------- ----------- ----------- ----------- -----------
Ending balance $ 264,736 $ 244,486 $ 240,348 $ 235,115 $ 232,690
========== =========== =========== =========== ===========
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, 2001, OREO acquired in satisfaction of debts amounted
to $5.4 million and branch premises held for sale amounted to $0.4 million.
Approximately $2.8 million of OREO acquired in satisfaction of debts relates
to the National City acquisition.
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, 2001, nonperforming loans and leases amounted to $171.5
million or 0.90% of consolidated loans and leases of $19.0 billion, an
increase of $26.8 million or 18.5% since June 30, 2001. Nonaccrual loans and
leases, primarily commercial loans, accounted for the increase compared to
the prior quarter. At September 30, 2001, approximately $26.6 million of
nonperforming loans are related to recent acquisitions.
Net charge-offs amounted to $11.1 million or 0.24% of average loans in the
third quarter of 2001 compared with net charge-offs of $6.6 million or 0.15%
of average loans in the second quarter of 2001 and $7.4 million or 0.17% of
average loans in the third quarter of the prior year.
In light of the events of September 11th, the Corporation performed
additional assessments of its loans to certain industries which may have
become more vulnerable. These include loans to airlines, travel and leisure
industries, auto suppliers and other transportation related industries and
insurance. The Corporation has concluded that there are no large
concentrations of loans or unusual draw down activity with respect to the
loans to these industries. In addition, nonperforming loans and loans
considered problem or watch type credits (loans considered to have a higher
risk of becoming nonperforming) to these industries appear to be
representative of the rest of portfolio. Only through the passage of time,
over future quarters, will the Corporation be able to determine the strength
of those borrowers.
The allowance for loan and lease losses represents management's estimate of
probable losses which have occurred as of the date of the financial
statements. In determining the adequacy of the reserve the Corporation
evaluates the reserves necessary for specific nonperforming loans and also
estimates losses in other loans and leases. As a result, the allowance for
loans and leases contains the following components:
Specific Reserve. The amount of specific reserves is determined
through a loan-by-loan analysis of nonperforming loans that
considers expected future cash flows, the value of collateral
and other factors that may impact the borrower's ability to make
payments when due. Included in this group are those nonaccrual
or renegotiated loans, which meet the criteria as being
"impaired" under the definition in SFAS 114. A loan is impaired
when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Allocated reserve. The amount of the allocated portion of the
loss reserve is determined by reserving factors assigned to
loans and leases based on the Corporation's historical loss
experience. Line officers and loan committees are responsible
for continually assigning grades to commercial loan types based
on standards established in the Corporation's loan policies and
adherence to the standards is closely monitored by the
Corporation's Loan Review Group. Loan grades are similar to, but
generally more conservative than, regulatory classifications.
In addition, reserving factors are applied to retail and smaller
balance ungraded credits as well as specialty loan products such
as credit card, student loans and mortgages. Reserving factors
are derived and are determined based on such factors as
historical charge-off experience, remaining life, and industry
practice for reserve levels. The use of industry practice is
intended to prevent an understatement of reserves based upon an
over-reliance on historical charge-offs during favorable
economic conditions.
Management determines a portion of the allocated loss reserve
based on factors that cannot be associated with a specific
credit. These factors include management's subjective
evaluation of local, national and international economic and
business conditions, changes to underwriting standards and
marketing channels such as use of centralized retail and small
business credit centers, trends towards higher advance rates and
longer amortization periods and the impact of acquisitions on
the Corporation's credit risk profile as well as management's
attempt to ensure that the overall reserve appropriately
reflects a margin for the imprecision necessarily inherent in
estimates of expected credit losses.
Management's evaluation of the factors described above resulted in an
allowance for loan and lease losses of $264.7 million at September 30, 2001
compared to $244.5 million at June 30, 2001. The level of reserve reflects
management's belief that losses in the loan and lease portfolio were larger
than would otherwise be suggested by the Corporation's favorable charge-off
experience in recent years; the Corporation's experience, as most recently
evidenced in the current quarter as well as the second and third quarters of
2000, of larger losses in commercial and commercial real estate loans in
brief periods at particular points in economic cycles; and the view that the
absolute level of the allowance should not decline appreciably given the
continued slowing of economic prosperity.
OTHER INCOME
------------
Total other income in the third quarter of 2001 amounted to $255.7 million
compared to $197.4 million in the same period last year. Included in other
income in the third quarter of the prior year was $50.1 million of
investment securities losses associated with Corporation's realignment of
its investment portfolio as previously discussed. Excluding the securities
losses, total other income increased $8.2 million or 3.3% compared to the
third quarter of last year.
Total data processing services revenue amounted to $144.4 million in the
third quarter of 2001 compared to $145.3 million in the third quarter of
2000. e-Finance solutions revenue in the third quarter of 2000 includes
buyout fees of $13.7 million compared to $0.8 million in the same quarter
this year. Excluding buyout fees, e-Finance solutions revenue increased $8.6
million or 37.1% which reflects growth in electronic bill presentment and
payment and electronic banking products for businesses and consumers.
Financial technology solutions revenue, the traditional outsourcing business,
increased $6.0 million primarily due to buyout fees. This largest source of
data processing services revenue is projected to grow at single digit levels
during 2001 due to continued bank consolidation and a weaker economy.
Professional services fees and software revenue declined primarily due to
lower software consulting fees. Other revenue declined primarily due to
lower professional services revenue.
Item processing revenue amounted to $11.7 million in the third quarter of
2001 compared to $13.1 million in the third quarter of 2000 and $12.0 million
in the second quarter of 2001. The slight revenue decline compared to the
second quarter represents some lost activity as a result of the events of
September 11th. By month-end transaction activity had returned to normal run
rate levels.
Trust services revenue amounted to $30.1 million in the third quarter of
2001, an increase of $0.2 million compared to $29.9 million in the third
quarter of 2000. Strong sales have offset declines in managed asset values.
Trust services revenue is largely derived from asset-based fees. With
declining equity markets and the continued movement of funds from higher fee
equity funds to lower fee fixed income or money market funds, maintaining
year-over-year revenue growth in the current market environment will be a
continuing challenge.
Service charges on deposits increased $2.5 million or 13.4% and amounted
$21.2 million in the third quarter of 2001. National City accounted for
approximately $0.6 million of the revenue in the third quarter of 2001. The
remainder of the increase was primarily attributable to service charges on
commercial demand accounts.
Mortgage banking revenue increased $5.3 million in the third quarter of 2001
compared to the third quarter of 2000. Gains on the sale of mortgage loans
accounted for the majority of the increase which reflects the increased
origination and sale activity as previously discussed.
Other income in the third quarter of 2001 amounted to $30.0 million compared
to $28.5 million in the third quarter of 2000, an increase of $1.5 million
or 5.0%. The increase in gains and income from indirect auto
securitizations, which began in the third quarter of 2000 as previously
discussed, accounted for the majority of the increase.
OTHER EXPENSE
-------------
Total other expense for the three months ended September 30, 2001,
amounted to $339.8 million compared to $280.8 million for the three ended
September 30, 2000.
Non recurring expenses in the third quarter of 2001 consisted of the
following:
As previously announced, transition expenses incurred in the
third quarter in conjunction with the second quarter
acquisitions of Derivion and Cyberbills amounted to
approximately $3.5 million of which $1.6 million is
attributable to salaries and benefits. The Corporation
estimates that transition expenses in the fourth quarter with
respect to these acquisitions will also be approximately $3.5
million.
Nonrecurring costs related to the third quarter acquisition of
Brokat's North American internet banking operations by
Metavante amounted to approximately $34.5 million. In
conjunction with this acquisition four locations and five
technology platforms will be consolidated resulting in
severance of $3.8 million and facility closure charges of
approximately $10.2 million. Write-offs of existing
technology and software which will be replaced by Brokat's
software amounted to $20.5 million.
Non recurring expenses in the third quarter of 2000 consisted of the
following:
As previously discussed, the Corporation sold $300.8 million
of portfolio ARM loans as part of its balance sheet management
strategy and realized losses of $3.1 million.
Organizational costs associated with Metavante's withdrawn IPO
amounted to $2.0 million.
Single charter related expenses incurred amounted to $4.2 million.
Excluding these nonrecurring charges, total other operating expense
amounted to $301.8 million in the third quarter of 2001 compared to $271.5
million in the third quarter of 2000, an increase of $30.3 million or
11.1%.
Approximately $8.8 million of operating expenses in the third quarter of
2001 were attributable to purchase acquisitions which were included in
M&I's operating expenses since the merger dates.
The Corporation's nonbanking businesses, especially its Data Services
segment ("Metavante"), continue to be the primary contributors to
operating expense growth. Excluding salaries and benefits expense and the
effect of acquisitions, Metavante operating expense growth represents over
half of all of the consolidated operating expense growth and reflects the
cost of ongoing investments in software, technology research and
development and infrastructure in potentially high-growth areas.
Expense control is sometimes measured in the financial services industry by
the efficiency ratio statistic. The efficiency ratio is calculated by taking
total other expense (excluding nonrecurring charges) divided by the sum of
total other income (including Capital Markets revenue but excluding
investment securities gains or losses) and net interest income on a fully
taxable equivalent basis. The Corporation's efficiency ratios for the three
months ended September 30, 2001 and 2000 and December 31, 2000 are:
Three Months Three Months Three Months
Ended Ended Ended
September 30, December 31, September 30,
2001 2000 2000
------------- ------------- -------------
Consolidated Corporation 62.6 % 65.4 % 64.8 %
Consolidated Corporation Excluding Metavante
Including Intangible Amortization 52.5 % 55.8 % 56.4 %
Excluding Intangible Amortization 50.4 % 53.4 % 54.1 %
Salaries and employee benefits expense amounted to $179.5 million in the
third quarter of 2001 including the severance and transitional charges of
$5.4 million previously discussed. Excluding the charge, salaries and
benefits expense amounted to $174.1 million compared to $162.2 million in the
third quarter of 2000, an increase of $11.9 million or 7.3%. Operating
salaries and employee benefits expense associated with acquisitions accounted
for $5.7 million of the increase. Continued adverse claims experience in
employee health plans added $3.1 million to expense in the current quarter
compared to the same period in the prior year.
Nonrecurring charges included in occupancy and equipment expense in the
third quarter of 2001 amounted to approximately $6.8 million. Excluding
these items, occupancy and equipment expense in the third quarter of 2001
amounted to $45.2 million and increase of $3.1 million since the third
quarter of 2000. Occupancy and equipment expense associated with the
current period acquisitions accounted for approximately $1.6 million of
the increase.
Excluding the effect of acquisitions, Metavante's operating expense growth
accounted for approximately $1.5 million or 68% of the increase in software,
supplies and printing and processing expenses and accounted for all of the
decline in professional fees in the third quarter of 2001 compared to the
third quarter of 2000. Expenses contributed by the acquisitions for these
items were approximately $0.9 million.
Approximately $1.3 million of intangible amortization in the third quarter
of 2001 represents write-downs of existing intangibles impaired as a
result of the Brokat acquisition.
Other expense amounted to $55.4 million in the third quarter of 2001.
Included in this category in the current quarter were nonrecurring charges
aggregating $23.9 million associated with Metavante's acquisitions.
Excluding these charges, other expense amounted to $31.5 million in the
current quarter compared to $18.2 million in the third quarter of last
year, an increase of $13.3 million. Customer related expense, including
advertising and promotion, was $2.5 million higher in the current quarter
compared to the same period last year. Recourse liability obligation
reversals amounted to $1.4 million in the third quarter of 2000.
Other expense is affected by the capitalization of costs, net of
amortization and write-downs associated with software development and
customer data processing conversions. Net software and conversion
capitalization was $10.8 million in the third quarter of 2000 and in the
current quarter amounted to $2.8 million resulting in an increase of $8.0
million in other expense in the third quarter of 2001 compared to third
quarter of 2000.
INCOME TAXES
------------
The provision for income taxes for the three months ended September 30,
2001 amounted to $38.8 million or 31.8% of pre-tax income compared to
$23.0 million or 30.9% of pre-tax income for the three months ended
September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
---------------------------------------------
Net income for the nine months ended September 30, 2001 amounted to $229.2
million compared to $230.8 million in the same period of 2000. Basic and
diluted earnings per share were $2.17 and $2.11, respectively for the nine
months ended September 30, 2001 compared to $2.19 and $2.12, respectively
for the same period last year. The year to date return on average equity
was 12.81% in the current period and 14.57% for the nine months ended
September 30, 2000.
Net income for the first nine months of 2001, includes certain losses and
expenses incurred in connection with the previously announced structural
changes and acquisitions at the Corporation's Metavante subsidiary, auto
lease residual value write-downs, the final charge for the charter
consolidation and the cumulative effect of the change in accounting for
derivatives and hedging activities. Net income for the first nine months of
the prior year includes the cumulative effect of the change in accounting for
certain conversion services provided by Metavante as well as security losses
and losses from the sale of ARM loans, single charter expenses and expenses
associated with the withdrawn IPO of Metavante. The impact of these items
is shown in the following table ($000's):
Three Months Ended
September 30,
Pre-tax --------------------------------
Effect 2001 2000
------------------------------------------------
Income as Reported $ 229,164 $ 230,792
Nonrecurring Losses and Expenses:
Metavante Subsidiary
Reduction in force and realignment $ 11,028
Investment losses 12,706
IPO expenses 1,996
Acquisition related 45,219
--------------- --------------- ---------------
Total Metavante Subsidiary 70,949 41,594 1,476
Balance Sheet Management
Investment securities losses 50,095 -- 32,562
Losses from sale of ARM loans 3,060 -- 1,989
Auto Lease Residual Value Write-downs 25,000 15,843 --
Charter Consolidations 2001 11,952 8,465 --
Charter Consolidations 2000 4,250 -- 2,821
Change in Accounting:
Derivatives and Hedging Activities 671 436 --
Conversion Services - Metavante 3,811 -- 2,279
--------------- ---------------
Total Nonrecurring Losses and Expenses 66,338 41,127
--------------- ---------------
Operating Income $ 295,502 $ 271,919
=============== ===============
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, 2001 and
2000, respectively. Operating income for the nine months ended September 30,
2001, and 2000, excludes the nonrecurring items previously discussed. "Cash
operating income" and related statistics is operating income before
amortization of intangibles. Amortization includes amortization of goodwill
and core deposit premiums and is net of negative goodwill accretion and 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,
----------------------------
2001 2000
------------- -------------
Interest income $ 1,307,129 $ 1,290,479
Interest expense (701,614) (792,238)
------------- -------------
Net interest income 605,515 498,241
Provision for loan and lease losses (34,006) (21,373)
Net investment securities gains (218) 1,171
Other income 756,776 733,128
Other expense (883,285) (806,520)
------------- -------------
Income before taxes 444,782 404,647
Income tax provision (149,280) (132,728)
------------- -------------
Operating income $ 295,502 $ 271,919
============= =============
Cash operating income $ 310,387 $ 286,116
============= =============
Per Common Share
Operating income
Basic $ 2.81 $ 2.58
Diluted 2.72 2.49
Cash Operating income
Basic $ 2.96 $ 2.72
Diluted 2.85 2.62
Dividends 0.845 0.770
Return on Average Equity
Operating income 16.52 % 17.16 %
Cash Operating income 20.24 21.28
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
Nine Months Ended
September 30,
----------------------------
2001 2000
------------- -------------
Interest income (FTE) 6.80 % 7.05 %
Interest expense (3.58) (4.25)
------------- -------------
Net interest income 3.22 2.80
Provision for loan and lease losses (0.17) (0.11)
Net investment securities gains 0.00 0.01
Other income 3.87 3.93
Other expense (4.53) (4.33)
------------- -------------
Income before taxes 2.39 2.30
Income tax provision (0.88) (0.84)
------------- -------------
Return on average assets
based on operating income 1.51 % 1.46 %
============= =============
Return on tangible average assets
based on cash operating income 1.61 % 1.55 %
============= =============
The increase in operating income was primarily due to growth in net interest
income of $107.3 million or 21.5%. Other income increased 3.2% and was
driven by data processing services and mortgage banking revenue. The
provision for loan and lease losses increased $12.6 million and other
operating expenses increased $76.8 million.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current nine
months and prior year nine months are presented in the following table.
Securitized ARM loans that are classified in the balance sheet as investment
securities available for sale are included with loans to provide a more
meaningful comparison ($ in millions):
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------------------ ------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------------------------ ------------------------------
Loans and leases (a) $ 18,676.7 $ 1,076.6 7.71 % $ 17,434.1 $ 1,052.4 8.07 %
Investment securities:
Taxable 3,377.4 171.9 6.97 3,607.8 176.2 6.38
Tax Exempt (a) 1,276.2 68.5 7.26 1,333.0 71.0 7.16
Other short-term investments (a) 431.5 13.4 4.14 309.5 14.3 6.17
---------- --------- --------- ---------- --------- ---------
Total interest earning assets $ 23,761.8 $ 1,330.4 7.52 % $ 22,684.4 $ 1,313.9 7.71 %
========== ========= ========= ========== ========= =========
Money market savings $ 5,674.2 $ 168.5 3.97 % $ 5,135.6 $ 200.0 5.20 %
Regular savings & NOW 1,741.2 15.9 1.22 1,874.7 23.8 1.69
Other CDs & time deposits 4,637.5 197.8 5.70 5,446.6 234.3 5.75
CDs greater than $100 & Brokered CDs 2,456.4 90.7 4.94 2,191.8 102.0 6.22
---------- --------- --------- ---------- --------- ---------
Total interest bearing deposits 14,509.3 472.9 4.36 14,648.7 560.1 5.11
Short-term borrowings 3,843.7 149.7 5.21 3,689.7 173.0 6.26
Long-term borrowings 1,797.9 79.1 5.88 1,185.3 59.1 6.66
---------- --------- --------- ---------- --------- ---------
Total interest bearing liabilities $ 20,150.9 $ 701.7 4.66 % $ 19,523.7 $ 792.2 5.42 %
========== ========= ========= ========== ========= =========
Net interest margin (FTE) as a
percent of average earning assets $ 628.7 3.55 % $ 521.7 3.06 %
========= ========= ========= =========
Net interest spread (FTE) 2.86 % 2.29 %
========= =========
(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.
CAPITAL RESOURCES
-----------------
Shareholders' equity was $2.59 billion at September 30, 2001 compared to
$2.24 billion at December 31, 2000 and $2.20 billion at September 30, 2000.
The Corporation had net unrealized gains on securities available for sale at
September 30, 2001 of $83.4 million, an increase in market value net of
related income tax effects of $45.3 million since December 31, 2000. Net
unrealized losses associated with derivative financial instruments designated
as cash flow hedges at September 30, 2001 amounted to $30.0 million.
During the third quarter of 2001, the Corporation issued 4.5 million shares
in the purchase acquisition of National City.
The Corporation acquired 1.5 million shares of its Common Stock during the
third quarter of 2001 at an aggregate cost of $85.7 million. For the nine
months ended September 30, 2001, M&I has repurchased 1.8 million shares of
its Common Stock. The aggregate cost of the shares repurchased was $101.2
million.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in
the following tables.
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
September 30, 2001 December 31, 2000
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,194 10.13 % $ 2,071 10.20 %
Tier 1 Capital
Minimum Requirement 866 4.00 812 4.00
-------------------------------- --------------------------------
Excess $ 1,328 6.13 % $ 1,259 6.20 %
================================ ================================
Total Capital $ 2,895 13.37 % $ 2,445 12.05 %
Total Capital
Minimum Requirement 1,732 8.00 1,624 8.00
-------------------------------- --------------------------------
Excess $ 1,163 5.37 % $ 821 4.05 %
================================ ================================
Risk-Adjusted Assets $ 21,652 $ 20,294
================= =================
LEVERAGE RATIOS
---------------
($ in millions)
September 30, 2001 December 31, 2000
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,194 8.52 % $ 2,071 8.25 %
Minimum Leverage
Requirement 773 - 1,287 3.00 - 5.00 753 - 1,255 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,421 - 907 5.52 - 3.52 % $ 1,318 - 816 5.25 - 3.25 %
================================ ================================
Adjusted Average
Total Assets $ 25,754 $ 25,096
================= =================
FORWARD-LOOKING STATEMENTS
--------------------------
Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of
Financial Condition 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
(i) the economic impact of the terrorist attacks on the U.S. on September 11
and the U.S. response to those attacks; (ii) any delays or slowdown in the
purchasing and decision-making activities of Metavante's financial
institution customers, and (iii) those referenced in the Corporation's Annual
Report on Form 10-K for the period ending December 31, 2000 and the
Corporation's Prospectus dated June 18, 2001 as filed with the SEC pursuant
to Rule 424(b)(3) under the Securities Act of 1933, as amended, or as may be
described form 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 2000 Annual Report on Form 10-K. Updated information
regarding the Corporation's use of derivative financial instruments is
contained in Note 11, 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 confine these
risks within prudent parameters and identify appropriate risk/reward
tradeoffs in the financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing
and embedded option characteristics across the array of assets and
liabilities held by the Corporation. Policies are in place to assure that
neither earnings nor fair value at risk exceed appropriate limits. The
use of a limited array of derivative financial instruments has allowed the
Corporation to achieve the desired balance sheet repricing structure while
simultaneously meeting the desired objectives of both its borrowing and
depositing customers.
The models used include measures of the expected repricing characteristics
of administered rate (NOW, savings and money market accounts) and non-rate
related products (demand deposit accounts, other assets and other
liabilities). These measures recognize the relative insensitivity of
these accounts to changes in market interest rates, as demonstrated
through current and historical experiences. In addition to information
about contractual payment information for most other assets and
liabilities, the models also include estimates of expected prepayment
characteristics for those items that are likely to materially change their
payment structures in different rate environments, including residential
mortgage products, certain commercial and commercial real estate loans and
certain mortgage-related securities. Estimates for these sensitivities
are based on industry assessments and are substantially driven by the
differential between the contractual coupon of the item and current market
rates for similar products.
This information is incorporated into a model that allows the projection
of future income levels in several different interest rate environments.
Earnings at risk are calculated by modeling income in an environment where
rates remain constant, and comparing this result to income in a different
rate environment, and then dividing this result into the Corporation's
budgeted / forecasted pre-tax income for the ensuing twelve months.
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, March 31, December 31,
2001 2001 2001 2000
------------- ------------ ------------- ------------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (2.6)% (4.6)% (4.9) % (6.4) %
Decline in rates 2.4 % 2.7 % 3.7 % 5.3 %
These results are based solely on the modeled parallel changes in market
rates, and do not reflect the earnings sensitivity that may arise from
other factors such as changes in the shape of the yield curve, the changes
in spread between key market rates, or accounting recognition for
impairment of certain intangibles. These results are also considered to
be conservative estimates due to the fact that they do not include any
management action to mitigate potential income variances within the
simulation process. Such action could potentially include, but 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, 2001 the fair value of equity at risk
for a gradual 100bp shift in rates was approximately 1.0% of the market
value of the Corporation.
The Corporation uses derivative financial instruments to manage interest
rate exposure. A small amount of derivatives are sold to customers where
the Corporation acts as an intermediary. The Corporation through its
trading accounts matches off these instruments in order to minimize
exposure to market risks.
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, but due to the nature of the
investments, cannot be quantified within acceptable levels of precision.
M&I Trust Services administer $55.6 billion in assets and directly manage
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.
PART II - OTHER INFORMATION
Item 5 - Other Information
--------------------------
On September 18, 2001, the Corporation issued a press release
announcing that David L. Andreas had joined the Corporation's Board of
Directors. The September 18, 2001 press release is attached as Exhibit
99.1 and is incorporated herein by reference.
On October 18, 2001,the Corporation issued a press release announcing
cetain executive officer changes. The October 18, 2001 press release
is attached as Exhibit 99.2 and is incorporated herein by reference.
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
B. Reports on Form 8-K:
On July 12, 2001, the Corporation reported Items 5 and 7 in a Current
Report on Form 8-K in connection with a letter agreement regarding the
prepayment of Diversified Business Credit, Inc. (DBCI)'s senior notes,
the termination of associated interest rate swap agreements and second
quarter financial results.
On August 24, 2001, the Corporation reported Items 5 and 7 in a Current
Report on Form 8-K in connection with the issuance of a press release
regarding Metavante's agreement to acquire Brokat Technologies U.S.
Internet Banking and Brokerage assets.
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/ P.R. Justiliano
______________________________________
P.R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ J.E. Sandy
______________________________________
J.E. Sandy
Vice President
November 14, 2001
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) September 18, 2001 Press Release
(99.2) October 18, 2001 Press Release