===============================================================================
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 March 31, 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 0-1220
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 April 30, 2001
----- ----------------
Common Stock, $1.00 Par Value 102,956,585
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
March 31, December 31, March 31,
2001 2000 2000
------------ ------------ ------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 639,557 $ 760,103 $ 674,604
Federal funds sold and security resale agreements 13,577 54,443 64,655
Money market funds 288,161 50,147 153,652
------------ ------------ ------------
Total cash and cash equivalents 941,295 864,693 892,911
Investment securities:
Trading securities, at market value 45,300 15,317 43,342
Short-term investments, at cost
which approximates market value 30,668 43,528 16,382
Available for sale at market value 4,575,569 4,735,722 4,306,051
Held to maturity at amortized cost, market
value $1,131,004 ($1,124,756 December 31,
and $1,130,123 March 31, 2000) 1,100,398 1,112,545 1,160,104
------------ ------------ ------------
Total investment securities 5,751,935 5,907,112 5,525,879
Loans and leases 17,804,471 17,587,087 16,965,521
Less: Allowance for loan and lease losses 240,348 235,115 232,471
------------ ------------ ------------
Net loans and leases 17,564,123 17,351,972 16,733,050
Premises and equipment 384,174 392,995 370,663
Goodwill and core deposit intangibles 304,837 310,930 333,885
Other intangibles 33,743 34,354 24,957
Accrued interest and other assets 1,174,438 1,215,683 1,082,393
------------ ------------ ------------
Total Assets $ 26,154,545 $ 26,077,739 $ 24,963,738
============ ============ ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 2,737,891 $ 3,129,834 $ 2,658,348
Interest bearing 15,035,449 16,118,793 14,409,973
------------ ------------ ------------
Total deposits 17,773,340 19,248,627 17,068,321
Funds purchased and security repurchase agreements 2,028,462 1,092,723 2,125,022
Other short-term borrowings 2,189,732 1,722,008 2,044,667
Accrued expenses and other liabilities 806,981 850,916 612,829
Long-term borrowings 1,042,712 921,276 1,038,184
------------ ------------ ------------
Total liabilities 23,841,227 23,835,550 22,889,023
Shareholders' equity:
---------------------
Series A convertible preferred stock,
$1.00 par value; 336,370 shares issued 336 336 336
Common stock, $1.00 par value;
112,757,546 shares issued 112,757 112,757 112,757
Additional paid-in capital 443,213 452,212 455,217
Retained earnings 2,174,964 2,117,759 1,976,667
Accumulated other comprehensive
income, net of related taxes 59,548 38,127 (45,057)
Less: Treasury common stock, at cost:
9,839,811 shares (9,910,839 December 31,
and 8,752,702 March 31, 2000) 457,375 458,472 405,805
Deferred compensation 20,125 20,530 19,400
------------ ------------ ------------
Total shareholders' equity 2,313,318 2,242,189 2,074,715
------------ ------------ ------------
Total Liabilities and Shareholders' Equity $ 26,154,545 $ 26,077,739 $ 24,963,738
============ ============ ============
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended March 31,
2001 2000
-------------- --------------
Interest income
---------------
Loans and leases $ 353,990 $ 326,478
Investment securities:
Taxable 77,951 67,890
Exempt from federal income taxes 15,900 16,447
Trading securities 328 527
Short-term investments 4,265 3,283
------------ ------------
Total interest income 452,434 414,625
Interest expense
----------------
Deposits 187,183 172,578
Short-term borrowings 54,101 57,039
Long-term borrowings 25,371 15,887
------------ ------------
Total interest expense 266,655 245,504
Net interest income 185,779 169,121
Provision for loan and lease losses 11,063 5,819
------------ ------------
Net interest income after provision
for loan and lease losses 174,716 163,302
Other income
------------
Data processing services:
Account processing fees 104,788 94,665
Professional services fees 15,505 18,285
Software revenue 8,023 9,318
Other revenue 4,676 7,733
------------ ------------
Total data processing services 132,992 130,001
Item processing 12,457 12,444
Internet banking 981 505
Trust services 30,029 27,808
Service charges on deposits 20,826 18,514
Mortgage banking 6,872 2,912
Capital Markets revenue 6,334 15,111
Net investment securities losses (123) --
Life insurance revenue 6,530 6,672
Other 30,063 27,459
------------ ------------
Total other income 246,961 241,426
Other expense
-------------
Salaries and employee benefits 167,922 157,318
Net occupancy 15,897 13,327
Equipment 28,632 27,400
Software expenses 8,070 6,865
Processing charges 8,950 7,549
Supplies and printing 4,950 4,857
Professional services 7,160 7,577
Shipping and handling 11,317 11,386
Amortization of intangibles 8,005 7,706
Single charter 5,980 --
Other 23,893 24,013
------------ ------------
Total other expense 290,776 267,998
Income before income taxes and cumulative
effect of changes in accounting principles 130,901 136,730
Provision for income taxes 44,299 46,015
------------ ------------
Income before cumulative effect of changes
in accounting principles 86,602 90,715
Cumulative effect of changes in accounting
principles, net of income taxes (436) (2,279)
------------ ------------
Net income $ 86,166 $ 88,436
============ ============
Net income per common share
---------------------------
Basic:
Income before cumulative effect of changes
in accounting principles $ 0.83 $ 0.86
Cumulative effect of changes in accounting
principles, net of income taxes -- (0.02)
------------ ------------
Net income $ 0.83 0.84
============ ============
Diluted:
Income before cumulative effect of changes
in accounting principles $ 0.80 $ 0.83
Cumulative effect of changes in accounting
principles, net of income taxes -- (0.02)
------------ ------------
Net income $ 0.80 $ 0.81
============ ============
Dividends paid per common share $ 0.265 $ 0.240
Weighted average common shares outstanding:
Basic 102,839 104,657
Diluted 107,819 109,564
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Three Months Ended March 31,
2001 2000
-------------- --------------
Net Cash Provided/(Used) by Operating Activities $ (8,828)$ 88,892
Cash Flows From Investing Activities:
-------------------------------------
Proceeds from sales of securities available for sale 10,875 11,498
Proceeds from maturities of securities available for sale 252,132 162,852
Proceeds from maturities of securities held to maturity 11,978 10,534
Purchases of securities available for sale (23,040) (136,933)
Net increase in loans (202,724) (607,295)
Purchases of assets to be leased (124,366) (102,100)
Principal payments on lease receivables 174,957 81,334
Fixed asset purchases, net (7,147) (14,571)
Acquisitions and investments in joint ventures -- (265)
Other 5,534 2,396
------------ ------------
Net cash provided/(used) in investing activities 98,199 (592,550)
Cash Flows From Financing Activities:
-------------------------------------
Net increase/(decrease) in deposits (1,476,456) 633,140
Proceeds from issuance of commercial paper 604,163 804,280
Payments for maturity of commercial paper (564,729) (625,093)
Net increase /(decrease) in other short-term borrowings 867,938 (534,826)
Proceeds from issuance of long-term debt 625,651 378,110
Payments of long-term debt (32,066) (19,913)
Dividends paid (28,279) (25,897)
Purchases of treasury stock (15,520) (94,756)
Other 6,529 1,668
------------ ------------
Net cash provided/(used) by financing activities (12,769) 516,713
------------ ------------
Net increase in cash and cash equivalents 76,602 13,055
Cash and cash equivalents, beginning of year 864,693 879,856
------------ ------------
Cash and cash equivalents, end of period $ 941,295 $ 892,911
============ ============
Supplemental cash flow information:
-----------------------------------
Cash paid during the period for:
Interest $ 293,851 $ 224,574
Income taxes 6,221 930
See notes to financial statements.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 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 months ended March 31, 2001 and 2000. The results
of operations for the three months ended March 31, 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 months ended March
31, 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 DERATIVE 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
March 31, 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 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 Corporation does not anticipate the adoption of SFAS 140 will
materially impact its present securitization activities.
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 March 31, 2001
--------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- ---------
Net Income $ 86,166
Convertible Preferred Dividends (1,019)
------------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 85,147 102,839 $ 0.83
========
Effect of Dilutive Securities
Convertible Preferred Stock 1,019 3,844
Stock Options and
Restricted Stock Plans -- 1,136
------------ -------------
Diluted Earnings Per Share
Income Available to Common
Shareholders Plus
Assumed Conversions $ 86,166 107,819 $ 0.80
========
Three Months Ended March 31, 2000
--------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- ---------
Net Income $ 88,436
Convertible Preferred Dividends (923)
------------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 87,513 104,657 $ 0.84
========
Effect of Dilutive Securities
Convertible Preferred Stock 923 3,844
Stock Options and
Restricted Stock Plans -- 1,063
------------ -------------
Diluted Earnings Per Share
Income Available to
Common Shareholders
Plus Assumed Conversions $ 88,436 109,564 $ 0.81
========
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2001 & 2000 (Unaudited)
5. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
March 31, December 31, March 31,
2001 2000 2000
------------ ------------ ------------
Investment securities available for sale:
U.S. treasury and government agencies $ 3,194,030 $ 3,342,952 $ 3,760,161
State and political subdivisions 153,356 151,041 145,993
Mortgage backed securities 329,044 342,171 170,812
Other 891,990 899,558 229,085
Fair value hedging instruments 7,149 -- --
------------ ------------ ------------
Total $ 4,575,569 $ 4,735,722 $ 4,306,051
============ ============ ============
March 31, December 31, March 31,
2001 2000 2000
------------ ------------ ------------
Investment securities held to maturity:
U.S. treasury and government agencies $ -- $ -- $ 5
State and political subdivisions 1,095,239 1,107,476 1,154,905
Other 5,159 5,069 5,194
------------ ------------ ------------
Total $ 1,100,398 $ 1,112,545 $ 1,160,104
============ ============ ============
6. The Corporation's loan and lease portfolio consists of the following
($000's):
March 31, December 31, March 31,
2001 2000 2000
------------ ------------ ------------
Commercial, financial & agricultural $ 5,329,597 $ 5,289,537 $ 5,031,736
Real estate:
Construction 636,429 619,281 515,502
Residential mortgage 5,083,629 5,049,557 5,154,388
Commercial mortgage 4,497,606 4,359,812 4,095,617
------------ ------------ ------------
Total real estate 10,217,664 10,028,650 9,765,507
Personal 1,180,833 1,174,248 1,320,014
Lease financing 1,064,813 1,094,652 848,264
Cash flow hedging
instruments at fair value 11,564 -- --
------------ ------------ ------------
Total $ 17,804,471 $ 17,587,087 $ 16,965,521
============ ============ ============
7. Sale of Receivables
During the first quarter of 2001, $67.7 million of automobile loans
were sold in securitization transactions and gains of $2.0 million were
recognized. Other income associated with auto securitizations amounted
to $3.8 million.
Key economic assumptions used in measuring the retained interests at
the date of securitization resulting from securitizations completed
during the first quarter were as follows (rate per annum):
Prepayment speed 25.0 %
Weighted average life (in months) 21.8
Expected credit losses 0.18 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one month LIBOR yield curve
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2001 & 2000 (Unaudited)
At March 31, 2001, securitized automobile loans and other automobile
loans managed together with them along with delinquency and credit loss
information consisted of the following:
Total
Securitized Portfolio Managed
------------ ------------ ------------
Loan balances $ 241,883 $ 295,502 $ 537,385
Principal amounts of loans
60 days or more past due 90 671 761
Net credit losses 49 287 336
8. The Corporation's deposit liabilities consists of the following
($000's):
March 31, December 31, March 31,
2001 2000 2000
------------ ------------ ------------
Noninterest bearing demand $ 2,737,891 $ 3,129,834 $ 2,658,348
Savings and NOW 7,758,708 7,486,094 7,033,134
CD's $100,000 and over 2,459,240 2,663,050 1,993,954
Other time deposits 3,307,283 3,532,310 3,456,666
Foreign deposits 1,513,822 2,437,339 1,926,219
Fair value hedging instruments (3,604) -- --
------------ ------------ ------------
$ 17,773,340 $ 19,248,627 $ 17,068,321
============ ============ ============
9. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
Three Months Ended March 31, 2001
---------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------ ------------ ------------
Net income $ 86,166
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 54,370 $ (20,006) 34,364
Reclassification for securities
transactions included in net income -- -- --
------------ ------------ ------------
Unrealized gains (losses) 54,370 (20,006) 34,364
Net gains (losses) on derivatives
hedging variability of cash flows:
Adoption of SFAS 133 (15,665) 5,483 (10,182)
Arising during the period (5,294) 1,853 (3,441)
Reclassification adjustments
for hedging activities
included in net income 1,047 (367) 680
------------ ------------ ------------
Net gains (losses) $ (19,912) $ 6,969 (12,943)
------------ ------------ ------------
Other comprehensive income 21,421
------------
Total comprehensive income $ 107,587
============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2001 & 2000 (Unaudited)
Three Months Ended March 31, 2000
---------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------ ------------- ------------
Net income $ 88,436
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (30,919) $ 10,833 (20,086)
Reclassification for securities
transactions included in net income 11,966 (4,188) 7,778
------------ ------------ ------------
Unrealized gains (losses) (18,953) 6,645 (12,308)
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 (12,308)
------------
Total comprehensive income $ 76,128
============
10. Derivative Financial Instruments and Hedging Activities
Interest rate risk, the exposure of the Corporation's net interest
income and net fair value of its assets and liabilities, to adverse
movements in interest rates, is a significant market risk exposure that
can have a material effect on the Corporation's financial position,
results of operations and cash flows. The Corporation has policies to
ensure that neither earnings nor fair value at risk exceed established
guidelines and assesses these risks by continually identifying and
monitoring changes in interest rates that may adversely impact expected
future earnings and fair values.
The Corporation has designed strategies to confine these risks within
the established limits and indentify appropriate risk / reward trade-
offs in the financial structure of its balance sheet. These strategies
include the use of derivative financial instruments to help achieve the
desired balance sheet repricing structure while meeting the desired
objectives of its customers.
Trading Instruments
-------------------
The Corporation enters into interest rate swaps as part of its trading
activities which enable its customers to manage their exposures to
interest rate risk. The Corporation's market risk from unfavorable
movements in interest rates is generally minimized by concurrently
entering into offsetting positions with nearly identical notional
values, terms and indices.
At March 31, 2001, interest rate swaps designated as trading consisted
of $268.8 million in notional amount of receive-fixed / pay-floating
with an aggregate positive fair value of $1.4 million and $268.8
million in notional amount of pay fixed receive floating with an
aggregate negative fair value of $1.3 million.
Interest rate swaps designated as trading are recorded at fair value.
Gains and losses arising from changes in fair value are recorded in
other income.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2001 & 2000 (Unaudited)
Fair Value Hedges
-----------------
The Corporation has fixed rate callable CDs, equity indexed CDs and
fixed rate long-term debt which expose the Corporation to variability
in fair values due to changes in market interest rates and, in the case
of the equity indexed CDs, to changes in the S&P 500 index.
To limit the Corporation's exposure to changes in fair value due to
changes in interest rates and the equity index, the Corporation has
entered into receive-fixed / pay-floating interest rate swaps with
identical call features, thereby creating the effect of floating rate
deposits and floating rate long-term debt. The Corporation has
determined that the hedges on the long-term debt qualify for the
special short-cut accounting prescribed by SFAS 133, resulting in no
ineffectiveness.
The Corporation also has Agency collateralized mortgage backed
investment securities designated as available for sale. The embedded
prepayment options in the underlying mortgages expose the Corporation
to variability in fair value in a changing interest rate environment.
To limit its exposure to changes in fair value, the Corporation has
designated purchased interest rate floors as a hedge against changes in
fair value attributable to the embedded prepayment option.
During the first quarter of 2001, the Corporation sold a portion of the
floors ($100 million in notional amount). The adjustment to the
carrying amount of the hedged investment securities of $3.2 million is
being accreted into earnings over the remaining life of the security
using the interest method.
The following table presents additional information with respect to the
Corporation's fair value hedges.
FAIR VALUE HEDGES - March 31, 2001
Impact to Net Interest Income -
First Quarter 2001 ($000's)
---------------------------------------
Components
Excluded
Notional Fair Wt. Avg. from
Hedged Hedging Amount Value Remaining Ineffec- Ineffec- Net
Item Instrument ($ in mil)($ in mil) Term (Yrs) tiveness tiveness Settlement Total
----------------- ------------------ --------- --------- ---------- --------- -------- ---------- --------
Callable CDs Receive Fixed Swap $ 540.9 $ 4.9 6.5 $ 146 $ -- $1,187 $1,333
Equity Index CDs Receive Fixed Swap 14.9 (1.3) 4.0 -- -- (224) (224)
Long-term
Borrowings Receive Fixed Swap 200.0 21.6 25.7 -- -- 1,216 1,216
CMOs (Prepay
Option) Interest Rate Floor 150.0 7.1 5.6 (222) -- 283 61
------- ------- ------ ------ ------ ------
$ 905.8 $ 32.3 $ (76) $ -- $2,462 $2,386
======= ======= ====== ====== ====== ======
Cash Flow Hedges
----------------
The Corporation has variable rate loans and variable rate short-term
borrowings which expose the Corporation to variability in interest
payments due to changes in interest rates. The Corporation believes it
is prudent to limit the variability of a portion of its interest
receipts and payments. To meet this objective, the Corporation enters
into various types of derivative financial instruments to manage
fluctuations in cash flows resulting from interest rate risk. At March
31, 2001, these instruments include interest rate swaps and an interest
rate floor.
The interest rate swaps change the variable-rate cash flow exposure on
the loans and short-term borrowings to fixed-rate cash flows through
the interest rate swaps.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2001 & 2000 (Unaudited)
The purchased interest rate floor also protects the Corporation from
decreases in interest rates that would result in decreased cash
interest receipts from the variable rate loans. Under the agreement,
the Corporation has the right to receive cash if interest rates
decrease below a specified level.
Ineffectiveness arising from differences between the critical terms of
the hedging instrument and hedged item are recorded in interest income
or expense based on the transaction that gave rise to the
ineffectiveness.
Changes in the fair value of the interest rate swaps or floor
designated as cash flow hedges are reported in accumulated other
comprehensive income (AOCI). These amounts subsequently are
reclassified to interest income or interest expense as a yield
adjustment in the same period in which the related interest on the
variable rate loans and short-term borrowings affects earnings.
The following table summarizes the Corporation's cash flow hedges at
March 31, 2001.
CASH FLOW HEDGES - March 31, 2001
Impact to Net Interest Income-
First Quarter 2001 ($000's) Estimated
-------------------------------- Reclass
Components from
Excluded AOCI in
Notional Fair Wt. Avg. from Reclass Next 12
Hedged Hedging Amount Value Remaining Ineffec- Ineffec- from Months
Item Instrument ($ in mil)($ in mil) Term (Yr) tiveness tiveness AOCI Total $(000's)
----------------- --------------- --------- --------- --------- -------- -------- ------- ------- --------
Variable Rate
Loans Pay Fixed Swap $ 721.1 $ 11.4 1.4 $ -- $ -- $ (218) $ (218) $ 6,889
Commercial Paper Pay Fixed Swap 200.0 (19.2) 5.7 -- -- (932) (932) (5,227)
Fed Funds
Purchased Pay Fixed Swap 500.0 (6.1) 2.8 -- -- 101 101 (4,177)
Variable Rate Interest Rate
Loans Floors 25.0 0.1 0.7 (8) -- 2 (6) 118
-------- ------- ----- ----- ------- ------- -------
$1,446.1 $ (13.8) $ (8) $ -- $(1,047) $(1,055) $(2,397)
======== ======= ===== ===== ======= ======= =======
For the three months ended March 31, 2000, the effect on net interest
income resulting from derivative financial instruments was a positive
$0.2 million.
11. Segments
Generally, the Corporation organizes its segments based on legal
entities. Each entity offers a variety of products and services to
meet the needs of its customers and the particular market served. Each
entity has its own president and is separately managed subject to
adherence to Corporate policies. Discrete financial information is
reviewed by senior management to assess performance on a monthly basis.
Certain segments are combined and consolidated for purposes of
assessing financial performance.
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 transfer to
the Banking segment occurred at the beginning of the third quarter of
2000.
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2001 & 2000 (Unaudited)
The Corporation evaluates the profit or loss performance of its
segments based on operating income. Operating income is after-tax
income excluding nonrecurring charges and charges for services from the
holding company. Operating income for the banking entities and certain
other entities also excludes certain assets, liabilities, equity,
revenues and expenses associated with adjustments, charges or credits
arising from acquisitions accounted for as purchases (hereinafter
called acquisition costs). The accounting policies of the
Corporation's segments are the same as those described in Note 1 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.
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 represents the aggregation of fifteen separately chartered
banks located in Wisconsin, one bank in Arizona, one federally
chartered thrift headquartered in Nevada and an operational support
subsidiary which, beginning in the third quarter of 2000, 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. In addition, the
Corporation's larger affiliate banks provide numerous services such as
cash management, regional credit, and centralized accounting to M&I's
community banking affiliates. Intrasegment revenues, expenses and
assets have been eliminated in the following information and prior
periods have been restated to include the item processing line of
business. ($ in millions):
Three Months Ended March 31,
----------------------------
2001 2000
------------ ------------
Revenue:
Net interest income $ 187.5 $ 170.9
Other revenues:
Unaffiliated customers 68.2 57.5
Affiliated customers 8.0 4.6
------------ ------------
Total revenues 263.7 233.0
Expenses:
Intersegment charges 15.7 10.2
Other operating expense 109.7 101.1
------------ ------------
Total expenses 125.4 111.3
Provision for loan and lease losses 10.9 5.8
Income tax expense 40.4 36.0
------------ ------------
Operating income $ 87.0 $ 79.9
============ ============
Identifiable assets $ 24,985.6 $ 23,585.4
============ ============
Return on tangible equity 18.8 % 19.4 %
============ ============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 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 March 31,
----------------------------
2001 2000
------------ ------------
Banking revenues:
Commercial Banking $ 106.9 $ 98.6
Retail Banking 104.4 95.1
Investments and Other 52.4 39.3
------------ ------------
Total banking revenues $ 263.7 $ 233.0
============ ============
Percent of total banking revenue:
Commercial Banking 40.5 % 42.3 %
Retail Banking 39.6 40.8
Investments and Other 19.9 16.9
------------ ------------
Total banking revenues 100.0 % 100.0 %
============ ============
Operating banking income
Commercial Banking $ 47.4 $ 40.3
Retail Banking 24.6 24.4
Investments and Other 15.0 15.2
------------ ------------
Total operating banking income $ 87.0 $ 79.9
============ ============
Percent of total operating banking income:
Commercial Banking 54.4 % 50.4 %
Retail Banking 28.3 30.5
Investments and Other 17.3 19.1
------------ ------------
Total operating banking income 100.0 % 100.0 %
============ ============
Banking return on tangible equity
Commercial Banking 23.7 % 21.9 %
Retail Banking 17.7 19.4
------------ ------------
Total banking return on tangible equity 18.8 % 19.4 %
============ ============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2001 & 2000 (Unaudited)
DATA SERVICES
Data Services includes Metavante and its two nonbank subsidiaries.
Metavante provides data processing services, develops and sells
software and provides consulting services to M&I affiliates as well as
banks, thrifts, credit unions, trust companies and other financial
services companies throughout the world although its activities are
primarily domestic. In addition, Metavante derives revenue from the
Corporation's 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 March 31,
----------------------------
2001 2000
------------ ------------
Revenue:
Net interest expense $ (0.6) $ (1.3)
Other revenues:
Unaffiliated customers 131.6 128.9
Affiliated customers 16.0 15.1
------------ ------------
Total revenues 147.0 142.7
Expenses:
Intersegment charges 3.2 0.7
Other operating expense 129.1 122.8
------------ ------------
Total expenses 132.3 123.5
Income tax expense 6.2 8.1
------------ ------------
Operating income $ 8.5 $ 11.1
============ ============
Identifiable assets $ 610.5 $ 528.5
============ ============
Return on equity 12.0 % 18.4 %
============ ============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 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 provide investment management and advisory services as well as
personal, commercial and corporate trust services in Wisconsin, Florida
and Arizona. Capital Markets Group provide venture capital and
advisory services. Intrasegment revenues, expenses and assets for the
entities that comprise Trust Services and Capital Markets Group have
been eliminated in the following information. ($ in millions):
Three Months Ended March 31,
----------------------------
2001 2000
------------ ------------
Revenue:
Net interest income $ 5.5 $ 5.0
Other revenues:
Unaffiliated customers 47.2 52.9
Affiliated customers 3.6 3.1
------------ ------------
Total revenues 56.3 61.0
Expenses:
Intersegment charges 7.4 7.4
Other operating expense 28.9 26.0
------------ ------------
Total expenses 36.3 33.4
Provision for loan and lease losses 0.2 0.0
Income tax expense 7.9 11.1
------------ ------------
Operating income $ 11.9 $ 16.5
============ ============
Identifiable assets $ 757.7 $ 704.1
============ ============
Return on tangible equity 20.5 % 30.7 %
============ ============
Total Revenues by type in All Others consist of the following:
Three Months Ended March 31,
----------------------------
2001 2000
------------ ------------
All Others Revenues:
Trust Services $ 30.3 $ 28.5
Residential Mortgage Banking 7.4 5.7
Capital Markets 7.1 15.8
Brokerage and Insurance 5.5 6.4
Commercial Leasing 2.9 2.4
Commercial Mortgage Banking 0.6 0.4
Others 2.5 1.8
------------ ------------
Total All Others revenues $ 56.3 $ 61.0
============ ============
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2001 & 2000 (Unaudited)
Segment information reconciled to the Consolidated Financial Statements
is as follows ($ in millions):
Three Months Ended March 31,
----------------------------
2001 2000
------------ ------------
Revenues:
Banking $ 263.7 $ 233.0
Data Services 147.0 142.7
All Others 56.3 61.0
Corporate overhead (6.9) (4.2)
Acquisition costs 0.3 0.4
Intersegment eliminations (27.7) (22.4)
------------ ------------
Consolidated revenues $ 432.7 $ 410.5
============ ============
Expenses:
Banking $ 125.4 $ 111.3
Data Services 132.3 123.5
All Others 36.3 33.4
Corporate overhead 14.1 17.2
Acquisition costs 4.4 5.0
Single charter 6.0 --
Intersegment eliminations (27.7) (22.4)
------------ ------------
Consolidated expenses $ 290.8 $ 268.0
============ ============
Net income (loss):
Operating income:
Banking $ 87.0 $ 79.9
Data Services 8.5 11.1
All Others 11.9 16.5
Corporate overhead (12.8) (12.9)
Nonrecurring (5.0) (2.3)
Acquisition costs (3.4) (3.9)
------------ ------------
Consolidated net income $ 86.2 $ 88.4
============ ============
Assets:
Banking $ 24,985.6 $ 23,585.4
Data Services 610.5 528.5
All Others 757.7 704.1
Corporate overhead 364.3 196.4
Acquisition costs 245.8 264.8
Intersegment eliminations (809.4) (315.5)
------------ ------------
Consolidated assets $ 26,154.5 $ 24,963.7
============ ============
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended March 31,
2001 2000
-------------- --------------
Assets
------
Cash and due from banks $ 612,645 $ 630,113
Investment securities:
Trading securities 29,919 41,553
Short-term investments 318,075 234,435
Other investment securities:
Taxable 4,488,625 4,132,667
Tax-exempt 1,293,755 1,341,892
------------- -------------
Total investment securities 6,130,374 5,750,547
Loans and leases:
Commercial 5,258,481 4,896,688
Real estate 10,105,358 9,599,400
Personal 1,173,905 1,313,719
Lease financing 1,079,695 825,300
------------- -------------
Total loans and leases 17,617,439 16,635,107
Less: Allowance for loan and lease losses 237,791 228,464
------------- -------------
Net loans and leases 17,379,648 16,406,643
Premises and equipment, net 386,423 372,300
Accrued interest and other assets 1,524,781 1,441,311
------------- -------------
Total Assets $ 26,033,871 $ 24,600,914
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 2,657,789 $ 2,609,079
Interest bearing 15,020,398 14,422,706
------------- -------------
Total deposits 17,678,187 17,031,785
Funds purchased and security repurchase agreements 1,916,858 2,751,558
Other short-term borrowings 1,759,942 1,143,504
Long-term borrowings 1,611,647 1,010,484
Accrued expenses and other liabilities 785,255 585,216
------------- -------------
Total liabilities 23,751,889 22,522,547
Shareholders' equity 2,281,982 2,078,367
------------- -------------
Total Liabilities and Shareholders' Equity $ 26,033,871 $ 24,600,914
============= =============
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
------------------------------------------
Net income for the first quarter of 2001 amounted to $86.2 million compared
to $88.4 million for the same period in the prior year. Basic and diluted
earnings per share were $.83 and $.80 respectively for the three months
ended March 31, 2001, compared with $.84 and $.81 respectively for the
three months ended March 31, 2000. The return on average assets and
average equity were 1.34% and 15.31% for the quarter ended March 31, 2001
and 1.45% and 17.11% for the quarter ended March 31, 2000.
Net income for the current quarter includes certain expenses incurred in
connection with the previously announced plan to reduce the number of
banking charters under which it operates and also includes the cumulative
effect of the change in accounting for derivatives and hedging activities.
Net income for the prior year comparative quarter includes the cumulative
effect of the change in accounting for certain conversion services provided
by Metavante. The impact of these items is shown in the following table:
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)
============== ==============
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 first quarter of 2001 and
2000 excludes the items discussed above and operating income for the third
and fourth quarters 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
---------- --------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
Interest income $ 452,434 $ 457,503 $ 443,265 $ 432,589 $ 414,625
Interest expense (266,655) (282,738) (279,200) (267,534) (245,504)
---------- ---------- ---------- ---------- ----------
Net interest income 185,779 174,765 164,065 165,055 169,121
Provision for loan
and lease losses (11,063) (8,979) (5,938) (9,616) (5,819)
Net investment securities
gains (losses) (123) (120) (110) 1,281 --
Other income 247,084 249,543 247,560 244,142 241,426
Other expense (284,796) (282,262) (271,542) (266,981) (267,997)
---------- ---------- ---------- ---------- ----------
Income before taxes 136,881 132,947 134,035 133,881 136,731
Income tax provision (45,754) (43,230) (43,578) (43,134) (46,016)
---------- ---------- ---------- ---------- ----------
Operating income $ 91,127 $ 89,717 $ 90,457 $ 90,747 $ 90,715
========== ========== ========== ========== ==========
Cash operating income $ 95,828 $ 94,663 $ 95,606 $ 95,307 $ 95,204
========== ========== ========== ========== ==========
Per Common Share
Operating income
Basic $ 0.88 $ 0.86 $ 0.86 $ 0.86 $ 0.86
Diluted 0.85 0.83 0.83 0.83 0.83
Cash Operating income
Basic $ 0.92 $ 0.90 $ 0.91 $ 0.91 $ 0.90
Diluted 0.89 0.87 0.88 0.88 0.87
Dividends 0.265 0.265 0.265 0.265 0.24
Return on Average Equity
Operating income 16.20 % 15.92 % 16.57 % 17.39 % 17.55 %
Cash Operating income 19.60 19.40 20.45 21.52 21.92
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
2001 2000
---------- --------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
Interest income (FTE) 7.16 % 7.27 % 7.16 % 7.08 % 6.91 %
Interest expense (4.15) (4.42) (4.43) (4.30) (4.01)
---------- ---------- ---------- ---------- ----------
Net interest income 3.01 2.85 2.73 2.78 2.90
Provision for loan
and lease losses (0.17) (0.14) (0.10) (0.15) (0.10)
Net investment securities
gains (losses) -- -- -- 0.02 --
Other income 3.85 3.90 3.93 3.92 3.94
Other expense (4.45) (4.41) (4.31) (4.29) (4.38)
---------- ---------- ---------- ---------- ----------
Income before taxes 2.24 2.20 2.25 2.28 2.36
Income tax provision (0.82) (0.80) (0.81) (0.82) (0.88)
---------- ---------- ---------- ---------- ----------
Return on average assets
based on operating income 1.42 % 1.40 % 1.44 % 1.46 % 1.48 %
========== ========== ========== ========== ==========
Return on tangible average assets
based on cash operating income 1.51 % 1.50 % 1.54 % 1.55 % 1.58 %
========== ========== ========== ========== ==========
NET INTEREST INCOME
-------------------
Net interest income for the first quarter of 2001 amounted to $185.8
million compared to $169.1 million reported for the first quarter of 2000.
Strong loan growth and increased spreads in loan products contributed to
the $16.7 million increase in net interest income despite the continued use
of higher-cost funding sources and reduced spreads in deposit products due
to an adverse shift in the mix of bank-issued deposit types.
Average earning assets in the first quarter of 2001 increased $1.4 billion
or 6.1% compared to the same period a year ago. Average loans, including
securitized adjustable rate mortgage loans (ARMs), accounted for $1.4
billion or all of the growth in earning assets compared to the first
quarter of last year. Average investment securities, excluding securitized
ARMs, declined $96.8 million while other earning assets increased $72.0
million for the three months ended March 31, 2001 compared with the same
period in the prior year.
Average interest bearing liabilities increased $1.0 billion or 5.1% in the
first quarter of 2001 compared to the same period in 2000. Since the first
quarter of 2000, average interest bearing deposits increased $0.6 billion.
Over 74% of the growth in interest bearing deposits were attributable to
bank-issued deposits. Average total short-term borrowings decreased $218
million and reflects a shift away from fed funds and repurchase agreements
and short-term bank notes to longer-term liabilities. Long-term borrowings
increased $0.6 billion.
Average noninterest bearing deposits increased $49 million or 1.9% compared
to the same period last year.
The growth and composition of the Corporation's quarterly average loan
portfolio for the current quarter and previous four quarters are reflected
in the following table. Securitized ARM loans which are classified in the
consolidated balance sheets as investment securities available for sale are
included to provide a more meaningful comparison ($ in millions):
Consolidated Average Loans, Leases and Securitized ARMs
-------------------------------------------------------
2001 2000 Growth Pct.
------- ----------------------------------- ----------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
-------- -------- -------- -------- -------- ------- --------
Commercial $ 5,258 $ 5,042 $ 4,950 $ 5,013 $ 4,897 7.4 % 4.3 %
Real Estate
Construction
Commercial 495 469 450 407 407 21.7 5.5
Residential 126 123 117 112 106 18.1 2.5
-------- -------- -------- -------- -------- ------- --------
Total Construction 621 592 567 519 513 21.0 4.9
Commercial Mortgages 4,429 4,300 4,219 4,159 4,050 9.3 3.0
Residential
Residential mortgages 2,409 2,740 3,168 3,011 2,862 (15.8) (12.1)
Home equity loans and lines 2,647 2,462 2,261 2,230 2,174 21.7 7.5
Securitized ARM loans 828 523 375 403 424 95.5 58.4
-------- -------- -------- -------- -------- ------- --------
Total Residential 5,884 5,725 5,804 5,644 5,460 7.8 2.8
-------- -------- -------- -------- -------- ------- --------
Total Real Estate 10,934 10,617 10,590 10,322 10,023 9.1 3.0
Personal
Student 134 119 108 254 262 (48.9) 12.5
Credit card 190 187 171 153 151 26.5 1.9
Other 850 852 883 944 901 (5.7) (0.3)
-------- -------- -------- -------- -------- ------- --------
Total Personal 1,174 1,158 1,162 1,351 1,314 (10.6) 1.4
Lease financing
Commercial 385 377 360 341 335 15.0 2.2
Personal 695 698 616 536 490 41.6 (0.5)
-------- -------- -------- -------- -------- ------- --------
Total Lease Financing 1,080 1,075 976 877 825 30.8 0.4
-------- -------- -------- -------- -------- ------- --------
Total Consolidated Average
Loans, Leases and ARMs $ 18,446 $ 17,892 $ 17,678 $ 17,563 $ 17,059 8.1 % 3.1 %
======== ======== ======== ======== ======== ======= ========
Total Consolidated Average
Loans, Leases and ARMs
Commercial Banking $ 10,567 $ 10,188 $ 9,979 $ 9,920 $ 9,689 9.1 % 3.7 %
Retail Banking 7,879 7,704 7,699 7,643 7,370 6.9 2.3
-------- -------- -------- -------- -------- ------- --------
Total Consolidated Average
Loans, Leases and ARMs $ 18,446 $ 17,892 $ 17,678 $ 17,563 $ 17,059 8.1 % 3.1 %
======== ======== ======== ======== ======== ======= ========
Total Consolidated Average
Loans and Leases $ 17,618 $ 17,369 $ 17,303 $ 17,160 $ 16,635 5.9 % 1.4 %
======== ======== ======== ======== ======== ======= ========
Compared with the first quarter of 2000, total consolidated average loans,
leases and securitized ARMs increased $1.4 billion or 8.1%. Approximately
63% of consolidated average loan growth was attributable to commercial
banking. Total loan growth in commercial banking amounted to $878 million
or 9.1% and was driven by commercial loan growth of $361 million and
commercial real estate loan growth of $467 million of which, $88 million
was attributable to commercial construction loan growth. Retail banking
loan growth amounted to $509 million or 6.9%. Home equity loans and lines
increased $473 million. In the fourth quarter of 2000, the Corporation
acquired $341 million of home equity loans and lines related to its
private-label banking services. Personal lease financing receivables
increased $205 million. Residential mortgages decreased $453 million or
15.8% while securitized ARM loans increased $404 million. In addition to
the ongoing sale of residential mortgage production in the secondary
market, late in the third quarter of 2000, the Corporation sold $300.8
million of portfolio ARM loans and late in the fourth quarter of 2000,
securitized $511 million of ARM loans. The decline in average student
loans of $128 million reflects the sale of approximately $150 million of
such loans late in the second quarter of 2000. Average other personal
loans decreased $51 million or 5.7%. 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 three months ended March 31, 2001 amounted to $68 million. The
Corporation anticipates that indirect auto loan origination will continue
to be securitized and sold in future quarters.
Generally, the Corporation sells residential real estate loan production in
the secondary market. Residential real estate loans originated and sold to
investors amounted to $ 322 million in the first quarter of 2001 compared
to $72 million in the first quarter of the prior year.
The growth and composition of the Corporation's quarterly average deposits for
the current and prior year's quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2001 2000 Growth Pct.
------- ----------------------------------- ----------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
-------- -------- -------- -------- -------- ------- --------
Noninterest bearing deposits
Commercial $ 1,639 $ 1,716 $ 1,694 $ 1,677 $ 1,668 (1.7)% (4.5)%
Personal 583 582 572 591 576 1.2 0.2
Other 436 428 373 351 365 19.5 1.8
-------- -------- -------- -------- -------- ------- -------
Total noninterest
bearing deposits 2,658 2,726 2,639 2,619 2,609 1.9 (2.5)
Interest bearing deposits
Savings & NOW 1,720 1,760 1,826 1,880 1,919 (10.4) (2.3)
Money market 5,873 5,558 5,248 5,092 5,065 15.9 5.7
Other CDs & time deposits 3,397 3,452 3,394 3,399 3,428 (0.9) (1.6)
CDs greater than $100,000 820 856 874 852 909 (9.8) (4.2)
Foreign Time 1,415 2,042 1,951 2,112 2,057 (31.2) (30.7)
Brokered CDs 1,795 1,780 1,653 1,239 1,045 71.8 0.8
-------- -------- -------- -------- -------- ------- -------
Total interest
bearing deposits 15,020 15,448 14,946 14,574 14,423 4.1 (2.8)
-------- -------- -------- -------- -------- ------- -------
Total consolidated
average deposits $ 17,678 $ 18,174 $ 17,585 $ 17,193 $ 17,032 3.8 % (2.7)%
======== ======== ======== ======== ======== ======= =======
Bank issued deposits $ 14,182 $ 14,125 $ 13,715 $ 13,572 $ 13,688 3.6 % 0.4 %
Wholesale deposits 3,496 4,049 3,870 3,621 3,344 4.6 (13.6)
-------- -------- -------- -------- -------- ------- -------
Total consolidated
average deposits $ 17,678 $ 18,174 $ 17,585 $ 17,193 $ 17,032 3.8 % (2.7)%
======== ======== ======== ======== ======== ======= =======
The Corporation continues to have some reliance on wholesale deposits for
funding. Compared with the first quarter of 2000, average wholesale deposit
growth amounted to $152 million or 4.6%. The increase in Brokered CDs of $750
million and brokered money market accounts of $124 million was offset by a
decrease in Eurodollar term and overnight funds, which are included in foreign
time, of $721 million.
Average bank issued deposits increased $494 million or 3.6% in the first
quarter of 2001 compared to the first quarter of 2000. As part of its
private-label banking services, the Corporation acquired $354 million of
deposits late in 2000. Average money market index accounts accounted for
approximately $858 million of the growth in average bank issued deposits while
savings and NOW declined $199 million and bank issued money market savings
decreased $175 million. This shift in mix had an adverse impact on the
interest margin. Noninterest bearing deposits, as previously discussed,
increased $49 million. Average bank issued deposits were negatively impacted
by the sale of three bank branches in 2000 all located in Illinois. Total
deposits sold amounted to approximately $111 million. There were no branch
sales in the first quarter of 2001 or during the first quarter of 2000.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current quarter
and prior year first quarter are presented in the following table.
Securitized ARM loans that are classified in the balance sheet as investment
securities available for sale are included with loans to provide a more
meaningful comparison ($ in millions):
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
-------------------------------- --------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
---------- ---------- ---------- ---------- ---------- ----------
Loans and leases (a) $ 18,445.9 $ 370.5 8.15 % $ 17,059.0 $ 335.0 7.90 %
Investment securities:
Taxable 3,660.1 61.9 6.98 3,708.8 59.9 6.34
Tax Exempt (a) 1,293.8 22.6 7.17 1,341.9 23.8 7.20
Other short-term investments (a) 348.0 4.6 5.36 276.0 3.8 5.56
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets $ 23,747.8 $ 459.6 7.88 % $ 22,385.7 $ 422.5 7.57 %
Money market savings $ 5,872.7 $ 71.8 4.96 % $ 5,065.3 $ 61.2 4.86 %
Regular savings & NOW 1,719.8 5.7 1.34 1,918.4 8.5 1.78
Other CDs & time deposits 4,812.9 69.5 5.86 5,484.9 74.6 5.47
CDs greater than
$100 & Brokered CDs 2,615.0 40.2 6.23 1,954.1 28.3 5.82
Total interest bearing deposits 15,020.4 187.2 5.05 14,422.7 172.6 4.81
Short-term borrowings 3,676.8 54.1 5.97 3,895.1 57.0 5.89
Long-term borrowings 1,611.6 25.3 6.38 1,010.5 15.9 6.32
Total interest bearing liabilities $ 20,308.8 $ 266.6 5.32 % $ 19,328.3 $ 245.5 5.11 %
========== ========== ========== ========== ========== ==========
Net interest margin (FTE) as a
percent of average earning assets $ 193.0 3.31 % $ 177.0 3.17 %
========== ========== ========== ==========
Net interest spread (FTE) 2.56 % 2.46 %
========== =========
(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 increased 31 basis points since the first
quarter of 2000 which had a positive impact on interest income (FTE) of
approximately $13.4 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 $23.7 million
compared with the first quarter of 2000. The cost of interest bearing
deposits increased 24 basis points from the same quarter of the previous year
which reflects, in part, the adverse shift in deposit mix previously
discussed. Short-term borrowing costs increased 8 basis points which also
reflects the shift in mix of short-term funding sources. Long-term borrowing
costs increased 6 basis points compared with the first quarter of 2000 which
is a result of the greater use of bank notes which were issued in the later
part of 2000. The overall increase in the cost of interest bearing
liabilities of 21 basis points increased interest expense by approximately
$5.7 million while the increase in the volume of interest bearing liabilities
increased interest expense by approximately $15.4 million.
In the recent declining interest rate environment, the Corporation has taken
certain actions 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 things, 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 March 31, 2001 and the prior four quarters.
NONPERFORMING ASSETS
--------------------
($000's)
2001 2000
---------- --------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
Nonaccrual $ 130,640 $ 121,425 $ 116,682 $ 119,584 $ 111,642
Renegotiated 560 614 658 421 688
Past due 90 days or more 7,080 7,371 7,295 10,069 9,334
---------- ---------- ---------- ---------- ----------
Total nonperforming
loans and leases 138,280 129,410 124,635 130,074 121,664
Other real estate owned 3,790 3,797 3,804 4,592 6,247
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 142,070 $ 133,207 $ 128,439 $ 134,666 $ 127,911
========== ========== ========== ========== ==========
Allowance for loan
and lease losses $ 240,348 $ 235,115 $ 232,690 $ 234,119 $ 232,471
========== ========== ========== ========== ==========
CONSOLIDATED STATISTICS
-----------------------
2001 2000
---------- --------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
Net Charge-offs (Recoveries)
to average loans and
leases annualized 0.13 % 0.16 % 0.17 % 0.19 % (0.02)%
Total nonperforming loans and
leases to total loans and leases 0.78 0.74 0.72 0.75 0.72
Total nonperforming assets to
total loans and leases and
other real estate owned 0.80 0.76 0.74 0.77 0.75
Allowance for loan and lease
losses to total loans and leases 1.35 1.34 1.34 1.35 1.37
Allowance for loan and lease losses
to nonperforming loans and leases 174 182 187 180 191
NONACCRUAL LOANS AND LEASES BY TYPE
-----------------------------------
($000's)
2001 2000
---------- --------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
Commercial
Commercial, financial
& agricultural $ 50,273 $ 49,965 $ 39,203 $ 51,505 $ 49,006
Lease financing receivables 2,959 1,921 2,046 2,271 3,929
---------- ---------- ---------- ---------- ----------
Total commercial 53,232 51,886 41,249 53,776 52,935
Real estate
Construction & land development 2,584 2,896 2,929 2,915 5,284
Commercial mortgage 38,797 35,011 42,246 36,159 28,069
Residential mortgage 34,244 29,895 28,155 25,198 23,715
---------- ---------- ---------- ---------- ----------
Total real estate 75,625 67,802 73,330 64,272 57,068
Personal 1,783 1,737 2,103 1,536 1,639
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and leases $ 130,640 $ 121,425 $ 116,682 $ 119,584 $ 111,642
========== ========== ========== ========== ==========
RECONCILIATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
-----------------------------------------------------
($000's)
2001 2000
---------- --------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
Beginning balance $ 235,115 $ 232,690 $ 234,119 $ 232,471 $ 225,862
Provision for loan and
lease losses 11,063 8,979 5,938 9,616 5,819
Allowance of banks
and loans acquired -- 1,270 -- -- --
Allowance transfer for
loan securitizations -- (1,022) -- -- --
Loans and leases charged-off
Commercial 2,577 2,253 5,210 2,711 449
Real estate 2,075 3,267 943 4,989 653
Personal 2,383 2,629 2,285 1,758 1,544
Leases 496 397 193 539 198
---------- ---------- ---------- ---------- ----------
Total charge-offs 7,531 8,546 8,631 9,997 2,844
Recoveries on loans and leases
Commercial 515 429 436 1,020 2,811
Real estate 410 645 291 373 206
Personal 728 627 508 539 525
Leases 48 43 29 97 92
---------- ---------- ---------- ---------- ----------
Total recoveries 1,701 1,744 1,264 2,029 3,634
---------- ---------- ---------- ---------- ----------
Net loans and leases
charge-offs (recoveries) 5,830 6,802 7,367 7,968 (790)
---------- ---------- ---------- ---------- ----------
Ending balance $ 240,348 $ 235,115 $ 232,690 $ 234,119 $ 232,471
========== ========== ========== ========== ==========
Nonperforming assets consist of nonperforming loans and other real estate
owned (OREO).
OREO is comprised of commercial and residential properties acquired in partial
or total satisfaction of problem loans and branch premises held for sale. At
March 31, 2001, OREO acquired in satisfaction of debts amounted to $3.2
million and branch premises held for sale amounted to $0.6 million.
Nonperforming loans and leases consist of nonaccrual, renegotiated or
restructured loans, and loans and leases that are delinquent 90 days or more
and still accruing interest. The balance of nonperforming loans and leases
can fluctuate widely based on the timing of cash collections, renegotiations
and renewals.
Maintaining nonperforming assets at an acceptable level is important to the
ongoing success of a financial services institution. The Corporation's
comprehensive credit review and approval process is critical to ensuring that
the amount of nonperforming assets on a long-term basis is minimized within
the overall framework of acceptable levels of credit risk. In addition to the
negative impact on net interest income and credit losses, nonperforming assets
also increase operating costs due to the expense associated with collection
efforts.
At March 31, 2001, nonperforming loans and leases amounted to $138.3 million
or 0.78% of consolidated loans and leases of $17.8 billion, an increase of
$8.9 million or 6.9% since December 31, 2000. Nonaccrual loans and leases
accounted for $9.2 million of the increase compared to the prior quarter.
Nonaccrual residential real estate loans accounted for $4.3 million of the
increase. Nonaccrual commercial real estate loans increased $3.8 million
driven primarily by multifamily loans. Two commercial lease financing
receivables placed on nonaccrual accounted for the $1.0 million increase in
nonaccrual leases while nonaccrual commercial and industrial loans were
relatively unchanged. Nonaccrual loans associated with the cranberry industry
amounted to $13.0 million at March 31, 2001, compared to $13.8 million at
December 31, 2000. While this sector represents 10% of total nonaccrual
loans, the Corporation feels this industry has stabilized and does not
anticipate further losses.
Net charge-offs amounted to $5.8 million or 0.13% of average loans in the
first quarter of 2001 compared with net charge-offs of $6.8 million or 0.16%
of average loans in the fourth quarter of 2000 and have remained fairly stable
over the past four quarters.
The allowance for loan and lease losses represents management's estimate of
probable inherent losses which have occurred as of the date of the financial
statements. In determining the adequacy of the reserve the Corporation
evaluates the reserves necessary for specific nonperforming loans and also
estimates losses inherent in other loans and leases. As a result, the
allowance for loans and leases contains the following components:
Specific Reserve. The amount of specific reserves is determined
through a loan-by-loan analysis of nonperforming loans that
considers expected future cash flows, the value of collateral and
other factors that may impact the borrower's ability to make
payments when due. Included in this group are those nonaccrual or
renegotiated loans which meet the criteria as being "impaired"
under the definition in SFAS 114. A loan is impaired when, based
on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
Allocated inherent reserve. The amount of the allocated portion
of the inherent loss reserve is determined by reserving factors
assigned to loans and leases based on the Corporation's internal
loan grading system. Line officers and loan committees are
responsible for continually assigning grades to commercial loan
types based on standards established in the Corporation's loan
policies and adherence to the standards is closely monitored by
the Corporation's Loan Review Group. Loan grades are similar to,
but generally more conservative than, regulatory classifications.
In addition, reserving factors are applied to retail and smaller
balance ungraded credits as well as specialty loan products such
as credit card, student loans and mortgages. Reserving factors
are derived and are determined based on such factors as
historical charge-off experience, remaining life, and industry
practice for reserve levels. The use of industry practice is
intended to prevent an understatement of reserves based upon an
over-reliance on historical charge-offs during favorable economic
conditions.
Unallocated inherent reserve. Management determines the
unallocated portion of the inherent loss reserve based on factors
that cannot be associated with a specific credit or loan
categories. These factors include management's subjective
evaluation of local, national and international economic and
business conditions, changes to underwriting standards and
marketing channels such as use of centralized retail and small
business credit centers, trends towards higher advance rates and
longer amortization periods and the impact of acquisitions on the
Corporation's credit risk profile. The unallocated portion of
the inherent loss reserve also reflects management's attempt to
ensure that the overall reserve appropriately reflects a margin
for the imprecision necessarily inherent in estimates of expected
credit losses.
Management's evaluation of the factors described above resulted in an
allowance for loan and lease losses of $240.3 million at March 31, 2001
compared to $235.1 million at December 31, 2000. The level of reserve
reflects management's belief that losses inherent in the loan and lease
portfolio were larger than would otherwise be suggested by the Corporation's
favorable charge-off experience in recent years; the Corporation's experience,
as most recently evidenced in the 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 continuing loan growth and
the slowing of economic prosperity.
OTHER INCOME
------------
Total other income in the first quarter of 2001 amounted to $247.0 million,
an increase of $5.6 million or 2.3%, compared to $241.4 million in the same
period last year.
Total data processing services revenue increased $3.0 million or 2.3% from
$130.0 million in the first quarter of 2000 to $133.0 million in the current
quarter. Account processing fees increased $10.1 million or 10.7% and
reflects growth in electronic bill payment and presentment and online banking.
Professional services fees and software revenue is somewhat seasonal in nature
and are typically lower in the first quarter. Other revenue declined
primarily due to lower equipment sales while buyout fees were relatively
unchanged.
The increase in internet banking revenue was driven by increased internet
mortgage lending activity.
Trust services revenue amounted to $30.0 million in the first quarter of 2001,
an increase of $2.2 million or 8.0% compared to $27.8 million in the first
quarter of 2000. Trust services revenue is largely derived from asset-based
fees. Maintaining year-over-year revenue growth in the current market
environment will be a continuing challenge.
Service charges on deposits increased $2.3 million or 12.5% and amounted $20.8
million in the first quarter of 2001. The increase was primarily attributable
to service charges on commercial demand accounts.
Mortgage banking revenue increased $4.0 million in the first quarter of 2001
compared to the first quarter of 2000. While all sources of mortgage banking
revenue increased compared to the prior year, 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.
The decrease in capital markets revenue is due to gains from the sale of
investments and other net unrealized gains. Net securities gains from
Capital Markets investments, which can vary from period to period, amounts to
$6.2 million in the current quarter compared to $14.8 million in the first
quarter of last year.
Other income in the first quarter of 2001 amounted to $30.1 million compared
to $27.5 million in the first quarter of 2000, an increase of $2.6 million or
9.5%. Gains and income from indirect auto securitizations, which began in the
third quarter of 2000 as previously discussed, amounted to $5.6 million in the
current quarter. Offsetting this income was lower investment income on
nonqualified benefit plan assets of approximately $1.5 million. During the
first quarter of 2000 the Corporation recognized reversion income associated
with the final settlement of an acquired pension plan of approximately $1.8
million.
OTHER EXPENSE
-------------
Total other expense for the three months ended March 31, 2001, amounted to
$290.8 million including costs attributable to the single charter initiative.
Single Charter related expenses incurred in the current quarter amounted to
$6.0 million. Such expenses consisted of the costs of programming changes
required to support operations and processes to achieve the scale required in
the single charter environment, systems conversion costs, consulting and other
professional fees, costs incurred to eliminate duplicate loan and deposit
customer's accounts and other affiliate shareholder matters and costs
associated with employee relocation, retention and severance. During the
first quarter of 2001, ten charter mergers were completed.
Excluding this item, total other expense amounted to $284.8 million in the
first quarter of 2001 compared to $268.0 million in the first quarter of 2000
an increase of $16.8 million or 6.3%.
The Corporation's nonbanking businesses, especially its Data Services segment
("Metavante"), continue to be the primary contributors to operating expense
growth. Metavante expense growth represents over half of all of the
consolidated operating expense growth and reflects the cost of adding
processing capacity and other related costs associated with developing new
products and services. Expense growth in the current quarter for the banking
segment reflects start-up costs associated with its private-label banking
services and losses associated with retail auto lease residual values.
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 March 31, 2001 and 2000 and the year ended December 31, 2000 are:
Three Months Three Months Three Months
Ended Ended Ended
March 31, December 31, March 31,
2001 2000 2000
------------ ------------ ------------
Consolidated Corporation 64.7 % 65.4 % 64.0 %
Consolidated Corporation Excluding Metavante
Including Intangible Amortization 53.9 % 55.8 % 53.8 %
Excluding Intangible Amortization 51.8 % 53.4 % 51.6 %
Salaries and employee benefits expense amounted to $167.9 million in the first
quarter of 2001 compared to $157.3 million in the first quarter of 2000, an
increase of $10.6 million or 6.7%. Salaries and employee benefits expense of
Metavante increased $8.0 million. At March 31, 2001, Metavante had
approximately 294 more full time equivalent employees when compared to March
31, 2000. Compared to the first quarter of 2000, expense growth in the
current quarter in salaries and employee benefits was $2.4 million or 3.9% for
the banking segment.
Data Services expense growth accounted for approximately $6.2 million or 96%
of the increase in net occupancy, equipment, software, supplies and printing
and processing expenses in the first quarter of 2001 compared to the first
quarter of 2000.
Approximately $1.3 million of the decline in professional fees was
attributable to Metavante and was offset by increased fees in mortgage and
internet banking.
Other expense amounted to $23.9 million in the first quarter of 2001, and
was relatively unchanged compared to the first quarter of 2000. Lower cost
of sales associated with equipment sales and card plastics revenue was $3.1
million and was offset by losses associated with auto lease residuals.
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 capitalization was $7.2
million in the first quarter of 2000 and in the current quarter amounted to
$6.4 million resulting in an increase of $0.8 million in other expense in
the first quarter of 2001 compared to first quarter of 2000.
INCOME TAXES
------------
The provision for income taxes for the three months ended March 31, 2001
amounted to $44.3 million or 33.8% of pre-tax income compared to $46.0
million or 33.7% of pre-tax income for the three months ended March 31,
2000.
CAPITAL RESOURCES
-----------------
Shareholders' equity was $2.31 billion at March 31, 2001 compared to $2.24
billion at December 31, 2000 and $2.07 billion at March 31, 2000.
The Corporation had net unrealized gains on securities available for sale
at March 31, 2000 of $72.5 million, an increase in market value net of
related income tax effects of $34.4 million since December 31, 2000. Net
unrealized losses associated with derivative financial instruments
designated cash flow hedges at March 31, 2001 amounted to $12.9 million.
For the three months ended March 31, 2000, M&I repurchased 0.3 million shares
of its Common Stock. The aggregate cost of the shares repurchased was $15.5
million.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in
the following tables.
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
March 31, 2001 December 31, 2000
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,130 10.08 % $ 2,071 10.20 %
Tier 1 Capital
Minimum Requirement 845 4.00 812 4.00
-------------------------------- --------------------------------
Excess $ 1,285 6.08 % $ 1,259 6.20 %
================================ ================================
Total Capital $ 2,522 11.94 % $ 2,445 12.05 %
Total Capital
Minimum Requirement 1,690 8.00 1,624 8.00
-------------------------------- --------------------------------
Excess $ 832 3.94 % $ 821 4.05 %
================================ ================================
Risk-Adjusted Assets $ 21,121 $ 20,294
================= =================
LEVERAGE RATIOS
---------------
($ in millions)
March 31, 2001 December 31, 2000
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,130 8.31 % $ 2,071 8.25 %
Minimum Leverage
Requirement 769 - 1,281 3.00 - 5.00 753 - 1,255 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,361 - 849 5.31 - 3.31 % $ 1,318 - 816 5.25 - 3.25 %
================================ ================================
Adjusted Average
Total Assets $ 25,620 $ 25,096
================= =================
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 March 31, 2001 and December 31, 2000:
Impact to Annual Pretax Income as of
------------------------------------
March 31, December 31,
2001 2000
----------------- ------------------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (4.9)% (6.4)%
Decline in rates 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 March 31, 2001 the fair value of equity at risk for a gradual 100bp
shift in rates was less than 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 exists, but due to the nature of the investments, cannot
be quantified within acceptable levels of precision.
M&I Trust Services administers $56.1 billion in assets and directly manages
a portfolio of $11.8 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 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits:
Exhibit 10 - Change of Control Agreement dated as of April 16, 2001
between the Corporation and Mark F. Furlong
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:
None
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
May 15, 2001