1
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UNITED STATES
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, 2005
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 by check mark whether the registrant is an accelerated
filer (as defined by Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company
(as defined by Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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, 2005
----- ----------------
Common Stock, $1.00 Par Value 235,005,784
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2
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,
2005 2004 2004
-------------- ------------- --------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 1,079,664 $ 838,668 $ 887,273
Federal funds sold and security resale agreements 252,183 72,515 84,499
Money market funds 40,264 76,955 51,949
------------- ------------- -------------
Total cash and cash equivalents 1,372,111 988,138 1,023,721
Investment securities:
Trading securities, at market value 28,414 18,418 35,592
Interest bearing deposits at other banks 13,551 23,105 25,532
Available for sale, at market value 5,675,681 5,358,999 5,322,536
Held to maturity, market value $679,996
($765,101 December 31, and
$802,785 September 30, 2004) 654,214 726,386 756,649
------------- ------------- -------------
Total investment securities 6,371,860 6,126,908 6,140,309
Loans held for sale 225,570 81,662 87,563
Loans and leases:
Loans and leases, net of unearned income 32,880,738 29,455,110 28,057,336
Less: Allowance for loan and lease losses 362,257 358,110 358,072
------------- ------------- -------------
Net loans and leases 32,518,481 29,097,000 27,699,264
Premises and equipment, net 469,062 467,225 461,208
Goodwill and other intangibles 2,387,539 2,126,433 2,041,541
Accrued interest and other assets 1,650,670 1,550,036 1,525,918
------------- ------------- -------------
Total Assets $ 44,995,293 $ 40,437,402 $ 38,979,524
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 5,224,241 $ 4,888,426 $ 4,753,267
Interest bearing 21,767,120 21,566,661 20,132,514
------------- ------------- -------------
Total deposits 26,991,361 26,455,087 24,885,781
Federal funds purchased and
security repurchase agreements 2,376,198 1,488,855 1,094,483
Other short-term borrowings 3,120,939 2,041,181 3,527,748
Accrued expenses and other liabilities 1,588,066 1,535,866 1,396,958
Long-term borrowings 6,374,864 5,026,599 4,486,258
------------- ------------- -------------
Total liabilities 40,451,428 36,547,588 35,391,228
Shareholders' equity:
---------------------
Series A convertible preferred stock, $1.00 par value;
2,000,000 shares authorized -- -- --
Common stock, $1.00 par value; 244,432,222 shares issued
(244,432,222 shares at December 31, 2004 and
240,832,522 shares at September 30, 2004) 244,432 244,432 240,833
Additional paid-in capital 743,914 671,815 513,289
Retained earnings 3,892,094 3,508,477 3,381,436
Accumulated other comprehensive income,
net of related taxes 6,013 23,338 20,842
Less: Treasury stock, at cost: 9,985,846 shares
(17,091,528 December 31, and
17,751,447 September 30, 2004) 302,796 518,231 538,233
Deferred compensation 39,792 40,017 29,871
------------- ------------- -------------
Total shareholders' equity 4,543,865 3,889,814 3,588,296
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 44,995,293 $ 40,437,402 $ 38,979,524
============= ============= =============
See notes to financial statements.
3
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
Three Months Ended
September 30,
----------------------------
2005 2004
------------- -------------
Interest income
---------------
Loans and leases $ 502,242 $ 356,694
Investment securities:
Taxable 53,836 51,753
Exempt from federal income taxes 16,388 15,042
Trading securities 58 78
Short-term investments 2,651 653
------------- -------------
Total interest income 575,175 424,220
Interest expense
----------------
Deposits 145,473 73,957
Short-term borrowings 27,952 14,352
Long-term borrowings 88,504 54,773
------------- -------------
Total interest expense 261,929 143,082
------------- -------------
Net interest income 313,246 281,138
Provision for loan and lease losses 9,949 6,872
------------- -------------
Net interest income after provision
for loan and lease losses 303,297 274,266
Other income
------------
Data processing services 284,967 238,960
Item processing 10,972 10,311
Trust services 41,908 37,510
Service charges on deposits 23,828 25,029
Gains on sale of mortgage loans 13,925 6,967
Other mortgage banking revenue 769 1,905
Net investment securities gains 7,359 465
Life insurance revenue 6,433 6,767
Other 48,526 40,014
------------- -------------
Total other income 438,687 367,928
Other expense
-------------
Salaries and employee benefits 271,258 231,468
Net occupancy 22,290 20,306
Equipment 32,317 30,456
Software expenses 14,997 13,468
Processing charges 16,157 12,478
Supplies and printing 5,624 5,456
Professional services 14,320 11,748
Shipping and handling 16,882 15,840
Amortization of intangibles 6,106 8,268
Other 63,831 58,608
------------- -------------
Total other expense 463,782 408,096
------------- -------------
Income before income taxes 278,202 234,098
Provision for income taxes 94,055 78,649
------------- -------------
Net income $ 184,147 $ 155,449
============= =============
Net income per common share
Basic $ 0.79 $ 0.70
Diluted 0.78 0.69
Dividends paid per common share $ 0.240 $ 0.210
Weighted average common shares outstanding (000's):
Basic 232,590 222,612
Diluted 237,027 226,235
See notes to financial statements.
4
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
Nine Months Ended
September 30,
----------------------------
2005 2004
------------- -------------
Interest income
---------------
Loans and leases $ 1,380,618 $ 1,017,171
Investment securities:
Taxable 159,044 148,693
Exempt from federal income taxes 47,898 43,635
Trading securities 174 222
Short-term investments 6,289 1,601
------------- -------------
Total interest income 1,594,023 1,211,322
Interest expense
----------------
Deposits 371,766 187,505
Short-term borrowings 78,305 44,448
Long-term borrowings 234,162 135,587
------------- -------------
Total interest expense 684,233 367,540
------------- -------------
Net interest income 909,790 843,782
Provision for loan and lease losses 31,800 25,126
------------- -------------
Net interest income after provision
for loan and lease losses 877,990 818,656
Other income
------------
Data processing services 828,998 622,428
Item processing 32,253 32,645
Trust services 123,361 111,682
Service charges on deposits 71,334 75,635
Gains on sale of mortgage loans 30,351 21,142
Other mortgage banking revenue 2,786 6,395
Net investment securities gains 42,630 13
Life insurance revenue 20,697 20,543
Other 138,377 120,859
------------- -------------
Total other income 1,290,787 1,011,342
Other expense
-------------
Salaries and employee benefits 772,179 647,277
Net occupancy 65,443 57,739
Equipment 93,403 84,868
Software expenses 42,492 37,174
Processing charges 44,599 37,339
Supplies and printing 17,911 16,968
Professional services 38,008 31,108
Shipping and handling 53,268 50,351
Amortization of intangibles 22,304 19,158
Other 203,189 163,120
------------- -------------
Total other expense 1,352,796 1,145,102
------------- -------------
Income before income taxes 815,981 684,896
Provision for income taxes 273,767 231,629
------------- -------------
Net income $ 542,214 $ 453,267
============= =============
Net income per common share
Basic $ 2.36 $ 2.04
Diluted 2.32 2.01
Dividends paid per common share $ 0.690 $ 0.600
Weighted average common shares outstanding (000's):
Basic 229,611 222,289
Diluted 233,714 225,892
See notes to financial statements.
5
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's except per share data)
Nine Months Ended
September 30,
----------------------------
2005 2004
------------- -------------
Net Cash Provided by Operating Activities $ 456,187 $ 679,583
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 91,618 11,358
Proceeds from maturities of securities available for sale 929,455 1,011,633
Proceeds from maturities of securities held to maturity 72,658 64,512
Purchases of securities available for sale (1,326,992) (1,503,844)
Net increase in loans (3,508,934) (3,158,085)
Purchases of assets to be leased (199,818) (148,455)
Principal payments on lease receivables 161,294 224,034
Purchases of premises and equipment, net (51,165) (54,821)
Acquisitions, net of cash and cash equivalents acquired (34,911) (909,689)
Other 7,878 17,056
------------- -------------
Net cash used in investing activities (3,858,917) (4,446,301)
Cash Flows From Financing Activities:
Net increase in deposits 564,440 2,615,409
Proceeds from issuance of commercial paper 4,317,523 4,877,029
Principal payments on commercial paper (4,283,274) (5,005,472)
Net increase (decrease) in other short-term borrowings 1,429,942 (712,411)
Proceeds from issuance of long-term borrowings 2,479,979 2,739,571
Payments of long-term borrowings (602,244) (450,437)
Dividends paid (158,598) (133,076)
Purchases of common stock -- (98,382)
Other 38,935 46,582
------------- -------------
Net cash provided by financing activities 3,786,703 3,878,813
------------- -------------
Net increase in cash and cash equivalents 383,973 112,095
Cash and cash equivalents, beginning of year 988,138 911,626
------------- -------------
Cash and cash equivalents, end of period $ 1,372,111 $ 1,023,721
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 628,729 $ 330,261
Income taxes 275,879 213,466
See notes to financial statements.
6
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
September 30, 2005 & 2004 (Unaudited)
1. The accompanying unaudited consolidated financial statements should
be read in conjunction with Marshall & Ilsley Corporation's ("M&I"
or "Corporation") 2004 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, 2005 and 2004. The results of operations for the
three and nine months ended September 30, 2005 and 2004 are not
necessarily indicative of results to be expected for the entire
year. Certain amounts in the 2004 consolidated financial statements
and analyses have been reclassified to conform with the 2005
presentation.
2. New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 154, Accounting Changes and
Error Corrections ("SFAS 154"). This statement is effective for
accounting changes and corrections of errors made after January 1,
2006. SFAS 154 generally requires retrospective application of
prior periods' financial statements of a voluntary change in
accounting principle. However, this statement does not change the
transition provisions of any existing accounting pronouncement,
including those that are in a transition phase as of the effective
date of SFAS 154.
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123 (revised
2004), Share-based Payment ("SFAS 123(R)"). SFAS 123(R) replaces
FASB Statement No. 123, Accounting for Stock-Based Compensation and
supercedes Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS 123(R) requires that
compensation costs relating to share-based payment transactions be
recognized in financial statements. That cost is measured based on
the fair value of the equity or liability instruments issued. SFAS
123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance based
awards, share appreciation rights, and employee share purchase
plans. SFAS 123(R) also provides guidance on measuring the fair
value of share-based payment awards.
The Corporation was originally required to adopt SFAS 123(R)
beginning in the third quarter of 2005. In April 2005, the
Securities and Exchange Commission ("SEC") announced the adoption of
a new rule that amends the compliance dates for SFAS 123(R). The
new rule allows companies to implement SFAS 123(R) at the beginning
of their next fiscal year. The Corporation plans to adopt SFAS
123(R) effective January 1, 2006.
On March 29, 2005 the SEC released Staff Accounting Bulletin No.
107, "Share-based Payment" ("SAB 107"). SAB 107 expresses views of
the SEC Staff regarding the application of SFAS 123(R). SAB 107 is
intended to assist both public entities in applying the provisions
of SFAS 123(R) and investors and other users of financial statements
in analyzing the information provided under SFAS 123(R).
On May 31, 2005, the FASB issued FSP EITF 00-19-1, "Application of
EITF Issue No. 00-19 to Freestanding Financial Instruments
Originally Issued as Employee Compensation." The guidance in this
FSP should be applied in accordance with the effective date and
transition provisions of Statement 123(R). This FSP clarifies that
a requirement to deliver registered shares, in and of itself, will
not result in liability classification for freestanding financial
instruments originally issued as employee compensation.
On August 31, 2005, the FASB issued FSP FAS 123(R)-1,
"Classification and Measurement of Freestanding Financial
Instruments Originally Issued in Exchange for Employee Services
under SFAS 123(R)." The guidance in this FSP should be applied in
accordance with the effective date and transition provisions of
Statement 123(R). This FSP defers the requirements under Statement
123(R) that make a freestanding financial instrument subject to the
recognition and measurement requirements of other generally accepted
accounting principles when the rights conveyed by the instrument are
no longer dependent on the holder being an employee.
7
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
3. Comprehensive Income
The following tables present the Corporation's comprehensive income
(000's):
Three Months Ended September 30, 2005
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 184,147
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (14,376) $ 5,079 (9,297)
Reclassification for securities
transactions included in net income (557) 195 (362)
------------ ------------ ------------
Unrealized gains (losses) (14,933) 5,274 (9,659)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 2,772 (970) 1,802
Reclassification adjustments for
hedging activities included in net income (2,520) 882 (1,638)
------------ ------------ ------------
Net gains (losses) $ 252 $ (88) 164
------------ ------------ ------------
Other comprehensive income (loss) (9,495)
------------
Total comprehensive income $ 174,652
============
Three Months Ended September 30, 2004
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 155,449
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 98,391 $ (34,737) 63,654
Reclassification for securities
transactions included in net income (378) 132 (246)
------------ ------------ ------------
Unrealized gains (losses) 98,013 (34,605) 63,408
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 6,090 (2,131) 3,959
Reclassification adjustments for
hedging activities included in net income 8,288 (2,901) 5,387
------------ ------------ ------------
Net gains (losses) $ 14,378 $ (5,032) 9,346
------------ ------------ ------------
Other comprehensive income (loss) 72,754
------------
Total comprehensive income $ 228,203
============
8
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
Nine Months Ended September 30, 2005
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 542,214
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (41,067) $ 14,505 (26,562)
Reclassification for securities
transactions included in net income (675) 236 (439)
------------ ------------ ------------
Unrealized gains (losses) (41,742) 14,741 (27,001)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 14,366 (5,028) 9,338
Reclassification adjustments for
hedging activities included in net income 520 (182) 338
------------ ------------ ------------
Net gains (losses) $ 14,886 $ (5,210) 9,676
------------ ------------ ------------
Other comprehensive income (loss) (17,325)
------------
Total comprehensive income $ 524,889
============
Nine Months Ended September 30, 2004
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 453,267
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (2,004) $ 648 (1,356)
Reclassification for securities
transactions included in net income (368) 129 (239)
------------ ------------ ------------
Unrealized gains (losses) (2,372) 777 (1,595)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 5,102 (1,786) 3,316
Reclassification adjustments for
hedging activities included in net income 25,273 (8,846) 16,427
------------ ------------ ------------
Net gains (losses) $ 30,375 $ (10,632) 19,743
------------ ------------ ------------
Other comprehensive income (loss) 18,148
------------
Total comprehensive income $ 471,415
============
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, 2005
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 184,147 232,590 $ 0.79
==========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 4,437
----------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 184,147 237,027 $ 0.78
=========== ============== ==========
9
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
Three Months Ended September 30, 2004
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 155,449 222,612 $ 0.70
==========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 3,623
----------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 155,449 226,235 $ 0.69
=========== ============== ==========
Nine Months Ended September 30, 2005
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 542,214 229,611 $ 2.36
==========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 4,103
----------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 542,214 233,714 $ 2.32
=========== ============== ==========
Nine Months Ended September 30, 2004
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 453,267 222,289 $ 2.04
==========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 3,603
----------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 453,267 225,892 $ 2.01
=========== ============== ==========
Options to purchase shares of common stock not included in the
computation of diluted net income per share because the exercise
prices of the options were greater than the average market price of
the common shares are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
----------------- ----------------- ----------------- -----------------
Shares 21 57 41 163
Price Range $ 44.95 - $ 47.02 $ 39.42 - $ 41.15 $ 43.83 - $ 47.02 $ 39.00 - $ 41.15
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," establishes financial
accounting and reporting standards for stock based employee
compensation plans.
SFAS 123 defines a fair value based method of accounting for
employee stock options or similar equity instruments. Under the
fair value based method, compensation cost is measured at the grant
date based on the fair value of the award using an option-pricing
model that takes into account the stock price at the grant date, the
exercise price, the expected life of the option, the volatility of
the underlying stock, expected dividends and the risk-free interest
rate over the expected life of the option. The resulting
compensation cost is recognized over the service period, which is
usually the vesting period.
10
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
Compensation cost can also be measured and accounted for using the
intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 ("APBO 25"), "Accounting for Stock
Issued to Employees." Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price
of the stock at grant date or other measurement date over the amount
paid to acquire the stock.
The largest difference between SFAS 123 and APBO 25 as they relate
to the Corporation is the amount of compensation cost attributable
to the Corporation's fixed stock option plans and employee stock
purchase plan ("ESPP"). Under APBO 25 no compensation cost is
recognized for fixed stock option plans because the exercise price
is equal to the quoted market price at the date of grant and
therefore there is no intrinsic value. SFAS 123 compensation cost
would equal the calculated fair value of the options granted. Under
APBO 25 no compensation cost is recognized for the ESPP because the
discount (15%) and the plan meets the definition of a qualified plan
under the Internal Revenue Code and meets the requirements of APBO
25. Under SFAS 123 the safe-harbor discount threshold is 5% for a
plan to be non-compensatory. SFAS 123 compensation cost would equal
the initial discount (15% of beginning of plan period price per
share) plus the value of a one year call option on 85% of a share of
stock plus the value of a one year put option on 15% of a share of
stock for each share purchased.
As permitted by SFAS 123, the Corporation continues to measure
compensation cost for such plans using the accounting method
prescribed by APBO 25. See Note 2.
Had compensation cost for the Corporation's ESPP and options granted
after January 1, 1995 been determined consistent with SFAS 123, the
Corporation's net income and earnings per share would have been
reduced to the following estimated pro forma amounts ($000's except
per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net Income, as reported $ 184,147 $ 155,449 $ 542,214 $ 453,267
Add: Stock-based employee compensation
expense included in reported net
income, net of tax 2,560 1,410 8,192 4,264
Less: Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of tax (7,154) (6,486) (22,117) (19,400)
---------- ---------- ---------- ----------
Pro forma net income $ 179,553 $ 150,373 $ 528,289 $ 438,131
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.79 $ 0.70 $ 2.36 $ 2.04
Pro forma 0.77 0.68 2.30 1.97
Diluted earnings per share:
As reported $ 0.78 $ 0.69 $ 2.32 $ 2.01
Pro forma 0.75 0.66 2.25 1.93
The fair value of each option grant was estimated as of the date of
grant using the Black-Scholes closed form option-pricing model for
options granted prior to September 30, 2004. A form of a lattice
option-pricing model was used for options granted after September
30, 2004.
11
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
5. Business Combinations
The following acquisitions, which are not considered to be material
business combinations, were completed during the third quarter of
2005:
On July 22, 2005, Metavante completed the acquisition of all of the
outstanding capital stock of Med-i-Bank, Inc. ("MBI") of Waltham,
Massachusetts for $150.5 million. Total consideration consisted of
2,850,730 shares of the Corporation's common stock valued at $133.8
million and $16.7 million in cash. MBI provides electronic payment
processing services for employee benefit and consumer-directed
healthcare accounts, such as flexible spending accounts, health
reimbursement arrangements and health savings account systems.
Initial goodwill, subject to the completion of appraisals and
valuations of the assets acquired and liabilities assumed, amounted
to $123.7 million. The estimated identifiable intangible asset to
be amortized (customer relationships) with an estimated useful life
of 10 years amounted to $25.0 million. The goodwill and intangibles
resulting from this transaction are not deductible for tax purposes.
On August 8, 2005, Metavante completed the acquisition of all of the
outstanding capital stock of TREEV LLC ("TREEV"), of Herndon,
Virginia. for $19.4 million. Total consideration consisted of
353,073 shares of the Corporation's common stock valued at $16.4
million and $3.0 million in cash. TREEV provides browser-based
document imaging, storage and retrieval products and services for
the financial-services industry in both lending and deposit
environments. TREEV would complement Metavante's check-imaging
products and services by providing solutions for document storage
and retrieval, including electronic report storage. Initial
goodwill, subject to the completion of appraisals and valuations of
the assets acquired and liabilities assumed, amounted to $16.9
million. The estimated identifiable intangible asset to be
amortized (customer relationship) with an estimated useful life of
10 years amounted to $4.9 million. The goodwill and intangibles
resulting from this transaction are not deductible for tax purposes.
On August 11, 2005, Metavante completed the acquisition of GHR
Systems, Inc. ("GHR") of Wayne, Pennsylvania for $63.7 million.
Total consideration consisted of 1,152,144 shares of the
Corporation's common stock valued at $52.2 million and $11.5 million
in cash. GHR provides loan origination technologies for the
residential mortgage and consumer finance industries, offers point
of sale products for any channel and comprehensive underwriting,
processing and closing technologies. Initial goodwill, subject to
the completion of appraisals and valuation of the assets acquired
and liabilities assumed, amounted to $44.4 million. The estimated
identifiable intangible asset to be amortized (customer
relationship) with an estimated useful life of 10 years amounted to
$10.5 million. The goodwill and intangibles resulting from this
transaction are not deductible for tax purposes.
Recent acquisition activities
-----------------------------
On October 6, 2005 Metavante completed the acquisition, announced in
August 2005, of Brasfield Corporation ("Brasfield") of Birmingham,
Alabama. Brasfield provides core processing products and services
to community banks which license and use Bankway software from
Kirchman Corporation, an indirect subsidiary of Metavante. Total
consideration consisted of 335,462 shares of the Corporation's
common stock valued at $14.6 million and $0.2 million in cash.
In October 2005, Metavante announced that it signed a definitive
agreement to acquire LINK2GOV Corp. ("LINK2GOV") of Nashville,
Tennessee. LINK2GOV is a provider of electronic payment processing
services for federal, state and local government agencies in the
United States, including the Internal Revenue Service. The
acquisition is expected to close in the fourth quarter of 2005,
pending regulatory approval and other customary closing conditions.
In October 2005, Marshall & Ilsley Trust Company, N.A. signed a
definitive agreement to acquire the trust and asset management
business assets of FirstTrust Indiana of Indianapolis, Indiana, a
division of First Indiana Bank, N.A. FirstTrust Indiana offers
asset management, trust administration and estate planning services
to high net-worth individuals and institutional customers. The
FirstTrust Indiana business has nearly $1 billion in assets under
administration and will be integrated into the Corporation's Trust
reporting unit. The acquisition is subject to regulatory approval
and is expected to close in the first quarter of 2006.
12
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
6. Selected investment securities, by type, held by the Corporation
were as follows ($000's):
September 30, December 31, September 30,
2005 2004 2004
------------- ------------- -------------
Investment securities available for sale:
U.S. treasury and government agencies $ 4,349,134 $ 4,157,374 $ 4,171,521
State and political subdivisions 701,290 504,027 479,822
Mortgage backed securities 125,562 150,658 158,410
Other 499,695 546,940 512,783
------------ ------------ ------------
Total $ 5,675,681 $ 5,358,999 $ 5,322,536
============ ============ ============
Investment securities held to maturity:
State and political subdivisions $ 651,914 $ 724,086 $ 754,349
Other 2,300 2,300 2,300
------------ ------------ ------------
Total $ 654,214 $ 726,386 $ 756,649
============ ============ ============
The following table provides the gross unrealized losses and fair
value, aggregated by investment category and the length of time the
individual securities have been in a continuous unrealized loss
position, at September 30, 2005 ($000's):
Less than 12 Months 12 Months or More Total
----------------------- ---------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ---------- ----------- ---------- ----------- -----------
U.S. treasury and
government agencies $ 2,473,646 $ 17,766 $ 723,620 $ 15,778 $ 3,197,266 $ 33,544
State and political
subdivisions 80,080 914 47,418 903 127,498 1,817
Mortgage backed securities 86,568 541 34,606 779 121,174 1,320
Other 396 4 980 2 1,376 6
----------- --------- ---------- --------- ----------- ---------
Total $ 2,640,690 $ 19,225 $ 806,624 $ 17,462 $ 3,447,314 $ 36,687
=========== ========= ========== ========= =========== =========
The Corporation believes that the unrealized losses in the
investment securities portfolio resulted from increases in market
interest rates and not from deterioration in the creditworthiness of
the issuer.
7. The Corporation's loan and lease portfolio, including loans held for
sale, consisted of the following ($000's):
September 30, December 31, September 30,
2005 2004 2004
------------- ------------- -------------
Commercial, financial and agricultural $ 9,281,803 $ 8,483,046 $ 7,923,699
Cash flow hedging instruments at fair value (26,604) (1,583) 7,816
------------ ------------ ------------
Commercial, financial and agricultural 9,255,199 8,481,463 7,931,515
Real estate:
Construction 3,265,174 2,265,227 2,070,784
Residential mortgage 9,668,728 8,548,029 8,083,863
Commercial mortgage 8,733,067 8,164,099 7,999,229
------------ ------------ ------------
Total real estate 21,666,969 18,977,355 18,153,876
Personal 1,587,552 1,540,024 1,524,747
Lease financing 596,588 537,930 534,761
------------ ------------ ------------
Total loans and leases $ 33,106,308 $ 29,536,772 $ 28,144,899
============ ============ ============
13
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
8. Sale of Receivables
During the third quarter of 2005, automobile loans with principal
balances of $199.4 million were sold in securitization transactions.
Net gains of $5.8 were recognized and are reported in Other income
in the Consolidated Statements of Income. Other income associated
with auto securitizations, primarily servicing income, amounted to a
$1.7 million in the current quarter.
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 (CPR) 15-40 %
Weighted average life (in months) 20.0
Expected credit losses
(based on original balance) 0.22-0.74 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one month
LIBOR yield curve
At September 30, 2005, securitized automobile loans and other
automobile loans managed together with them, along with delinquency
and credit loss information consisted of the following ($000's):
Total
Securitized Portfolio Managed
------------- ------------- -------------
Loan balances $ 1,013,239 $ 217,104 $ 1,230,343
Principal amounts of loans
60 days or more past due 1,052 306 1,358
Net credit losses year to date 1,790 706 2,496
9. Goodwill and Other Intangibles
The changes in the carrying amount of goodwill for the nine months
ended September 30, 2005 were as follows ($000's):
Banking Metavante Others Total
------------- ------------- ------------- -------------
Goodwill balance as
of January 1, 2005 $ 815,086 $ 978,418 $ 5,412 $ 1,798,916
Goodwill acquired during the period -- 205,733 -- 205,733
Purchase accounting adjustments (114) 16,196 3,585 19,667
------------ ------------ ------------ ------------
Goodwill balance as
of September 30, 2005 $ 814,972 $ 1,200,347 $ 8,997 $ 2,024,316
============ ============ ============ ============
Goodwill acquired for the Metavante segment includes initial
goodwill relating to the acquisitions of MBI, TREEV and GHR in the
third quarter of 2005 and the acquisition of Prime Associates, Inc.
in the first quarter of 2005.
Purchase accounting adjustments for Metavante for the nine months
ended September 2005 represent adjustments made to the initial
estimates of fair value associated with the acquisitions of Kirchman
Corporation, Advanced Financial Solutions, Inc. and its affiliated
companies, NYCE Corporation, Response Data Corp., NuEdge Systems
LLC, and VECTORsgi Holdings, Inc. Purchase accounting adjustments
for Metavante also included the effect of a contingent payment made
in the first quarter of 2005 in connection with the Printing For
Systems, Inc. acquisition. Purchase accounting adjustments for the
Others segment included the effect of a contingent payment made for
an acquisition made by the Corporation's Trust subsidiary in 2004,
net of the reduction of goodwill allocated to the sale of two small
Trust business lines. Purchase accounting adjustments for the
Banking segment was the reduction of goodwill allocated to a branch
divestiture.
14
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
At September 30, 2005, the Corporation's other intangible assets
consisted of the following ($000's):
September 30, 2005
----------------------------------------
Accum-
Gross ulated Net
Carrying Amort- Carrying
Amount ization Value
------------- ------------ -------------
Other intangible assets
Core deposit intangible $ 152,816 $ 77,077 $ 75,739
Data processing contract
rights/customer lists 299,520 27,471 272,049
Trust customers 4,750 1,120 3,630
Tradename 10,775 2,971 7,804
Other Intangibles 1,250 346 904
------------ ----------- ------------
$ 469,111 $ 108,985 $ 360,126
============ =========== ============
Mortgage loan servicing rights $ 3,097
============
The estimated amortization expense of other intangible assets and
mortgage loan servicing rights for the next five annual fiscal years
are ($000's):
2005 - 2006 $ 32,290
2006 - 2007 30,031
2007 - 2008 28,228
2008 - 2009 26,930
2009 - 2010 25,876
10. The Corporation's deposit liabilities consisted of the following
($000's):
September 30, December 31, September 30,
2005 2004 2004
------------- ------------- -------------
Noninterest bearing demand $ 5,224,241 $ 4,888,426 $ 4,753,267
Savings and NOW 10,194,871 10,118,415 10,081,369
Cash flow hedge-Brokered MMDA (4,966) (1,445) (147)
------------ ------------ ------------
Total Savings and NOW 10,189,905 10,116,970 10,081,222
CD's $100,000 and over 6,116,679 5,592,947 5,988,784
Cash flow hedge-Institutional CDs (17,911) (8,977) 5,089
------------ ------------ ------------
Total CD's $100,000 and over 6,098,768 5,583,970 5,993,873
Other time deposits 3,228,265 2,721,214 2,686,482
Foreign deposits 2,250,182 3,144,507 1,370,937
------------ ------------ ------------
Total deposits $ 26,991,361 $ 26,455,087 $ 24,885,781
============ ============ ============
15
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
11. Derivative Financial Instruments and Hedging Activities
The following is an update of the Corporation's use of derivative
financial instruments and its hedging activities as described in its
Annual Report on Form 10-K for the year ended December 31, 2004.
Generally there were no substantive changes in the types of
derivative financial instruments the Corporation employs or its
hedging activities in the nine months ended September 30, 2005.
Trading Instruments and Other Free Standing Derivatives
Loan commitments accounted for as derivatives are not material to
the Corporation and the Corporation does not employ any formal
hedging strategies for these commitments.
Trading and free-standing derivative contracts are not linked to
specific assets and liabilities on the balance sheet or to
forecasted transactions in an accounting hedge relationship and,
therefore, do not qualify for hedge accounting under SFAS 133. They
are carried at fair value with changes in fair value recorded as a
component of other noninterest income.
At September 30, 2005, free standing interest rate swaps consisted
of $2.1 billion in notional amount of receive fixed/pay floating
with an aggregate negative fair value of $21.9 million and $1.2
billion in notional amount of pay fixed/receive floating with an
aggregate positive fair value of $17.5 million.
At September 30, 2005, interest rate caps purchased amounted to
$33.8 million in notional amount with a positive fair value of $0.3
million and interest rate caps sold amounted to $33.8 million in
notional amount with a negative fair value of $0.3 million.
At September 30, 2005, the notional value of interest rate futures
designated as trading was $5.2 billion with a positive fair value of
$0.6 million.
Fair Value Hedges
-----------------
The following table presents updated information with respect to
selected fair value hedges.
Fair Value Hedges
September 30, 2005 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
--------------------- ------------------ ----------- ------------ ----------
Fixed Rate CDs Receive Fixed Swap $ 777.0 $ (18.7) 9.1
Medium Term Notes Receive Fixed Swap 362.5 (5.7) 7.7
Fixed Rate
Bank Notes Receive Fixed Swap 1,070.5 (13.4) 6.7
Institutional CDs Receive Fixed Swap 120.0 (0.6) 1.3
The impact from fair value hedges to total net interest income for
the three and nine months ended September 30, 2005 was a positive
$6.9 million and $26.0 million, respectively. The impact to net
interest income due to ineffectiveness was not material.
16
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
Cash Flow Hedges
----------------
The following table updates the Corporation's cash flow hedges.
Cash Flow Hedges
September 30, 2005 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
--------------------- ------------------ ----------- ------------ ----------
Variable Rate Loans Receive Fixed Swap $ 1,150.0 $ (26.6) 4.1
Institutional CDs Pay Fixed Swap 2,305.0 17.9 0.8
Federal Funds
Purchased Pay Fixed Swap 300.0 (2.8) 1.6
FHLB Advances Pay Fixed Swap 920.0 18.9 2.7
Floating Rate
Bank Notes Pay Fixed Swap 125.0 0.8 1.5
Money Market Accounts Pay Fixed Swap 250.0 5.0 1.8
The impact to total net interest income from cash flow hedges,
including amortization of terminated cash flow hedges was a positive
$2.5 million for the three months ended September 30, 2005 and a
negative $0.5 million for the nine months ended September 30, 2005.
The impact due to ineffectiveness was not material.
12. Postretirement Health Plan
The Corporation sponsors a defined benefit health plan that provides
health care benefits to eligible current and retired employees.
Eligibility for retiree benefits is dependent upon age, years of
service, and participation in the health plan during active service.
The plan is contributory and in 1997 and 2002 the plan was amended.
Employees hired or retained from mergers after September 1, 1997
will be granted access to the Corporation's plan upon becoming an
eligible retiree; however, such retirees must pay 100% of the cost
of health care benefits. The plan continues to contain other cost-
sharing features such as deductibles and coinsurance.
Net periodic postretirement benefit costs for the three and nine
month periods ended September 30, 2005 and 2004 included the
following components ($000's):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Service cost $ 553 $ 630 $ 1,658 $ 1,892
Interest on APBO 1,158 1,024 3,476 3,756
Expected return
on assets (149) (225) (448) (225)
Prior service
amortization (680) (1,121) (2,041) (2,481)
Actuarial loss
amortization 264 564 792 1,689
Other -- -- -- --
---------- ---------- ---------- ----------
$ 1,146 $ 872 $ 3,437 $ 4,631
========== ========== ========== ==========
Benefit payments and expenses, net of participant contributions, for
the three and nine months ended September 30, 2005 amounted to $0.9
million and $2.9 million, respectively.
17
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
13. Segments
The following represents the Corporation's operating segments as of
and for the three and nine months ended September 30, 2005 and 2004.
There have not been any changes to the way the Corporation organizes
its segments. Beginning with the third quarter of 2005, total other
income for Metavante includes float income which represents interest
income on balances invested in an affiliate bank which arise from
Electronic Bill Payment activities. This income was formerly
reported as a component of Net Interest Income for Metavante.
Segment information for all prior periods have been restated for
this reclassification. Fees - intercompany represent intercompany
revenues charged to other segments for providing certain services.
Expenses - intercompany represent fees charged by other segments for
certain services received. For each segment, Expenses -
intercompany are not the costs of that segment's reported
intercompany revenues. Intersegment revenues, expenses and assets
have been eliminated ($ in millions):
Three Months Ended September 30, 2005
---------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- idated
Banking Metavante Others Overhead nations Income
------------ ------------ ------------ ------------ ----------- -------------
Net interest income $ 315.5 $ (9.0) $ 5.8 $ (2.7) $ 3.6 $ 313.2
Other income
Fees - external 95.2 284.9 50.1 8.5 -- 438.7
Fees - internal
Fees - intercompany 14.1 23.2 7.2 21.5 (66.0) --
Float income - intercompany -- 3.6 -- -- (3.6) --
---------- ----------- ----------- ----------- ---------- -----------
Total other income 109.3 311.7 57.3 30.0 (69.6) 438.7
Other expense
Expenses - other 162.4 241.1 34.1 26.1 0.1 463.8
Expenses - intercompany 43.5 10.8 11.6 0.2 (66.1) --
---------- ----------- ----------- ----------- ---------- -----------
Total other expense 205.9 251.9 45.7 26.3 (66.0) 463.8
Provision for loan
and lease losses 9.7 -- 0.2 -- -- 9.9
---------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 209.2 50.8 17.2 1.0 -- 278.2
Income tax
expense (benefit) 68.5 18.7 6.4 0.5 -- 94.1
---------- ----------- ----------- ----------- ---------- -----------
Segment income $ 140.7 $ 32.1 $ 10.8 $ 0.5 $ -- $ 184.1
========== =========== =========== =========== ========== ===========
Identifiable assets $ 42,406.9 $ 2,712.9 $ 743.9 $ 649.5 $ (1,517.9) $ 44,995.3
========== =========== =========== =========== ========== ===========
Return on average equity 15.6 % 15.5 % 15.5 % 16.5 %
========== =========== =========== ===========
Three Months Ended September 30, 2004
---------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- idated
Banking Metavante Others Overhead nations Income
------------ ------------ ------------ ------------ ----------- -------------
Net interest income $ 284.4 $ (8.7) $ 5.9 $ (1.5) $ 1.0 $ 281.1
Other income
Fees - external 82.1 239.0 45.4 1.4 -- 367.9
Fees - internal
Fees - intercompany 15.1 20.9 5.6 17.5 (59.1) --
Float income - intercompany -- 1.0 -- -- (1.0) --
---------- ----------- ----------- ----------- ---------- -----------
Total other income 97.2 260.9 51.0 18.9 (60.1) 367.9
Other expense
Expenses - other 153.1 206.1 31.4 18.2 (0.7) 408.1
Expenses - intercompany 38.3 11.2 11.1 (2.2) (58.4) --
---------- ----------- ----------- ----------- ---------- -----------
Total other expense 191.4 217.3 42.5 16.0 (59.1) 408.1
Provision for loan
and lease losses 6.5 -- 0.4 -- -- 6.9
---------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 183.7 34.9 14.0 1.4 -- 234.0
Income tax
expense (benefit) 61.5 13.6 5.5 (2.0) -- 78.6
---------- ----------- ----------- ----------- ---------- -----------
Segment income $ 122.2 $ 21.3 $ 8.5 $ 3.4 $ -- $ 155.4
========== =========== =========== =========== ========== ===========
Identifiable assets $ 36,819.1 $ 2,154.0 $ 607.2 $ 850.4 $ (1,451.2) $ 38,979.5
========== =========== =========== =========== ========== ===========
Return on average equity 16.2 % 19.9 % 14.7 % 17.6 %
========== =========== =========== ===========
18
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2005 & 2004 (Unaudited)
Nine Months Ended September 30, 2005
---------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- idated
Banking Metavante Others Overhead nations Income
------------ ------------ ------------ ------------ ----------- -------------
Net interest income $ 919.4 $ (29.0) $ 17.0 $ (6.5) $ 8.9 $ 909.8
Other income
Fees - external 274.3 829.0 169.0 18.5 -- 1,290.8
Fees - internal
Fees - intercompany 42.9 68.4 17.5 64.8 (193.6) --
Float income - intercompany -- 8.9 -- -- (8.9) --
---------- ----------- ----------- ----------- ---------- -----------
Total other income 317.2 906.3 186.5 83.3 (202.5) 1,290.8
Other expense
Expenses - other 474.4 698.1 98.1 82.6 (0.4) 1,352.8
Expenses - intercompany 124.4 30.7 36.1 2.0 (193.2) --
---------- ----------- ----------- ----------- ---------- -----------
Total other expense 598.8 728.8 134.2 84.6 (193.6) 1,352.8
Provision for loan
and lease losses 30.9 -- 0.9 -- -- 31.8
---------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 606.9 148.5 68.4 (7.8) -- 816.0
Income tax
expense (benefit) 193.5 57.5 26.4 (3.6) -- 273.8
---------- ----------- ----------- ----------- ---------- -----------
Segment income $ 413.4 $ 91.0 $ 42.0 $ (4.2) $ -- $ 542.2
========== =========== =========== =========== ========== ===========
Identifiable assets $ 42,406.9 $ 2,712.9 $ 743.9 $ 649.5 $ (1,517.9) $ 44,995.3
========== =========== =========== =========== ========== ===========
Return on average equity 16.1 % 18.0 % 21.5 % 17.3 %
========== =========== =========== ===========
Nine Months Ended September 30, 2004
---------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- idated
Banking Metavante Others Overhead nations Income
------------ ------------ ------------ ------------ ----------- -------------
Net interest income $ 839.5 $ (11.2) $ 18.9 $ (5.8) $ 2.4 $ 843.8
Other income
Fees - external 250.7 622.5 134.6 3.5 -- 1,011.3
Fees - internal
Fees - intercompany 47.4 58.9 17.4 52.7 (176.4) --
Float income - intercompany -- 2.4 -- -- (2.4) --
---------- ----------- ----------- ----------- ---------- -----------
Total other income 298.1 683.8 152.0 56.2 (178.8) 1,011.3
Other expense
Expenses - other 457.8 541.3 91.0 56.0 (1.0) 1,145.1
Expenses - intercompany 109.9 34.3 34.8 (3.6) (175.4) --
---------- ----------- ----------- ----------- ---------- -----------
Total other expense 567.7 575.6 125.8 52.4 (176.4) 1,145.1
Provision for loan
and lease losses 23.4 -- 1.7 -- -- 25.1
---------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 546.5 97.0 43.4 (2.0) -- 684.9
Income tax
expense (benefit) 180.3 38.0 16.9 (3.6) -- 231.6
---------- ----------- ----------- ----------- ---------- -----------
Segment income $ 366.2 $ 59.0 $ 26.5 $ 1.6 $ -- $ 453.3
========== =========== =========== =========== ========== ===========
Identifiable assets $ 36,819.1 $ 2,154.0 $ 607.2 $ 850.4 $ (1,451.2) $ 38,979.5
========== =========== =========== =========== ========== ===========
Return on average equity 16.2 % 19.4 % 14.4 % 17.6 %
========== =========== =========== ===========
Total revenue, net interest income plus total other income, by type
in Others consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2005 2004 2005 2004
----------- ----------- ----------- ----------
Trust Services $ 42.8 $ 36.9 $ 123.0 $ 109.6
Residential Mortgage Banking 6.9 8.3 18.0 23.5
Capital Markets 0.6 (0.2) 22.8 (0.5)
Brokerage and Insurance 6.6 5.7 21.0 19.2
Commercial Leasing 3.7 3.8 11.3 12.0
Commercial Mortgage Banking 1.5 1.5 4.3 4.5
Others 1.0 0.9 3.1 2.6
---------- ---------- ---------- ---------
Total revenue $ 63.1 $ 56.9 $ 203.5 $ 170.9
========== ========== ========== =========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended
September 30,
----------------------------
2005 2004
------------- -------------
Assets
------
Cash and due from banks $ 993,351 $ 853,162
Investment securities:
Trading securities 26,350 23,439
Short-term investments 272,662 165,125
Other investment securities:
Taxable 4,839,664 4,710,840
Tax-exempt 1,369,506 1,224,094
------------ ------------
Total investment securities 6,508,182 6,123,498
Loans and leases:
Loans and leases, net of unearned income 32,479,305 27,499,589
Less: Allowance for loan and lease losses 363,913 362,296
------------ ------------
Net loans and leases 32,115,392 27,137,293
Premises and equipment, net 458,778 458,070
Accrued interest and other assets 4,059,705 3,443,717
------------ ------------
Total Assets $ 44,135,408 $ 38,015,740
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 5,049,451 $ 4,637,961
Interest bearing 21,302,690 19,996,303
------------ ------------
Total deposits 26,352,141 24,634,264
Federal funds purchased and
security repurchase agreements 2,055,778 1,761,838
Other short-term borrowings 803,193 731,731
Long-term borrowings 8,685,936 5,899,749
Accrued expenses and other liabilities 1,807,704 1,470,299
------------ ------------
Total liabilities 39,704,752 34,497,881
Shareholders' equity 4,430,656 3,517,859
------------ ------------
Total Liabilities and Shareholders' Equity $ 44,135,408 $ 38,015,740
============ ============
20
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Nine Months Ended
September 30,
----------------------------
2005 2004
------------- -------------
Assets
------
Cash and due from banks $ 950,509 $ 808,936
Investment securities:
Trading securities 25,027 22,950
Short-term investments 244,109 180,716
Other investment securities:
Taxable 4,830,427 4,638,611
Tax-exempt 1,327,456 1,180,816
------------ ------------
Total investment securities 6,427,019 6,023,093
Loans and leases:
Loans and leases, net of unearned income 31,228,509 26,482,061
Less: Allowance for loan and lease losses 362,127 359,443
------------ ------------
Net loans and leases 30,866,382 26,122,618
Premises and equipment, net 451,684 443,834
Accrued interest and other assets 3,925,729 2,951,399
------------ ------------
Total Assets $ 42,621,323 $ 36,349,880
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 4,857,646 $ 4,489,782
Interest bearing 20,831,716 19,066,853
------------ ------------
Total deposits 25,689,362 23,556,635
Federal funds purchased and
security repurchase agreements 2,131,946 2,186,105
Other short-term borrowings 916,014 872,162
Long-term borrowings 7,942,493 4,952,207
Accrued expenses and other liabilities 1,755,854 1,349,872
------------ ------------
Total liabilities 38,435,669 32,916,981
Shareholders' equity 4,185,654 3,432,899
------------ ------------
Total Liabilities and Shareholders' Equity $ 42,621,323 $ 36,349,880
============ ============
21
OVERVIEW
--------
Current operating trends and financial results have been positive and are
a confirmation of the Corporation's overall strategy of driving earnings
per share growth by: (1) expanding banking operations into faster growing
regions beyond Wisconsin; (2) increasing the number of financial
institutions to which the Corporation provides correspondent banking
services; (3) expanding trust services and other wealth management product
and service offerings for high net-worth individuals; and (4) growing
Metavante's business through organic growth and acquisitions.
The Corporation continues to focus on its key metrics of growing revenues
through balance sheet growth, fee-based income growth and strong credit
quality. Management believes that the Corporation has demonstrated solid
fundamental performance in each of these key areas and as a result, the
third quarter and first nine months of 2005 produced strong financial
results.
Net income for the third quarter of 2005 amounted to $184.1 million
compared to $155.4 million for the same period in the prior year, an
increase of $28.7 million, or 18.5%. Diluted earnings per share were
$0.78 for the three months ended September 30, 2005, compared with $0.69
for the three months ended September 30, 2004, an increase of 13.0%. The
return on average assets and average equity was 1.66% and 16.49%,
respectively, for the quarter ended September 30, 2005, and 1.63% and
17.58%, respectively, for the quarter ended September 30, 2004.
For the nine months ended September 30, 2005, net income amounted to
$542.2 million compared to $453.3 million for the nine months ended
September 30, 2004, an increase of $88.9 million, or 19.6%. Diluted
earnings per share were $2.32 for the nine months ended September 30,
2005, compared with $2.01 for the nine months ended September 30, 2004, an
increase of 15.4%. The return on average assets and average equity was
1.70% and 17.32%, respectively, for the first nine months of 2005, and
1.67% and 17.64%, respectively, for the first nine months of 2004.
Earnings growth for the three and nine months ended September 30, 2005
compared to the three and nine months ended September 30, 2004 was
attributable to a number of factors. The increase in net interest income
was driven by loan and bank-issued deposit growth. Net interest income
growth was somewhat mitigated by the financing costs associated with
Metavante's 2004 acquisitions. On a comparative basis, net charge-offs
and the resulting provisions for loan and lease losses were higher in the
third quarter and first nine months of 2005 than the third quarter and
first nine months of 2004. Despite the increase, net charge-offs for the
three and nine months ended September 30, 2005 continue to be below the
Corporation's five-year historical average. Metavante and the trust
services reporting unit continued to exhibit growth in both revenue and
earnings. Metavante's growth in revenue and earnings reflects, in part,
the impact of its acquisition and divestiture activities and higher
transaction volumes in core processing activity and payment processing.
The acquisition and divestiture activities included three acquisitions
completed in the third quarter of 2005, one acquisition completed in the
first quarter of 2005 and six acquisitions and two divestitures completed
in 2004. For the three and nine months ended September 30, 2005, the
Corporation realized a gain that was primarily due to the liquidation of
an equity investment in a cash tender offer. During the second quarter of
2005, the Corporation realized a gain due to the sale of an entity
associated with the Corporation's investment in an independent private
equity and venture capital partnership. In addition, during the first
quarter of 2005 the Corporation realized a gain due to the change in
control of PULSE EFT Associates. These factors along with continued
expense management resulted in double-digit earnings growth in the three
and nine months ended September 30, 2005 compared to the three and nine
months ended September 30, 2004.
Management continues to believe that there are some key factors that could
affect future operating trends and financial results. Management believes
that credit losses will likely return to historical levels. While it is
unclear when this will occur, management does not believe that current net
charge-off levels are sustainable indefinitely. Rapidly shifting and
unstable yield curves make balance sheet management vulnerable to
potential earnings volatility. While the Corporation has taken what it
believes to be a conservative position relative to a generally rising
interest rate environment, shifts in customer behavior and re-pricing
characteristics present a persistent challenge.
22
Based on its performance in the first nine months of 2005, including the
acquisitions that closed in the third quarter, management expects
Metavante's total 2005 revenues (internal and external) to be at the upper
end of, or slightly exceed, the $1.1 billion to $1.2 billion revenue range
previously provided and segment earnings will be at the upper end of, or
slightly exceed, the previously provided range of $115.0 million to $120.0
million. In the Banking segment, management expects double digit loan
growth for the remainder of 2005. However, it is possible that loan
growth will not be at the same levels experienced during the first half of
the current year. The Corporation's actual results for the year ended
December 31, 2005 could differ materially from those expected by
management. See "Forward-Looking Statements" in this Form 10-Q and the
Corporation's 2004 Annual Report on Form 10-K for a discussion of the
various risk factors that could cause actual results to be different than
expected results.
NOTEWORTHY TRANSACTIONS AND EVENTS
----------------------------------
Some of the more noteworthy transactions and events that occurred in the
three and nine months ended September 30, 2005 and 2004 consisted of the
following:
Third quarter 2005
------------------
During the third quarter, Metavante completed three acquisitions that were
funded primarily with the Corporation's common stock. See Note 5 in Notes
to Financial Statements for further discussion.
Net investment securities gains as reported in the Consolidated Statements
of Income for the third quarter were primarily due to an equity investment
that the Corporation liquidated in a cash tender offer. That transaction
resulted in a pre-tax gain of $6.6 million or $0.02 per diluted share for
the three and nine months ended September 30, 2005.
Second quarter 2005
-------------------
As announced in the Corporation's Form 8-K dated May 26, 2005, the
Corporation realized a gain due to the sale of an entity associated with
its investment in an independent private equity and venture capital
partnership. The gross pre-tax gain amounted to $29.0 million and is
reported in Net investment securities gains (losses) in the Consolidated
Statements of Income. On an after-tax basis, and net of related
compensation expense, the gain amounted to $16.2 million or $0.07 per
diluted share for nine months ended September 30, 2005.
First quarter 2005
------------------
During the first quarter of 2005, Metavante completed the acquisition of
all of the outstanding common stock of Prime Associates, Inc. ("Prime") of
Clark, New Jersey for $24.5 million. Total consideration consisted of
563,114 shares of Marshall & Ilsley Corporation common stock valued at
$24.0 million and $0.5 million in cash. Prime is a provider of anti-money
laundering and fraud interdiction software and data products for financial
institutions, insurance companies and securities firms.
During the first quarter of 2005, the Corporation's banking segment's
investment in certain membership interests of PULSE EFT Associates
("PULSE") was liquidated by PULSE due to a change in control. The cash
received resulted in a gain of $5.3 million which is reported in Net
investment securities gains (losses) in the Consolidated Statements of
Income. An additional $0.3 million was received in the second quarter of
2005.
Third quarter 2004
------------------
During the third quarter of 2004, Metavante completed three acquisitions
that were funded with cash. On July 29, 2004, the Corporation completed
two financing transactions aggregating $1.0 billion. The net proceeds
were used for general corporate purposes, including the long-term
financing of the Metavante acquisitions.
During the third quarter of 2004, the Corporation prepaid $300 million of
floating rate debt and terminated a related interest rate swap designated
as a cash flow hedge that resulted in a charge to earnings of $2.0
million. The loss is reported in Other expense in the Consolidated
Statements of Income.
Second quarter 2004
-------------------
On May 27, 2004, Metavante completed the purchase of certain assets and
the assumption of certain liabilities of Kirchman Corporation
("Kirchman"). Kirchman is a provider of automation software and
compliance services to the banking industry. This acquisition provided
Metavante with core-processing software that financial institutions can
run in-house, a solution Metavante previously did not offer.
23
First quarter 2004
------------------
On January 1, 2004, the Corporation's Banking segment completed the
purchase for cash of certain assets and the assumption of certain
liabilities of AmerUs Home Lending, Inc. ("AmerUs"), an Iowa-based
corporation engaged in the business of brokering and servicing mortgage
and home equity loans. Although not material to the Corporation, this
acquisition enhances the Corporation's wholesale lending activities by
expanding its broker network.
During the first quarter of 2004, the Corporation prepaid and retired
$55.0 million of higher cost fixed rate debt that resulted in a charge to
earnings of $4.9 million. The loss is reported in other in Other expense
in the Consolidated Statements of Income.
NET INTEREST INCOME
-------------------
Net interest income is the difference between interest earned on earning
assets and interest owed on interest bearing liabilities. Net interest
income represented approximately 41.7% and 41.3% of the Corporation's
source of revenues for the three and nine months ended September 30, 2005
compared to 43.3% and 45.5%, respectively for the three and nine months
ended September 30, 2004.
Net interest income for the third quarter of 2005 amounted to $313.2
million compared to $281.1 million reported for the third quarter of 2004,
an increase of $32.1 million or 11.4%. For the nine months ended
September 30, 2005, net interest income amounted to $909.8 million
compared to $843.8 million for the nine months ended September 30, 2004,
an increase of $66.0 million or 7.8%. Loan growth and the growth in
noninterest bearing and other bank-issued deposits were the primary
contributors to the increase in net interest income. Factors negatively
affecting net interest income compared to the prior year three and nine
month periods included the impact of lengthening liabilities in order to
reduce future volatility in net interest income due to interest rate
changes, the interest expense associated with the debt issued in the third
quarter of 2004 to fund Metavante's acquisitions in 2004 and accelerated
purchase premium amortization associated with wholesale home equity loans.
Average earning assets in the third quarter of 2005 amounted to $39.0
billion compared to $33.6 billion in the third quarter of 2004, an
increase of $5.4 billion or 16.0%. Average loans and leases accounted for
$5.0 billion of the growth in average earning assets in the third quarter
of 2005 compared to the third quarter of 2004. Average investment
securities increased $0.3 billion over the prior quarter. Average earning
assets for the nine months ended September 30, 2005 amounted to $37.7
billion compared to $32.5 billion for the nine months ended September 30,
2004, an increase of $5.2 billion or 15.8%. Average loans and leases
accounted for $4.7 billion of the growth in average earning assets over
the respective periods. Average investment securities increased $0.3
billion.
Average interest bearing liabilities increased $4.5 billion or 15.7% in
the third quarter of 2005 compared to the third quarter of 2004. Average
interest bearing deposits increased $1.3 billion or 6.5% in the third
quarter of 2005 compared to the third quarter of last year. Average total
borrowings increased $3.2 billion or 37.5% in the third quarter of 2005
compared to the same period in 2004. For the nine months ended September
30, 2005, average interest bearing liabilities increased $4.7 billion or
17.5% compared to the same period in 2004. Average interest bearing
deposits increased $1.8 billion or 9.3% in the first nine months of 2005
compared to the first nine months of last year. Average total borrowings
increased $2.9 billion or 37.2% in the first nine months of 2005 compared
to the same period in 2004.
Average noninterest bearing deposits increased $0.4 billion or 8.9% in the
three months ended September 30, 2005 compared to the same period last
year. On a year-to-date basis, average noninterest bearing deposits
increased $0.4 billion or 8.2% in the first nine months of 2005 compared
to the first nine months of 2004.
24
The growth and composition of the Corporation's quarterly average loan and
lease portfolio for the current quarter and previous four quarters are
reflected in the following table ($ in millions):
Consolidated Average Loans and Leases
--------------------------------------
2005 2004 Growth Pct.
----------------------------- -------------------- ------------------
Third Second First Fourth Third Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- -------- ---------
Commercial Loans and Leases
---------------------------
Commercial $ 9,126 $ 8,932 $ 8,460 $ 8,076 $ 7,796 17.1 % 2.2 %
Commercial real estate
Commercial mortgages 8,661 8,509 8,275 8,042 7,826 10.7 1.8
Construction 1,484 1,358 1,241 1,143 1,100 34.9 9.3
-------- -------- -------- -------- -------- ------ ------
Total commercial
real estate 10,145 9,867 9,516 9,185 8,926 13.7 2.8
Commercial lease financing 462 425 398 402 395 17.2 8.8
-------- -------- -------- -------- -------- ------ ------
Total Commercial Loans
and Leases 19,733 19,224 18,374 17,663 17,117 15.3 2.6
Personal Loans and Leases
-------------------------
Residential real estate
Residential mortgages 4,537 3,986 3,562 3,234 2,929 54.9 13.8
Construction 1,633 1,382 1,167 1,017 865 88.9 18.2
-------- -------- -------- -------- -------- ------ ------
Total residential
real estate 6,170 5,368 4,729 4,251 3,794 62.6 14.9
Personal loans
Student 74 78 88 85 79 (6.8) (4.3)
Credit card 228 217 217 208 214 6.6 5.3
Home equity loans
and lines 4,905 5,098 5,131 5,035 4,894 0.2 (3.8)
Other 1,241 1,186 1,217 1,251 1,256 (1.2) 4.6
-------- -------- -------- -------- -------- ------ ------
Total personal loans 6,448 6,579 6,653 6,579 6,443 0.1 (2.0)
Personal lease financing 128 123 128 135 146 (12.4) 3.7
-------- -------- -------- -------- -------- ------ ------
Total Personal Loans
and Leases 12,746 12,070 11,510 10,965 10,383 22.8 5.6
======== ======== ======== ======== ======== ====== ======
Total Consolidated Average
Loans and Leases $ 32,479 $ 31,294 $ 29,884 $ 28,628 $ 27,500 18.1 % 3.8 %
======== ======== ======== ======== ======== ====== ======
Total consolidated average loans and leases increased $5.0 billion or
18.1% in the third quarter of 2005 compared to the third quarter of 2004.
Total average commercial loan and lease growth was $2.6 billion, a 15.3%
increase in the current quarter compared to the third quarter of the prior
year. Approximately 50.8% of the growth in total average commercial loans
and leases was attributable to commercial and industrial loans. Total
average personal loans and leases increased $2.4 billion or 22.8% in the
third quarter of 2005 compared to the third quarter of 2004. This growth
was driven primarily by growth in residential real estate loans that
consist primarily of three and five year ARMs (adjustable rate mortgages)
and construction loans. Average home equity loans and lines increased
slightly in the third quarter of 2005 compared to the third quarter of
2004. Average indirect auto loans and leases declined in the current
quarter compared to the third quarter of the prior year. From a
production standpoint, residential real estate loan closings in the third
quarter of 2005 were $0.6 billion or 61.8% greater than loan closings in
the third quarter of 2004 and were $0.1 billion or 7.9% greater than loan
closings in the second quarter of 2005.
For the nine months ended September 30, 2005, total consolidated average
loans and leases increased $4.7 billion or 17.9% compared to the nine
months ended September 30, 2004. Total average commercial loan and lease
growth was $2.6 billion, a 16.0% increase in the first nine months of 2005
compared to the first nine months of the prior year. Approximately 52.0%
of the growth in total average commercial loans and leases was
attributable to commercial and industrial loans. Total average personal
loans and leases increased $2.1 billion or 21.0% in the first nine months
of 2005 compared to the first nine months of 2004. This growth was driven
primarily by growth in residential real estate loans and home equity loans
and lines. Year-to-date average indirect auto loans and leases declined
in the first nine months of 2005 compared to the same period of the prior
year. From a production standpoint, residential real estate loan closings
in the first nine months of 2005 were $1.2 billion or 40.1% greater than
loan closings in the first nine months of 2004.
25
Total average commercial loan and lease growth continued to be strong in
the third quarter and first nine months of 2005. Management attributes
the loan growth to the strength of the local economies in the markets the
Corporation serves, sales success and continued customer satisfaction.
The rate of commercial loan growth slowed somewhat during the latter part
of the third quarter which was due in part to continued price discipline
on the part of the lending groups, increased paydowns on construction
loans and the somewhat seasonal nature of loan demand which the
Corporation has experienced in third quarters in the past. The
Corporation continues to believe that double-digit loan growth is a
reasonable expectation for the year ended December 31, 2005. However, it
is uncertain whether the growth rates experienced in the first half of
2005 will be sustained for the remainder of the year.
Home equity loans and lines, which includes M&I's wholesale activity,
continue to be one of the primary consumer loan products. As previously
discussed, average home equity loans and lines increased slightly in the
third quarter of 2005 compared to the third quarter of 2004. The
proportion of loans sold at origination has significantly increased from
2004 to 2005 in response to the increased demand for home equity products
with higher loan-to-value characteristics. In addition, the Corporation
experienced increased prepayment activity on its wholesale home equity
products in the third quarter of 2005.
The Corporation sells some of its residential real estate production
(residential real estate and home equity loans) in the secondary market.
Selected residential real estate loans with rate and term characteristics
that are considered desirable are periodically retained in the portfolio.
For the three months ended September 30, 2005 and 2004 real estate loans
sold to investors amounted to $0.8 billion and $0.3 billion, respectively.
For the nine months ended September 30, 2005, real estate loans sold to
investors amounted to $1.7 billion compared to $1.2 billion in the nine
months ended September 30, 2004. At September 30, 2005 and 2004, the
Corporation had approximately $191.6 million and $87.6 million of mortgage
loans held for sale, respectively. Gains from the sale of mortgage loans
amounted to $13.9 million in the third quarter of 2005 compared to $7.0
million in the third quarter of 2004. For the nine months ended September
30, 2005, gains from the sale of mortgage loans amounted to $30.4 compared
to $21.1 million in the nine months ended September 30, 2004.
Auto loans securitized and sold in the third quarter of 2005 amounted to
$0.2 billion compared to $0.1 billion in the third quarter of 2004. For
the nine months ended September 30, 2005, auto loans securitized and sold
amounted to $0.4 billion compared to $0.5 billion in the nine months ended
September 30, 2004. For the three months ended September 30, 2005, net
gains from the sale and securitization of auto loans were approximately
break-even compared to net losses of $1.2 million in the third quarter of
2004. For the nine months ended September 30, 2005, net losses from the
sale and securitization of auto loans were $0.2 million compared to net
losses of $3.4 million for the nine month ended September 30, 2004. The
losses incurred were primarily due to lower loan interest spreads
associated with new auto loan production in a rising interest rate
environment. Auto loans held for sale amounted to $34.0 million at
September 30, 2005.
The Corporation anticipates that it will continue to divest itself of
selected assets through sale or securitization in future periods.
26
The growth and composition of the Corporation's quarterly average deposits
for the current and previous four quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2005 2004 Growth Pct.
----------------------------- -------------------- ------------------
Third Second First Fourth Third Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- -------- ---------
Bank issued deposits
--------------------
Noninterest bearing deposits
Commercial $ 3,589 $ 3,377 $ 3,263 $ 3,427 $ 3,280 9.4 % 6.3 %
Personal 932 958 930 923 902 3.4 (2.7)
Other 528 491 500 521 456 15.9 7.6
-------- -------- -------- -------- -------- ------ ------
Total noninterest
bearing deposits 5,049 4,826 4,693 4,871 4,638 8.9 4.6
Interest bearing deposits
Savings and NOW 3,049 3,149 3,281 3,402 3,452 (11.7) (3.2)
Money market 6,047 5,819 5,692 5,654 5,612 7.8 3.9
Foreign activity 932 882 904 887 849 9.7 5.6
-------- -------- -------- -------- -------- ------ ------
Total interest
bearing deposits 10,028 9,850 9,877 9,943 9,913 1.2 1.8
Time deposits
Other CDs and time deposits 3,095 2,951 2,787 2,685 2,653 16.7 4.9
CDs greater than $100,000 1,421 1,243 1,074 906 805 76.6 14.4
-------- -------- -------- -------- -------- ------ ------
Total time deposits 4,516 4,194 3,861 3,591 3,458 30.6 7.7
-------- -------- -------- -------- -------- ------ ------
Total bank issued deposits 19,593 18,870 18,431 18,405 18,009 8.8 3.8
Wholesale deposits
------------------
Money market 1,068 1,077 1,073 1,096 747 42.9 (0.8)
Brokered CDs 4,615 4,437 4,761 4,960 5,009 (7.9) 4.0
Foreign time 1,076 1,086 969 811 869 23.8 (0.9)
-------- -------- -------- -------- -------- ------ ------
Total wholesale deposits 6,759 6,600 6,803 6,867 6,625 2.0 2.4
-------- -------- -------- -------- -------- ------ ------
Total consolidated
average deposits $ 26,352 $ 25,470 $ 25,234 $ 25,272 $ 24,634 7.0 % 3.5 %
======== ======== ======== ======== ======== ====== ======
Total consolidated average deposits increased $1.7 billion or 7.0% in the
third quarter of 2005 compared to the third quarter of 2004. Average
noninterest bearing deposits increased $0.4 billion or 8.9% while average
bank-issued interest bearing deposits increased $1.2 billion or 8.8% in
the current quarter compared to the third quarter of the prior year. For
the nine months ended September 30, 2005, total consolidated average
deposits increased $2.1 billion or 9.1% compared to the nine months ended
September 30, 2004. Average noninterest bearing deposits increased $0.4
billion or 8.2% while average bank-issued interest bearing deposits
increased $0.8 billion or 6.3% in the first nine months of 2005 compared
to the first nine months of the prior year. As interest rates have risen,
the Corporation has been positioned to be able to be competitive on price
and to regain deposit growth that management believes will be sustainable
across the interest rate cycle.
The growth in bank issued deposits, especially noninterest bearing
deposits, includes both commercial and retail banking. Noninterest
bearing deposits are subject to seasonality and are influenced by the
interest rate environment. In commercial banking, the focus remains on
developing deeper relationships through the sale of treasury management
products and services along with revised incentive plans focused on
growing deposits. The retail banking strategy continues to focus on
aggressively selling the right products to meet the needs of customers and
enhance the Corporation's profitability. The Corporation continues to
emphasize the sale of checking products.
27
For the three months ended September 30, 2005, average wholesale deposits
increased $0.1 billion, or 2.0% compared to the three months ended
September 30, 2004. For the nine months ended September 30, 2005, average
wholesale deposits increased $0.9 billion, or 16.2% compared to the nine
months ended September 30, 2004. The Corporation continues to make use of
wholesale funding alternatives, especially brokered money market deposits
and institutional certificates of deposit. These deposits are funds in
the form of deposits generated through distribution channels other than
M&I's own banking branches. These deposits allow the Corporation's bank
subsidiaries to gather funds across a wider geographic base and at pricing
levels considered attractive, where the underlying depositor may be retail
or institutional. Access to and use of these funding sources also provide
the Corporation with the flexibility to not pursue unprofitable single
service time deposit relationships.
During the third quarter of 2005, $250.0 million of fixed rate and $200.0
million of floating rate senior bank notes were issued. The fixed rate
senior bank notes mature in 2008 and have a coupon rate of 4.50%. The
floating rate senior bank notes mature in 2007 and have a coupon rate that
is indexed to the three-month London Inter-Bank Offered Rate. During the
third quarter of 2005, a fixed rate advance from the Federal Home Loan
Bank ("FHLB") with a coupon rate of 1.90% aggregating $450.0 million
matured. Series E medium-term notes in the amount of $0.5 million with an
annual coupon rate of 7.19% matured during the third quarter of 2005.
During the second quarter of 2005, $350.0 million of subordinated bank
notes were issued. The subordinated bank notes mature in 2015 and have a
coupon rate of 4.85%. Senior bank notes in an aggregate amount of $525.0
million were also issued during the second quarter of 2005. The senior
bank notes are floating rate and mature at various times in 2007 and 2010.
Approximately $125.0 million of the senior bank notes were converted to a
fixed rate through the use of an interest rate swap.
During the first quarter of 2005, a new FHLB floating rate advance
aggregating $250.0 million was obtained. The FHLB advance matures in 2011
and was converted to a fixed rate through the use of an interest rate
swap. During the first quarter of 2005, $900.0 million of senior bank
notes with an annual weighted average coupon interest rate of 4.13% were
issued. The notes mature at various times beginning in 2008 through 2017.
During the third quarter of 2004, the Corporation prepaid $300 million of
floating rate debt and terminated a related interest rate swap designated
as a cash flow hedge that resulted in a charge to earnings of $2.0
million. During the first quarter of 2004, a fixed rate FHLB advance
aggregating $55.0 million with an annual coupon interest rate of 5.06% was
prepaid and retired resulting in a charge to earnings of $4.9 million.
28
The Corporation's consolidated average interest earning assets and
interest bearing liabilities, interest earned and interest paid for the
three and nine months ended September 30, 2005 and 2004, are presented in
the following tables ($ in millions):
Consolidated Yield and Cost Analysis
------------------------------------
Three Months Ended Three Months Ended
September 30, 2005 September 30, 2004
--------------------------- ---------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
--------------------------- ---------------------------
Loans and leases: (a)
Commercial loans and leases $ 9,588.0 $ 146.8 6.08 % $ 8,190.5 $ 99.3 4.82 %
Commercial real estate loans 10,145.5 160.0 6.26 8,926.4 120.8 5.38
Residential real estate loans 6,169.5 95.4 6.14 3,794.1 52.2 5.48
Home equity loans and lines 4,905.1 74.8 6.05 4,893.4 63.3 5.15
Personal loans and leases 1,671.2 25.8 6.13 1,695.2 21.7 5.09
---------- ------- ------- ---------- ------- -------
Total loans and leases 32,479.3 502.8 6.14 27,499.6 357.3 5.17
Investment securities (b):
Taxable 4,839.7 53.8 4.40 4,710.8 51.7 4.36
Tax Exempt (a) 1,369.5 24.2 7.16 1,224.1 22.6 7.46
---------- ------- ------- ---------- ------- -------
Total investment securities 6,209.2 78.0 4.99 5,934.9 74.3 4.99
Trading securities (a) 26.3 0.1 0.90 23.5 0.1 1.38
Other short-term investments 272.7 2.7 3.86 165.1 0.7 1.57
---------- ------- ------- ---------- ------- -------
Total interest earning assets $ 38,987.5 $ 583.6 5.94 % $ 33,623.1 $ 432.4 5.12 %
========== ======= ======= ========== ======= =======
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 10,027.5 $ 52.0 2.06 % $ 9,913.0 $ 19.8 0.79 %
Bank issued time deposits 4,516.3 37.4 3.29 3,457.7 21.5 2.47
---------- ------- ------- ---------- ------- -------
Total bank issued deposits 14,543.8 89.4 2.44 13,370.7 41.3 1.23
Wholesale deposits 6,758.9 56.1 3.29 6,625.6 32.7 1.96
---------- ------- ------- ---------- ------- -------
Total interest bearing deposits 21,302.7 145.5 2.71 19,996.3 74.0 1.47
Short-term borrowings 2,859.0 27.9 3.88 2,493.6 14.3 2.29
Long-term borrowings 8,685.9 88.5 4.04 5,899.7 54.8 3.69
---------- ------- ------- ---------- ------- -------
Total interest
bearing liabilities $ 32,847.6 $ 261.9 3.16 % $ 28,389.6 $ 143.1 2.01 %
========== ======= ======= ========== ======= =======
Net interest margin (FTE)
as a percent of average
earning assets $ 321.7 3.27 % $ 289.3 3.42 %
======= ======= ======= =======
Net interest spread (FTE) 2.78 % 3.11 %
======= =======
(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.
29
Consolidated Yield and Cost Analysis
------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2005 September 30, 2004
--------------------------- ---------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
--------------------------- ---------------------------
Loans and leases: (a)
Commercial loans and leases $ 9,270.2 $ 399.4 5.76 % $ 7,863.6 $ 276.4 4.70 %
Commercial real estate loans 9,845.4 446.7 6.07 8,611.4 345.8 5.36
Residential real estate loans 5,427.3 241.3 5.94 3,508.6 144.1 5.49
Home equity loans and lines 5,043.9 223.5 5.92 4,674.2 183.5 5.24
Personal loans and leases 1,641.7 71.6 5.83 1,824.3 69.3 5.07
---------- -------- ------ ---------- -------- ------
Total loans and leases 31,228.5 1,382.5 5.92 26,482.1 1,019.1 5.14
Investment securities (b):
Taxable 4,830.4 159.0 4.39 4,638.6 148.7 4.30
Tax Exempt (a) 1,327.5 71.1 7.32 1,180.8 65.7 7.58
---------- -------- ------ ---------- -------- ------
Total investment securities 6,157.9 230.1 5.01 5,819.4 214.4 4.95
Trading securities (a) 25.0 0.2 1.00 23.0 0.2 1.34
Other short-term investments 244.1 6.3 3.44 180.7 1.6 1.18
---------- -------- ------- --------- -------- ------
Total interest earning assets $ 37,655.5 $1,619.1 5.75 % $32,505.2 $1,235.3 5.08 %
========== ======= ======= ========== ======= =======
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 9,918.7 $ 127.5 1.72 % $ 9,966.6 $ 51.1 0.68 %
Bank issued time deposits 4,192.6 95.0 3.03 3,314.4 59.9 2.41
---------- -------- ------ ---------- -------- ------
Total bank issued deposits 14,111.3 222.5 2.11 13,281.0 111.0 1.12
Wholesale deposits 6,720.4 149.2 2.97 5,785.8 76.5 1.77
---------- -------- ------ ---------- -------- ------
Total interest bearing deposits 20,831.7 371.7 2.39 19,066.8 187.5 1.31
Short-term borrowings 3,048.0 78.3 3.43 3,058.3 44.4 1.94
Long-term borrowings 7,942.5 234.2 3.94 4,952.2 135.6 3.66
---------- -------- ------ ---------- -------- ------
Total interest
bearing liabilities $ 31,822.2 $ 684.2 2.87 % $27,077.3 $ 367.5 1.81 %
========== ======= ======= ========== ======== ======
Net interest margin (FTE)
as a percent of average
earning assets $ 934.9 3.32 % $ 867.8 3.57 %
======= ======= ======== ======
Net interest spread (FTE) 2.88 % 3.27 %
======= ======
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax
rate of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for
available for sale securities.
The net interest margin, as a percent of average earning assets on a fully
taxable equivalent basis ("FTE"), decreased 15 basis points from 3.42% in
the third quarter of 2004 to 3.27% in the third quarter of 2005. For the
nine months ended September 30, 2005, the net interest margin was 3.32%
compared to 3.57% for the nine months ended September 30, 2004, a decrease
of 25 basis points. The decrease in net interest margin in 2005 was
offset, in part, by the increase in noninterest bearing deposits as
previously discussed. When comparing the net interest margin percentage
for the three and nine months ended September 30, 2005 to the three and
nine months ended September 30, 2004, the Corporation estimates that the
additional interest expense associated with the $1.0 billion of debt
issued in late July 2004 to finance Metavante's acquisitions lowered the
net interest margin by approximately 11 basis points in the third quarter
of 2005 and 9 basis points in the third quarter of 2004. On a year to
date basis, the additional interest expense associated with the debt
issued to finance Metavante's acquisitions lowered the net interest margin
by approximately 12 basis points for the nine months ended September 30,
2005 compared to 3 basis points for the nine months ended September 30,
2004. Unlike a bank acquisition or loan growth, where the primary source
of revenue is interest income, the revenue impact of Metavante's
acquisitions is recorded in Other income and is not a component of the net
interest margin statistic. Compared to the second quarter of 2005, the
net interest margin decreased 6 basis points from 3.33% in the second
quarter of 2005 to 3.27% in the third quarter of 2005. Approximately 3
basis points was due to accelerated amortization of premiums paid on
wholesale home equity loans due to increased prepayment activity as
previously discussed. These loans predominately had prepayment penalties
associated with them which are reported in Other income and offset the
negative impact on the net interest margin. Approximately 2 basis points
of the decline was due to the difference in the number of days in the
comparative quarters.
30
Should current trends continue, management expects a continued slight
downward pressure on the net interest margin as a percent of average
earning assets. While management expects prepayment activity on wholesale
home equity loans to revert to normal levels, continued increased
prepayments would also continue to result in slight downward pressure on
the net interest margin as a percent of average earning assets but will
have a negligible effect on net income due to prepayment penalties. Net
interest income and the net interest margin percentage can vary and
continue to be influenced by loan and deposit growth, product spreads,
pricing competition in the Corporation's markets, prepayment activity,
future interest rate changes and various other factors.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of September 30, 2005, and the prior four quarters:
Nonperforming Assets
--------------------
($000's)
2005 2004
----------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Nonaccrual $ 141,408 $ 126,920 $ 124,416 $ 127,722 $ 139,154
Renegotiated 148 176 220 236 244
Past due 90 days or more 5,743 4,514 5,314 4,405 3,148
---------- ---------- ---------- ---------- ----------
Total nonperforming loans and leases 147,299 131,610 129,950 132,363 142,546
Other real estate owned 8,774 9,124 6,770 8,056 7,098
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 156,073 $ 140,734 $ 136,720 $ 140,419 $ 149,644
========== ========== ========== ========== ==========
Allowance for loan and lease losses $ 362,257 $ 360,138 $ 358,280 $ 358,110 $ 358,072
========== ========== ========== ========== ==========
Consolidated Statistics
-----------------------
2005 2004
----------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Net charge-offs to average
loans and leases annualized 0.10 % 0.15 % 0.11 % 0.18 % 0.10 %
Total nonperforming loans and leases
to total loans and leases 0.44 0.41 0.42 0.45 0.51
Total nonperforming assets to total loans
and leases and other real estate owned 0.47 0.44 0.45 0.48 0.53
Allowance for loan and lease losses
to total loans and leases 1.09 1.12 1.17 1.21 1.27
Allowance for loan and lease losses
to total nonperforming loans and leases 246 274 276 271 251
31
Nonaccrual Loans and Leases By Type
-----------------------------------
($000's)
2005 2004
----------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Commercial
Commercial, financial
and agricultural $ 47,644 $ 35,777 $ 37,587 $ 41,047 $ 49,714
Lease financing receivables 3,012 3,990 4,882 4,463 5,476
---------- ---------- ---------- ---------- ----------
Total commercial 50,656 39,767 42,469 45,510 55,190
Real estate
Construction and land development 3,057 1,500 785 578 207
Commercial mortgage 30,351 37,107 28,115 31,852 33,817
Residential mortgage 56,488 47,797 52,056 49,206 48,715
---------- ---------- ---------- ---------- ----------
Total real estate 89,896 86,404 80,956 81,636 82,739
Personal 856 749 991 576 1,225
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and leases $ 141,408 $ 126,920 $ 124,416 $ 127,722 $ 139,154
========== ========== ========== ========== ==========
Reconciliation of Allowance for Loan and Lease Losses
-----------------------------------------------------
($000's)
2005 2004
----------------------------------- -----------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Beginning balance $ 360,138 $ 358,280 $ 358,110 $ 358,072 $ 357,898
Provision for loan and lease losses 9,949 13,725 8,126 12,837 6,872
Allowance of banks and loans acquired -- -- -- -- --
Loans and leases charged-off
Commercial 2,256 3,767 6,036 5,453 4,403
Real estate 6,576 8,190 3,339 4,342 3,047
Personal 3,186 3,765 3,416 3,345 3,207
Leases 337 380 246 6,178 252
---------- ---------- ---------- ---------- ----------
Total charge-offs 12,355 16,102 13,037 19,318 10,909
Recoveries on loans and leases
Commercial 2,634 2,264 2,604 5,100 2,366
Real estate 575 413 1,380 387 611
Personal 787 782 719 765 900
Leases 529 776 378 267 334
---------- ---------- ---------- ---------- ----------
Total recoveries 4,525 4,235 5,081 6,519 4,211
---------- ---------- ---------- ---------- ----------
Net loans and leases charge-offs 7,830 11,867 7,956 12,799 6,698
---------- ---------- ---------- ---------- ----------
Ending balance $ 362,257 $ 360,138 $ 358,280 $ 358,110 $ 358,072
========== ========== ========== ========== ==========
Nonperforming assets consist of nonperforming loans and leases and other
real estate owned ("OREO").
OREO is principally comprised of commercial and residential properties
acquired in partial or total satisfaction of problem loans and amounted to
$8.8 million at September 30, 2005, compared to $9.1 million at June 30,
2005 and $6.8 million at March 31, 2005.
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.
32
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 are
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, 2005, nonperforming loans and leases amounted to $147.3
million or 0.44% of consolidated loans and leases compared to $131.6
million or 0.41% of consolidated loans and leases at June 30, 2005, and
$130.0 million or 0.42% of consolidated loans and leases at March 31,
2005. At September 30, 2005 nonperforming loans and leases increased
$15.7 million or 11.9% compared to nonperforming loans and leases at June
30, 2005. Despite the increase, the ratio of nonperforming loans and
leases to consolidated loans and leases since December 31, 2004 and at
each quarter end throughout 2005 has remained in a fairly narrow range and
continues to be below management's expectations. Nonaccrual loans and
leases continue to be the primary source of nonperforming loans and
leases. Since June 30, 2005, almost all loan types experienced an
increase in nonaccrual balances except for nonaccrual commercial real
estate loans and nonaccrual lease financing receivables. The decline in
nonaccrual commercial real estate loans was primarily due to charge-offs.
Net charge-offs amounted to $7.8 million or 0.10% of average loans and
leases in the third quarter of 2005 compared to $11.9 million or 0.15% of
average loans and leases in the second quarter of 2005 and $8.0 million or
0.11% of average loans and leases in the first quarter of 2005. The lower
level of net charge-offs experienced throughout 2004 and the first nine
months of 2005 has to some extent been the result of higher than normal
recoveries. Based on the status of some of the larger charge-offs
recognized in recent quarters, management expects recoveries will likely
return to lower levels in future periods. Recoveries in the third quarter
of 2005 were relatively unchanged compared to the second quarter of 2005
but were $0.6 million lower than recoveries in the first quarter of 2005
and $2.0 million lower than recoveries in the fourth quarter of 2004. The
ratio of recoveries to charge-offs was 36.6% in the third quarter of 2005
which was above the Corporation's five year historical average ratio of
recoveries to charge-offs of 26.9%. For the nine months ended September
30, 2005, the ratio of recoveries to charge-offs was 33.4%.
Management continues to expect the longer term level of nonperforming
loans and leases to be in the range of 50-60 basis points of total loans
and leases and expects net charge-offs to trend to historical levels.
While it is unclear when this will occur, management does not believe that
current net charge-off levels are sustainable indefinitely.
The provisions for loan and lease losses amounted to $9.9 million for the
three months ended September 30, 2005 compared to $13.7 million for the
three months ended June 30, 2005 and $6.9 million for the three months
ended September 30, 2004. For the nine months ended September 30, 2005,
the provision for loan and lease losses amounted to $31.8 million compared
to $25.1 million for the nine months ended September 30, 2004. The
allowance for loan and lease losses as a percent of consolidated loans and
leases outstanding was 1.09% at September 30, 2005, 1.12% at June 30, 2005
and 1.27% at September 30, 2004.
OTHER INCOME
------------
Other income or noninterest sources of revenue represented approximately
58.3% and 56.7% of the Corporation's total sources of revenues for the
three months ended September 30, 2005 and 2004, respectively. Total other
income in the third quarter of 2005 amounted to $438.7 million compared to
$367.9 million in the same period last year, an increase of $70.8 million
or 19.2%. For the nine months ended September 30, 2005, other income
represented approximately 58.7% of the Corporation's total sources of
revenues and amounted to $1,290.8 million. By comparison, for the nine
months ended September 30, 2004, other income represented approximately
54.5% of the Corporation's total sources of revenues and amounted to
$1,011.3 million. For the nine months ended September 30, 2005 other
income increased $279.5 million or 27.6% compared to the nine months ended
September 30, 2004.
The increase in other income in the third quarter and first nine months of
2005 compared to the same periods in 2004 was primarily due to growth in
data processing services revenue. Other income for the three and nine
months ended September 30, 2005 includes certain investment securities
gains as previously discussed.
Data processing services revenue amounted to $285.0 million in the third
quarter of 2005 compared to $239.0 million in the third quarter of 2004,
an increase of $46.0 million or 19.3%. For the nine months ended
September 30, 2005, data processing services revenue amounted to $829.0
million compared to $622.4 million in the nine months ended September 30,
2004, an increase of $206.6 million or 33.2%. Revenue growth continued
throughout the segment driven by revenue associated with acquisitions and
higher transaction volumes in core processing activity and payment
processing. Revenue associated with Metavante's acquisitions completed in
2005 and 2004 net of revenue lost from the 2004 divestitures contributed a
significant portion of the revenue growth in the three and nine months
ended September 30, 2005, over the comparable three and nine months ended
September 30, 2004, respectively. The acquisition related revenue growth
includes cross sales of acquired products to clients across the entire
segment. Total buyout revenue, which varies from period to period,
decreased $0.4 million in the current quarter compared to the third
quarter of last year and was $2.6 million higher in the first nine months
of 2005 compared to the first nine months of 2004.
33
Trust services revenue amounted to $41.9 million in the third quarter of
2005 compared to $37.5 million in the third quarter of 2004, an increase
of $4.4 million or 11.7%. For the nine months ended September 30, 2005,
trust services revenue amounted to $123.4 million compared to $111.7
million for the nine months ended September 30, 2004, an increase of $11.7
million or 10.5%. The increase in revenue was due to sales efforts that
continue to emphasize cross-selling and integrated delivery. Assets under
management were approximately $18.7 billion at September 30, 2005,
compared to $18.3 billion at December 31, 2004, and $17.4 billion at
September 30, 2004.
Service charges on deposits amounted to $23.8 million in the third quarter
of 2005 compared to $25.0 million in the third quarter of 2004, a decrease
of $1.2 million. For the nine months ended September 30, 2005, service
charges on deposits amounted to $71.3 million compared to $75.6 million
for the nine months ended September 30, 2004, a decrease of $4.3 million.
A portion of this source of fee income is sensitive to changes in interest
rates. In a rising interest rate environment, customers that pay for
services receive a higher earnings credit for maintaining balances which
results in lower fee income. Service charges on deposits associated with
commercial demand deposits accounted for the majority of the decline in
this revenue in both the three and nine months ended September 30, 2005
compared to the three and nine months ended September 30, 2004.
Total mortgage banking revenue was $14.7 million in the third quarter of
2005 compared with $8.9 million in the third quarter of 2004, an increase
of $5.8 million. Total mortgage banking revenue was $33.1 million in the
first nine months of 2005 compared with $27.5 million in the first nine
months of 2004, an increase of $5.6 million. For the three months ended
September 30, 2005 and 2004, the Corporation sold $0.8 billion and $0.3
billion of residential mortgage and home equity loans to the secondary
market, respectively. For the nine months ended September 30, 2005 and
2004, the Corporation sold $1.7 billion and $1.2 billion of residential
mortgage and home equity loans to the secondary market, respectively. As
previously discussed, the proportion of home equity loans sold at
origination has significantly increased from 2004 to 2005 in response to
the increased demand for home equity products with higher loan-to-value
characteristics. Retained interests in the form of mortgage servicing
rights on residential mortgage loans sold amounted to $0.8 million for the
nine months ended September 30, 2005 and $1.1 million for the nine months
ended September 30, 2004.
Net investment securities gains amounted to $7.4 million and $42.6 million
for the three and nine months ended September 30, 2005, respectively. As
previously discussed, during the third quarter an equity investment the
Corporation had in a company was liquidated in a cash tender offer
resulting in a gain of $6.6 million. During the second quarter of 2005,
the Corporation realized a gain due to the sale of an entity associated
with its investment in an independent private equity and venture capital
partnership. The gross gain amounted to $29.0 million. During the first
quarter of 2005, the Corporation's banking segment's investment in certain
membership interests of PULSE was liquidated by PULSE. The cash received
resulted in a gain of $5.3 million. An additional $0.3 million was
received in the second quarter of 2005. Net investment securities
activities for the three and nine months ended September 30, 2004 were not
significant.
Other income in the third quarter of 2005 amounted to $48.5 million
compared to $40.0 million in the third quarter of 2004, an increase of
$8.5 million or 21.3%. For the nine months ended September 30, 2005,
other income amounted to $138.4 million compared to $120.9 million for the
nine months ended September 30, 2004, an increase of $17.5 million or
14.5%. The primary contributors to the increase in other income in the
three and nine months ended September 30, 2005 compared to the three and
nine months ended September 30, 2004 were higher auto securitization
related income, as previously discussed, and increases in card related
fees and loan related fees. The increase in loan related fees includes
prepayment penalties on wholesale home equity loans as previously
discussed. Other income for the three and nine months ended September 30,
2005 includes gains from the sale of certain trust custody businesses that
amounted to $0.8 million and $1.0 million, respectively. In addition,
other income for the nine months ended September 30, 2005 includes a gain
of $0.9 million from a branch divestiture and a gain of $0.8 million from
the required sale of a facility.
34
OTHER EXPENSE
-------------
Total other expense for the three months ended September 30, 2005 amounted
to $463.8 million compared to $408.1 million for the three months ended
September 30, 2004, an increase of $55.7 million or 13.6%. For the nine
months ended September 30, 2005, total other expense amounted to $1,352.8
million compared to $1,145.1 million for the nine months ended September
30, 2004, an increase of $207.7 million or 18.1%.
Total other expense for the three and nine months ended September 30, 2005
included the operating expenses associated with Metavante's acquisitions
of Kirchman in May 2004, Advanced Financial Solutions, Inc. and its
affiliated companies in July 2004, NYCE in July 2004, Response Data Corp.
in September 2004, NuEdge Systems LLC in October 2004, VECTORsgi Holdings,
Inc. in November 2004, Prime Associates, Inc. on February 9, 2005, Med-i-
Bank, Inc. on July 22, 2005, TREEV on August 8, 2005 and GHR Systems, Inc.
on August 11, 2005. Total other expense for the three and nine months
ended September 30, 2005 excluded the operating expenses associated with
the 401k Retirement Plan Services operations and the direct customer base
of Paytrust.com that were sold in the fourth quarter of 2004.
Metavante's acquisitions and divestitures had a significant impact on the
period-to-period comparability of operating expenses in 2005 compared to
2004. Approximately $20.2 million of the operating expense growth in the
third quarter of 2005 compared to the third quarter of 2004 was
attributable to the acquisitions and divestitures. Approximately $139.9
million of the operating expense growth in the first nine months of 2005
compared to the first nine months of 2004 was attributable to the
acquisitions and divestitures. The operating expenses of the acquired and
divested entities have been included in or excluded from the Corporation's
consolidated operating expenses from the dates the transactions were
completed.
Other expense for the three months ended September 30, 2004 included a
charge to earnings of $2.0 million because the Corporation prepaid $300
million of floating rate debt and terminated a related interest rate swap
designated as a cash flow hedge. Other expense for the nine months ended
September 30, 2004 included a product impairment charge by Metavante that
amounted to $5.5 million in the second quarter of 2004. In addition,
other expense for the nine months ended September 30, 2004 included a
charge to earnings of $4.9 million because the Corporation prepaid and
retired $55.0 million of higher cost fixed rate debt during the first
quarter of 2004.
The Corporation estimates that its expense growth in the three and nine
months ended September 30, 2005 compared to the three and nine months
ended September 2004, excluding the effects of the acquisitions and
divestitures, the debt prepayment and the impairment charge, was
approximately $37.4 million or 9.7% and $80.2 million or 7.5%,
respectively.
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 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, 2005, and prior four quarters were:
Efficiency Ratios
-----------------
Three Months Ended
---------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
2005 2005 2005 2004 2004
------------- ------------- ------------- ------------- -------------
Consolidated Corporation 61.6 % 59.9 % 62.0 % 61.6 % 62.2 %
Consolidated Corporation
Excluding Metavante 48.7 % 47.7 % 48.8 % 47.0 % 49.0 %
Salaries and employee benefits expense amounted to $271.3 million in the
third quarter of 2005 compared to $231.5 million in the third quarter of
2004, an increase of $39.8 million or 17.2%. For the nine months ended
September 30, 2005, salaries and employee benefits expense amounted to
$772.2 million compared to $647.3 million for the nine months ended
September 30, 2004, an increase of $124.9 million or 19.3%. Salaries and
employee benefit expense for the three and nine months ended September 30,
2004 included certain expense adjustments associated with health and
welfare benefits that included the benefit for the retroactive recognition
of the effect of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. Salaries and benefits associated with
acquisitions and divestitures previously discussed accounted for
approximately $12.9 million and $70.2 million of the increase in salaries
and employee benefits expense in the third quarter and first nine months
of 2005 compared to the third quarter and first nine months of 2004,
respectively. Other contributors included increased expense for product
development and increased expense associated with professional services
revenue at Metavante, increased expense for expanded lending activities by
the banking segment and increased expense associated with long-term
incentive plans. Long-term incentive plans include plans that are tied to
consolidated performance and the Corporation's common stock price, and
business-line performance incentives, which increased due to significant
business success. From September 30, 2004 to September 30, 2005, the
Corporation's common stock price increased 8.0%.
35
For the third quarter of 2005, occupancy and equipment expense amounted to
$54.6 million compared to $50.8 million in the third quarter of 2004, an
increase of $3.8 million or 7.6%. For the nine months ended September 30,
2005, occupancy and equipment expense amounted to $158.8 million compared
to $142.6 million for the nine months ended September 30, 2004, an
increase of $16.2 million or 11.4%. The acquisitions and divestitures
accounted for approximately all of the increase in occupancy and equipment
expense in the three and nine months ended September 30, 2005 compared to
the three and nine months ended September 30, 2004, respectively.
Software expenses, processing charges, supplies and printing, professional
services and shipping and handling expenses totaled $68.0 million in the
third quarter of 2005 compared to $59.0 million in the third quarter of
2004, an increase of $9.0 million or 15.2%. For the nine months ended
September 30, 2005, software expenses, processing charges, supplies and
printing, professional services and shipping and handling expenses totaled
$196.3 million compared to $172.9 million, for the nine months ended
September 30, 2004, an increase of $23.4 million or 13.5%. Metavante's
expense growth accounted for $7.7 million of the increase in expense for
these items in the third quarter of 2005 compared to the third quarter of
2004. The acquisitions and divestitures accounted for approximately $5.3
million of Metavante's increase in these expense items. The acquisitions
and divestitures accounted for $20.0 million of the increase in these
expense items in the nine months ended September 30, 2005 compared to the
nine months ended September 30, 2004.
Amortization of intangibles amounted to $6.1 million in the third quarter
of 2005 compared to $8.3 million in the third quarter of 2004, a decrease
of $2.2 million. For the nine months ended September 30, 2005,
amortization of intangibles amounted to $22.3 million compared to $19.2
million for the nine months ended September 30, 2004, an increase of $3.1
million. Amortization associated with mortgage servicing rights decreased
amortization expense $0.3 million and $1.1 million in the third quarter of
2005 and first nine months of 2005 compared to the third quarter and first
nine months of 2004, respectively. The carrying value of the
Corporation's mortgage servicing rights was $3.1 million at September 30,
2005. Amortization of core deposit intangibles, which is based on a
declining balance method, decreased $0.6 million and $1.7 million in the
third quarter and first nine months of 2005 compared to the third quarter
and first nine months of the prior year. Intangible amortization for the
three months ended September 30, 2005 includes adjustments due to the
final determination of the fair value and useful lives of intangible
assets acquired by Metavante. For the nine months ended September 30,
2005 compared to the nine months ended September 30, 2004 intangibles
amortization expense in connection with Metavante's acquisitions and
divestitures increased $6.4 million.
Other expense amounted to $63.8 million in the third quarter of 2005
compared to $58.6 million in the third quarter of 2004, an increase of
$5.2 million or 8.9%. Higher expenses associated with credit cards and
cost of card plastic sales were the primary drivers to the increase in
other expense in the third quarter of 2005 compared to the third quarter
of 2004. Included in other expense for the three months ended September
30, 2004 was the $2.0 million loss recognized for the termination of
interest rate swaps as previously discussed. For the nine months ended
September 30, 2005, other expense amounted to $203.2 million compared to
$163.1 million for the nine months ended September 30, 2004, an increase
of $40.1 million or 24.6%. The acquisitions and divestitures accounted
for approximately $23.5 million of the increase in other expense in the
first nine months of 2005 compared to the first nine months of 2004. As
previously discussed, other expense for the nine months ended September
30, 2004 includes losses of $6.9 million recognized for the prepayment and
termination of interest rate swaps on long-term borrowings. Higher
expenses associated with credit cards and advertising contributed to the
increase in other expense for the nine months ended September 30, 2005
compared to the nine months ended September 30, 2004.
Other expense is affected by the capitalization of costs, net of
amortization associated with software development and customer data
processing conversions. Net software and conversion amortization was $2.1
million in the third quarter of 2005 compared to $3.5 million in the third
quarter of 2004, resulting in a decrease to other expense over the
comparative quarters of $1.4 million. For the nine months ended September
30, 2005 net software and conversion amortization was $13.6 million
compared to $13.3 million for the nine months ended September 30, 2004,
resulting in an increase to other expense over the comparative nine months
of $0.3 million. Included in net software and conversion amortization for
the nine months ended September 30, 2004 is Metavante's write-off of
capitalized software associated with an impaired product as previously
discussed.
36
INCOME TAXES
------------
The provision for income taxes for the three months ended September 30,
2005 amounted to $94.1 million or 33.8% of pre-tax income compared to
$78.6 million or 33.6% of pre-tax income for the three months ended
September 30, 2004. For the nine months ended September 30, 2005 the
provision for income taxes amounted to $273.8 million or 33.6% of pre-tax
income compared to $231.6 million or 33.8% of pre-tax income for the nine
months ended September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Shareholders' equity was $4.5 billion or 10.1% of total consolidated
assets at September 30, 2005, compared to $3.9 billion or 9.6% of total
consolidated assets at December 31, 2004, and $3.6 billion or 9.2% of
total consolidated assets at September 30, 2004. The increase in
shareholders' equity at September 30, 2005 was primarily due to earnings
net of dividends paid. In the second quarter of 2005, the Corporation's
Board of Directors authorized an increase in the quarterly cash dividend
paid on the Corporation's common stock, from $0.21 per share to $0.24 per
share, or 14.3%. Shareholders' equity at September 30, 2005 includes the
effect of certain common stock issuances in 2005. During the third quarter
of 2005, the Corporation issued 4,355,947 shares of its common stock
valued at $202.4 million in conjunction with Metavante's acquisitions of
Med-i-Bank, Inc., TREEV and GHR Systems, Inc. During the first quarter of
2005, the Corporation issued 563,114 shares of its common stock valued at
$24.0 million in conjunction with Metavante's acquisition of Prime
Associates, Inc. Also during the first quarter of 2005, the Corporation
issued 355,046 shares of its common stock valued at $14.4 million to fund
its 2004 obligations under its retirement and employee stock ownership
plans.
At September 30, 2005, the net gain in accumulated other comprehensive
income amounted to $6.0 million which represented a negative change in
accumulated other comprehensive income of $17.3 million since December 31,
2004. Net accumulated other comprehensive income associated with
available for sale investment securities was a net gain of $4.1 million at
September 30, 2005, compared to a net gain of $31.1 million at December
31, 2004, resulting in a net loss of $27.0 million over the nine month
period. Net accumulated other comprehensive income associated with the
change in fair value of the Corporation's derivative financial instruments
designated as cash flow hedges was a net gain of $9.7 million over the
nine month period.
The Corporation has a Stock Repurchase Program under which it may
repurchase up to 12 million shares of its common stock annually. No
shares were acquired under the program in the third quarter or first nine
months of 2005. For the nine months ended September 30, 2004, 2.3 million
shares were acquired at an aggregate cost of $88.5 million or an average
price of $38.98 per common share. As a result of the use of cash for
acquisitions, the Corporation does not expect that it will acquire shares
of its common stock under the Stock Repurchase Program in the near term.
As described in the Prospectus Supplement dated October 17, 2005, the
Corporation has entered into an equity distribution agreement whereby the
Corporation may offer and sell up to 3.5 million shares of its common
stock from time to time through certain designated sales agents. However,
the Corporation will not sell more than the number of shares of its common
stock necessary for the aggregate gross proceeds from such sales to reach
$150.0 million.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown
in the following tables.
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
September 30, 2005 December 31, 2004
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,940 7.63 % $ 2,520 7.42 %
Tier 1 Capital
Minimum Requirement 1,541 4.00 1,358 4.00
-------------------------------- --------------------------------
Excess $ 1,399 3.63 % $ 1,162 3.42 %
================================ ================================
Total Capital $ 4,554 11.82 % $ 3,802 11.20 %
Total Capital
Minimum Requirement 3,082 8.00 2,716 8.00
-------------------------------- --------------------------------
Excess $ 1,472 3.82 % $ 1,086 3.20 %
================================ ================================
Risk-Adjusted Assets $ 38,520 $ 33,948
================= =================
37
LEVERAGE RATIOS
---------------
($ in millions)
September 30, 2005 December 31, 2004
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,940 7.01 % $ 2,520 6.72 %
Minimum Leverage
Requirement 1,258 - 2,097 3.00 - 5.00 1,126 - 1,876 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,682 - 843 4.01 - 2.01 % $ 1,394 - 644 3.72 - 1.72 %
================================ ================================
Adjusted Average
Total Assets $ 41,934 $ 37,509
================= =================
M&I manages its liquidity to ensure that funds are available to each of
its banks to satisfy the cash flow requirements of depositors and
borrowers and to ensure the Corporation's own cash requirements are met.
M&I maintains liquidity by obtaining funds from several sources.
The Corporation's most readily available source of liquidity is its
investment portfolio. Investment securities available for sale, which
totaled $5.7 billion at September 30, 2005, represent a highly accessible
source of liquidity. The Corporation's portfolio of held-to-maturity
investment securities, which totaled $0.7 billion at September 30, 2005,
provides liquidity from maturities and amortization payments. The
Corporation's loans held-for-sale provide additional liquidity. These
loans represent recently funded loans that are prepared for delivery to
investors, which generally occurs within thirty to ninety days after the
loan has been funded.
Depositors within M&I's defined markets are another source of liquidity.
Core deposits (demand, savings, money market and consumer time deposits)
averaged $17.2 billion in the third quarter of 2005. The Corporation's
banking affiliates may also access the federal funds markets or utilize
collateralized borrowings such as treasury demand notes or FHLB advances.
The banking affiliates may use wholesale deposits. Wholesale deposits are
funds in the form of deposits generated through distribution channels
other than the Corporation's own banking branches. These deposits allow
the Corporation's banking subsidiaries to gather funds across a national
geographic base and at pricing levels considered attractive, where the
underlying depositor may be retail or institutional. Access to wholesale
deposits also provides the Corporation with the flexibility to not pursue
single service time deposit relationships in markets that have experienced
some unprofitable pricing levels. Wholesale deposits averaged $6.8
billion in the third quarter of 2005.
The Corporation utilizes certain financing arrangements to meet its
balance sheet management, funding, liquidity, and market or credit risk
management needs. The majority of these activities are basic term or
revolving securitization vehicles. These vehicles are generally funded
through term-amortizing debt structures or with short-term commercial
paper designed to be paid off based on the underlying cash flows of the
assets securitized. These vehicles provide access to funding sources
substantially separate from the general credit risk of the Corporation and
its subsidiaries. See Note 8 to the Consolidated Financial Statements for
an update of the Corporation's securitization activities in the third
quarter of 2005.
The Corporation's lead bank, M&I Marshall & Ilsley Bank (the "Bank"), has
implemented a bank note program which permits it to issue up to $7.0
billion of short-term and medium-term notes which are offered and sold
only to institutional investors. This program is intended to enhance
liquidity by enabling the Bank to sell its debt instruments in private
markets in the future without the delays which would otherwise be
incurred. Bank notes outstanding at September 30, 2005, amounted to $5.3
billion of which $1.3 billion is subordinated and qualifies as
supplementary capital for regulatory capital purposes. Bank notes issued
during the third quarter of 2005 amounted to $450.0 million.
The national capital markets represent a further source of liquidity to
M&I. M&I has filed a number of shelf registration statements that are
intended to permit M&I to raise funds through sales of corporate debt
and/or equity securities with a relatively short lead time.
During the third quarter of 2005, the Corporation amended the shelf
registration statement originally filed with the Securities and Exchange
Commission during the second quarter of 2004 to describe the equity
distribution agreement previously discussed. The shelf registration
statement enables the Corporation to issue various securities, including
debt securities, common stock, preferred stock, depositary shares,
purchase contracts, units, warrants, and trust preferred securities, up to
an aggregate amount of $3.0 billion. Approximately $1.30 billion is
available for future securities issuances.
38
During the fourth quarter of 2004, the Corporation filed a shelf
registration statement with the Securities and Exchange Commission which
will enable the Corporation to issue up to 6.0 million shares of its
common stock which may be offered and issued from time to time in
connection with the acquisition by M&I, Metavante and/or other
consolidated subsidiaries of businesses that the Corporation determines to
be to its advantage as they become available. At September 30, 2005, 3.9
million shares of common stock were available for future issuances.
Under other shelf registration statements, the Corporation may issue up to
$0.6 billion of medium-term Series F notes with maturities ranging from 9
months to 30 years and at fixed or floating rates. At September 30, 2005,
no Series F notes had been issued. The Corporation may issue up to $0.5
billion of medium-term MiNotes with maturities ranging from 9 months to 30
years and at fixed or floating rates. The MiNotes are issued in smaller
denominations to attract retail investors. At September 30, 2005, MiNotes
issued amounted to $0.2 billion. Additionally, the Corporation has a
commercial paper program. At September 30, 2005, commercial paper
outstanding amounted to $0.3 billion.
Short-term borrowings represent contractual debt obligations with
maturities of one year or less and amounted to $3.4 billion at September
30, 2005. Long-term borrowings amounted to $8.5 billion at September 30,
2005. The scheduled maturities of long-term borrowings including
estimated interest payments at September 30, 2005 are as follows: $2.4
billion is due in less than one year; $2.8 billion is due in one to three
years; $2.0 billion is due in three to five years; and $3.8 billion is due
in more than five years. As previously discussed, during the first
quarter of 2005, the Corporation issued shares of its common stock valued
at $14.4 million to fund a portion of its 2004 obligations under its
retirement and employee stock ownership plans. There have been no other
substantive changes to the Corporation's contractual obligations as
reported in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
------------------------------
At September 30, 2005, there have been no substantive changes with respect
to the Corporation's off-balance sheet activities as disclosed in the
Corporation's 2004 Annual Report on Form 10-K. See Note 8 to the
Consolidated Financial Statements for an update of the Corporation's
securitization activities in the third quarter of 2005. The Corporation
continues to believe that based on the off-balance sheet arrangements with
which it is presently involved, such off-balance sheet arrangements
neither have, or are reasonably likely to have, a material impact to its
current or future financial condition, results of operations, liquidity or
capital.
CRITICAL ACCOUNTING POLICIES
----------------------------
The Corporation has established various accounting policies which govern
the application of accounting principles generally accepted in the United
States in the preparation of the Corporation's consolidated financial
statements. The significant accounting policies of the Corporation are
described in the footnotes to the consolidated financial statements
contained in the Corporation's Annual Report on Form 10-K and updated as
necessary in its Quarterly Reports on Form 10-Q. Certain accounting
policies involve significant judgments and assumptions by management that
may have a material impact on the carrying value of certain assets and
liabilities. Management considers such accounting policies to be critical
accounting policies. The judgments and assumptions used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of judgments
and assumptions made by management, actual results could differ from these
judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of the operations of the
Corporation. Management continues to consider the following to be those
accounting policies that require significant judgments and assumptions:
Allowance for Loan and Lease Losses
-----------------------------------
The allowance for loan and lease losses represents management's estimate
of probable losses inherent in the Corporation's loan and lease portfolio.
Management evaluates the allowance each quarter to determine that it is
adequate to absorb these inherent losses. This evaluation is supported by
a methodology that identifies estimated losses based on assessments of
individual problem loans and historical loss patterns of homogeneous loan
pools. In addition, environmental factors, including economic conditions
and regulatory guidance, unique to each measurement date are also
considered. This reserving methodology has the following components:
SPECIFIC RESERVE. The Corporation's internal risk rating system is used
to identify loans and leases that 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. For impaired loans, impairment is measured using one
of three alternatives: (1) the present value of expected future cash flows
discounted at the loan's effective interest rate; (2) the loan's
observable market price, if available; or (3) the fair value of the
collateral for collateral dependent loans and loans for which foreclosure
is deemed to be probable. In general, these loans have been internally
identified as credits requiring management's attention due to underlying
problems in the borrower's business or collateral concerns. Subject to a
minimum size, a quarterly review of these loans is performed to identify
the specific reserve necessary to be allocated to each of these loans.
This analysis considers expected future cash flows, the value of
collateral and also other factors that may impact the borrower's ability
to make payments when due.
39
COLLECTIVE LOAN IMPAIRMENT. This component of the allowance for loan and
lease losses is comprised of two elements. First, the Corporation makes a
significant number of loans and leases, which due to their underlying
similar characteristics, are assessed for loss as homogeneous pools.
Included in the homogeneous pools are loans and leases from the retail
sector and commercial loans under a certain size that have been excluded
from the specific reserve allocation previously discussed. The
Corporation segments the pools by type of loan or lease and, using
historical loss information, estimates a loss reserve for each pool.
The second element reflects management's recognition of the uncertainty
and imprecision underlying the process of estimating losses. The internal
risk rating system is used to identify those loans within certain industry
segments that based on financial, payment or collateral performance,
warrant closer ongoing monitoring by management. The specific loans
mentioned earlier are excluded from this analysis. Based on management's
judgment, reserve ranges are allocated to industry segments due to
environmental conditions unique to the measurement period. Consideration
is given to both internal and external environmental factors such as
economic conditions in certain geographic or industry segments of the
portfolio, economic trends, risk profile, and portfolio composition.
Reserve ranges are then allocated using estimates of loss exposure that
management has identified based on these economic trends or conditions.
The following factors were taken into consideration in determining the
adequacy of the allowance for loan and lease losses at September 30, 2005:
In general, the Corporation's borrowing customers appear to have
successfully managed their businesses through the slower economic
conditions, the economy is improving and the Corporation's customer
base is showing signs of increased business activity as evidenced by
the loan growth in this quarter.
At September 30, 2005, allowances for loan and lease losses continue
to be carried for exposures to manufacturing, healthcare, production
agriculture (including dairy and cropping operations), truck
transportation, accommodation, general contracting, motor vehicle
and parts dealers and the airline industries. The majority of the
commercial charge-offs incurred during the past two years were in
these industry segments. While most loans in these categories are
still performing, the Corporation continues to believe these sectors
have been more adversely affected by the previous economic slowdown.
Reduced revenues causing a declining utilization of the industry's
capacity levels have impacted manufacturing. As a result,
collateral values and the amounts realized through the sale or
liquidation of manufacturing plant and equipment have declined
accordingly.
During the third quarter of 2005, the Corporation's commitments to
Shared National Credits were approximately $2.9 billion with usage
averaging around 46%. Many of the Corporation's largest charge-offs
have come from the Shared National Credit portfolio. Although these
factors result in an increased risk profile, as of September 30,
2005 Shared National Credit nonperforming loans amounted to $3.9
million. The Corporation's exposure to Shared National Credits is
monitored closely given this lending group's loss experience.
The Corporation's primary lending areas are Wisconsin, Arizona,
Minnesota and Missouri. The Minnesota and Missouri markets continue
to represent relatively new geographic regions for the Corporation.
Each of these regions has cultural and environmental factors that
are unique to them. The uncertainty regarding the inherent losses
in their respective loan portfolios continue to present increased
risks which have been mitigated by the implementation of the
Corporation's credit underwriting and monitoring processes. At
September 30, 2005, total nonperforming loans and leases as a
percent of total loans and leases for the Minnesota and Missouri
regions combined was higher than the consolidated total of
nonperforming loans and leases as a percent of total consolidated
loans and leases.
At September 30, 2005, nonperforming loans and leases amounted to
$147.3 million or 0.44% of consolidated loans and leases compared to
$131.6 million or 0.41% of consolidated loans and leases at June 30,
2005, and $130.0 million or 0.42% of consolidated loans and leases
at March 31, 2005. At September 30, 2005 nonperforming loans and
leases increased $15.7 million or 11.9% compared to nonperforming
loans and leases at June 30, 2005. Despite the increase, the ratio
of nonperforming loans and leases to consolidated loans and leases
since December 31, 2004 and at each quarter end throughout 2005 has
remained in a fairly narrow range and continues to be below
management's expectations. Nonaccrual loans and leases continue to
be the primary source of nonperforming loans and leases. Since June
30, 2005, almost all loan types experienced an increase in
nonaccrual balances except for nonaccrual commercial real estate
loans and nonaccrual lease financing receivables. The decline in
nonaccrual commercial real estate loans was primarily due to charge-
offs.
40
Net charge-offs amounted to $7.8 million or 0.10% of average loans
and leases in the third quarter of 2005 compared to $11.9 million or
0.15% of average loans and leases in the second quarter of 2005 and
$8.0 million or 0.11% of average loans and leases in the first
quarter of 2005. The lower level of net charge-offs experienced
throughout 2004 and the first nine months of 2005 has to some extent
been the result of higher than normal recoveries. Based on the
status of some of the larger charge-offs recognized in recent
quarters, management expects recoveries will likely return to lower
levels in future periods. Recoveries in the third quarter of 2005
were relatively unchanged compared to the second quarter of 2005 but
were $0.6 million lower than recoveries in the first quarter of 2005
and $2.0 million lower than recoveries in the fourth quarter of
2004. The ratio of recoveries to charge-offs was 36.6% in the third
quarter of 2005 which was above the Corporation's five year
historical average ratio of recoveries to charge-offs of 26.9%. For
the nine months ended September 30, 2005, the ratio of recoveries to
charge-offs was 33.4%.
Management continues to expect the longer term level of
nonperforming loans and leases to be in the range of 50-60 basis
points of total loans and leases and expects net charge-offs to
trend to historical levels. While it is unclear when this will
occur, management does not believe that current net charge-off
levels are sustainable indefinitely.
Based on the above loss estimates, management determined its best estimate
of the required allowance for loans and leases. Management's evaluation
of the factors described above resulted in an allowance for loan and lease
losses of $362.3 million or 1.09% of loans and leases outstanding at
September 30, 2005. The allowance for loan and lease losses was $358.1
million or 1.21% of loans and leases outstanding at December 31, 2004 and
$358.1 million or 1.27% of loans and leases outstanding at September 30,
2004. Consistent with the credit quality trends noted above, the
provision for loan and lease losses amounted to $9.9 million and $31.8
million for the three and nine months ended September 30, 2005,
respectively. The resulting provisions for loan and lease losses are the
amounts required to establish the allowance for loan and lease losses at
the required level after considering charge-offs and recoveries.
Management recognizes there are significant estimates in the process and
the ultimate losses could be significantly different from those currently
estimated.
The Corporation has not materially changed any aspect of its overall
approach in the determination of the allowance for loan and lease losses.
There have been no material changes in assumptions or estimation
techniques as compared to prior periods that impacted the determination of
the current period allowance. However, on an on-going basis the
Corporation continues to refine the methods used in determining
management's best estimate of the allowance for loan and lease losses.
Capitalized Software and Conversion Costs
-----------------------------------------
Direct costs associated with the production of computer software that will
be licensed externally or used in a service bureau environment are
capitalized. Capitalization of such costs is subject to strict accounting
policy criteria, although the appropriate time to initiate capitalization
requires management judgment. Once the specific capitalized project is
put into production, the software cost is amortized over its estimated
useful life, generally four years. Each quarter, the Corporation performs
net realizable value tests to ensure the assets are recoverable. Such
tests require management judgment as to the future sales and profitability
of a particular product which involves, in some cases, multi-year
projections. Technology changes and changes in customer requirements can
have a significant impact on the recoverability of these assets and can be
difficult to predict. Should significant adverse changes occur, estimates
of useful life may have to be revised or write-offs would be required to
recognize impairment. For the three months ended September 30, 2005 and
2004, the amount of software costs capitalized amounted to $10.7 million
and $10.3 million, respectively. Amortization expense of software costs
amounted to $13.1 million for the three months ended September 30, 2005
compared to $13.4 million for the three months ended September 30, 2004.
For the nine months ended September 30, 2005 and 2004, the amount of
software costs capitalized amounted to $29.6 million and $30.7 million,
respectively. Amortization expense of software costs amounted to $43.3
million for the nine months ended September 30, 2005 compared to $41.5
million for the nine months ended September 30, 2004.
41
Based on a strategic product review performed during the second quarter of
2004, Metavante determined that a certain product had limited growth
potential and that future marketing of the product should be discontinued.
As a result of the strategic product review and net realizable value test
on this product, Metavante determined that the capitalized software
associated with the product was impaired and recorded a write-down.
Amortization expense for the nine months ended September 30, 2004,
includes $4.9 million for the write-down of the capitalized software costs
associated with the impaired product.
Direct costs associated with customer system conversions to the data
processing operations are capitalized and amortized on a straight-line
basis over the terms, generally five to seven years, of the related
servicing contracts.
Capitalization only occurs when management is satisfied that such costs
are recoverable through future operations or penalties (buyout fees) in
case of early termination. For the three months ended September 30, 2005
and 2004, the amount of conversion costs capitalized amounted to $2.7
million and $2.8 million, respectively. Amortization expense of
conversion costs amounted to $2.4 million and $3.2 million for the three
months ended September 30, 2005 and 2004, respectively. For the nine
months ended September 30, 2005 and 2004, the amount of conversion costs
capitalized amounted to $8.2 million and $7.2 million, respectively.
Amortization expense of conversion costs amounted to $8.1 million and $9.7
million for the nine months ended September 30, 2005 and 2004,
respectively.
Net unamortized costs were ($ in millions):
September 30,
--------------------------
2005 2004
------------ ------------
Software $ 153.2 $ 160.8
Conversions 28.0 28.2
----------- -----------
Total $ 181.2 $ 189.0
=========== ===========
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the amount of costs that are capitalized
for software development or conversion activities. There have been no
material changes in assumptions or estimation techniques as compared to
prior periods that impacted the determination of the periodic amortization
of such costs.
Financial Asset Sales and Securitizations
-----------------------------------------
The Corporation utilizes certain financing arrangements to meet its
balance sheet management, funding, liquidity, and market or credit risk
management needs. The majority of these activities are basic term or
revolving securitization vehicles. These vehicles are generally funded
through term-amortizing debt structures or with short-term commercial
paper designed to be paid off based on the underlying cash flows of the
assets securitized. These financing entities are contractually limited to
a narrow range of activities that facilitate the transfer of or access to
various types of assets or financial instruments. In certain situations,
the Corporation provides liquidity and/or loss protection agreements. In
determining whether the financing entity should be consolidated, the
Corporation considers whether the entity is a qualifying special-purpose
entity ("QSPE") as defined in Statement of Financial Accounting Standards
("SFAS") No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. For non-consolidation, a QSPE
must be demonstrably distinct, have significantly limited permitted
activities, hold assets that are restricted to transferred financial
assets and related assets, and can sell or dispose of non-cash financial
assets only in response to specified conditions.
In December 2003, the Corporation adopted Financial Accounting Standards
Board Interpretation No. 46 ("FIN 46R"), Consolidation of Variable
Interest Entities (revised December 2003). This interpretation addresses
consolidation by business enterprises of variable interest entities.
Under current practice, entities generally have been included in
consolidated financial statements because they are controlled through
voting interests. This interpretation explains how to identify variable
interest entities and how an entity assesses its interests in a variable
interest entity to decide whether to consolidate that entity. FIN 46R
requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. Variable interest
entities that effectively disperse risks will not be consolidated unless a
single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. Transferors
to QSPEs and "grandfathered" QSPEs subject to the reporting requirements
of SFAS 140 are outside the scope of FIN 46R and do not consolidate those
entities. FIN 46R also requires certain disclosures by the primary
beneficiary of a variable interest entity or an entity that holds a
significant variable interest in a variable interest entity.
42
With respect to the Corporation's securitization activities, the adoption
of FIN 46R did not have an impact on its consolidated financial statements
because its transfers are generally to QSPEs.
The Corporation sells financial assets in a two-step process that results
in a surrender of control over the assets as evidenced by true-sale
opinions from legal counsel, to unconsolidated entities that securitize
the assets. The Corporation retains interests in the securitized assets
in the form of interest-only strips and a cash reserve account. Gain or
loss on sale of the assets depends in part on the carrying amount assigned
to the assets sold allocated between the asset sold and retained interests
based on their relative fair values at the date of transfer. The value of
the retained interests is based on the present value of expected cash
flows estimated using management's best estimates of the key assumptions -
credit losses, prepayment speeds, forward yield curves and discount rates
commensurate with the risks involved. Actual results can differ from
expected results.
The Corporation reviews the carrying values of the retained interests
monthly to determine if there is a decline in value that is other than
temporary and periodically reviews the propriety of the assumptions used
based on current historical experience as well as the sensitivities of the
carrying value of the retained interests to adverse changes in the key
assumptions. The Corporation believes that its estimates result in a
reasonable carrying value of the retained interests.
The Corporation regularly sells automobile loans to an unconsolidated
multi-seller special purpose entity commercial paper conduit in
securitization transactions in which servicing responsibilities and
subordinated interests are retained. The outstanding balances of
automobile loans sold in these securitization transactions were $1,013.2
million at September 30, 2005. At September 30, 2005 the carrying amount
of retained interests amounted to $33.1 million.
The Corporation also sells, from time to time, debt securities classified
as available for sale that are highly rated to an unconsolidated
bankruptcy remote QSPE whose activities are limited to issuing highly
rated asset-backed commercial paper with maturities up to 180 days which
is used to finance the purchase of the investment securities. The
Corporation provides liquidity back-up in the form of Liquidity Purchase
Agreements. In addition, the Corporation acts as counterparty to interest
rate swaps that enable the QSPE to hedge its interest rate risk. Such
swaps are designated as free-standing derivative financial instruments in
the Corporation's Consolidated Balance Sheet.
At September 30, 2005, highly rated investment securities in the amount of
$288.6 million were outstanding in the QSPE to support the outstanding
commercial paper.
Income Taxes
------------
Income taxes are accounted for using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on tax assets and liabilities of a
change in tax rates is recognized in the income statement in the period
that includes the enactment date.
The determination of current and deferred income taxes is based on complex
analyses of many factors, including interpretation of Federal and state
income tax laws, the difference between tax and financial reporting basis
of assets and liabilities (temporary differences), estimates of amounts
currently due or owed, such as the timing of reversals of temporary
differences and current accounting standards. The Federal and state
taxing authorities who make assessments based on their determination of
tax laws periodically review the Corporation's interpretation of Federal
and state income tax laws. Tax liabilities could differ significantly
from the estimates and interpretations used in determining the current and
deferred income tax liabilities based on the completion of taxing
authority examinations.
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 expected
financial and operating activities and results which are preceded by words
such as "expects", "anticipates" or "believes". Such statements are
subject to important factors that could cause the Corporation's actual
results to differ materially from those anticipated by the forward-looking
statements. These factors include those referenced in Item 1, Business,
of the Corporation's Annual Report on Form 10-K for the period ended
December 31, 2004 under the heading "Forward-Looking Statements," as
updated below, and as may be described from time to time in the
Corporation's subsequent SEC filings, and such factors are incorporated
herein by reference.
43
Unauthorized disclosure of sensitive or confidential client or customer
information, whether through a breach of the Corporation's computer
systems or otherwise, could severely harm the Corporation's business.
As part of the Corporation's financial and data processing products and
services, the Corporation collects, processes and retains sensitive and
confidential client and customer information on behalf of itself and other
third parties, such as Metavante's customers. Despite the security
measures the Corporation has in place, its facilities and systems, and
those of its third party service providers, may be vulnerable to security
breaches, acts of vandalism, computer viruses, misplaced or lost data,
programming and/or human errors, or other similar events. Any security
breach involving the misappropriation, loss or other unauthorized
disclosure of confidential customer information (whether by the
Corporation or by its vendors) could severely damage the reputation of the
Corporation, expose the Corporation to the risks of litigation and
liability, disrupt its operations and harm its business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following updated information should be read in conjunction with the
Corporation's 2004 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 limit these risks
within prudent parameters and identify appropriate risk/reward tradeoffs
in the financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing
and embedded option characteristics of the assets and liabilities held by
the Corporation. Policies are in place to assure that neither earnings
nor fair value at risk exceed appropriate limits. The use of a limited
array of derivative financial instruments has allowed the Corporation to
achieve the desired balance sheet repricing structure while simultaneously
meeting the desired objectives of both its borrowing and depositing
customers.
The models used include measures of the expected repricing characteristics
of administered rate (NOW, savings and money market accounts) and non-rate
related products (demand deposit accounts, other assets and other
liabilities). These measures recognize the relative insensitivity of
these accounts to changes in market interest rates, as demonstrated
through current and historical experiences. However, during the second
quarter of 2003, the Corporation increased the proportion of these
accounts modeled as rate sensitive, in order to recognize the instability
of some of the recent balance growth in these accounts. This modeling
treatment will be maintained until the incremental balances can be
observed across a more complete interest rate cycle. In addition to
contractual payment information for most other assets and liabilities, the
models also include estimates of expected prepayment characteristics for
those items that are likely to materially change their payment structures
in different rate environments, including residential mortgage products,
certain commercial and commercial real estate loans and certain mortgage-
related securities. Estimates for these sensitivities are based on
industry assessments and are substantially driven by the differential
between the contractual coupon of the item and current market rates for
similar products.
44
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 difference by the Corporation's
budgeted operating income before taxes for the calendar year. Since
future interest rate moves are difficult to predict, the following table
presents two potential scenarios - a gradual increase of 100bp across the
entire yield curve over the course of the year (+25bp per quarter), and a
gradual decrease of 100bp across the entire yield curve over the course of
the year (-25bp per quarter) for the balance sheet as of the indicated
dates:
Impact to Annual Pretax Income as of
----------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
2005 2005 2005 2004 2004
----------------------------------------------------------------------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (0.1)% 0.3 % (0.2)% (0.1)% 0.4 %
Decline in rates 0.0 % (0.6)% 0.3 % 0.2 % (0.4)%
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 and changes
in spread between key market rates. These results also do not include any
management action to mitigate potential income variances within the
simulation process. Such action could potentially include, but would not
be limited to, adjustments to the repricing characteristics of any on- or
off-balance sheet item with regard to short-term rate projections and
current market value assessments.
Actual results will differ from simulated results due to the 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 asset 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, 2005, the fair value of equity at
risk for a gradual 100bp shift in rates was no more than 2.0% of the
market value of the Corporation.
Equity Risk
-----------
In addition to interest rate risk, the Corporation incurs market risk in
the form of equity risk. The Corporation invests directly and indirectly
through investment funds, 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. However, fair values are difficult to determine until an actual
sale or liquidation transaction actually occurs. At September 30, 2005,
the carrying value of total active capital markets investments amounted to
approximately $32.0 million.
As of September 30, 2005, M&I Trust Services administered $79.7 billion in
assets and directly managed a portfolio of $18.7 billion. Exposure exists
to changes in equity values due to the fact that fee income is partially
based on equity balances. While this exposure is present, quantification
remains difficult due to the number of other variables affecting fee
income. Interest rate changes can also have an effect on fee income for
the above stated reasons.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the reports
filed by us under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. We carried out an evaluation,
under the supervision and with the participation of our management,
including our Chief Executive Officer and our Senior Vice President and
Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Rule 13a-15 of the
Exchange Act. Based on that evaluation, our Chief Executive Officer and
our Senior Vice President and Chief Financial Officer concluded that our
disclosure controls and procedures are effective as of the end of the
period covered by this report.
There have been no changes in our internal control over financial
reporting identified in connection with the evaluation discussed above
that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
45
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table reflects the purchases of Marshall & Ilsley
Corporation stock for the specified period:
Total Number of Maximum Number
Shares Purchased of Shares that
as Part of May Yet Be
Total Number Average of Publicly Purchased Under
of Shares Price Paid Announced Plans the Plans
Period Purchased(1) per Share or Programs or Programs
----------------- ------------- ----------- ------------------ -----------------
January 1 to
January 31, 2005 18,100 $ 43.35 -- 12,000,000
February 1 to
February 28, 2005 13,523 $ 37.77 -- 12,000,000
March 1 to
March 31, 2005 1,000 $ 30.32 -- 12,000,000
April 1 to
April 30, 2005 6,048 $ 41.97 -- 12,000,000
May 1 to
May 31, 2005 1,108 $ 41.89 -- 12,000,000
June 1 to
June 30, 2005 4,888 $ 43.51 -- 12,000,000
July 1 to
July 31, 2005 8,554 $ 45.41 -- 12,000,000
August 1 to
August 31, 2005 5,442 $ 44.77 -- 12,000,000
September 1 to
September 30, 2005 1,977 $ 45.82 -- 12,000,000
------------ --------- ---------------
Total 67,505 $ 42.61 --
============ ========= ===============
(1) Includes shares purchased by rabbi trusts pursuant to nonqualified
deferred compensation plans.
The Corporation's Share Repurchase Program was publicly reconfirmed in
April 2004 and again in April 2005. The Share Repurchase Program
authorizes the purchase of up to 12 million shares annually and renews
each year at that level unless changed or terminated by subsequent Board
action.
ITEM 6. EXHIBITS
Exhibit 11 - Statement Regarding 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 I - Financial Information herein.
Exhibit 12 - Statement Regarding Computation of Ratio of
Earnings to Fixed Charges
Exhibit 31(a) - Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
Exhibit 31(b) - Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
Exhibit 32(a) - Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
Exhibit 32(b) - Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
46
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
(Registrant)
/s/ Patricia R. Justiliano
__________________________________
Patricia R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ James E. Sandy
__________________________________
James E. Sandy
Vice President
November 9, 2005
47
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
______________ ____________________________________________
(11) Statement Regarding 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 I - Financial Information
herein.
(12) Statement Regarding Computation of Ratio
of Earnings to Fixed Charges.
(31)(a) Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
(31)(b) Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
(32)(a) Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
(32)(b) Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.