SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 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 53202
Milwaukee, Wisconsin (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (414) 765-7801
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on Which Registered:
-------------------- -----------------------
Common Stock--$1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant is approximately $5,549,736,000 as of February 28, 2001. The number
of shares of common stock outstanding as of February 28, 2001 is 102,868,135.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Proxy Statement for
the registrant's Annual Meeting of Shareholders to be held on April 24, 2001.
PART I
ITEM 1. BUSINESS
General
Marshall & Ilsley Corporation ("M&I" or the "Corporation"), incorporated in
Wisconsin in 1959, is a registered bank holding company under the Bank Holding
Company Act of 1956 (the "BHCA"). As of December 31, 2000, M&I had
consolidated total assets of approximately $26.1 billion and consolidated
total deposits of approximately $19.2 billion, making M&I the second largest
bank holding company headquartered in Wisconsin. The executive offices of M&I
are located at 770 North Water Street, Milwaukee, Wisconsin 53202 (telephone
number (414) 765-7801).
M&I's principal assets are the stock of its bank and nonbank subsidiaries.
M&I's subsidiaries include Metavante Corporation ("Metavante") (formerly its
M&I Data Services Division), 20 commercial banks, one federal savings bank and
a number of companies engaged in businesses that the Federal Reserve Board
(the "FRB") has determined to be closely-related or incidental to the business
of banking. M&I provides its subsidiaries with financial and managerial
assistance in such areas as budgeting, tax planning, compliance assistance,
asset and liability management, investment administration and portfolio
planning, business development, advertising and human resources management.
M&I's bank and savings association subsidiaries provide a full range of
banking services to individuals, businesses and governments throughout
Wisconsin, and in the Phoenix and Tucson, Arizona metropolitan areas, Las
Vegas, Nevada and Naples, Florida. These subsidiaries offer retail,
institutional, international, business and correspondent banking, investment
and trust services through the operation of over 200 banking offices in
Wisconsin, 14 offices in Arizona, one office in Florida and one office in
Nevada. The M&I bank and saving association subsidiaries hold a significant
portion of their mortgage and investment portfolios indirectly through their
ownership interests in direct and indirect subsidiaries. M&I Marshall & Ilsley
Bank ("M&I Bank") is M&I's largest bank subsidiary, with consolidated assets
as of December 31, 2000 of approximately $12.7 billion.
Metavante and two other nonbank subsidiaries are major suppliers of
financial and data processing services and software to banking, financial and
related organizations. Metavante provides integrated products and services to
financial services providers that enable them to initiate and process a broad
range of financial transactions electronically, including through the
Internet. Metavante's integrated financial transaction processing,
outsourcing, software and consulting products and services provide virtually
all of the technology that a financial services provider needs to run its
operations. As of December 31, 2000, Metavante had over 3,300 clients in the
United States and abroad, including large banks, mid-tier and community banks,
Internet banks and non-traditional financial services providers. In 2000,
Metavante's products and services were used to originate and/or process nearly
7.2 billion transactions for consumer and business customer bank accounts.
In July 2000, M&I transferred its M&I Data Services business to a wholly-
owned subsidiary and renamed that subsidiary Metavante Corporation. This
transfer was made in connection with a proposed public offering of Metavante's
common stock. The proposed public offering was withdrawn in November 2000 due
to adverse market conditions and a near term slow down in financial account
processing markets. M&I expects to continue to invest in and grow Metavante's
business, and will evaluate future growth strategies for Metavante as
circumstances permit.
M&I's other nonbank subsidiaries operate a variety of bank-related
businesses, including those providing investment management services,
insurance services, trust services, equipment lease financing, commercial and
residential mortgage banking, home equity financing, venture capital,
brokerage services and financial advisory services. M&I Investment Management
Corp. offers a full range of asset management services to M&I's trust company
subsidiaries, the Marshall Funds and other individual, business and
institutional customers. M&I's trust company subsidiaries provide trust and
employee benefit plan services to customers throughout the United States with
offices in Wisconsin, Arizona, Florida, Nevada, North Carolina and Illinois.
M&I First National Leasing
2
Corp. leases a variety of equipment and machinery to large and small
businesses. M&I Dealer Finance, Inc. provides retail vehicle lease financing.
M&I Mortgage Corp. originates, purchases, sells and services residential
mortgages. M&I Mortgage Reinsurance Corporation acts as a reinsurer of private
mortgage insurance written in connection with residential mortgage loans
originated in the M&I system. The Richter-Schroeder Company originates and
services long-term commercial real estate loans for institutional investors.
M&I Capital Markets Group L.L.C. and M&I Ventures L.L.C. provide venture
capital, financial advisory and strategic planning services to customers,
including assistance in connection with the private placement of securities,
raising funds for expansion, leveraged buy-outs, divestitures, mergers and
acquisitions and small business investment company transactions. M&I Brokerage
Services, Inc., a broker-dealer registered with the National Association of
Securities Dealers and the Securities and Exchange Commission, provides
brokerage and other investment related services to a variety of retail and
commercial customers. M&I Support Services Corp. operates an extensive multi-
media customer service center that provides banking customers with 24-hour
phone access to personal bankers and other customer services.
Principal Sources of Revenue
The table below shows the amount and percentages of M&I's total
consolidated operating revenues resulting from interest on loans and leases,
interest on investment securities and fees for data processing services for
each of the last three years ($ in thousands):
Interest on Fees for Data
Interest on Investment Processing
Loans and Leases Securities Services
-------------------- ------------------ ------------------
Percent Percent Percent
of Total of Total of Total Total
Year Ended Operating Operating Operating Operating
December 31 Amount Revenues Amount Revenues Amount Revenues Revenues
----------- ---------- --------- -------- --------- -------- --------- ----------
2000.................... $1,391,651 52.0% $354,823 13.3% $546,041 20.4% $2,676,334
1999.................... 1,156,775 48.7 337,945 14.2 494,816 20.8 2,375,129
1998.................... 1,085,829 48.7 346,012 15.5 421,945 18.9 2,228,544
M&I business segment information is contained in Note 20 of the Notes to
the Consolidated Financial Statements contained in Item 8, Consolidated
Financial Statements and Supplementary Data.
Competition
M&I and its subsidiaries face substantial competition from hundreds of
competitors in the markets they serve, some of which are larger and have
greater resources than M&I. M&I's bank subsidiaries compete for deposits and
other sources of funds and for credit relationships with other banks, savings
associations, credit unions, finance companies, mutual funds, life insurance
companies (and other long-term lenders) and other financial and non-financial
companies located both within and outside M&I's primary market area, many of
which offer products functionally equivalent to bank products. M&I's nonbank
operations compete with numerous banks, finance companies, data servicing
companies, leasing companies, mortgage bankers, brokerage firms, financial
advisors, trust companies, mutual funds and investment bankers in Wisconsin
and throughout the United States.
The markets for the financial products and services offered by Metavante
are intensely competitive. Metavante competes with a variety of companies in
various segments of the financial services industry, and its competitors vary
in size and in the scope and breadth of products and services they offer.
Certain segments of the financial services industry tend to be highly
fragmented with numerous companies competing for market share. Highly
fragmented segments currently include online banking, financial account
processing, customer relationship management solutions and electronic funds
transfer and card solutions. Other segments of the
3
financial services industry are relatively new with limited competition,
including private label banking and trust and investment solutions. Currently,
the electronic bill payment and presentment market is highly centralized. In
this market, Metavante faces one dominant competitor and a small number of
other primary competitors. Metavante also faces competition from in-house
technology departments of existing and potential clients who may develop their
own product offerings.
Employees
As of December 31, 2000, M&I and its subsidiaries employed in the aggregate
11,753 employees. M&I considers employee relations to be excellent. None of
the employees of M&I or its subsidiaries are represented by a collective
bargaining group.
Supervision and Regulation
As a registered bank holding company, M&I is subject to regulation and
examination by the FRB under the BHCA. M&I's state bank subsidiaries are
subject to regulation and examination by the Wisconsin Department of Financial
Institutions, or in the case of M&I Thunderbird Bank, the Arizona State
Banking Department. In addition, all of M&I's state chartered banks are
regulated by the FRB. M&I's federal savings bank subsidiary is subject to
regulation and examination by the Office of Thrift Supervision. In addition,
all of M&I's bank subsidiaries are subject to examination by the Federal
Deposit Insurance Corporation (the "FDIC").
Under FRB policy, M&I is expected to act as a source of financial strength
to each of its bank subsidiaries and to commit resources to support each bank
subsidiary in circumstances when it might not do so absent such requirements.
In addition, there are numerous federal and state laws and regulations which
regulate the activities of M&I and its bank subsidiaries, including
requirements and limitations relating to capital and reserve requirements,
permissible investments and lines of business, transactions with affiliates,
loan limits, mergers and acquisitions, issuances of securities, dividend
payments, inter-affiliate liabilities, extensions of credit and branch
banking. Information regarding capital requirements for bank holding companies
and tables reflecting M&I's regulatory capital position at December 31, 2000
can be found in Note 14 of the Notes to the Consolidated Financial Statements
contained in Item 8, Consolidated Financial Statements and Supplementary Data.
The federal regulatory agencies have broad power to take prompt corrective
action if a depository institution fails to maintain certain capital levels.
In addition, a bank holding company's controlled insured depository
institutions are liable for any loss incurred by the FDIC in connection with
the default of, or any FDIC-assisted transaction involving, an affiliated
insured bank or savings association. Current federal law provides that
adequately capitalized and managed bank holding companies from any state may
acquire banks and bank holding companies located in any other state, subject
to certain conditions. Banks are permitted to create interstate branching
networks in states that do not "opt out" of interstate branching.
The laws and regulations to which M&I is subject are constantly under
review by Congress, regulatory agencies and state legislatures. In November
1999, Congress enacted the Gramm-Leach-Bliley Act of 1999 (the "Act"), which
eliminates certain barriers to and restrictions on affiliations between banks
and securities firms, insurance companies and other financial services
organizations. Among other things, the Act repealed certain Glass-Steagall Act
restrictions on affiliations between banks and securities firms, and amended
the BHCA to permit bank holding companies that qualify as "financial holding
companies" to engage in a broad list of "financial activities," and any non-
financial activity that the FRB, in consultation with the Secretary of the
Treasury, determines is "complementary" to a financial activity and poses no
substantial risk to the safety and soundness of depository institutions or the
financial system. The Act treats various lending, insurance underwriting,
insurance company portfolio investment, financial advisory, securities
underwriting, dealing and market-making, and merchant banking activities as
financial in nature for this purpose.
4
Under the Act, a bank holding company may become certified as a financial
holding company by filing a notice with the FRB, together with a certification
that the bank holding company meets certain criteria, including capital,
management, and Community Reinvestment Act requirements. M&I has not yet
determined whether or when it may elect to become a financial holding company.
The Act also imposes strict new privacy restrictions on the transfer and
use by financial institutions of nonpublic personal information about their
customers. On June 1, 2000, the federal banking regulatory agencies issued
final regulations implementing the Act's consumer privacy protections. Among
other things, the new privacy regulations give customers the right to "opt-
out" of having their nonpublic personal information shared by a financial
institution with nonaffiliated third parties, bars financial institutions from
disclosing customer account numbers or other such access codes to
nonaffiliated third parties for direct marketing purposes, and requires
disclosures by financial institutions of their policies and procedures for
protecting customers' nonpublic personal information.
The earnings and business of M&I and its bank subsidiaries also are
affected by the general economic and political conditions in the United States
and abroad and by the monetary and fiscal policies of various federal
agencies. The FRB impacts the competitive conditions under which M&I operates
by determining the cost of funds obtained from money market sources for
lending and investing and by exerting influence on interest rates and credit
conditions. In addition, legislative and economic factors can be expected to
have an ongoing impact on the competitive environment within the financial
services industry. The impact of fluctuating economic conditions and federal
regulatory policies on the future profitability of M&I and its subsidiaries
cannot be predicted with certainty.
Selected Statistical Information
Statistical information relating to M&I and its subsidiaries on a
consolidated basis is set forth as follows:
(1) Average Balance Sheets and Analysis of Net Interest Income for each
of the last three years is included in Item 7, Management's Discussion and
Analysis of Financial Position and Results of Operations.
(2) Analysis of Changes in Interest Income and Interest Expense for each
of the last two years is included in Item 7, Management's Discussion and
Analysis of Financial Position and Results of Operations.
(3) Nonaccrual, Past Due and Restructured Loans and Leases for each of
the last five years is included in Item 7, Management's Discussion and
Analysis of Financial Position and Results of Operations.
(4) Summary of Loan and Lease Loss Experience for each of the last five
years (including the narrative discussion) is included in Item 7,
Management's Discussion and Analysis of Financial Position and Results of
Operations.
(5) Return on Average Shareholders' Equity, Return on Average Assets and
other statistical ratios for each of the last five years can be found in
Item 6, Selected Financial Data.
The following tables set forth certain statistical information relating to
M&I and its subsidiaries on a consolidated basis.
Investment Securities
The amortized cost of M&I's consolidated investment securities, other than
trading and other short-term investments, at December 31 of each year are ($
in thousands):
2000 1999 1998
---------- ---------- ----------
U.S. Treasury and government agencies......... $3,303,366 $3,924,192 $3,658,730
States and political subdivisions............. 1,251,359 1,277,638 1,051,712
Other......................................... 1,235,156 377,289 304,174
---------- ---------- ----------
$5,789,881 $5,579,119 $5,014,616
========== ========== ==========
5
The maturities, at amortized cost, and weighted average yields (for tax-
exempt obligations on a fully taxable basis assuming a 35% tax rate) of
investment securities at December 31, 2000 are ($ in thousands):
After One but
Within Five After Five but After Ten
Within One Year Years Within Ten Years Years Total
---------------- ---------------- ------------------ -------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------- ----- ---------- ----- ---------- ------- -------- ----- ---------- -----
U.S. Treasury and
government agencies.... $ 903,429 7.11% $2,132,712 7.16% $ 256,126 7.30% $ 11,099 7.32% $3,303,366 7.15%
States and political
subdivisions........... 46,494 6.78 375,651 6.85 232,173 7.19 597,041 7.43 1,251,359 7.19
Other................... 644,074 7.33 409,133 7.10 33,057 7.94 148,892 3.82 1,235,156 6.85
---------- ---- ---------- ---- ---------- ------ -------- ---- ---------- ----
$1,593,997 7.19% $2,917,496 7.11% $ 521,356 7.29% $757,032 6.72% $5,789,881 7.09%
========== ==== ========== ==== ========== ====== ======== ==== ========== ====
Types of Loans and Leases
M&I's consolidated loans and leases, classified by type, at December 31 of
each year are ($ in thousands):
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------
Commercial, financial
and agricultural....... $ 5,230,795 $ 4,691,996 $ 4,025,663 $ 3,346,101 $2,904,341
Industrial development
revenue bonds.......... 58,742 62,861 52,174 49,126 32,241
Real estate:
Construction.......... 619,281 494,558 425,442 458,670 394,228
Mortgage:
Residential......... 5,049,557 4,941,450 4,045,022 4,146,416 2,560,936
Commercial.......... 4,359,812 4,034,771 3,667,924 3,450,897 2,477,652
----------- ----------- ----------- ----------- ----------
Total mortgage.... 9,409,369 8,976,221 7,712,946 7,597,313 5,038,588
Personal................ 1,174,248 1,299,416 1,166,541 1,161,608 1,181,846
Lease financing......... 1,094,652 810,009 613,400 489,094 331,505
----------- ----------- ----------- ----------- ----------
17,587,087 16,335,061 13,996,166 13,101,912 9,882,749
Less:
Allowance for loan and
lease losses......... 235,115 225,862 226,052 208,651 161,659
----------- ----------- ----------- ----------- ----------
Net loans and leases.... $17,351,972 $16,109,199 $13,770,114 $12,893,261 $9,721,090
=========== =========== =========== =========== ==========
Loan and Lease Balances and Maturities
The analysis of selected loan and lease maturities at December 31, 2000 and
the rate structure for the categories indicated are ($ in thousands):
Rate Structure of Loans and
Maturity Leases Due After One Year
----------------------------------------- ---------------------------------
Over One
Year Over With With
One Year Through Five Predetermined Floating
Or Less Five Years Years Total Rate Rate Total
---------- ---------- -------- ---------- ------------- -------- ----------
Commercial, financial
and agricultural....... $3,643,241 $1,459,954 $127,600 $5,230,795 $1,308,740 $278,814 $1,587,554
Industrial development
revenue bonds.......... 13,929 11,527 33,286 58,742 28,156 16,657 44,813
Real estate--
construction........... 315,475 303,806 -- 619,281 193,559 110,247 303,806
Lease financing......... 193,387 839,686 61,579 1,094,652 901,265 -- 901,265
---------- ---------- -------- ---------- ---------- -------- ----------
$4,166,032 $2,614,973 $222,465 $7,003,470 $2,431,720 $405,718 $2,837,438
========== ========== ======== ========== ========== ======== ==========
--------
Notes:
(1) Scheduled repayments are reported in the maturity category in which the
payments are due based on the terms of the loan agreements. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
over-drafts are reported as due in one year or less.
(2) Amounts shown for the rate structure of loans and leases due after one
year include the estimated effect arising from the use of interest rate
swaps.
6
Nonaccrual, Past Due and Restructured Loans and Leases
Generally, a loan is placed on nonaccrual if payment of interest is more
than 60 days delinquent and the loan has been determined by management to be a
"problem" loan. In addition, loans which are past due 90 days or more as to
interest or principal are also placed on nonaccrual. Exceptions to these rules
are generally only for loans fully collateralized by readily marketable
securities or other relatively risk free collateral.
Potential Problem Loans and Leases
At December 31, 2000 the Corporation had $11.5 million of loans for which
payments are presently current, but the borrowers are experiencing serious
financial problems. These loans are subject to constant management attention
and their classification is reviewed on a quarterly basis.
Deposits
The average amount of and the average rate paid on selected deposit
categories for each of the years ended December 31 is as follows ($ in
thousands):
2000 1999 1998
---------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
----------- ---- ----------- ---- ----------- ----
Noninterest bearing
demand deposits......... $ 2,648,419 $ 2,663,609 $ 2,545,724
Interest bearing demand
deposits................ 1,069,958 1.66% 1,116,919 1.54% 1,129,725 1.85%
Savings deposits......... 6,017,730 4.82 5,740,898 3.86 5,145,798 4.02
Time deposits............ 7,761,676 5.98 6,635,476 5.23 5,935,968 5.67
----------- ----------- -----------
Total deposits........... $17,497,783 $16,156,902 $14,757,215
=========== =========== ===========
The maturity distribution of time deposits (CDs $100,000 and over and other
time) issued in amounts of $100,000 and over and outstanding at December 31,
2000 ($ in thousands) is:
Three months or less............................................. $ 446,597
Over three and through six months................................ 456,818
Over six and through twelve months............................... 656,270
Over twelve months............................................... 1,113,056
----------
$2,672,741
==========
At December 31, 2000, time deposits issued by foreign offices totaled $2.44
billion.
Short-Term Borrowings
Information related to M&I's funds purchased and security repurchase
agreements for the last three years is as follows ($ in thousands):
2000 1999 1998
---------- ---------- ----------
Amount outstanding at year end.......... $1,092,723 $1,402,077 $1,712,165
Average amount outstanding during the
year................................... 2,211,537 2,276,978 2,042,371
Maximum amount outstanding at any
month's end............................ 2,767,114 2,609,501 2,541,006
Weighted average interest rate at year
end.................................... 5.91% 3.95% 4.39%
Weighted average interest rate during
the year............................... 6.28% 5.00% 5.36%
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Forward-Looking Statements
This report contains statements that may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements other than historical facts contained or
incorporated by reference in this report. These statements speak of M&I's
plans, goals, beliefs or expectations, refer to estimates or use similar
terms. Future filings by M&I with the Securities and Exchange Commission, and
statements other than historical facts contained in written material, press
releases and oral statements issued by, or on behalf of, M&I may also
constitute forward-looking statements.
Forward-looking statements are subject to significant risks and
uncertainties, and M&I's actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause actual
results to differ from the results discussed in forward-looking statements
include, but are not limited to:
. General economic and industry conditions, either nationally or in the
states in which M&I does business, which are less favorable than expected
and that result in, among other things, a deterioration in credit quality
and/or loan performance and collectability;
. Legislation or regulatory changes which adversely affect the businesses
in which M&I is engaged;
. Changes in the interest rate environment;
. Changes in securities markets with respect to the market value of
financial assets and the level of volatility in certain markets such as
foreign exchange;
. Significant increases in competition in the banking and financial
services industry resulting from technological developments, new product
introductions, evolving industry standards, industry consolidation,
increased availability of financial services from non-banks, regulatory
changes and other factors, as well as actions taken by particular
competitors;
. M&I's success in continuing to generate significant levels of new
business in its existing markets and in identifying and penetrating
targeted markets;
. M&I's success in implementing its business strategy;
. Changes in consumer spending, borrowing and saving habits;
. M&I's ability to attract and retain senior management;
. Technological changes;
. Acquisitions and unanticipated occurrences which delay or reduce the
expected benefits of acquisitions;
. M&I's ability to increase market share and control expenses;
. The effect of compliance with legislation or regulatory changes;
. The effect of changes in accounting policies and practices; and
. The costs and effects of unanticipated litigation and of unexpected or
adverse outcomes in such litigation.
In addition to the factors discussed above, the following factors
concerning Metavante's business may cause M&I's results to differ from the
results discussed in the forward-looking statements:
. Operational difficulties with Metavante's information technology systems
and unauthorized access, computer viruses and other disruptive problems
that may compromise the integrity and security of Metavante's information
technology systems and the data Metavante processes;
. Damage to Metavante's data centers due to fire, power loss,
telecommunications failure and other disasters;
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. Metavante's ability to protect its intellectual property, including
without limitation, its proprietary software;
. Metavante's success in attracting and retaining senior management and
skilled technical employees; and
. Metavante's ability to adapt to potential industry changes in information
technology systems, on which Metavante is highly dependent, and which may
present operational issues or require significant capital spending.
All forward-looking statements contained in this report or which may be
contained in future statements made for or on behalf of M&I are based upon
information available at the time the statement is made and M&I assumes no
obligation to update any forward-looking statement.
ITEM 2. PROPERTIES
M&I and M&I Marshall & Ilsley Bank ("M&I Bank") occupy offices on all or
portions of 15 floors of a 21-story building located at 770 North Water
Street, Milwaukee, Wisconsin. M&I Bank owns the building and its adjacent 10-
story parking lot and leases the remaining floors to a professional tenant. In
addition, various subsidiaries of M&I lease commercial office space in
downtown Milwaukee office buildings near the 770 North Water Street facility.
M&I Bank also owns or leases various branch offices located in Milwaukee and
in surrounding suburban communities. M&I has 19 subsidiary banks throughout
Wisconsin. M&I Thunderbird Bank, a wholly-owned bank subsidiary of M&I, is
located in Phoenix, Arizona and has 14 offices in the Phoenix and Tucson,
Arizona metropolitan areas. M&I Bank FSB, a federal savings bank subsidiary of
M&I, is located in Las Vegas, Nevada and has a branch in Naples, Florida and
Milwaukee, Wisconsin. The subsidiary banks and savings association occupy
modern facilities which are owned or leased. Metavante owns a data processing
facility located in Brown Deer, a suburb of Milwaukee, from which Metavante
conducts data processing activities. Metavante owns an 160,000 square foot
facility in Milwaukee that houses its software development teams. Properties
leased by Metavante also include commercial office space in Brown Deer, a data
processing site in Oak Creek, Wisconsin, and processing centers and sales
offices in various cities throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
M&I is not currently involved in any material pending legal proceedings
other than litigation of a routine nature and various legal matters which are
being defended and handled in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
Executive Officers of the Registrant
Name of
Officer Office
------- ------
J.B. Wigdale Age 64
Chairman of the Board since December 1992, Chief Executive Officer
since October 1992, Director since December 1988, Vice Chairman of
the Board, December 1988 to December 1992, Marshall & Ilsley
Corporation; Chairman of the Board since January 1989, Chief
Executive Officer since 1987, Director since 1981, M&I Marshall &
Ilsley Bank; Director, M&I Mortgage Corp., Metavante Corporation,
M&I Brokerage Services, Inc., M&I Capital Markets Group L.L.C.,
Marshall & Ilsley Trust Company and M&I Ventures, L.L.C.
D.J. Kuester Age 59
Director since February 1994, President since 1987, Marshall &
Ilsley Corporation; President and Director since January 1989, M&I
Marshall & Ilsley Bank; Chairman of the Board and Director,
Metavante Corporation; Director, M&I Support Services Corp.;
Director and President, M&I Insurance Company of Arizona, Inc.
T.M. Bolger Age 51
Senior Vice President and Chief Credit Officer since 1994, Marshall
& Ilsley Corporation; Executive Vice President since 1997, M&I
Marshall & Ilsley Bank; Director, Richter-Schroeder Company, Inc.,
M&I First National Leasing Corp. and M&I Support Services Corp.
J.L. Delgadillo Age 48
Senior Vice President of Marshall & Ilsley Corporation since 1993;
Chief Executive Officer since January 1998 and Director of
Metavante Corporation since 1994; President and Chief Operating
Officer of Metavante Corporation since 1993; Senior Vice President
of Metavante Corporation from 1989 to 1993; Director and Executive
Vice President, M&I EastPoint Technology, Inc. since 1996.
S.T. Happ Age 39
Senior Vice President since April 1999, Marshall & Ilsley
Corporation; President, Chief Executive Officer and Director since
January 1994, M&I Mortgage Corp.; Vice President, M&I Bank FSB;
President and Director, M&I Mortgage Reinsurance Corporation.
M.A. Hatfield Age 55
Senior Vice President since 1993, Secretary since 1981 and
Treasurer from 1986 to May 1995, Marshall & Ilsley Corporation;
Vice President and Secretary, M&I Marshall & Ilsley Bank; Director,
M&I Support Services Corp.; Director and Secretary, M&I First
National Leasing Corp., M&I Insurance Company of Arizona, Inc.,
Richter-Schroeder Company, Inc., M&I Bank FSB and M&I Dealer
Finance, Inc.; Secretary and Treasurer, M&I Mortgage Corp.;
Secretary, M&I Capital Markets Group L.L.C., Marshall & Ilsley
Trust Company, M&I Investment Management Corp., Marshall & Ilsley
Trust Company of Florida, M&I Insurance Services, Inc. and M&I
Brokerage Services, Inc.
P.R. Justiliano Age 50
Senior Vice President since 1994 and Corporate Controller since
April 1989, Vice President, 1986 to 1994, Marshall & Ilsley
Corporation; Controller, M&I Marshall & Ilsley Bank, since
September 1998; Director and Treasurer, M&I Insurance Company of
Arizona, Inc.; Director, M&I Bank FSB.
T.J. O'Neill Age 40
Senior Vice President since April 1997, Marshall & Ilsley
Corporation; Executive Vice President since 2000, Senior Vice
President since 1997, Vice President since 1990, M&I Marshall &
Ilsley Bank; President and Director, M&I Bank FSB, M&I Dealer
Finance, Inc.; Director, M&I Support Services Corp., M&I Brokerage
Services, Inc. and M&I Insurance Services, Inc.
P.J. Renard Age 40
Senior Vice President, Director of Human Resources since 2000, Vice
President and Manager since 1994, Marshall & Ilsley Corporation.
J. L. Roberts Age 48
Senior Vice President, Marshall & Ilsley Corporation since 1994;
Senior Vice President since 1994, Vice President and Controller
from 1986 to 1995, M&I Marshall & Ilsley Bank; President and
Director, M&I Support Services Corp. since 1995; Director, M&I Bank
FSB.
T.A. Root Age 44
Senior Vice President since 1998, Audit Director since May 1996,
Vice President from 1991 to 1998, Marshall & Ilsley Corporation;
Vice President and Auditor since 1993, M&I Marshall & Ilsley Bank.
10
Name of
Officer Office
------- ------
L.I. Sherman Age 52
Senior Vice President, Director of Marketing, Marshall & Ilsley
Corporation since 1996; Senior Vice President, Director of
Marketing from 1989 to 1995, Old Kent Financial Corp.
J.V. Williams Age 56
Senior Vice President since December 1997, Marshall & Ilsley
Corporation; Executive Vice President and Chief Operating Officer
since January 1999, Marshall & Ilsley Trust Company; Chief
Executive Officer and Director since January 1996, M&I Insurance
Services, Inc.; Senior Vice President since 1994, M&I Marshall &
Ilsley Bank; Chief Executive Officer and Director, M&I Brokerage
Services, Inc.; Executive Vice President, Chief Operating Officer
and Director, M&I Investment Management Corp.; Director, M&I
Capital Markets Group L.L.C., M&I Portfolio Services, Inc. and M&I
National Trust Company.
D.H. Wilson Age 41
Senior Vice President and Treasurer since December 1996, Vice
President and Treasurer since 1995, Marshall & Ilsley Corporation;
Vice President, Treasury from June 1992 to May 1995, ABN
AMRO/LaSalle National Bank; Director, M&I Custody of Nevada, Inc.
and M&I Bank FSB.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Stock Listing
M&I's common stock is traded under the symbol "MI" on the New York Stock
Exchange. Common dividends declared and the price range for M&I's common stock
for each of the last five years can be found in Item 8, Consolidated Financial
Statements, Quarterly Financial Information.
A discussion of the regulatory restrictions on the payment of dividends can
be found under Item 7, Management's Discussion and Analysis of Financial
Position and Results of Operations, and in Note 14 in Item 8, Consolidated
Financial Statements.
Holders of Common Equity
At December 31, 2000, M&I had approximately 19,660 record holders of its
Common Stock.
11
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Summary of Operating Earnings Years Ended December 31 ($000's
except share data)
2000 1999 1998 1997 1996
---------- ---------- ---------- --------- ---------
Interest Income:
Loans and Leases...... $1,391,651 $1,156,775 $1,085,829 $ 921,161 $ 804,951
Investment Securities.
Taxable............. 272,536 269,668 280,377 240,238 198,787
Tax Exempt.......... 65,429 58,820 52,969 45,420 30,718
Other Short-term
Investments.......... 18,366 11,321 14,869 13,514 11,365
---------- ---------- ---------- --------- ---------
Total Interest
Income............. 1,747,982 1,496,584 1,434,044 1,220,333 1,045,821
Interest Expense:
Deposits.............. 772,016 585,864 564,540 460,418 392,473
Short-term Borrowings. 224,187 142,294 126,624 111,193 63,892
Long-term Borrowings.. 78,773 63,145 66,810 54,175 53,615
---------- ---------- ---------- --------- ---------
Total Interest
Expense............ 1,074,976 791,303 757,974 625,786 509,980
---------- ---------- ---------- --------- ---------
Net Interest Income..... 673,006 705,281 676,070 594,547 535,841
Provision for Loan and
Lease Losses........... 30,352 25,419 27,090 17,633 15,634
---------- ---------- ---------- --------- ---------
Net Interest Income
After Provision for
Loan and Lease Losses.. 642,654 679,862 648,980 576,914 520,207
Other Income:
Data Processing
Services............. 546,041 494,816 421,945 344,362 273,287
Trust Services........ 117,680 100,963 88,496 78,595 70,190
Net Securities Gains
(Losses)............. 1,051 (4,083) 7,145 (2,578) (4,803)
Other................. 314,146 286,849 276,914 213,732 199,659
---------- ---------- ---------- --------- ---------
Total Other Income.. 978,918 878,545 794,500 634,111 538,333
Other Expense:
Salaries and Benefits. 623,360 583,659 523,606 460,164 392,711
Other................. 460,618 446,809 431,216 362,689 323,936
---------- ---------- ---------- --------- ---------
Total Other Expense. 1,083,978 1,030,468 954,822 822,853 716,647
---------- ---------- ---------- --------- ---------
Income Before Income
Taxes.................. 537,594 527,939 488,658 388,172 341,893
Provision for Income
Taxes.................. 175,958 173,428 171,067 131,487 119,983
---------- ---------- ---------- --------- ---------
Operating Income........ $ 361,636 $ 354,511 $ 317,591 $ 256,685 $ 221,910
========== ========== ========== ========= =========
Accounting Changes &
Special Charges........ (46,513) -- (16,268) -- (15,275)
---------- ---------- ---------- --------- ---------
Net Income.............. $ 315,123 $ 354,511 $ 301,323 $ 256,685 $ 206,635
========== ========== ========== ========= =========
Per Share:
Basic Operating
Income............... $ 3.44 $ 3.32 $ 2.94 $ 2.62 $ 2.28
Basic Net Income...... 2.99 3.32 2.79 2.62 2.12
Diluted Operating
Income............... 3.32 3.14 2.76 2.43 2.12
Diluted Net Income.... 2.89 3.14 2.61 2.43 1.98
Common Dividends
Declared............. 1.035 0.940 0.860 0.785 0.720
Other Significant Data:
Year-End Common Stock
Price................ $ 50.83 $ 62.81 $ 58.44 $ 62.13 $ 34.63
Return on Average
Shareholders'
Equity*.............. 16.84% 16.32% 14.89% 16.49% 16.14%
Return on Average
Assets*.............. 1.44 1.56 1.53 1.51 1.52
Dividend Payout Ratio. 35.81 29.94 32.95 32.30 36.36
Average Equity to
Average Assets Ratio. 8.58 9.57 10.26 9.15 9.39
Ratio of Earnings to
Fixed Charges**
Excluding Interest
on Deposits........ 2.46x 3.38x 3.25x 3.21x 3.52x
Including Interest
on Deposits........ 1.43x 1.65x 1.60x 1.61x 1.61x
--------
*Based on Operating Income
**See Exhibit 12 for detailed computation of these ratios.
12
Consolidated Average Balance Sheets
Years ended December 31 ($000's except share data)
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Assets:
Cash and Due from
Banks................. $ 615,015 $ 638,399 $ 652,988 $ 614,824 $ 586,985
Short-term
Investments........... 265,487 186,105 247,049 206,295 188,082
Trading Securities..... 30,926 37,277 43,404 40,822 25,264
Investment Securities:
Taxable.............. 4,063,774 4,208,498 4,317,668 3,570,225 3,104,010
Tax Exempt........... 1,327,159 1,217,847 1,078,333 913,130 668,913
Loans and Leases:
Commercial............. 4,975,482 4,359,880 3,749,518 3,128,568 2,947,631
Real Estate............ 9,958,164 8,639,360 7,967,626 6,309,818 5,139,926
Personal............... 1,245,738 1,204,931 1,154,110 1,147,203 1,148,511
Lease Financing........ 938,525 705,054 532,043 394,024 293,448
----------- ----------- ----------- ----------- -----------
Total Loans and Leases.. 17,117,909 14,909,225 13,403,297 10,979,613 9,529,516
Allowance for Loan and
Lease Losses........... 233,466 228,500 216,456 174,525 166,886
----------- ----------- ----------- ----------- -----------
Net Loans and Leases.... 16,884,443 14,680,725 13,186,841 10,805,088 9,362,630
Other Assets............ 1,854,973 1,732,112 1,263,890 851,030 709,803
----------- ----------- ----------- ----------- -----------
Total Assets....... $25,041,777 $22,700,963 $20,790,173 $17,001,414 $14,645,687
=========== =========== =========== =========== ===========
Liabilities and
Shareholders' Equity:
Noninterest Bearing
Deposits.............. $ 2,648,419 $ 2,663,609 $ 2,545,724 $ 2,301,097 $ 2,116,197
Interest Bearing
Deposits:
Savings and NOW...... 1,845,916 2,027,658 2,140,380 1,915,888 1,905,775
Money Market Savings. 5,241,772 4,830,159 4,135,143 3,022,944 2,597,732
CDs of $100 or more.. 2,303,442 1,694,301 1,547,816 1,334,532 933,164
Other................ 5,458,234 4,941,175 4,388,152 3,665,334 3,344,644
----------- ----------- ----------- ----------- -----------
Total Deposits......... 17,497,783 16,156,902 14,757,215 12,239,795 10,897,512
Short-term Borrowings.. 3,538,846 2,803,834 2,357,161 2,017,829 1,218,177
Long-term Borrowings... 1,178,805 1,009,132 1,046,321 787,819 823,397
Accrued Expenses and
Other Liabilities..... 678,269 558,978 496,439 399,605 331,743
Shareholders' Equity... 2,148,074 2,172,117 2,133,037 1,556,366 1,374,858
----------- ----------- ----------- ----------- -----------
Total Liabilities
and Shareholders'
Equity............ $25,041,777 $22,700,963 $20,790,173 $17,001,414 $14,645,687
=========== =========== =========== =========== ===========
Other Significant Data:
Book Value Per Share
at Year End........... $21.19 $19.47 $19.88 $17.94 $13.75
Average Common Shares
Outstanding........... 104,100,652 104,940,787 105,918,139 95,831,283 95,895,547
Employees at Year
End*.................. 11,753 11,433 10,756 10,227 8,995
Historically Reported
Credit Quality Ratios:*
Net Loan and Lease
Charge-offs to
Average Loans and
Leases................ 0.12% 0.17% 0.07% 0.13% 0.23%
Total Nonperforming
Loans and Leases** &
OREO to End of Period
Loans and Leases &
OREO.................. 0.76 0.75 0.85 0.70 0.81
Allowance for Loan and
Lease Losses to End
of Period Loans and
Leases................ 1.34 1.38 1.62 1.62 1.68
Allowance for Loan and
Lease Losses to Total
Nonperforming Loans
and Leases**.......... 182 193 206 275 225
--------
*Not restated for acquisitions accounted for as pooling of interests.
**Loans and leases nonaccrual, restructured, and past due 90 days or more.
13
Yield & Cost Analysis
Years ended December 31 (Tax equivalent basis)
2000 1999 1998 1997 1996
----- ----- ----- ----- -----
Average Rates Earned:
Loans & Securitized ARMs.................. 8.13% 7.77% 8.09% 8.36% 8.41%
Investment Securities--Taxable............ 6.49 6.26 6.26 6.62 6.29
Investment Securities--Tax Exempt......... 7.16 7.13 7.44 7.40 6.76
Trading Securities........................ 4.92 5.08 5.13 5.01 4.83
Short-term Investments.................... 6.35 5.08 5.13 5.57 5.40
Average Rates Paid:
Interest Bearing Deposits................. 5.20% 4.34% 4.62% 4.63% 4.47%
Short-term Borrowings..................... 6.34 5.07 5.37 5.51 5.24
Long-term Borrowings...................... 6.68 6.26 6.39 6.88 6.51
M&I Marshall & Ilsley Bank
Average Prime Rate...................... 9.24 8.02 8.35 8.44 8.27
Summary Yield and Cost Analysis:
(As a % of Average Assets)
Average Yield............................. 7.10% 6.72% 7.02% 7.31% 7.25%
Average Cost.............................. 4.29 3.49 3.64 3.68 3.48
----- ----- ----- ----- -----
Net Interest Income....................... 2.81 3.23 3.38 3.63 3.77
Provision for Loan and Lease Losses....... 0.12 0.11 0.13 0.10 0.11
----- ----- ----- ----- -----
Net Interest Income After Provision for
Loan and Lease Losses.................... 2.69 3.12 3.25 3.53 3.66
Net Securities Gains (Losses)............. -- (0.02) 0.03 (0.02) (0.03)
Other Income.............................. 3.90 3.89 3.79 3.75 3.71
Other Expense............................. 4.32 4.54 4.59 4.84 4.89
----- ----- ----- ----- -----
Income Before Income Taxes................ 2.27 2.45 2.48 2.42 2.45
Provision for Income Taxes................ 0.83 0.89 0.95 0.91 0.93
----- ----- ----- ----- -----
Operating Income.......................... 1.44% 1.56% 1.53% 1.51% 1.52%
===== ===== ===== ===== =====
Accounting Changes & Special Charges...... (0.18) -- (0.08) -- (0.11)
----- ----- ----- ----- -----
Net Income.............................. 1.26% 1.56% 1.45% 1.51% 1.41%
===== ===== ===== ===== =====
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
Net income in 2000 amounted to $315.1 million or $2.89 per share on a
diluted basis. The return on average assets and return on average equity were
1.26% and 14.67%, respectively. By comparison, 1999 net income was $354.5
million, diluted earnings per share was $3.14, the return on average assets
was 1.56% and the return on average equity was 16.32%. For the year ended
December 31, 1998, net income was $301.3 million or $2.61 per share diluted
and the returns on average assets and average equity were 1.45% and 14.13%,
respectively.
On April 1, 1998, the Corporation completed the merger with Advantage
Bancorp, Inc. ("Advantage"), a Kenosha, Wisconsin based savings and loan
holding company, by issuing 1.2 shares of the Corporation's Common Stock for
each share of Advantage Common Stock. At the time of merger, Advantage had
consolidated assets of $1.0 billion. The transaction was accounted for as a
pooling of interests. In conjunction with this transaction, the Corporation
recorded a merger/restructuring charge.
The results of operations and financial position for the periods presented
also include the effects of the acquisitions of certain assets and liabilities
by the Metavante subsidiary of the Corporation from the dates of merger. All
three transactions were accounted for as purchases. Cash consideration in the
three transactions aggregated $86 million.
The results of operations for the year ended December 31, 2000, include the
effects of losses from investment security and loan sales to realign the
investment portfolio and dispose of lower yielding assets, costs associated
with the planned Initial Public Offering (IPO) of the Corporation's Metavante
subsidiary and costs incurred in connection with the plan to consolidate the
Corporation's banking charters into a single charter as announced in the
second quarter. In addition, in 2000, the Corporation adopted SAB 101 which
changed the way conversion revenue and cost is recognized as more fully
described in Note 2 to the Consolidated Financial Statements in Item 8.
The following is a summary of the unusual items reported in 2000 and 1998
and the comparative operating income, earnings per share and return on average
equity based on operating income for 2000, 1999, and 1998.
Pre-tax effect 2000 1999 1998
-------------- ------ ------ ------
($ in millions, except per share
data)
Net income.............................. $315.1 $354.5 $301.3
Special charges
Investment portfolio realignment--
securities losses.................... $50.6 32.9 -- --
Balance sheet management--losses on
sale of ARM loans.................... 3.1 2.0 -- --
Metavante IPO......................... 4.5 3.1 -- --
Banking charter consolidation......... 9.1 6.2 -- --
Merger/Restructuring charges.......... 23.4 -- -- 16.3
------ ------ ------
Total special charges................... 44.2 -- 16.3
------ ------ ------
Change in accounting.................... 3.8 2.3 -- --
------ ------ ------
Operating income........................ $361.6 $354.5 $317.6
====== ====== ======
Operating income per share
Basic................................. $ 3.44 $ 3.32 $ 2.94
Diluted............................... 3.32 3.14 2.76
Operating income to average equity...... 16.84% 16.32% 14.89%
The following reconciles operating income to operating income before
amortization of intangibles ("tangible operating income"). Amortization
includes amortization of goodwill and core deposit premiums and is net of
negative goodwill accretion and the income tax benefit or expense, if any,
related to each component. These calculations were specifically formulated by
the Corporation and may not be comparable to similarly titled measures
reported by other companies.
15
Summary Consolidated Tangible Operating Income and Financial Statistics
($ in millions, except per share data)
2000 1999 1998
------ ------ ------
Operating income........................................ $361.6 $354.5 $317.6
Amortization, net of tax................................ 19.2 23.8 21.0
------ ------ ------
Tangible operating income............................... $380.8 $378.3 $338.6
====== ====== ======
Tangible operating income per share
Basic................................................. $ 3.62 $ 3.55 $ 3.14
Diluted............................................... 3.50 3.35 2.94
Return on average tangible assets....................... 1.54% 1.69% 1.65%
Return on average tangible equity....................... 20.78 20.49 18.48
Operating Income Statement Components as a Percent of Average Total Assets
The following table presents a summary of the major elements of the
consolidated operating income statements for the years ended December 31,
2000, 1999 and 1998. Each of the elements is stated as a percent of
consolidated average total assets outstanding for the respective year and,
where appropriate, is converted to a fully taxable equivalent basis (FTE). The
results exclude the special charges in 2000 and 1998 as previously discussed.
2000 1999 1998
----- ----- -----
Interest Income............................................ 7.10% 6.72% 7.02%
Interest Expense........................................... (4.29) (3.49) (3.64)
----- ----- -----
Net Interest Income........................................ 2.81 3.23 3.38
Provision for Loan and Lease Losses........................ (0.12) (0.11) (0.13)
Net Securities (Losses) / Gains............................ -- (0.02) 0.03
Other Income............................................... 3.90 3.89 3.79
Other Expense.............................................. (4.32) (4.54) (4.59)
----- ----- -----
Income Before Income Taxes................................. 2.27 2.45 2.48
Income Taxes............................................... (0.83) (0.89) (0.95)
----- ----- -----
Operating Income To Average Assets......................... 1.44% 1.56% 1.53%
===== ===== =====
Net Interest Income
Net interest income in 2000 amounted to $673.0 million compared with net
interest income of $705.3 million in 1999, a decrease of $32.3 million.
Average earning assets in 2000 amounted to $22.8 billion compared to $20.6
billion in 1999, an increase of $2.2 billion or 10.9%. Average loans and
leases, including securitized adjustable rate mortgage loans (ARMs), increased
$2.1 billion or 13.6%. The remainder of the increase was distributed evenly
between investment securities and short-term investments. During the latter
part of the third quarter of 2000, the Corporation realigned its available for
sale investment securities portfolio through the sale and purchase of
approximately $1.6 billion of U.S. Government Agency securities. The full
benefit of these transactions was realized beginning in the fourth quarter of
2000 and will have a more significant impact in 2001.
Average interest bearing liabilities increased $2.3 billion or 13.1% in
2000 compared to 1999. Average interest bearing deposits increased $1.4
billion or 10.0%. Average short-term borrowings increased $735 million
16
while average long-term borrowings increased $170 million. The increase in
borrowings reflects, in part, greater use of senior and subordinated notes by
the banking affiliates. Average noninterest bearing deposits were relatively
unchanged compared to the prior year. The increase in average interest bearing
liabilities in 2000 reflects funding of earning asset growth along with the
effect of treasury share repurchases.
The growth and composition of the Corporation's average loan and lease
portfolio for the current year and prior two years are reflected in the
following table. The securitized ARM loans that are classified as investment
securities available for sale are included to provide a more meaningful
comparison ($ in millions):
Percent
Growth
------------
2000 1999
vs vs
2000 1999 1998 1999 1998
--------- --------- --------- ----- -----
Commercial Loans................... $ 4,975.5 $ 4,359.9 $ 3,749.5 14.1% 16.3%
Real Estate Loans:
Construction..................... 547.8 430.1 421.3 27.4 2.1
Commercial Mortgages............. 4,182.6 3,845.3 3,545.1 8.8 8.5
Residential Mortgages............ 5,227.8 4,363.9 4,001.3 19.8 9.1
Securitized ARM Loans............ 431.4 536.6 919.3 (19.6) (41.6)
--------- --------- --------- ----- -----
Total Real Estate Loans & ARMs..... 10,389.6 9,175.9 8,887.0 13.2 3.3
Personal Loans:
Student Loans.................... 185.2 257.9 268.8 (28.2) (4.1)
Other Personal Loans............. 1,060.5 947.0 885.3 12.0 7.0
--------- --------- --------- ----- -----
Total Personal Loans............... 1,245.7 1,204.9 1,154.1 3.4 4.4
Lease Financing Receivables:
Commercial....................... 353.2 335.0 329.6 5.4 1.6
Personal......................... 585.3 370.1 202.4 58.2 82.8
--------- --------- --------- ----- -----
Total Lease Financing Receivables.. 938.5 705.1 532.0 33.1 32.5
--------- --------- --------- ----- -----
Total Consolidated Average Loans,
Leases & ARMs..................... $17,549.3 $15,445.8 $14,322.6 13.6% 7.8%
========= ========= ========= ===== =====
Total Consolidated Average Loans,
Leases & ARMs
Total Commercial Banking......... $ 9,944.6 $ 8,870.0 $ 7,910.5 12.1% 12.1%
Total Retail Banking............. 7,604.7 6,575.8 6,412.1 15.6% 2.6%
--------- --------- --------- ----- -----
Total Consolidated Average Loans,
Leases & ARMs..................... $17,549.3 $15,445.8 $14,322.6 13.6% 7.8%
========= ========= ========= ===== =====
Total Consolidated Average Loans
and Leases........................ $17,117.9 $14,909.2 $13,403.3 14.8% 11.2%
========= ========= ========= ===== =====
Compared to 1999, average loans, leases and ARMs increased $2.1 billion or
13.6%. Total loan growth in commercial banking amounted to $1.1 billion or
12.1% and was driven by commercial loan growth of $616 million and commercial
real estate loan and commercial real estate construction growth of $441
million. Retail banking loan growth amounted to $1.0 billion or 15.6 %. Home
equity loans and lines accounted for $380 million, residential mortgages
accounted for $484 million and lease financing receivables accounted for $215
million of the growth in retail loans. In the fourth quarter of 2000, the
Corporation acquired $341 million of home equity loans and lines in support of
its private-label banking services.
Generally, the Corporation sells fixed rate residential real estate loans
and in 2000 began selling a portion of ARM loan production in the secondary
market. Residential real estate loans originated and sold to investors
amounted to $0.6 billion in 2000 compared to $1.1 billion in 1999. As part of
its announced balance sheet management restructuring, the Corporation sold
$300.8 million of portfolio ARM loans. ARM loans transferred to available for
sale securities late in 2000 amounted to $511 million. During the third
quarter of 2000, the
17
Corporation began securitizing indirect automobile loans. Auto loans
securitized and sold in 2000 amounted to $223 million. In addition, $149.9
million of student loans were sold in 2000. The Corporation anticipates that
it will continue to divest of lower yielding assets through sale or
securitization in future periods.
The growth and composition of the Corporation's consolidated average
deposits for the current year and prior two years are reflected below ($ in
millions):
Percent
Growth
-----------
2000 1999
vs vs
2000 1999 1998 1999 1998
--------- --------- --------- ---- ----
Noninterest Bearing
Commercial.............. $ 1,693.5 $ 1,720.3 $ 1,658.2 (1.6)% 3.7%
Personal................ 580.2 558.7 508.9 3.8 9.8
Other................... 374.7 384.6 378.6 (2.6) 1.6
--------- --------- --------- ---- ----
Total Noninterest Bearing
Deposits................. 2,648.4 2,663.6 2,545.7 (0.6) 4.6
Interest Bearing
Savings and NOW......... 1,845.9 2,027.6 2,140.4 (9.0) (5.3)
Money Market............ 5,241.8 4,830.2 4,135.1 8.5 16.8
Other CDs & Time........ 5,458.3 4,941.2 4,388.2 10.5 12.6
CDs Greater than
$100,000............... 872.8 817.9 816.5 6.7 0.2
Brokered CDs............ 1,430.6 876.4 731.3 63.2 19.8
--------- --------- --------- ---- ----
Total Interest Bearing
Deposits................. 14,849.4 13,493.3 12,211.5 10.1 10.5
--------- --------- --------- ---- ----
Total Consolidated Average
Deposits................. $17,497.8 $16,156.9 $14,757.2 8.3% 9.5%
========= ========= ========= ==== ====
Total Bank Issued
Deposits................. $13,775.6 $13,513.5 $13,194.5 1.9% 2.4%
Total Wholesale Deposits.. 3,722.2 2,643.4 1,562.7 40.8 69.2
--------- --------- --------- ---- ----
Total Consolidated Average
Deposits................. $17,497.8 $16,156.9 $14,757.2 8.3% 9.5%
========= ========= ========= ==== ====
Due to strong earning asset growth, particularly loan growth, the
Corporation continued to make greater use of wholesale deposits in 2000.
Wholesale deposits increased $1.1 billion or 40.8%, of which, eurodollar term
and overnight deposits, which are included in Other CDs & Time, accounted for
$0.5 billion of the increase while brokered CDs increased $0.6 billion.
Money market savings, especially money market index accounts exhibited the
greatest growth in bank issued deposits in 2000 compared to 1999. Average bank
issued money market savings increased $343 million or 8.1%. Average bank
issued eurodollar activity and bank issued time deposits increased $80 million
and $36 million, respectively while average savings and NOW decreased $182
million in 2000 compared to the prior year. As previously discussed,
noninterest bearing deposits were relatively unchanged year over year.
During 2000, M&I disposed of three branches. Deposits and loans aggregating
approximately $111 million and $8 million, respectively were divested in 2000.
As part of its private-label banking services, the Corporation acquired $354
million of deposits late in 2000.
The net interest margin (FTE) as a percent of average earning assets was
3.08% in 2000 compared to 3.58% in 1999, a decrease of 50 basis points. The
yield on earning assets increased 36 basis points from 7.43% in 1999 to 7.79%
in 2000 while the cost of interest bearing liabilities increased 92 basis
points from 4.57% in 1999 to 5.49% in 2000. The continued reliance on higher-
cost funding sources and lower loan spreads resulted in the margin decline.
Premium amortization associated with purchase accounting adjustments arising
primarily from the 1997 acquisition of Security Capital Corporation (Security)
was $3.9 million less in 2000 compared to the prior year due to slower
prepayments.
18
The yield on loans, leases and securitized ARMs was 8.13% in 2000 compared
to 7.77% in 1999, an increase of 36 basis points. The increase in yield and
the strong loan growth previously discussed contributed 90% of the increase in
interest income on an FTE basis.
The remaining increase in interest on earning assets was primarily
attributable to investment securities. The total yield on the investment
security portfolio, excluding securitized ARMs, increased by approximately 19
basis points in 2000 compared to 1999.
The increase in the rates paid on interest bearing liabilities contributed
approximately $161 million and the increase in volume accounted for
approximately $122 million of the increase in interest paid on interest
bearing liabilities in 2000 compared to the prior year. In addition to the use
of higher-cost funds for earning asset growth, interest expense was adversely
affected by the repurchase of treasury shares. The Corporation estimates that
approximately $26.4 million of interest expense was attributable to the $471
million spent to repurchase common shares in 2000 and 1999.
During 1999, the Corporation's banking affiliates began issuing bank notes.
At December 31, 2000, bank notes, which are included in short-term borrowings
and long-term borrowings, amounted to $1.4 billion. See Note 12, Short-term
Borrowings, and Note 13, Long-term Borrowings, in Notes to Consolidated
Financial Statements contained in Item 8 herein for further discussion
regarding bank notes. During 2000, the Corporation filed a registration
statement to issue up to $500 million of medium-term Series E notes.
Approximately $21.2 million of the Corporation's other series medium-term
notes matured in 2000.
Throughout 2000 the Corporation employed a variety of derivative financial
instruments in the form of receive fixed/pay floating interest rate swaps and
interest rate floors designated as hedges against the interest rate volatility
associated with variable rate assets and liabilities. See Note 18, Financial
Instruments with Off-Balance Sheet Risk in Notes to Consolidated Financial
Statements contained in Item 8 herein for further discussion regarding the
Corporation's use of derivative financial instruments.
For 2000, the effect on net interest income resulting from the derivative
financial instruments designated as hedges was a negative $3.5 million
compared with a positive $7.0 million in 1999.
On January 1, 2001, the Corporation adopted the new accounting standard for
accounting for derivative financial instruments and hedging activities as
explained in Note 1 in Notes to Consolidated Financial Statements contained in
Item 8 herein. The new standard requires that those derivative instruments be
recognized in the Corporation's Consolidated Balance Sheets as assets or
liabilities at their fair value. The Corporation has determined that those
freestanding derivatives previously designated as hedges will continue to be
eligible for the special hedge accounting prescribed by the new standard. The
impact resulting from the transition adjustment of adopting the new standard
will be a charge to accumulated other comprehensive income (equity) of $10.2
million and a decrease to net income of $0.4 million which will be presented
as a cumulative-type change in accounting. The Corporation does not expect
that applying the new standard will result in a material difference to income
compared to current accounting.
The Corporation anticipates that the net interest margin will stabilize in
2001.
Net interest income in 1999 amounted to $705.3 million, an increase of
$29.2 million or 4.3% compared with net interest income of $676.1 million in
1998.
Average earning assets in 1999 amounted to $20.6 billion compared to $19.1
billion in 1998, an increase of $1.5 billion or 7.7%. Average loans and
leases, including securitized adjustable rate mortgage loans (ARMs), increased
$1.1 billion or 7.8%. The remaining growth in average earning assets was
primarily attributable to investment securities.
19
Average interest bearing liabilities increased $1.7 billion or 10.8% in
1999 compared to 1998. Average interest bearing deposits increased $1.3
billion or 10.5%. Average short-term borrowings increased $447 million while
average long-term borrowings decreased $37 million. Average noninterest
bearing deposits increased $118 million or 4.6% in 1999 compared to the prior
year. The increase in average interest bearing liabilities in 1999 reflects
funding of earning asset growth along with the effect of cash paid for
acquisitions and the effect of treasury share repurchases.
Compared to 1998, average loans, leases and ARMs increased $1.1 billion or
7.8%. Loan growth was primarily attributable to commercial banking. Total loan
growth in commercial banking amounted to $960 million or 12.1% and was driven
by commercial loan growth of $610 million and commercial real estate loan
growth of $344 million. Retail banking loan growth amounted to $164 million or
2.6% primarily due to growth in home equity loans and lines of $400 million
and $168 million of growth in lease financing receivables. Residential real
estate loans and securitized ARM loans decreased $455 million which reflects,
in part, the effect of increased prepayments throughout 1998 and early 1999 as
customers refinanced to fixed rate loans and reduced demand in the second half
of 1999 due to increases in interest rates. There were no ARM loan
securitizations in 1999. Generally, the Corporation sells fixed rate
residential real estate loans in the secondary market. One to four family
residential real estate loans sold to investors amounted to $1.1 billion in
1999 compared to $2.2 billion in 1998.
Due to strong earning asset growth, particularly loan growth, the
Corporation made greater use of wholesale deposits in 1999 compared to the
prior year. Wholesale deposits increased $1.1 billion or 69.2%, of which,
eurodollar term and overnight deposits, which are included in Other CDs &
Time, accounted for $870 million of the increase while brokered CDs increased
$145 million.
Money market savings, especially money market index accounts, and
noninterest bearing deposits exhibited the greatest growth in bank issued
deposits in 1999 compared to 1998. Average bank issued money market savings
increased $630 million or 17.5% and noninterest bearing deposits increased
$118 million or 4.6%. Average savings and NOW decreased $113 million or 5.3%
in 1999 compared to the prior year.
During 1999, M&I disposed of eight branches. Deposits and loans aggregating
approximately $92 million and $31 million, respectively were divested in 1999.
The net interest margin (FTE) as a percent of average earning assets was
3.58% in 1999 compared to 3.69% in 1998, a decrease of 11 basis points. The
yield on earning assets decreased 25 basis points from 7.68% in 1998 to 7.43%
in 1999 while the cost of interest bearing liabilities decreased 28 basis
points from 4.85% in 1998 to 4.57% in 1999.
The yield on loans, leases and securitized ARMs was 7.77% in 1999 compared
to 8.09% in 1998, a decrease of 32 basis points. The decline in yield
reflects, in part, run-off of higher yielding loans and securitized ARMs
throughout 1998 and early 1999 as well as lower yields on new loans. Premium
amortization associated with Security purchase accounting adjustments for
fixed rate mortgage and home equity loans amounted to $4.0 million in 1999
compared to $11.2 million in 1998 which reflects a slowing of prepayments
beginning in the second quarter of 1999. Loan and lease growth offset the
yield decline and netted approximately $42 million or 64% of the increase in
interest on earning assets on a FTE basis.
The remaining increase in interest on earning assets is primarily
attributable to investment securities. The total yield on the investment
security portfolio, excluding securitized ARMs, decreased by approximately 7
basis points in 1999 compared to 1998. Premium amortization associated with
Security purchase accounting adjustments for investment securities was $2.8
million in 1999 compared to $7.6 million in 1998. Average investment
securities, excluding Securitized ARM loans and fair market adjustments for
available for sale securities, increased $456 million or 10.3%. The increase
in volume offset the decline in yield and contributed $27 million or 41% of
the increase in interest on earning assets on a FTE basis.
20
The increase in the volume of interest bearing liabilities, primarily
deposits and short-term borrowings accounted for the increase in interest paid
on interest bearing liabilities in 1999. In addition to the use of wholesale
deposits to fund earning asset growth, the costs of acquisitions and the
repurchase of treasury shares adversely affected interest expense. The
Corporation estimates that approximately $9.3 million of interest expense is
attributable to common shares repurchased in 1999.
During 1999, eight of the Corporation's banking affiliates began issuing
bank notes. At December 31, 1999, bank notes, which are included in short-term
borrowings, amounted to $550 million. During 1999, the Corporation issued $75
million of Series D medium-term notes which were used, in part, to refinance
maturities of medium-term notes in 1999.
At December 31, 1999, the Corporation had receive fixed/pay floating
interest rate swaps and interest rate floors designated as hedges against the
interest rate volatility associated with variable rate loans, brokered
callable CDs, brokered callable step-up CDs, retail callable CDs and equity
index CDs. See Note 18, Financial Instruments with Off-Balance Sheet Risk in
Notes to Consolidated Financial Statements contained in Item 8 herein for
further discussion regarding the Corporation's use of derivative financial
instruments.
For 1999, the effect on net interest income resulting from the derivative
financial instruments designated as hedges was a positive $7.0 million
compared with a positive $5.1 million in 1998.
In late December, 1998, the Corporation purchased $400 million of single
premium bank-owned life insurance policies which insure the lives of certain
officers of the Corporation and its affiliates. The Corporation is utilizing
this vehicle to fund future employee benefit obligations. These purchases were
funded by the maturities and sales of investment securities classified as
available for sale. The net realizable values of bank-owned life insurance
policies are a component of other assets in the consolidated balance sheets
and periodic increases in the values are included as a component of other
income. These transactions have the effect of reducing the Corporation's net
interest income (and margin) and increasing its other income.
21
Average Balance Sheets and Analysis of Net Interest Income
The Corporation's consolidated average balance sheets, interest earned and
interest paid, and the average interest rates earned and paid for each of the
last three years are presented in the following table. Securitized ARM loans
that are classified as investment securities available for sale are included
with loans and leases to provide a more meaningful comparison ($ in
thousands):
2000 1999 1998
-------------------------------- -------------------------------- --------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield or Average Earned/ Yield or Average Earned/ Yield or
Balance Paid Cost (3) Balance Paid Cost (3) Balance Paid Cost (3)
----------- ---------- -------- ----------- ---------- -------- ----------- ---------- --------
Loans, leases, and
securitized ARMs
(1,2)................. $17,549,271 $1,426,750 8.13% $15,445,809 $1,198,505 7.77% $14,322,551 $1,156,569 8.09%
Investment securities:
Taxable............... 3,632,411 239,509 6.49 3,671,914 229,909 6.26 3,398,414 211,562 6.26
Tax exempt (1)........ 1,327,159 94,371 7.16 1,217,847 85,552 7.13 1,078,333 77,212 7.44
Interest bearing
deposits in other
banks................. 24,850 2,066 8.31 21,566 1,184 5.49 28,704 1,466 5.11
Funds sold and security
resale agreements..... 99,126 6,429 6.49 68,764 3,758 5.47 38,738 2,218 5.73
Trading securities (1). 30,926 1,523 4.92 37,277 1,894 5.08 43,404 2,225 5.13
Other short-term
investments........... 141,511 8,363 5.91 95,775 4,515 4.71 179,607 8,982 5.00
----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ----
Total interest
earning assets..... 22,805,254 1,779,011 7.79% 20,558,952 1,525,317 7.43% 19,089,751 1,460,234 7.68%
Cash and demand
deposits due from
banks................. 615,015 638,399 652,988
Premises and equipment,
net................... 376,286 360,624 357,040
Other assets........... 1,478,688 1,371,488 906,850
Allowance for loan and
lease losses.......... (233,466) (228,500) (216,456)
----------- ----------- -----------
Total assets........ $25,041,777 $22,700,963 $20,790,173
=========== =========== ===========
Money market savings
deposits.............. $ 5,241,772 $ 277,813 5.30% $ 4,830,159 $ 205,148 4.25% $ 4,135,143 $ 184,621 4.46%
Savings and interest
bearing demand
deposits.............. 1,845,916 29,812 1.62 2,027,658 33,525 1.65 2,140,380 43,174 2.02
Other time deposits.... 5,458,234 318,229 5.83 4,941,175 254,965 5.16 4,388,152 246,800 5.62
CDs greater than $100,
brokered and callable
CDs................... 2,303,442 146,162 6.35 1,694,301 92,226 5.44 1,547,816 89,945 5.81
----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ----
Total interest bearing
deposits.............. 14,849,364 772,016 5.20 13,493,293 585,864 4.34 12,211,491 564,540 4.62
Short-term borrowings.. 3,538,846 224,187 6.34 2,803,834 142,294 5.07 2,357,161 126,624 5.37
Long-term borrowings... 1,178,805 78,773 6.68 1,009,132 63,145 6.26 1,046,321 66,810 6.39
----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ----
Total interest
bearing
liabilities........ 19,567,015 1,074,976 5.49% 17,306,259 791,303 4.57% 15,614,973 757,974 4.85%
Noninterest bearing
deposits.............. 2,648,419 2,663,609 2,545,724
Other liabilities...... 678,269 558,978 496,439
Shareholders' equity... 2,148,074 2,172,117 2,133,037
----------- ----------- -----------
Total liabilities
and shareholders'
equity............. $25,041,777 $22,700,963 $20,790,173
=========== =========== ===========
Net interest income. $ 704,035 $ 734,014 $ 702,260
========== ========== ==========
Net yield on
interest earning
assets............. 3.08% 3.58% 3.69%
==== ==== ====
--------
Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35%
for all years presented, and excluding disallowed interest expense.
(2) Loans and leases on nonaccrual status have been included in the
computation of average balances.
(3) Based on average balances excluding fair value adjustments for available
for sale securities.
22
Analysis of Changes in Interest Income and Interest Expense
The effect on interest income and interest expense due to volume and rate
changes in 2000 and 1999 are outlined in the following table. Changes not due
solely to either volume or rate are allocated to rate ($ in thousands):
2000 versus 1999 1999 versus 1998
------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------- -------------------
Average Average Increase Average Average Increase
Volume (2) Rate (Decrease) Volume (2) Rate (Decrease)
---------- -------- ---------- ---------- -------- ----------
Interest on earning
assets:
Loans, leases, and
securitized ARMs (1). $163,952 $ 64,293 $228,245 $ 91,738 $(49,802) $41,936
Investment securities:
Taxable............... 1,066 8,534 9,600 18,372 (25) 18,347
Tax-exempt (1)........ 8,421 398 8,819 12,065 (3,725) 8,340
Interest bearing
deposits in other
banks.................. 180 702 882 (365) 83 (282)
Funds sold and security
resale agreements...... 1,661 1,010 2,671 1,720 (180) 1,540
Trading securities (1).. (323) (48) (371) (314) (17) (331)
Other short-term
investments............ 2,154 1,694 3,848 (4,192) (275) (4,467)
-------- -------- -------- -------- -------- -------
Total interest
income change...... $177,111 $ 76,583 $253,694 $119,024 $(53,941) $65,083
======== ======== ======== ======== ======== =======
Expense on interest
bearing liabilities:
Money market savings
deposits............. $ 17,494 $ 55,171 $ 72,665 $ 30,998 $(10,471) $20,527
Savings and interest
bearing demand
deposits............. (2,999) (714) (3,713) (2,277) (7,372) (9,649)
Other time deposits... 26,680 36,584 63,264 31,080 (22,915) 8,165
CDs greater than $100,
brokered and callable
CDs.................. 33,137 20,799 53,936 8,511 (6,230) 2,281
-------- -------- -------- -------- -------- -------
Total interest bearing
deposits............. 74,312 111,840 186,152 68,312 (46,988) 21,324
Short-term borrowings. 37,265 44,629 81,894 23,986 (8,316) 15,670
Long-term borrowings.. 10,622 5,005 15,627 (2,376) (1,289) (3,665)
-------- -------- -------- -------- -------- -------
Total interest
expense change..... $122,199 $161,474 $283,673 $ 89,922 $(56,593) $33,329
======== ======== ======== ======== ======== =======
--------
Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35%
for all years presented, and excluding disallowed interest expense.
(2) Based on average balances excluding fair value adjustments for available
for sale securities.
23
Summary of Loan and Lease Loss Experience and Credit Quality
The following tables present comparative credit quality information as of
and for the year ended December 31, 2000, as well as the preceding four years:
Consolidated Credit Quality Information
December 31, ($000's)
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Nonperforming Assets by Type
Loans and Leases:
Nonaccrual................. $121,425 $106,387 $101,346 $ 66,945 $ 63,459
Renegotiated............... 614 708 978 1,338 1,819
Past Due 90 Days or More... 7,371 9,975 7,631 8,238 7,366
-------- -------- -------- -------- --------
Total Nonperforming Loans
and Leases................ 129,410 117,070 109,955 76,521 72,644
Other Real Estate Owned...... 3,797 6,230 8,751 15,573 8,052
-------- -------- -------- -------- --------
Total Nonperforming
Assets.................. $133,207 $123,300 $118,706 $ 92,094 $ 80,696
======== ======== ======== ======== ========
Allowance for Loan and Lease
Losses...................... $235,115 $225,862 $226,052 $208,651 $161,659
======== ======== ======== ======== ========
Consolidated Statistics
Net Charge-offs to Average
Loans and Leases............ 0.12% 0.17% 0.07% 0.12% 0.21%
Total Nonperforming Loans and
Leases to Total Loans and
Leases...................... 0.74 0.72 0.79 0.58 0.74
Total Nonperforming Assets to
Total Loans and Leases and
Other Real Estate Owned..... 0.76 0.75 0.85 0.70 0.82
Allowance for Loan and Lease
Losses to Total Loans and
Leases...................... 1.34 1.38 1.62 1.59 1.64
Allowance for Loan and Lease
Losses to Nonperforming
Loans and Leases............ 182 193 206 273 223
Major Categories of Nonaccrual Loans and Leases ($000's)
December 31, 2000 December 31, 1999
------------------------------- -------------------------------
% of % of % of % of
Nonaccrual Loan Type Nonaccrual Nonaccrual Loan Type Nonaccrual
---------- --------- ---------- ---------- --------- ----------
Commercial and Lease
Financing.............. $ 51,886 0.9% 42.7% $ 56,806 1.1% 53.4%
Real Estate
Construction and Land
Development............ 2,896 0.5 2.4 2,609 0.5 2.5
Commercial Real Estate.. 35,011 0.7 28.9 19,668 0.5 18.5
Residential Real Estate. 29,895 0.7 24.6 25,901 0.5 24.3
-------- --- ----- -------- --- -----
Total Real Estate... 67,802 0.7 55.9 48,178 0.5 45.3
Personal and Lease
Financing.............. 1,737 0.1 1.4 1,403 0.1 1.3
-------- --- ----- -------- --- -----
Total............... $121,425 0.7% 100.0% $106,387 0.7% 100.0%
======== === ===== ======== === =====
24
Reconciliation of Consolidated Allowance for Loan and Lease Losses ($000's)
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Allowance for Loan and Lease
Losses
At Beginning of Year........... $225,862 $226,052 $208,651 $161,659 $166,815
Provision for Loan and Lease
Losses......................... 30,352 25,419 27,090 17,633 15,634
Allowance of Banks and Loans
Acquired....................... 1,270 -- -- 42,773 --
Allowance Transfer for Loan
Securitizations................ (1,022) -- -- -- (440)
Loans and Leases Charged-off:
Commercial.................... 10,623 17,275 6,401 8,474 16,294
Real Estate--Construction..... 4 157 352 87 13
Real Estate--Mortgage......... 9,848 5,719 5,115 3,907 3,446
Personal...................... 8,216 7,121 7,886 7,868 6,390
Leases........................ 1,327 2,285 1,191 1,166 2,397
-------- -------- -------- -------- --------
Total Charge-offs............... 30,018 32,557 20,945 21,502 28,540
Recoveries on Loans and Leases:
Commercial.................... 4,696 2,696 6,708 4,176 3,231
Real Estate--Construction..... 57 6 164 53 9
Real Estate--Mortgage......... 1,458 1,413 1,369 1,097 2,483
Personal...................... 2,199 2,244 2,690 2,501 2,355
Leases........................ 261 589 325 261 112
-------- -------- -------- -------- --------
Total Recoveries................ 8,671 6,948 11,256 8,088 8,190
-------- -------- -------- -------- --------
Net Loans and Leases Charged-
off............................ 21,347 25,609 9,689 13,414 20,350
-------- -------- -------- -------- --------
Allowance for Loan and Lease
Losses
at End of Year................. $235,115 $225,862 $226,052 $208,651 $161,659
======== ======== ======== ======== ========
Nonperforming assets consist of nonperforming loans and other real estate
owned (OREO).
OREO is comprised of commercial and residential properties acquired in
partial or total satisfaction of problem loans and branch premises held for
sale. OREO acquired in satisfaction of debts amounted to $2.7 million, $5.1
million and $5.6 million at December 31, 2000, 1999 and 1998 respectively.
Branch premises held for sale amounted to $1.1 million, $1.1 million and $3.2
million at the end of 2000, 1999 and 1998, respectively.
Nonperforming loans and leases consist of nonaccrual, renegotiated or
restructured loans, and loans and leases that are delinquent 90 days or more
and still accruing interest. The balance of nonperforming loans and leases can
fluctuate widely based on the timing of cash collections, renegotiations and
renewals.
Maintaining nonperforming assets at an acceptable level is important to the
ongoing success of a financial services institution. The Corporation's
comprehensive credit review and approval process is critical to ensuring that
the amount of nonperforming assets on a long-term basis is minimized within
the overall framework of acceptable levels of credit risk. In addition to the
negative impact on net interest income and credit losses, nonperforming assets
also increase operating costs due to the expense associated with collection
efforts.
At December 31, 2000, nonperforming loans and leases amounted to $129.4
million or 0.74% of consolidated loans and leases compared to $117.1 million
or 0.72% at December 31, 1999 and $110.0 million or 0.79% at December 31,
1998. Nonaccrual loans increased $15.0 million at year end 2000 compared to
year end 1999. Nonaccrual commercial mortgages accounted for $15.3 million of
the increase. Nonaccrual loans associated with the cranberry industry amounted
to $13.8 million or approximately 11% of total nonaccrual loans at December
31, 2000. Nonaccrual residential real estate and other nonaccrual personal
loans were $31.6 million at December 31, 2000, an increase of $4.3 million
over the prior year. This increase was offset by a decline in commercial loans
and leases of $4.9 million.
25
Net charge-offs amounted to $21.3 million or 0.12% of average loans and
leases in 2000 compared with $25.6 million or 0.17% of average loans and
leases in 1999 and $9.7 million or 0.07% of average loans and leases in 1998.
Cranberry industry related net charge-offs amounted to $6.2 million or 29% of
total net charge-offs in 2000. The Corporation does not anticipate further
losses in this sector.
The allowance for loan and lease losses represents management's estimate of
probable inherent losses which have occurred as of the date of the financial
statements. In determining the adequacy of the reserve the Corporation
evaluates the reserves necessary for specific nonperforming loans and also
estimates losses inherent in other loans and leases. As a result, the
allowance for loans and leases contains the following components:
Specific Reserve. The amount of specific reserves is determined through a
loan-by-loan analysis of nonperforming loans that considers expected future
cash flows, the value of collateral and other factors that may impact the
borrower's ability to make payments when due. Included in this group are
those nonaccrual or renegotiated loans which meet the criteria as being
"impaired" under the definition in SFAS 114. A loan is impaired when, based
on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement.
Allocated inherent reserve. The amount of the allocated portion of the
inherent loss reserve is determined by reserving factors assigned to loans
and leases based on the Corporation's internal loan grading system. Line
officers and loan committees are responsible for continually assigning
grades to commercial loan types based on standards established in the
Corporation's loan policies and adherence to the standards is closely
monitored by the Corporation's Loan Review Group. Loan grades are similar
to, but generally more conservative than, regulatory classifications. In
addition, reserving factors are applied to retail and smaller balance
ungraded credits as well as specialty loan products such as credit card,
student loans and mortgages. Reserving factors are derived and are
determined based on such factors as historical charge-off experience,
remaining life, and industry practice for reserve levels. The use of
industry practice is intended to prevent an understatement of reserves
based upon an over-reliance on historical charge-offs during favorable
economic conditions.
Unallocated inherent reserve. Management determines the unallocated portion
of the inherent loss reserve based on factors that cannot be associated
with a specific credit or loan categories. These factors include
management's subjective evaluation of local, national and international
economic and business conditions, changes to underwriting standards and
marketing channels such as use of centralized retail and small business
credit centers, trends towards higher advance rates and longer amortization
periods and the impact of acquisitions on the Corporation's credit risk
profile. The unallocated portion of the inherent loss reserve also reflects
management's attempt to ensure that the overall reserve appropriately
reflects a margin for the imprecision necessarily inherent in estimates of
expected credit losses.
Management's evaluation of the factors described above resulted in an
allowance for loan and lease losses of $235.1 million at December 31, 2000
compared to $225.9 million at December 31, 1999 and $226.1 million at December
31, 1998. The level of reserve reflects management's belief that losses
inherent in the loan and lease portfolio were larger than would otherwise be
suggested by the Corporation's favorable charge-off experience in recent
years; the Corporation's experience, as most recently evidenced in the current
year, of larger losses in commercial and commercial real estate loans in brief
periods at particular points in economic cycles; and the view that the
absolute level of the allowance should not decline appreciably given
continuing loan growth and the slowing of economic prosperity.
The resulting provision for loan and lease losses amounted to $30.4 million
for the twelve months ended December 31, 2000, while net charge-offs totaled
$21.3 million.
Charge-offs for 2001 will continue to be affected by the various factors
previously discussed. The Corporation anticipates charge-off levels will
continue at recent historical levels. However, negative economic events,
adverse developments in industry segments within the portfolio, or
deterioration of a large loan or loans could have significant adverse impacts
on the loss levels. There are no known material loans believed to be in
imminent danger of deteriorating or defaulting which would give rise to a
large near-term charge-off.
26
Other Income
Total other income amounted to $928.3 million in 2000 compared to $878.5
million in 1999. Excluding securities losses of $50.6 million associated with
the realignment of investment securities previously discussed, total other
income in 2000 amounted to $978.9 million or an increase of $100.4 million or
11.4%.
In July 2000, the Corporation created an independent subsidiary Metavante
Corporation ("Metavante") which consisted of the former Data Services Division
of the Corporation except for the payment services or item processing line of
business which was transferred to its banking segment. Metavante was created
in contemplation of a planned IPO and organized to better reflect its
technology-focused business. Data processing services revenue in the
Consolidated Statements of Income contained in Item 8 herein have been
reclassified to reflect the organizational change and to conform data
processing services revenue types to the way it was presented in Metavante's
initial registration statement.
Total data processing services revenue amounted to $546.0 million in 2000
compared to $494.8 million in 1999, an increase of $51.2 million or 10.4%.
Account processing fees increased $50.8 million or 15.0% and reflects a full
year of revenue from the electronic banking services and plastic card
personalization and procurement services acquisitions in 1999 as well as
growth in electronic payment services and electronic funds transfer services.
Other data services revenue increased $2.2 million. Buyout fees, which vary
period to period, increased $13.5 million primarily due to one large fee
recognized in the third quarter of 2000 as a result of an acquisition.
Equipment sales were $10.4 million lower in 2000 compared to 1999.
Item processing revenue increased $11.2 million due to the addition of a
large customer that converted its item processing in the fourth quarter of
1999.
Fees from trust services were $117.7 million in 2000 compared to $101.0
million in 1999, an increase of $16.7 million or 16.6%. All product lines
reflected revenue growth. At December 31, 2000 total trust assets were $1.2
billion higher than the previous year. Assets under management increased $1.0
billion or 9% and proprietary mutual fund balances increased $0.5 billion or
11%.
Mortgage banking revenue was $16.7 million in 2000 compared with $27.3
million in 1999, a decrease of $10.6 million. Gains from sales of mortgages to
the secondary market and mortgage related fees declined $9.6 million and loan
servicing fees decreased $1.0 million.
Capital markets revenue increased $7.6 million in 2000 compared to the
prior year. Net gains from the sale of investments, which vary from period to
period, accounted for $7.8 million of the increase.
In addition to the increase in net realizable value, life insurance revenue
in 2000 includes death benefit gains of $0.6 million.
Net securities gains in 2000 excluding the effect of the losses incurred
from the investment security portfolio re-alignment previously discussed,
amounted to $1.1 million and principally represents gains from the sale of
certain equity securities by the banking segment.
Other noninterest income amounted to $121.7 million in 2000 compared to
$109.6 million in 1999, an increase of $12.1 million. Revenue associated with
auto securitizations which began in 2000 amounted to $3.9 million. Gains from
the sale of branches and other assets sales were $7.2 million greater in 2000
compared to 1999. Other increases in commissions and fees in 2000 offset the
death benefit gain on life insurance policies of $6.0 million recognized in
1999.
Total other income amounted to $878.5 million in 1999 compared to $794.5
million in 1998, an increase of $84.0 million or 10%.
Total data processing services revenue increased $72.9 million or 17.3%
from $421.9 million in 1998 to $494.8 million in the current year. Account
processing fees increased $90.7 million. Revenues associated with
27
acquisitions and a joint venture accounted for $46.6 million of the increase.
Revenue from electronic funds distribution increased $11.6 million while
revenue from other e-commerce related activities increased $6.0 million. The
remainder of the increase in revenue was attributable to traditional
processing.
Internet banking revenue is primarily revenue from internet mortgage
lending and discount brokerage. Internet mortgage lending began in the fourth
quarter of 1998. During the third and fourth quarters of 1999, internet
product offerings were expanded to include deposit (CDs) and home equity
lending.
Fees from trust services were $101.0 million in 1999 compared to $88.5
million in 1998, an increase of $12.5 million or 14.1%. Personal trust fees
increased $3.7 million, commercial trust fees increased $2.5 million and
revenue from outsourcing services increased $2.7 million over the prior year.
Service charges on deposits increased $8.0 million or 12.9% from $61.7
million in 1998 to $69.7 million in 1999. Service charges on commercial demand
accounted for $6.6 million of the increase.
Mortgage banking revenue was $27.3 million in 1999 compared with $53.7
million in 1998, a decrease of $26.4 million. Gains from sales of mortgages to
the secondary market and mortgage related fees declined $23.0 million and loan
servicing fees decreased $3.4 million. As previously discussed, declining
interest rates throughout 1998 resulted in refinancings at record levels in
1998 and early 1999.
Capital markets revenue decreased $12.4 million in 1999 compared to the
prior year. Net gains from the sale of investments, which vary from period to
period, accounted for $11.9 million of the decline.
Life insurance revenue represents the increase in net realizable value
primarily associated with the purchase of $400 million of single premium bank-
owned life insurance policies late in 1998 which insure the lives of certain
officers of the Corporation and its affiliate banks. This vehicle is being
used to fund future employee benefit obligations.
Net securities losses in 1999 amounted to $4.1 million and principally
represent write-offs of investments in housing equity partnerships.
Other noninterest income amounted to $109.6 million in 1999 compared to
$91.7 million in 1998, an increase of $17.9 million. Deposit premiums from the
sale of eight branches amounted to $7.8 million. Death benefit gains from life
insurance policies amounted to $6.0 million.
Other Expense
Total other expense amounted to $1,100.7 million in 2000, an increase of
$70.2 million or 6.8% from $1,030.5 million in 1999.
In July, 2000, the Corporation announced the planned IPO of Metavante, its
plan to reduce the number of banking charters under which it operates and the
sale of assets and investment portfolio realignment. Losses from the
investment portfolio realignment of $50.6 million were previously discussed in
Other Income.
The line Single Charter / IPO / Arm Loan Sales in the Consolidated
Statements of Income contained in Item 8 reflect the costs incurred for these
initiatives and include the following:
Losses from the sale of portfolio ARM loans amounted to $3.1 million.
IPO expenses amounted to $4.5 million. Such expenses included registration
costs and professional fees incurred in preparation of an initial
registration statement as well as professional fees for tax and benefit
plan consulting, market assessments, other strategic consulting and name
change. Such expenses also included costs that normally would be netted
against the IPO proceeds had it proceeded as originally planned.
28
Single Charter expenses amounted to $9.1 million and consist of the cost of
programming changes required to support operations and processes to achieve
the scale required in the single charter environment, consulting fees and
other professional fees, costs incurred to eliminate duplicate loan and
deposit customer's accounts and other affiliate shareholder matters and
costs associated with employee relocation, retention and severance. The
first charter merger was completed in the fourth quarter of 2000.
Total costs for the single charter and IPO were originally estimated to be
approximately $19.0 million (after-tax) beginning in the third quarter of 2000
and in subsequent quarters throughout 2001 as incurred. The Corporation
continues to believe the estimate is reasonable.
Excluding the above, operating expenses amounted to $1,084.0 in 2000
compared to $1,030.5 in 1999, an increase of $53.5 million or 5.2%.
The increase in expenses is primarily attributable to the Corporation's
nonbanking businesses, particularly its data processing business segment
("Metavante"). Metavante's expense growth of approximately $30.3 million or
6.4% in 2000 compared to 1999 represents approximately 57% of the Corporations
total operating expense growth.
Expense control is sometimes measured in the financial services industry by
the efficiency ratio statistic. The efficiency ratio is calculated by taking
total other expense (excluding special charges) divided by the sum of total
other income (excluding securities gains or losses other than Capital Markets
revenue) and net interest income on a fully taxable equivalent basis. The
Corporation's efficiency ratios for the years ended December 31, 2000, 1999,
and 1998 were:
Efficiency Ratios 2000 1999 1998
----------------- ----- ----- -----
Consolidated Corporation................................ 64.4% 63.7% 64.1%
Consolidated Corporation Excluding Data Services:
Including Intangible Amortization..................... 54.8% 53.5% 54.7%
Excluding Intangible Amortization..................... 52.6% 50.8% 49.9%
Total salaries and benefits expense amounted to $623.4 million for 2000
compared to $583.7 million in 1999, an increase of $39.7 million or 6.8%.
Metavante contributed approximately $40.5 million to the increase. Compared to
1999, Metavante had over 500 more full-time equivalent employees and contract
programmers in 2000 in response to the continued growth in the electronic
banking and electronic payment services businesses. Salaries and benefits of
the Corporation's banking segment increased $10.3 million or 4.5%. Incentive
compensation based on the Corporation's common stock performance decreased
$11.3 million.
Metavante's expense growth, driven in part by continued investment in
infrastructure, accounted for $16.5 million or all of the corporate-wide
expense growth in net occupancy, equipment, software, processing, supplies and
printing and professional services.
The increase in shipping and handling reflects the increase in item
processing revenue especially from a large new customer as previously
discussed.
Amortization of intangibles decreased $5.6 million. Amortization of core
deposit premiums decreased $2.9 million. A decrease in goodwill and other
amortization associated with acquisitions by Metavante were partially offset
by increases in amortization of mortgage loan and auto loan servicing rights.
Other expenses amounted to $101.6 million in 2000 compared to $104.9
million in the prior year, a decrease of $3.3 million or 3.2%. Auto lease
residual impairment and off-lease inventory write-downs in 2000 amounted to
$8.6 million.
Other expense is affected by the capitalization of costs, net of
amortization, associated with software development and data processing
conversions. The amount of capitalized software development costs and
29
capitalized conversion costs net of their respective amortization increased
$11.4 million and $1.6 million in 2000 compared to 1999.
Total other expense amounted to $1,030.5 million in 1999, an increase of
$75.6 million or 7.9% from $954.8 million, before merger/restructuring expense
in 1998. Including these charges, total other expense for 1998 amounted to
$978.2 million. The merger/restructuring expense of $23.4 million in 1998
relates to the merger with Advantage.
The increase in expenses is primarily attributable to the Corporation's
nonbanking businesses, particularly its data processing business segment.
Metavante's expense growth of $53.2 million or 12.8% in 1999 compared to 1998
represents approximately 69% of the Corporations total operating expense
growth and reflects the cost of adding processing capacity and other related
costs associated with increased revenue growth including the impact of
acquisitions as well as continued work on Year 2000.
Total salaries and benefits expense amounted to $583.7 million for 1999
compared to $523.6 million in 1998, an increase of $60.1 million or 11.5%. The
data processing segment contributed approximately $33.5 million or 56% of the
increase. Salaries and benefits of the Corporation's banking segment increased
$11.9 million or 5.5%. Incentive compensation based on the Corporation's
common stock performance increased $10.7 million.
Metavante's expense growth accounted for $16.6 million or 69% of the
corporate-wide expense growth in net occupancy, equipment, software,
processing, supplies and printing and shipping and handling.
Professional services increased $9.8 million or 38.5% over 1998. Metavante
accounted for $5.5 million of the increase. Banking and all others which
includes internet lending and deposit software development and enhancements
and fees associated with the moving from NASDAQ to the New York Stock Exchange
accounted for the remainder of the increase.
Amortization of intangibles decreased $4.4 million. Amortization of core
deposit premiums decreased $3.8 million. Amortization of mortgage servicing
rights decreased $8.5 million which reflects the slowing of prepayment
activity in 1999. Goodwill amortization increased $8.0 million.
Other expenses amounted to $104.9 million in 1999 compared to $118.9
million in the prior year, a decrease of $14.0 million or 11.7%. Cost of
equipment sales declined $8.0 million while the cost of card plastic sales
increased $2.2 million.
Other expense is affected by the capitalization of costs, net of
amortization, associated with software development and data processing
conversions. The amount of capitalized software development costs and
capitalized conversion costs net of their respective amortization increased
$6.0 million and $2.0 million in 1999 compared to 1998. During 1999,
capitalized software impairment write-downs amounted to $1.1 million.
Income Tax Provision
The provision for income taxes was $152.9 million in 2000, $173.4 million
in 1999 and $164.0 million in 1998. The effective tax rate in 2000 was 32.5%
compared to 32.9% in 1999 and 35.2% in 1998. The decrease in the effective
rate in 1999 is due to the increase in tax-exempt income.
Capital Resources
Shareholders' equity was $2.24 billion or 8.6% of total consolidated assets
at December 31, 2000, compared to $2.12 billion or 8.7% of total consolidated
assets at December 31, 1999. The increase associated with earnings,
30
net of dividends paid, and the increase in the fair value of securities
available for sale net of related tax effects was offset by the effect of
treasury share repurchases. The increase in the fair value of securities
available for sale net of related tax effects of $70.9 million reflects, in
part, the securities investment portfolio realignment previously discussed.
The Corporation and its affiliates continue to have a strong capital base
and the Corporation's regulatory capital ratios continue to be significantly
above the defined minimum regulatory ratios. See Note 14 to the Consolidated
Financial Statements contained in Item 8 herein for the Corporation's
comparative capital ratios and the capital ratios of its significant
subsidiaries.
The Corporation's subsidiaries, primarily its banking subsidiaries, are
restricted by regulations from making distributions above prescribed amounts.
In addition, banking subsidiaries are limited in making loans and advances to
the Corporation. At December 31, 2000, approximately $222.8 million and $114.8
million were available for distribution without regulatory approval from the
Corporation's banking and nonbanking subsidiaries, respectively.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to each subsidiary bank in circumstances when it
might not do so absent such policy.
The Corporation has a Stock Repurchase Program under which up to 6 million
shares can be repurchased annually. During 2000 and 1999, the Corporation
repurchased 3.2 and 5.1 million shares at an aggregate cost of $156.3 and
$317.1 million, respectively.
During 1999, the holder of the Corporation's Series A convertible preferred
stock converted 348,944 shares of Series A into 3,832,957 shares of common
stock which were issued from the Corporation's treasury stock.
Metavante IPO
In July 2000, the Corporation announced that it had filed a registration
statement with the Securities and Exchange Commission for the IPO of its
Metavante subsidiary. In November 2000, the Corporation withdrew the IPO due
to adverse market conditions and the near term slow down in financial account
processing markets.
Year 2000
Year 2000 (Y2K) was the term used to describe the fact that many existing
computer programs used only two digits to identify a year in a date field.
These programs were designed and developed without considering the impact of
the upcoming change in the century. If not corrected, many computer
applications could have failed or created erroneous results by or at the year
2000. The term also refers to devices with imbedded technology that are time
sensitive and may fail to recognize year 2000 correctly. This issue affected
virtually all companies and organizations.
The transition to Year 2000 was successful and there were no material
adverse consequences to its systems or customers during the transition.
The majority of Metavante's contracts did not provide for additional
reimbursement over and above the previously contracted maintenance amounts.
The Corporation estimates that the total net direct cost for the year 2000
effort was approximately $37.4 million with Metavante representing
approximately 94% of that amount. Approximately $12.1 million was expensed in
1999.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. For additional
information on the Corporation's derivative financial instruments and foreign
exchange position, see Note 18 to the Consolidated Financial Statements
contained in Item 8 herein.
Interest Rate Risk
The Corporation uses financial modeling techniques to identify potential
changes in income under a variety of possible interest rate scenarios.
Financial institutions, by their nature, bear interest rate and liquidity risk
as a necessary part of the business of managing financial assets and
liabilities. The Corporation has designed strategies to confine these risks
within prudent parameters and identify appropriate risk/reward tradeoffs in
the financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing and
embedded option characteristics across the array of assets and liabilities
held by the Corporation. Policies are in place to assure that neither earnings
nor fair value at risk exceed appropriate limits. The use of a limited array
of derivative financial instruments has allowed the Corporation to achieve the
desired balance sheet repricing structure while simultaneously meeting the
desired objectives of both its borrowing and depositing customers.
The models used include measures of the expected repricing characteristics
of administered rate (NOW, savings and money market accounts) and non-rate
related products (demand deposit accounts, other assets and other
liabilities). These measures recognize the relative insensitivity of these
accounts to changes in market interest rates, as demonstrated through current
and historical experiences. In addition to information about contractual
payment information for most other assets and liabilities, the models also
include estimates of expected prepayment characteristics for those items that
are likely to materially change their payment structures in different rate
environments, including residential mortgage products, certain commercial and
commercial real estate loans and certain mortgage-related securities.
Estimates for these sensitivities are based on industry assessments and are
substantially driven by the differential between the contractual coupon of the
item and current market rates for similar products.
This information is incorporated into a model that allows the projection of
future income levels in several different interest rate environments. Earnings
at risk are calculated by modeling income in an environment where rates remain
constant, and comparing this result to income in a different rate environment,
and then dividing this result into the Corporation's budgeted pre-tax income
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 December 31, 2000:
Hypothetical Change in Interest Impact to 2001
Rates Pretax Income
------------------------------- --------------
100 basis point gradual rise in rates..................... (6.4%)
100 basis point gradual decline in rates.................. 5.3%
These results are based solely on the modeled parallel changes in market
rates, and do not reflect the earnings sensitivity that may arise from other
factors such as changes in the shape of the yield curve, the changes in spread
between key market rates, or accounting recognition for impairment of certain
intangibles. These results are also considered to be conservative estimates
due to the fact that they do not include any management action to mitigate
potential income variances within the simulation process. Such action could
potentially include, but
32
would not be limited to, adjustments to the repricing characteristics of any
on- or off-balance sheet item with regard to short-term rate projections and
current market value assessments.
Actual results will differ from simulated results due to timing, magnitude,
and frequency of interest rate changes as well as changes in market conditions
and management strategies.
Another component of interest rate risk is measuring the fair value at risk
for a given change in market interest rates. The Corporation also uses
computer modeling techniques to determine the present value of all asset and
liability cash flows (both on- and off-balance sheet), adjusted for prepayment
expectations, using a market discount rate. The net change in the present
value of the assets and liability cash flows in different market rate
environments is the amount of fair value at risk from those rate movements. As
of December 31, 2000 the fair value of equity at risk for a gradual 100bp
shift in rates was less than 0.5% of the market value of the Corporation.
The Corporation uses derivative financial instruments to manage interest
rate exposure. Such derivatives consisted of $1.5 billion in notional amount
of interest rate swaps and $275 million in notional amount of interest rate
floors at December 31, 2000, respectively. A small amount of derivatives are
sold to customers where the Corporation acts as an intermediary. The
Corporation through its trading accounts matches off these instruments in
order to minimize exposure to market risks. Customer interest rate derivatives
held for trading amounted to $126 million of notional value, consisting of $63
million in notional value of receive fixed and $63 million in notional value
of pay fixed interest rate swaps as of December 31, 2000. As part of its auto
securitization activities, the Corporation has entered into a balance
guaranteed receive fixed / pay floating interest rate swap which is designated
as a trading activity for accounting purposes. At December 31, 2000, the
notional value and fair value were $202.9 million and $1.9 million,
respectively.
Equity Risk
In addition to interest rate risk, the Corporation incurs market risk in
the form of equity risk. M&I's Capital Markets Group invests in private,
medium-sized companies to help establish new businesses or recapitalize
existing ones and, to a lessor extent, invests in publicly traded equity
securities. Exposure to the change in equity values for the nonpublic
companies that are held in their portfolio exists, but due to the nature of
the investments, cannot be quantified within acceptable levels of precision.
M&I Trust Services administers nearly $59 billion in assets and directly
manages a portfolio of more than $12 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.
33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
Consolidated Balance Sheets
December 31 ($000's except share data)
2000 1999
----------- -----------
Assets
Cash and Cash Equivalents:
Cash and Due from Banks............................. $ 760,103 $ 705,293
Federal Funds Sold and Security Resale Agreements... 54,443 101,922
Money Market Funds.................................. 50,147 72,641
----------- -----------
Total Cash and Cash Equivalents................... 864,693 879,856
Investment Securities:
Trading Securities, at Market Value................. 15,317 40,334
Interest Bearing Deposits at Other Banks............ 43,528 6,828
Available for Sale, at Market Value................. 4,735,722 4,357,196
Held to Maturity, Market Value $1,124,756
($1,137,126 in 1999)............................... 1,112,545 1,170,734
----------- -----------
Total Investment Securities....................... 5,907,112 5,575,092
Loans and Leases, Net of Unearned Income of $215,125
($157,499 in 1999)................................... 17,587,087 16,335,061
Less: Allowance for Loan and Lease Losses............. 235,115 225,862
----------- -----------
Net Loans and Leases.............................. 17,351,972 16,109,199
Premises and Equipment................................ 392,995 370,534
Goodwill and Core Deposit Intangibles................. 310,930 347,489
Other Intangibles..................................... 34,354 18,927
Accrued Interest and Other Assets..................... 1,215,683 1,068,626
----------- -----------
Total Assets...................................... $26,077,739 $24,369,723
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest Bearing................................. $ 3,129,834 $ 2,830,960
Interest Bearing.................................... 16,118,793 13,604,222
----------- -----------
Total Deposits.................................... 19,248,627 16,435,182
Short-term Borrowings................................. 2,814,731 4,540,255
Accrued Expenses and Other Liabilities................ 850,916 612,336
Long-term Borrowings.................................. 921,276 665,024
----------- -----------
Total Liabilities................................. 23,835,550 22,252,797
Shareholders' Equity:
Series A Convertible Preferred Stock, $1.00 par
value, 2,000,000 Shares Authorized; 336,370 Shares
Issued; Liquidation Preference $33,637............. 336 336
Common Stock, $1.00 par value, 320,000,000
(160,000,000 in 1999) Shares Authorized;
112,757,546 Shares Issued.......................... 112,757 112,757
Additional Paid-in Capital.......................... 452,212 457,097
Retained Earnings................................... 2,117,759 1,914,128
Net Unrealized Securities Gains/(Losses), Net of
Taxes.............................................. 38,127 (32,749)
Less: Treasury Stock, at Cost, 9,910,839 Shares
(6,941,684 in 1999)................................ 458,472 314,513
Deferred Compensation............................. 20,530 20,130
----------- -----------
Total Shareholders' Equity........................ 2,242,189 2,116,926
----------- -----------
Total Liabilities and Shareholders' Equity........ $26,077,739 $24,369,723
=========== ===========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
34
Consolidated Statements of Income
Years ended December 31 ($000's except share data)
2000 1999 1998
---------- ---------- ----------
Interest Income
Loans and Leases............................ $1,391,651 $1,156,775 $1,085,829
Investment Securities:
Taxable.................................... 272,536 269,668 280,377
Exempt from Federal Income Taxes........... 65,429 58,820 52,969
Trading Securities.......................... 1,508 1,864 2,203
Short-term Investments...................... 16,858 9,457 12,666
---------- ---------- ----------
Total Interest Income.................... 1,747,982 1,496,584 1,434,044
Interest Expense
Deposits.................................... 772,016 585,864 564,540
Short-term Borrowings....................... 224,187 142,294 126,624
Long-term Borrowings........................ 78,773 63,145 66,810
---------- ---------- ----------
Total Interest Expense................... 1,074,976 791,303 757,974
---------- ---------- ----------
Net Interest Income......................... 673,006 705,281 676,070
Provision for Loan and Lease Losses......... 30,352 25,419 27,090
---------- ---------- ----------
Net Interest Income After Provision for Loan
and Lease Losses........................... 642,654 679,862 648,980
Other Income
Data Processing Services:
Account Processing Fees.................... 390,760 339,914 249,210
Professional Services Fees................. 74,032 79,127 80,893
Software Revenues.......................... 38,061 34,806 36,420
Other Revenues............................. 43,188 40,969 55,422
---------- ---------- ----------
Total Data Processing Services.............. 546,041 494,816 421,945
Item Processing............................. 51,409 40,169 41,003
Internet Banking............................ 2,481 1,861 59
Trust Services.............................. 117,680 100,963 88,496
Service Charges on Deposits................. 73,866 69,699 61,730
Mortgage Banking............................ 16,695 27,317 53,655
Capital Markets Revenue..................... 20,005 12,439 24,860
Net Investment Securities (Losses)/Gains.... (49,515) (4,083) 7,145
Life Insurance Revenue...................... 27,993 25,767 3,893
Other....................................... 121,697 109,597 91,714
---------- ---------- ----------
Total Other Income....................... 928,352 878,545 794,500
Other Expense
Salaries and Employee Benefits.............. 623,360 583,659 523,606
Net Occupancy............................... 55,226 49,225 44,181
Equipment................................... 113,373 107,670 103,180
Software Expenses........................... 30,011 26,972 22,181
Processing Charges.......................... 32,093 30,324 25,286
Supplies and Printing....................... 19,891 19,364 18,679
Professional Services....................... 33,966 35,086 25,326
Shipping and Handling....................... 41,964 35,181 31,066
Amortization of Intangibles................. 32,478 38,046 42,457
Single Charter/IPO/Arm Loan Sales........... 16,678 -- --
Merger/Restructuring........................ -- -- 23,373
Other....................................... 101,616 104,941 118,860
---------- ---------- ----------
Total Other Expense...................... 1,100,656 1,030,468 978,195
---------- ---------- ----------
Income Before Income Taxes and Cumulative
Effect of Changes in Accounting Principles. 470,350 527,939 465,285
Provision for Income Taxes.................. 152,948 173,428 163,962
---------- ---------- ----------
Income Before Cumulative Effect of Changes
in Accounting Principles................... 317,402 354,511 301,323
Cumulative Effect of Changes in Accounting
Principles, Net of Income Taxes............ (2,279) -- --
---------- ---------- ----------
Net Income.................................. $ 315,123 $ 354,511 $ 301,323
========== ========== ==========
Net Income Per Common Share
Basic:
Income Before Cumulative Effect of Changes
in Accounting Principles.................. $ 3.01 $ 3.32 $ 2.79
Cumulative Effect of Changes in Accounting
Principles................................ (0.02) -- --
---------- ---------- ----------
Net Income................................. $ 2.99 $ 3.32 $ 2.79
========== ========== ==========
Diluted:
Income Before Cumulative Effect of Changes
in Accounting Principles.................. $ 2.91 $ 3.14 $ 2.61
Cumulative Effect of Changes in Accounting
Principles................................ (0.02) -- --
---------- ---------- ----------
Net Income................................. $ 2.89 $ 3.14 $ 2.61
========== ========== ==========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
35
Consolidated Statements of Cash Flows
Years ended December 31 ($000's)
2000 1999 1998
----------- ----------- -----------
Cash Flows From Operating Activities:
Net Income.............................. $ 315,123 $ 354,511 $ 301,323
Adjustments to Reconcile Net Income to
Net Cash Provided by
Operating Activities:
Depreciation and Amortization......... 69,197 86,156 111,392
Provision for Loan and Lease Losses... 30,352 25,419 27,090
Losses/(Gains) on Sales of Assets..... 7,047 (42,522) (77,183)
Proceeds from Sales of Trading
Securities and Loans Held for Resale. 4,529,322 4,766,956 5,211,992
Purchases of Trading Securities and
Loans Held for Resale................ (3,952,604) (4,606,316) (5,245,240)
Other................................. 30 40,011 (59,464)
----------- ----------- -----------
Total Adjustments................... 683,344 269,704 (31,413)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. 998,467 624,215 269,910
Cash Flows From Investing Activities:
Net (Increase) Decrease in Shorter Term
Securities............................. -- 21,400 (14,450)
Proceeds from Maturities of Longer Term
Securities............................. 735,750 1,026,967 1,461,553
Proceeds from Sales of Securities
Available for Sale..................... 1,538,995 116,823 160,474
Purchases of Longer Term Securities..... (2,030,760) (1,681,037) (1,054,290)
Decrease in Loans Due to Divestitures... 8,352 30,817 --
Net Increase in Loans................... (1,721,384) (2,342,319) (1,016,336)
Purchases of Assets to be Leased........ (573,833) (429,345) (317,862)
Principal Payments on Lease Receivables. 360,992 294,891 242,227
Purchases of Premises and Equipment,
Net.................................... (78,817) (66,899) (60,811)
Acquisitions Accounted for as Purchases,
Net of Cash Equivalents Acquired and
Investments in Joint Ventures.......... -- (84,408) (5,170)
Purchase of Bank-Owned Life Insurance... -- -- (400,000)
Other................................... 18,163 12,751 14,997
----------- ----------- -----------
Net Cash Used in Investing Activities... (1,742,542) (3,100,359) (989,668)
Cash Flows From Financing Activities:
Decrease in Deposits Due to
Divestitures........................... (100,791) (84,191) --
Net Increase in Deposits................ 2,565,584 607,243 899,591
Proceeds from Issuance of Commercial
Paper.................................. 3,190,712 1,926,791 779,653
Principal Payments on Commercial Paper.. (3,115,064) (1,740,439) (829,077)
Net Increase (Decrease) in Other Short-
term Borrowings........................ (1,717,077) 2,226,463 41,210
Proceeds from Issuance of Long-term
Debt................................... 536,587 288,526 87,573
Payment of Long-term Debt............... (368,469) (371,832) (159,963)
Dividends Paid.......................... (111,379) (104,490) (97,241)
Purchase of Common Stock................ (156,319) (317,149) (29,633)
Proceeds from the Issuance of Common
Stock.................................. 5,241 18,359 15,086
Other................................... (113) (19) 1,234
----------- ----------- -----------
Net Cash Provided by Financing
Activities............................. 728,912 2,449,262 708,433
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents............................ (15,163) (26,882) (11,325)
Cash and Cash Equivalents, Beginning of
Year................................... 879,856 906,738 918,063
----------- ----------- -----------
Cash and Cash Equivalents, End of Year.. $ 864,693 $ 879,856 $ 906,738
=========== =========== ===========
Supplemental Cash Flow Information:
Cash Paid During the Year for:
Interest.............................. $ 984,883 $ 775,065 $ 759,231
Income Taxes.......................... 116,363 125,841 141,553
The accompanying notes are an integral part of the Consolidated Financial
Statements.
36
Consolidated Statements of Shareholders' Equity
($000's except share data)
Unrealized
Compre- Additional Treasury Deferred Securities
hensive Preferred Common Paid-in Retained Common Compen- Gains Net
Income Stock Stock Capital Earnings Stock sation of Taxes
-------- --------- -------- ---------- ---------- --------- -------- ----------
Balance, December 31,
1997.................. $ 685 $113,185 $620,899 $1,460,646 $(215,787) $ (9,297) $52,098
Comprehensive Income:
Net Income............ $301,323 -- -- -- 301,323 -- -- --
Unrealized Gains on
Securities:
Unrealized
Securities Gains
Net of Taxes of
$6,367............. 11,262 -- -- -- -- -- -- --
Reclassification
Adjustment for
Gains Included in
Net Income Net of
Taxes of $2,940.... (5,258) -- -- -- -- -- -- --
--------
Total Unrealized
Gains on
Securities....... 6,004 -- -- -- -- -- -- 6,004
--------
Comprehensive Income... $307,327 -- -- -- -- -- -- --
========
Transactions by
Affiliates Prior to
Combination........... -- -- -- (327) -- -- --
Issuance of 526,200
Treasury Common Shares
in the 1998 Business
Combination........... -- (526) (14,255) -- 14,781 -- --
Issuance of 1,133,564
Common and Treasury
Common Shares Under
Stock Option and
Restricted Stock
Plans................. -- 139 (10,830) (592) 28,151 (1,728) --
Acquisition of 697,247
Common Shares......... -- (41) 821 -- (33,799) 486 --
Dividends Declared on
Preferred Stock--$9.63
Per Share............. -- -- -- (6,603) -- -- --
Dividends Declared on
Common Stock--$0.86
Per Share............. -- -- -- (90,311) -- -- --
Repayment of ESOP Loan. -- -- 1,246 -- -- 1,373 --
Merger/Restructuring
Charge................ -- -- 9,893 -- -- -- --
Transfer of 246,854
Treasury Common Shares
to Directors' Deferred
Compensation Trust.... -- -- -- -- 12,608 (12,608) --
Net Change in Deferred
Compensation.......... -- -- 175 (10) -- 2,136 --
Income Tax Benefit for
Compensation Expense
for Tax Purposes in
Excess of Amounts
Recognized for
Financial Reporting
Purposes.............. -- -- 13,846 -- -- -- --
Other.................. -- -- -- (3) -- 1 --
----- -------- -------- ---------- --------- -------- -------
Balance, December 31,
1998.................. $ 685 $112,757 $621,795 $1,664,123 $(194,046) $(19,637) $58,102
===== ======== ======== ========== ========= ======== =======
The accompanying notes are an integral part of the Consolidated Financial
Statements.
37
Consolidated Statements of Shareholders' Equity
($000's except share data)
Unrealized
Compre- Additional Treasury Deferred Securities
hensive Preferred Common Paid-in Retained Common Compen- Gains/(Losses)
Income Stock Stock Capital Earnings Stock sation Net of Taxes
-------- --------- -------- ---------- ---------- --------- -------- --------------
Balance, December 31,
1998.................. $ 685 $112,757 $621,795 $1,664,123 $(194,046) $(19,637) $ 58,102
Comprehensive Income:
Net Income............ $354,511 -- -- -- 354,511 -- -- --
Unrealized
Gains/(Losses) on
Securities:
Unrealized
Securities Losses
Net of Taxes of
$51,914............ (91,851) -- -- -- -- -- -- --
Reclassification
Adjustment for
Gains Included in
Net Income Net of
Taxes of $538...... 1,000 -- -- -- -- -- -- --
--------
Total Unrealized
Losses on
Securities....... (90,851) -- -- -- -- -- -- (90,851)
--------
Comprehensive Income... $263,660 -- -- -- -- -- -- --
========
Issuance of 3,832,957
Treasury Common Shares
on Conversion of
348,944 Shares of
Preferred Stock....... (349) -- (160,635) -- 160,984 -- --
Issuance of 988,557
Treasury Common Shares
Under Stock Option and
Restricted Stock
Plans................. -- -- (16,806) -- 36,503 (1,332) --
Acquisition of
5,109,028 Common
Shares................ -- -- (82) -- (317,954) 198 --
Dividends Declared on
Preferred Stock--
$10.58 Per Share...... -- -- -- (6,297) -- -- --
Dividends Declared on
Common Stock--$0.94
Per Share............. -- -- -- (98,193) -- -- --
Net Change in Deferred
Compensation.......... -- -- -- -- -- 641 --
Income Tax Benefit for
Compensation Expense
for Tax Purposes in
Excess of Amounts
Recognized for
Financial Reporting
Purposes.............. -- -- 12,764 -- -- -- --
Other.................. -- -- 61 (16) -- -- --
----- -------- -------- ---------- --------- -------- --------
Balance, December 31,
1999.................. $ 336 $112,757 $457,097 $1,914,128 $(314,513) $(20,130) $(32,749)
===== ======== ======== ========== ========= ======== ========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
38
Consolidated Statements of Shareholders' Equity
($000's except share data)
Unrealized
Compre- Additional Treasury Deferred Securities
hensive Preferred Common Paid-in Retained Common Compen- Gains/(Losses)
Income Stock Stock Capital Earnings Stock sation Net of Taxes
-------- --------- -------- ---------- ---------- --------- -------- --------------
Balance, December 31,
1999.................. $ 336 $112,757 $457,097 $1,914,128 $(314,513) $(20,130) $(32,749)
Comprehensive Income:
Net Income............ $315,123 -- -- -- 315,123 -- -- --
Unrealized
Gains/(Losses) on
Securities:
Unrealized
Securities Gains
Net of Taxes of
$56,790............ 104,469 -- -- -- -- -- -- --
Reclassification
Adjustment For
Losses Included in
Net Income Net of
Taxes of $18,091... (33,593) -- -- -- -- -- -- --
--------
Total Unrealized
Gains on
Securities....... 70,876 -- -- -- -- -- -- 70,876
--------
Comprehensive Income... $385,999 -- -- -- -- -- -- --
========
Issuance of 270,531
Treasury Common Shares
Under Stock Option and
Restricted Stock
Plans................. -- -- (6,897) -- 12,496 (355) --
Acquisition of
3,239,686 Common
Shares................ -- -- (67) -- (156,455) 156 --
Dividends Declared on
Preferred Stock--
$11.83 Per Share...... -- -- -- (3,979) -- -- --
Dividends Declared on
Common Stock--$1.035
Per Share............. -- -- -- (107,400) -- -- --
Net Change in Deferred
Compensation.......... -- -- -- -- -- (201) --
Income Tax Benefit for
Compensation Expense
for Tax Purposes in
Excess of Amounts
Recognized for
Financial Reporting
Purposes.............. -- -- 2,486 -- -- -- --
Other.................. -- -- (407) (113) -- -- --
----- -------- -------- ---------- --------- -------- --------
Balance, December 31,
2000.................. $ 336 $112,757 $452,212 $2,117,759 $(458,472) $(20,530) $ 38,127
===== ======== ======== ========== ========= ======== ========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
39
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998 ($000's except share data)
Marshall & Ilsley Corporation ("M&I" or the "Corporation") is a bank and
savings and loan association holding company that provides financial services
to a wide variety of corporate, institutional, government and individual
customers. The Corporation's principal activities consist of banking and data
processing services. Banking services, lending and accepting deposits from
retail and commercial customers are provided through 19 banks located in
Wisconsin, one federally chartered thrift located in Nevada with a branch in
Florida and one bank in Arizona. Financial and data processing services and
software sales are provided through the Corporation's Metavante Corporation
subsidiary ("Metavante"), formerly known as M&I's Data Services Division, and
its two nonbank subsidiaries. Other financial services provided by M&I include
personal property lease financing; investment management and advisory
services; commercial and residential mortgage banking; venture capital and
financial advisory services; trust services to residents of Wisconsin, Arizona
and Florida; and brokerage and insurance services. M&I's largest affiliates
and principal operations are in Wisconsin; however, it has activities in other
markets, particularly in certain neighboring Midwestern states, and in
Arizona, Nevada and Florida.
1. Summary of Significant Accounting Policies
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those estimates.
Consolidation principles--The Consolidated Financial Statements include the
accounts of Marshall & Ilsley Corporation and all subsidiaries. All
significant intercompany balances and transactions are eliminated in
consolidation. Certain amounts in the 1999 and 1998 Consolidated Financial
Statements have been reclassified to conform to the 2000 presentation.
Cash and cash equivalents--For purposes of the Consolidated Financial
Statements, the Corporation defines cash equivalents as short-term investments
which have an original maturity of three months or less and are readily
convertible into cash.
Securities--Securities, when purchased, are designated as Trading,
Investment Securities Held to Maturity, or Investment Securities Available for
Sale and remain in that category until they are sold or mature. The specific
identification method is used in determining the cost of securities sold.
Investment Securities Held to Maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts. The Corporation
designates investment securities as held to maturity only when it has the
positive intent and ability to hold them to maturity. Investment Securities
Available for Sale are carried at fair value with fair value adjustments net
of the related income tax effects reported as a separate component of
shareholders' equity. Short-term Investments, other than Trading Securities,
are carried at cost, which approximates market value. Trading Securities are
carried at fair value, with adjustments to the carrying value reflected in the
Consolidated Statements of Income.
Loans and leases--Interest on loans, other than direct financing leases, is
recognized as income based on the loan principal outstanding during the
period. Unearned income on financing leases is recognized over the lease term
on a basis that results in an approximate level rate of return on the lease
investment. Loans are generally placed on nonaccrual status when they are past
due 90 days as to either interest or principal. When a loan is placed on
nonaccrual status, previously accrued and uncollected interest is charged to
interest income on loans. A nonaccrual loan may be restored to an accrual
basis when interest and principal payments are brought current and
collectibility of future payments is not in doubt.
40
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
The Corporation defers and amortizes fees and certain incremental direct
costs, primarily salary and employee benefit expenses, over the contractual
term of the loan or lease as an adjustment to the yield. The unamortized net
fees and costs are reported as part of the loan or lease balance outstanding.
Allowance for loan and lease losses--The allowance for loan and lease
losses is maintained at a level believed adequate by management to absorb
estimated probable losses in the loan and lease portfolio. Management's
determination of the adequacy of the allowance is based on a continual review
of the loan and lease portfolio, loan and lease loss experience, economic
conditions, growth and composition of the portfolio, and other relevant
factors. As a result of management's continual review, the allowance is
adjusted through provisions for loan and lease losses charged against income.
Receivable sales--The Corporation regularly sells receivables in
securitizations of automobile loans and retains interests in the securitized
receivables in the form of servicing rights, interest-only strips, interest
rate swaps and a cash reserve account. Gain or loss on sale of the receivables
depends in part on the carrying amount assigned to the assets sold and the
retained interests. The value of the retained interests is based on the
present value of future expected cash flows. Future expected cash flows
represent management's best estimates of the key assumptions--credit losses,
prepayment speeds, forward yield curves and discount rates commensurate with
the risks involved.
Premises and equipment--Land is recorded at cost. Premises and equipment
are recorded at cost and depreciated principally on the straight-line method
with annual rates varying from 10 to 50 years for buildings and 3 to 10 years
for equipment. Long-lived assets, which are considered impaired, are carried
at fair value and long-lived assets to be disposed of are carried at the lower
of the carrying amount or fair value less cost to sell. Maintenance and
repairs are charged to expense and betterments are capitalized.
Other real estate owned--Other real estate owned includes assets that have
been acquired in satisfaction of debts and bank branch premises held for sale.
Other real estate acquired in satisfaction of debts is recorded at fair value,
less estimated selling costs, and bank branch premises are recorded at the
lower of cost or fair value, less estimated selling costs, at the date of
transfer. Valuation adjustments required at the date of transfer for assets
acquired in satisfaction of debts are charged to the allowance for loan and
lease losses, whereas any valuation adjustments on premises are reported in
other expense. Subsequent to transfer, other real estate owned is carried at
the lower of cost or fair value, less estimated selling costs, based upon
periodic evaluations. Rental income from properties and gains on sales are
included in other income, and property expenses, which include carrying costs,
required valuation adjustments and losses on sales, are recorded in other
expense. At December 31, 2000 and 1999, other real estate amounted to $3,797
and $6,230, respectively.
Mortgage servicing--Fees related to the servicing of mortgage loans are
recorded as income when payments are received from mortgagors. Mortgage loans
held for sale to investors are carried at the lower of cost or market,
determined on an aggregate basis, based on outstanding firm commitments
received for such loans or on current market prices. Mortgage loans held for
sale amounted to $38,762 at December 31, 2000 and $15,956 at December 31,
1999.
Data processing services--Data processing and related revenues are
recognized as services performed based on amounts billable under the
contracts. Processing services performed that have not been billed to
customers are accrued. Revenue includes shipping and handling costs associated
with such income producing activities as prescribed by Emerging Issues Task
Force Issue No. 00-10, ("EITF 00-10"), "Accounting for Shipping and Handling
Fees and Costs".
Previously, amounts charged to customers for shipping and handling were
netted against the related cost for financial statement purposes. Consolidated
Statements of Income for the years ended December 31, 1999 and 1998 have been
restated in accordance with EITF 00-10.
41
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Revenues attributable to the licensing of software are generally recognized
upon delivery and performance of certain contractual obligations, provided
that no significant vendor obligations remain and collection of the resulting
receivable is deemed probable. Service revenues from customer maintenance fees
for ongoing customer support and product updates are recognized ratably over
the term of the maintenance period. Service revenues from training and
consulting are recognized when the services are performed. Conversion revenues
associated with the conversion of customers' processing systems to Metavante's
processing systems are deferred and amortized over the period of the related
processing contract, generally five years. See Note 2 regarding the change in
accounting for conversion revenues.
Direct costs associated with the production of computer software which will
be marketed or used in data processing operations are capitalized and
amortized on the straight-line method over the estimated economic life of the
product, generally four years. Such capitalized costs are periodically
evaluated for impairment and adjusted to net realizable value when impairment
is indicated. Direct costs associated with customer system conversions to the
data services operations are capitalized and amortized on the straight-line
method over the terms of the related servicing contract. Routine maintenance
of software products including maintenance required for the year 2000, design
costs and development costs incurred prior to establishment of a product's
technological feasibility for software to be sold, are expensed as incurred.
Net unamortized costs at December 31 were:
2000 1999
-------- -------
Software................................................. $ 98,666 $70,904
Conversions.............................................. 56,142 11,788
-------- -------
Total.................................................... $154,808 $82,692
======== =======
See Note 2 for the effect on conversion costs due to the change in
accounting.
Amortization expense was $40,731, $23,836 and $18,308, for 2000, 1999 and
1998, respectively.
Intangibles--Unamortized intangibles resulting from acquisitions consist of
goodwill, core deposit premiums, purchased data processing contract rights and
loan servicing rights. The Corporation recognizes as separate assets rights to
service loans when the loans are purchased or originated and sold with
servicing retained. Servicing rights are amortized over the periods during
which the corresponding loan servicing revenues are anticipated to be
generated. Purchased data processing contract rights represent the costs to
acquire the rights to data processing and software distribution. Such costs
are generally amortized over the average contract lives. Goodwill is amortized
on the straight-line basis over periods ranging from 10 to 25 years while core
deposit premiums are amortized principally on an accelerated basis over
periods ranging up to 10 years. The Corporation continually evaluates whether
later events and circumstances have occurred to indicate that the carrying
value of intangibles should be reduced for possible impairment and utilizes
estimates of undiscounted net income over the remaining life to measure
recoverability. A valuation allowance is established through a charge to
income to the extent that the fair value of any stratum of its loan servicing
rights are less than its carrying value.
The Corporation also has negative goodwill included in other liabilities,
the majority of which arose from an acquisition in 1992. Negative goodwill
amounted to $2,809 and $4,371 at December 31, 2000 and 1999, respectively. The
negative goodwill is being accreted on a straight-line basis over a period of
10 years and amounted to $1,562 in 2000, 1999, and 1998, respectively.
Long-term borrowings--The guaranteed preferred beneficial interest of the
Corporation's special purpose finance subsidiary which holds as its sole
asset, junior subordinated deferrable interest debentures issued by the
42
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Corporation, is classified as long-term borrowings and shown net of its
related discount. The distributions, including the related accretion of
discount, are classified as interest expense for purposes of the Consolidated
Financial Statements.
Interest risk management instruments--As a service to customers and as part
of its asset/liability management activities, the Corporation may enter into
interest rate futures, forwards, swaps, floors, caps and option contracts.
These derivative financial instruments are carried at fair value unless the
instrument qualifies for hedge accounting treatment. Fair value adjustments on
risk management instruments carried at fair value are reflected in other
income. Gains and losses realized on futures and forward contracts qualifying
as hedges are deferred and amortized over the terms of the related assets or
liabilities and are included as adjustments to interest income or expense.
Settlement on interest rate swaps and option contracts are recognized over the
lives of the agreements as adjustments to interest income or expense.
The hedge accounting method is applied to interest rate swaps that meet the
hedge criteria which is discussed below. Under this method, accrued income or
expense associated with the swap is recognized as a component of the interest
income or expense of the hedged asset or liability. Unrealized gains and
losses are recognized on a basis that is consistent with the method of
accounting for the hedged asset or liability. Unrealized gains or losses are
not recognized for hedged assets or liabilities carried at amortized cost.
Unrealized gains and losses on derivative financial instruments which hedge
investment securities available for sale are reported as a component of
shareholders' equity, net of applicable income tax effects.
The criteria to qualify an interest rate swap for the hedge accounting
method is as follows:
1. The swap must be designated as a hedge and reduce the interest rate
risk of the designated asset or liability.
2. The notional amount of the swap must be less than or equal to the
amortized cost of the asset or liability to be hedged.
3. The swap must achieve its intended objective of converting the yield
on the hedged asset or liability to the desired rate. This criteria is
assumed to have been met if the interest rate on the hedged asset or
liability is identical to the offsetting rate on the swap. If the two rates
are not identical, the correlation between the levels of the two rates
since inception of the swap must be measured to ensure that the swap is
meeting its intended objective.
If an interest risk management instrument is terminated or ceases to
qualify for the hedge accounting method, any realized or unrealized gain or
loss at that time is deferred and amortized over the remaining period of the
original hedge. Any subsequent realized or unrealized gains or losses on
instruments that no longer meet the hedge criteria are included in the
determination of net income. If the item being hedged is sold, any deferred or
unrealized gain or loss on the interest risk management instrument at the time
of sale is considered in the determination of the gain or loss on the sale. If
the interest risk management instrument is not terminated, it must be carried
at fair value on a prospective basis, with changes in fair value included in
the determination of periodic net income.
Cash flows from interest risk management instruments are reported in the
Consolidated Statements of Cash Flows as operating activities.
Foreign exchange contracts--Foreign exchange contracts include such
commitments as foreign currency spot, forward, future and option contracts.
Foreign exchange contracts and the premiums on options written or sold are
carried at market value, with realized and unrealized gains and losses
included in other income.
43
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Treasury stock--Treasury stock acquired is recorded at cost and is shown as
a reduction of shareholders' equity in the Consolidated Balance Sheets.
Treasury stock issued is valued based on average cost. The difference between
the consideration received upon issuance and the average cost is charged or
credited to additional paid-in capital.
New accounting pronouncements--
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of SFAS 133. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its fair
value. The Statement requires that changes in the derivatives fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative
instrument's gains and losses to offset related results on the hedged item
in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting.
Statement 133, as amended, is effective for fiscal years beginning after
June 15, 2000. Statement 133 cannot be applied retroactively. Statement 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts. With respect to hybrid
instruments, a company may elect to apply SFAS 133, as amended, to (1) all
hybrid contracts, (2) only those hybrid instruments that were issued,
acquired or substantively modified after December 31, 1997, or (3) only
those hybrid instruments that were issued, acquired or substantively
modified after December 31, 1998.
The Corporation adopted SFAS 133 effective January 1, 2001. Note 19,
Fair Value of Financial Instruments, presents the fair value of the
freestanding derivatives held by the Corporation. Statement 133 requires
that those derivative instruments be recognized in the Corporation's
Consolidated Balance Sheets as assets or liabilities at their fair value.
The Corporation has determined that those freestanding derivatives
previously designated as hedges will continue to be eligible for the
special hedge accounting prescribed by SFAS 133. The impact resulting from
the transition adjustment of adopting SFAS 133 will be a charge to
accumulated other comprehensive income (equity) of $10.2 million and an
decrease to net income of $0.4 million which will be presented as a
cumulative-type change in accounting. The Corporation does not expect that
SFAS 133 will result in a material difference to income compared to current
accounting.
In September, 2000, the FASB issued SFAS 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
replaces SFAS 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of
SFAS 125's provisions without reconsideration. SFAS 140 is generally
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The
disclosure requirements are effective for financial statements for fiscal
years ending after December 15, 2000. See Note 9. The Corporation does not
anticipate the adoption of SFAS 140 will materially impact its present
securitization activities.
2. Change in Method of Accounting
During the fourth quarter of 2000, the Corporation adopted the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101--Revenue
Recognition in Financial Statements (SAB 101). SAB 101 provides guidance on a
variety of revenue recognition matters. Under SAB 101, certain conversion
services provided by
44
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Metavante did not qualify as discrete earnings events. As a result, the
revenue and the cost of providing those services should be deferred and
recognized on a straight-line basis over the term of the total processing
contract. The cumulative change in accounting represents the impact of
applying the guidance to services provided in previous years and resulted in
the following:
Conversion revenue deferred...................................... $46,224
Conversion cost deferred......................................... 42,413
-------
Net revenue deferred............................................. 3,811
Income tax benefit............................................... 1,532
-------
Cumulative effect of change in accounting principles............. $ 2,279
=======
The cumulative effect of change in accounting principles was retroactively
recorded as of January 1, 2000, and Quarterly Financial Information
(Unaudited) has been restated to reflect application of the guidance contained
in SAB 101. The impact of restating quarterly financial information was not
material.
3. Earnings Per Share
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):
Year Ended December 31, 2000
------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
----------- -------------- ---------
Net income................................ $315,123
Convertible preferred dividends........... (3,979)
--------
Basic earnings per share
Income available to common shareholders. $311,144 104,027 $2.99
=====
Effect of dilutive securities
Convertible preferred stock............. 3,979 3,844
Stock option, restricted stock and
performance plans...................... -- 1,012
-------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions............... $315,123 108,883 $2.89
=====
Year Ended December 31, 1999
------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
----------- -------------- ---------
Net income................................ $354,511
Convertible preferred dividends........... (6,297)
--------
Basic earnings per share
Income available to common shareholders. $348,214 104,859 $3.32
=====
Effect of dilutive securities
Convertible preferred stock............. 6,297 6,543
Stock option, restricted stock and
performance plans...................... -- 1,603
-------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions............... $354,511 113,005 $3.14
=====
45
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Year Ended December 31, 1998
------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
----------- -------------- ---------
Net income................................ $301,323
Convertible preferred dividends........... (6,603)
--------
Basic earnings per share
Income available to common shareholders. $294,720 105,810 $2.79
=====
Effect of dilutive securities
Convertible preferred stock............. 6,603 7,677
Stock option, restricted stock and
performance plans...................... -- 1,753
-------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions............... $301,323 115,240 $2.61
=====
Options to purchase shares of common stock not included in the computation
of diluted net income per share because the options' exercise price was greater
than the average market price of the common shares for the year ended December
31, are as follows:
Grant Date Exercise Price 2000 1999 1998
---------- -------------- --------- ------ ---------
09/18/2000............................ 48.125 2,500 -- --
03/20/2000............................ 49.688 1,500 -- --
10/01/1997............................ 50.125 3,500 -- --
04/25/2000............................ 50.438 37,500 -- --
12/27/2000............................ 50.960 1,500 -- --
08/13/1998............................ 51.063 4,500 -- --
12/10/1998............................ 51.813 1,137,079 -- --
06/11/1998............................ 53.719 -- -- 8,000
04/03/2000............................ 55.313 1,500 -- --
12/11/1997............................ 57.000 865,576 -- 954,350
02/16/1999............................ 57.094 3,000 -- --
01/11/2000............................ 57.188 3,000 -- --
04/28/1998............................ 57.625 57,000 -- 59,000
02/01/1999............................ 59.125 1,500 -- --
10/04/1999............................ 60.000 3,000 -- --
10/14/1999............................ 60.188 6,000 -- --
10/11/1999............................ 60.531 4,500 -- --
12/16/1999............................ 61.500 1,430,458 -- --
12/14/1999............................ 62.188 500 -- --
08/12/1999............................ 62.250 27,500 -- --
04/27/1999............................ 67.000 59,500 60,000 --
10/29/1999............................ 67.125 2,000 2,000 --
05/20/1999............................ 67.875 2,500 2,500 --
05/10/1999............................ 70.063 1,500 1,500 --
--------- ------ ---------
Total options excluded from
earnings per share............... 3,657,113 66,000 1,021,350
========= ====== =========
46
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
4. Business Combinations
The Corporation has consummated the following business combinations during
the three years ended December 31, 2000:
Consideration
-------------------- Method of
Organization Date Consummated Cash Common Stock Accounting
------------ ----------------- ------- ------------ ----------
Cardpro Services, Inc......... October 1, 1999 $13,110 -- Purchase
Electronic Banking Services... April 1, 1999 66,153 -- Purchase
Moneyline Express............. December 31, 1998 6,750 -- Purchase
Advantage Bancorp, Inc........ April 1, 1998 -- 3,981,152 Pooling
On October 1, 1999, the Corporation through its Metavante subsidiary
acquired certain assets of Cardpro Services, Inc., a provider of plastic card
personalization and procurement services located in Illinois. The assets were
acquired for cash in a transaction accounted for using the purchase method of
accounting. Goodwill amounted to $2.9 million and is being amortized on a
straight-line basis over ten years. Additional payments, contingent upon
earnings, may be made through 2005. The total cumulative maximum payout over
the contingency period is $2.16 million. Contingency payments, if made, will
be charged to goodwill. There was no in-process research and development
acquired in this transaction.
On April 1, 1999, the Corporation, through its Metavante subsidiary,
completed the acquisition of the assets, operational processes and customer
relationships of the Electronic Banking Services business unit of ADP in a
cash transaction using the purchase method of accounting. The acquired
software products and outsourcing solutions are designed to provide businesses
with access to their banking information and transactions through a spectrum
of delivery methods. Goodwill amounted to $44.0 million and is being amortized
on a straight-line basis over fifteen years. There was no in-process research
and development acquired in this transaction.
Moneyline Express, Inc. ("Moneyline") specializes in electronic bill
payment. Moneyline provides consumer bill-payment processing to financial
institution customers including M&I's home-banking customers. On December 31,
1998, the Corporation, through its Metavante subsidiary, acquired certain
assets of Moneyline in a cash transaction accounted for as a purchase.
Goodwill recorded in this transaction amounted to $5.4 million and is being
amortized on a straight-line basis over fifteen years. There was no in-process
research and development acquired in this transaction.
The April 1, 1998 merger of Advantage Bancorp, Inc. ("Advantage") with and
into the Corporation was a tax-free reorganization accounted for as a pooling
of interests. In accordance with the terms of the merger, each share of
Advantage Common Stock was converted into a right to receive 1.2 shares of the
Corporation's Common Stock. In conjunction with this transaction the
Corporation recorded a merger/restructuring charge of $23.4 million ($16.3
million after-tax). During 1999, the remaining obligation associated with a
closed facility was satisfied and the merger/restructuring has been completed.
There were no material adjustments to the initial amount recorded.
5. Cash and Due from Banks
At December 31, 2000, $3,147 of cash and due from banks was restricted,
primarily due to requirements of the Federal Reserve System to maintain
certain reserve balances.
47
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
6. Securities
The book and market values of securities at December 31 were:
2000 1999
--------------------- ---------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Investment Securities Available
for Sale:
U.S. Treasury and government
agencies....................... $3,303,366 $3,342,952 $3,924,183 $3,852,731
States and political
subdivisions................... 143,883 151,041 111,882 109,971
Mortgage backed securities...... 342,385 342,171 179,677 176,780
Other........................... 887,702 899,558 192,643 217,714
---------- ---------- ---------- ----------
Total......................... $4,677,336 $4,735,722 $4,408,385 $4,357,196
========== ========== ========== ==========
Investment Securities Held to
Maturity:
U.S. Treasury and government
agencies....................... $ -- $ -- $ 9 $ 9
States and political
subdivisions................... 1,107,476 1,119,687 1,165,756 1,132,148
Other........................... 5,069 5,069 4,969 4,969
---------- ---------- ---------- ----------
Total......................... $1,112,545 $1,124,756 $1,170,734 $1,137,126
========== ========== ========== ==========
The unrealized gains and losses of securities at December 31 were:
2000 1999
--------------------- ---------------------
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ---------- ---------- ----------
Investment Securities Available
for Sale:
U.S. Treasury and government
agencies....................... $42,371 $2,785 $ 9,199 $80,651
States and political
subdivisions................... 7,158 -- 5 1,916
Mortgage backed securities...... 786 1,000 124 3,021
Other........................... 11,940 84 25,257 186
------- ------ ------- -------
Total......................... $62,255 $3,869 $34,585 $85,774
======= ====== ======= =======
Investment Securities Held to
Maturity:
States and political
subdivisions................... $17,850 $5,639 $ 3,477 $37,085
Other........................... -- -- -- --
------- ------ ------- -------
Total......................... $17,850 $5,639 $ 3,477 $37,085
======= ====== ======= =======
The book value and market value of securities by contractual maturity at
December 31, 2000 were:
Investment Securities Investment Securities
Available for Sale Held to Maturity
--------------------- ---------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Within one year..................... $ 998,525 $ 999,103 $ 47,268 $ 47,388
From one through five years......... 2,769,078 2,801,326 376,080 380,663
From five through ten years......... 504,663 514,198 217,545 223,018
After ten years..................... 405,070 421,095 471,652 473,687
---------- ---------- ---------- ----------
Total........................... $4,677,336 $4,735,722 $1,112,545 $1,124,756
========== ========== ========== ==========
The gross realized gains and losses amounted to $22,876 and $52,861 in
2000, $12,074 and $4,382 in 1999, and $31,421 and $638 in 1998, respectively.
Net securities gains of $19,530, $11,775, and $23,638 in 2000, 1999
48
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
and 1998, respectively, are included in the line Capital Markets Revenue in
the Consolidated Statements of Income.
At December 31, 2000, securities with a value of approximately $586,536
were pledged to secure public deposits, short-term borrowings, and for other
purposes required by law.
Approximately $511 million of adjustable rate mortgage loans (ARMs) were
transferred to investment securities available for sale during 2000. There
were no ARMs transferred during 1999. The Corporation has agreed to guarantee
the first 4% of the loan pools securitized through government agencies against
potential loss for transfers occurring prior to 2000. These are noncash
transactions for purposes of the Consolidated Statements of Cash Flows.
7. Loans and Leases
Loans and Leases at December 31 were:
2000 1999
----------- -----------
Commercial, financial and agricultural................. $ 5,289,537 $ 4,754,857
Real estate:
Construction......................................... 619,281 494,558
Residential mortgage................................. 5,049,557 4,941,450
Commercial mortgage.................................. 4,359,812 4,034,771
Personal............................................... 1,174,248 1,299,416
Lease financing........................................ 1,094,652 810,009
----------- -----------
Total loans and leases............................. $17,587,087 $16,335,061
=========== ===========
The Corporation's lending activities are concentrated primarily in the
Midwest. Approximately 5% of its portfolio consists of loans granted to
customers located in Arizona. The Corporation had $0.2 million in foreign
credits at December 31, 2000. The Corporation's loan portfolio consists of
business loans extending across many industry types, as well as loans to
individuals. As of December 31, 2000, total loans to any group of customers
engaged in similar activities and having similar economic characteristics, as
defined by standard industrial classifications, did not exceed 10% of total
loans.
The Corporation evaluates the credit risk of each customer on an individual
basis and, where deemed appropriate, collateral is obtained. Collateral varies
by individual loan customer but may include accounts receivable, inventory,
real estate, equipment, deposits, personal and government guaranties, and
general security agreements. Access to collateral is dependent upon the type
of collateral obtained. On an on-going basis, the Corporation monitors its
collateral and the collateral value related to the loan balance outstanding.
An analysis of loans outstanding to directors and officers, including their
related interests, of the Corporation and its significant subsidiaries for
2000 is presented in the following table. All of these loans were made in the
ordinary course of business with normal credit terms, including interest rates
and collateral. The beginning balance has been adjusted to reflect the
activity of newly-appointed directors and executive officers.
Loans to directors and executive officers:
Balance, beginning of year..................................... $ 285,178
New loans...................................................... 173,861
Repayments..................................................... (176,034)
---------
Balance, end of year........................................... $ 283,005
=========
49
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
8. Allowance for Loan and Lease Losses
An analysis of the allowance for loan and lease losses follows:
2000 1999 1998
-------- -------- --------
Balance, beginning of year................. $225,862 $226,052 $208,651
Allowance of loans acquired................ 1,270 -- --
Allowance of loans transferred to
Investment Securities..................... (1,022) -- --
Provision charged to expense............... 30,352 25,419 27,090
Charge-offs................................ (30,018) (32,557) (20,945)
Recoveries................................. 8,671 6,948 11,256
-------- -------- --------
Balance, end of year....................... $235,115 $225,862 $226,052
======== ======== ========
During 2000, the Corporation acquired approximately $341 million of home
equity loans and lines of credit. The allowance of loans acquired is
consistent with the estimate of probable losses as determined by the seller
financial institution.
As of December 31, 2000 and 1999, nonaccrual loans and leases totaled
$121,425 and $106,387, respectively.
At December 31, 2000 and 1999 the Corporation's recorded investment in
impaired loans and leases and the related valuation allowance are as follows:
2000 1999
-------------------- --------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
Total impaired loans and leases
(nonaccrual and renegotiated)....... $122,039 $107,095
Loans and leases excluded from
individual evaluation............... (34,167) (32,255)
-------- --------
Impaired loans evaluated............. $ 87,872 $ 74,840
======== ========
Valuation allowance required......... $ 5,727 $2,137 $ 3,533 $ 980
No valuation allowance required...... 82,145 -- 71,307 --
-------- ------ -------- -----
Impaired loans evaluated............. $ 87,872 $2,137 $ 74,840 $ 980
======== ====== ======== =====
The recorded investment in impaired loans for which no allowance is
required is net of applications of cash interest payments and net of previous
direct writedowns of $21,332 in 2000 and $13,862 in 1999 against the loan
balance outstanding. The required valuation allowance is included in the
allowance for loan and lease losses in the Consolidated Balance Sheets.
The average recorded investment in total impaired loans and leases for the
years ended December 31, 2000 and 1999 amounted to $118,832 and $116,835,
respectively.
Interest payments received on impaired loans and leases are recorded as
interest income unless collection of the remaining recorded investment is
doubtful at which time payments received are recorded as reductions of
principal. Interest income recognized on total impaired loans and leases
amounted to $6,410 in 2000, $6,253 in 1999, and $6,808 in 1998. The gross
income that would have been recognized had such loans and leases been
performing in accordance with their original terms would have been $11,415 in
2000, $9,980 in 1999, and $8,795 in 1998.
9. Sales of Receivables
During 2000, automobile loans were sold in securitization transactions.
Servicing responsibilities and subordinated interests were retained. The
Corporation receives annual servicing fees equal to 1% of the outstanding
balance and rights to future cash flows arising after investors in the
securitization trust have received
50
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
their contractual return and after certain administrative costs of operating
the trust. The investors and the securitization trust have no recourse to the
Corporation's other assets for failure of debtors to pay when due. The
Corporation's retained interests are subordinate to investor's interests.
Their value is subject to credit, prepayment and interest rate risks on the
transferred financial assets.
During 2000, the Corporation recognized gains and trading income of $3,155
on the securitization of automobile loans.
Key economic assumptions used in measuring the retained interests at the
date of securitization resulting from securitizations completed during the
year were as follows (rate per annum):
Prepayment speed...................... 28.4%
Weighted average life (in months)..... 20.8
Expected credit losses................ 0.16%
Residual cash flow discount rate...... 12.0%
Variable returns to transferees....... Forward one month LIBOR yield curve
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10 percent and 20
percent adverse changes in those assumptions are as follows ($ in millions):
Adverse Change
in Assumptions
--------------------------
10% 20%
--------------------------
Carrying amount retained interests--
automobile loans........................ $13.7
Weighted average life (in months)........ 21.4
Prepayment speed (per annum)............. 28.4%
Impact on fair value of adverse change... $ 0.2 $ 0.5
Expected credit losses (annual rate)..... 0.16%
Impact on fair value of adverse change... 0.0 0.1
Residual cash flows discount rate
(annual)................................ 12.0%
Impact on fair value of adverse change... 0.1 0.2
Interest rate returns to transferees..... Forward one month LIBOR yield curve
Impact on fair value of adverse change... 1.6 3.2
These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a 10 percent adverse
variation in assumptions generally can not be extrapolated because the
relationship of the change in assumption to the change in fair value may not
be linear. Also, the effect of an adverse variation in a particular assumption
on the fair value of the retained interest is calculated without changing any
other assumption. Realistically, changes in one factor may result in changes
in another (for example, increases in market interest rates may result in
lower prepayments and increased credit losses), which might magnify or
counteract the sensitivities.
Actual and projected credit losses represented 0.15% of total automobile
loans securitized in 2000.
The following table summarizes certain cash flows received from and paid to
the securitization trust for the year ended December 31, 2000:
Proceeds from new securitizations............................... $223,098
Servicing fees received......................................... 533
Net charge-offs................................................. (31)
Cash collateral account transfers, net.......................... (5,071)
Other cash flows received on retained interests, net............ 600
51
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
At December 31, 2000, securitized automobile loans and other automobile
loans managed together with them along with delinquency and credit loss
information consisted of the following:
Securitized Portfolio Total Managed
----------- --------- -------------
Loan balances........................ $197,306 $303,702 $501,008
Principal amounts of loans 60 days or
more past due....................... 104 1,034 1,138
Net credit losses.................... 31 651 682
10. Premises and Equipment
The composition of premises and equipment at December 31 was:
2000 1999
-------- --------
Land................................................... $ 47,893 $ 46,896
Buildings and leasehold improvements................... 347,566 325,889
Furniture and equipment................................ 458,242 421,028
-------- --------
853,701 793,813
Less accumulated depreciation.......................... 460,706 423,279
-------- --------
Total premises and equipment....................... $392,995 $370,534
======== ========
Depreciation expense was $62,018 in 2000, $62,845 in 1999, and $66,107 in
1998.
The Corporation leases certain of its facilities and equipment. Rent
expense under such operating leases was $56,555 in 2000, $50,200 in 1999, and
$39,338 in 1998.
The future minimum lease payments under operating leases that have initial
or remaining noncancellable lease terms in excess of one year for 2001 through
2005 are $24,013, $20,815, $18,100, $15,097, and $12,831, respectively.
11. Deposits
The composition of deposits at December 31 was:
2000 1999
----------- -----------
Noninterest bearing demand....................... $ 3,129,834 $ 2,830,960
Savings and NOW.................................. 7,486,094 6,966,423
CDs $100,000 and over............................ 2,663,050 1,885,933
Other time deposits.............................. 3,532,310 3,419,333
Foreign deposits................................. 2,437,339 1,332,533
----------- -----------
Total deposits............................... $19,248,627 $16,435,182
=========== ===========
At December 31, 2000, the scheduled maturities for CDs $100,000 and over,
other time deposits, and foreign deposits were:
2001........................................................... $6,556,858
2002........................................................... 1,126,562
2003........................................................... 193,583
2004........................................................... 166,670
2005 and thereafter............................................ 589,026
----------
$8,632,699
==========
52
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
12. Short-term Borrowings
Short-term borrowings at December 31 were:
2000 1999
---------- ----------
Funds purchased and security repurchase
agreements....................................... $1,092,723 $1,402,077
U.S. Treasury demand notes........................ 81,930 169,615
U.S. Treasury demand notes--special direct........ -- 1,874,714
Senior bank notes--Puttable Reset Securities...... 1,008,060 --
Senior bank notes................................. 99,988 549,825
Commercial paper.................................. 322,161 246,514
Current maturities of long-term borrowings........ 209,355 292,890
Other............................................. 514 4,620
---------- ----------
Total short-term borrowings................... $2,814,731 $4,540,255
========== ==========
U.S. Treasury demand notes--special direct represent secured borrowings of
three banking affiliates with a maximum term of 21 days.
In September, 1999, eight of the Corporation's affiliate banking
subsidiaries began offering bank notes. Bank notes may be senior or
subordinated in ranking, have maturities ranging from 7 days to 30 years at a
fixed or floating rate up to a maximum of $5.0 billion aggregate principal
amount outstanding at any time. The bank notes are offered through certain
designated agents and are offered and sold only to institutional investors.
The bank notes are sole obligations of the respective issuing banks and are
not obligations of or guaranteed by the Corporation.
The senior bank notes--Puttable Reset Securities ("PRS") will mature on
December 1, 2007. In certain circumstances, the notes will be put back to the
issuing bank at par prior to final maturity by the noteholders and the notes
are subject to exercise of a call option by certain broker/dealers. Beginning
December 3, 2001 and each December 1 thereafter until and including December
1, 2006, certain broker/dealers have the right to purchase all of the
outstanding notes from the noteholders at a price equal to 100% of the
principal amount of the notes and then remarket the notes at an interest rate
that was previously agreed upon. However, if the broker/ dealers do not
purchase the notes on the aforementioned date(s), each holder of outstanding
notes will be deemed to have put all of the holder's notes to the issuing bank
at a price equal to 100% of the principal amount of the notes and the notes
will be completely retired. The initial interest rate is 6.75% and, to the
extent the notes are purchased and remarketed, the interest rate will reset
each date the notes are remarketed at 6% plus an applicable credit spread as
defined in the offering circular. The call and put are considered clearly and
closely related for purposes of recognition and measurement under SFAS 133.
The amount of other senior bank notes outstanding at December 31, 2000,
represents the borrowing of one banking subsidiary at a fixed rate of 6.81%
and matures in March of 2001. Senior bank notes outstanding at December 31,
1999, represent the aggregate borrowing of four banking subsidiaries that
matured in September and October of 2000. Each bank note outstanding had a
fixed rate, which ranged from 6.07% to 6.36%. Interest is paid at maturity.
Unused lines of credit, primarily to support commercial paper borrowings,
were $75.0 million at December 31, 2000 and $ 70.0 million at December 31,
1999.
53
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
13. Long-term Borrowings
Long-term borrowings at December 31 were:
2000 1999
--------- --------
Corporation:
6.375% subordinated notes due in 2003................. $ 99,794 $ 99,722
Medium-term Series C, D and E notes................... 130,900 151,130
7.65% cumulative company-obligated mandatorily
redeemable capital trust pass-through securities..... 199,160 199,128
Other................................................. -- 9,628
Subsidiaries:
Borrowings from Federal Home Loan Bank (FHLB):
Floating rate advances.............................. 100,000 250,000
Fixed rate advances................................. 260,151 208,795
Senior bank notes..................................... 199,628 --
Subordinated bank note................................ 98,854 --
Nonrecourse notes..................................... 29,008 24,999
9.75% obligation under capital lease due through 2006. 3,083 3,472
Other................................................. 10,053 11,040
--------- --------
1,130,631 957,914
Less current maturities............................... 209,355 292,890
--------- --------
Total long-term borrowings........................ $ 921,276 $665,024
========= ========
The 6.375% subordinated notes are not redeemable prior to maturity and
qualify as Tier 2 or supplementary capital for regulatory capital purposes.
Interest is payable semiannually.
At December 31, 2000, there were $16,900 of medium-term Series C notes
outstanding. The medium-term Series C notes have fixed interest rates of 6.35%
to 6.75% and mature at various amounts and times through 2002. No additional
borrowings may occur under the Series C notes. At December 31, 2000, medium-
term Series D notes outstanding amounted to $89,300 with fixed interest rates
of 6.27% to 7.20% and $23,700 at three month LIBOR plus 26 basis points.
Series D notes mature at various times and amounts in 2001 through 2004. No
additional borrowings may occur under the Series D notes. In May, 2000, the
Corporation filed a registration statement with the Securities and Exchange
Commission to issue up to $500 million of medium-term Series E notes. These
issues may have maturities ranging from 9 months to 30 years and may be at
fixed or floating rates. At December 31, 2000, series E notes outstanding
amounted to $1,000 with fixed rates of 6.90% to 7.19%. Series E notes
outstanding mature in 2002 and 2005.
In December 1996, the Corporation formed M&I Capital Trust A (the "Trust")
and issued $200 million in liquidation or principal amount of cumulative
preferred capital securities. Holders of the capital securities are entitled
to receive cumulative cash distributions at an annual rate of 7.65% payable
semiannually.
Concurrently with the issuance of the capital securities, the Trust
invested the proceeds, together with the consideration paid by the Corporation
for the common interest in the Trust, in junior subordinated deferrable
interest debentures ("subordinated debt") issued by the Corporation. The
subordinated debt, which represents the sole asset of the Trust, bears
interest at an annual rate of 7.65% payable semiannually and matures on
December 1, 2026.
The subordinated debt is junior in right of payment to all present and
future senior indebtedness of the Corporation. The Corporation may redeem the
subordinated debt in whole or in part at any time on or after
54
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
December 1, 2006 at specified call premiums, and at par on or after December
1, 2016. In addition, in certain circumstances the subordinated debt may be
redeemed at par upon the occurrence of certain events. The Corporation's right
to redeem the subordinated debt is subject to regulatory approval.
The Corporation has the right, subject to certain conditions, to defer
payments of interest on the subordinated debt for extension periods, each
period not exceeding ten consecutive semiannual periods. As a consequence of
the Corporation's extension of the interest payment period, distributions on
the capital securities would be deferred. In the event the Corporation
exercises its right to extend an interest payment period, the Corporation is
prohibited from making dividend or any other equity distributions during such
extension period.
The payment of distributions, liquidation of the Trust or payment upon the
redemption of the capital securities are guaranteed by the Corporation.
The Corporation, as owner of the common interest in the Trust, has the
right at any time to terminate the Trust, subject to certain conditions. In
circumstances other than maturity or redemption of the subordinated debt, the
subordinated debt would be distributed to the holders of the Trust securities
on a pro rata basis in liquidation of the holders' interests in the Trust.
The capital securities qualify as Tier 1 capital for regulatory capital
purposes.
Fixed rate FHLB advances have interest rates, which range from 5.23% to
8.47% and mature at various times in 2001 through 2012. A portion of the
advances are subject to periodic principal payments. $28.5 million may be
repaid without penalty at six month intervals. All other advances are subject
to a prepayment penalty if they are repaid prior to maturity. Fixed rate
advances in the amount of $100 million are callable every three months
beginning in February 1998 upon five days notice.
The floating rate advances mature in 2001. The interest rate is reset
monthly based on the London Interbank Offered Rate (LIBOR).
The Corporation is required to maintain unencumbered first mortgage loans
and mortgage-related securities such that the outstanding balance of FHLB
advances does not exceed 60% of the book value of this collateral. In
addition, a portion of these advances are collaterized by all FHLB stock.
Senior Bank notes represent the aggregate borrowings of two banking
affiliates at December 31, 2000. The senior bank notes have a fixed interest
rate of 7.25% and pay interest semi-annually. The notes mature in 2002.
The subordinated bank note has a fixed rate of 7.875% and matures in 2010.
Interest is paid semi-annually. The subordinated bank note qualifies as Tier 2
or supplementary capital for regulatory capital purposes.
The nonrecourse notes are reported net of prepaid interest and represent
borrowings by the commercial leasing subsidiary from banks and other financial
institutions. These notes have a weighted average interest rate of 8.42% at
December 31, 2000 and are due in installments over varying periods through
2007. Lease financing receivables at least equal to the amount of the notes
are pledged as collateral.
Scheduled maturities of long-term borrowings are: $460,712, $120,210,
$5,156, and $3,549 for 2002 through 2005, respectively.
55
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
14. Shareholders' Equity
The Corporation has 5,000,000 shares of preferred stock authorized, of
which the Board of Directors has designated 2,000,000 shares as Series A
convertible, with a $100 value per share for conversion purposes. Series A is
nonvoting preferred stock. The same cash dividends will be paid on Series A as
would have been paid on the common stock exchanged for Series A. Except under
limited circumstances, the holder may not sell, transfer or otherwise dispose
of stock acquired by conversion, and then, only under prescribed conditions
and subject to the Corporation's right of first refusal.
The holder has the option to convert Series A into common stock at the same
ratio that the common stock was exchanged for Series A. During 1999, the
holder of Series A converted 348,944 shares of Series A into 3,832,957 shares
of common stock which were issued out of the Corporation's treasury common
stock. This is a noncash transaction for purposes of the Consolidated
Statements of Cash Flows. At December 31, 2000 and 1999, there were 336,370
shares of Series A outstanding which are convertible into 3,844,228 shares of
common stock.
The preferred stock is treated as a common stock equivalent in all
applicable per share calculations.
In 1998, the Corporation began sponsoring a deferred compensation plan for
its non-employee directors and the non-employee directors of its affiliates.
Participants may elect to have their deferred fees used to purchase M&I common
stock with dividend reinvestment. Such shares will be distributed to plan
participants in accordance with the plan provisions. At December 31, 2000 and
1999, 288,858 and 267,535 shares of M&I common stock, respectively, were held
in a grantor trust. The aggregate cost of such shares is included in Deferred
Compensation as a reduction of shareholders' equity in the Consolidated
Balance Sheets and amounted to $14,940 at December 31, 2000 and $13,525 at
December 31, 1999.
In conjunction with previous acquisitions, the Corporation assumed certain
deferred compensation and nonqualified retirement plans for former directors
and executive officers of acquired companies. At December 31, 2000 and 1999,
93,552 and 106,333 common shares of M&I Stock, respectively, were maintained
in a grantor trust with such shares to be distributed to plan participants in
accordance with the provisions of the plans. The aggregate cost of such shares
of $3,731 and $4,218 at December 31, 2000 and 1999, respectively, is included
in Deferred Compensation as a reduction of shareholders' equity in the
Consolidated Balance Sheets.
The Corporation issues treasury common stock in conjunction with exercises
of stock option and restricted stock, acquisitions, and conversions of
convertible securities. Treasury shares are acquired from restricted stock
forfeitures, shares tendered to cover tax withholding associated with stock
option exercises and vesting of key restricted stock, mature shares tendered
for stock option exercises in lieu of cash and open market purchases in
accordance with approved share repurchase programs. The Corporation is
currently authorized to repurchase up to 6.0 million shares per year. Shares
repurchased in accordance with the approved plan amounted to 3.2 million
shares with an aggregate cost of $156.3 million in 2000 and 5.1 million shares
with an aggregate cost of $317.1 million in 1999.
Federal banking regulatory agencies have established capital adequacy rules
which take into account risk attributable to balance sheet assets and off-
balance sheet activities. All banks and bank holding companies must meet a
minimum total risk-based capital ratio of 8%. Of the 8% required, at least
half must be comprised of core capital elements defined as Tier 1 capital. The
federal banking agencies also have adopted leverage capital guidelines which
banking organizations must meet. Under these guidelines, the most highly rated
banking organizations must meet a minimum leverage ratio of at least 3% Tier 1
capital to total assets, while lower rated banking organizations must maintain
a ratio of at least 4% to 5%. Failure to meet minimum capital requirements
56
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Consolidated Financial Statements.
At December 31, 2000 and 1999, the most recent notification from the
Federal Reserve Board categorized the Corporation as well capitalized under
the regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the
Corporation's category.
To be well capitalized under the regulatory framework, the Tier 1 capital
ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10%
and the leverage ratio must meet or exceed 5%.
The Corporation's risk-based capital and leverage ratios are as follows ($
in millions):
Risk-Based Capital Ratios
--------------------------------------------------
As of December 31, 2000 As of December 31, 1999
------------------------ ------------------------
Amount Ratio Amount Ratio
-------------- --------- -------------- ---------
Tier 1 capital............. $ 2,070.8 10.20% $ 1,992.8 11.11%
Tier 1 capital adequacy
minimum requirement....... 811.7 4.00 717.5 4.00
-------------- --------- -------------- ---------
Excess..................... $ 1,259.1 6.20% $ 1,275.3 7.11%
============== ========= ============== =========
Total capital.............. $ 2,444.6 12.05% $ 2,277.0 12.69%
Total capital adequacy
minimum requirement....... 1,623.5 8.00 1,435.0 8.00
-------------- --------- -------------- ---------
Excess..................... $ 821.1 4.05% $ 842.0 4.69%
============== ========= ============== =========
Risk-adjusted assets....... $ 20,293.6 $ 17,937.1
============== ==============
Leverage Ratio
--------------------------------------------------
As of December 31, 2000 As of December 31, 1999
------------------------ ------------------------
Amount Ratio Amount Ratio
-------------- --------- -------------- ---------
Tier 1 capital to adjusted
total assets.............. $ 2,070.8 8.25% $ 1,992.8 8.49%
Minimum leverage adequacy
requirement............... 752.9-1,254.8 3.00-5.00 704.4-1,174.1 3.00-5.00
-------------- --------- -------------- ---------
Excess..................... $1,317.9-816.0 5.25-3.25% $1,288.4-818.7 5.49-3.49%
============== ========= ============== =========
Adjusted average total
assets.................... $ 25,096.4 $ 23,481.0
============== ==============
All of the Corporation's banking subsidiaries' risk-based capital and
leverage ratios meet or exceed the defined minimum requirements, and have been
deemed well capitalized as of December 31, 2000 and 1999. The following table
presents the risk-based capital ratios for the Corporation's significant
banking subsidiaries:
Subsidiary Tier 1 Total Leverage
---------- ------ ----- --------
M&I Marshall & Ilsley Bank
December 31, 2000............................... 8.46% 10.42% 7.12%
December 31, 1999............................... 9.11 10.28 6.93
M&I Bank of Southern Wisconsin
December 31, 2000............................... 9.88 11.13 7.61
December 31, 1999............................... 9.35 10.60 7.20
Banking subsidiaries are restricted by banking regulations from making
dividend distributions above prescribed amounts and are limited in making
loans and advances to the Corporation. At December 31, 2000, the retained
earnings of subsidiaries available for distribution as dividends without
regulatory approval was approximately $337.6 million.
57
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
15. Income Taxes
Total income tax expense for the years ended December 31, 2000, 1999, and
1998 was allocated as follows:
2000 1999 1998
-------- -------- --------
Income before income taxes and cumulative
effect of changes in accounting
principles................................ $152,948 $173,428 $163,962
Cumulative effect of changes in
accounting principles................... (1,532) -- --
Shareholders' Equity:
Compensation expense for tax purposes
in excess of amounts recognized for
financial reporting purposes.......... (2,486) (12,764) (13,846)
Unrealized (losses)/gains on investment
securities available for sale......... 38,699 (51,376) 3,427
-------- -------- --------
$187,629 $109,288 $153,543
======== ======== ========
The current and deferred portions of the provision for income taxes were:
2000 1999 1998
-------- -------- --------
Current:
Federal.................................... $115,789 $126,358 $140,649
State...................................... 22,652 7,059 20,556
-------- -------- --------
138,441 133,417 161,205
Deferred:
Federal.................................... 20,618 31,860 3,565
State...................................... (6,111) 8,151 (808)
-------- -------- --------
14,507 40,011 2,757
-------- -------- --------
Total provision for income taxes......... $152,948 $173,428 $163,962
======== ======== ========
The following is a reconciliation between the amount of the provision for
income taxes and the amount of tax computed by applying the statutory Federal
income tax rate (35%):
2000 1999 1998
-------- -------- --------
Tax computed at statutory rates............ $164,623 $184,779 $162,850
Increase (decrease) in taxes resulting
from:
Federal tax-exempt income................ (19,428) (18,145) (15,836)
State income taxes, net of Federal tax
benefit................................. 10,824 10,050 13,082
Bank owned life insurance................ (9,837) (9,018) (1,362)
Other.................................... 6,766 5,762 5,228
-------- -------- --------
Total provision for income taxes....... $152,948 $173,428 $163,962
======== ======== ========
58
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
The tax effects of temporary differences that give rise to significant
elements of the deferred tax assets and deferred tax liabilities at December
31, are as follows:
2000 1999
-------- --------
Deferred tax assets:
Deferred compensation.............................. $ 29,356 $ 28,069
Allowance for loan and lease losses................ 93,507 83,945
Accrued postretirement benefits.................... 27,430 26,016
Conversion revenue deferred........................ 19,414 --
Unrealized gains and losses........................ -- 18,440
State NOLs and other............................... 90,311 66,353
-------- --------
Total deferred tax assets before valuation
allowance....................................... 260,018 222,823
Valuation allowance................................ (40,653) (25,727)
-------- --------
Net deferred tax assets.......................... 219,365 197,096
Deferred tax liabilities:
Lease revenue reporting............................ 134,373 99,518
Deferred expense, net of unearned income........... 61,647 30,596
Premises and equipment, principally due to
depreciation...................................... 12,216 13,064
Pension funding versus expense..................... -- 5,234
Purchase accounting adjustments.................... 8,750 14,841
Unrealized gains and losses........................ 20,259 --
Other.............................................. 38,859 38,237
-------- --------
Total deferred tax liabilities................... 276,104 201,490
-------- --------
Net deferred tax liability....................... $ 56,739 $ 4,394
======== ========
The valuation allowance has been provided to reduce certain state deferred
tax assets to the amount of tax benefit management believes it will more
likely than not realize. At December 31, 2000 and 1999, the Corporation
recognized $14,558 and $15,061, respectively of deferred tax assets related to
state net operating losses that may be offset against future taxable income
through 2015 and 2014, respectively. At December 31, 2000, the Corporation
believes there is at least a 50% chance that the carryforward may expire
unused. However, as time passes the Corporation will be able to better assess
the amount of tax benefit it will realize from using the carryforward.
Accordingly, the tax benefit of the carryforward has been offset by a
valuation allowance which is the primary cause of the change in valuation
allowance compared to December 31, 1999.
The amount of income tax expense or (benefit) related to net securities
gains or losses amounted to ($9,512), $3,292, and $11,136, in 2000, 1999, and
1998, respectively.
16. Stock Option and Restricted Stock Plans
The Corporation has Executive Stock Option and Restricted Stock Plans which
provide for the grant of nonqualified and incentive stock options, stock
appreciation rights and rights to purchase restricted shares to key employees
at prices ranging from not less than the par value of the common shares to the
market value of the shares at the date of grant.
The nonqualified and incentive stock option plans generally provide for the
grant of options to purchase shares of the Corporation's common stock for a
period of ten years from the date of grant. Options granted generally become
exercisable over a period of two or three years from the date of grant
however, options granted to Directors of the Corporation vest immediately and
options granted after 1996 provide accelerated or immediate vesting for grants
to individuals who meet certain age and years of service criteria at the date
of grant.
59
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Activity relating to nonqualified and incentive stock options was:
Weighted
Number of Option Price Average
Shares Per Share Exercise Price
---------- ------------ --------------
Shares under option at December
31, 1997....................... 6,099,602 $ 7.67-57.00 $26.19
Options granted................. 1,312,150 45.88-57.63 52.06
Options lapsed or surrendered... (59,003) 7.67-57.63 49.57
Options exercised............... (1,102,814) 7.67-40.13 15.01
---------- ------------ ------
Shares under option at December
31, 1998....................... 6,249,935 $ 7.67-57.63 $33.38
Options granted................. 1,606,725 57.09-70.06 61.72
Options lapsed or surrendered... (81,789) 10.92-62.25 52.15
Options exercised............... (967,557) 7.67-57.63 19.01
---------- ------------ ------
Shares under option at December
31, 1999....................... 6,807,314 $ 7.68-70.06 $41.88
Options granted................. 1,756,350 41.52-62.19 44.26
Options lapsed or surrendered... (185,613) 13.38-67.00 48.72
Options exercised............... (262,531) 7.68-57.00 19.95
---------- ------------ ------
Shares under option at December
31, 2000....................... 8,115,520 $11.56-70.06 $42.95
========== ============ ======
The range of options outstanding at December 31, 2000 were:
Weighted-Average Weighted-Average
Number of Shares Exercise Price Remaining
Price ----------------------- ----------------------- Contractual Life
Range Outstanding Exercisable Outstanding Exercisable (In Years)
----- ----------- ----------- ----------- ----------- ----------------
$ 7-18 624,779 624,779 $16.14 $16.14 1.1
19-29 1,504,181 1,504,181 22.36 22.36 3.8
30-40 615,097 615,097 32.08 32.08 6.0
41-52 2,902,429 1,542,779 47.22 50.13 9.0
53-61 945,076 928,449 57.09 57.05 7.0
Over $61 1,523,958 771,297 61.75 61.96 8.9
--------- --------- ------ ------ ---
8,115,520 5,986,582 $42.95 $40.35 7.0
========= ========= ====== ====== ===
Options exercisable at December 31, 1999 and 1998 were 5,031,588 and
4,759,535, respectively. The weighted average exercise price for options
exercisable was $35.96 at December 31, 1999 and $27.10 at December 31, 1998.
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
option 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.
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
60
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
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 it relates to the
Corporation is the amount of compensation cost attributable to the
Corporation's fixed stock option plans. 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.
As permitted by SFAS 123, the Corporation continues to measure compensation
cost for such plans using the accounting method prescribed by APBO 25.
Had compensation cost for the Corporation's 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 pro forma
amounts:
2000 1999 1998
-------- -------- --------
Net income:
As reported................................. $315,123 $354,511 $301,323
Pro forma................................... 300,793 341,355 292,227
Basic earnings per share:
As reported................................. $ 2.99 $ 3.32 $ 2.79
Pro forma................................... 2.85 3.20 2.70
Diluted earnings per share:
As reported................................. $ 2.89 $ 3.14 $ 2.61
Pro forma................................... 2.78 3.03 2.54
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes option pricing model. The resulting compensation cost
was amortized over the vesting period. No compensation cost associated with
such options was included in determining pro forma net income.
The grant date fair values and assumptions used to determine such value are
as follows:
2000 1999 1998
----------- ----------- -----------
Weighted-average grant date fair
value........................... $13.82 $19.54 $13.31
Assumptions:
Risk-free interest rates....... 5.14-6.79% 4.75-6.45% 4.53-5.88%
Expected volatility............ 24.36-31.33% 22.00-24.62% 18.38-22.01%
Expected term (in years)....... 6.0 6.0 6.0
Expected dividend yield........ 2.11% 1.56% 1.69%
Activity relating to the Corporation's Restricted Purchase Rights was:
December 31
------------------------
2000 1999 1998
------ ------- -------
Restricted stock purchase rights outstanding--
Beginning of Year............................ -- -- 10,500
Restricted stock purchase rights granted...... 8,000 21,000 20,250
Restricted stock purchase rights exercised.... (8,000) (21,000) (30,750)
------ ------- -------
Restricted stock purchase rights outstanding--
End of Year -- -- --
Weighted-average grant date market value...... $45.35 $ 64.41 $ 56.40
Aggregate compensation expense................ $ 726 $ 534 $ 556
Unamortized deferred compensation............. $1,859 $ 2,387 $ 1,964
61
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Restrictions on stock issued pursuant to the exercise of stock purchase
rights lapse within a seven year period. Accordingly, the compensation related
to issuance of the rights is deferred and amortized over the vesting period.
Unamortized deferred compensation is reflected as a reduction of shareholders'
equity.
Shares reserved for the granting of options and stock purchase rights at
December 31, 2000 were 5,208,605.
The Corporation also has a Long-term Incentive Plan. Under the plan,
performance units may be awarded from time to time. Once awarded, additional
performance units will be credited to each participant based on dividends paid
by the Corporation on its common stock. At the end of a designated vesting
period, participants will receive an amount equal to some percent (0%-275%) of
the initial performance units credited plus those additional units credited as
dividends based on the established performance criteria. Units awarded to
certain executives of the Corporation were 46,850 in 2000, 50,000 in 1999, and
103,250 in 1998. The vesting period is three years from the date the
performance units were awarded. At December 31, 2000, based on the performance
criteria, approximately $3,841 would be due to the participants under the 1998
and 1999 awards. In addition, the amount payable to participants under the
1997 award, which was fully vested, was $6,019 at December 31, 2000.
Compensation expense in 1998 associated with the accelerated vesting of
Advantage's stock options outstanding amounted to $10,372, which is included
in Merger/Restructuring in the Consolidated Statements of Income.
17. Employee Retirement and Health Plans
The Corporation has a defined contribution retirement plan and an incentive
savings plan for substantially all employees. The retirement plan provides for
a guaranteed contribution to eligible participants equal to 2% of
compensation. At the Corporation's option, a profit sharing amount may also be
contributed and may vary from year to year up to a maximum of 6% of eligible
compensation. Under the incentive savings plan, employee contributions up to
6% of eligible compensation are matched up to 50% by the Corporation based on
the Corporation's return on equity as defined by the plan. Total expense
relating to these plans was $40,016, $37,378, and $32,108 in 2000, 1999, and
1998, respectively.
The Corporation also has supplemental retirement plans to provide
retirement benefits to certain of its key executives. Total expense relating
to these plans amounted to $1,174 in 2000, $174 in 1999, and $1,393 in 1998.
Advantage sponsored a defined contribution ESOP plan for substantially all
of its employees. In conjunction with the merger, such plan was terminated and
distributions were made to the former participants in the plan. Advantage
sponsored a defined contribution 401(k) plan that merged with the
Corporation's incentive savings plan at October 1, 1998. Total expense
relating to these plans amounted to $127 in 1998. In addition, expense
associated with the termination of the ESOP in 1998 amounted to $1,246, which
is included in Merger/Restructuring in the Consolidated Statements of Income.
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
the plan was amended. Employees hired or retained from mergers after September
1, 1997 will be granted access to the Corporation's plan upon retirement
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. The plan is not funded.
62
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
The changes during the year of the accumulated postretirement benefit
obligation (APBO) for retiree health benefits are as follows:
2000 1999
------- -------
APBO, beginning of year................................ $46,867 $49,176
Service cost........................................... 2,593 3,044
Interest cost on APBO.................................. 3,601 3,381
Actuarial losses/(gains)............................... 9,042 (7,132)
Change due to acquisitions/divestitures................ -- 64
Benefits paid.......................................... (1,853) (1,666)
------- -------
APBO, end of year...................................... 60,250 46,867
Unrecognized net gain.................................. 2,432 12,215
Unrecognized prior service cost........................ 1,584 1,788
------- -------
Accrued postretirement benefit cost.................... $64,266 $60,870
======= =======
Weighted average discount rate used in determining
APBO.................................................. 8.00% 7.75%
======= =======
The assumed health care cost trend for 2001 was 6.25%. The rate was assumed
to decrease gradually to 5.00% in 2006 and remain at that level thereafter.
Net periodic postretirement benefit cost for the years ended December 31,
2000, 1999, and 1998 includes the following components:
2000 1999 1998
------ ------ ------
Service cost...................................... $2,593 $3,044 $3,475
Interest on APBO.................................. 3,601 3,381 3,804
Net amortization and deferral..................... (944) (157) (263)
------ ------ ------
$5,250 $6,268 $7,016
====== ====== ======
The assumed health care cost trend rate has a significant effect on the
amounts reported for the health care plans. A one percentage point change on
assumed health care cost trend rates would have the following effects:
One One
Percentage Point Percentage Point
Increase Decrease
---------------- ----------------
Effect on total of service and
interest cost components............. $1,103 $ (853)
Effect on postretirement benefit
obligation........................... 8,738 (7,176)
63
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
18. Financial Instruments with Off-Balance Sheet Risk
Financial instruments with off-balance sheet risk at December 31 were:
2000 1999
---------- ----------
Financial instruments whose amounts represent
credit risk:
Commitments to extend credit:
To commercial customers....................... $6,397,068 $6,042,131
To individuals................................ 1,778,514 1,529,355
Standby letters of credit, net of
participations................................. 606,539 536,466
Commercial letters of credit.................... 38,090 22,423
Mortgage loans sold with recourse............... 1,613 1,972
Financial instruments whose amounts exceed the
amount of credit risk:
Foreign exchange contracts:
Commitments to purchase foreign exchange...... 758,407 382,528
Commitments to deliver foreign exchange....... 760,593 383,118
Options written/purchased..................... -- 9,715
Interest risk management instruments:
Interest rate swaps............................. 1,530,000 1,007,000
Interest rate floors............................ 275,000 275,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates and may require payment of a
fee. The majority of the Corporation's commitments to extend credit generally
provide for the interest rate to be determined at the time the commitment is
utilized. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
The Corporation evaluates each customer's credit worthiness on an
individual basis. Collateral obtained, if any, upon extension of credit, is
based upon management's credit evaluation of the customer. Collateral
requirements and the ability to access collateral is generally similar to that
required on loans outstanding as discussed in Note 7.
Standby and commercial letters of credit are contingent commitments issued
by the Corporation to support the financial obligations of a customer to a
third party. Standby letters of credit are issued to support public and
private financing, and other financial or performance obligations of
customers. Commercial letters of credit are issued to support payment
obligations of a customer as buyer in a commercial contract for the purchase
of goods. Letters of credit have maturities which generally reflect the
maturities of the underlying obligations. The credit risk involved in issuing
letters of credit is the same as that involved in extending loans to
customers. If deemed necessary, the Corporation holds various forms of
collateral to support letters of credit.
Certain mortgage loans sold to government agencies have limited recourse
provisions.
Foreign exchange contracts are commitments to purchase or deliver foreign
currency at a specified exchange rate. The Corporation enters into foreign
exchange contracts primarily in connection with trading activities to enable
customers involved in international trade to hedge their exposure to foreign
currency fluctuations and to minimize the Corporation's own exposure to
foreign currency fluctuations resulting from the above. Foreign exchange
contracts include such commitments as foreign currency spot, forward, future
and, to a much lesser extent, option contracts. The risks in these
transactions arise from the ability of the counterparties to perform
64
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
under the terms of the contracts and the risk of trading in a volatile
commodity. The Corporation actively monitors all transactions and positions
against predetermined limits established on traders and types of currency to
ensure reasonable risk taking.
The Corporation's market risk from unfavorable movements in currency
exchange rates is minimized by essentially matching commitments to deliver
foreign currencies with commitments to purchase foreign currencies.
At December 31, 2000, the Corporation's foreign currency position resulting
from foreign exchange contracts by major currency was as follows ($000's US):
Commitments To Commitments To
Deliver Purchase
Foreign Exchange Foreign Exchange
---------------- ----------------
Currency
Euros.................................. $313,939 $314,028
English Pound Sterling................. 240,411 240,527
Japanese Yen........................... 96,967 95,434
Swiss Franc............................ 33,388 33,304
Deutsche Mark.......................... 25,150 24,502
Australian Dollars..................... 12,551 12,640
Danish Kronor.......................... 11,611 11,572
Canadian Dollars....................... 10,017 9,716
New Zealand Dollars.................... 5,536 5,536
Italian Lire........................... 3,865 3,970
Norwegian Kronor....................... 3,917 3,916
All Other.............................. 3,241 3,262
-------- --------
Total.............................. $760,593 $758,407
======== ========
Average amount of contracts to
deliver/purchase foreign exchange..... $600,581 $595,504
======== ========
These amounts do not represent the actual credit or market exposure.
Interest rate swaps are contractual agreements between counterparties to
exchange interest payment streams based on notional principal amounts over a
set period of time. Swap agreements normally involve the exchange of fixed and
floating rate payment obligations without the exchange of the underlying
principal amounts.
The Corporation enters into interest rate swaps to manage the interest rate
volatility associated with variable rate loans, brokered callable CDs,
brokered callable step-up CDs, retail callable time deposits and equity
indexed CDs at the Corporation's affiliate banks. The Corporation also enters
into interest swaps in connection with trading activities to enable customers
to manage their interest rate risks. The Corporation's market risk from
unfavorable movements in interest rates associated with trading swaps is
generally minimized by concurrently entering into offsetting positions with
nearly identical notional values, terms and indexes. Interest rate swaps held
for trading consisted of $63.0 million in notional amount of receive fixed and
$63.0 million in notional amount of pay fixed at December 31, 2000. By
comparison interest rate swaps held for trading consisted of $47.5 million in
notional amount of receive fixed and $47.5 million in notional amount of pay
fixed at December 31, 1999.
In addition to the above, as part of its auto securitization activities
which began in 2000, the Corporation has entered into a balance guaranteed
receive fixed pay floating interest rate swap which has been designated as
65
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
trading. The floating leg index is based on the cost of commercial paper used
to fund the purchase of the collateral. The receive index is fixed at 6.60%.
As of December 31, 2000 there was $202.9 million in notional value
outstanding. The fair value at December 31, 2000 was $1,877. Net trading gains
amounted to $2,111 in 2000.
At December 31, 2000, the Corporation's interest rate swap portfolio held
for other than trading consisted of the following ($ in millions):
Remaining Maturity in Years
-----------------------------------------------------
Over
Other 0-1 Yrs 1-2 Yrs 2-3 Yrs 3-4 Yrs 4-5 Yrs 5 Yrs Total
----- ------- ------- ------- ------- ------- ----- ------
Notional value.......... $ 171 $ 75 $ 219 $ 122 $ 145 $ 798 $1,530
Weighted average receive
rate................... 6.42% 5.38% 5.74% 5.75% 6.38% 6.95% 6.49%
Weighted average pay
rate (variable)........ 6.65% 6.70% 6.68% 6.57% 6.55% 6.68% 6.65%
The impact on net interest income from interest rate swaps was a negative
$2.64 million in 2000 and a positive $7.19 and $5.21 million in 1999 and 1998,
respectively.
Interest caps and floors are contracts with notional principal amounts that
require the seller, in exchange for a fee, to make payments to the purchaser
if a specified market rate rises/falls above/below the fixed ceiling or floor
or index rate on specified future dates.
The Corporation purchases standard interest rate caps and floors to manage
the interest volatility associated with variable rate loans and the risk
associated with embedded prepayment options in asset-backed available for sale
investment securities. At December 31, 2000, the Corporation's interest rate
floor portfolio held for other than trading consisted of the following ($ in
millions):
Weighted-Average
--------------------------
Notional Strike Remaining
Type Amount Rate Index Term (years)
---- -------- ------ ------ ------------
Floors................................ $275.0 6.386% 6.661% 5.38
No payments were received in 2000 or 1999. The effect of amortization of
the fee premiums were $833 in 2000, $227 in 1999 and $117 in 1998,
respectively. Unamortized premium associated with floors amounted to $4,569 at
December 31, 2000 and $5,402 at December 31, 1999.
The market risk due to potential fluctuations in interest rates is inherent
in swap, cap and floor agreements. Credit risk arises from the potential
failure of counterparties to perform in accordance with the terms of the
contracts. The Corporation maintains risk management policies that define
parameters of acceptable market risk within the framework of its overall
asset/liability management strategies and monitor and limit exposure to credit
risk. The Corporation believes its credit and settlement procedures serve to
minimize its exposure to credit risk. Credit exposure resulting from swaps,
caps and floors is represented by their fair value amounts, increased by an
estimate of potential adverse position exposure arising from changes over time
in interest rates, maturities and other relevant factors. At December 31, 2000
the estimated credit exposure arising from swaps and floors was approximately
$14.6 million.
66
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
19. Fair Value of Financial Instruments
The book values and estimated fair values for on and off-balance sheet
financial instruments as of December 31, 2000 and 1999 are reflected below:
Balance Sheet Financial Instruments ($ in millions)
2000 1999
------------------- -------------------
Book Fair Book Fair
Value Value Value Value
--------- --------- --------- ---------
Financial Assets:
Cash and short-term investments...... $ 908.2 $ 908.2 $ 886.7 $ 886.7
Trading securities................... 15.3 15.3 40.3 40.3
Investment securities available for
sale................................ 4,735.7 4,735.7 4,357.2 4,357.2
Investment securities held to
maturity............................ 1,112.5 1,124.8 1,170.7 1,137.1
Net loans and leases................. 17,352.0 17,877.1 16,109.2 16,201.0
Interest receivable.................. 211.1 211.1 146.4 146.4
Financial Liabilities:
Deposits............................. 19,248.6 19,496.3 16,435.2 16,496.0
Short-term borrowings................ 2,605.4 2,605.4 4,247.4 4,247.4
Long-term borrowings................. 1,130.6 1,252.8 957.9 961.8
Interest payable..................... 203.5 203.5 113.4 113.4
Where readily available, quoted market prices were utilized by the
Corporation. If quoted market prices were not available, fair values were
based on estimates using present value or other valuation techniques. These
techniques were significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The calculated fair value
estimates, therefore, cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized upon immediate settlement of
the instrument. SFAS 107 excludes certain financial instruments and all
nonfinancial assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the entire Corporation.
The following methods and assumptions were used in estimating the fair
value for financial instruments.
Cash and Short-term Investments
The carrying amounts reported for cash and short-term investments
approximates the fair values for those assets.
Trading and Investment Securities
Fair value is based on quoted market prices or dealer quotes where
available. See Note 6, Securities, for additional information. Estimated fair
values for residual interests in the form of interest-only strips from
automobile loan securitizations are based on discounted cash analysis as
described in Note 9.
Loans
Loans that reprice or mature within three months of December 31 were
assigned fair values based on their book value. Market values were used on
performing loans where available. Most remaining loan balances were assigned
fair values based on a discounted cash flow analysis. The discount rate was
based on the treasury yield curve, with rate adjustments for credit quality,
cost and profit factors.
67
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Deposits
The fair value for demand deposits or any interest bearing deposits with no
fixed maturity date was considered to be equal to the carrying value. Time
deposits with defined maturity dates were considered to have a fair value
equal to the book value if the maturity date was within three months of
December 31. The remaining time deposits were assigned fair values based on a
discounted cash flow analysis using discount rates which approximate interest
rates currently being offered on time deposits with comparable maturities.
Borrowings
Short-term borrowings are carried at cost which approximates fair value.
Long-term debt was generally valued using a discounted cash flow analysis with
a discount rate based on current incremental borrowing rates for similar types
of arrangements or, if not readily available, based on a build up approach
similar to that used for loans and deposits. Long-term borrowings include
their related current maturities.
Off-Balance Sheet Financial Instruments ($ in millions)
Fair values of loan commitments and letters of credit have been estimated
based on the equivalent fees, net of expenses, that would be charged for
similar contracts and customers at December 31.
2000 1999
---- ----
Loan commitments................................................ $6.8 $3.8
Letters of credit............................................... 4.8 4.2
Foreign exchange contracts are carried at market value (U.S. dollar
equivalent of the underlying contract). The fair value of options
written/purchased are based on the market value as of the reporting date.
2000 1999
------ ------
Commitments to purchase foreign exchange................... $758.4 $382.5
Commitments to deliver foreign exchange.................... 760.6 383.1
Options written/purchased.................................. -- 2.1
Interest rate swaps and floors are assigned a value based on a discounted
cash flow analysis utilizing the forward yield curve.
2000 1999
----- ------
Interest rate swaps........................................ $(6.2) $(31.9)
Interest rate floors....................................... 10.2 4.0
See Note 18 for additional information on off-balance sheet financial
instruments.
20. Business Segments
Generally, the Corporation organizes its segments based on legal entities.
Each entity offers a variety of products and services to meet the needs of its
customers and the particular market served. Each entity has its own president
and is separately managed subject to adherence to corporate policies. Discrete
financial information is reviewed by senior management to assess performance
on a monthly basis. Certain segments are combined and consolidated for
purposes of assessing financial performance.
The Metavante Corporation ("Metavante") subsidiary, formerly the Data
Services Division of the Corporation, was created on July 1, 2000. Certain
assets and liabilities of the Data Services Division which
68
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
represent the payment services or item processing line of business, were
transferred to the Banking segment. Current year information and all prior
periods presented have been restated for the transfer for the Banking segment
and the Data Services Segment.
The Corporation evaluates the profit or loss performance of its segments
based on operating income. Operating income is after-tax income excluding
nonrecurring charges and charges for services from the holding company.
Operating income for the banking entities and certain other entities also
excludes certain assets, liabilities, equity, revenues and expenses associated
with adjustments, charges or credits arising from acquisitions accounted for
as purchases (hereinafter called acquisition costs). The accounting policies
of the Corporation's segments are the same as those described in Note 1.
Intersegment revenues may be based on cost, current market prices or
negotiated prices between the providers and receivers of services.
Based on the way the Corporation organizes its segments, the Corporation
has determined that it has two reportable segments. Information with respect
to M&I's segments is as follows:
Banking
Banking represents the aggregation of nineteen separately chartered banks
located in Wisconsin, one bank in Arizona, one federally chartered thrift
headquartered in Nevada with a branch in Florida and an operational support
subsidiary which beginning in the third quarter of 2000, includes item
processing as previously discussed. Banking consists of accepting deposits,
making loans and providing other services such as cash management, foreign
exchange and correspondent banking to a variety of commercial and retail
customers. Products and services are provided through a variety of delivery
channels including traditional branches, supermarket branches, telephone
centers, ATMs and the Internet. In addition, the Corporation's larger
affiliate banks provide numerous services such as cash management, regional
credit, and centralized accounting to M&I's community banking affiliates.
Intrasegment revenues, expenses and assets have been eliminated in the
following information and prior periods have been restated to include the item
processing line of business. ($ in millions)
2000 1999 1998
--------- --------- ---------
Revenue:
Net interest income......... $ 679.4 $ 701.5 $ 664.8
Other revenues:
Unaffiliated customers.... 255.8 222.0 208.4
Affiliated customers...... 22.0 16.5 13.5
--------- --------- ---------
Total revenues.......... 957.2 940.0 886.7
Expenses:
Intersegment charges........ 61.9 61.3 65.5
Other operating expense..... 407.6 376.4 356.9
--------- --------- ---------
Total expenses.......... 469.5 437.7 422.4
Provision for loan and lease
losses....................... 29.9 25.0 26.1
Income tax expense............ 139.3 152.7 149.0
--------- --------- ---------
Operating income.............. $ 318.5 $ 324.6 $ 289.2
========= ========= =========
Identifiable assets........... $24,626.5 $22,860.4 $20,239.4
========= ========= =========
Net purchases of premises and
equipment.................... $ 28.9 $ 28.3 $ 31.8
========= ========= =========
Return on tangible equity..... 18.4% 20.1% 18.3%
========= ========= =========
69
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
The following tables present revenue and operating income by line of
business for Banking. This information is based on the Corporation's product
profitability measurement system and is an aggregation of the revenues and
expenses associated with the products and services within each line of
business. Net interest income is derived from the Corporation's internal funds
transfer pricing system, expenses are allocated based on available transaction
volumes and the provision for loan and lease losses is allocated based on
credit risk. Equity is assigned to products and services on a basis that
considers market, operational and reputation risk. ($ in millions)
Commercial Retail Investments Total
2000 Banking Banking and Other Banking
---- ---------- ------- ----------- -------
Revenue:
Net interest income............. $352.8 $344.6 $(18.0) $679.4
Other revenue................... 56.2 71.4 150.2 277.8
------ ------ ------ ------
Total revenues................ $409.0 $416.0 $132.2 $957.2
====== ====== ====== ======
Percent of total.................. 42.7% 43.5% 13.8% 100.0%
====== ====== ====== ======
Operating income.................. $159.5 $ 98.5 $ 60.5 $318.5
====== ====== ====== ======
Percent of total.................. 50.1% 30.9% 19.0% 100.0%
====== ====== ====== ======
Return on tangible equity......... 20.8% 19.1% 18.4%
====== ====== ======
1999
----
Revenue:
Net interest income............. $337.0 $323.2 $ 41.3 $701.5
Other revenue................... 54.6 60.0 123.9 238.5
------ ------ ------ ------
Total revenues................ $391.6 $383.2 $165.2 $940.0
====== ====== ====== ======
Percent of total.................. 41.6% 40.8% 17.6% 100.0%
====== ====== ====== ======
Operating income.................. $157.5 $ 94.1 $ 73.0 $324.6
====== ====== ====== ======
Percent of total.................. 48.5% 29.0% 22.5% 100.0%
====== ====== ====== ======
Return on tangible equity......... 23.3% 20.3% 20.1%
====== ====== ======
1998
----
Revenue:
Net interest income............. $303.8 $292.4 $ 68.6 $664.8
Other revenue................... 48.9 70.3 102.7 221.9
------ ------ ------ ------
Total revenues................ $352.7 $362.7 $171.3 $886.7
====== ====== ====== ======
Percent of total.................. 39.8% 40.9% 19.3% 100.0%
====== ====== ====== ======
Operating income.................. $148.5 $ 91.2 $ 49.5 $289.2
====== ====== ====== ======
Percent of total.................. 51.3% 31.6% 17.1% 100.0%
====== ====== ====== ======
Return on tangible equity......... 23.1% 20.1% 18.3%
====== ====== ======
Data Services
Data Services includes Metavante as well as its two nonbank subsidiaries.
Metavante provides data processing services, develops and sells software and
provides consulting services to M&I affiliates as well as banks, thrifts,
credit unions, trust companies and other financial services companies
throughout the world although its activities are primarily domestic. In
addition, Metavante derives revenue from the Corporation's
70
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
credit card merchant operations. The majority of Metavante's revenue is
derived from internal and external processing. Intrasegment revenues, expenses
and assets have been eliminated in the following information and prior periods
have been restated to exclude the item processing business. ($ in millions)
2000 1999 1998
------ ------ ------
Revenue:
Net interest expense........................... $ (2.8) $ (4.1) $ (2.4)
Other revenues:
Unaffiliated customers....................... 542.4 492.8 422.1
Affiliated customers......................... 64.1 56.1 59.4
------ ------ ------
Total revenues............................. 603.7 544.8 479.1
Expenses:
Intersegment charges........................... 8.5 3.5 2.2
Other operating expense........................ 499.7 469.4 416.2
------ ------ ------
Total expenses............................. 508.2 472.9 418.4
Income tax expense............................... 39.6 31.6 25.2
====== ====== ======
Operating income................................. $ 55.9 $ 40.3 $ 35.5
====== ====== ======
Identifiable assets.............................. $636.3 $475.1 $340.4
====== ====== ======
Net purchases of premises and equipment.......... $ 45.9 $ 35.2 $ 25.7
====== ====== ======
Return on equity................................. 21.5% 18.2% 19.6%
====== ====== ======
All Others
M&I's primary other operating segments includes Trust Services, Mortgage
Banking (residential and commercial), Capital Markets Group, Brokerage and
Insurance Services and Commercial Leasing. Trust Services provide investment
management and advisory services as well as personal, commercial and corporate
trust services in Wisconsin, Florida and Arizona. Capital Markets Group
provide venture capital and advisory services. Intrasegment revenues, expenses
and assets for the entities that comprise Trust Services and Capital Markets
Group have been eliminated in the following information. ($ in millions)
2000 1999 1998
------ ------ ------
Revenue:
Net interest income............................. $ 21.5 $ 22.8 $ 34.6
Other revenues:
Unaffiliated customers........................ 175.0 152.5 157.8
Affiliated customers.......................... 14.2 17.8 23.0
------ ------ ------
Total revenues.............................. 210.7 193.1 215.4
Expenses:
Intersegment charges............................ 28.2 26.2 28.3
Other operating expense......................... 105.5 101.6 104.9
------ ------ ------
Total expenses.............................. 133.7 127.8 133.2
Provision for loan and lease losses............... 0.5 0.4 1.0
Income tax expense................................ 30.3 25.5 31.9
====== ====== ======
Operating income.................................. $ 46.2 $ 39.4 $ 49.3
====== ====== ======
Identifiable assets............................... $633.1 $650.3 $647.9
====== ====== ======
Net purchases of premises and equipment........... $ 2.8 $ 2.3 $ 1.3
====== ====== ======
Return on tangible equity......................... 20.5% 18.9% 26.2%
====== ====== ======
71
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Total Revenues by type in All Others consist of the following:
2000 1999 1998
------ ------ ------
Trust Services....................................... $120.1 $103.6 $ 90.4
Residential Mortgage Banking......................... 25.8 33.5 48.6
Capital Markets...................................... 22.7 16.8 33.4
Brokerage and Insurance.............................. 22.1 20.2 18.1
Commercial Leasing................................... 10.3 10.9 13.7
Commercial Mortgage Banking.......................... 2.2 1.6 7.3
Others............................................... 7.5 6.5 3.9
------ ------ ------
Total.......................................... $210.7 $193.1 $215.4
====== ====== ======
Segment information reconciled to the Consolidated Financial Statements is
as follows ($ in millions):
2000 1999 1998
-------- -------- --------
Revenues:
Banking........................................ $ 957.2 $ 940.0 $ 886.7
Data Services.................................. 603.7 544.8 479.1
All Others..................................... 210.7 193.1 215.4
Corporate overhead............................. (20.9) (4.4) (4.9)
Acquisition costs.............................. 1.4 0.8 (10.3)
Nonrecurring securities losses................. (50.6) -- --
Intersegment eliminations...................... (100.1) (90.5) (95.4)
-------- -------- --------
Consolidated revenues............................ $1,601.4 $1,583.8 $1,470.6
======== ======== ========
Expenses:
Banking........................................ $ 469.5 $ 437.7 $ 422.4
Data Services.................................. 508.2 472.9 418.4
All Others..................................... 133.7 127.8 133.2
Corporate overhead............................. 53.2 60.0 49.5
Acquisition costs.............................. 19.5 22.6 26.7
Merger/restructuring........................... -- -- 23.4
Single Charter/IPO/Arm loan sales.............. 16.7 -- --
Intersegment eliminations...................... (100.1) (90.5) (95.4)
-------- -------- --------
Consolidated expenses............................ $1,100.7 $1,030.5 $ 978.2
======== ======== ========
Provision for loan and lease losses:
Banking........................................ $ 29.9 $ 25.0 $ 26.1
All Others..................................... 0.5 0.4 1.0
-------- -------- --------
Consolidated provision for loan and lease losses. $ 30.4 $ 25.4 $ 27.1
======== ======== ========
Income tax expense (benefit):
Banking........................................ $ 139.3 $ 152.7 $ 149.0
Data Services.................................. 39.6 31.6 25.2
All Others..................................... 30.3 25.5 31.9
Corporate overhead............................. (30.6) (32.3) (25.0)
Acquisition costs.............................. (2.6) (4.1) (10.0)
Merger/restructuring........................... -- -- (7.1)
Securities losses/Single charter/IPO/Arm loan
sales......................................... (23.1) -- --
-------- -------- --------
Consolidated income tax expense.................. $ 152.9 $ 173.4 $ 164.0
======== ======== ========
72
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Segment information reconciled to the Consolidated Financial Statements
(continued) ($ in millions)
2000 1999 1998
--------- --------- ---------
Net income (loss) before change in accounting:
Operating income:
Banking................................... $ 318.5 $ 324.6 $ 289.2
Data Services............................. 55.9 40.3 35.5
All Others................................ 46.2 39.4 49.3
Corporate overhead.......................... (43.5) (32.1) (29.4)
Acquisition costs........................... (15.5) (17.7) (27.0)
Merger/restructuring........................ -- -- (16.3)
Securities losses/Single charter/IPO/Arm
loan sales................................. (44.2) -- --
--------- --------- ---------
Consolidated net income before change in
accounting................................... $ 317.4 $ 354.5 $ 301.3
========= ========= =========
Assets:
Banking..................................... $24,626.5 $22,860.4 $20,239.4
Data Services............................... 636.3 475.1 340.4
All Others.................................. 633.1 650.3 647.9
Corporate overhead.......................... 241.7 174.6 196.7
Acquisition costs........................... 249.7 269.0 290.7
Intersegment eliminations................... (309.6) (59.7) (148.8)
--------- --------- ---------
Consolidated assets........................... $26,077.7 $24,369.7 $21,566.3
========= ========= =========
Depreciation and amortization:
Banking..................................... $ (20.9) $ 5.4 $ 23.6
Data Services............................... 86.6 73.8 63.2
All Others.................................. (18.7) (18.3) (15.7)
Corporate overhead.......................... 4.2 3.7 3.2
Acquisition costs........................... 18.0 21.6 37.1
--------- --------- ---------
Consolidated depreciation and amortization.... $ 69.2 $ 86.2 $ 111.4
========= ========= =========
Purchases of premises and equipment, net:
Banking..................................... $ 28.9 $ 28.3 $ 31.8
Data Services............................... 45.9 35.2 25.7
All Others.................................. 2.8 2.3 1.3
Corporate overhead.......................... 1.2 1.1 2.0
--------- --------- ---------
Consolidated purchases of premises and
equipment, net............................... $ 78.8 $ 66.9 $ 60.8
========= ========= =========
73
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
21. Condensed Financial Information--Parent Corporation Only
On July 1, 2000, the Corporation contributed certain assets and liabilities
of its Data Services division as well as its investment in two related nonbank
subsidiaries into a new subsidiary, Metavante, and contributed the remainder of
the division's assets and liabilities (consisting of the payment services or
item processing business) to its banking support subsidiary. These are noncash
transactions for purposes of the Condensed Statements of Cash Flows. The
Condensed Statements of Income reflect the operating activity of the Data
Services division through the six months ended June 30, 2000.
Condensed Balance Sheets
December 31
2000 1999
---------- ----------
Assets
Cash and cash equivalents................................ $ 145,480 $ 33,850
Data processing services receivables..................... -- 132,572
Commercial loans purchased from affiliates............... -- 75,000
Indebtedness of nonbank affiliates....................... 249,408 315,965
Investments in affiliates:
Banks.................................................. 2,062,316 1,848,189
Nonbanks............................................... 558,278 263,544
Premises and equipment, net.............................. 7,281 137,246
Other assets............................................. 115,222 281,899
---------- ----------
Total assets......................................... $3,137,985 $3,088,265
========== ==========
Liabilities and Shareholders' Equity
Commercial paper issued.................................. $ 322,161 $ 246,514
Other liabilities........................................ 137,595 259,031
Long-term borrowings:
7.65% Junior Subordinated Deferrable Interest
Debentures due to M&I Capital Trust A................. 205,346 205,314
Other.................................................. 230,694 260,480
---------- ----------
Total long-term borrowings........................... 436,040 465,794
---------- ----------
Total liabilities.................................... 895,796 971,339
Shareholders' equity..................................... 2,242,189 2,116,926
---------- ----------
Total liabilities and shareholders' equity........... $3,137,985 $3,088,265
========== ==========
Scheduled maturities of long-term borrowings are $67,950 in 2001, $48,450 in
2002, $113,000 in 2003, $1,000 in 2004, and $500 in 2005. See Note 13 for a
description of the junior subordinated debt due to M&I Capital Trust A.
74
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Condensed Statements of Income
Years Ended December 31
2000 1999 1998
-------- -------- --------
Income
Cash dividends:
Bank affiliates................................ $117,812 $172,920 $186,149
Nonbank affiliates............................. 22,961 49,729 67,114
Interest from affiliates......................... 30,320 22,530 19,019
Data processing income........................... 304,365 568,269 482,567
Service fees and other........................... 67,794 70,197 64,406
-------- -------- --------
Total income................................. 543,252 883,645 819,255
Expense
Interest......................................... 57,409 41,143 32,979
Salaries and employee benefits................... 186,075 322,399 274,929
Administrative and general....................... 128,653 215,039 217,469
Single Charter................................... 2,960 -- --
-------- -------- --------
Total expense................................ 375,097 578,581 525,377
Income before income taxes, cumulative effect of
changes in accounting principles and equity in
undistributed net income of affiliates.......... 168,155 305,064 293,878
Provisions for income taxes...................... 10,893 27,904 16,296
-------- -------- --------
Income before cumulative effect of changes in
accounting principles and equity in
undistributed net income of affiliates.......... 157,262 277,160 277,582
Cumulative effect of changes in accounting
principles, net of income taxes................. (2,279) -- --
-------- -------- --------
Income before equity in undistributed net income
of affiliates................................... 154,983 277,160 277,582
Equity in undistributed net income of affiliates,
net of dividends paid:
Banks.......................................... 113,368 103,114 44,611
Nonbanks....................................... 46,772 (25,763) (20,870)
-------- -------- --------
Net income................................... $315,123 $354,511 $301,323
======== ======== ========
75
Notes to Consolidated Financial Statements--(Continued)
December 31, 2000, 1999, and 1998 ($000's except share data)
Condensed Statements of Cash Flows
Years Ended December 31
2000 1999 1998
----------- ----------- -----------
Cash Flows From Operating Activities
Net income.............................. $ 315,123 $ 354,511 $ 301,323
Noncash items included in income:
Equity in undistributed net income of
affiliates........................... (160,140) (77,351) (23,741)
Depreciation and amortization......... 35,526 72,343 68,957
Merger/Restructuring.................. -- -- 11,615
Other................................. (26,682) (32,605) (57,085)
----------- ----------- -----------
Net cash provided by operating
activities............................. 163,827 316,898 301,069
Cash Flows From Investing Activities
Increases in indebtedness of
affiliates........................... (1,906,477) (1,356,937) (1,462,564)
Decreases in indebtedness of
affiliates........................... 2,125,433 1,294,864 1,409,058
Increases in investments in
affiliates........................... (36,177) (399) (5,434)
Net capital expenditures.............. (19,500) (36,739) (30,874)
Acquisitions accounted for as
purchases, net of cash equivalents
acquired and investments in joint
ventures............................. -- (84,408) (5,170)
Purchase of Bank-Owned Life Insurance. -- -- (32,625)
Other................................. (5,993) 1,135 14,416
----------- ----------- -----------
Net cash provided by (used) in investing
activities............................. 157,286 (182,484) (113,193)
Cash Flows From Financing Activities
Dividends paid........................ (111,379) (104,490) (97,241)
Proceeds from issuance of commercial
paper................................ 3,190,712 1,926,791 779,653
Principal payments on commercial
paper................................ (3,115,064) (1,740,439) (829,077)
Proceeds from issuance of long-term
debt................................. 1,000 75,200 --
Payments on long-term debt............ (23,561) (35,857) (13,913)
Purchase of common stock.............. (156,319) (317,149) (29,633)
Proceeds from exercise of stock
options.............................. 5,241 18,359 15,086
Other................................. (113) (19) (25)
----------- ----------- -----------
Net cash used in financing activities... (209,483) (177,604) (175,150)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 111,630 (43,190) 12,726
Cash and cash equivalents, beginning of
year................................... 33,850 77,040 64,314
----------- ----------- -----------
Cash and cash equivalents, end of year.. $ 145,480 $ 33,850 $ 77,040
=========== =========== ===========
76
Quarterly Financial Information (Unaudited)
Following is unaudited financial information for each of the calendar
quarters during the years ended December 31, 2000 and 1999. Quarterly
financial information for the year ended December 31, 2000, has been restated
for the change in accounting as discussed in Note 2 to the Consolidated
Financial Statements.
Quarter Ended
-----------------------------------
Dec. 31 Sept. 30 June 30 March 31
-------- -------- -------- --------
2000
Total Interest Income..................... $457,503 $443,265 $432,589 $414,625
Net Interest Income....................... 174,765 164,065 165,055 169,121
Provision for Loan and Lease Losses....... 8,979 5,938 9,616 5,819
Income before Income Taxes and Change in
Accounting............................... 125,104 74,634 133,882 136,730
Income before Change in Accounting........ 84,330 51,610 90,747 90,715
Change in Accounting, Net of Income Taxes. -- -- -- (2,279)
Net Income................................ 84,330 51,610 90,747 88,436
Net Income Per Share:*
Basic Before Change in Accounting....... $ 0.80 $ 0.49 $ 0.86 $ 0.86
Basic................................... 0.80 0.49 0.86 0.84
Diluted Before Change in Accounting..... 0.78 0.47 0.83 0.83
Diluted................................. 0.78 0.47 0.83 0.81
1999
Total Interest Income..................... $398,819 $380,477 $364,702 $352,586
Net Interest Income....................... 176,919 177,803 177,742 172,817
Provision for Loan and Lease Losses....... 10,938 4,797 4,811 4,873
Income before Income Taxes................ 130,038 135,379 133,513 129,009
Net Income................................ 90,626 90,836 87,518 85,531
Net Income Per Share:*
Basic................................... $ 0.84 $ 0.86 $ 0.82 $ 0.79
Diluted................................. 0.81 0.81 0.77 0.75
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Common Dividends Declared
First Quarter............................... $0.240 $0.220 $0.200 $0.185 $0.165
Second Quarter.............................. 0.265 0.240 0.220 0.200 0.185
Third Quarter............................... 0.265 0.240 0.220 0.200 0.185
Fourth Quarter.............................. 0.265 0.240 0.220 0.200 0.185
------ ------ ------ ------ ------
$1.035 $0.940 $0.860 $0.785 $0.720
====== ====== ====== ====== ======
--------
* May not add due to rounding
Price Range of Stock
(Low and High Close)
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
First Quarter
Low........................................ $43.88 $55.38 $53.25 $32.75 $24.63
High....................................... 60.44 59.25 59.50 40.25 26.25
Second Quarter
Low........................................ 41.52 54.75 50.44 35.06 24.88
High....................................... 55.31 71.94 61.63 42.50 28.13
Third Quarter
Low........................................ 43.56 55.88 44.00 40.88 25.50
High....................................... 51.63 69.75 59.00 52.63 30.13
Fourth Quarter
Low........................................ 38.63 57.81 40.50 50.06 30.00
High....................................... 51.49 69.31 58.44 62.13 35.38
77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of Marshall & Ilsley
Corporation:
We have audited the accompanying consolidated balance sheets of Marshall &
Ilsley Corporation (a Wisconsin corporation) and subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31, 2000,
1999 and 1998. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Marshall &
Ilsley Corporation and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for the years ended December
31, 2000, 1999 and 1998, in conformity with auditing principles generally
accepted in the United States.
As discussed in Note 2 to the Consolidated Financial Statements, effective
January 1, 2000, the Corporation changed its method of accounting for certain
conversion services.
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin,
January 12, 2001
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to M&I's definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 24, 2001, except for
information as to executive officers which is set forth in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to M&I's definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 24, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to M&I's definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 24, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to M&I's definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 24, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Consolidated Financial Statements:
Balance Sheets--December 31, 2000 and 1999
Statements of Income--years ended December 31, 2000, 1999 and 1998
Statements of Cash Flows--years ended December 31, 2000, 1999 and
1998
Statements of Shareholders' Equity--years ended December 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
Quarterly Financial Information (Unaudited)
Report of Independent Public Accountants
2. Financial Statement Schedules
All schedules are omitted because they are not required, not
applicable or the required information is contained elsewhere.
3. Exhibits
See Index to Exhibits of this Form 10-K which is incorporated herein
by reference.
(b) Reports on Form 8-K
On November 6, 2000, the Company reported Items 5 and 7 in a Current
Report on Form 8-K in connection with the withdrawal of the initial public
offering for its Metavante Corporation subsidiary. An Exhibit in the Form
8-K consists of a Press Release dated November 1, 2000. No financial
statements were required to be filed.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ J.B. Wigdale
By: _________________________________
J.B. Wigdale
Chairman of the Board
Date: March 5, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ J.B. Wigdale
________________________________________________
J.B. Wigdale
Chairman of the Board and a Director
(Chief Executive Officer) Date: March 5, 2001
/s/ D.J. Kuester
________________________________________________
D.J. Kuester
President and a Director
(Acting Chief Financial Officer) Date: March 5, 2001
/s/ P.R. Justiliano
___________________________________________
P.R. Justiliano
Senior Vice President and Corporate Controller
(Principal Accounting Officer) Date: March 5, 2001
Directors: Oscar C. Boldt, Wendell F. Bueche, Timothy E. Hoeksema, Burleigh E.
Jacobs, Ted D. Kellner, D.J. Kuester, Katharine C. Lyall, Don R.
O'Hare, San W. Orr, Jr., Peter M. Platten, III, Robert A. Schaefer,
Stuart W. Tisdale, George E. Wardeberg and J.B. Wigdale.
/s/ M.A. Hatfield Date: March 5, 2001
By: _________________________________
M.A. Hatfield
As Attorney-In-Fact*
--------
*Pursuant to authority granted by powers of attorney, copies of which are
filed herewith.
80
MARSHALL & ILSLEY CORPORATION
INDEX TO EXHIBITS
(Item 14(a)3)
ITEM
----
(3) (a) Restated Articles of Incorporation, as amended, incorporated by
reference to M&I's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, SEC File No. 1-15403
(b) By-laws, as amended, incorporated by reference to M&I's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000, SEC File
No. 1-15403
(4) (a) Indenture between M&I and Chemical Bank (as successor to
Manufacturers Hanover Trust Company) dated as of November 15, 1985
("Senior Indenture"), incorporated by reference to M&I's
Registration Statement on Form S-3 (Registration No. 33-21377), as
supplemented by the First Supplemental Indenture to the Senior
Indenture dated as of May 31, 1990, incorporated by reference to
M&I's Current Report on Form 8-K dated May 31, 1990, and as
supplemented by the Second Supplemental Indenture to the Senior
Indenture dated as of July 15, 1993, incorporated by reference to
M&I's Quarterly Report on Form 10-Q for the quarter ended June 30,
1993, SEC File No. 1-15403
(b) Form of Medium Term Notes, Series C, Series D and Series E issued
pursuant to the Senior Indenture, included in Exhibit 4(a)
(c) Indenture between M&I and Chemical Bank dated as of July 15, 1993
("Subordinated Indenture"), incorporated by reference to M&I's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993,
SEC File No. 1-15403
(d) Form of Subordinated Note issued pursuant to the Subordinated
Indenture, included in Exhibit 4(c)
(e) Designation of Rights and Preferences of holders of Series A
Preferred Stock, incorporated by reference to M&I's Current Report
on Form 8-K dated May 20, 1985, SEC File No. 1-15403
(f) Amended and Restated Declaration of Trust dated as of December 9,
1996 among Marshall & Ilsley Corporation, as Sponsor, The Chase
Manhattan Bank, as Institutional Trustee, Chase Manhattan Bank
Delaware, as Delaware Trustee, the Regular Trustees identified
thereon, and the holders from time to time of undivided interests
in the assets of the Trust, incorporated by reference to M&I's
Registration Statement on Form S-4 dated January 15, 1997, SEC Reg.
No. 333-19809
(g) Indenture, dated as of December 9, 1996, between Marshall & Ilsley
Corporation and The Chase Manhattan Bank, as Indenture Trustee,
incorporated by reference to M&I's Registration Statement on Form
S-4 dated January 15, 1997, SEC Reg. No. 333-19809
(h) First Supplemental Indenture, dated as of December 9, 1996, between
Marshall & Ilsley Corporation and The Chase Manhattan Bank, as
Indenture Trustee, incorporated by reference to M&I's Registration
Statement on Form S-4 dated January 15, 1997, SEC Reg. No. 333-
19809
(i) Form of Capital Security Certificate for M&I Capital Trust A,
included as Exhibit A-2 to Exhibit 4(h)
(j) Capital Securities Guarantee Agreement, dated as of December 9,
1996, between Marshall & Ilsley Corporation and The Chase Manhattan
Bank, as Guarantee Trustee, incorporated by reference to M&I's
Registration Statement on Form S-4 dated January 15, 1997, SEC Reg.
No. 333-19809
(k) Registration Rights Agreement dated December 2, 1996, by and among
Marshall & Ilsley Corporation, M&I Capital Trust A and Salomon
Brothers Inc, as Representative of the Initial Purchasers,
incorporated by reference to M&I's Registration Statement on Form
S-4 dated January 15, 1997, SEC Reg. No. 333-19809
(l) Form of Subordinated Debt Security, included as part of Exhibit
4(j)
(m) Issuing and Paying Agency Agreement, dated as of September 17,
1999, between M&I Marshall & Ilsley Bank, M&I Bank of Southern
Wisconsin, M&I Bank Northeast, M&I Bank Fox Valley, M&I Thunderbird
Bank, M&I Bank South, M&I Mid-State Bank and M&I Community State
Bank and The Chase Manhattan Bank
(10) (a) 1983 Executive Stock Option and Restricted Stock Plan, as amended,
incorporated by reference to M&I's Annual Report on Form 10-K for
the fiscal year ended December 31, 1987, SEC File No. 1-15403*
(b) 1985 Executive Stock Option and Restricted Stock Plan, as amended,
incorporated by reference to M&I's Annual Report on Form 10-K for
the fiscal year ended December 31, 1987, SEC File No. 1-15403*
(c) M&I Marshall & Ilsley Bank Supplementary Retirement Benefits Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for
the fiscal year ended December 31, 1983, SEC File No. 1-15403*
(d) Deferred Compensation Trust between Marshall & Ilsley Corporation
and Bessemer Trust Company dated April 28, 1987, as amended,
incorporated by reference to M&I's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988, SEC File No. 1-15403*
(e) 1989 Executive Stock Option and Restricted Stock Plan, incorporated
by reference to M&I's Annual Report on Form 10-K for the fiscal
year ended December 31, 1988, as amended by M&I's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990, SEC File No.
1-15403*
(f) Marshall & Ilsley Corporation Supplemental Retirement Benefits
Plan, incorporated by reference to M&I's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, SEC File No. 1-15403*
(g) Marshall & Ilsley Trust Company Supplemental Retirement Benefits
Plan, incorporated by reference to M&I's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, SEC File No. 1-15403*
(h) Marshall & Ilsley Corporation 1993 Executive Stock Option Plan, as
amended, incorporated by reference to M&I's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, SEC File No. 1-
15403*
(i) Marshall & Ilsley Corporation 1995 Directors Stock Option Plan,
incorporated by reference to M&I's Proxy Statement for the 1995
Annual Meeting of Shareholders, SEC File No. 1-15403*
(j) Marshall & Ilsley Corporation Assumption Agreement dated May 31,
1994 assuming rights, obligations and interests of Valley
Bancorporation under various stock option plans, incorporated by
reference to M&I's Registration Statement on Form S-8 (Reg. No. 33-
53897)*
2
(k) Valley Bancorporation 1992 Outside Directors' Stock Option Plan,
incorporated by reference to the Valley 1992 Proxy Statement*
(l) Employment agreement between M&I and Mr. Peter M. Platten, III,
incorporated by reference to M&I's Registration Statement on Form
S-4 (Reg. No. 33-51753)*
(m) Letter agreement dated January 25, 1994 between Valley
Bancorporation and Mr. Peter M. Platten, III incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, SEC File No. 1-15403*
(n) Marshall & Ilsley Corporation 1997 Executive Stock Option and
Restricted Stock Plan, incorporated by reference to M&I's Proxy
Statement for the 1997 Annual Meeting of Shareholders*
(o) Marshall & Ilsley Corporation Executive Deferred Compensation Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, SEC File No. 1-15403*
(p) Deferred Compensation Trust II between Marshall & Ilsley
Corporation and Marshall & Ilsley Trust Company, incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, SEC File No. 1-15403*
(q) Marshall & Ilsley Corporation Annual Executive Incentive
Compensation Plan, incorporated by reference to M&I's Proxy
Statement for the 1997 Annual Meeting of Shareholders*
(r) Marshall & Ilsley Corporation Amended and Restated Supplementary
Retirement Benefits Plan, incorporated by reference to M&I's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996,
SEC File No. 1-15403*
(s) Security Capital Corporation 1993 Incentive Stock Option Plan,
incorporated by reference to M&I's Registration Statement on Form
S-8 (Reg. No. 333-36909)*
(t) Security Bank S.S.B. Deferred Compensation Plans for Key Executive
Officers and Directors, incorporated by reference to Security
Capital Corporation's Registration Statement on Form S-1 (Reg. No.
33-68982)*
(u) Security Bank S.S.B. Supplemental Pension Plan, incorporated by
reference to Security Capital Corporation's Registration Statement
on Form S-1 (Reg. No. 33-68982)*
(v) Directors Deferred Compensation Plan, incorporated by reference to
M&I's Proxy Statement for the 1998 Annual Meeting of Shareholders*
(w) Marshall & Ilsley Corporation 1994 Long-Term Incentive Plan for
Executives, as amended, incorporated by reference to M&I's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997,
SEC File No. 1-15403*
(x) Marshall & Ilsley Corporation Amended and Restated Executive
Deferred Compensation Plan, incorporated by reference to M&I's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999, SEC File No. 1-15403*
(y) Marshall & Ilsley Corporation Amended and Restated 1997 Executive
Stock Option and Restricted Stock Plan, incorporated by reference
to M&I's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999, SEC File No. 1-15403*
(z) Marshall & Ilsley Corporation Amended and Restated 1994 Long-Term
Incentive Plan for Executives, incorporated by reference to M&I's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999, SEC File No. 1-15403*
3
(aa) Marshall & Ilsley Corporation Amended and Restated Annual Executive
Compensation Plan, incorporated by reference to M&I's Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
1999, SEC File No. 1-15403*
(bb) Marshall & Ilsley Corporation 2000 Executive Stock Option and
Restricted Stock Plan, incorporated by reference to M&I's Proxy
Statement for the 2000 Annual Meeting of Shareholders*
(cc) Early Retirement and Consulting Agreements dated as of September
18, 2000 between Marshall & Ilsley Corporation and G.H.
Gunnlaugsson, incorporated by reference to M&I's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000, SEC File No.
1-15403*
(dd) Form of Change of Control Agreements between M&I and Messrs.
Wigdale, Kuester, Bolger and Delgadillo*
(ee) Change of Control Agreement, dated August 12, 1999, between M&I and
Mr. Hatfield*
(ff) Form of Change of Control Agreements between M&I and Ms. Justiliano
and Messrs. O'Neill, Renard, Roberts, Root, Sherman, Williams and
Wilson*
(gg) Amended and Restated Marshall & Ilsley Corporation Nonqualified
Retirement Benefit Plan*
(11) Computation of Net Income Per Common Share, incorporated by reference to
Note 3 of Notes to Consolidated Financial Statements included in Item 8,
Consolidated Financial Statements.
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries
(23) Consent of Arthur Andersen LLP
(24) Powers of Attorney
M&I will provide a copy of any instrument defining the rights of holders of
long-term debt to the Commission upon request.
-------------
* Management contract or compensatory plan or arrangement.
4