1
============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-15403
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
770 North Water Street
Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-7801
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class October 31, 2003
----- ----------------
Common Stock, $1.00 Par Value 226,438,414
============================================================================
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
September 30, December 31, September 30,
2003 2002 2002
------------- ------------- -------------
Assets
- ------
Cash and cash equivalents:
Cash and due from banks $ 866,337 $ 1,012,090 $ 886,035
Federal funds sold and security resale agreements 16,370 30,117 15,964
Money market funds 110,937 104,325 206,440
------------- ------------- -------------
Total cash and cash equivalents 993,644 1,146,532 1,108,439
Investment securities:
Trading securities, at market value 40,165 21,252 27,484
Short-term investments, at cost which
approximates market value 85,253 93,851 50,755
Available for sale at market value 4,626,406 4,266,372 3,821,691
Held to maturity at amortized cost,
market value $923,052 ($993,937 December 31,
and $1,296,782 September 30, 2002) 871,018 942,819 1,230,989
------------- ------------- -------------
Total investment securities 5,622,842 5,324,294 5,130,919
Mortgage loans held for sale 42,820 311,077 265,671
Loans and leases
Loans and leases, net of unearned income 24,592,476 23,597,769 21,171,230
Less: Allowance for loan and lease losses 348,100 338,409 300,628
------------- ------------- -------------
Net loans and leases 24,244,376 23,259,360 20,870,602
Premises and equipment 435,379 442,395 408,944
Goodwill and other intangibles 1,082,395 1,088,804 746,192
Accrued interest and other assets 1,327,806 1,302,180 1,546,768
------------- ------------- -------------
Total Assets $ 33,749,262 $ 32,874,642 $ 30,077,535
============= ============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 4,682,267 $ 4,461,880 $ 3,940,870
Interest bearing 17,626,670 15,931,826 13,728,288
------------- ------------- -------------
Total deposits 22,308,937 20,393,706 17,669,158
Funds purchased and security repurchase agreements 2,449,867 946,583 1,013,256
Other short-term borrowings 1,916,617 5,146,784 5,579,981
Accrued expenses and other liabilities 1,042,401 1,067,120 918,839
Long-term borrowings 2,694,281 2,283,781 2,174,739
------------- ------------- -------------
Total liabilities 30,412,103 29,837,974 27,355,973
Shareholders' equity:
- ---------------------
Series A convertible preferred stock, $1.00 par value;
336,370 shares issued September 30, 2002 -- -- 336
Common stock, $1.00 par value; 240,832,522 shares issued 240,833 240,833 240,833
Additional paid-in capital 558,453 569,162 751,991
Retained earnings 2,960,574 2,675,148 2,586,191
Accumulated other comprehensive income,
net of related taxes (6,530) (44,427) (30,404)
Less: Treasury common stock, at cost: 14,766,946 shares
(14,599,565 December 31, and
30,815,860 September 30, 2002) 394,922 381,878 806,014
Deferred compensation 21,249 22,170 21,371
------------- ------------- -------------
Total shareholders' equity 3,337,159 3,036,668 2,721,562
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 33,749,262 $ 32,874,642 $ 30,077,535
============= ============= =============
See notes to financial statements.
3
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended September 30,
--------------------------------
2003 2002
------------- -------------
Interest income
Loans and leases $ 322,953 $ 325,954
Investment securities:
Taxable 33,323 49,826
Exempt from federal income taxes 14,380 15,069
Trading securities 66 77
Short-term investments 518 1,847
------------- -------------
Total interest income 371,240 392,773
Interest expense
Deposits 52,276 69,601
Short-term borrowings 19,643 39,711
Long-term borrowings 40,653 30,660
------------- -------------
Total interest expense 112,572 139,972
------------- -------------
Net interest income 258,668 252,801
Provision for loan and lease losses 7,852 18,842
------------- -------------
Net interest income after provision for loan and lease losses 250,816 233,959
Other income
Data processing services:
e-Finance solutions 41,061 36,989
Financial technology solutions 125,229 116,932
------------- -------------
Total data processing services 166,290 153,921
Item processing 11,194 9,792
Trust services 32,029 28,966
Service charges on deposits 25,402 24,921
Gains on sale of mortgage loans 19,356 10,412
Other mortgage banking revenue 4,847 3,931
Net investment securities gains (losses) 16,741 (4,282)
Life insurance revenue 7,439 7,463
Other 41,740 37,417
------------- -------------
Total other income 325,038 272,541
Other expense
Salaries and employee benefits 199,387 187,173
Net occupancy 12,298 20,228
Equipment 27,978 29,205
Software expenses 11,693 10,514
Processing charges 13,239 11,085
Supplies and printing 5,351 5,085
Professional services 11,072 9,048
Shipping and handling 12,495 11,962
Amortization of intangibles 3,389 7,740
Other 113,113 34,534
------------- -------------
Total other expense 410,015 326,574
------------- -------------
Income before income taxes 165,839 179,926
Provision for income taxes 25,540 60,690
------------- -------------
Net income $ 140,299 $ 119,236
============= =============
Net income per common share
Basic $ 0.62 $ 0.56
Diluted 0.61 0.54
Dividends paid per common share $ 0.180 $ 0.160
Weighted average common shares outstanding:
Basic 226,724 210,053
Diluted 228,935 219,578
See notes to financial statements.
4
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------- -------------
Interest income
Loans and leases $ 984,147 $ 957,510
Investment securities:
Taxable 120,395 150,210
Exempt from federal income taxes 43,619 45,602
Trading securities 188 259
Short-term investments 1,959 9,742
------------- -------------
Total interest income 1,150,308 1,163,323
Interest expense
Deposits 175,377 213,919
Short-term borrowings 62,667 116,370
Long-term borrowings 125,168 89,958
------------- -------------
Total interest expense 363,212 420,247
------------- -------------
Net interest income 787,096 743,076
Provision for loan and lease losses 53,186 51,018
------------- -------------
Net interest income after provision for loan and lease losses 733,910 692,058
Other income
Data processing services:
e-Finance solutions 121,719 104,763
Financial technology solutions 359,649 340,470
Other -- 2
------------- -------------
Total data processing services 481,368 445,235
Item processing 31,038 29,198
Trust services 93,252 91,303
Service charges on deposits 76,831 75,719
Gains on sale of mortgage loans 49,671 20,967
Other mortgage banking revenue 13,824 10,117
Net investment securities gains (losses) 15,694 (5,148)
Life insurance revenue 23,200 22,201
Other 125,331 106,105
------------- -------------
Total other income 910,209 795,697
Other expense
Salaries and employee benefits 590,068 551,953
Net occupancy 49,134 56,120
Equipment 84,647 86,862
Software expenses 32,374 33,135
Processing charges 35,863 29,592
Supplies and printing 16,491 14,735
Professional services 32,308 27,633
Shipping and handling 37,706 34,858
Amortization of intangibles 17,803 16,970
Other 184,885 106,336
------------- -------------
Total other expense 1,081,279 958,194
------------- -------------
Income before income taxes 562,840 529,561
Provision for income taxes 159,859 174,269
------------- -------------
Net income $ 402,981 $ 355,292
============= =============
Net income per common share
Basic $ 1.78 $ 1.67
Diluted 1.77 1.61
Dividends paid per common share $ 0.520 $ 0.465
Weighted average common shares outstanding:
Basic 226,480 210,367
Diluted 228,307 220,142
See notes to financial statements.
5
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------- -------------
Net Cash Provided by Operating Activities $ 686,639 $ 660,878
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 11,905 3,423
Proceeds from maturities of securities available for sale 2,421,686 1,285,798
Proceeds from maturities of securities held to maturity 72,735 61,023
Purchases of securities available for sale (2,846,463) (1,532,517)
Purchases of securities held to maturity (1,000) (631)
Net increase in loans (1,130,000) (1,801,521)
Purchases of assets to be leased (446,201) (147,831)
Principal payments on lease receivables 610,481 340,442
Fixed asset purchases, net (46,228) (31,381)
Purchase acquisitions, net of cash equivalents acquired (3,041) (23,250)
Cash deposited for Mississippi Valley
Bancshares, Inc. acquisition -- (255,224)
Other 12,892 5,542
------------- -------------
Net cash used in investing activities (1,343,234) (2,096,127)
Cash Flows From Financing Activities:
Net increase in deposits 1,910,688 347,014
Proceeds from issuance of commercial paper 5,521,502 4,844,410
Payments for maturity of commercial paper (5,520,344) (4,770,385)
Net (decrease) increase in other short-term borrowings (1,378,138) 283,613
Proceeds from issuance of long-term debt 1,226,858 885,389
Payments of long-term debt (1,108,898) (368,684)
Dividends paid (117,554) (100,877)
Purchases of treasury stock (52,424) (159,405)
Other 22,017 18,848
------------- -------------
Net cash provided by financing activities 503,707 979,923
------------- -------------
Net decrease in cash and cash equivalents (152,888) (455,326)
Cash and cash equivalents, beginning of year 1,146,532 1,563,765
------------- -------------
Cash and cash equivalents, end of period $ 993,644 $ 1,108,439
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 371,074 $ 403,239
Income taxes 230,023 159,369
See notes to financial statements.
6
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
September 30, 2003 & 2002 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I" or
"Corporation") 2002 Annual Report on Form 10-K. The unaudited
financial information included in this report reflects all adjustments
consisting only of normal recurring accruals and adjustments which are
necessary for a fair statement of the financial position and results
of operations as of and for the three and nine months ended September
30, 2003 and 2002. The results of operations for the three and nine
months ended September 30, 2003 and 2002 are not necessarily indicative
of results to be expected for the entire year. Certain amounts in the
2002 consolidated financial statements and analyses have been
reclassified to conform with the 2003 presentation.
2. New Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 149 (SFAS 149),
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies financial accounting
and reporting for derivatives instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133
(SFAS 133), Accounting for Derivative Instruments and Hedging
Activities. The amendments to SFAS 133 fall principally into three
categories: amendments related to SFAS 133 Implementation Issues that
were previously cleared by the FASB during the Derivatives
Implementation Group process, amendments clarifying the definition of
a derivative and amendments relating to the definition of expected cash
flows in FASB Concepts Statement No. 7, Using Cash Flow Information and
Present Value in Accounting Measurement. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The provisions
of SFAS 149 that related to SFAS 133 Implementation Issues that have
been effective for fiscal quarters that began prior to June 15, 2003,
continue to be applied in accordance with their respective effective
dates. In addition, those provisions of SFAS 149, which relate to
forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to both existing
contracts and new contracts entered into after June 30, 2003. The
adoption of SFAS 149 did not materially impact the Corporation's
present derivatives and hedging activities.
In May 2003, the FASB issued FASB No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement prescribes how an issuer classifies and
measures certain financial instruments. Financial instruments within
the scope of SFAS 150 are required to be classified as liabilities (or
assets in some circumstances). Many of those instruments were
previously classified as equity. Examples of financial instruments
that are within the scope of SFAS 150 include: mandatorily redeemable
equity shares, forward purchase contracts or written put options on the
issuer's equity shares that are to be physically settled or net cash
settled and payables that can be settled with a variable number of the
issuer's equity shares. SFAS 150 does not apply to features that are
embedded in a financial instrument that is not a derivative in its
entirety. Financial instruments that are not within the scope of SFAS
150 include: convertible debt, puttable stock or other outstanding
shares that are conditionally redeemable. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective for the Corporation July 1, 2003.
The trust preferred securities issued by the Corporation's finance
subsidiary, M&I Capital Trust A, qualify as mandatorily redeemable
equity shares under SFAS 150. As stated in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2002, the
Corporation's accounting policy is to classify these trust preferred
securities as borrowings net of their related discounts. The
distributions, including the related accretion of discount, are
classified as interest expense for purposes of the Consolidated
Financial Statements. On July 31, 2003, the Corporation redeemed all
of the Floating Rate Debentures held by its subsidiary, MVBI Capital
Trust, and MVBI Capital Trust redeemed all of its outstanding Floating
Rate Trust Preferred Securities at an aggregate liquidation amount of
$14.95 million.
The Corporation believes that its current accounting policies with
respect to the trust preferred securities issued by the Corporation's
finance subsidiaries are in compliance with SFAS 150 and that there
will no impact to the Corporation from adopting SFAS 150 as it relates
to the remaining fixed rate trust preferred securities that were issued
by M&I Capital Trust A.
7
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. This Interpretation
addresses consolidation by business enterprises of variable interest
entities. Under current practice, entities generally have been
included in consolidated financial statements because they are
controlled through voting interests. This Interpretation explains how
to identify variable interest entities and how an entity assesses its
interests in a variable interest entity to decide whether to
consolidate that entity. FIN 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among
parties involved. Variable interest entities that effectively disperse
risks will not be consolidated unless a single party holds an interest
or combination of interests that effectively recombines risks that were
previously dispersed. Transferors to qualifying special purpose
entities (QSPEs) and "grandfathered" QSPEs subject to the reporting
requirements of SFAS 140 are outside the scope of FIN 46 and do not
consolidate those entities. FIN 46 also requires certain disclosures
by the primary beneficiary of a variable interest entity or an entity
that holds a significant variable interest in a variable interest
entity.
FIN 46 is applicable for all entities with variable interests in
variable interest entities created after January 31, 2003 immediately.
Public companies with a variable interest in a variable interest entity
created before February 1, 2003, were to apply the provisions of FIN
46 no later than the beginning of the first interim reporting period
beginning after June 15, 2003.
On October 9, 2003, FASB Staff Position No. FIN 46-6 (FSP 46-6),
Effective Date of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities was issued. FSP 46-6 delayed the application of the
provisions of FIN 46 for public companies with respect to variable
interest entities created before February 1, 2003 until the first
interim or annual period ending after December 15, 2003.
The Corporation's asset transfers are generally to QSP's or to entities
in which the Corporation does not hold a significant variable interest.
As a result, the Corporation does not believe that FIN 46 requires the
consolidation of the conduit or the securitizations in its financial
statements. For additional discussion on the Corporation's asset sales
and securitization activities see Note 7 and the discussion of critical
accounting policies contained in Item 2, Management's Discussion and
Analysis of Financial Position and Results of Operations.
With respect to other interests in entities that may be subject to FIN
46, such as low-income housing investments, the Corporation is
continuing to inventory and evaluate those entities and its interests
to determine if those entities are variable interest entities and, to
the extent they qualify as variable interest entities, if the
Corporation is the primary beneficiary or holds a significant variable
interest. The Corporation does not anticipate that the adoption of FIN
46 with respect to these interests will have a material impact to its
consolidated financial statements.
8
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
3. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
Three Months Ended September 30, 2003
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 140,299
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (22,345) $ 9,207 (13,138)
Reclassification for securities
transactions included in net income -- -- --
------------- ------------- -------------
Unrealized gains (losses) (22,345) 9,207 (13,138)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 16,256 (5,689) 10,567
Reclassification adjustments for
hedging activities included in net income 57,182 (20,014) 37,168
------------- ------------- -------------
Net gains (losses) $ 73,438 $ (25,703) 47,735
------------- ------------- -------------
Other comprehensive income (loss) 34,597
-------------
Total comprehensive income $ 174,896
=============
Three Months Ended September 30, 2002
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 119,236
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (6,509) $ 2,611 (3,898)
Reclassification for securities
transactions included in net income -- -- --
------------- ------------- -------------
Unrealized gains (losses) (6,509) 2,611 (3,898)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (104,949) 36,732 (68,217)
Reclassification adjustments for
hedging activities included in net income 14,521 (5,082) 9,439
------------- ------------- -------------
Net gains (losses) $ (90,428) $ 31,650 (58,778)
------------- ------------- -------------
Other comprehensive income (loss) (62,676)
-------------
Total comprehensive income $ 56,560
=============
9
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
Nine Months Ended September 30, 2003
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 402,981
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (29,974) $ 11,886 (18,088)
Reclassification for securities
transactions included in net income (1,675) 586 (1,089)
------------- ------------- -------------
Unrealized gains (losses) (31,649) 12,472 (19,177)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (6,597) 2,309 (4,288)
Reclassification adjustments for
hedging activities included in net income 94,403 (33,041) 61,362
------------- ------------- -------------
Net gains (losses) $ 87,806 $ (30,732) 57,074
------------- ------------- -------------
Other comprehensive income (loss) 37,897
-------------
Total comprehensive income $ 440,878
=============
Nine Months Ended September 30, 2002
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 355,292
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 5,875 $ (2,069) 3,806
Reclassification for securities
transactions included in net income -- -- --
------------- ------------- -------------
Unrealized gains (losses) 5,875 (2,069) 3,806
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (152,876) 53,506 (99,370)
Reclassification adjustments for
hedging activities included in net income 37,783 (13,223) 24,560
------------- ------------- -------------
Net gains (losses) $ (115,093) $ 40,283 (74,810)
------------- ------------- -------------
Other comprehensive income (loss) (71,004)
-------------
Total comprehensive income $ 284,288
=============
4. A reconciliation of the numerators and denominators of the basic and
diluted per share computations are as follows (dollars and shares in
thousands, except per share data):
Three Months Ended September 30, 2003
--------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- ------------- -------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 140,299 226,724 $ 0.62
=============
Effect of Dilutive Securities
Stock Options and Restricted Stock Plans -- 2,211
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 140,299 228,935 $ 0.61
=============
10
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
Three Months Ended September 30, 2002
--------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- ------------- -------------
Net Income $ 119,236
Convertible Preferred Dividends (1,230)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 118,006 210,053 $ 0.56
=============
Effect of Dilutive Securities
Convertible Preferred Stock 1,230 7,688
Stock Options and Restricted Stock Plans -- 1,837
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 119,236 219,578 $ 0.54
=============
Nine Months Ended September 30, 2003
--------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- ------------- -------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 402,981 226,480 $ 1.78
=============
Effect of Dilutive Securities
Stock Options and Restricted Stock Plans -- 1,827
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 402,981 228,307 $ 1.77
=============
Nine Months Ended September 30, 2002
--------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-------------- ------------- -------------
Net Income $ 355,292
Convertible Preferred Dividends (3,575)
--------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 351,717 210,367 $ 1.67
=============
Effect of Dilutive Securities
Convertible Preferred Stock 3,575 7,688
Stock Options and Restricted Stock Plans -- 2,087
-------------- -------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 355,292 220,142 $ 1.61
=============
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 are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ ------------------------------------
2003 2002 2003 2002
----------------- ----------------- ---------------- ------------------
Shares 3,465,078 6,550,412 6,366,792 6,442,162
Price Range $31.510 - $33.938 $29.450 - $33.938 $29.420 - $33.938 $30.585 - $33.938
11
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," establishes financial
accounting and reporting standards for stock based employee
compensation plans.
SFAS 123 defines a fair value based method of accounting for employee
stock options or similar equity instruments. Under the fair value
based method, compensation cost is measured at the grant date based on
the fair value of the award using an option-pricing model that takes
into account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock,
expected dividends and the risk-free interest rate over the expected
life of the option. The resulting compensation cost is recognized over
the service period, which is usually the vesting period.
Compensation cost can also be measured and accounted for using the
intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 (APBO 25), "Accounting for Stock Issued
to Employees." Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the stock at
grant date or other measurement date over the amount paid to acquire
the stock.
The largest difference between SFAS 123 and APBO 25 as they relate to
the Corporation is the amount of compensation cost attributable to the
Corporation's fixed stock option plans and employee stock purchase plan
(ESPP). Under APBO 25 no compensation cost is recognized for fixed
stock option plans because the exercise price is equal to the quoted
market price at the date of grant and therefore there is no intrinsic
value. SFAS 123 compensation cost would equal the calculated fair value
of the options granted. Under APBO 25 no compensation cost is
recognized for the ESPP because the discount (15%) and the plan meets
the definition of a qualified plan of the Internal Revenue Code and
meets the requirements of APBO 25. Under SFAS 123 the safe-harbor
discount threshold is 5% for a plan to be non-compensatory. SFAS 123
compensation cost would equal the initial discount (15% of beginning
of plan period price per share) plus the value of a one year call
option on 85% of a share of stock for each share purchased.
As permitted by SFAS 123, the Corporation continues to measure
compensation cost for such plans using the accounting method prescribed
by APBO 25.
Had compensation cost for the Corporation's ESPP and options granted
after January 1, 1995 been determined consistent with SFAS 123, the
Corporation's net income and earnings per share would have been reduced
to the following estimated pro forma amounts:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Income, as reported $ 140,299 $ 119,236 $ 402,981 $ 355,292
Add: Stock-based employee compensation expense
included in reported net income, net of tax 984 731 3,020 2,519
Less:Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax (5,820) (5,443) (17,873) (17,284)
----------- ----------- ----------- -----------
Pro forma net income $ 135,463 $ 114,524 $ 388,128 $ 340,527
=========== =========== =========== ===========
Basic earnings per share:
As reported $ 0.62 $ 0.56 $ 1.78 $ 1.67
Pro forma 0.60 0.54 1.71 1.60
Diluted earnings per share:
As reported $ 0.61 $ 0.54 $ 1.77 $ 1.61
Pro forma 0.59 0.52 1.70 1.55
12
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
5. Selected investment securities, by type, held by the Corporation are
as follows ($000's):
September 30, December 31, September 30,
2003 2002 2002
------------- ------------- -------------
Investment securities available for sale:
U.S. treasury and government agencies $ 3,738,303 $ 3,266,144 $ 2,812,461
State and political subdivisions 285,201 265,470 242,747
Mortgage backed securities 118,974 162,268 175,385
Other 483,928 572,490 591,098
------------- ------------- -------------
Total $ 4,626,406 $ 4,266,372 $ 3,821,691
============= ============= =============
Investment securities held to maturity:
U.S. treasury and government agencies $ -- $ 30 $ 239,605
State and political subdivisions 868,195 939,158 967,751
Other 2,823 3,631 23,633
------------- ------------- -------------
Total $ 871,018 $ 942,819 $ 1,230,989
============= ============= =============
6. The Corporation's loan and lease portfolio, including mortgage loans
held for sale, consists of the following ($000's):
September 30, December 31, September 30,
2003 2002 2002
------------- ------------- -------------
Commercial, financial and agricultural $ 6,866,523 $ 6,867,091 $ 6,047,032
Cash flow hedging instruments at fair value 19,784 4,423 6,541
------------- ------------- -------------
Total commercial, financial and agricultural 6,886,307 6,871,514 6,053,573
Real estate:
Construction 1,283,880 1,058,144 964,343
Residential mortgage 6,876,820 6,758,650 6,421,572
Commercial mortgage 7,021,572 6,586,332 5,718,998
------------- ------------- -------------
Total real estate 15,182,272 14,403,126 13,104,913
Personal 1,954,821 1,852,202 1,464,412
Lease financing 611,896 782,004 814,003
------------- ------------- -------------
Total loans and leases $ 24,635,296 $ 23,908,846 $ 21,436,901
============= ============= =============
7. Sale of Receivables
During the third quarter of 2003, $187.5 million of automobile loans
were sold in securitization transactions. Gains of $0.8 million were
recognized and are reported in Other income in the Consolidated
Statements of Income. Other income associated with auto
securitizations, primarily servicing fees, amounted to $1.2 million in
the current quarter.
Key economic assumptions used in measuring the retained interests at
the date of securitization resulting from securitizations completed
during the third quarter were as follows (rate per annum):
Prepayment speed (CPR) 19-35 %
Weighted average life (in months) 18.8
Weighted average expected credit losses
(based on original balance) 0.50 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one month LIBOR yield curve
13
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
At September 30, 2003, securitized automobile loans and other
automobile loans managed together with them, along with delinquency and
credit loss information consisted of the following:
Total
Securitized Portfolio Managed
------------- ------------- -------------
Loan balances $ 918,297 $ 190,438 $ 1,108,735
Principal amounts of loans
60 days or more 915 294 1,209
Net credit losses (recoveries)
year to date 1,424 5 1,429
During the second quarter of 2003, the Corporation recognized an
impairment loss of approximately $4.1 million, which is included in net
investment securities gains in the Consolidated Statements of Income
for the nine months ended September 30, 2003.
8. Goodwill and Other Intangibles:
The changes in the carrying amount of goodwill for the nine months
ended September 30, 2003 are as follows (dollars in thousands):
Banking Metavante Others Total
----------- ----------- ----------- -----------
Goodwill balance as of January 1, 2003 $ 801,977 $ 136,672 $ 4,687 $ 943,336
Goodwill acquired during the period -- -- -- --
Purchase accounting adjustments 7,749 1,662 -- 9,411
----------- ----------- ----------- -----------
Goodwill balance as of September 30, 2003 $ 809,726 $ 138,334 $ 4,687 $ 952,747
=========== =========== =========== ===========
Purchase accounting adjustments for the banking segment in the first
nine months of 2003 were primarily due to the adjustments required to
be made to the initial estimates of fair value for the loans acquired
and the deposits and borrowings assumed in the acquisition of
Mississippi Valley Bancshares, Inc., partially offset by the reduction
of goodwill allocated to the sale of two branches during the second
quarter and one branch sold during the third quarter.
Purchase accounting adjustments for Metavante in the first nine months
of 2003 represent the net effect of additional contingent consideration
paid as a result of revenue targets being achieved, offset by the
return of consideration placed in escrow associated with acquisitions
completed in 2001 and adjustments required to be made to the initial
estimates of fair value associated with the PayTrust, Inc. acquisition
and the Spectrum EBP, LLC acquisition.
At September 30, 2003, the Corporation's other intangible assets
consisted of the following ($000's):
September 30, 2003
-------------------------------------
Gross Accum- Net
Carrying ulated Carrying
Amount Amort Value
----------- ----------- -----------
Other intangible assets:
Core deposit intangible $ 161,028 $ 61,224 $ 99,804
Data processing contract rights/customer lists 34,061 12,138 21,923
Trust customers 750 119 631
Tradename 2,500 833 1,667
----------- ----------- -----------
$ 198,339 $ 74,314 $ 124,025
=========== =========== ===========
Mortgage loan servicing rights $ 39,672 $ 34,049 $ 5,623
=========== =========== ===========
14
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
9. The Corporation's deposit liabilities consists of the following
($000's):
September 30, December 31, September 30,
2003 2002 2002
------------- ------------- -------------
Noninterest bearing demand $ 4,682,267 $ 4,461,880 $ 3,940,870
Savings and NOW 9,261,984 9,225,899 7,986,521
CD's $100,000 and over 3,878,947 2,793,793 1,916,726
Cash flow hedge-Institutional CDs 16,821 18,330 15,058
------------- ------------- -------------
Total CD's $100,000 and over 3,895,768 2,812,123 1,931,784
Other time deposits 2,701,047 2,979,502 2,700,044
Foreign deposits 1,767,871 914,302 1,109,939
------------- ------------- -------------
Total deposits $ 22,308,937 $ 20,393,706 $ 17,669,158
============= ============= =============
10. Derivative Financial Instruments and Hedging Activities
Trading Instruments and Other Free Standing Derivatives
The Corporation enters into various derivative contracts primarily to
focus on providing derivative products to customers which enables them
to manage their exposures to interest rate risk. The Corporation's
market risk from unfavorable movements in interest rates is generally
economically hedged by concurrently entering into offsetting derivative
contracts. The offsetting derivative contracts generally have nearly
identical notional values, terms and indices. The Corporation uses
interest rate futures to economically hedge the exposure to interest
rate risk arising from the interest rate swap entered into in
conjunction with its auto securitization activities.
Interest rate lock commitments on residential mortgage loans intended
to be held for sale are considered free-standing derivative
instruments. The option to sell the mortgage loans at the time the
commitments are made are also free-standing derivative instruments.
The change in fair value of these derivative instruments due to changes
in interest rates tend to offset each other and act as economic hedges.
Trading and free-standing derivative contracts are not linked to
specific assets and liabilities on the balance sheet or to forecasted
transactions in an accounting hedge relationship and, therefore, do not
qualify for hedge accounting under SFAS 133. They are carried at fair
value with changes in fair value recorded as a component of other
noninterest income.
At September 30, 2003, free standing interest rate swaps consisted of
$1.2 billion in notional amount of receive fixed/pay floating with an
aggregate positive fair value of $16.5 million and $0.7 billion in
notional amount of pay fixed/receive floating with an aggregate
negative fair value of $9.0 million.
At September 30, 2003, interest rate caps purchased amounted to $5.0
million in notional with a positive fair value of $0.1 million and
interest rate caps sold amounted to $5.0 million in notional with a
negative fair value of $0.1 million.
At September 30, 2003, the notional value of free standing interest
rate futures was $4.0 billion with a negative fair value of $0.8
million.
15
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
Hedging Instruments
The following table presents information with respect to the
Corporation's fair value hedges.
Fair Value Hedges
September 30, 2003 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------- ------------------- ----------- ----------- -----------
Callable CDs Receive Fixed Swap $ 285.0 $ (2.2) 6.7
Medium Term Notes Receive Fixed Swap 321.8 9.4 8.1
Institutional CDs Receive Fixed Swap 100.0 0.1 0.6
For the three and nine months ended September 30, 2003, the impact from
fair value hedges to net interest income was a positive $8.1 million
and $22.1 million, respectively.
The following table presents information with respect to the
Corporation's cash flow hedges.
Cash Flow Hedges
September 30, 2003 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------- ------------------- ----------- ----------- -----------
Variable Rate Loans Receive Fixed Swap $ 900.0 $ 19.8 5.4
Institutional CDs Pay Fixed Swap 820.0 (16.8) 1.4
Commercial Paper Pay Fixed Swap 0.0 0.0 0.0
Fed Funds Purchased Pay Fixed Swap 860.0 (34.1) 1.6
FHLB Advances Pay Fixed Swap 610.0 (10.1) 3.6
The Corporation regularly originates and holds floating rate commercial
loans that reprice monthly on the first business day to one-month
LIBOR. As a result, the Corporation's interest receipts are exposed
to variability in cash flows due to changes in one-month LIBOR.
In order to hedge the interest rate risk associated with the floating
rate commercial loans indexed to one-month LIBOR, the Corporation has
entered into receive fixed / pay LIBOR-based floating interest rate
swaps designated as cash flow hedges against the first LIBOR-based
interest payments received that, in the aggregate for each period, are
interest payments on such principal amount of its then existing LIBOR-
indexed floating-rate commercial loans equal to the notional amount of
the interest rate swaps outstanding.
Hedge effectiveness is assessed at inception and each quarter on an on-
going basis using regression analysis that takes into account reset
date differences for certain designated interest rate swaps that reset
quarterly. Each month the Corporation makes a determination that it
is probable that the Corporation will continue to receive interest
payments on at least that amount of principal of its existing LIBOR-
indexed floating-rate commercial loans that reprice monthly on the
first business day to one-month LIBOR equal to the notional amount of
the interest rate swaps outstanding. Ineffectiveness is measured using
the hypothetical derivative method and is recorded as a component of
interest income on loans.
For the three and nine months ended September 30, 2003, the impact
from cash flow hedges to net interest income was a negative $16.7
million and $52.5 million, respectively.
16
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
During the third quarter of 2003, $610.0 million of FHLB floating rate
advances were retired. In conjunction with the retirement of debt,
$610.0 million in notional value of receive floating/pay fixed interest
rate swaps designated as cash flow hedges against the retired floating
rate advances were terminated. The loss in accumulated other
comprehensive income aggregating $40.5 million ($26.3 million after
tax) was charged to other expense during the third quarter. Additional
floating FHLB advances were issued in the third quarter at lower rates
and with slightly longer maturities. These new advances were hedged
with new receive floating/pay fixed interest rate swaps.
During the second quarter of 2003, the Corporation announced that it
would redeem all of the Floating Rate Debentures held by its
subsidiary, MVBI Capital Trust, and MVBI Capital Trust would redeem all
of its currently outstanding Floating Rate Trust Preferred Securities
at an aggregate liquidation amount of $14.95 million. In conjunction
with the redemption during the second quarter, the Corporation
terminated the associated interest rate swap designated as a cash flow
hedge. The loss in accumulated other comprehensive income aggregating
$1.4 million ($0.9 million after tax), was charged to other expense
during the second quarter of 2003.
During the first quarter of 2003, the Corporation terminated the fair
value hedge on long-term borrowings. The adjustment to the fair value
of the hedged instrument of $35.2 million is being accreted as income
into earnings over the expected remaining term of the borrowings using
the effective interest method. Also during the quarter, the cash flow
hedge on commercial paper was terminated. The $32.6 million in
accumulated other comprehensive income at the time of termination is
being amortized as expense into earnings in the remaining periods
during which the hedged forecasted transaction affects earnings.
11. Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN 45"). This
Interpretation elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing
the guarantee. Loan commitments and commercial letters of credit are
excluded from the scope of this Interpretation.
Standby letters of credit are contingent commitments issued by the
Corporation to support the obligations of a customer to a third party
and to support public and private financing, and other financial or
performance obligations of customers. Standby letters of credit have
maturities which generally reflect the maturities of the underlying
obligations. The credit risk involved in issuing standby 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 the standby letters of credit. The gross amount of standby
letters of credit issued at September 30, 2003 was $1.2 billion. Of
the amount outstanding at September 30, 2003, standby letters of credit
conveyed to others in the form of participations amounted to $64.6
million. Since many of the standby letters of credit are expected to
expire without being drawn upon, the amounts outstanding do not
necessarily represent future cash requirements. At September 30, 2003,
the estimated fair value associated with letters of credit amounted to
$3.3 million.
Metavante offers credit card processing to its customers. Under the
rules of the credit card associations, Metavante has certain contingent
liabilities for card transactions acquired from merchants. This
contingent liability arises in the event of a billing dispute between
the merchant and a cardholder that is ultimately resolved in the
cardholder's favor. In such case, Metavante charges the transaction
back ("chargeback") to the merchant and the disputed amount is credited
or otherwise refunded to the cardholder. If Metavante is unable to
collect this amount from the merchant, due to the merchant's insolvency
or other reasons, Metavante will bear the loss for the amount of the
refund paid to the cardholder. In most cases this contingent liability
situation is unlikely to arise because most products or services are
delivered when purchased, and credits are issued by the merchant on
returned items. However, where the product or service is not provided
until some time following the purchase, the contingent liability may
be more likely. This credit loss exposure is within the scope of the
recognition and measurement provisions of FIN 45. The Corporation has
concluded that the fair value of the contingent liability was
immaterial due to the following factors: (1) merchants are evaluated
for credit risk in a manner similar to that employed in making lending
decisions; (2) if deemed appropriate, the Corporation obtains
collateral which includes holding funds until the product or service
is delivered or severs its relationship with a merchant; and (3)
compensation, if any, received for providing the guarantee is minimal.
17
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
Metavante assesses the contingent liability and records credit losses
for known losses and a provision for losses incurred but not reported
which are based on historical chargeback loss experience. For the nine
months ended September 30, 2003, such losses amounted to twelve
thousand dollars.
12. Segments
The following represents the Corporation's operating segments as of and
for the three and nine months ended September 30, 2003 and 2002. There
have not been any changes to the way the Corporation organizes its
segments or reports segment financial information. Fees - Intercompany
represent intercompany revenues charged to other segments for providing
certain services. Expenses - Intercompany represent fees charged by
other segments for certain services received. For each segment,
Expenses - Intercompany are not the costs of that segment's reported
intercompany revenues. Intersegment expenses and assets have been
eliminated. ($ in millions):
Three Months Ended September 30, 2003
---------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- ---------- ---------- ---------- ---------- ----------- --------- ----------
Revenues:
Net interest income $ 255.1 $ (0.4) $ 8.0 $ (4.0) $ -- $ 258.7 $ -- $ 258.7
Fees - Other 101.8 166.3 55.9 1.2 (0.2) 325.0 -- 325.0
Fees - Intercompany 14.8 17.3 9.9 -- (42.0) -- -- --
---------- --------- --------- --------- --------- ---------- -------- ---------
Total revenues 371.7 183.2 73.8 (2.8) (42.2) 583.7 -- 583.7
Expenses:
Expenses - Other 197.2 157.8 27.5 26.9 0.6 410.0 -- 410.0
Expenses - Intercompany 26.4 9.7 9.1 (2.4) (42.8) -- -- --
---------- --------- --------- --------- --------- ---------- -------- ----------
Total expenses 223.6 167.5 36.6 24.5 (42.2) 410.0 -- 410.0
Provision for loan
and lease losses 7.3 -- 0.6 -- -- 7.9 -- 7.9
---------- --------- --------- --------- --------- ---------- -------- ----------
Income before taxes 140.8 15.7 36.6 (27.3) -- 165.8 -- 165.8
Income tax expense 21.0 1.4 14.5 (11.4) -- 25.5 -- 25.5
---------- --------- --------- --------- --------- ---------- -------- ----------
Segment income $ 119.8 $ 14.3 $ 22.1 $ (15.9) $ -- $ 140.3 $ -- $ 140.3
========== ========= ========= ========= ========= ========== ======== ==========
Identifiable assets $ 32,597.0 $ 904.1 $ 601.0 $ 487.4 $ (840.2) $ 33,749.3 $ -- $ 33,749.3
========== ========= ========= ========= ========= ========== ======== ==========
Return on average equity 16.3% 16.0% 36.6% 16.9%
========== ========= ========= ==========
Three Months Ended September 30, 2002
---------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- ---------- ---------- ---------- ---------- ----------- --------- ----------
Revenues:
Net interest income $ 251.6 $ (1.0) $ 7.3 $ (5.1) $ -- $ 252.8 $ -- $ 252.8
Fees - Other 82.2 153.9 35.1 1.3 -- 272.5 -- 272.5
Fees - Intercompany 11.4 16.1 6.4 -- (33.9) -- -- --
---------- --------- --------- --------- --------- ---------- -------- ----------
Total revenues 345.2 169.0 48.8 (3.8) (33.9) 525.3 -- 525.3
Expenses:
Expenses - Other 132.8 139.6 33.2 16.5 0.6 322.7 3.9 326.6
Expenses - Intercompany 21.9 6.2 8.1 (1.7) (34.5) -- -- --
---------- --------- --------- --------- --------- ---------- -------- ----------
Total expenses 154.7 145.8 41.3 14.8 (33.9) 322.7 3.9 326.6
Provision for loan
and lease losses 18.5 -- 0.3 -- -- 18.8 -- 18.8
---------- --------- --------- --------- --------- ---------- -------- ----------
Income before taxes 172.0 23.2 7.2 (18.6) -- 183.8 (3.9) 179.9
Income tax expense 56.8 9.5 3.2 (7.2) -- 62.3 (1.6) 60.7
---------- --------- --------- --------- --------- ---------- -------- ----------
Segment income $ 115.2 $ 13.7 $ 4.0 $ (11.4) $ -- $ 121.5 $ (2.3) $ 119.2
========== ========= ========= ========= ========= ========== ======== ==========
Identifiable assets $ 28,742.4 $ 766.2 $ 732.1 $ 588.8 $ (752.0) $ 30,077.5 $ -- $ 30,077.5
========== ========= ========= ========= ========= ========== ======== ==========
Return on average equity 18.7% 17.7% 7.4% 17.4%
========== ========= ========= ==========
18
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2003 & 2002 (Unaudited)
Nine Months Ended September 30, 2003
---------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- ---------- ---------- ---------- ---------- ----------- --------- ----------
Revenues:
Net interest income $ 779.5 $ (2.0) $ 23.7 $ (14.1) $ -- $ 787.1 $ -- $ 787.1
Fees - Other 287.4 481.4 137.8 3.8 (0.2) 910.2 -- 910.2
Fees - Intercompany 42.9 52.3 26.4 -- (121.6) -- -- --
---------- --------- --------- --------- --------- ---------- -------- ----------
Total revenues 1,109.8 531.7 187.9 (10.3) (121.8) 1,697.3 -- 1,697.3
Expenses:
Expenses - Other 485.4 441.9 90.0 60.9 0.6 1,078.8 2.5 1,081.3
Expenses - Intercompany 71.9 27.0 26.9 (3.4) (122.4) -- -- --
---------- --------- --------- --------- --------- ---------- -------- ----------
Total expenses 557.3 468.9 116.9 57.5 (121.8) 1,078.8 2.5 1,081.3
Provision for loan
and lease losses 43.9 -- 9.3 -- -- 53.2 -- 53.2
---------- --------- --------- --------- --------- ---------- -------- ----------
Income before taxes 508.6 62.8 61.7 (67.8) -- 565.3 (2.5) 562.8
Income tax expense 142.8 20.9 24.4 (27.3) -- 160.8 (1.0) 159.8
---------- --------- --------- --------- --------- ---------- -------- ----------
Segment income $ 365.8 $ 41.9 $ 37.3 $ (40.5) $ -- $ 404.5 $ (1.5)$ 403.0
========== ========= ========= ========= ========= ========== ======== ==========
Identifiable assets $ 32,597.0 $ 904.1 $ 601.0 $ 487.4 $ (840.2) $ 33,749.3 $ -- $ 33,749.3
========== ========= ========= ========= ========= ========== ======== ==========
Return on average equity 16.8% 16.3% 21.2% 16.9%
========== ========= ========= ==========
Nine Months Ended September 30, 2002
---------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elim- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- ---------- ---------- ---------- ---------- ----------- --------- ----------
Revenues:
Net interest income $ 741.0 $ (3.0) $ 20.7 $ (15.6) $ -- $ 743.1 $ -- $ 743.1
Fees - Other 231.6 445.3 114.9 3.9 -- 795.7 -- 795.7
Fees - Intercompany 33.8 48.5 17.5 -- (99.8) -- -- --
---------- --------- --------- --------- --------- ---------- -------- ----------
Total revenues 1,006.4 490.8 153.1 (11.7) (99.8) 1,538.8 -- 1,538.8
Expenses:
Expenses - Other 392.6 415.0 84.8 63.9 (2.0) 954.3 3.9 958.2
Expenses - Intercompany 57.5 17.5 25.9 (3.1) (97.8) -- -- --
---------- --------- --------- --------- --------- ---------- -------- ----------
Total expenses 450.1 432.5 110.7 60.8 (99.8) 954.3 3.9 958.2
Provision for loan
and lease losses 50.2 -- 0.8 -- -- 51.0 -- 51.0
---------- --------- --------- --------- --------- ---------- -------- ----------
Income before taxes 506.1 58.3 41.6 (72.5) -- 533.5 (3.9) 529.6
Income tax expense 162.5 24.1 16.8 (27.5) -- 175.9 (1.6) 174.3
---------- --------- --------- --------- --------- ---------- -------- ----------
Segment income $ 343.6 $ 34.2 $ 24.8 $ (45.0) $ -- $ 357.6 $ (2.3) $ 355.3
========== ========= ========= ========= ========= ========== ======== ==========
Identifiable assets $ 28,742.4 $ 766.2 $ 732.1 $ 588.8 $ (752.0) $ 30,077.5 $ -- $ 30,077.5
========== ========= ========= ========= ========= ========== ======== ==========
Return on average equity 18.7% 15.3% 14.9% 17.7%
========== ========= ========= ==========
Metavante's segment income excludes charges in the three months ended
September 30, 2002 and the nine months ended September 30, 2003 and
2002 for certain transition expenses associated with the integration
of the July 2002 PayTrust, Inc. acquisition which are included in
"Excluded Charges."
Total Revenue by type in All Others consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Trust Services $ 31.8 $ 29.0 $ 93.0 $ 91.0
Residential Mortgage Banking 13.3 12.9 40.9 30.6
Capital Markets 16.2 (4.2) 18.2 (4.5)
Brokerage and Insurance 5.9 5.5 17.5 18.6
Commercial Leasing 4.0 3.4 11.5 11.0
Commercial Mortgage Banking 1.5 1.2 4.1 3.4
Others 1.1 1.0 2.7 3.0
---------- ---------- ---------- ----------
Total revenue $ 73.8 $ 48.8 $ 187.9 $ 153.1
========== ========== ========== ==========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended
September 30,
------------------------------
2003 2002
------------- -------------
Assets
- ------
Cash and due from banks $ 742,287 $ 705,880
Investment securities:
Trading securities 26,769 21,098
Short-term investments 259,646 477,285
Other investment securities
Taxable 3,990,121 3,444,294
Tax-exempt 1,166,772 1,223,370
------------- -------------
Total investment securities 5,443,308 5,166,047
Loans and leases:
Loans and leases, net of unearned income 24,596,403 20,940,989
Less: Allowance for loan and lease losses 351,514 301,127
------------- -------------
Net loans and leases 24,244,889 20,639,862
Premises and equipment, net 437,404 414,818
Accrued interest and other assets 2,571,807 1,999,721
------------- -------------
Total Assets $ 33,439,695 $ 28,926,328
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 4,348,872 $ 3,505,620
Interest bearing 17,805,959 14,780,334
------------- -------------
Total deposits 22,154,831 18,285,954
Funds purchased and security repurchase agreements 2,660,662 2,563,474
Other short-term borrowings 441,924 1,778,498
Long-term borrowings 3,775,716 2,633,620
Accrued expenses and other liabilities 1,116,672 938,839
------------- -------------
Total liabilities 30,149,805 26,200,385
Shareholders' equity 3,289,890 2,725,943
------------- -------------
Total Liabilities and Shareholders' Equity $ 33,439,695 $ 28,926,328
============= =============
20
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Nine Months Ended
September 30,
------------------------------
2003 2002
------------- -------------
Assets
- ------
Cash and due from banks $ 750,837 $ 684,745
Investment securities:
Trading securities 23,321 14,587
Short-term investments 266,537 821,219
Other investment securities:
Taxable 3,972,106 3,181,076
Tax-exempt 1,179,967 1,229,627
------------- -------------
Total investment securities 5,441,931 5,246,509
Loans and leases:
Loans and leases, net of unearned income 24,301,069 20,266,963
Less: Allowance for loan and lease losses 347,291 291,072
------------- -------------
Net loans and leases 23,953,778 19,975,891
Premises and equipment, net 440,886 410,193
Accrued interest and other assets 2,539,814 1,939,685
------------- -------------
Total Assets $ 33,127,246 $ 28,257,023
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 4,095,794 $ 3,351,235
Interest bearing 17,722,429 14,624,650
------------- -------------
Total deposits 21,818,223 17,975,885
Funds purchased and security repurchase agreements 2,770,397 2,404,503
Other short-term borrowings 533,319 1,821,389
Long-term borrowings 3,724,792 2,492,603
Accrued expenses and other liabilities 1,083,064 877,745
------------- -------------
Total liabilities 29,929,795 25,572,125
Shareholders' equity 3,197,451 2,684,898
------------- -------------
Total Liabilities and Shareholders' Equity $ 33,127,246 $ 28,257,023
============= =============
21
Net income for the third quarter of 2003 amounted to $140.3 million compared
to $119.2 million for the same period in the prior year. Basic and diluted
earnings per share were $0.62 and $0.61, respectively, for the three months
ended September 30, 2003, compared with $0.56 and $0.54, respectively, for
the three months ended September 30, 2002. The return on average assets and
average equity was 1.66% and 16.92% for the quarter ended September 30, 2003,
and 1.64% and 17.35% for the quarter ended September 30, 2002.
Net income for the nine months ended September 30, 2003, amounted to $403.0
million compared to $355.3 million for the first nine months of the prior
year. Basic and diluted earnings per share were $1.78 and $1.77,
respectively, for the nine months ended September 30, 2003, compared with
$1.67 and $1.61, respectively, for the nine months ended September 30, 2002.
The return on average assets and average equity was 1.63% and 16.85% for the
nine months ended September 30, 2003, and 1.68% and 17.69% for the nine
months ended September 30, 2002.
The results of operations and financial position as of and for the three and
nine months ended September 30, 2003, include the effects of Metavante's
acquisition of PayTrust, Inc. ("PayTrust") in the third quarter of 2002 and
the Corporation's banking acquisitions of Richfield State Agency, Inc. and
Century Bancshares, Inc. which both closed on March 1, 2002 and the
acquisition of Mississippi Valley Bancshares, Inc. ("Southwest") which closed
on October 1, 2002. All acquisitions were accounted for using the purchase
method of accounting and accordingly the results of operations and financial
position are included from the dates the transactions were closed.
Net income for the nine months ended September 30, 2003 includes the final
transition charges related to the integration of Metavante's July 2002
acquisition of PayTrust. Acquisition related transition expenses associated
with PayTrust amounted to $1.5 million (after-tax) and were incurred in the
first quarter of 2003. For the three and nine months ended September 30,
2002, acquisition related transition expenses associated with PayTrust
amounted to $2.3 million (after-tax) or $0.01 per diluted share. Total
cumulative transition expenses with respect to PayTrust, which were incurred
in the third and fourth quarters of 2002 and the first quarter of 2003,
amounted to $5.7 million after-tax.
In addition, net income for the three and nine months ended September 30,
2003 include the following items:
Gain (Loss) $ in millions
-------------------------
Pre-tax After-tax
----------- -----------
Gain on sale of company in Capital Markets portfolio $ 16.2 $ 10.5
Settlement of income tax audits -- 29.9
Reversal of liabilities for a facility closure 8.5 5.1
Write off of capitalized software costs (15.7) (9.4)
Cost of debt refinancing (54.7) (35.6)
-----------
Total net income impact $ 0.5
===========
During the third quarter, one of the portfolio companies held by the
Corporation's Capital Markets group was sold at a gain. The gain of $16.2
million is reported in net investment securities gains (losses) in the
Consolidated Statements of Income.
Several income tax audits covering multiple tax jurisdictions were resolved
during the current quarter which positively affected the banking segment by
approximately $25.0 million and the data processing segment (Metavante) by
$4.9 million. The impact is reported in the provision for income taxes in
the Consolidated Statements of Income.
In conjunction with previous acquisitions, Metavante had made certain
operating decisions with respect to facility and platform consolidations.
During the current quarter, Metavante elected to retain one of the facilities
and the related platforms that previously had been set for closure. As a
result of these decisions, $8.5 million of liabilities established for the
facility closure, consisting of severance of $2.4 million and lease costs of
$6.1 million were no longer required. As a result of a change in product
strategy, $15.7 million of related capitalized software costs were determined
to have no future value and were written off. The financial statement impact
of these decisions are reflected in salaries and employee benefits expense,
net occupancy expense and other expense in the Consolidated Statements of
Income.
22
As a result of the financial impact of the previously described transactions
and decisions which occurred in the current quarter and in consideration of
the low interest rate environment, the Corporation acquired and terminated
$730.3 million in par value of its longer-term and higher cost debt
obligations. These debt obligations were replaced with debt obligations that
have a lower cost and slightly longer maturities. The cost of acquiring and
terminating the existing debt obligations amounted to $54.7 million and is
reported as a component of other expense in the Consolidated Statements of
Income.
The aggregate net income impact of these transactions and decisions was
approximately $0.5 million and was not material to reported net income or
earnings per share for the three and nine months ended September 30, 2003.
The Corporation believes these actions will help to stabilize the net
interest margin and provide increased flexibility to offset the costs of
expansion and other investment opportunities in future periods.
NET INTEREST INCOME
___________________
Net interest income for the third quarter of 2003 amounted to $258.7 million
compared to $252.8 million reported for the third quarter of 2002. For the
nine months ended September 30, 2003, net interest income amounted to $787.1
million compared to $743.1 million for the nine months ended September 30,
2002. Loan growth, increased spreads on certain loan products and the impact
of the banking acquisitions in 2002 contributed to the increase in net
interest income. Factors negatively affecting net interest income included
accelerated levels of prepayments, asset repricing in excess of deposit
repricing, the impact from lengthening liabilities in order to reduce future
volatility in net interest income due to interest rate movements and cash
expenditures for repurchases of common stock and acquisitions in the prior
year. Net interest income for the three and nine months ended September 30,
2003, was not significantly affected by the debt transactions previously
discussed due to the timing of completing those transactions.
Average earning assets in the third quarter of 2003 increased $3.9 billion
or 15.1% and on a year-to-date basis increased $4.2 billion or 16.6% compared
to the same periods a year ago. Average loans and leases accounted for $3.7
billion of the quarter over quarter growth and $4.0 billion of the year-to-
date period over period growth in earning assets. Average investment
securities increased $0.5 billion and other short-term investments and
trading securities declined $0.2 billion in the third quarter of 2003
compared to the third quarter of 2002. On a comparative average year-to-date
basis, average investment securities increased $0.7 billion and other short-
term investments and trading securities declined $0.5 billion in the nine
months ended September 30, 2003, compared to the nine months ended September
30, 2002. The Corporation estimates that approximately $1.6 billion and $1.8
billion of the average loan and lease growth in the three and nine months
ended September 30, 2003 compared to like periods in the prior year, was
attributable to the 2002 banking acquisitions.
Average interest bearing liabilities increased $2.9 billion or 13.5% in the
third quarter of 2003 compared to the same period in 2002. For the nine
months ended September 30, 2003, average interest bearing liabilities
increased $3.4 billion or 16.0% over the comparable period. Average interest
bearing deposits increased $3.0 billion or 20.5% in the third quarter of 2003
compared to the third quarter of last year. On a year-to-date basis, average
interest bearing deposits increased $3.1 billion or 21.2% in the nine months
ended September 30, 2003, compared to the nine months ended September 30,
2002. Average borrowings were relatively unchanged in the third quarter of
2003 and increased $0.3 billion or 4.6% in the first nine months of 2003
compared to the same periods in 2002. The Corporation estimates that
approximately $1.5 billion and $1.7 billion of the average interest bearing
deposit growth in the three and nine months ended September 30, 2003 compared
to like periods in the prior year, was attributable to the 2002 banking
acquisitions.
Average noninterest bearing deposits increased $0.8 billion or 24.1% and $0.7
billion or 22.2% in the three and nine months ended September 30, 2003,
respectively, compared to the same periods last year. Approximately $0.2
billion of the growth in average noninterest bearing deposits in the three
and nine months ended September 30, 2003, compared to the same periods in
2002 was attributable to the 2002 banking acquisitions.
23
The growth and composition of the Corporation's quarterly average loan and
lease portfolio for the current quarter and previous four quarters are
reflected in the following table. ($ in millions):
Consolidated Average Loans and Leases
_____________________________________
2003 2002 Growth Pct.
----------------------------- ------------------- ---------------
Third Second First Fourth Third Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- ------ --------
Commercial
Commercial $ 6,912 $ 7,043 $ 6,827 $ 6,636 $ 5,998 15.2 % (1.9)%
Commercial real estate
Commercial mortgages 6,986 6,859 6,677 6,464 5,617 24.4 1.9
Construction 1,014 977 934 896 799 27.0 3.8
--------- --------- --------- --------- --------- ------ --------
Total commercial
real estate 8,000 7,836 7,611 7,360 6,416 24.7 2.1
Commercial lease financing 392 390 394 395 384 2.1 0.6
--------- --------- --------- --------- --------- ------ --------
Total Commercial 15,304 15,269 14,832 14,391 12,798 19.6 0.2
Personal
Residential real estate
Residential mortgages 2,751 2,705 2,623 2,741 2,545 8.1 1.7
Construction 210 189 175 156 150 39.9 11.3
--------- --------- --------- --------- --------- ------ --------
Total residential
real estate 2,961 2,894 2,798 2,897 2,695 9.9 2.3
Personal loans
Student 84 97 107 94 86 (2.8) (13.5)
Credit card 200 191 187 182 172 16.6 5.1
Home equity loans
and lines 4,100 4,075 4,048 3,873 3,543 15.7 0.6
Other 1,692 1,551 1,561 1,445 1,198 41.2 9.1
--------- --------- --------- --------- --------- ------ --------
Total personal loans 6,076 5,914 5,903 5,594 4,999 21.5 2.7
Personal lease financing 255 322 367 406 449 (43.1) (20.7)
--------- --------- --------- --------- --------- ------ --------
Total Personal 9,292 9,130 9,068 8,897 8,143 14.1 1.8
--------- --------- --------- --------- --------- ------ --------
Total Consolidated Average
Loans and Leases $ 24,596 $ 24,399 $ 23,900 $ 23,288 $ 20,941 17.5 % 0.8 %
========= ========= ========= ========= ========= ====== ========
Compared with the third quarter of 2002, total consolidated average loans and
leases increased $3.7 billion or 17.5%. Approximately $1.6 billion of
average total consolidated loan and lease growth in the third quarter of 2003
was attributable to the 2002 banking acquisitions. Excluding the impact of
these acquisitions, total average commercial loans and leases increased $1.1
billion or 7.4% primarily due to an increase of $0.8 billion in average
commercial real estate loans. Total average personal loans and leases
increased $1.0 billion or 11.8% excluding the impact of acquisitions.
Average personal loan and lease growth, excluding acquisitions, was driven
primarily by growth in home equity loans and lines of $0.5 billion with the
remainder of the growth attributable to indirect auto loans and residential
real estate mortgage and construction loans. From a production standpoint,
residential real estate loan closings declined approximately 8.8% in the
third quarter compared to the second quarter of 2003. For the nine months
ended September 30, 2003 production was approximately $1.8 billion or 64.8%
greater than production in the first nine months of 2002. The current
application volume appears to be slowing. The application volume in
September and early October indicates that fourth quarter loan closings may
be approximately one-half of the volume of closings experienced in the
current quarter.
Compared to the second quarter of 2003, total average loans increased $0.2
billion or 0.8% and was driven by personal loan growth. Total average
commercial loans and leases were relatively unchanged compared to the second
quarter of 2003. The growth in average commercial real estate loans in the
current quarter of $164.2 million was offset by a decline in average
commercial loans of $130.8 million. While total commercial commitments
increased, line utilization declined between the second and third quarters
of the current year. The Corporation had similar experience in average
commercial loan growth in the third quarter of 2002 compared to second
quarter of 2002 where average commercial loans decreased $88.9 million,
excluding acquisitions, which indicates that some seasonality exists in
commercial lending during the third quarter.
The rate of growth experienced in commercial loans has largely been the
result of attracting new customers in all of the Corporation's markets.
Existing customers are generally not increasing their credit needs but appear
to be successfully managing their businesses through the slower economic
conditions and lower revenue levels. The Corporation's commercial lending
activities have historically fared well as the economy strengthens and it
anticipates loan demand from existing customers will slowly strengthen
reflecting the condition of its markets in future quarters. Home equity
loans and lines, which includes M&I's wholesale activity, continue to be the
primary consumer loan product. The Corporation anticipates these products
will continue to drive growth in the consumer side of its banking activities.
24
Generally, the Corporation sells residential real estate production in the
secondary market, although selected loans with wider spreads and adjustable
rate characteristics are periodically retained in the portfolio and serve as
a potential source of liquidity in the future. Residential real estate loans
sold to investors amounted to $1.1 billion in the third quarter of 2003
compared to $0.8 billion in the third quarter of the prior year. For the
nine months ended September 30, 2003, and 2002, residential real estate loans
sold to investors amounted to $3.2 billion and $1.7 billion, respectively.
At September 30, 2003 and 2002, the Corporation had approximately $42.8
million and $265.7 million of mortgage loans held for sale, respectively.
Gains from the sale of mortgage loans amounted to $19.4 million in the third
quarter of 2003 compared to $10.4 million in the third quarter of last year.
For the nine months ended September 30, 2003, and 2002, gains from the sale
of mortgage loans amounted to $49.7 million and $21.0 million, respectively.
Auto loans securitized and sold in the third quarter of 2003 amounted to $0.2
billion compared to $0.1 billion in the third quarter of last year. For the
nine months ended September 30, 2003, and 2002, auto loans securitized and
sold amounted to $0.5 billion and $0.3 billion, respectively. Gains from the
sale and securitization of auto loans amounted to $0.8 million in the current
quarter compared to $2.9 million in the same period last year. For the nine
months ended September 30, 2003, and 2002, gains from the sale and
securitization of auto loans amounted to $6.1 million and $5.9 million,
respectively.
During the third quarter of 2002, the Corporation sold $37.9 million of
student loans. Gains from the sale of student loans amounted to $1.6 million
in the third quarter of the prior year. For the nine months ended September
30, 2003 and 2002, the Corporation sold $32.2 million and $43.3 million of
student loans and recognized gains of $1.4 million and $1.8 million,
respectively.
The Corporation anticipates that it will continue to divest narrower interest
rate spread assets through sale or securitization in future periods.
The growth and composition of the Corporation's quarterly average deposits
for the current and previous four quarters are as follows ($ in millions):
Consolidated Average Deposits
_____________________________
2003 2002 Growth Pct.
----------------------------- ------------------- ---------------
Third Second First Fourth Third Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- ------ --------
Bank issued deposits
Noninterest bearing deposits
Commercial $ 2,991 $ 2,799 $ 2,666 $ 2,811 $ 2,432 22.9 % 6.8 %
Personal 828 818 761 728 711 16.6 1.3
Other 530 456 433 439 363 46.0 16.2
--------- --------- --------- --------- --------- ------ --------
Total noninterest
bearing deposits 4,349 4,073 3,860 3,978 3,506 24.1 6.8
Interest bearing deposits
Savings and NOW 3,273 3,139 2,896 2,733 2,420 35.2 4.3
Money market 6,040 6,135 6,274 6,443 5,556 8.7 (1.5)
Foreign activity 759 861 867 891 733 3.5 (11.9)
--------- --------- --------- --------- --------- ------ --------
Total interest
bearing deposits 10,072 10,135 10,037 10,067 8,709 15.6 (0.6)
Time deposits
Other CDs and
time deposits 2,707 2,791 2,905 3,033 2,756 (1.8) (3.0)
CDs greater than $100,000 617 628 662 680 634 (2.6) (1.7)
--------- --------- --------- --------- --------- ------ --------
Total time deposits 3,324 3,419 3,567 3,713 3,390 (1.9) (2.8)
--------- --------- --------- --------- --------- ------ --------
Total bank issued deposits 17,745 17,627 17,464 17,758 15,605 13.7 0.7
Wholesale deposits
Money market 73 75 77 75 74 (1.7) (2.8)
Brokered CDs 2,938 3,048 2,682 1,584 1,606 82.9 (3.6)
Foreign time 1,399 1,392 924 1,206 1,001 39.8 0.5
--------- --------- --------- --------- --------- ------ --------
Total wholesale deposits 4,410 4,515 3,683 2,865 2,681 64.5 (2.3)
--------- --------- --------- --------- --------- ------ --------
Total consolidated
average deposits $ 22,155 $ 22,142 $ 21,147 $ 20,623 $ 18,286 21.2 % 0.1 %
========= ========= ========= ========= ========= ====== ========
25
Total average deposits increased $3.9 billion or 21.2% in the third quarter
of 2003 compared to the third quarter of 2002. The Corporation believes that
annual deposit growth better reflects trends due to the seasonality that
occurs between quarters. Average deposits associated with the 2002 banking
acquisitions accounted for approximately $1.7 billion of the third quarter
2003 versus 2002 quarterly average deposit growth. Excluding the effect of
these acquisitions, noninterest bearing deposits increased $0.7 billion while
bank-issued interest bearing activity accounts increased $0.3 billion. The
growth in bank-issued transaction deposits reflects the successful sales
focus on certain activity accounts particularly in the new and expanded
markets. Excluding acquisitions, average bank-issued time deposits declined
$0.5 billion. M&I's markets have continued to experience some unprofitable
pricing on single service time deposit relationships to the extent of pricing
time deposits above comparable wholesale levels. The Corporation has elected
not to pursue such relationships.
The growth in bank issued deposits includes both commercial and retail
banking and the effect of the lower interest rate environment. In commercial
banking, the focus remains on developing deeper relationships through the
sale of treasury management products and services along with revised
incentive plans focused on growing deposits. The retail banking strategy
continues to focus on aggressively selling the right products to meet the
needs of customers and enhance the Corporation's profitability. Specific
retail deposit initiatives include bank-at-work, single service calling, and
retention calling programs.
Compared with the third quarter of 2002, average wholesale deposits increased
$1.7 billion in the current quarter. The Corporation has made greater use
of wholesale funding alternatives, especially institutional CDs, during the
latter half of 2002 and 2003. These deposits are funds in the form of
deposits generated through distribution channels other than M&I's own banking
branches. These deposits allow the Corporation's bank subsidiaries to gather
funds across a wider geographic base and at pricing levels considered
attractive, where the underlying depositor may be retail or institutional.
Access to and use of these funding sources also provide the Corporation with
the flexibility to not pursue unprofitable single service time deposit
relationships as previously discussed.
During the third quarter of 2003, the Corporation's 6.375% subordinated notes
in the amount of $100.0 million matured. In addition, $51.6 million of the
Corporation's Series E medium-term notes with a fixed coupon rate of 5.75%
were acquired in open-market purchases. Series E medium term notes
aggregating $50.0 million and MiNotes aggregating $64.5 million were issued
by the Corporation during the third quarter of 2003. During the third
quarter of 2003, $13.2 million of 4.125% senior bank notes and $22.3 million
of 6.375% subordinated bank notes were acquired in open-market purchases.
Fixed rate advances from the Federal Home Loan Bank ("FHLB") aggregating
$33.2 million with a weighted average coupon of 6.08% were retired during the
current quarter. In addition, $610.0 million of FHLB floating rate advances
were retired. Receive floating/ pay fixed interest rate swaps designated as
cash flow hedges on the forecasted interest payments on the retired FHLB
floating rate advances were terminated during the third quarter. New FHLB
advances in the third quarter of 2003 amounted to $1.1 billion.
Approximately $0.5 billion of the new FHLB advances were fixed rate and $0.6
billion were floating rate advances. As announced in the second quarter of
2003, MVBI Capital Trust redeemed its Floating Rate Trust Preferred
Securities on July 31, 2003.
26
The Corporation's consolidated average interest earning assets and
interest bearing liabilities, interest earned and interest paid for the
three and nine months ended September 30, 2003 and 2002, are presented in
the following tables ($ in millions):
Consolidated Yield and Cost Analysis
____________________________________
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
-------------------------------- -------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------ --------- --------- ------------ --------- --------
Loans and leases: (a)
Commercial loans and leases $ 7,304.4 $ 83.9 4.55 % $ 6,382.3 $ 84.5 5.25 %
Commercial real estate loans 8,000.0 110.9 5.50 6,415.4 106.3 6.57
Residential real estate loans 2,961.2 42.7 5.72 2,695.1 46.1 6.79
Home equity loans and lines 4,098.6 56.7 5.49 3,543.4 58.7 6.57
Personal loans and leases 2,232.2 29.4 5.23 1,904.8 30.9 6.45
----------- --------- --------- ----------- --------- ---------
Total loans and leases 24,596.4 323.6 5.22 20,941.0 326.5 6.19
Investment securities (b):
Taxable 3,990.1 33.3 3.34 3,444.3 49.9 5.89
Tax Exempt (a) 1,166.8 21.7 7.50 1,223.3 22.5 7.41
----------- --------- --------- ----------- --------- ---------
Total investment securities 5,156.9 55.0 4.27 4,667.6 72.4 6.29
Trading securities (a) 26.8 0.1 0.99 21.1 0.1 1.50
Other short-term investments 259.6 0.5 0.79 477.3 1.8 1.54
----------- --------- --------- ----------- --------- ---------
Total interest earning assets $ 30,039.7 $ 379.2 5.02 % $ 26,107.0 $ 400.8 6.11 %
=========== ========= ========= =========== ========= =========
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 10,072.1 $ 16.2 0.64 % $ 8,709.5 $ 26.9 1.22 %
Bank issued time deposits 3,324.3 20.3 2.42 3,390.1 26.9 3.15
----------- --------- --------- ----------- --------- ---------
Total bank issued deposits 13,396.4 36.5 1.08 12,099.6 53.8 1.76
Wholesale deposits 4,409.6 15.8 1.42 2,680.7 15.8 2.33
----------- --------- --------- ----------- --------- ---------
Total interest bearing deposits 17,806.0 52.3 1.16 14,780.3 69.6 1.87
Short-term borrowings 3,102.6 19.6 2.51 4,342.0 39.7 3.63
Long-term borrowings 3,775.7 40.7 4.27 2,633.6 30.7 4.62
----------- --------- --------- ----------- --------- ---------
Total interest bearing liabilities $ 24,684.3 $ 112.6 1.81 % $ 21,755.9 $ 140.0 2.55 %
=========== ========= ========= =========== ========= =========
Net interest margin (FTE) as a
percent of average earning assets $ 266.6 3.53 % $ 260.8 3.98 %
========= ========= ========= =========
Net interest spread (FTE) 3.21 % 3.56 %
========= =========
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax
rate of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for
available for sale securities.
27
Consolidated Yield and Cost Analysis
____________________________________
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
-------------------------------- -------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
------------ --------- --------- ------------ --------- --------
Loans and leases: (a)
Commercial loans and leases $ 7,319.6 $ 254.2 4.64 % $ 6,373.2 $ 254.2 5.33 %
Commercial real estate loans 7,817.3 335.2 5.73 6,154.1 308.2 6.70
Residential real estate loans 2,884.9 130.6 6.05 2,560.8 134.4 7.02
Home equity loans and lines 4,074.1 175.2 5.75 3,413.8 172.0 6.74
Personal loans and leases 2,205.2 90.8 5.50 1,765.1 90.4 6.84
----------- --------- --------- ----------- --------- ---------
Total loans and leases 24,301.1 986.0 5.42 20,267.0 959.2 6.33
Investment securities (b):
Taxable 3,972.1 120.4 4.10 3,181.1 150.2 6.49
Tax Exempt (a) 1,180.0 65.6 7.58 1,229.6 68.0 7.48
----------- --------- --------- ----------- --------- ---------
Total investment securities 5,152.1 186.0 4.89 4,410.7 218.2 6.77
Trading securities (a) 23.3 0.2 1.11 14.6 0.3 2.44
Other short-term investments 266.5 1.9 0.98 821.2 9.7 1.59
----------- --------- --------- ----------- --------- ---------
Total interest earning assets $ 29,743.0 $ 1,174.1 5.29 % $ 25,513.5 $ 1,187.4 6.24 %
=========== ========= ========= =========== ========= =========
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 10,081.2 $ 59.3 0.79 % $ 8,636.1 $ 81.1 1.26 %
Bank issued time deposits 3,435.9 65.6 2.55 3,482.0 88.3 3.39
----------- --------- --------- ----------- --------- ---------
Total bank issued deposits 13,517.1 124.9 1.24 12,118.1 169.4 1.87
Wholesale deposits 4,205.3 50.5 1.61 2,506.5 44.5 2.38
----------- --------- --------- ----------- --------- ---------
Total interest bearing deposits 17,722.4 175.4 1.32 14,624.6 213.9 1.96
Short-term borrowings 3,303.7 62.6 2.54 4,225.9 116.4 3.68
Long-term borrowings 3,724.8 125.2 4.49 2,492.6 90.0 4.83
----------- --------- --------- ----------- --------- ---------
Total interest bearing liabilities $ 24,750.9 $ 363.2 1.96 % $ 21,343.1 $ 420.3 2.63 %
=========== ========= ========= =========== ========= =========
Net interest margin (FTE) as a
percent of average earning assets $ 810.9 3.65 % $ 767.1 4.04 %
========= ========= ========= =========
Net interest spread (FTE) 3.33 % 3.61 %
========= =========
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax
rate of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for
available for sale securities.
The net interest margin, as a percent of average earning assets on a fully
taxable equivalent basis ("FTE"), decreased 45 basis points from 3.98
percent in the third quarter of 2002 to 3.53 percent in the third quarter
of 2003. The yield on average interest earning assets decreased 109 basis
points in the third quarter of 2003 compared to the third quarter of the
prior year. The cost of bank issued interest bearing deposits in the
current quarter decreased 68 basis points from the same quarter of the
previous year. The increase in noninterest bearing deposits as previously
discussed provided a benefit to the net interest margin. The cost of
other funding sources (wholesale deposits and total borrowings) decreased
86 basis points in the current quarter compared to the third quarter of
last year.
On a year-to-date basis, the net interest margin FTE decreased 39 basis
points from 4.04 percent for the nine months ended September 30, 2002 to
3.65 percent for the nine months ended September 30, 2003. The yield on
average interest earning assets decreased 95 basis points in the first
nine months of 2003 compared to the first nine months of the prior year.
The cost of bank issued interest bearing deposits decreased 63 basis
points while the cost of other funding sources decreased 80 basis points
for the nine months ended September 30, 2003, compared to the nine months
ended September 30, 2002.
Net interest income was affected by a number of factors. Solid balance
sheet growth and increased loan spreads have been beneficial to net
interest income in the first nine months of 2003. The current lower
absolute level of interest rates and increased level of prepayments has
shortened the expected life of many of the Corporation's financial assets.
Lower reinvestment rates, holding assets with shorter lives and a
conscious slowing in deposit repricing resulting from selectively lowering
deposit rates, have negatively impacted net interest income. The
Corporation continued to experience higher levels of prepayments with
respect to its loans and investment securities in the first two months of
the current quarter with some slowing in September. At this point, the
Corporation estimates that based on the current interest rate environment,
most of the accelerated prepayment activity with respect to its loans and
investment securities has occurred.
28
Based on the anticipated lower levels of prepayment activity and the
impact of the debt refinancing previously discussed, the Corporation
anticipates the net interest margin as a percent of average earning assets
will stabilize or improve somewhat beginning in the fourth quarter of
2003. Net interest income and the net interest margin can vary and
continues to be influenced by loan and deposit growth, product spreads,
pricing competition in the Corporation's markets, prepayment activity,
future interest rate changes and various other factors.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
______________________________________________________
The following tables present comparative consolidated credit quality
information as of September 30, 2003, and the prior four quarters.
Nonperforming Assets
____________________
($000's)
2003 2002
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Nonaccrual $ 180,535 $ 195,448 $ 205,373 $ 188,232 $ 173,185
Renegotiated 286 304 312 326 305
Past due 90 days or more 6,479 7,561 6,439 5,934 7,407
------------ ------------ ------------ ------------ ------------
Total nonperforming loans and leases 187,300 203,313 212,124 194,492 180,897
Other real estate owned 13,642 10,527 8,259 8,692 8,223
------------ ------------ ------------ ------------ ------------
Total nonperforming assets $ 200,942 $ 213,840 $ 220,383 $ 203,184 $ 189,120
============ ============ ============ ============ ============
Allowance for loan and lease losses $ 348,100 $ 348,100 $ 338,253 $ 338,409 $ 300,628
============ ============ ============ ============ ============
Consolidated Statistics
_______________________
2003 2002
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Net charge-offs to average
loans and leases annualized 0.13% 0.16% 0.44% 0.23% 0.20%
Total nonperforming loans and leases
to total loans and leases 0.76 0.82 0.88 0.81 0.84
Total nonperforming assets to total loans
and leases and other real estate owned 0.82 0.86 0.91 0.85 0.88
Allowance for loan and lease losses
to total loans and leases 1.41 1.40 1.40 1.42 1.40
Allowance for loan and lease losses
to total nonperforming loans and leases 186 171 159 174 166
29
Nonaccrual Loans and Leases By Type
___________________________________
($000's)
2003 2002
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Commercial
Commercial, financial
and agricultural $ 66,571 $ 77,389 $ 93,400 $ 81,433 $ 78,421
Lease financing receivables 4,538 6,350 6,755 2,819 2,994
------------ ------------ ------------ ------------ ------------
Total commercial 71,109 83,739 100,155 84,252 81,415
Real estate
Construction and land development 353 460 2,017 145 79
Commercial mortgage 47,012 46,346 42,241 46,179 37,408
Residential mortgage 60,287 63,843 59,547 56,166 52,590
------------ ------------ ------------ ------------ ------------
Total real estate 107,652 110,649 103,805 102,490 90,077
Personal 1,774 1,060 1,413 1,490 1,693
------------ ------------ ------------ ------------ ------------
Total nonaccrual loans and leases $ 180,535 $ 195,448 $ 205,373 $ 188,232 $ 173,185
============ ============ ============ ============ ============
Reconciliation of Allowance for Loan and Lease Losses
_____________________________________________________
($000's)
2003 2002
-------------------------------------- -------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------ ------------
Beginning balance $ 348,100 $ 338,253 $ 338,409 $ 300,628 $ 292,512
Provision for loan and lease losses 7,852 19,642 25,692 23,398 18,842
Allowance of banks and loans acquired -- -- -- 27,848 --
Loans and leases charged-off
Commercial 4,317 6,619 2,256 8,276 6,482
Real estate 3,238 3,739 3,130 3,074 2,113
Personal 2,528 2,942 2,969 3,608 2,632
Leases 880 1,191 20,060 2,496 2,053
------------ ------------ ------------ ------------ ------------
Total charge-offs 10,963 14,491 28,415 17,454 13,280
Recoveries on loans and leases
Commercial 1,400 2,624 902 1,525 1,070
Real estate 591 772 495 971 343
Personal 831 732 733 813 667
Leases 289 568 437 680 474
------------ ------------ ------------ ------------ ------------
Total recoveries 3,111 4,696 2,567 3,989 2,554
------------ ------------ ------------ ------------ ------------
Net loans and leases charge-offs 7,852 9,795 25,848 13,465 10,726
------------ ------------ ------------ ------------ ------------
Ending balance $ 348,100 $ 348,100 $ 338,253 $ 338,409 $ 300,628
============ ============ ============ ============ ============
Nonperforming assets consist of nonperforming loans and leases and other
real estate owned (OREO).
OREO is principally comprised of commercial and residential properties
acquired in partial or total satisfaction of problem loans and amounted to
$13.6 million at September 30, 2003, compared to $10.5 million at June 30,
2003 and $8.2 million at September 30, 2002. Approximately $1.7 million
of the increase since June 30, 2003 relates to commercial real estate and
$1.4 million of the increase since June 30, 2003 relates to residential
real estate.
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.
30
At September 30, 2003, nonperforming loans and leases amounted to $187.3
million or 0.76% of consolidated loans and leases compared to $203.3
million or 0.82% of consolidated loans and leases at June 30, 2003, a
decrease of $16.0 million or 7.9%. Nonaccrual loans and leases accounted
for $14.9 million of the decrease since June 30, 2003. Nonaccrual
commercial loans decreased $10.8 million. Nonaccrual commercial real
estate loans increased $0.7 million. Nonaccrual construction and land
development loans were relatively unchanged. Nonaccrual residential real
estate loans decreased $3.6 million. Nonaccrual consumer loans increased
$0.7 million. Nonaccrual leases decreased $1.8 million compared to the
second quarter of 2003.
Net charge-offs amounted to $7.9 million or 0.13% of average loans and
leases in the third quarter of 2003 compared to $9.8 million or 0.16% of
average loans in the second quarter of 2003 and $10.7 million or 0.20% of
average loans in the third quarter of 2002.
Credit quality continued to show improvement as evidenced by the decline
in nonperforming loans and leases and net charge-offs which were somewhat
lower than expected based on the state of the economy in the markets the
Corporation serves. In previous quarters, the Corporation disclosed that
it expects net charge-offs, excluding the airline lease charge-offs taken
in the first quarter, to range from 0.15% to 0.25% for the year and
nonperfoming loans and leases as a percent of total loans and leases
outstanding to be in the range of 80-90 basis points. Based on this
quarter's experience, it appears that the Corporation's credit quality
ratios will be at the low end of the range in the near term. Until the
economy demonstrates clear strengthening, some degree of stress and
uncertainty exists and the Corporation believes it is too soon to project
if this quarter's experience will be sustained.
The provision for loan and lease losses amounted to $7.9 million and $53.2
million for the three and nine months ended September 30, 2003,
respectively compared to $18.8 million and $51.0 million for the three and
nine months ended September 30, 2002, respectively. The Corporation has
not substantively changed any aspect to its overall approach in the
determination of the allowance for loan and lease losses. There have been
no material changes in assumptions or estimation techniques as compared to
prior periods that impacted the determination of the current period
allowance. The allowance for loan and lease losses to the total loan and
lease portfolio was 1.41% at September 30, 2003, and 1.40% at September
30, 2002.
OTHER INCOME
____________
Total other income in the third quarter of 2003 amounted to $325.0 million
compared to $272.5 million in the same period last year, an increase of
$52.5 million or 19.3%. For the nine months ended September 30, 2003,
total other income amounted to $910.2 million, an increase of $114.5
million or 14.4% compared to $795.7 million for the nine months ended
September 30, 2002.
Total data processing services revenue amounted to $166.3 million in the
third quarter of 2003 compared to $153.9 million in the third quarter of
2002, an increase of $12.4 million or 8.0%. On a year to date basis,
total data processing services revenue amounted to $481.4 million for the
first nine months of 2003 compared to $445.2 million in the first nine
months of 2002, an increase of $36.2 million or 8.1%. e-Finance solutions
revenue increased $4.1 million or 11.0% and $17.0 million or 16.2% in the
three and nine months ended September 30, 2003, respectively, compared to
the same periods in the prior year. Revenue growth was driven by consumer
payment volume from three large financial institution clients, increased
adoption of electronic bill presentment and payment in the customer base
and revenues associated with the PayTrust acquisition. Financial
technology solutions revenue, the traditional outsourcing business,
increased $8.3 million or 7.1% in the third quarter of 2003 compared to
the third quarter of last year and increased $19.2 million or 5.6% for the
nine months ended September 30, 2003, compared to the nine months ended
September 30, 2002. Primary contributors to revenue growth in the current
quarter included electronic funds delivery, card solutions, and private
label banking. During the current quarter several significant client
conversions to the core financial account processing system were
completed. Total buyout revenue, which varies from period to period,
decreased $3.5 million in the current quarter compared to the third
quarter of last year and was $6.0 million less in the first nine months
of 2003 compared to the first nine months of 2002.
For the three months ended September 30, 2003, item processing revenue
amounted to $11.2 million compared to $9.8 million for the three months
ended September 30, 2002, an increase of $1.4 million or 14.3%. For the
nine months ended September 30, 2003, item processing revenue amounted to
$31.0 million compared to $29.2 million for the nine months ended
September 30, 2002, an increase of $1.8 million or 6.3%. Revenue in the
current quarter includes a payment services contract buyout of $0.6
million. The remainder of the increase in revenues is due to new
customers and increased volumes processed.
31
Trust services revenue increased $3.0 million or 10.6% in the third
quarter of 2003 compared to the third quarter of 2002 amounting to $32.0
million in 2003 and $29.0 million in 2002, respectively. For the nine
months ended September 30, 2003, trust services revenue amounted to $93.3
million compared to $91.3 million for the nine months ended September 30,
2002, an increase of $2.0 million or 2.1%. The positive impact from
acquisitions and sales efforts were offset by the decline in market values
of assets under management. Assets under management were approximately
$14.5 billion at September 30, 2003, compared to $12.9 billion at December
31, 2002, and $12.2 billion at September 30, 2002. During the third
quarter of 2003, Trust services continued to experience modest shifting of
funds into equities as a result of improved market performance which
provided some benefit to revenue.
Service charges on deposits in the third quarter of 2003 increased $0.5
million or 1.9% compared to the third quarter of 2002. For the nine
months ended September 30, 2003, service charges on deposits increased
$1.1 million or 1.5% compared with the nine months ended September 30,
2002. For the three and nine months ended September 30, 2003, service
charges on deposits associated with the Southwest acquisition amounted to
$0.8 million and $2.3 million, respectively.
Total mortgage banking revenue was $24.2 million in the third quarter of
2003 compared with $14.3 million in the third quarter of 2002, an increase
of $9.9 million. Total mortgage banking revenue was $63.5 million in the
first nine months of 2003 compared with $31.1 million in the first nine
months of 2002, an increase of $32.4 million. Gains from sales of
mortgages to the secondary market and mortgage-related fees accounted for
the increase. For the three and nine months ended September 30, 2003, the
Corporation sold $1.1 billion and $3.2 billion of loans to the secondary
market, respectively. Retained interests in the form of mortgage
servicing rights amounted to $1.7 million in the first nine months of
2003. For the three and nine months ended September 30, 2002, the
Corporation sold $0.8 billion and $1.7 billion of loans to the secondary
market, respectively. Retained interests in the form of mortgage
servicing rights amounted to $2.5 million in the first nine months of
2002.
Net investment securities gains in the third quarter of 2003 amounted to
$16.7 million. As previously discussed, $16.2 million represents the gain
from the sale of one of the portfolio companies held by the Corporation's
Capital Markets group. For the nine months ended September 30, 2003, net
investment securities gains amounted to $15.7 million. Gains recognized
by the Corporation's Capital Markets group amounted to $17.9 million,
including the transaction previously discussed. These gains were offset
by $4.1 million of impairment losses on the interest-only strips
associated with auto loan securitization activity recognized in the second
quarter of 2003. The Corporation's Capital Markets Group had losses of
$4.2 million for the three months ended September 30, 2002, and losses of
$4.8 million for the nine months ended September 30, 2002.
Other income in the third quarter of 2003 amounted to $41.7 million
compared to $37.4 million in the third quarter of 2002, an increase of
$4.3 million or 11.6%. For the nine months ended September 30, 2003,
compared to the nine months ended September 30, 2002, other income
increased $19.2 million or 18.1%. Approximately $1.5 million and $3.6
million of the increase for the three and nine months ended September 30,
2003, respectively, was attributable to the 2002 banking acquisitions.
Loan fees, which include prepayment charges, and other commissions and
fees, excluding the impact of the Southwest acquisition, increased $6.4
million in the current quarter compared to the third quarter of last year
and for the nine month period increased $15.4 million. Auto
securitization income decreased $1.6 million and increased $1.5 million
for the three and nine months ended September 30, 2003, respectively,
compared to the same periods of the prior year. The quarter over quarter
decline was primarily due to lower gains from the sale of auto loans which
was offset by increased servicing fee income. The increase on a year to
date basis was primarily due to increased servicing fee income. Auto
loans securitized and sold in the third quarter of 2003 amounted to $0.2
billion compared to $0.1 billion in the third quarter of last year. Auto
loans securitized and sold in the first nine months of 2003 amounted to
$0.5 billion compared to $0.3 billion in the first nine months of last
year. Gains from the sale of student loans decreased $1.6 million in the
current quarter compared to the third quarter of 2002. On a comparative
year to date basis, gains from the sale of student loans declined $0.4
million. Approximately $32.2 million and $43.3 million student loans were
sold in the first nine months of 2003 and 2002, respectively. Gains from
the sale of a branch contributed approximately $1.6 million to other
income in the third quarter of 2003. For the nine months ended September
30, 2003, three branches were sold at an aggregate gain of $2.5 million.
Gains from the sale of other real estate increased $2.1 million in the
nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002. The increase was primarily due to the sale of one
large property in the first quarter of 2003. Trading income in the third
quarter of 2003 decreased $2.8 million and on a year to date basis
decreased $5.6 million compared to the same periods last year and was
primarily due to lower income from fair value adjustments on free standing
derivative instruments associated with auto loans sold to the multi-seller
revolving conduit. Beginning in the second half of 2002 and throughout
2003, the Corporation has employed free standing interest rate futures to
economically hedge the market value volatility from the auto-related
derivative instrument due to changes in interest rates.
32
OTHER EXPENSE
_____________
Total other expense for the three months ended September 30, 2003 amounted
to $410.0 million compared to $326.6 million for the three months ended
September 30, 2002, an increase of $83.4 million or 25.6%. Approximately
$7.0 million of the quarter over quarter expense growth was attributable
to the Southwest acquisition which closed in the fourth quarter of 2002
and was included in M&I's operating expenses since the acquisition date.
Total other expense for the three months ended September 30, 2003 includes
the impact of the reversal of liabilities for a facility closure, write
off of capitalized software costs and the cost of debt refinancing as
previously discussed, which aggregated $61.9 million. Total other expense
for the three months ended September 30, 2002 includes the transition
costs associated with Metavante's integration of PayTrust which amounted
to $3.9 million. Excluding the impact of acquisition activity and the
items discussed above, total other expense growth in the third quarter of
2003 compared to the third quarter of 2002 was approximately $18.4 million
or 5.7%.
For the nine months ended September 30, 2003, total other expense amounted
to $1,081.3 million compared to $958.2 million for the nine months ended
September 30, 2002, an increase of $123.1 million or 12.8%. Total other
expense for the nine months ended September 30, 2003 includes the impact
of the reversal of liabilities for a facility closure, write off of
capitalized software costs and the cost of debt refinancing as previously
discussed, which aggregated $61.9 million. The Corporation estimates that
approximately $28.2 million of the expense growth on a year to date basis
was attributable to the bank and Metavante acquisitions which were
included in M&I's operating expenses since their acquisition dates. In
addition, the nine months ended September 30, 2003 and 2002, include
expenses for the transition costs associated with Metavante's integration
of PayTrust which amounted to $2.5 million and $3.9 million, respectively.
Excluding the impact of acquisition activity and the items discussed
above, total other expense growth in the first nine months of 2003
compared to the first nine months of 2002 was approximately $34.4 million
or 3.6%.
Expense control is sometimes measured in the financial services industry
by the efficiency ratio statistic. The efficiency ratio is calculated by
taking total other expense divided by the sum of total other income
(including Capital Markets revenue but excluding investment securities
gains or losses) and net interest income on a fully taxable equivalent
basis. The Corporation's efficiency ratios for the three months ended
September 30, 2003, and prior four quarters were:
Efficiency Ratios
_________________
September 30, June 30, March 31, December 31, September 30,
2003 2003 2003 2002 2002
-----------------------------------------------------------------
Consolidated Corporation 69.4 % 59.0 % 59.6 % 60.4 % 60.7 %
Consolidated Corporation
Excluding Metavante 60.6 % 48.2 % 48.5 % 49.6 % 50.0 %
Excluding the impact of the reversal of liabilities for a facility
closure, write off of capitalized software costs, the cost of debt
refinancing and the Capital Markets gain as previously discussed, the
Corporation's consolidated efficiency ratio, excluding Metavante, was
approximately 49.4% for the three months ended September 30, 2003.
Salaries and employee benefits expense amounted to $199.4 million in the
third quarter of 2003 compared to $187.2 million in the third quarter of
2002, an increase of $12.2 million. For the nine months ended September
30, 2003, salaries and employee benefits expense amounted to $590.1
million compared to $552.0 million for the nine months ended September 30,
2002, an increase of $38.1 million. Included in salaries and benefit
expense for the three and nine months ended September 30, 2003 was a
reversal of $2.4 million of accrued severance associated with the decision
to keep a facility operational as previously discussed. Salaries and
employee benefits expense associated with the acquisitions and the
PayTrust transition costs accounted for approximately $1.3 million and
$14.0 million of the increase in salaries and benefits expense for the
three and nine months ended September 30, 2003, respectively. Variable
incentive compensation, primarily attributable to the banking segment,
increased $6.4 million and $17.5 million in the three and nine months
ended September 30, 2003 compared to the respective comparative periods of
the prior year.
For the three months ended September 30, 2003, occupancy and equipment
expense amounted to $40.3 million compared to $49.4 million in the
comparative three month period in 2002, a decrease of $9.1 million. On a
year to date basis, occupancy and equipment expense amounted to $133.8
million in the first nine months of 2003 compared to $143.0 million in the
first nine months of 2002, a decrease of $9.2 million. Included in
occupancy and equipment expense for the three and nine months ended
September 30, 2003 is a reversal of $6.1 million of accrued lease
termination costs associated with the decision to keep a facility
operational as previously discussed. Occupancy and equipment expense
associated with the PayTrust transition accounted for $1.7 million and
$0.9 million of the decline in this expense in the three and nine months
ended September 30, 2003 compared to the respective periods in the prior
year. Expense reductions at the banking and Metavante segments more than
offset the added expense from acquisitions.
33
Software expense in the third quarter of 2003 amounted to $11.7 million
compared to $10.5 million in the third quarter of 2002. For the nine
months ended September 30, 2003, software expense amounted to $32.4
million compared to $33.1 million for the nine months ended September 30,
2002. As previously reported, during the first quarter of 2002, the
Corporation's banking segment incurred nonrecurring software charges of
approximately $1.7 million.
For the three months ended September 30, 2003, processing charges amounted
to $13.2 million compared to $11.1 million for the three months ended
September 30, 2002. For the nine months ended September 30, 2003,
processing charges amounted to $35.9 million compared to $29.6 million for
the nine months ended September 30, 2002. The quarter over quarter and
year to date over year to date growth in processing charges was primarily
attributable to the banking segment and was due to increased third-party
processing charges associated with wholesale loan activity.
Supplies and printing and shipping and handling expense amounted to $17.8
million in the third quarter of 2003 compared to $17.0 million in the
third quarter of 2002, an increase of $0.8 million or 4.7%. On a year to
date basis, supplies and printing and shipping and handling expense
amounted to $54.2 million in the first nine months of 2003 compared to
$49.6 million in the first nine months of 2002, an increase of $4.6
million or 9.3%. Approximately $0.1 million and $0.5 million of the
increase for the three and nine months ended September 30, 2003,
respectively, was attributable to the banking and Metavante acquisitions
and the PayTrust transition costs. The remainder of the increase was
primarily attributable to Metavante for both comparable periods.
For the three months ended September 30, 2003, professional services
expense amounted to $11.1 million compared to $9.0 million for the three
months ended September 30, 2002, an increase of $2.1 million.
Approximately $0.1 million of the increase in professional services
expense was attributable to the banking and Metavante acquisitions and
transition costs. For the nine months ended September 30, 2003,
professional services expense amounted to $32.3 million compared to $27.6
million for the nine months ended September 30, 2002, an increase of $4.7
million. Approximately $0.7 million of the increase in professional
services expense in the first nine months of 2003 compared to the same
period in 2002 was attributable to the banking and Metavante acquisitions
and the PayTrust transition costs. The remaining increase was primarily
attributable to increased fees associated with mortgage loan production
and increased fees incurred by Metavante.
Intangible amortization expense decreased $4.4 million in the third
quarter of 2003 compared to the third quarter of 2002 and on a year to
date basis, increased $0.8 million in the first nine months of 2003
compared to the first nine months of 2002. Core deposit premium
amortization increased $1.3 million and $4.4 million the three and nine
months ended September 30, 2003, compared to the respective periods in the
prior year. Amortization and valuation reserve adjustments associated
with mortgage servicing rights decreased amortization expense $4.8 million
in the third quarter of 2003 compared to the third quarter of 2002 and on
a year to date basis, decreased amortization expense by $1.7 million.
During the third quarter of 2003, $2.4 million of the valuation reserve
established for mortgage servicing rights was reversed based on the
estimated fair value of the servicing rights at September 30, 2003. The
carrying value of the Corporation's mortgage servicing rights was $5.6
million at September 30, 2003.
Other expense amounted to $113.1 million in the third quarter of 2003
compared to $34.5 million in the third quarter of 2002, an increase of
$78.6 million. For the nine months ended September 30, 2003 other expense
amounted to $184.9 million compared to $106.3 million for the nine months
ended September 30, 2002, which was also an increase of $78.6 million.
Included in other expense for the three and nine months ended September
30, 2003, is the cost of the debt retirement and swap terminations, as
previously discussed, which amounted to $54.7 million in the third quarter
of 2003. For the nine months ended September 30, 2003, such costs
amounted to $56.7 million and include the current quarter transactions
plus the $2.0 million recognized in the second quarter of 2003 associated
with the redemption of MVBI Capital Trust's Floating Rate Trust Preferred
Securities. Expense associated with the banking and Metavante
acquisitions and the PayTrust transition costs contributed approximately a
net $0.4 million to other expense in the third quarter of 2003 and
contributed a net $2.9 million to other expense in the first nine months
of 2003. Increases in the cost of business related insurance coverage,
increased spending in advertising and promotion and increased costs
associated with Metavante's card solutions and equipment sales added an
additional $4.2 million to other expense in the third quarter of 2003
compared to the third quarter of 2002 and $10.8 million in the nine months
ended September 30, 2003, compared to the nine months ended September 30,
2002. Litigation, environmental clean-up and other losses recorded in the
third quarter of 2002 and asset write-downs associated with foreclosed
properties and commercial leasing residual values recorded in the first
quarter of 2002 offset the comparable quarter over quarter and year to
date over year to date expense growth.
34
Other expense is affected by the capitalization of costs, net of
amortization and write-downs associated with software development and
customer data processing conversions. Net software and conversion
amortization and write-downs were $16.2 million in the third quarter of
2003 and in the third quarter of 2002 net capitalization amounted to $4.2
million resulting in an increase to other expense over the comparative
quarters of $20.4 million. Net software and conversion amortization and
write-downs were $7.8 million for the nine months ended September 30, 2003
and net capitalization amounted to $11.4 million for the nine months ended
September 30, 2002, resulting in an increase to other expense over the
comparative year to date periods of $19.2 million. As previously
discussed, write-downs of capitalized software costs deemed to have no
future value were $15.7 million in the three and nine months ended
September 30, 2003. Approximately $1.5 million of net software
capitalization in the nine months ended September 30, 2003 related to the
PayTrust acquisition.
INCOME TAXES
____________
The provision for income taxes for the three months ended September 30,
2003, amounted to $25.5 million or 15.4% of pre-tax income compared to
$60.7 million or 33.7% of pre-tax income for the three months ended
September 30, 2002. The provision for income taxes for the nine months
ended September 30, 2003, amounted to $159.9 million or 28.4% of pre-tax
income compared to $174.3 million or 32.9% of pre-tax income for the nine
months ended September 30, 2002.
In the normal course of business, the Corporation and its affiliates are
routinely subject to examinations from federal and state tax authorities.
During the third quarter of 2003, several income tax audits covering
multiple tax jurisdictions were resolved which positively affected the
banking segment by approximately $25.0 million and Metavante by $4.9
million and resulted in a lower provision for income taxes in the
Consolidated Statements of Income for the three and nine months ended
September 30, 2003. Excluding the impact of the income tax audits, the
pro forma effective income tax rate for both the three and nine months
ended September 30, 2003 would have been 33.8%.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
Shareholders' equity was $3.34 billion or 9.9% of total consolidated
assets at September 30, 2003, compared to $3.04 billion or 9.2% of total
consolidated assets at December 31, 2002, and $2.72 billion or 9.0% of
total consolidated assets at September 30, 2002. The increase at
September 30, 2003 was primarily due to earnings net of dividends paid.
The loss in accumulated other comprehensive income was $37.9 million lower
since December 31, 2002, and $23.9 million lower since September 30, 2002.
The net unrealized gain associated with available for sale investment
securities declined $19.2 million since December 31, 2002 while the
unrealized loss associated with the change in fair value of the
Corporation's derivative financial instruments designated as cash flow
hedges declined $57.1 million since December 31, 2002 resulting in the net
increase in Shareholders' equity. The change in fair value of the
Corporation's derivative financial instruments designated as cash flow
hedges since December 31, 2002 was primarily due to the termination of
certain interest rate swaps associated with the debt retirement in the
third quarter of 2003 and the redemption of the trust preferred securities
in the second quarter of 2003.
The Corporation has a Stock Repurchase Program under which up to 12
million shares can be repurchased annually. During the third quarter of
2003, 1.6 million common shares were acquired at an aggregate cost of
$50.2 million or $31.33 per common share. For the nine months ended
September 30, 2003, 1.7 million shares have been acquired at an aggregate
cost of $54.5 million or $31.19 per share.
35
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown
in the following tables.
Risk-Based Capital Ratios
_________________________
($ in millions)
September 30, 2003 December 31, 2002
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,583 9.31 % $ 2,344 8.75 %
Tier 1 Capital
Minimum Requirement 1,110 4.00 1,072 4.00
-------------------------------- --------------------------------
Excess $ 1,473 5.31 % $ 1,272 4.75 %
================================ ================================
Total Capital $ 3,552 12.80 % $ 3,322 12.40 %
Total Capital
Minimum Requirement 2,220 8.00 2,143 8.00
-------------------------------- --------------------------------
Excess $ 1,332 4.80 % $ 1,179 4.40 %
================================ ================================
Risk-Adjusted Assets $ 27,753 $ 26,791
================= =================
Leverage Ratios
---------------
($ in millions)
September 30, 2003 December 31, 2002
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,583 7.98 % $ 2,344 7.58 %
Minimum Leverage
Requirement 970 - 1,618 3.00 - 5.00 928 - 1,546 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,613 - 965 4.98 - 2.98 % $ 1,416 - 798 4.58 - 2.58 %
================================ ================================
Adjusted Average
Total Assets $ 32,358 $ 30,924
================= =================
M&I manages its liquidity to ensure that funds are available to each of
its banks to satisfy the cash flow requirements of depositors and
borrowers and to ensure the Corporation's own cash requirements are met.
M&I maintains liquidity by obtaining funds from several sources.
The Corporation's most readily available source of liquidity is its
investment portfolio. Investment securities available for sale, which
totaled $4.6 billion at September 30, 2003, represent a highly accessible
source of liquidity. The Corporation's portfolio of held-to-maturity
investment securities, which totaled $0.9 billion at September 30, 2003,
provides liquidity from maturities and amortization payments. The
Corporation's mortgage loans held-for-sale provide additional liquidity.
The loans, which aggregated $42.8 million at September 30, 2003, represent
recently funded home mortgage loans that are prepared for delivery to
investors, which generally occurs within thirty to ninety days after the
loan has been funded.
Depositors within M&I's defined markets are another source of liquidity.
Core deposits (demand, savings, money market and consumer time deposits)
averaged $17.7 billion in the third quarter of 2003. The Corporation's
banking affiliates may also access the federal funds markets or utilize
collateralized borrowings such as treasury demand notes or FHLB advances.
The banking affiliates may use wholesale deposits. Wholesale deposits are
funds in the form of deposits generated through distribution channels
other than the Corporation's own banking branches. These deposits allow
the Corporation's banking subsidiaries to gather funds across a national
geographic base and at pricing levels considered attractive, where the
underlying depositor may be retail or institutional. Access to wholesale
deposits also provides the Corporation with the flexibility to not pursue
single service time deposit relationships in markets that have experienced
some unprofitable pricing levels. Wholesale deposits averaged $4.4
billion in the third quarter of 2003.
The Corporation utilizes certain financing arrangements to meet its
balance sheet management, funding, liquidity, and market or credit risk
management needs. The majority of these activities are basic term or
revolving securitization vehicles. These vehicles are generally funded
through term-amortizing debt structures or with short-term commercial
paper designed to be paid off based on the underlying cash flows of the
assets securitized. These vehicles provide access to funding sources
substantially separate from the general credit risk of the Corporation and
its subsidiaries. See Note 7 to the Consolidated Financial Statements for
an update of the Corporation's securitization activities in the third
quarter of 2003.
36
The Corporation's lead bank, M&I Marshall & Ilsley Bank ("Bank"), has
implemented a bank note program which permits it to issue up to $7.0
billion of short-term and medium-term notes which are offered and sold
only to institutional investors. This program is intended to enhance
liquidity by enabling the Bank to sell its debt instruments in private
markets in the future without the delays which would otherwise be
incurred. Bank notes outstanding at September 30, 2003, amounted to $2.2
billion of which $0.6 billion is subordinated and qualifies as
supplementary capital for regulatory capital purposes. During the third
quarter of 2003, the Bank acquired $13.2 million of its senior notes and
$22.3 million of its subordinated notes in open market purchases as part
of the debt refinancing previously discussed. No bank notes were issued
during the third quarter of 2003.
The national capital markets represent a further source of liquidity to
M&I. M&I has filed a shelf registration statement which is intended to
permit M&I to raise funds through sales of corporate debt securities with
a relatively short lead time. Under the shelf registration statement, the
Corporation may issue up to $0.5 billion of medium-term Series E notes
with maturities ranging from 9 months to 30 years and at fixed or floating
rates. At September 30, 2003, Series E notes outstanding amounted to $0.2
billion. During the third quarter of 2003, M&I acquired $51.6 million of
Series E notes in open market purchases as part of the debt refinancing
previously discussed. Series E notes aggregating $50.0 million were
issued during the third quarter of 2003. The Corporation may issue up to
$0.5 billion of medium-term MiNotes with maturities ranging from 9 months
to 30 years and at fixed or floating rates. The MiNotes are issued in
smaller denominations to attract retail investors. Approximately $64.5
million of MiNotes were issued during the third quarter of 2003.
Additionally, the Corporation has a commercial paper program. At
September 30, 2003, commercial paper outstanding amounted to $0.3 billion.
Short-term borrowings represent contractual debt obligations with
maturities of one year or less and amounted to $3.1 billion at September
30, 2003. Long-term borrowings which are scheduled to mature in one year
or less at September 30, 2003 amounted to $1.3 billion. Other obligations
include future minimum lease payments on facilities and equipment as
described in Note 10 and commitments to extend credit and letters of
credit as described in Note 19 of the Notes to Consolidated Financial
Statements contained in Item 8 of the Corporation's Annual Report on Form
10-K for the year ended December 31, 2002. Many commitments to extend
credit expire without being drawn upon and letters of credit are
contingent commitments. The amounts outstanding at any time do not
necessarily represent future cash requirements. 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.
CRITICAL ACCOUNTING POLICIES
____________________________
The Corporation has established various accounting policies which govern
the application of accounting principles generally accepted in the United
States in the preparation of the Corporation's consolidated financial
statements. The significant accounting policies of the Corporation are
described in the footnotes to the consolidated financial statements
contained in the Corporation's Annual Report on Form 10-K and updated as
necessary in its Quarterly Reports on Form 10-Q. Certain accounting
policies involve significant judgments and assumptions by management that
may have a material impact on the carrying value of certain assets and
liabilities. Management considers such accounting policies to be critical
accounting policies. The judgments and assumptions used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of judgments
and assumptions made by management, actual results could differ from these
judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of the operations of the
Corporation. Management continues to consider the following to be those
accounting policies that require significant judgments and assumptions:
Allowance for Loan and Lease Losses
___________________________________
The allowance for loan and lease losses represents management's estimate
of probable losses inherent in the Corporation's loan and lease portfolio.
Management evaluates the allowance each quarter to determine that it is
adequate to absorb these inherent losses. This evaluation is supported by
a methodology that identifies estimated losses based on assessments of
individual problem loans and historical loss patterns of homogeneous loan
pools. In addition, environmental factors, including regulatory guidance,
unique to each measurement date are also considered. This reserving
methodology has the following components:
Specific Reserve. The Corporation's internal risk rating system is used
to identify loans and leases rated "Classified" as defined by regulatory
agencies. In general, these loans have been internally identified as
credits requiring management's attention due to underlying problems in the
borrower's business or collateral concerns. Subject to a minimum size, a
quarterly review of these loans is performed to identify the specific
reserve necessary to be allocated to each of these loans. This analysis
considers expected future cash flows, the value of collateral and also
other factors that may impact the borrower's ability to make payments when
due. Included in this group are those nonaccrual or renegotiated loans
that meet the criteria as being "impaired" under the definition in SFAS
114. A loan is impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. For impaired
loans, impairment is measured using one of three alternatives: (1) the
present value of expected future cash flows discounted at the loan's
effective interest rate; (2) the loan's observable market price, if
available; or (3) the fair value of the collateral for collateral
dependent loans and loans for which foreclosure is deemed to be probable.
37
Collective Loan Impairment. This component of the allowance for loan and
lease losses is comprised of two elements. First, the Corporation makes a
significant number of loans and leases, which due to their underlying
similar characteristics, are assessed for loss as homogeneous pools.
Included in the homogeneous pools are loans and leases from the retail
sector and commercial loans under a certain size, which have been excluded
from the specific reserve allocation previously discussed. The
Corporation segments the pools by type of loan or lease and using
historical loss information, estimates a loss reserve for each pool.
The second element reflects management's recognition of the uncertainty
and imprecision underlying the process of estimating losses. Based on
management's judgment, reserves are allocated to industry segments or
product types due to environmental conditions unique to the measurement
period. Consideration is given to both internal and external
environmental factors such as economic conditions in certain geographic or
industry segments of the portfolio, economic trends in the retail lending
sector, risk profile, and portfolio composition. Reserves are allocated
based on estimates of loss exposure that management has identified based
on these economic trends or conditions. The internal risk rating system
is then used to identify those loans within these industry segments that
based on financial, payment or collateral performance, warrant closer
ongoing monitoring by management. The specific loans mentioned earlier
are excluded from this analysis.
The following factors were taken into consideration in determining the
adequacy of the allowance for loans and lease losses at September 30,
2003:
Management continues to be concerned over the lack of economic
improvement forecasted for 2003 and the resulting impact this will
have on the Corporation's customer base. Although recent economic
reports and opinions indicate there may be some signs of
improvement, the uncertainty remains as to when there may be any
substantive increase in business activity. In addition, the retail
loan portfolio will continue to be affected by the prolonged
economic conditions as evidenced by the generally increasing
personal bankruptcy and unemployment rates.
At September 30, 2003, nonperforming loans and leases amounted to
$187.3 million or 0.76% of consolidated loans and leases compared to
$203.3 million or 0.82% of consolidated loans and leases at June 30,
2003, and $212.1 million or 0.88% of consolidated loans and leases
at March 31, 2003. Nonperforming loans and leases decreased $16.0
million or 7.9% in the third quarter of 2003 compared to the second
quarter of 2003. Approximately 79% of the decline was attributable
to two larger credits. Average nonperforming loans and leases
declined $22.1 million in the third quarter of 2003 compared to the
second quarter of 2003 after remaining at consistent levels between
the first and second quarters of 2003. Average nonperforming loans
and leases amounted to $194.4 million in the current quarter
compared to $216.5 million in the second quarter of 2003.
Nonperforming loans and leases were $7.2 million or 3.7% lower at
September 30, 2003, compared to December 31, 2002. As stated in
previous quarters, some of the Corporation's largest nonperforming
loans are in industries that have undergone well-publicized declines
during the recent recession. Among those industries affected are
construction and related, technology, airline, manufacturing and
healthcare.
At the present time, there is no specific industry that is of
immediate concern, however, the Corporation believes that the
current economic environment will continue to negatively affect the
markets and communities it serves in the near term. While
nonperforming loans have remained in the 80-90 basis point range
over the past two years, there continues to be some risk of
nonperforming loans increasing.
The Corporation's primary lending areas are Wisconsin, Arizona,
Minnesota and Missouri. The recent acquisitions in Minnesota and
Missouri represent new geographic regions for the Corporation. Each
of these regions has cultural and environmental factors that are
unique to them. The risk in entering these new regions and the
uncertainty regarding the inherent losses in their respective loan
portfolios will remain until the Corporation's credit underwriting
and monitoring processes are fully implemented.
38
Net charge-offs in the third quarter of 2003 amounted to $7.9
million, or 13 basis points of total average loans and leases
outstanding this quarter compared to $9.8 million or 16 basis points
of total average loans and leases outstanding in the second quarter
of 2003 and $25.8 million or 44 basis points in the first quarter of
2003. Included in charge-offs for the first quarter was $19.0
million related to the carrying value of lease obligations for
airplanes leased to Midwest Airlines, Inc. In 2002 and 2001, annual
net charge-offs have remained in the range of approximately 20 basis
points. This range of net charge-offs to average loans is somewhat
higher than historical levels incurred by the Corporation over the
past five years. In previous quarters, the Corporation disclosed
that it expects net charge-offs, excluding the airline lease charge-
offs taken in the first quarter, to range from 0.15% to 0.25% for
the year and nonperfoming loans and leases as a percent of total
loans and leases outstanding to be in the range of 80-90 basis
points. Based on this quarter's experience, it appears that the
Corporation's credit quality ratios will be at the low end of the
range in the near term. Until the economy demonstrates clear
strengthening, some degree of stress and uncertainty exists and the
Corporation believes it is too soon to project if this quarter's
experience will be sustained.
During the third quarter of 2003, the Corporation's commitments to
shared national credits were approximately $2.0 billion with usage
averaging around 41%. Many of these borrowers are in industries
currently impacted by the economic climate. In addition, many of
the Corporation's largest charge-offs have come from the shared
national credit portfolio. Approximately $1.3 million of the net
charge-offs in the third quarter of 2003 relate to a shared national
credit. Although these factors result in an increased risk profile,
as of September 30, 2003, shared national credit nonperforming loans
were approximately 0.31% and 0.74% of this segment's total
commitments and outstandings, respectively. The Corporation's
exposure to shared national credits is monitored closely given the
economic uncertainty as well as this segment's loss experience.
At September 30, 2003, special reserves continue to be carried for
exposures to manufacturing, healthcare, production agriculture
(including dairy and cropping operations), and the airline and
travel industries. The majority of the commercial charge-offs
incurred during the past year were in these industry segments.
While most loans in these categories are still performing, the
Corporation continues to believe these sectors have been more
adversely affected by the economic slowdown. Reduced revenues
causing a declining utilization of the industry's capacity levels
have impacted manufacturing. As a result, collateral values and the
amounts realized through the sale or liquidation of manufacturing
plant and equipment have declined accordingly.
Based on the above loss estimates, senior lending and financial management
determine their best estimate of the required reserve. Management's
evaluation of the factors described above resulted in an allowance for
loan and lease losses of $348.1 million at September 30, 2003 which was
unchanged since June 30, 2003. The resulting provisions for loan and
lease losses are the amounts required to establish the allowance for loan
and lease losses to the required level after considering charge-offs and
recoveries. Management recognizes there are significant estimates in the
process and the ultimate losses could be significantly different from
those currently estimated.
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the allowance for loan and lease losses.
There have been no material changes in assumptions or estimation
techniques as compared to prior periods that impacted the determination of
the current period allowance.
Capitalized Software and Conversion Costs
_________________________________________
Direct costs associated with the production of computer software that will
be licensed externally or used in a service bureau environment are
capitalized. Capitalization of such costs is subject to strict accounting
policy criteria, however, the appropriate time to initiate capitalization
requires management judgment. Once the specific capitalized project is
put into production, the software cost is amortized over its estimated
useful life, generally four years. Each quarter, the Corporation performs
net realizable value tests to ensure the assets are recoverable. Such
tests require management judgment as to the future sales and profitability
of a particular product which involves, in some cases, multi-year
projections. Technology changes and changes in customer requirements can
have a significant impact on the recoverability of these assets and can be
difficult to predict. Should significant adverse changes occur, estimates
of useful life may have to be revised or write-offs would be required to
recognize impairment. For the three months ended September 30, 2003, and
2002, the amount of software costs capitalized amounted to $11.8 million
and $14.8 million, respectively. Amortization expense of software costs,
excluding write-offs, amounted to $11.1 for the three months ended
September 30, 2003 compared to $9.3 million for the three months ended
September 30, 2002. For the nine months ended September 30, 2003, and
2002, the amount of software costs capitalized amounted to $43.8 million
and $42.5 million, respectively. Amortization expense of software costs,
excluding write-offs, amounted to $32.6 million and $25.5 million for the
nine months ended September 30, 2003, and 2002, respectively.
In conjunction with previous acquisitions, Metavante had made certain
operating decisions with respect to platform consolidations. As a result
of a change in product strategy, $15.7 million of related capitalized
software costs were determined to have no future value and were written
off.
39
Direct costs associated with customer system conversions to the data
processing operations are capitalized and amortized on a straight-line
basis over the terms, generally five to seven years, of the related
servicing contracts.
Capitalization only occurs when management is satisfied that such costs
are recoverable through future operations or penalties (buyout fees) in
the case of early termination. For the three months ended September 30,
2003, and 2002, the amount of conversion costs capitalized amounted to
$3.2 million, respectively. Amortization expense amounted to $4.4 million
and $4.5 million for the three months ended September 30, 2003, and 2002,
respectively. For the nine months ended September 30, 2003, and 2002, the
amount of conversion costs capitalized amounted to $9.4 million and $7.6
million, respectively. Amortization expense amounted to $12.7 million and
$13.2 million for the nine months ended September 30, 2003, and 2002,
respectively.
Net unamortized costs were ($ in millions):
September 30,
-------------------------
2003 2002
----------- -----------
Software $ 137.7 $ 132.9
Conversions 32.6 37.7
----------- -----------
Total $ 170.3 $ 170.6
=========== ===========
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the amount of costs that are capitalized
for software development or conversion activities. There have been no
material changes in assumptions or estimation techniques as compared to
prior periods that impacted the determination of the periodic amortization
of such costs.
Financial Asset Sales and Securitizations
_________________________________________
The Corporation utilizes certain financing arrangements to meet its
balance sheet management, funding, liquidity, and market or credit risk
management needs. The majority of these activities are basic term or
revolving securitization vehicles. These vehicles are generally funded
through term-amortizing debt structures or with short-term commercial
paper designed to be paid off based on the underlying cash flows of the
assets securitized. These financing entities are contractually limited to
a narrow range of activities that facilitate the transfer of or access to
various types of assets or financial instruments. In certain situations,
the Corporation provides liquidity and/or loss protection agreements. In
determining whether the financing entity should be consolidated, the
Corporation considers whether the entity is a qualifying special-purpose
entity (QSPE) as defined in Statement of Financial Accounting Standards
(SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. For non-consolidation a QSPE must be
demonstrably distinct, have significantly limited permitted activities,
hold assets that are restricted to transferred financial assets and
related assets, and can sell or dispose of non-cash financial assets only
in response to specified conditions.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. This interpretation
addresses consolidation by business enterprises of variable interest
entities. Under current practice, entities generally have been included
in consolidated financial statements because they are controlled through
voting interests. This interpretation explains how to identify variable
interest entities and how an entity assesses its interests in a variable
interest entity to decide whether to consolidate that entity. FIN 46
requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. Variable interest
entities that effectively disperse risks will not be consolidated unless a
single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. Transferors
to QSPEs and "grandfathered" QSPEs subject to the reporting requirements
of SFAS 140 are outside the scope of FIN 46 and do not consolidate those
entities. FIN 46 also requires certain disclosures by the primary
beneficiary of a variable interest entity or an entity that holds a
significant variable interest in a variable interest entity.
With respect to its existing securitization activities, the Corporation
does not believe FIN 46 impacts its consolidated financial statements
because its transfers are generally to QSPEs or to entities in which the
Corporation does not hold a significant variable interest.
The Corporation regularly sells automobile loans to an unconsolidated
multi-seller special purpose entity commercial paper conduit in
securitization transactions in which subordinated interests are retained.
The outstanding balances of automobile loans sold in these securitization
transactions were $918.3 million at September 30, 2003. At September 30,
2003, the carrying amount of retained interests amounted to $47.1 million.
40
The financial assets are sold in a two-step process that results in a
surrender of control over the assets as evidenced by true-sale opinions
from legal counsel, to unconsolidated entities that securitize the assets.
The Corporation retains interests in the securitized assets in the form of
interest-only strips and a cash reserve account. Gain or loss on sale of
the assets depends in part on the carrying amount assigned to the assets
sold allocated between the asset sold and retained interests based on
their relative fair values at the date of transfer. The value of the
retained interests is based on the present value of expected cash flows
estimated using management's best estimates of the key assumptions -
credit losses, prepayment speeds, forward yield curves and discount rates
commensurate with the risks involved. Actual results can differ from
expected results.
The Corporation reviews the carrying values of the retained interests
monthly to determine if there is a decline in value that is other than
temporary and periodically reviews the propriety of the assumptions used
based on current historical experience as well as the sensitivities of the
carrying value of the retained interests to adverse changes in the key
assumptions. The Corporation believes that its estimates result in a
reasonable estimate of fair value of the retained interests.
During the second quarter of 2003, the Corporation recognized an
impairment loss of approximately $4.1 million, which is included in net
investment securities gains in the Consolidated Statements of Income for
the nine months ended September 30, 2003. The difference between revised
assumptions based on actual and projected experience compared to initially
expected assumptions were deemed to be other than temporary.
The Corporation also sells, from time to time, investment securities
classified as available for sale that are highly rated to an
unconsolidated bankruptcy remote QSPE whose activities are limited to
issuing highly rated asset-backed commercial paper with maturities up to
180 days which is used to finance the purchase of the investment
securities. The Bank provides liquidity back-up in the form of Liquidity
Purchase Agreements. In addition, the Bank acts as counterparty to
interest rate swaps that enable the QSPE to hedge its interest rate risk.
Such swaps are designated as trading in the Corporation's Consolidated
Balance Sheet.
Under the terms of the Administration Agreement, the Bank, as
administrator of the QSPE, is required to sell interests in the securities
funded by the QSPE to the Bank as the liquidity purchaser under the
liquidity agreements, if at any time (after giving effect to any issuance
of new commercial paper notes and the receipt of payments under any swap
agreement) the QSPE has insufficient funds to repay any maturing
commercial paper note and the Bank, as liquidity agent, has received a
notice of such deficiency. The Bank, as the liquidity provider, will be
obligated to purchase interests in such securities under the terms of the
liquidity agreement to repay the maturing commercial paper notes unless
(i) after giving effect to such purchase, the aggregate of securities,
purchased under the relevant liquidity agreement would exceed the
aggregate maximum liquidity purchase amount under such liquidity agreement
or (ii) certain bankruptcy events with respect to the QSPE have occurred;
provided that the Bank is not required to purchase any defaulted security.
For this purpose, a defaulted security is any security that is rated below
"Caa2" by Moody's and below "CCC" by Standard & Poors. To date, the Bank
has never acquired interests in any securities under the terms of the
liquidity agreements.
A subsidiary of the Bank has entered into interest rate swaps with the
QSPE designed to counteract the interest rate risk associated with third
party beneficial interest (commercial paper) and the transferred assets.
The beneficial interests in the form of commercial paper have been issued
by the QSPE to parties other than the Bank and its subsidiary or any other
affiliates. The notional amounts do not exceed the amount of beneficial
interests. The swap agreements do not provide the QSPE or its
administrative agent any decision-making authority other than those
specified in the standard ISDA Master Agreement.
At September 30, 2003, highly rated investment securities in the amount of
$208.7 million were outstanding in the QSPE to support the outstanding
commercial paper.
Income Taxes
____________
Income taxes are accounted for using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on tax assets and liabilities of a
change in tax rates is recognized in the income statement in the period
that includes the enactment date.
The determination of current and deferred income taxes is based on complex
analyses of many factors including interpretation of Federal and state
income tax laws, the difference between tax and financial reporting basis
of assets and liabilities (temporary differences), estimates of amounts
currently due or owed such as the timing of reversals of temporary
differences and current accounting standards. The Corporation's
interpretation of Federal and state income tax laws is periodically
reviewed by the Federal and state taxing authorities who make assessments
based on their determination of tax laws. Tax liabilities could differ
significantly from the estimates and interpretations used in determining
the current and deferred income tax liabilities based on the completion of
taxing authority examinations.
41
During the third quarter of 2003, several income tax audits covering
multiple tax jurisdictions were resolved which positively affected the
banking segment by approximately $25.0 million and Metavante by $4.9
million and resulted in a lower provision for income taxes in the
Consolidated Statements of Income for the three and nine months ended
September 30, 2003.
FORWARD-LOOKING STATEMENTS
__________________________
Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of
Financial Position and Results of Operations" and "Quantitative and
Qualitative Disclosures about Market Risk," respectively, contain forward-
looking statements within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include, without limitation, statements regarding expected
operating activities and results which are preceded by words such as
"expects", "anticipates" or "believes". Such statements are subject to
important factors that could cause the Corporation's actual results to
differ materially than those anticipated by the forward-looking
statements. These factors include those referenced in Item 1, Business,
of the Corporation's Annual Report on Form 10-K for the period ending
December 31, 2002 under the heading "Forward-Looking Statements" or as may
be described from time to time in the Corporation's subsequent SEC
filings, and such factors are incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following updated information should be read in conjunction with the
Corporation's 2002 Annual Report on Form 10-K. Updated information
regarding the Corporation's use of derivative financial instruments is
contained in Note 10, Notes to Financial Statements contained in Item 1
herein.
Market risk arises from exposure to changes in interest rates, exchange
rates, commodity prices, and other relevant market rate or price risk.
The Corporation faces market risk through trading and other than trading
activities. While market risk that arises from trading activities in the
form of foreign exchange and interest rate risk is immaterial to the
Corporation, market risk from other than trading activities in the form of
interest rate risk is measured and managed through a number of methods.
Interest Rate Risk
___________________
The Corporation uses financial modeling techniques to identify potential
changes in income under a variety of possible interest rate scenarios.
Financial institutions, by their nature, bear interest rate and liquidity
risk as a necessary part of the business of managing financial assets and
liabilities. The Corporation has designed strategies to limit these risks
within prudent parameters and identify appropriate risk/reward tradeoffs
in the financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing
and embedded option characteristics of the assets and liabilities held by
the Corporation. Policies are in place to assure that neither earnings
nor fair value at risk exceed appropriate limits. The use of a limited
array of derivative financial instruments has allowed the Corporation to
achieve the desired balance sheet repricing structure while simultaneously
meeting the desired objectives of both its borrowing and depositing
customers.
The models used include measures of the expected repricing characteristics
of administered rate (NOW, savings and money market accounts) and non-rate
related products (demand deposit accounts, other assets and other
liabilities). These measures recognize the relative insensitivity of
these accounts to changes in market interest rates, as demonstrated
through current and historical experiences. However, during the second
quarter of 2003, the Corporation increased the proportion of these
accounts modeled as rate sensitive, in order to recognize the instability
of some of the recent balance growth in these accounts. This modeling
treatment will be maintained until the incremental balances can be
observed across a more complete interest rate cycle. In addition to
contractual payment information for most other assets and liabilities, the
models also include estimates of expected prepayment characteristics for
those items that are likely to materially change their payment structures
in different rate environments, including residential mortgage products,
certain commercial and commercial real estate loans and certain mortgage-
related securities. Estimates for these sensitivities are based on
industry assessments and are substantially driven by the differential
between the contractual coupon of the item and current market rates for
similar products.
42
This information is incorporated into a model that allows the projection
of future income levels in several different interest rate environments.
Earnings at risk is calculated by modeling income in an environment where
rates remain constant, and comparing this result to income in a different
rate environment, and then dividing this difference by the Corporation's
budgeted operating income before taxes for the calendar year. Since
future interest rate moves are difficult to predict, the following table
presents two potential scenarios - a gradual increase of 100bp across the
entire yield curve over the course of a year (+25bp per quarter), and a
gradual decrease of 100bp across the entire yield curve over the course of
a year (-25bp per quarter) for the balance sheet as of the indicated
dates:
Impact to Annual Pretax Income as of
September 30, June 30, March 31, December 31, September 30,
2003 2003 2003 2002 2002
--------------------------------------------------------------------
Hypothetical Change in Interest Rate
- ------------------------------------
100 basis point gradual:
Rise in rates (1.1)% (0.6)% 0.9 % 0.9 % 1.5 %
Decline in rates (1.6)% (2.0)% (1.4)% (2.0)% (2.0)%
These results are based solely on the modeled parallel changes in market
rates, and do not reflect the earnings sensitivity that may arise from
other factors such as changes in the shape of the yield curve, the changes
in spread between key market rates, or accounting recognition for
impairment of certain intangibles. These results also do not include any
management action to mitigate potential income variances within the
simulation process. Such action could potentially include, but would not
be limited to, adjustments to the repricing characteristics of any on- or
off-balance sheet item with regard to short-term rate projections and
current market value assessments.
Actual results will differ from simulated results due to the timing,
magnitude, and frequency of interest rate changes as well as changes in
market conditions and management strategies.
Another component of interest rate risk is measuring the fair value at
risk for a given change in market interest rates. The Corporation also
uses computer modeling techniques to determine the present value of all
asset and liability cash flows (both on- and off-balance sheet), adjusted
for prepayment expectations, using a market discount rate. The net change
in the present value of the asset and liability cash flows in different
market rate environments is the amount of fair value at risk from those
rate movements. As of September 30, 2003, the fair value of equity at
risk for a gradual 100bp shift in rates has not changed materially since
December 31, 2002.
Equity Risk
___________
In addition to interest rate risk, the Corporation incurs market risk in
the form of equity risk. M&I's Capital Markets Group invests in private,
medium-sized companies to help establish new businesses or recapitalize
existing ones. Exposure to the change in equity values for the companies
that are held in their portfolio exist, however, fair values are difficult
to determine until an actual sale or liquidation transaction actually
occurs.
As of September 30, 2003, M&I Trust Services administered $61.2 billion in
assets and directly managed a portfolio of $14.5 billion. Exposure exists
to changes in equity values due to the fact that fee income is partially
based on equity balances. While this exposure is present, quantification
remains difficult due to the number of other variables affecting fee
income. Interest rate changes can also have an effect on fee income for
the above stated reasons.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the reports
filed by us under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. We carried out an evaluation,
under the supervision and with the participation of our management,
including our Chief Executive Officer and President and our Executive Vice
President and Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Rule
13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive
Officer and President and our Executive Vice President and Chief Financial
Officer concluded that our disclosure controls and procedures are
effective as of the end of the period covered by this report.
There have been no changes in our internal control over financial
reporting identified in connection with the evaluation discussed above
that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
43
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Audit Committee of the Board of Directors of Marshall & Ilsley
Corporation has approved the following audit and non-audit services
performed or to be performed for the Corporation by its independent
auditors, Deloitte & Touche LLP:
Advice and assistance in evaluating implications of Internal
Revenue Service regulations related to certain existing
employee benefit programs.
People Soft implementation readiness review.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit 10.1 - Amendment to Marshall & Ilsley Corporation Amended
and Restated Executive Deferred Compensation Plan.
Exhibit 10.2 - Amendment to Amended and Restated Directors Deferred
Compensation Plan of Marshall & Ilsley Corporation.
Exhibit 10.3 - Amendment to The Marshall & Ilsley Corporation
Amended and Restated Deferred Compensation Trust II
between the Corporation and Marshall & Ilsley Trust
Company N.A.
Exhibit 10.4 - Amendment to The Marshall & Ilsley Corporation
Amended and Restated Deferred Compensation Trust III
between the Corporation and Marshall & Ilsley Trust
Company N.A.
Exhibit 11 - Statement Regarding Computation of Earnings Per
Share, Incorporated by Reference to NOTE 4 of Notes
to Financial Statements contained in Item 1 -
Financial Statements (unaudited) of Part 1 -
Financial Information herein.
Exhibit 12 - Statement Regarding Computation of Ratio of Earnings
to Fixed Charges
Exhibit 31.1 - Rule 13a-14(a) Certification of Chief Executive
Officer.
Exhibit 31.2 - Rule 13a-14(a) Certification of Chief Financial
Officer.
Exhibit 32.1 - Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350.
Exhibit 32.2 - Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350.
B. Reports on Form 8-K:
On July 14, 2003, the Corporation furnished Items 7 and 9 in a
Current Report on Form 8-K relating to the release of earnings for
the quarterly period ended June 30, 2003.
44
SIGNATURES
__________
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
(Registrant)
/s/ Patricia R. Justiliano
__________________________________
Patricia R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ James E. Sandy
__________________________________
James E. Sandy
Vice President
November 13, 2003
45
EXHIBIT INDEX
Exhibit Number Description of Exhibit
______________ ________________________________________________
(10.1) Amendment to Marshall & Ilsley Corporation
Amended and Restated Executive Deferred
Compensation Plan.
(10.2) Amendment to Amended and Restated Directors
Deferred Compensation Plan of Marshall & Ilsley
Corporation.
(10.3) Amendment to The Marshall & Ilsley Corporation
Amended and Restated Deferred Compensation Trust
II between the Corporation and Marshall & Ilsley
Trust Company N.A.
(10.4) Amendment to The Marshall & Ilsley Corporation
Amended and Restated Deferred Compensation Trust
III between the Corporation and Marshall &
Ilsley Trust Company N.A.
(11) Statement Regarding Computation of Earnings Per
Share, Incorporated by Reference to NOTE 4 of
Notes to Financial Statements contained in Item
1 - Financial Statements (unaudited) of Part 1 -
Financial Information herein.
(12) Statement Regarding Computation of Ratio of
Earnings to Fixed Charges.
(31.1) Rule 13a-14(a) Certification of Chief Executive
Officer.
(31.2) Rule 13a-14(a) Certification of Chief Financial
Officer.
(32.1) Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
(32.2) Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.