1
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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 June 30, 2004
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 July 31, 2004
----- ----------------
Common Stock, $1.00 Par Value 222,837,584
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
June 30, December 31, June 30,
2004 2003 2003
------------ ------------ -------------
Assets
- ------
Cash and cash equivalents:
Cash and due from banks $ 823,790 $ 810,088 $ 988,252
Federal funds sold and security resale agreements 259,964 44,076 34,237
Money market funds 52,144 57,462 95,653
------------ ------------ ------------
Total cash and cash equivalents 1,135,898 911,626 1,118,142
Investment securities:
Trading securities, at market value 27,982 16,197 30,001
Short-term investments, at cost which
approximates market value 24,091 45,551 133,112
Available for sale at market value 5,144,611 4,786,446 4,471,856
Held to maturity at amortized cost, market value $802,354
($873,949 December 31, and $963,801 June 30, 2003) 769,899 820,886 891,145
------------ ------------ ------------
Total investment securities 5,966,583 5,669,080 5,526,114
Mortgage loans held for sale 84,301 34,623 298,474
Loans and leases
Loans and leases, net of unearned income 27,111,014 25,150,317 24,600,345
Less: Allowance for loan and lease losses 357,898 349,561 348,100
------------ ------------ ------------
Net loans and leases 26,753,116 24,800,756 24,252,245
Premises and equipment 433,562 438,485 438,197
Goodwill and other intangibles 1,269,059 1,104,552 1,084,813
Accrued interest and other assets 1,429,099 1,413,521 1,348,110
------------ ------------ ------------
Total Assets $ 37,071,618 $ 34,372,643 $ 34,066,095
============ ============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 4,709,873 $ 4,715,283 $ 4,652,703
Interest bearing 20,515,413 17,554,822 17,617,437
------------ ------------ ------------
Total deposits 25,225,286 22,270,105 22,270,140
Funds purchased and security repurchase agreements 1,263,129 765,072 2,152,778
Other short-term borrowings 2,298,987 4,167,929 3,144,623
Accrued expenses and other liabilities 1,149,379 1,106,221 983,735
Long-term borrowings 3,700,674 2,734,623 2,271,533
------------ ------------ ------------
Total liabilities 33,637,455 31,043,950 30,822,809
Shareholders' equity:
- ---------------------
Series A convertible preferred stock, $1.00 par value;
2,000,000 shares authorized -- -- --
Common stock, $1.00 par value; 240,832,522 shares issued 240,833 240,833 240,833
Additional paid-in capital 549,579 564,269 561,982
Retained earnings 3,272,646 3,061,246 2,860,996
Accumulated other comprehensive income,
net of related taxes (51,912) 2,694 (41,127)
Less: Treasury common stock, at cost: 18,056,286 shares
(17,606,489 December 31, and 13,693,706 June 30,2003) 547,469 513,562 358,686
Deferred compensation 29,514 26,787 20,712
------------ ------------ ------------
Total shareholders' equity 3,434,163 3,328,693 3,243,286
------------ ------------ ------------
Total Liabilities and Shareholders' Equity $ 37,071,618 $ 34,372,643 $ 34,066,095
============ ============ ============
See notes to financial statements.
3
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Three Months Ended June 30,
----------------------------
2004 2003
------------- -------------
Interest income
- ---------------
Loans and leases $ 334,525 $ 331,009
Investment securities:
Taxable 48,623 41,253
Exempt from federal income taxes 14,422 14,452
Trading securities 55 57
Short-term investments 404 708
------------- -------------
Total interest income 398,029 387,479
Interest expense
- ----------------
Deposits 57,999 60,274
Short-term borrowings 14,260 20,974
Long-term borrowings 41,762 42,288
------------- -------------
Total interest expense 114,021 123,536
Net interest income 284,008 263,943
Provision for loan and lease losses 9,227 19,642
------------- -------------
Net interest income after provision for loan and lease losses 274,781 244,301
Other income
- ------------
Data processing services 197,344 157,990
Item processing 10,902 9,570
Trust services 37,922 31,183
Service charges on deposits 25,083 25,191
Gains on sale of mortgage loans 8,976 17,002
Other mortgage banking revenue 2,725 4,762
Net investment securities gains (losses) 77 (2,616)
Life insurance revenue 7,096 8,518
Other 39,860 43,139
------------- -------------
Total other income 329,985 294,739
Other expense
- -------------
Salaries and employee benefits 211,881 193,456
Net occupancy 18,238 18,201
Equipment 26,244 27,973
Software expenses 12,481 10,371
Processing charges 11,812 10,606
Supplies and printing 5,806 5,885
Professional services 10,288 10,540
Shipping and handling 18,087 11,259
Amortization of intangibles 5,438 7,495
Other 54,403 39,887
------------- -------------
Total other expense 374,678 335,673
------------- -------------
Income before income taxes 230,088 203,367
Provision for income taxes 78,379 68,715
------------- -------------
Net income $ 151,709 $ 134,652
============= =============
Net income per common share
Basic $ 0.68 $ 0.59
Diluted 0.67 0.59
Dividends paid per common share $ 0.210 $ 0.180
Weighted average common shares outstanding:
Basic 221,950 226,483
Diluted 225,502 228,394
See notes to financial statements.
4
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
Six Months Ended June 30,
----------------------------
2004 2003
------------- -------------
Interest income
- ---------------
Loans and leases $ 660,477 $ 661,194
Investment securities:
Taxable 96,940 87,072
Exempt from federal income taxes 28,593 29,239
Trading securities 145 122
Short-term investments 947 1,441
------------- -------------
Total interest income 787,102 779,068
Interest expense
- ----------------
Deposits 113,548 123,101
Short-term borrowings 30,096 43,024
Long-term borrowings 80,814 84,515
------------- -------------
Total interest expense 224,458 250,640
Net interest income 562,644 528,428
Provision for loan and lease losses 18,254 45,334
------------- -------------
Net interest income after provision for loan and lease losses 544,390 483,094
Other income
- ------------
Data processing services 383,468 315,078
Item processing 22,334 19,844
Trust services 74,172 61,223
Service charges on deposits 50,606 51,429
Gains on sale of mortgage loans 14,175 30,315
Other mortgage banking revenue 4,490 8,977
Net investment securities losses (452) (1,047)
Life insurance revenue 13,776 15,761
Other 80,845 83,591
------------- -------------
Total other income 643,414 585,171
Other expense
- -------------
Salaries and employee benefits 415,809 390,681
Net occupancy 37,433 36,836
Equipment 54,412 56,669
Software expenses 23,706 20,681
Processing charges 24,861 22,624
Supplies and printing 11,512 11,140
Professional services 19,360 21,236
Shipping and handling 34,511 25,211
Amortization of intangibles 10,890 14,414
Other 104,512 71,771
------------- -------------
Total other expense 737,006 671,263
------------- -------------
Income before income taxes 450,798 397,002
Provision for income taxes 152,980 134,320
------------- -------------
Net income $ 297,818 $ 262,682
============= =============
Net income per common share
Basic $ 1.34 $ 1.16
Diluted 1.32 1.15
Dividends paid per common share $ 0.390 $ 0.340
Weighted average common shares outstanding:
Basic 222,125 226,355
Diluted 225,764 228,022
See notes to financial statements.
5
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Six Months Ended June 30,
----------------------------
2004 2003
------------- -------------
Net Cash Provided by Operating Activities $ 418,748 $ 367,644
Cash Flows From Investing Activities:
- -------------------------------------
Proceeds from sales of securities available for sale 8,890 7,801
Proceeds from maturities of securities available for sale 740,921 1,453,731
Proceeds from maturities of securities held to maturity 51,142 52,636
Purchases of securities available for sale (1,183,926) (1,749,825)
Purchases of securities held to maturity -- (1,000)
Net increase in loans (2,118,630) (1,241,192)
Purchases of assets to be leased (104,414) (294,929)
Principal payments on lease receivables 151,108 399,961
Fixed asset purchases, net (28,519) (31,820)
Purchase acquisitions, net of cash equivalents acquired (165,673) (3,041)
Other 11,207 8,821
------------- -------------
Net cash used in investing activities (2,637,894) (1,398,857)
Cash Flows From Financing Activities:
- -------------------------------------
Net increase in deposits 2,970,412 1,869,039
Proceeds from issuance of commercial paper 3,029,442 3,884,534
Payments for maturity of commercial paper (3,027,527) (3,884,786)
Net decrease in other short-term borrowings (1,444,961) (566,006)
Proceeds from issuance of long-term debt 1,178,185 13,227
Payments of long-term debt (117,094) (243,907)
Dividends paid (86,417) (76,836)
Purchases of treasury stock (98,381) (4,360)
Other 39,759 11,918
------------- -------------
Net cash provided by financing activities 2,443,418 1,002,823
------------- -------------
Net increase (decrease) in cash and cash equivalents 224,272 (28,390)
Cash and cash equivalents, beginning of year 911,626 1,146,532
------------- -------------
Cash and cash equivalents, end of period $ 1,135,898 $ 1,118,142
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 194,136 $ 253,154
Income taxes 138,953 149,364
See notes to financial statements.
6
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2004 & 2003 (Unaudited)
1. The accompanying unaudited consolidated financial statements should
be read in conjunction with Marshall & Ilsley Corporation's ("M&I"
or "Corporation") 2003 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 six months ended June 30, 2004 and 2003. The results of
operations for the three and six months ended June 30, 2004 and 2003
are not necessarily indicative of results to be expected for the
entire year. Certain amounts in the 2003 consolidated financial
statements and analyses have been reclassified to conform with the
2004 presentation.
2. New Accounting Pronouncement
On March 31, 2004, the Financial Accounting Standards Board ("FASB")
ratified the consensuses reached by the Emerging Issues Task Force
("EITF") in EITF Issue No. 03-1, "The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain Investments"
("Issue 03-1"). Issue 03-1 provides guidance that should be used to
determine when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an
impairment loss. The guidance also includes accounting
considerations subsequent to recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses
that have not been recognized as other-than-temporary impairments.
For equity securities (including cost method investments) and debt
securities that can be contractually prepaid or otherwise settled in
such a way that the investor would not recover substantially all of
its cost, an impairment should be deemed other than temporary unless
(a) the investor has the ability and intent to hold an investment
for a reasonable period of time sufficient for a forecasted recovery
of fair value up to the cost of the investment, and (b) evidence
indicating the cost of the investment is recoverable within a
reasonable period of time outweighs evidence to the contrary.
For debt securities that can not be contractually prepaid or
otherwise settled in such a way that the investor would not recover
substantially all of its cost, an impairment should be deemed other
than temporary if (a) the investor does not have the ability and
intent to hold an investment until a forecasted recovery of fair
value up to the cost of the investment, which in certain cases may
mean until maturity, or (b) it is probable that the investor will be
unable to collect all amounts due according to the contractual terms
of the debt security.
Although not presumptive, a pattern of selling investments prior to
the forecasted recovery of fair value may call into question the
investors' intent.
The guidance for evaluating whether an investment is other-than-
temporarily impaired should be applied to other-than-temporary
impairment evaluations made in reporting periods beginning after
June 15, 2004. The disclosures were effective in annual financial
statements for fiscal years ending after December 15, 2003, for
investments accounted for under FASB Statements 115 and 124.
As shown in Note 6 in Notes to Financial Statements, at June 30,
2004 the Corporation had gross unrealized losses associated with its
investment securities portfolios of $67.4 million. Of that amount,
$60.8 million has been in a continuous unrealized loss position for
less than twelve months. The Corporation believes that the
unrealized losses are the result of increases in market interest
rates and it is probable that the Corporation will collect all
amounts due according to the contractual terms of the investment
securities. The Corporation currently expects that it will be able
to appropriately demonstrate the requisite ability and intent to
hold the investments through a forecasted recovery of fair value up
to the cost of the investments, which in certain cases may mean
until maturity.
7
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
3. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
Three Months Ended June 30, 2004
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 151,709
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (142,839) $ 50,282 (92,557)
Reclassification for securities
transactions included in net income 10 (3) 7
------------ ------------ ------------
Unrealized gains (losses) (142,829) 50,279 (92,550)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (4,286) 1,500 (2,786)
Reclassification adjustments for
hedging activities included in net income 7,991 (2,797) 5,194
------------ ------------ ------------
Net gains (losses) $ 3,705 $ (1,297) 2,408
------------ ------------ ------------
Other comprehensive income (loss) (90,142)
------------
Total comprehensive income $ 61,567
============
Three Months Ended June 30, 2003
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 134,652
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ 4,178 $ (1,456) 2,722
Reclassification for securities
transactions included in net income -- -- --
------------ ------------ ------------
Unrealized gains (losses) 4,178 (1,456) 2,722
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (8,998) 3,149 (5,849)
Reclassification adjustments for
hedging activities included in net income 18,783 (6,574) 12,209
------------ ------------ ------------
Net gains (losses) $ 9,785 $ (3,425) 6,360
------------ ------------ ------------
Other comprehensive income (loss) 9,082
------------
Total comprehensive income $ 143,734
============
8
Six Months Ended June 30, 2004
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 297,818
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (100,395) $ 35,385 (65,010)
Reclassification for securities
transactions included in net income 10 (3) 7
------------ ------------ ------------
Unrealized gains (losses) (100,385) 35,382 (65,003)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (989) 346 (643)
Reclassification adjustments for
hedging activities included in net income 16,985 (5,945) 11,040
------------ ------------ ------------
Net gains (losses) $ 15,996 $ (5,599) 10,397
------------ ------------ ------------
Other comprehensive income (loss) (54,606)
------------
Total comprehensive income $ 243,212
============
Six Months Ended June 30, 2003
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- -------------
Net income $ 262,682
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (7,629) $ 2,679 (4,950)
Reclassification for securities
transactions included in net income (1,675) 586 (1,089)
------------ ------------ ------------
Unrealized gains (losses) (9,304) 3,265 (6,039)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (22,853) 7,998 (14,855)
Reclassification adjustments for
hedging activities included in net income 37,221 (13,027) 24,194
------------ ------------ ------------
Net gains (losses) $ 14,368 $ (5,029) 9,339
------------ ------------ ------------
Other comprehensive income (loss) 3,300
------------
Total comprehensive income $ 265,982
============
9
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
4. A reconciliation of the numerators and denominators of the basic and
diluted per share computations are as follows (dollars and shares in
thousands, except per share data):
Three Months Ended June 30, 2004
------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 151,709 221,950 $ 0.68
===========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 3,552
------------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 151,709 225,502 $ 0.67
===========
Three Months Ended June 30, 2003
------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 134,652 226,483 $ 0.59
===========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 1,911
------------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 134,652 228,394 $ 0.59
===========
Six Months Ended June 30, 2004
------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 297,818 222,125 $ 1.34
===========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 3,639
------------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 297,818 225,764 $ 1.32
===========
Six Months Ended June 30, 2003
------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
Basic Earnings Per Share
Income Available to Common Shareholders $ 262,682 226,355 $ 1.16
===========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 1,667
------------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 262,682 228,022 $ 1.15
===========
10
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
Options to purchase shares of common stock not included in the
computation of diluted net income per share because the exercise
prices of the options were greater than the average market price of
the common shares are as follows:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- --------------------------------------
2004 2003 2004 2003
------------------ ------------------ ------------------ ------------------
Shares 32,500 6,357,146 32,500 11,932,304
Price Range $39.090 - $41.150 $29.600 - $33.938 $39.090 - $41.150 $28.275 - $33.938
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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net Income, as reported $ 151,709 $ 134,652 $ 297,818 $ 262,682
Add: Stock-based employee compensation expense
included in reported net income, net of tax 1,432 1,018 2,854 2,036
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax (6,784) (6,090) (12,972) (12,156)
----------- ----------- ----------- -----------
Pro forma net income $ 146,357 $ 129,580 $ 287,700 $ 252,562
=========== =========== =========== ===========
Basic earnings per share:
As reported $ 0.68 $ 0.59 $ 1.34 $ 1.16
Pro forma 0.66 0.57 1.30 1.12
Diluted earnings per share:
As reported $ 0.67 $ 0.59 $ 1.32 $ 1.15
Pro forma 0.65 0.57 1.27 1.11
11
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
5. Business Combinations
The following acquisition, which was not considered a material
business combination, was completed during the second quarter of
2004:
On May 27, 2004, the data processing segment, Metavante,
completed the purchase of certain assets and the assumption of
certain liabilities of the privately held Kirchman Corporation
("Kirchman"), of Orlando, Florida for $157.4 million in cash,
subject to certain adjustments. Kirchman is a provider of
automation software and compliance services to the banking
industry. The acquisition of Kirchman provides Metavante with
core-processing software that financial institutions can run
in-house, a solution that Metavante previously did not offer.
Initial goodwill, subject to the completion of appraisals and
valuations of the assets acquired and liabilities assumed,
amounted to $144.9 million. The estimated identifiable
intangible asset to be amortized (customer relationships) with
an estimated useful life of 10 years amounted to $25.0
million. The goodwill and intangibles resulting from this
transaction are deductible for tax purposes.
Recently Announced Acquisitions
On May 17, 2004, Metavante announced it had entered into a
definitive agreement to acquire substantially all of the
outstanding common stock of the NYCE Corporation ("NYCE"), of
Montvale, New Jersey, for approximately $610 million in cash,
subject to certain adjustments. NYCE owns and operates one of
the largest electronic funds transfer networks in the United
States and provides debit card authorization processing
services for automated teller machines (ATM), on-line and off-
line signature based debit card transactions. It is expected
that this acquisition will enable Metavante to significantly
expand its electronic funds transfer (EFT) business. NYCE's
annual revenue and net income in 2003 amounted to $142.8
million and $30.7 million, respectively. These results are
not necessarily indicative of results to be expected by
Metavante. The acquisition was completed July 30, 2004. See
Note 14 Subsequent Events in the Notes to Financial
Statements.
6. Selected investment securities, by type, held by the Corporation are
as follows ($000's):
June 30, December 31, June 30,
2004 2003 2003
------------- ------------- -------------
Investment securities available for sale:
U.S. treasury and government agencies $ 4,096,353 $ 3,886,278 $ 3,585,172
State and political subdivisions 397,764 299,321 285,562
Mortgage backed securities 141,448 149,990 141,925
Other 509,046 450,857 459,197
------------- ------------- -------------
Total $ 5,144,611 $ 4,786,446 $ 4,471,856
============= ============= =============
Investment securities held to maturity:
U.S. treasury and government agencies $ -- $ -- $ 30
State and political subdivisions 767,580 818,065 888,089
Other 2,319 2,821 3,026
------------- ------------- -------------
Total $ 769,899 $ 820,886 $ 891,145
============= ============= =============
The following table provides the gross unrealized losses and fair
value, aggregated by investment category and the length of time the
individual securities have been in a continuous unrealized loss
position, at June 30, 2004 ($000's):
Less than 12 Months 12 Months or More Total
------------------------ ------------------------ ------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- -----------
U.S. treasury and
government agencies $ 2,827,451 $ 53,373 $ 146,552 $ 5,961 $ 2,974,003 $ 59,334
State and political subdivisions 139,520 6,772 6,177 592 145,697 7,364
Other 61,601 703 6,302 35 67,903 738
----------- ----------- ----------- ----------- ----------- -----------
Total $ 3,028,572 $ 60,848 $ 159,031 $ 6,588 $ 3,187,603 $ 67,436
=========== =========== =========== =========== =========== ===========
12
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
The Corporation believes that the unrealized losses in the
investment securities portfolio resulted from increases in market
interest rates and not from deterioration in the creditworthiness of
the issuer.
7. The Corporation's loan and lease portfolio, including mortgage loans
held for sale, consists of the following ($000's):
June 30, December 31, June 30,
2004 2003 2003
------------- ------------- -------------
Commercial, financial and agricultural $ 7,785,955 $ 7,104,844 $ 7,129,832
Cash flow hedging instruments at fair value (26,772) 5,830 16,276
------------- ------------- -------------
Total commercial, financial and agricultural 7,759,183 7,110,674 7,146,108
Real estate:
Construction 1,393,890 1,330,526 1,187,777
Residential mortgage 8,202,603 7,270,531 6,924,069
Commercial mortgage 7,696,070 7,149,149 6,941,263
------------- ------------- -------------
Total real estate 17,292,563 15,750,206 15,053,109
Personal 1,590,166 1,747,738 2,011,826
Lease financing 553,403 576,322 687,776
------------- ------------- -------------
Total loans and leases $ 27,195,315 $ 25,184,940 $ 24,898,819
============= ============= =============
8. Sale of Receivables
During the second quarter of 2004, $296.6 million of automobile
loans were sold in securitization transactions. Losses of $3.2
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 second quarter were as follows (rate per annum):
Prepayment speed (CPR) 19-35 %
Weighted average life (in months) 15.4
Expected credit losses
(based on original balance) 0.22-0.72 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one month
LIBOR yield curve
At June 30, 2004, securitized automobile loans and other automobile
loans managed together with them, along with delinquency and credit
loss information consisted of the following ($000's):
Total
Securitized Portfolio Managed
------------ ------------ ------------
Loan balances $ 1,176,107 $ 82,114 $ 1,258,221
Principal amounts of loans
60 days or more past due 794 71 865
Net credit losses year to date 1,205 37 1,242
9. Goodwill and Other Intangibles:
The changes in the carrying amount of goodwill for the six months
ended June 30, 2004 are as follows ($000's):
Banking Metavante Others Total
------------ ------------ ------------ ------------
Goodwill balance as of January 1, 2004 $ 809,772 $ 155,329 $ 4,687 $ 969,788
Goodwill acquired during the period 4,986 144,913 -- 149,899
Purchase accounting adjustments -- 1,458 -- 1,458
------------ ------------ ------------ ------------
Goodwill balance as of June 30, 2004 $ 814,758 $ 301,700 $ 4,687 $ 1,121,145
============ ============ ============ ============
13
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
Goodwill acquired for the Metavante segment in the second quarter of
2004 was the initial goodwill associated with the Kirchman
acquisition.
Goodwill acquired for the Banking segment in the first quarter of
2004 was the initial goodwill associated with the AmerUs Home
Lending, Inc. acquisition.
Purchase accounting adjustments for Metavante in the first quarter
of 2004 represent the effect of adjustments made to the initial
estimates of fair value associated with the November 2003
acquisition of Printing For Systems, Inc.
At June 30, 2004, the Corporation's other intangible assets
consisted of the following ($000's):
June 30, 2004
----------------------------------------
Gross Accum- Net
Carrying ulated Carrying
Amount Amort Value
------------ ------------ ------------
Other intangible assets:
Core deposit intangible $ 159,474 $ 69,738 $ 89,736
Data processing contract rights/customer lists 60,265 12,519 47,746
Trust customers 5,475 625 4,850
Tradename 2,775 1,504 1,271
------------ ------------ ------------
$ 227,989 $ 84,386 $ 143,603
============ ============ ============
Mortgage loan servicing rights $ 4,311
============
10. The Corporation's deposit liabilities consists of the following
($000's):
June 30, December 31, June 30,
2004 2003 2003
------------- ------------- -------------
Noninterest bearing demand $ 4,709,873 $ 4,715,283 $ 4,652,703
Savings and NOW 9,101,821 9,301,744 9,392,962
CD's $100,000 and over 5,374,731 4,480,111 3,713,100
Cash flow hedge-Institutional CDs (8,613) 13,071 21,584
------------- ------------- -------------
Total CD's $100,000 and over 5,366,118 4,493,182 3,734,684
Other time deposits 2,637,467 2,646,639 2,756,922
Foreign deposits 3,410,007 1,113,257 1,732,869
------------- ------------- -------------
Total deposits $ 25,225,286 $ 22,270,105 $ 22,270,140
============= ============= =============
11. 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 enable
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.
Interest rate lock commitments on residential mortgage loans
intended to be held for sale are considered free-standing derivative
instruments. For purposes of estimating the fair value of the free-
standing derivative at the balance sheet date, the Corporation
assumes the fair value of the written option at inception is zero
and measures the change in market interest rates from the date of
commitment to the balance sheet date. The change in market rates
and the expected duration of the loan form the basis for estimating
fair value, which may result in an asset or liability. 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. Loan
commitments accounted for as derivatives are not material to the
Corporation and the Corporation does not employ any formal hedging
strategies.
14
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
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 June 30, 2004, free standing interest rate swaps consisted of
$0.9 billion in notional amount of receive fixed/pay floating with
an aggregate negative fair value of $12.5 million and $0.9 billion
in notional amount of pay fixed/receive floating with an aggregate
positive fair value of $11.3 million.
At June 30, 2004, interest rate caps purchased amounted to $13.8
million in notional amount with a positive fair value of $0.2
million and interest rate caps sold amounted to $13.8 million in
notional amount with a negative fair value of $0.2 million.
At June 30, 2004, the notional value of interest rate futures
designated as trading was $2.2 billion with a negative fair value of
$0.5 million.
Fair Value Hedges
The Corporation has fixed rate callable and institutional CDs and
fixed rate long-term debt which expose the Corporation to
variability in fair values due to changes in market interest rates.
To limit the Corporation's exposure to changes in fair value due to
changes in interest rates, the Corporation has entered into receive-
fixed / pay-floating interest rate swaps with identical call
features, thereby creating the effect of floating rate deposits and
floating rate long-term debt. The Corporation has determined that
the hedges on the long-term debt qualify for the special short-cut
accounting prescribed by SFAS 133, resulting in no ineffectiveness.
The following table presents additional information with respect to
selected fair value hedges.
Fair Value Hedges
June 30, 2004 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
--------------------- ------------------- ----------- ------------ -----------
Fixed Rate CDs Receive Fixed Swap $ 510.0 $ (13.2) 10.9
Medium Term Notes Receive Fixed Swap 371.7 0.8 9.0
Fixed Rate Bank Notes Receive Fixed Swap 225.0 (5.3) 5.6
Institutional CDs Receive Fixed Swap 5.0 (0.3) 14.8
The impact from fair value hedges to total net interest income for
the three and six months ended June 30, 2004 was a positive $10.9
million and $20.4 million, respectively. The impact to net interest
income due to ineffectiveness was immaterial.
Cash Flow Hedges
The Corporation has variable rate loans, variable rate deposits and
variable rate borrowings, which expose the Corporation to
variability in interest payments due to changes in interest rates.
The Corporation believes it is prudent to limit the variability of a
portion of its interest receipts and payments. To meet this
objective, the Corporation enters into various types of derivative
financial instruments to manage fluctuations in cash flows resulting
from interest rate risk.
15
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
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 of each month 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.
The interest rate swaps change the variable-rate cash flow exposure
on the loans, deposits and borrowings to fixed-rate cash flows.
Changes in the fair value of the interest rate swaps designated as
cash flow hedges are reported in accumulated other comprehensive
income. These amounts are subsequently reclassified to interest
income or interest expense as a yield adjustment in the same period
in which the related interest on the variable rate loans, variable
rate deposits and variable rate borrowings affects earnings.
Ineffectiveness arising from differences between the critical terms
of the hedging instrument and hedged item is recorded in interest
income or expense.
The following table summarizes the Corporation's cash flow hedges.
Cash Flow Hedges
June 30, 2004 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
--------------------- ------------------- ----------- ------------ -----------
Variable Rate Loans Receive Fixed Swap $ 1,150.0 $ (26.8) 5.4
Institutional CDs Pay Fixed Swap 2,430.0 8.6 1.5
Fed Funds Purchased Pay Fixed Swap 360.0 (12.3) 2.5
FHLB Advances Pay Fixed Swap 610.0 7.2 3.4
Medium Term Notes Pay Fixed Swap 350.0 (1.7) 5.0
The impact to total net interest income from cash flow hedges,
including amortization of terminated cash flow hedges, for the three
and six months ended June 30, 2004 was a negative $8.0 million and
$17.0 million, respectively. The impact due to ineffectiveness was
immaterial.
12. Postretirement Health Plan
The Corporation sponsors a defined benefit health plan that provides
health care benefits to eligible current and retired employees.
Eligibility for retiree benefits is dependent upon age, years of
service, and participation in the health plan during active service.
The plan is contributory and in 1997 and 2002 the plan was amended.
Employees hired or retained from mergers after September 1, 1997
will be granted access to the Corporation's plan upon becoming an
eligible retiree; however, such retirees must pay 100% of the cost
of health care benefits. The plan continues to contain other cost-
sharing features such as deductibles and coinsurance.
16
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
Net periodic postretirement benefit costs for the three and six
month period ended June 30, 2004 and 2003 includes the following
components ($000's):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Service cost $ 631 $ 535 $ 1,262 $ 1,070
Interest on APBO 1,366 1,335 2,732 2,670
Prior service amortization (680) (680) (1,360) (1,361)
Actuarial loss amortization 562 501 1,125 1,003
Other -- 165 -- 330
------------ ------------ ------------ ------------
$ 1,879 $ 1,856 $ 3,759 $ 3,712
============ ============ ============ ============
Benefit payments and expenses, net of participant contributions for
the three and six months ended June 30, 2004 amounted to $0.9
million and $1.9 million, respectively. In addition, in the first
quarter of 2004, the Corporation made a discretionary contribution
to the retirement health benefit trust in the amount of $7.2
million. The expected benefit payments and expenses, net of
participant contributions, and excluding discretionary
contributions, for the year ended December 31, 2004 is $3.4 million.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act
introduces a prescription drug benefit program under Medicare
(Medicare Part D) as well as a 28% federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D.
At December 31, 2003, the Corporation had elected to defer
recognition of the effect of the Act in accordance with Financial
Accounting Standards Board Staff Position (FSP) 106-1, Accounting
and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, until such time as
specific authoritative guidance on the accounting for the federal
subsidy was issued.
In March 2004, the Financial Accounting Standards Board issued
proposed FSP 106-b, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act
of 2003. FSP 106-b addresses the employers' accounting for the
effects of the Act. The accounting for the subsidy applies only to
the sponsor of a single-employer defined benefit postretirement
health care plan. The proposed rule would be effective for fiscal
quarters beginning after June 15, 2004 with retroactive application
of the guidance generally required.
As of and for the three and six months ended June 30, 2004, any
measures of the accumulated postretirement benefit obligation or net
periodic postretirement benefit cost do not reflect the effects of
the Act. The Corporation estimates that financial statement impact
of the Act will not be material.
17
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
13. Segments
The following represents the Corporation's operating segments as of
and for the three and six months ended June 30, 2004 and 2003.
There have not been any changes to the way the Corporation organizes
its segments. Charges for services from the holding company had
previously been excluded from segment income. Beginning with the
presentation of segment information in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2003, management
determined that it was more meaningful to include such charges in
evaluating the performance of its segments. Prior year segment
information has been restated to include such costs and conform to
the current year presentation. 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 June 30, 2004
------------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- --------- --------- --------- --------- ---------- --------- --------
Revenues:
Net interest income $ 280.2 $ (0.9) $ 6.6 $ (1.9) $ -- $ 284.0 $ -- $ 284.0
Fees - Other 85.6 197.4 45.8 1.2 -- 330.0 -- 330.0
Fees - Intercompany 16.6 19.2 7.0 17.6 (60.4) -- -- --
---------- --------- --------- --------- --------- ---------- --------- --------
Total revenues 382.4 215.7 59.4 16.9 (60.4) 614.0 -- 614.0
Expenses:
Expenses - Other 152.4 171.3 29.7 21.0 0.3 374.7 -- 374.7
Expenses - Intercompany 38.5 12.2 11.5 (1.5) (60.7) -- -- --
---------- --------- --------- --------- --------- ---------- --------- --------
Total expenses 190.9 183.5 41.2 19.5 (60.4) 374.7 -- 374.7
Provision for loan
and lease losses 8.5 -- 0.7 -- -- 9.2 -- 9.2
---------- --------- --------- --------- --------- ---------- --------- --------
Income before taxes 183.0 32.2 17.5 (2.6) -- 230.1 -- 230.1
Income tax expense 60.0 12.6 6.9 (1.1) -- 78.4 -- 78.4
---------- --------- --------- --------- --------- ---------- --------- --------
Segment income $ 123.0 $ 19.6 $ 10.6 $ (1.5) $ -- $ 151.7 $ -- $ 151.7
========== ========= ========= ========= ========= ========== ========= ========
Identifiable assets $ 35,778.8 $ 1,218.0 $ 610.0 $ 624.2 $(1,159.4) $ 37,071.6 $ -- $37,071.6
========== ========= ========= ========= ========= ========== ========= ========
Return on average equity 16.4% 19.3% 16.8% 17.9%
========== ========= ========= ========
Three Months Ended June 30, 2003
------------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- --------- --------- --------- --------- ---------- --------- --------
Revenues:
Net interest income $ 261.9 $ (0.5) $ 8.0 $ (5.4) $ -- $ 264.0 $ -- $ 264.0
Fees - Other 94.0 158.0 40.7 2.0 -- 294.7 -- 294.7
Fees - Intercompany 14.7 18.0 9.2 15.5 (57.4) -- -- --
---------- --------- --------- --------- --------- ---------- --------- --------
Total revenues 370.6 175.5 57.9 12.1 (57.4) 558.7 -- 558.7
Expenses:
Expenses - Other 145.1 142.5 31.8 16.8 (0.5) 335.7 -- 335.7
Expenses - Intercompany 37.5 10.5 10.2 (1.3) (56.9) -- -- --
---------- --------- --------- --------- --------- ---------- --------- --------
Total expenses 182.6 153.0 42.0 15.5 (57.4) 335.7 -- 335.7
Provision for loan
and lease losses 19.0 -- 0.6 -- -- 19.6 -- 19.6
---------- --------- --------- --------- --------- ---------- --------- --------
Income before taxes 169.0 22.5 15.3 (3.4) -- 203.4 -- 203.4
Income tax expense 55.0 9.3 5.6 (1.2) -- 68.7 -- 68.7
---------- --------- --------- --------- --------- ---------- --------- --------
Segment income $ 114.0 $ 13.2 $ 9.7 $ (2.2) $ -- $ 134.7 $ -- $ 134.7
========== ========= ========= ========= ========= ========== ========= ========
Identifiable assets $ 32,991.3 $ 879.6 $ 715.5 $ 476.4 $ (996.7) $ 34,066.1 $ -- $ 34,066.1
========== ========= ========= ========= ========= ========== ========= ========
Return on average equity 15.7% 15.3% 16.6% 16.9%
========== ========= ========= ========
18
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
Six Months Ended June 30, 2004
------------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- --------- --------- --------- --------- ---------- --------- --------
Revenues:
Net interest income $ 555.1 $ (1.1) $ 13.0 $ (4.3) $ -- $ 562.7 $ -- $ 562.7
Fees - Other 168.7 383.5 89.1 2.1 -- 643.4 -- 643.4
Fees - Intercompany 32.2 38.1 11.8 35.1 (117.2) -- -- --
---------- --------- --------- --------- --------- ---------- --------- --------
Total revenues 756.0 420.5 113.9 32.9 (117.2) 1,206.1 -- 1,206.1
Expenses:
Expenses - Other 304.6 335.3 59.6 37.8 (0.3) 737.0 -- 737.0
Expenses - Intercompany 71.6 23.1 23.6 (1.4) (116.9) -- -- --
---------- --------- --------- --------- --------- ---------- --------- --------
Total expenses 376.2 358.4 83.2 36.4 (117.2) 737.0 -- 737.0
Provision for loan
and lease losses 16.9 -- 1.4 -- -- 18.3 -- 18.3
---------- --------- --------- --------- --------- ---------- --------- --------
Income before taxes 362.9 62.1 29.3 (3.5) -- 450.8 -- 450.8
Income tax expense 118.9 24.4 11.4 (1.7) -- 153.0 -- 153.0
---------- --------- --------- --------- --------- ---------- --------- --------
Segment income $ 244.0 $ 37.7 $ 17.9 $ (1.8) $ -- $ 297.8 $ -- $ 297.8
========== ========= ========= ========= ========= ========== ========= ========
Identifiable assets $ 35,778.8 $ 1,218.0 $ 610.0 $ 624.2 $(1,159.4) $ 37,071.6 $ -- $ 37,071.6
========== ========= ========= ========= ========= ========== ========= ========
Return on average equity 16.3% 19.1% 14.2% 17.7%
========== ========= ========= ========
Six Months Ended June 30, 2003
------------------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- Sub- Excluded idated
Banking Metavante Others Overhead nations total Charges Income
---------- --------- --------- --------- --------- ---------- --------- --------
Revenues:
Net interest income $ 524.4 $ (1.5) $ 15.7 $ (10.2) $ -- $ 528.4 $ -- $ 528.4
Fees - Other 185.6 315.1 81.9 2.7 (0.1) 585.2 -- 585.2
Fees - Intercompany 28.1 34.9 16.4 31.1 (110.5) -- -- --
---------- --------- --------- --------- --------- ---------- --------- --------
Total revenues 738.1 348.5 114.0 23.6 (110.6) 1,113.6 -- 1,113.6
Expenses:
Expenses - Other 288.2 284.1 62.4 34.1 -- 668.8 2.5 671.3
Expenses - Intercompany 70.9 19.8 20.9 (1.0) (110.6) -- -- --
---------- --------- --------- --------- --------- ---------- --------- --------
Total expenses 359.1 303.9 83.3 33.1 (110.6) 668.8 2.5 671.3
Provision for loan
and lease losses 36.7 -- 8.6 -- -- 45.3 -- 45.3
---------- --------- --------- --------- --------- ---------- --------- --------
Income before taxes 342.3 44.6 22.1 (9.5) -- 399.5 (2.5) 397.0
Income tax expense 111.5 18.5 8.8 (3.5) -- 135.3 (1.0) 134.3
---------- --------- --------- --------- --------- ---------- --------- --------
Segment income $ 230.8 $ 26.1 $ 13.3 $ (6.0) $ -- $ 264.2 $ (1.5) $ 262.7
========== ========= ========= ========= ========= ========== ========= ========
Identifiable assets $ 32,991.3 $ 879.6 $ 715.5 $ 476.4 $ (996.7) $ 34,066.1 $ -- $ 34,066.1
========== ========= ========= ========= ========= ========== ========= ========
Return on average equity 16.1% 15.6% 11.6% 16.8%
========== ========= ========= ========
Metavante's segment income for the six months ended June 30, 2003
excludes certain transition expenses associated with the integration
of the July 2002 acquisition of Paytrust, Inc. Such expenses are
included in 'Excluded Charges."
Total Revenue by type in Others consists of the following:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Trust Services $ 37.2 $ 31.3 $ 72.7 $ 61.2
Residential Mortgage Banking 9.0 14.9 15.2 27.6
Capital Markets 0.3 0.2 (0.4) 2.0
Brokerage and Insurance 6.7 5.8 13.5 11.6
Commercial Leasing 4.2 3.7 8.2 7.5
Commercial Mortgage Banking 1.4 1.3 3.0 2.6
Others 0.6 0.7 1.7 1.5
-------- -------- -------- --------
Total revenue $ 59.4 $ 57.9 $ 113.9 $ 114.0
======== ======== ======== ========
19
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
14. Subsequent Events
On July 1, 2004, Metavante completed the acquisition of all of the
outstanding common stock of the privately held Advanced Financial
Solutions, Inc. and its affiliated companies (collectively "AFS"),
of Oklahoma City, Oklahoma for $140.3 million in cash, subject to
adjustment. AFS is a provider of image-based payment, transaction
and document software technologies. AFS also operates an electronic
check-clearing network through one of its affiliates. It is
expected that this acquisition will allow Metavante to expand its
current product offerings in payment and transaction processing and
image related services, provide the technology and expertise to help
banks facilitate the necessary change to comply with the Check
Clearing for the 21st Century Act (known as Check 21) and capture
another leg in the payments segment-electronic check image exchange.
Additional contingent consideration may be paid based on the
attainment of certain performance objectives each year, beginning on
the date of closing and ending December 31, 2004, and each year
thereafter through 2007. Contingent payments, if made, would be
reflected as adjustments to goodwill. Initial goodwill, subject to
the completion of appraisals and valuations of the assets acquired
and liabilities assumed, amounted to $96.3 million. The estimated
identifiable intangible asset to be amortized (customer
relationships) with an estimated useful life of 12 years amounted to
$22.9 million. The goodwill and intangibles resulting from this
transaction are partially deductible for tax purposes.
On July 29, 2004, the Corporation completed two financing
transactions aggregating $1.0 billion. The net proceeds will be
used for general corporate purposes, including to provide long-term
financing for the two recently completed Metavante acquisitions and
to fund the acquisition of the NYCE Corporation. The financing
transactions consisted of the following:
The Corporation issued $600.0 million of 4.375% Senior Notes due
August 1, 2009. Interest is payable semi-annually each February 1st
and August 1st with the first payment due February 1, 2005.
The Corporation and M&I Capital Trust B also issued 16,000,000 units
of Common SPACESSM. Each unit has a stated value of $25.00 for an
aggregate value of $400.0 million. Each Common SPACES consists of
(i) a stock purchase contract under which the investor agrees to
purchase for $25, a fraction of a share of the Corporation's common
stock on the stock purchase date and (ii) a 1/40, or 2.5%, undivided
beneficial interest in a preferred security of M&I Capital Trust B,
also referred to as the STACKSSM, with an initial liquidation amount
of $1,000. The stock purchase date is expected to be August 15,
2007, but could be deferred for quarterly periods until August 15,
2008.
The Corporation will make quarterly contract payments under the
stock purchase contract at the annual rate of 2.60% of the stated
amount of $25 per stock purchase contract. Until the stock purchase
date, M&I Capital Trust B will make quarterly distributions on the
STACKS at the annual rate of 3.90%.
The STACKS will be remarketed for settlement on the stock purchase
date. Following a successful remarketing, the distribution rate on
the STACKS will be reset. The Corporation may elect, in connection
with the remarketing, that the STACKS will be redeemable at the
Corporation's option at any time on or after the second anniversary
of the stock purchase date.
On the stock purchase date, the number of shares of common stock the
Corporation will issue upon settlement of the stock purchase
contracts depends on the applicable market value per share of the
Corporation's common stock, which will be determined just prior to
the stock purchase date, and other factors. The Corporation
currently estimates that it will issue approximately 8.8 million to
10.9 million common shares to settle the stock purchase contracts.
The Common SPACES will qualify as tier 1 capital for regulatory
capital purposes.
20
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2004 & 2003 (Unaudited)
For accounting purposes, the Corporation will recognize the present
value of the quarterly contract payments under the stock purchase
contract as a liability with an offsetting reduction in
shareholders' equity. The liability will increase over three years
by charges to the consolidated statement of income and be reduced by
the contract payments. M&I Capital Trust B will not be consolidated
in the Corporation's financial statements, however, the aggregate
principal amount of the subordinated debt securities the Corporation
issued to M&I Capital Trust B, which is the sole asset of M&I
Capital Trust B, will be reported in long-term borrowings in the
Corporation's consolidated balance sheet. The interest paid on the
subordinated debt securities, initially at an annual rate of 3.90%,
will be reported as interest expense on long-term borrowings in the
consolidated statement of income. Fees and expenses incurred for
the offering of Common SPACES will be allocated between the
subordinated debt securities and stock purchase contracts. The
amount allocated to the subordinated debt securities will be
amortized and recognized as a component of interest expense based on
a level constant rate. The amount allocated to the stock purchase
contracts will be a charge (reduction) to shareholders' equity.
Before issuance of the common shares upon settlement of the stock
purchase contracts, the stock purchase contracts will be reflected
in diluted earnings per share calculations using the treasury stock
method. The Corporation expects there will be some dilutive effect
on earnings per share for periods when the average market price of
the Corporation's common stock for the reporting period is above
$46.28 but no dilutive effect on diluted earnings per share in
periods when the average market price is equal to or below $46.28.
On July 30, 2004, Metavante completed the acquisition of all of the
outstanding common stock of the NYCE Corporation, for $610.7 million
in cash, subject to certain adjustments. Initial goodwill, subject
to the completion of appraisals and valuations of the assets
acquired and liabilities assumed, amounted to $440.4 million. The
estimated identifiable intangible asset to be amortized (customer
relationships) with an estimated useful life of 15 years amounted to
$172.0 million. The goodwill and intangibles resulting from this
transaction are not deductible for tax purposes.
21
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 June 30,
------------------------------
2004 2003
------------- -------------
Assets
- ------
Cash and due from banks $ 801,986 $ 746,737
Investment securities:
Trading securities 22,138 24,729
Short-term investments 164,685 282,557
Other investment securities:
Taxable 4,671,113 4,041,583
Tax-exempt 1,171,209 1,176,175
------------- -------------
Total investment securities 6,029,145 5,525,044
Loans and leases:
Loans and leases, net of unearned income 26,507,894 24,398,674
Less: Allowance for loan and lease losses 359,856 345,233
------------- -------------
Net loans and leases 26,148,038 24,053,441
Premises and equipment, net 434,888 441,803
Accrued interest and other assets 2,757,888 2,531,549
------------- -------------
Total Assets $ 36,171,945 $ 33,298,574
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 4,513,599 $ 4,072,645
Interest bearing 18,995,645 18,069,128
------------- -------------
Total deposits 23,509,244 22,141,773
Funds purchased and security repurchase agreements 2,279,498 2,634,792
Other short-term borrowings 979,383 569,678
Long-term borrowings 4,703,870 3,699,813
Accrued expenses and other liabilities 1,294,056 1,052,205
------------- -------------
Total liabilities 32,766,051 30,098,261
Shareholders' equity 3,405,894 3,200,313
------------- -------------
Total Liabilities and Shareholders' Equity $ 36,171,945 $ 33,298,574
============= =============
22
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Six Months Ended June 30,
------------------------------
2004 2003
------------- -------------
Assets
- ------
Cash and due from banks $ 786,580 $ 755,183
Investment securities:
Trading securities 22,703 21,569
Short-term investments 188,598 270,039
Other investment securities:
Taxable 4,602,099 3,962,950
Tax-exempt 1,158,940 1,186,673
------------- -------------
Total investment securities 5,972,340 5,441,231
Loans and leases:
Loans and leases, net of unearned income 25,967,707 24,150,954
Less: Allowance for loan and lease losses 358,001 345,145
------------- -------------
Net loans and leases 25,609,706 23,805,809
Premises and equipment, net 436,637 442,656
Accrued interest and other assets 2,702,534 2,523,553
------------- -------------
Total Assets $ 35,507,797 $ 32,968,432
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 4,414,879 $ 3,967,157
Interest bearing 18,597,021 17,679,972
------------- -------------
Total deposits 23,011,900 21,647,129
Funds purchased and security repurchase agreements 2,400,570 2,826,174
Other short-term borrowings 943,148 579,773
Long-term borrowings 4,473,229 3,698,908
Accrued expenses and other liabilities 1,288,997 1,065,982
------------- -------------
Total liabilities 32,117,844 29,817,966
Shareholders' equity 3,389,953 3,150,466
------------- -------------
Total Liabilities and Shareholders' Equity $ 35,507,797 $ 32,968,432
============= =============
23
OVERVIEW
--------
Earnings growth in the second quarter of 2004 was in many respects driven
by the same factors that affected earnings growth in the first quarter of
2004. Loan and deposit growth, lower provisions for loan and lease losses
resulting from the continued improvement in credit quality, revenue and
earnings growth by both the data processing segment ("Metavante") and
trust services reporting unit and continued expense management resulted in
double-digit earnings growth in the three and six months ended June 30,
2004 compared to the three and six months ended June 30, 2003. During the
second quarter and first half of 2004, the Corporation experienced lower
revenue from mortgage loan sales compared to the same period last year.
Net income for the second quarter of 2004 amounted to $151.7 million
compared to $134.7 million for the same period in the prior year, an
increase of $17.0 million, or 12.7%. Diluted earnings per share was $0.67
for the three months ended June 30, 2004, compared with $0.59 for the
three months ended June 30, 2003, an increase of 13.6%. The return on
average assets and average equity was 1.69% and 17.92% for the quarter
ended June 30, 2004, and 1.62% and 16.88%, respectively, for the quarter
ended June 30, 2003.
Net income for the first half of 2004 amounted to $297.8 million compared
to $262.7 million for the first half of 2003, an increase of $35.1
million, or 13.4%. Diluted earnings per share was $1.32 for the six
months ended June 30, 2004, compared with $1.15 for the six months ended
June 30, 2003, an increase of 14.8%. The return on average assets and
average equity was 1.69% and 17.67% for the first half of 2004, and 1.61%
and 16.81%, respectively, for the first half of 2003.
The Corporation has experienced strong earnings growth in the first half
of 2004. Management continues to believe that low double digit earnings
growth in 2004 is achievable, however, with the economy recovering slowly
and modest evidence of job growth in the markets the Corporation serves,
management remains cautious in its expectations that each positive
attribute experienced in the first and second quarters will continue or
improve in future quarters. The Corporation's actual results for the year
ended December 31, 2004 could differ materially from those expected by
management. See "Forward-Looking Statements" in this Form 10-Q and the
Corporation's 2003 Annual Report on Form 10-K for a discussion of the
various risk factors that could cause actual results to be different than
expected results.
NOTEWORTHY TRANSACTIONS AND EVENTS
----------------------------------
Some of the more notable transactions and events that occurred in the
first half of 2004 and 2003 consisted of the following:
Second Quarter 2004
- -------------------
On May 17, 2004, Metavante announced it had entered into a definitive
agreement to acquire substantially all of the outstanding common stock of
the privately held NYCE Corporation ("NYCE"), of Montvale, New Jersey, for
approximately $610 million in cash, subject to certain adjustments. NYCE
owns and operates one of the largest electronic funds transfer networks in
the United States and provides debit card authorization processing
services for automated teller machines (ATM), on-line and off-line
signature based debit card transactions. It is expected that this
acquisition will enable Metavante to significantly expand its electronic
funds transfer (EFT) business. NYCE's annual revenue and net income in
2003 amounted to $142.8 million and $30.7 million, respectively. These
results are not necessarily indicative of results to be expected by
Metavante. Shareholder and regulatory approvals have been obtained and
the transaction closed on July 30, 2004. See Note 14 Subsequent Events in
the Notes to Financial Statements.
On May 27, 2004, Metavante completed the purchase of certain assets and
the assumption of certain liabilities for $157.4 million in cash of the
privately held Kirchman Corporation ("Kirchman") of Orlando, Florida.
Kirchman provides automation software and compliance services to the
banking industry. The acquisition of Kirchman provides Metavante with
core processing software that financial institutions can run in-house, a
solution that Metavante previously did not offer. One month of Kirchman's
results of operations are included in the consolidated statements of
income for the three and six months ended June 30, 2004. See Note 5
Business Combinations in the Notes to Financial Statements.
During the second quarter of 2004, the Corporation filed a shelf
registration statement with the Securities and Exchange Commission which
will enable the Corporation to issue various securities, including debt
securities, common stock, preferred stock, depositary shares, purchase
contracts, units, warrants, and trust preferred securities, up to an
aggregate amount of $3.0 billion. On July 29, 2004, the Corporation
issued $600 million of senior notes and $400 million of Common SPACESSM
under the shelf registration statement. See Note 14 Subsequent Events in
the Notes to Financial Statements.
24
First Quarter 2004
- ------------------
During the first quarter of 2004, the Corporation's Banking segment
completed the purchase for cash of certain assets and the assumption of
certain liabilities of AmerUs Home Lending, Inc. ("AmerUs"), an Iowa-based
corporation engaged in the business of brokering and servicing mortgage
and home equity loans. Although not material to the Corporation, this
acquisition enhances the Corporation's wholesale lending activities by
expanding its broker network and acquiring technology that enhances the
efficiency of the wholesale lending process.
During the first quarter of 2004, the Corporation prepaid and retired
$55.0 million of higher cost fixed rate debt that resulted in a charge to
earnings of $4.9 million. The loss is reported in other in Other expense
in the Consolidated Statements of Income.
During the first quarter of 2004, Metavante announced the signing of a
definitive agreement to acquire all of the outstanding common stock of the
privately held Advanced Financial Solutions, Inc. and its affiliated
companies (collectively "AFS"), of Oklahoma City, Oklahoma. AFS is a
provider of image-based payment, transaction and document software
technologies. AFS also operates an electronic check-clearing network
through one of its affiliates. It is expected that this acquisition will
allow Metavante to expand its current product offerings in payment and
transaction processing and image related services, provide the technology
and expertise to help banks facilitate the necessary change to comply with
the Check Clearing for the 21st Century Act (known as Check 21) and
capture another leg in the payments segment-electronic check image
exchange. Metavante completed this acquisition on July 1, 2004. See Note
14, Subsequent Events in Notes to Financial Statements.
Second Quarter 2003
- -------------------
During the second quarter of 2003, the Corporation announced 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
redemption price of $14.95 million. In conjunction with the redemption,
the Corporation terminated the associated interest rate swap designated as
a cash flow hedge. The loss in accumulated other comprehensive income and
unamortized debt issuance costs aggregating $2.0 million were charged to
Other expense in the Consolidated Statements of Income during the second
quarter of 2003.
During the second quarter of 2003, the Corporation recognized impairment
losses on the interest-only strips which represent retained interests
associated with its auto securitization activities in the amount of $4.1
million. The loss is reported in net investment securities gains (losses)
in the Consolidated Statements of Income.
First Quarter 2003
- ------------------
During the first quarter of 2003, Metavante completed the integration of
its acquisition of Paytrust, Inc. ("Paytrust"). Acquisition-related
transition expenses amounted to $2.5 million and are reported in various
line items in Other expense in the Consolidated Statements of Income.
NET INTEREST INCOME
-------------------
Net interest income for the second quarter of 2004 amounted to $284.0
million compared to $263.9 million reported for the second quarter of
2003. For the six months ended June 30, 2004, net interest income
amounted to $562.6 million compared to $528.4 million for the six months
ended June 30, 2003. Loan growth, slower prepayment activity across all
asset classes, growth in noninterest bearing deposits and the impact of
prepaying higher cost debt in the latter part of 2003 all contributed to
the increase in net interest income. Factors negatively affecting net
interest income included the impact of lengthening liabilities in order to
reduce future volatility in net interest income due to interest rate
movements, cash expenditures for current year acquisitions and cash
expenditures for repurchases of common stock and acquisitions in the prior
year.
Average earning assets in the second quarter of 2004 amounted to $32.5
billion compared to $29.9 billion in the second quarter of 2003, an
increase of $2.6 billion or 8.7%. Average loans and leases accounted for
$2.1 billion of the quarter over quarter growth. Average investment
securities increased $0.6 billion. Average other short-term investments
and trading securities decreased $0.1 billion in the second quarter of
2004 compared to the second quarter of 2003. Average earning assets for
the six months ended June 30, 2004 amounted to $31.9 billion compared to
$29.6 billion for the six months ended June 30, 2003, an increase of $2.3
billion or 7.9%. Average loans and leases accounted for $1.8 billion of
the growth over the respective periods. Average investment securities
increased $0.6 billion. Average other short-term investments and trading
securities decreased $0.1 billion in the first half of 2004 compared to
the same period in 2003.
25
Average interest bearing liabilities increased $2.0 billion or 7.9% in the
second quarter of 2004 compared to the same period in 2003. Average
interest bearing deposits increased $0.9 billion or 5.1% in the second
quarter of 2004 compared to the second quarter of last year. Average
total borrowings increased $1.1 billion or 15.3% in the second quarter of
2004 compared to the same period in 2003. For the six months ended June
30, 2004, average interest bearing liabilities increased $1.6 billion or
6.6% compared to the same period in 2003. Average interest bearing
deposits increased $0.9 billion or 5.2% in the first six months of 2004
compared to the first six months of last year. Average total borrowings
increased $0.7 billion or 10.0% in the first half of 2004 compared to the
same period in 2003.
Average noninterest bearing deposits increased $0.4 billion or 10.8% in
the three months ended June 30, 2004 compared to the same period last
year. On a year-to-date basis, average noninterest bearing deposits
increased $0.4 billion or 11.3% in the first six months of 2004 compared
to the first six months of 2003.
The growth and composition of the Corporation's quarterly average loan and
lease portfolio for the current quarter and previous four quarters are
reflected in the following table. ($ in millions):
Consolidated Average Loans and Leases
-------------------------------------
2004 2003 Growth Pct.
------------------- ----------------------------- -------------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- -------- ----------
Commercial
Commercial $ 7,463 $ 7,142 $ 6,839 $ 6,912 $ 7,043 6.0% 4.5%
Commercial real estate
Commercial mortgages 7,512 7,246 7,076 6,986 6,859 9.5 3.7
Construction 1,071 1,075 1,071 1,014 977 9.6 (0.4)
--------- --------- --------- --------- --------- -------- ----------
Total commercial real estate 8,583 8,321 8,147 8,000 7,836 9.5 3.1
Commercial lease financing 393 399 384 392 390 0.8 (1.4)
--------- --------- --------- --------- --------- -------- ----------
Total Commercial 16,439 15,862 15,370 15,304 15,269 7.7 3.6
Personal
Residential real estate
Residential mortgages 3,210 2,958 2,811 2,751 2,705 18.6 8.5
Construction 292 269 246 210 189 54.7 8.7
--------- --------- --------- --------- --------- -------- ----------
Total residential real estate 3,502 3,227 3,057 2,961 2,894 21.0 8.5
Personal loans
Student 83 102 95 84 97 (15.1) (19.5)
Credit card 244 230 213 200 191 28.1 6.1
Home equity loans and lines 4,688 4,439 4,215 4,100 4,075 15.1 5.6
Other 1,388 1,391 1,516 1,692 1,551 (10.6) (0.2)
--------- --------- --------- --------- --------- -------- ----------
Total personal loans 6,403 6,162 6,039 6,076 5,914 8.3 3.9
Personal lease financing 164 177 198 255 322 (48.9) (7.1)
--------- --------- --------- --------- --------- -------- ----------
Total Personal 10,069 9,566 9,294 9,292 9,130 10.3 5.3
--------- --------- --------- --------- --------- -------- ----------
Total Consolidated Average
Loans and Leases $ 26,508 $ 25,428 $ 24,664 $ 24,596 $ 24,399 8.6% 4.2%
========= ========= ========= ========= ========= ======== ==========
Total consolidated average loans and leases increased $2.1 billion or 8.6%
in the second quarter of 2004 compared to the second quarter of 2003.
Total average commercial loan and lease growth amounted to $1.2 billion or
7.7% in the current quarter compared to the second quarter of the prior
year. The growth in average commercial loans and leases in the second
quarter of 2004 compared to the second quarter of 2003 was primarily due
to the growth in average commercial real estate loans which increased $0.7
billion. Total average personal loans and leases increased $1.0 billion
or 10.3% in the second quarter of 2004 compared to the second quarter of
2003. This growth was driven primarily by growth in home equity loans and
lines and residential real estate loans which each increased approximately
$0.6 billion. Average indirect auto loans and leases declined
approximately $0.3 billion in the current quarter compared to the second
quarter of the prior year. From a production standpoint, residential real
estate loan closings in the second quarter of 2004 were $0.5 billion or
59.2% ahead of loan closings in the first quarter of 2004 but were
approximately $0.5 billion or 27.3% lower in the second quarter of 2004
compared to the second quarter of 2003. Early indications, as measured by
application volume, suggest that loan closings in the third quarter of
2004 may approximate first quarter production.
26
For the six month period, total consolidated average loans and leases
increased $1.8 billion or 7.5% in the first half of 2004 compared to the
first half of 2003. Total average commercial loan and lease growth
amounted to $1.1 billion or 7.3% in the six months ended June 30, 2004
compared to the six months ended June 30, 2003. The growth in average
commercial loans and leases in the first half of 2004 compared to the same
period in 2003 was primarily due to the growth in average commercial real
estate loans which increased $0.7 billion. Total average personal loans
and leases increased $0.7 billion or 7.9% in the first six months of 2004
compared to the first six months of 2003. This growth was driven
primarily by growth in home equity loans and lines and residential real
estate loans which each increased approximately $0.5 billion. Average
indirect auto loans and leases declined approximately $0.3 billion in the
six months ended June 30, 2004 compared to the six months ended June 30,
2003. From a production standpoint, residential real estate loan closings
declined approximately $1.0 billion or 32.6% in the first half of 2004
compared to the first half of 2003.
The growth in average commercial loans since the fourth quarter of 2003
has been a combination of loans to new customers and increased activity
from existing customers whose businesses are in a variety of industries
located in Wisconsin and generally throughout the Corporation's markets
outside of the state. While it may be too early to determine if this is
the early stage of more robust business loan demand, the Corporation's
commercial lending activities have historically fared well as the economy
strengthens in its markets. 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.
Generally, the Corporation sells residential real estate production in the
secondary market, although selected loans with adjustable rate
characteristics are periodically retained in the portfolio. Residential
real estate loans sold to investors amounted to $0.5 billion in the second
quarter of 2004 compared to $1.1 billion in the second quarter of the
prior year. Approximately $58.6 million of loans sold were attributable
to the AmerUs acquisition. For the six months ended June 30, 2004
residential real estate loans sold to investors amounted to $0.8 billion
compared to $2.1 billion in the six months ended June 30, 2003.
Approximately $117.0 million of loans sold in the first half of 2004 were
attributable to the AmerUs acquisition. At June 30, 2004 and 2003, the
Corporation had approximately $84.3 million and $298.5 million of mortgage
loans held for sale, respectively. Gains from the sale of mortgage loans
amounted to $9.0 million in the second quarter of 2004 compared to $17.0
million in the second quarter of last year. For the six months ended June
30, 2004 and 2003, gains from the sale of mortgage loans amounted to $14.2
million and $30.3 million, respectively. Approximately $1.1 million and
$2.7 million of the gain in the second quarter and first half of 2004,
respectively, was attributable to the AmerUs acquisition.
Auto loans securitized and sold in the second quarter of 2004 amounted to
$0.3 billion compared to $0.2 billion in the second quarter of last year.
For the six months ended June 30, 2004, auto loans securitized and sold
amounted to $0.4 billion compared to $0.3 billion for the six months ended
June 30, 2003. For the three and six months ended June 30, 2004, losses
from the sale and securitization of auto loans amounted to $3.2 million
and $2.2 million, respectively. For the three and six months ended June
30, 2003, gains from the sale and securitization of auto loans amounted to
$3.0 million and $5.3 million, respectively. The losses incurred in 2004
are primarily due to lower loan interest spreads associated with new auto
loan production in a rising interest rate environment.
The Corporation anticipates that it will continue to divest itself of
selected assets through sale or securitization in future periods.
27
The growth and composition of the Corporation's quarterly average deposits
for the current and previous four quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2004 2003 Growth Pct.
------------------- ----------------------------- -------------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- -------- ----------
Bank issued deposits
Noninterest bearing deposits
Commercial $ 3,129 $ 2,976 $ 3,112 $ 2,991 $ 2,799 11.8 % 5.1%
Personal 908 855 855 828 818 10.9 6.1
Other 477 485 502 530 456 4.8 (1.5)
--------- --------- --------- --------- --------- -------- ----------
Total noninterest
bearing deposits 4,514 4,316 4,469 4,349 4,073 10.8 4.6
Interest bearing deposits
Savings and NOW 3,395 3,303 3,282 3,273 3,139 8.2 2.8
Money market 5,657 5,780 6,015 6,040 6,135 (7.8) (2.1)
Foreign activity 943 909 799 759 861 9.5 3.7
--------- --------- --------- --------- --------- -------- ----------
Total interest
bearing deposits 9,995 9,992 10,096 10,072 10,135 (1.4) 0.0
Time deposits
Other CDs and time deposits 2,582 2,611 2,659 2,707 2,791 (7.5) (1.1)
CDs greater than $100,000 660 632 633 617 628 5.1 4.5
--------- --------- --------- --------- --------- -------- ----------
Total time deposits 3,242 3,243 3,292 3,324 3,419 (5.2) 0.0
--------- --------- --------- --------- --------- -------- ----------
Total bank issued deposits 17,751 17,551 17,857 17,745 17,627 0.7 1.1
Wholesale deposits
Money market 72 75 74 73 75 (3.8) (3.9)
Brokered CDs 4,498 3,854 3,270 2,938 3,048 47.6 16.7
Foreign time 1,188 1,035 1,282 1,399 1,392 (14.7) 14.8
--------- --------- --------- --------- --------- -------- ----------
Total wholesale deposits 5,758 4,964 4,626 4,410 4,515 27.5 16.0
--------- --------- --------- --------- --------- -------- ----------
Total consolidated
average deposits $ 23,509 $ 22,515 $ 22,483 $ 22,155 $ 22,142 6.2 % 4.4%
========= ========= ========= ========= ========= ======== ==========
Total consolidated average deposits increased $1.4 billion or 6.2% in the
second quarter of 2004 compared to the second quarter of 2003. Average
noninterest bearing deposits increased $0.4 billion or 10.8% while average
bank-issued interest bearing activity accounts were relatively unchanged
in the current quarter compared to the second quarter of the prior year.
Average bank-issued time deposits declined $0.1 billion in the second
quarter of 2004 compared to the second quarter of 2003, but recently has
shown some signs of growth.
For the six months ended June 30, 2004, total average consolidated
deposits increased $1.4 billion or 6.3% compared to the six months ended
June 30, 2003. Average noninterest bearing deposits increased $0.4
billion or 11.3% while average bank-issued interest bearing activity
accounts were relatively unchanged in the first half of 2004 compared to
the first half of 2003.
The growth in bank issued deposits, especially noninterest bearing
deposits, includes both commercial and retail banking and was influenced
by 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. The Corporation
continues to emphasize the sale of checking products. However, management
expects the annual growth in noninterest bearing balances in 2004 to be
more modest than that experienced in 2003.
For the three and six months ended June 30, 2004, average wholesale
deposits increased $1.2 billion and $1.3 billion, respectively compared to
the three and six months ended June 30, 2003. The Corporation continues
to make greater use of wholesale funding alternatives, especially
institutional certificates of deposits. 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.
28
During the first quarter of 2004, a fixed rate advance from the Federal
Home Loan Bank ("FHLB") aggregating $55.0 million with an annual coupon
interest rate of 5.06% was prepaid and retired resulting in a charge to
earnings of $4.9 million. In addition, $45.0 million of FHLB fixed rate
advances with an annual coupon interest rate of 5.48% matured. During the
first quarter of 2004, $225.0 million of senior bank notes with an annual
weighted average coupon interest rate of 2.81% were issued. In addition,
$200.0 million of amortizing senior bank notes with a semi-annual coupon
interest rate of 2.90% were issued. New FHLB advances amounted to $150.0
million with an annual coupon interest rate of 2.07% in the first quarter
of 2004 and $500.0 million with an annual weighted coupon interest rate of
3.29% in the second quarter of 2004. During the second quarter of 2004,
the Corporation issued $100.0 million of Series E medium term notes with
an annual coupon rate of 1.72% and $2.6 million of MiNotes with an annual
weighted average coupon interest rate of 4.97%.
The Corporation's consolidated average interest earning assets and
interest bearing liabilities, interest earned and interest paid for the
three and six months ended June 30, 2004 and 2003, are presented in the
following tables ($ in millions):
Consolidated Yield and Cost Analysis
------------------------------------
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
-------------------------------- -------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
----------- --------- --------- ----------- --------- ---------
Loans and leases: (a)
Commercial loans and leases $ 7,855.9 $ 89.7 4.59 % $ 7,432.7 $ 86.6 4.68 %
Commercial real estate loans 8,582.9 113.9 5.34 7,835.8 112.4 5.75
Residential real estate loans 3,501.8 47.2 5.42 2,894.0 43.8 6.07
Home equity loans and lines 4,688.6 61.1 5.24 4,074.8 59.0 5.81
Personal loans and leases 1,878.7 23.3 5.00 2,161.4 29.8 5.53
---------- -------- --------- ---------- -------- ---------
Total loans and leases 26,507.9 335.2 5.09 24,398.7 331.6 5.45
Investment securities (b):
Taxable 4,671.1 48.6 4.19 4,041.6 41.3 4.15
Tax Exempt (a) 1,171.2 21.7 7.59 1,176.2 21.7 7.57
---------- -------- --------- ---------- -------- ---------
Total investment securities 5,842.3 70.3 4.87 5,217.8 63.0 4.92
Trading securities (a) 22.1 0.1 1.05 24.7 0.1 0.94
Other short-term investments 164.7 0.4 1.00 282.5 0.7 1.01
---------- -------- --------- ---------- -------- ---------
Total interest earning assets $ 32,537.0 $ 406.0 5.02 % $ 29,923.7 $ 395.4 5.31 %
========== ======== ========= ========== ======== =========
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 9,995.5 $ 15.8 0.64 % $ 10,134.8 $ 20.7 0.82 %
Bank issued time deposits 3,241.8 19.2 2.38 3,418.9 21.6 2.54
---------- -------- --------- ---------- -------- ---------
Total bank issued deposits 13,237.3 35.0 1.06 13,553.7 42.3 1.25
Wholesale deposits 5,758.3 23.0 1.61 4,515.4 18.0 1.60
---------- -------- --------- ---------- -------- ---------
Total interest bearing deposits 18,995.6 58.0 1.23 18,069.1 60.3 1.34
Short-term borrowings 3,258.9 14.2 1.76 3,204.5 21.0 2.63
Long-term borrowings 4,703.9 41.8 3.57 3,699.8 42.3 4.58
---------- -------- --------- ---------- -------- ---------
Total interest bearing liabilities $ 26,958.4 $ 114.0 1.70 % $ 24,973.4 $ 123.6 1.98 %
========== ======== ========= ========== ======== =========
Net interest margin (FTE) as a
percent of average earning assets $ 292.0 3.61 % $ 271.8 3.65 %
======== ========= ======== =========
Net interest spread (FTE) 3.32 % 3.33 %
========= =========
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax
rate of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for
available for sale securities.
29
Consolidated Yield and Cost Analysis
------------------------------------
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
-------------------------------- -------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
----------- --------- --------- ----------- --------- ---------
Loans and leases: (a)
Commercial loans and leases $ 7,698.4 $ 177.2 4.63 % $ 7,327.3 $ 170.4 4.69 %
Commercial real estate loans 8,452.1 225.0 5.35 7,724.4 224.3 5.86
Residential real estate loans 3,364.2 91.9 5.49 2,846.1 87.9 6.23
Home equity loans and lines 4,563.4 120.1 5.29 4,061.6 118.5 5.88
Personal loans and leases 1,889.6 47.6 5.07 2,191.5 61.3 5.64
---------- -------- --------- ---------- -------- ---------
Total loans and leases 25,967.7 661.8 5.13 24,150.9 662.4 5.53
Investment securities (b):
Taxable 4,602.1 96.9 4.26 3,963.0 87.1 4.50
Tax Exempt (a) 1,158.9 43.1 7.64 1,186.7 43.9 7.61
---------- -------- --------- ---------- -------- ---------
Total investment securities 5,761.0 140.0 4.93 5,149.7 131.0 5.21
Trading securities (a) 22.7 0.2 1.33 21.6 0.1 1.18
Other short-term investments 188.6 0.9 1.01 270.0 1.5 1.08
---------- -------- --------- ---------- -------- ---------
Total interest earning assets $ 31,940.0 $ 802.9 5.06 % $ 29,592.2 $ 795.0 5.43 %
========== ======== ========= ========== ======== =========
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 9,993.7 $ 31.3 0.63 % $ 10,085.8 $ 43.1 0.86 %
Bank issued time deposits 3,242.0 38.4 2.38 3,492.7 45.4 2.62
---------- -------- --------- ---------- -------- ---------
Total bank issued deposits 13,235.7 69.7 1.06 13,578.5 88.5 1.31
Wholesale deposits 5,361.3 43.8 1.65 4,101.5 34.7 1.71
---------- -------- --------- ---------- -------- ---------
Total interest bearing deposits 18,597.0 113.5 1.23 17,680.0 123.2 1.40
Short-term borrowings 3,343.7 30.1 1.81 3,405.9 43.0 2.55
Long-term borrowings 4,473.3 80.8 3.63 3,698.9 84.5 4.61
---------- -------- --------- ---------- -------- ---------
Total interest bearing liabilities $ 26,414.0 $ 224.4 1.71 % $ 24,784.8 $ 250.7 2.04 %
========== ======== ========= ========== ======== =========
Net interest margin (FTE) as a
percent of average earning assets $ 578.5 3.65 % $ 544.3 3.72 %
======== ========= ======== =========
Net interest spread (FTE) 3.35 % 3.39 %
========= =========
(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 4 basis points from 3.65
percent in the second quarter of 2003 to 3.61 percent in the second
quarter of 2004. The yield on average interest earning assets decreased
29 basis points in the second quarter of 2004 compared to the second
quarter of the prior year. The cost of bank issued interest bearing
deposits in the current quarter decreased 19 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 54 basis points in the current quarter compared to
the second quarter of last year.
On a year to date basis, the net interest margin, as a percent of average
earning assets on a FTE basis, decreased 7 basis points from 3.72 percent
in the six months ended June 30, 2003 to 3.65 percent in the six months
ended June 30, 2004. The yield on average interest earning assets
decreased 37 basis points in the first half of 2004 compared to the first
six months of the prior year. The cost of bank issued interest bearing
deposits in the six months ended June 30, 2004, decreased 25 basis points
from the same period of the previous year. As previously discussed, the
increase in noninterest bearing deposits provided a benefit to the net
interest margin. The cost of other funding sources (wholesale deposits
and total borrowings) decreased 56 basis points in the six months ended
June 30, 2004, compared to the six months ended June 30, 2003.
30
Net interest income for the quarter and first six months of 2004 was
affected by a number of factors. Loan growth, the early retirement of
higher cost debt in the latter part of 2003, and lower levels of
prepayment activity were beneficial to net interest income in 2004. The
low absolute level of interest rates and increased level of prepayments
experienced in the first three quarters of 2003 shortened the expected
life of many of the Corporation's financial assets. Lower reinvestment
rates and a conscious slowing in deposit repricing resulting from
selectively lowering deposit rates, has adversely impacted net interest
income.
Management expects the net interest margin as a percent of average earning
assets will likely trend down over the remainder of 2004 as a result of
the following: loan spreads tend to be more narrow, particularly as
interest rates increase; as the economy improves, the Corporation's
capacity to generate loans will likely exceed its ability to generate
appropriately priced deposits; and the cost of funding Metavante's recent
acquisitions will result in additional interest expense in future periods.
See Note 14, Subsequent Events, in Notes to Financial Statements for a
description of recently completed debt offerings. Net interest income and
the net interest margin can vary and continue to be influenced by loan and
deposit growth, product spreads, pricing competition in the Corporation's
markets, prepayment activity, future interest rate changes and various
other factors.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of June 30, 2004, and the prior four quarters.
Nonperforming Assets
--------------------
($000's)
2004 2003
------------------------ -------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Nonaccrual $ 137,845 $ 149,550 $ 166,387 $ 180,535 $ 195,448
Renegotiated 253 261 278 286 304
Past due 90 days or more 6,902 6,296 6,111 6,479 7,561
----------- ----------- ----------- ----------- -----------
Total nonperforming loans and leases 145,000 156,107 172,776 187,300 203,313
Other real estate owned 10,394 13,172 13,235 13,642 10,527
----------- ----------- ----------- ----------- -----------
Total nonperforming assets $ 155,394 $ 169,279 $ 186,011 $ 200,942 $ 213,840
=========== =========== =========== =========== ===========
Allowance for loan and lease losses $ 357,898 $ 353,687 $ 349,561 $ 348,100 $ 348,100
=========== =========== =========== =========== ===========
Consolidated Statistics
-----------------------
2004 2003
------------------------ -------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Net charge-offs to average
loans and leases annualized 0.08% 0.08% 0.13% 0.13% 0.16%
Total nonperforming loans and leases
to total loans and leases 0.53 0.60 0.69 0.76 0.82
Total nonperforming assets to total loans
and leases and other real estate owned 0.57 0.65 0.74 0.82 0.86
Allowance for loan and lease losses
to total loans and leases 1.32 1.36 1.39 1.41 1.40
Allowance for loan and lease losses
to total nonperforming loans and leases 247 227 202 186 171
31
Nonaccrual Loans and Leases By Type
-----------------------------------
($000's)
2004 2003
------------------------ -------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Commercial
Commercial, financial
and agricultural $ 39,473 $ 45,714 $ 56,096 $ 66,571 $ 77,389
Lease financing receivables 6,398 7,381 13,308 4,538 6,350
----------- ----------- ----------- ----------- -----------
Total commercial 45,871 53,095 69,404 71,109 83,739
Real estate
Construction and land development 1,724 78 800 353 460
Commercial mortgage 38,561 46,172 42,857 47,012 46,346
Residential mortgage 50,776 49,528 52,098 60,287 63,843
----------- ----------- ----------- ----------- -----------
Total real estate 91,061 95,778 95,755 107,652 110,649
Personal 913 677 1,228 1,774 1,060
----------- ----------- ----------- ----------- -----------
Total nonaccrual loans and leases $ 137,845 $ 149,550 $ 166,387 $ 180,535 $ 195,448
=========== =========== =========== =========== ===========
Reconciliation of Allowance for Loan and Lease Losses
-----------------------------------------------------
($000's)
2004 2003
------------------------ -------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Beginning balance $ 353,687 $ 349,561 $ 348,100 $ 348,100 $ 338,253
Provision for loan and lease losses 9,227 9,027 9,807 7,852 19,642
Allowance of banks and loans acquired -- 27 -- -- --
Loans and leases charged-off
Commercial 4,015 2,904 4,497 4,317 6,619
Real estate 2,765 3,138 5,142 3,238 3,739
Personal 2,616 3,653 3,661 2,528 2,942
Leases 536 1,001 2,494 880 1,191
----------- ----------- ----------- ----------- -----------
Total charge-offs 9,932 10,696 15,794 10,963 14,491
Recoveries on loans and leases
Commercial 2,279 2,886 3,810 1,400 2,624
Real estate 1,336 1,555 2,508 591 772
Personal 906 756 762 831 732
Leases 395 571 368 289 568
----------- ----------- ----------- ----------- -----------
Total recoveries 4,916 5,768 7,448 3,111 4,696
----------- ----------- ----------- ----------- -----------
Net loans and leases charge-offs 5,016 4,928 8,346 7,852 9,795
----------- ----------- ----------- ----------- -----------
Ending balance $ 357,898 $ 353,687 $ 349,561 $ 348,100 $ 348,100
=========== =========== =========== =========== ===========
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
$10.4 million at June 30, 2004, compared to $13.2 million at March 31,
2004 and December 31, 2003, respectively.
Nonperforming loans and leases consist of nonaccrual, renegotiated or
restructured loans, and loans and leases that are delinquent 90 days or
more and still accruing interest. The balance of nonperforming loans and
leases can fluctuate widely based on the timing of cash collections,
renegotiations and renewals.
Maintaining nonperforming assets at an acceptable level is important to
the ongoing success of a financial services institution. The
Corporation's comprehensive credit review and approval process are
critical to ensuring that the amount of nonperforming assets on a long-
term basis is minimized within the overall framework of acceptable levels
of credit risk. In addition to the negative impact on net interest income
and credit losses, nonperforming assets also increase operating costs due
to the expense associated with collection efforts.
32
At June 30, 2004, nonperforming loans and leases amounted to $145.0
million or 0.53% of consolidated loans and leases compared to $156.1
million or 0.60% of consolidated loans and leases at March 31, 2004 and
$172.8 million or 0.69% of consolidated loans and leases at December 31,
2003. Nonaccrual loans and leases have been the primary source of the
decrease in nonperforming loans and leases since December 31, 2003. The
net decrease was primarily due to continued reductions and positive
resolutions in several portfolio segments and improving credit conditions
throughout the loan and lease portfolios.
Net charge-offs amounted to $5.0 million or 0.08% of average loans and
leases in the second quarter of 2004 compared to $4.9 million or 0.08% of
average loans and leases in the first quarter of 2004 and $8.3 million or
0.13% of average loans and leases in the fourth quarter of 2003. The net
charge-off activity experienced in the first and second quarters of 2004
are the lowest levels experienced in any individual quarter since the
second quarter of 2000. This lower level of net charge-offs has to some
extent been the result of higher than normal recoveries. Based on the
status of some of the larger charge-offs recognized in recent quarters,
management expects recoveries will likely return to a lower level in
future periods.
Credit quality continued to show improvement as evidenced by the decline
in nonperforming loans and leases and net charge-offs which were lower
than expected based on the state of the economy in the markets the
Corporation serves. At year-end 2003, the Corporation disclosed that it
expects net charge-offs in 2004 to range from 0.15% to 0.20% for the year
and nonperfoming loans and leases as a percent of total loans and leases
outstanding to be in the range of 70-80 basis points. Based on first and
second quarter experience, it appears that the Corporation's credit
quality ratios may be at the low end of these ranges in the near term.
Management continues to believe that the long-term impact of the recent
recession may still provide some unanticipated results within the loan and
lease portfolio and some degree of stress and uncertainty continues to
exist.
The provision for loan and lease losses amounted to $9.2 million for the
three months ended June 30, 2004 compared to $9.0 million for the three
months ended March 31, 2004 and $19.6 million for the three months ended
June 30, 2003. 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 as a percent of total loans and leases outstanding was 1.32%
at June 30, 2004, 1.36% at March 31, 2004 and 1.39% at December 31, 2003.
OTHER INCOME
------------
Total other income in the second quarter of 2004 amounted to $330.0
million compared to $294.7 million in the same period last year, an
increase of $35.3 million or 12.0%. For the six months ended June 30,
2004, total other income amounted to $643.4 million compared to $585.2
million for the six months ended June 30, 2003, an increase of $58.2
million or 10.0%. The increase in other income was primarily due to
growth in data processing services and trust services revenue and was
partially offset by lower mortgage banking revenue.
Data processing services revenue amounted to $197.3 million in the second
quarter of 2004 compared to $158.0 million in the second quarter of 2003,
an increase of $39.3 million or 24.9%. For the six months ended June 30,
2004, data processing services revenue amounted to $383.5 million compared
to $315.1 million for the six months ended June 30, 2003, an increase of
$68.4 million or 21.7%. Revenue associated with Metavante's November 2003
acquisition of Printing For Systems, Inc. and the May 2004 acquisition of
the Kirchman Corporation contributed approximately $14.9 million and $26.8
million to the revenue growth in the three and six months ended June 30,
2004, over the comparable three and six months ended June 30, 2003.
Overall, revenue growth was generally strong throughout all aspects of the
segment. Total buyout revenue, which varies from period to period,
increased $1.3 million in the current quarter compared to the second
quarter of last year. For the six months ended June 30, 2004 buyout
revenue increased $2.2 million compared to the six months ended June 30,
2003. Management expects data processing services revenue will continue
to demonstrate revenue growth over the comparative periods of the prior
year. Management continues to believe that the revenue and segment income
outlook that was provided in the 2003 Annual Report on Form 10-K for the
year ended December 31, 2004 is achievable and will be enhanced by
Metavante's recent acquisitions. See Note 14, Subsequent Events in Notes
to Financial Statements for an update on Metavante's recently completed
acquisitions.
For the three months ended June 30, 2004, item processing revenue amounted
to $10.9 million compared to $9.6 million for the three months ended June
30, 2003, an increase of $1.3 million or 13.9%. For the six months ended
June 30, 2004, item processing revenue amounted to $22.3 million compared
to $19.8 million for the six months ended June 30, 2003, an increase of
$2.5 million or 12.5%. The increase in revenues is due to new customers
and increased volumes processed.
33
Trust services revenue amounted to $37.9 million in the second quarter of
2004 compared to $31.2 million in the second quarter of 2003, an increase
of $6.7 million or 21.6%. For the six months ended June 30, 2004, trust
services revenue amounted to $74.2 million compared to $61.2 million for
the six months ended June 30, 2003, an increase of $13.0 million or 21.2%.
Revenue associated with the employee benefit plan business purchased from
a national banking association located in Missouri contributed
approximately $2.7 million and $4.3 million to the revenue growth in the
three and six months ended June 30, 2004 compared to the same periods in
the prior year. The remainder of the increase in revenue was due to sales
efforts, positive equity market performance and some shifting of funds
into equities. Assets under management were approximately $17.1 billion
at June 30, 2004, compared to $15.7 billion at December 31, 2003, and
$14.0 billion at June 30, 2003.
Total mortgage banking revenue was $11.7 million in the second quarter of
2004 compared with $21.8 million in the second quarter of 2003, a decrease
of $10.1 million. For the six months ended June 30, 2004, total mortgage
banking revenue was $18.7 million compared with $39.3 million for the six
months ended June 30, 2003, a decrease of $20.6 million. For the three
and six months ended June 30, 2004, the Corporation sold $0.5 billion and
$0.8 billion of residential mortgage loans to the secondary market.
Retained interests in the form of mortgage servicing rights amounted to
$0.7 million for the six months ended June 30, 2004. By comparison, for
the three and six months ended June 30, 2003, the Corporation sold $1.1
billion and $2.1 billion of residential mortgage loans to the secondary
market. Retained interests in the form of mortgage servicing rights
amounted to $1.0 million for the six months ended June 30, 2003.
Approximately $58.6 million of the residential mortgage loans sold and
$1.1 million of the reported gain recognized in the second quarter of 2004
and $117.0 million of the residential mortgage loans sold and $2.7 million
of the reported gain recognized in the first half of 2004 was attributable
to the AmerUs acquisition.
Net investment securities activities for the three and six months ended
June 30, 2004 were not significant. For the three and six months ended
June 30, 2003 net investment securities losses amounted to $2.6 million
and $1.0 million, respectively. Impairment losses on the interest-only
strips which represent retained interests associated with auto loan
securitization activity amounted to $4.1 million in the second quarter of
2003. For the six months ended June 30, 2003, the Corporation's Capital
Markets Group recognized gains, which can vary from period to period, of
$1.8 million.
Other income in the second quarter of 2004 amounted to $39.9 million
compared to $43.1 million in the second quarter of 2003, a decrease of
$3.2 million. For the six months ended June 30, 2004, other income
amounted to $80.8 million compared to $83.6 million for the six months
ended June 30, 2003, a decrease of $2.8 million. For the three and six
months ended June 30, 2004, auto securitization income decreased $5.7
million and $6.7 million compared to the same periods of the prior year as
previously discussed. During the second quarter of 2003, the Corporation
sold two bank branches at a gain of $0.9 million. Gains from the sale of
other real estate decreased $0.8 million in the six months ended June 30,
2004 compared to the six months ended June 30, 2003. The decrease was
primarily due to the sale of one large property in the first quarter of
2003. Growth in various other sources of fee income in the second quarter
and first six months of 2004 compared to the respective periods of 2003,
offset the income declines previously discussed.
OTHER EXPENSE
-------------
Total other expense for the three months ended June 30, 2004 amounted to
$374.7 million compared to $335.7 million for the three months ended June
30, 2003, an increase of $39.0 million or 11.6%. For the six months ended
June 30, 2004, total other expense amounted to $737.0 million compared to
$671.3 million for the six months ended June 30, 2003, an increase of
$65.7 million or 9.8%. Total other expense for the second quarter of 2004
includes the product impairment charge by Metavante, the operating
expenses associated with Metavante's acquisition of Printing For Systems,
Inc. in November 2003 and the Kirchman Corporation in May 2004, the
purchase of certain employee benefit plan segments beginning in the third
quarter of 2003 by the Trust Services reporting unit and the purchase of
AmerUs Home Lending, Inc. by the Banking segment on January 1, 2004. Such
operating expenses have all been included in the Corporation's
consolidated operating expenses since the acquisitions were completed.
Total other operating expenses for the six months ended June 30, 2004,
includes the aforementioned items as well as the charge in the first
quarter of 2004 for the early retirement of some higher cost fixed rate
debt. Total other expense for the six months ended June 30, 2003 includes
the transition costs associated with the completion of Metavante's
integration of Paytrust. For the three and six months ended June 30,
2004, the estimated aggregate impact of these items was an increase to
total other expense over the comparative periods of approximately $20.8
million and $33.3 million, respectively. Excluding the impact of these
items, total other expense growth in the second quarter of 2004 compared
to the second quarter of 2003 was approximately $18.2 million or 5.4% and
for the six months ended June 30, 2004 compared to the six months ended
June 30, 2003, was approximately $32.4 million or 4.8%.
34
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
June 30, 2004, and prior four quarters were:
Efficiency Ratios
-----------------
Three Months Ended
---------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
2004 2004 2003 2003 2003
---------------------------------------------------------------
Consolidated Corporation 60.2 % 60.4 % 63.9 % 69.4 % 59.0 %
Consolidated Corporation
Excluding Metavante 48.8 % 49.2 % 52.1 % 60.6 % 48.2 %
Salaries and employee benefits expense amounted to $211.9 million in the
second quarter of 2004 compared to $193.5 million in the second quarter of
2003, an increase of $18.4 million or 9.5%. For the six months ended June
30, 2004, salaries and employee benefits expense amounted to $415.8
compared to $390.7 million for the six months ended June 30, 2003, an
increase of $25.1 million or 6.4%. Salaries and benefits associated with
acquisitions and increases in performance-based incentive compensation
were the primary drivers of the growth in salaries and employee benefits
expense in the second quarter and first six months of 2004 compared to the
respective periods in 2003. Salaries and expense growth for the six
months ended June 30, 2004 compared to the six months ended June 30, 2003
was offset by the salaries and benefits expense associated with the
Paytrust integration activities in the first quarter of 2003.
For the three and six months ended June 30, 2004, occupancy and equipment
expense amounted to $44.5 million and $91.8 million, respectively and was
relatively unchanged over the comparative periods. Included in equipment
expense for the three and six months ended June 30, 2004, was
approximately $0.4 million of charges associated with a product impairment
as previously discussed. Occupancy and equipment expense associated with
the Paytrust integration activities in the first quarter of the 2003 was
approximately $0.8 million.
Software expenses, processing charges, supplies and printing, professional
services and shipping and handling expenses totaled $58.5 million in the
second quarter of 2004 compared to $48.7 million in the second quarter of
2003, an increase of $9.8 million or 20.2%. Metavante contributed
approximately $9.0 million to the expense growth, with a significant part
of that expense growth due to its acquisitions. Expense growth in these
areas by other segments and the holding company were offset by lower
expenses associated with residential mortgage loan production which were
approximately $1.8 million less in the second quarter of 2004 compared to
the second quarter of the prior year. For the six months ended June 30,
2004, software expenses, processing charges, supplies and printing,
professional services and shipping and handling expenses totaled $114.0
million compared to $100.9 million for the six months ended June 30, 2003,
an increase of $13.1 million or 12.9%. Metavante's expense growth in
these areas, including the effect of its acquisitions net of the
applicable expenses associated with the Paytrust integration activities in
the first quarter of 2003, was the primary contributor to the expense
growth in the first six months of 2004 compared to the first six months in
2003. Expense growth in these areas by other segments and the holding
company were offset by lower expenses associated with residential mortgage
loan production which were approximately $3.5 million less in the six
month ended June 30, 2004 compared to the six months ended June 30, 2003.
Amortization of intangibles amounted to $5.4 million in the second quarter
of 2004 compared to $7.5 million in the second quarter of 2003, a decrease
of $2.1 million. For the six months ended June 30, 2004, amortization of
intangibles amounted to $10.9 million compared to $14.4 million for the
six months ended June 30, 2003, a decrease of $3.5 million. Amortization
and valuation reserve adjustments associated with mortgage servicing
rights decreased amortization expense $2.1 million in the second quarter
of 2004 compared to the second quarter of 2003 and decreased amortization
expense $2.7 million in the first half of 2004 compared to the first half
of 2003. The carrying value of the Corporation's mortgage servicing
rights was $4.3 million at June 30, 2004. Amortization of core deposit
intangibles, which is based on a declining balance method, decreased $0.6
million in the second quarter of 2004 compared to the second quarter of
the prior year and decreased $1.7 million in the six months ended June 30,
2004 compared to the six months ended June 30, 2003. Included in
amortization of intangibles for the three and six months ended June 30,
2004 is Metavante's $0.2 million write-off of a customer-related
intangible associated with an impaired product as previously discussed.
Other expense amounted to $54.4 million in the second quarter of 2004
compared to $39.9 million in the second quarter of 2003, an increase of
$14.5 million or 36.4%. For the six months ended June 30, 2004, other
expense amounted to $104.5 million compared to $71.8 million for the six
months ended June 20, 2003, an increase of $32.7 million or 45.6%. For
the three and six months ended June 30, 2004, the cost associated with
card plastic sales increased $3.6 million and $9.1 million, respectively
compared to the respective periods of the prior year. This increase was
primarily attributable to Metavante's acquisition of Printing For Systems,
Inc. Other expense for the three and six months ended June 30, 2003
includes the $2.0 million charge associated with redemption of all of the
Floating Rate Debentures held by its subsidiary, MVBI Capital Trust as
previously discussed. Other expense for the six months ended June 30,
2004, includes the $4.9 million charge associated with the early
retirement of $55.0 million of higher cost fixed rate debt which occurred
during the first quarter of 2004.
35
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 was $6.7 million in the second quarter of 2004 and in the
second quarter of 2003 net capitalization amounted to $5.2 million
resulting in an increase to other expense over the comparative quarters of
$11.9 million. For the six months ended June 30, 2004, net software and
conversion amortization was $9.7 million and for the six months ended June
30, 2003, net capitalization amounted to $8.4 million resulting in an
increase to other expense over the comparative six month periods of $18.1
million. Included in net software and conversion amortization for the
three and six months ended June 30, 2004 is Metavante's $4.9 million
write-off of capitalized software associated with an impaired product as
previously discussed.
INCOME TAXES
------------
The provision for income taxes for the three months ended June 30, 2004
amounted to $78.4 million or 34.1% of pre-tax income compared to $68.7
million or 33.8% of pre-tax income for the three months ended June 30,
2003. For the six months ended June 30, 2004, the provision for income
taxes amounted to $153.0 million or 33.9% of pre-tax income compared to
$134.3 million or 33.8% of pre-tax income for the six months ended June
30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Shareholders' equity was $3.43 billion or 9.3% of total consolidated
assets at June 30, 2004, compared to $3.33 billion or 9.7% of total
consolidated assets at December 31, 2003, and $3.24 billion or 9.5% of
total consolidated assets at June 30, 2003. The increase at June 30, 2004
was primarily due to earnings net of dividends paid. At June 30, 2004, the
net loss in accumulated other comprehensive income amounted to $51.9
million which represent a negative change in accumulated other
comprehensive income of $54.6 million since December 31, 2003. Net
accumulated other comprehensive income associated with available for sale
investment securities was a net gain of $41.8 million at December 31,
2003, compared to a net loss of $23.2 million at June 30, 2004, resulting
in a net loss of $65.0 million over the six month period. The unrealized
loss associated with the change in fair value of the Corporation's
derivative financial instruments designated as cash flow hedges declined
$10.4 million since December 31, 2003, resulting in the net increase in
shareholders' equity.
The Corporation has a Stock Repurchase Program under which up to 12
million shares can be repurchased annually. During the second quarter of
2004, no common shares were acquired under the program. For the six
months ended June 30, 2004, 2.3 million common shares were acquired at an
aggregate cost of $88.5 million or an average price of $38.98 per common
share. As a result of the Metavante acquisitions, the Corporation does
not expect that it will acquire common shares under the Stock Repurchase
Program in the near term. See Item 2 in Part II of this Form 10-Q for the
monthly purchase activity relating to the Corporation's Stock Repurchase
Program in 2004. For the three and six months ended June 30, 2003, 0.15
million common shares were acquired at an aggregate cost of $4.4 million
or $29.66 per common share.
36
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown
in the following tables.
RISK-BASED CAPITAL RATIOS
_________________________
($ in millions)
June 30, 2004 December 31, 2003
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,526 8.33 % $ 2,538 8.87 %
Tier 1 Capital
Minimum Requirement 1,213 4.00 1,144 4.00
-------------------------------- --------------------------------
Excess $ 1,313 4.33 % $ 1,394 4.87 %
================================ ================================
Total Capital $ 3,509 11.57 % $ 3,511 12.28 %
Total Capital
Minimum Requirement 2,426 8.00 2,288 8.00
-------------------------------- --------------------------------
Excess $ 1,083 3.57 % $ 1,223 4.28 %
================================ ================================
Risk-Adjusted Assets $ 30,324 $ 28,601
================= =================
LEVERAGE RATIOS
---------------
($ in millions)
June 30, 2004 December 31, 2003
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 2,526 7.23 % $ 2,538 7.80 %
Minimum Leverage
Requirement 1,048 - 1,746 3.00 - 5.00 977 - 1,628 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,478 - 780 4.23 - 2.23 % $ 1,561 - 910 4.80 - 2.80 %
================================ ================================
Adjusted Average
Total Assets $ 34,915 $ 32,553
================= =================
M&I manages its liquidity to ensure that funds are available to each of
its banks to satisfy the cash flow requirements of depositors and
borrowers and to ensure the Corporation's own cash requirements are met.
M&I maintains liquidity by obtaining funds from several sources.
The Corporation's most readily available source of liquidity is its
investment portfolio. Investment securities available for sale, which
totaled $5.1 billion at June 30, 2004, represent a highly accessible
source of liquidity. The Corporation's portfolio of held-to-maturity
investment securities, which totaled $0.8 billion at June 30, 2004,
provides liquidity from maturities and amortization payments. The
Corporation's mortgage loans held-for-sale provide additional liquidity.
These loans 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 $16.1 billion in the second quarter of 2004. 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 $5.8
billion in the second quarter of 2004.
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 second
quarter of 2004.
37
The Corporation's lead bank, M&I Marshall & Ilsley Bank ("the Bank"), has
implemented a bank note program which permits it to issue up to $7.0
billion of short-term and medium-term notes which are offered and sold
only to institutional investors. This program is intended to enhance
liquidity by enabling the Bank to sell its debt instruments in private
markets in the future without the delays which would otherwise be
incurred. Bank notes outstanding at June 30, 2004, amounted to $2.6
billion of which $0.6 billion is subordinated and qualifies as
supplementary capital for regulatory capital purposes. There were no bank
notes issued during the second quarter of 2004.
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 June 30, 2004, Series E notes issued amounted to $0.4 billion.
The Corporation may issue up to $0.5 billion of medium-term MiNotes with
maturities ranging from 9 months to 30 years and at fixed or floating
rates. The MiNotes are issued in smaller denominations to attract retail
investors. At June 30, 2004, MiNotes issued amounted to $0.1 billion.
Approximately $2.6 million of MiNotes were issued during the second
quarter of 2004. Additionally, the Corporation has a commercial paper
program. At June 30, 2004, commercial paper outstanding amounted to $0.3
billion.
During the second quarter of 2004, the Corporation filed a shelf
registration statement with the Securities and Exchange Commission which
will enable the Corporation to issue various securities, including debt
securities, common stock, preferred stock, depositary shares, purchase
contracts, units, warrants, and trust preferred securities, up to an
aggregate amount of $3.0 billion. On July 29, 2004, the Corporation
issued $600 million of senior notes and $400 million of Common SPACES
under the shelf registration statement. See Note 14 Subsequent Events in
the Notes to Financial Statements.
Short-term borrowings represent contractual debt obligations with
maturities of one year or less and amounted to $2.2 billion at June 30,
2004. Long-term borrowings amounted to $5.1 billion at June 30, 2004.
The scheduled maturities of long-term borrowings at June 30, 2004 are as
follows: $1.4 billion is due in less than one year; $1.6 billion is due in
one to three years; $0.9 billion is due in three to five years; and $1.2
billion is due in more than five years. There have been no other
substantive changes to the Corporation's contractual obligations as
reported in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2003.
OFF-BALANCE SHEET ARRANGEMENTS
------------------------------
At June 30, 2004, there have been no substantive changes with respect to
the Corporation's off-balance sheet activities. See Note 7 to the
Consolidated Financial Statements for an update of the Corporation's
securitization activities in the second quarter of 2004. Based on the
off-balance sheet arrangements with which it is presently involved, the
Corporation does not believe that such off-balance sheet arrangements
either have, or are reasonably likely to have, a material impact to its
current or future financial condition, results of operations, liquidity or
capital.
CRITICAL ACCOUNTING POLICIES
----------------------------
The Corporation has established various accounting policies which govern
the application of accounting principles generally accepted in the United
States in the preparation of the Corporation's consolidated financial
statements. The significant accounting policies of the Corporation are
described in the footnotes to the consolidated financial statements
contained in the Corporation's Annual Report on Form 10-K and updated as
necessary in its Quarterly Reports on Form 10-Q. Certain accounting
policies involve significant judgments and assumptions by management that
may have a material impact on the carrying value of certain assets and
liabilities. Management considers such accounting policies to be critical
accounting policies. The judgments and assumptions used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of judgments
and assumptions made by management, actual results could differ from these
judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of the operations of the
Corporation. Management continues to consider the following to be those
accounting policies that require significant judgments and assumptions:
Allowance for Loan and Lease Losses
-----------------------------------
The allowance for loan and lease losses represents management's estimate
of probable losses inherent in the Corporation's loan and lease portfolio.
Management evaluates the allowance each quarter to determine that it is
adequate to absorb these inherent losses. This evaluation is supported by
a methodology that identifies estimated losses based on assessments of
individual problem loans and historical loss patterns of homogeneous loan
pools. In addition, environmental factors, including economic conditions
and regulatory guidance, unique to each measurement date are also
considered. This reserving methodology has the following components:
38
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.
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 using
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 loan and lease losses at June 30, 2004:
In general, the Corporation's borrowing customers appear to be
successfully managing their businesses through the slower economic
conditions. While there appear to be some signs of improvement in
the economy and the Corporation's customer base is beginning to see
some signs of increased business activity, the customers remain
cautious of there being any substantive increase in revenues until
later in the year. As a result, the recession's lagging impact may
continue to affect the operating performance of M&I's customers in
the near term.
At June 30, 2004, special reserves continue to be carried for
exposures to manufacturing, healthcare, production agriculture
(including dairy and cropping operations), truck transportation, and
the airline and travel industries. The majority of the commercial
charge-offs incurred during the past two years were in these
industry segments. While most loans in these categories are still
performing, the Corporation continues to believe these sectors have
been more adversely affected by the 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.
During the second quarter of 2004, the Corporation's commitments to
Shared National Credits were approximately $2.4 billion with usage
averaging around 37%. Many of these borrowers are in industries
impacted by the recent months economic climate. In addition, many
of the Corporation's largest charge-offs have come from Shared
National Credits. Approximately $3.1 million of the net charge-offs
in 2003 came from Shared National Credits. Although these factors
result in an increased risk profile, as of June 30, 2004, Shared
National Credit nonperforming loans were approximately 0.05% and
0.07% 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.
The Corporation's primary lending areas are Wisconsin, Arizona,
Minnesota and Missouri. The acquisitions in Minnesota and Missouri
continue to represent relatively new geographic regions for the
Corporation. Each of the regions has cultural and environmental
factors that are unique to them. Although mitigated by the
implementation of the Corporation's credit underwriting and
monitoring processes, the uncertainty regarding the inherent losses
in their respective loan and lease portfolios continues to present
increased risks.
39
At June 30, 2004, nonperforming loans and leases amounted to $145.0
million or 0.53% of consolidated loans and leases compared to $156.1
million or 0.60% of consolidated loans and leases at March 31, 2004
and $172.8 million or 0.69% of consolidated loans and leases at
December 31, 2003. Nonaccrual loans and leases have been the
primary source of the decrease in nonperforming loans and leases
since December 31, 2003. The net decrease was primarily due to
continued reductions and positive resolutions in several portfolio
segments and improving credit conditions throughout the loan and
lease portfolios.
Net charge-offs amounted to $5.0 million or 0.08% of average loans
and leases in the second quarter of 2004 compared to $4.9 million or
0.08% of average loans and leases in the first quarter of 2004 and
$8.3 million or 0.13% of average loans and leases in the fourth
quarter of 2003. The net charge-off activity experienced in the
first and second quarters of 2004 are the lowest levels experienced
by the Corporation in any individual quarter since the second
quarter of 2000. This lower level of net charge-offs in the first
six months of 2004 has to some extent been the result of higher than
normal recoveries. Based on the status of some of the larger
charge-offs recognized in recent quarters, management expects
recoveries will likely return to a lower level in future periods.
Credit quality continued to show improvement as evidenced by the
decline in nonperforming loans and leases and net charge-offs which
were lower than expected based on the state of the economy in the
markets the Corporation serves. In the 2003 Annual Report on Form
10-K, the Corporation disclosed that it expects net charge-offs in
2004 to range from 0.15% to 0.20% for the year and nonperfoming
loans and leases as a percent of total loans and leases outstanding
to be in the range of 70-80 basis points. Based on the first six
month's experience, it appears that the Corporation's credit quality
ratios may be at the low end of these ranges in the near term. At
the present time, there is no specific industry that is of immediate
concern; however, management continues to believe that the long-term
impact of the recent recession may still provide some unanticipated
results within the loan and lease portfolio and some degree of
stress and uncertainty continues to exist.
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 $357.9 million or 1.32% of loans and leases
outstanding at June 30, 2004 compared to $353.7 million or 1.36% of loans
and leases outstanding at March 31, 2004. The resulting provision for
loan and lease losses was the amount 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, although the appropriate time to initiate capitalization
requires management judgment. Once the specific capitalized project is
put into production, the software cost is amortized over its estimated
useful life, generally four years. Each quarter, the Corporation performs
net realizable value tests to ensure the assets are recoverable. Such
tests require management judgment as to the future sales and profitability
of a particular product which involves, in some cases, multi-year
projections. Technology changes and changes in customer requirements can
have a significant impact on the recoverability of these assets and can be
difficult to predict. Should significant adverse changes occur, estimates
of useful life may have to be revised or write-offs would be required to
recognize impairment. For the three months ended June 30, 2004 and 2003,
the amount of software costs capitalized amounted to $10.4 million and
$16.6 million, respectively. Amortization expense of software costs
amounted to $16.7 million for the three months ended June 30, 2004
compared to $10.8 million for the three months ended June 30, 2003. For
the six months ended June 30, 2004 and 2003, the amount of software costs
capitalized amounted to $20.4 million and $32.0 million, respectively.
Amortization expense of software costs amounted to $28.1 million for the
six months ended June 30, 2004 compared to $21.5 million for the six
months ended June 30, 2003.
40
Based on a strategic product review performed during the second quarter of
2004, Metavante determined that a certain product had limited growth
potential and that future marketing of the product to new customers should
be discontinued. As a result of the strategic product review and net
realizable value test on this product, Metavante determined that the
capitalized software associated with the product was impaired and recorded
a write-down. Amortization expense of software costs for the three and six
months ended June 30, 2004, includes $4.9 million for the write-down of
the capitalized software costs associated with the impaired product.
Direct costs associated with customer system conversions to the data
processing operations are capitalized and amortized on a straight-line
basis over the terms, generally five to seven years, of the related
servicing contracts.
Capitalization only occurs when management is satisfied that such costs
are recoverable through future operations or penalties (buyout fees) in
case of early termination. For the three months ended June 30, 2004 and
2003, the amount of conversion costs capitalized amounted to $2.8 million
and $3.6 million, respectively. Amortization expense of conversion costs
amounted to $3.2 million and $4.2 million for the three months ended June
30, 2004 and 2003, respectively. For the six months ended June 30, 2004
and 2003, the amount of conversion costs capitalized amounted to $4.4
million and $6.2 million, respectively. Amortization expense of
conversion costs amounted to $6.5 million and $8.3 million for the six
months ended June 30, 2004 and 2003, respectively.
Net unamortized costs were ($ in millions):
June 30,
-------------------------
2004 2003
----------- -----------
Software $ 139.1 $ 153.1
Conversions 28.6 33.8
----------- -----------
Total $ 167.7 $ 186.9
=========== ===========
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the amount of costs that are capitalized
for software development or conversion activities. There have been no
material changes in assumptions or estimation techniques as compared to
prior periods that impacted the determination of the periodic amortization
of such costs.
Financial Asset Sales and Securitizations
-----------------------------------------
The Corporation utilizes certain financing arrangements to meet its
balance sheet management, funding, liquidity, and market or credit risk
management needs. The majority of these activities are basic term or
revolving securitization vehicles. These vehicles are generally funded
through term-amortizing debt structures or with short-term commercial
paper designed to be paid off based on the underlying cash flows of the
assets securitized. These financing entities are contractually limited to
a narrow range of activities that facilitate the transfer of or access to
various types of assets or financial instruments. In certain situations,
the Corporation provides liquidity and/or loss protection agreements. In
determining whether the financing entity should be consolidated, the
Corporation considers whether the entity is a qualifying special-purpose
entity (QSPE) as defined in Statement of Financial Accounting Standards
(SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. For non-consolidation a QSPE must be
demonstrably distinct, have significantly limited permitted activities,
hold assets that are restricted to transferred financial assets and
related assets, and can sell or dispose of non-cash financial assets only
in response to specified conditions.
In December 2003, the Corporation adopted FASB Interpretation No. 46 ("FIN
46R"), Consolidation of Variable Interest Entities (revised December
2003). This interpretation addresses consolidation by business
enterprises of variable interest entities and explains how to identify
variable interest entities and how an entity assesses its interests in a
variable interest entity to decide whether to consolidate that entity.
FIN 46R requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. Variable interest
entities that effectively disperse risks will not be consolidated unless a
single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. Transferors
to QSPEs and "grandfathered" QSPEs subject to the reporting requirements
of SFAS 140 are outside the scope of FIN 46R and do not consolidate those
entities.
With respect to its existing securitization activities, the Corporation
does not believe FIN 46R impacts its consolidated financial statements
because its transfers are generally to QSPEs.
41
The Corporation sells financial assets in a two-step process that results
in a surrender of control over the assets as evidenced by true-sale
opinions from legal counsel, to unconsolidated entities that securitize
the assets. The Corporation retains interests in the securitized assets
in the form of interest-only strips and a cash reserve account. Gain or
loss on sale of the assets depends in part on the carrying amount assigned
to the assets sold allocated between the asset sold and retained interests
based on their relative fair values at the date of transfer. The value of
the retained interests is based on the present value of expected cash
flows estimated using management's best estimates of the key assumptions-
credit losses, prepayment speeds, forward yield curves, and discount rates
commensurate with the risks involved. Actual results can differ from
expected results.
The Corporation reviews the carrying values of the retained interests
monthly to determine if there is a decline in value that is other than
temporary and periodically reviews the propriety of the assumptions used
based on current historical experience as well as the sensitivities of the
carrying value of the retained interests to adverse changes in the key
assumptions. The Corporation believes that its estimates result in a
reasonable estimate of fair value of the retained interests.
The Corporation periodically sells automobile loans to an unconsolidated
multi-seller special purpose entity commercial paper conduit in
securitization transactions in which servicing responsibilities and
subordinated interests are retained. The outstanding balances of
automobile loans sold in these securitization transactions were $1,176.1
million at June 30, 2004. At June 30, 2004, the carrying amount of
retained interests amounted to $57.5 million.
The Corporation also sells, from time to time, debt securities classified
as available for sale that are highly rated to an unconsolidated
bankruptcy remote QSPE whose activities are limited to issuing highly
rated asset-backed commercial paper with maturities up to 180 days which
is used to finance the purchase of the investment securities. The 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 free-standing derivative financial instruments 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 interests (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 June 30, 2004, highly rated investment securities in the amount of
$314.0 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.
42
The determination of current and deferred income taxes is based on complex
analyses of many factors, including interpretation of Federal and state
income tax laws, the difference between tax and financial reporting basis
of assets and liabilities (temporary differences), estimates of amounts
currently due or owed such as the timing of reversals of temporary
differences and current accounting standards. The Federal and state
taxing authorities who make assessments based on their determination of
tax laws periodically review the Corporation's interpretation of Federal
and state income tax laws. Tax liabilities could differ significantly
from the estimates and interpretations used in determining the current and
deferred income tax liabilities based on the completion of taxing
authority examinations.
FORWARD-LOOKING STATEMENTS
--------------------------
Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of
Financial 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
financial and operating activities and results which are preceded by words
such as "expects", "anticipates" or "believes". Such statements are subject
to important factors that could cause the Corporation's actual results to
differ materially from those anticipated by the forward-looking statements.
These factors include those referenced in Item 1, Business, of the
Corporation's Annual Report on Form 10-K for the period ending December 31,
2003 under the heading "Forward-Looking Statements" and 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 2003 Annual Report on Form 10-K. Updated information regarding
the Corporation's use of derivative financial instruments is contained in
Note 11, Notes to Financial Statements contained in Item 1 herein.
Market risk arises from exposure to changes in interest rates, exchange
rates, commodity prices, and other relevant market rate or price risk. The
Corporation faces market risk through trading and other than trading
activities. While market risk that arises from trading activities in the
form of foreign exchange and interest rate risk is immaterial to the
Corporation, market risk from other than trading activities in the form of
interest rate risk is measured and managed through a number of methods.
Interest Rate Risk
------------------
The Corporation uses financial modeling techniques to identify potential
changes in income under a variety of possible interest rate scenarios.
Financial institutions, by their nature, bear interest rate and liquidity
risk as a necessary part of the business of managing financial assets and
liabilities. The Corporation has designed strategies to limit these risks
within prudent parameters and identify appropriate risk/reward tradeoffs in
the financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing and
embedded option characteristics of the assets and liabilities held by the
Corporation. Policies are in place to assure that neither earnings nor fair
value at risk exceed appropriate limits. The use of a limited array of
derivative financial instruments has allowed the Corporation to achieve the
desired balance sheet repricing structure while simultaneously meeting the
desired objectives of both its borrowing and depositing customers.
The models used include measures of the expected repricing characteristics
of administered rate (NOW, savings and money market accounts) and non-rate
related products (demand deposit accounts, other assets and other
liabilities). These measures recognize the relative insensitivity of these
accounts to changes in market interest rates, as demonstrated through current
and historical experiences. However, during the second quarter of 2003, the
Corporation increased the proportion of these accounts modeled as rate
sensitive, in order to recognize the instability of some of the recent growth
in balances 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.
43
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
------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
2004 2004 2003 2003 2003
------------- ------------ ------------ ------------- ------------
Hypothetical Change in Interest Rate
- ------------------------------------
100 basis point gradual:
Rise in rates (0.6)% (0.7)% (0.6)% (1.1)% (0.6)%
Decline in rates 0.6 % (2.1)% (1.8)% (1.6)% (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 and the changes in
spread between key market rates. The gradual 100bp shift down changed from
last quarter due primarily to the rise in short-term rates. In the modeling
process, one of the significant assumptions in the repricing characteristics
of administered rate accounts is that we would not be able to drop rates
below a certain level. In the gradual decrease scenario, this had a negative
impact. Now that short-term rates have risen, those floors have less of a
negative impact on our position. 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 June 30, 2004, the fair value of equity at risk for a gradual 100bp
shift in rates was no more than 2.0% of the market value of the Corporation.
Equity Risk
-----------
In addition to interest rate risk, the Corporation incurs market risk in the
form of equity risk. M&I's Capital Markets Group invests in private, medium-
sized companies to help establish new businesses or recapitalize existing
ones. Exposure to the change in equity values for the companies that are
held in their portfolio exists, however, fair values are difficult to
determine until an actual sale or liquidation transaction actually occurs.
As of June 30, 2004, M&I Trust Services administered $70.1 billion in assets
and directly managed a portfolio of $17.1 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.
44
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
E. Shares Purchased
The following table reflects the purchases of Marshall & Ilsley
Corporation stock for the specified period:
Total Number of
Shares Purchased as Maximum Number of
Average Part of Publicly Shares that May Yet
Total Number of Price Paid Announced Plans or Be Purchased Under
Period Shares Purchased per Share Programs the Plans or Programs
----------------- ------------------- ----------- -------------------- ----------------------
January 1 to
January 31, 2004 634,313 $ 38.54 625,900 11,374,100
February 1 to
February 29, 2004 1,319,864 $ 39.03 1,317,200 10,056,900
March 1 to
March 31, 2004 326,900 $ 39.67 326,900 9,730,000
April 1 to
April 30, 2004 1,214 $ 36.68 -- 9,730,000
May 1 to
May 31, 2004 -- $ -- -- 9,730,000
June 1 to
June 30, 2004 -- $ -- -- 9,730,000
The Corporation's Share Repurchase Program was publicly reconfirmed
in April 2003 and again in April 2004. The Share Repurchase
Program authorizes the purchase of up to 12 million shares annually
and renews each year at that level unless changed or terminated by
subsequent Board action.
(1) Does not include 17,873 shares purchased by rabbi trusts, at
an average price paid per share of $38.03, pursuant to
nonqualified deferred compensation plans for the six months
ended June 30, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. The Corporation held its Annual Meeting of Shareholders on April
27, 2004.
B. Votes cast for the election of seven directors to serve until the
2007 Annual Meeting of Shareholders are as follows:
Director For Withheld Abstentions Non-Vote
-------------------- ------------ ---------- ------------ ---------
Jon F. Chait 177,958,877 2,610,692 -- --
Bruce E. Jacobs 178,028,873 2,540,696 -- --
Dennis J. Kuester 177,879,928 2,689,641 -- --
Edward L. Meyer, Jr. 178,100,030 2,469,539 -- --
San W. Orr, Jr. 175,748,780 4,820,789 -- --
Debra S. Waller 177,662,625 2,906,944 -- --
George E. Wardeberg 177,912,545 2,657,024 -- --
The continuing directors of the Corporation are as follows:
David L. Andreas Richard A. Abdoo
Andrew N. Baur Ted D. Kellner
John A. Mellowes Katharine C. Lyall
Robert J. O'Toole Peter M. Platten, III
Robert A. Schaefer James A. Urdan
John S. Shiely James B. Wigdale
45
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit 10 - Change of Control Agreement dated as of
May 12, 2004 between the Corporation
and Frank R. Martire.
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(a) - Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
Exhibit 31(b) - Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
Exhibit 32(a) - Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
Exhibit 32(b) - Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
B. Reports on Form 8-K:
On April 13, 2004, the Corporation filed Item 5 and furnished
Items 7 and 12 in a Current Report on Form 8-K relating to the
change of executive officers at M&I Marshall & Ilsley Bank and
the release of earnings for the quarter ended March 31, 2004,
respectively.
On May 17, 2004, the Corporation filed Items 5 and 7 (Exhibit
99.1), and furnished Items 7 (Exhibit 99.2) and 9, in a Current
Report on Form 8-K relating to the announcement of the signing of
a definitive agreement by Metavante Corporation, a wholly-owned
subsidiary of M&I and NYCE Corporation.
46
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
(Registrant)
/s/ Patricia R. Justiliano
__________________________________
Patricia R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ James E. Sandy
__________________________________
James E. Sandy
Vice President
August 9, 2004
47
EXHIBIT INDEX
Exhibit Number Description of Exhibit
______________ ____________________________________________
(10) Change of Control Agreement dated as of
May 12, 2004 between the Corporation
and Frank R. Martire.
(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)(a) Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
(31)(b) Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
(32)(a) Certification of Chief Executive Officer
pursuant to 18 U.S.C .Section 1350.
(32)(b) Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.