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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-1220
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
770 North Water Street
Milwaukee, Wisconsin 53202
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (414) 765-7801
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock--$1.00 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant is $6,286,077,000 as of January 29, 1999. The number of shares of
common stock outstanding as of January 29, 1999 is 106,094,123.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Proxy Statement for
the registrant's Annual Meeting of Shareholders to be held on April 27, 1999.
PART I
ITEM 1. BUSINESS
General
Marshall & Ilsley Corporation ("M&I" or the "Corporation"), incorporated in
Wisconsin in 1959, is a registered bank holding company under the Bank Holding
Company Act of 1956 (the "BHCA"). As of December 31, 1998, M&I had
consolidated total assets of approximately $21.6 billion and consolidated
total deposits of approximately $15.9 billion, making M&I the second largest
bank holding company headquartered in Wisconsin. The executive offices of M&I
are located at 770 North Water Street, Milwaukee, Wisconsin 53202 (telephone
number (414) 765-7801).
M&I's principal assets are the stock of its bank and nonbank subsidiaries
and the assets of its Data Services Division ("M&I Data Services"). M&I's
subsidiaries include 27 commercial banks, one federal savings bank and a
number of companies engaged in businesses that the Federal Reserve Board (the
"FRB") has determined to be closely-related or incidental to the business of
banking. M&I provides its subsidiaries with financial and managerial
assistance in such areas as budgeting, tax planning, compliance assistance,
asset and liability management, investment administration and portfolio
planning, business development, advertising and human resources management.
M&I's bank and savings association subsidiaries provide a full range of
banking services to individuals, businesses and governments throughout
Wisconsin, and in the Phoenix, Arizona metropolitan area, and the northern
Chicago, Illinois suburbs. These subsidiaries offer retail, institutional,
international, business and correspondent banking, investment and trust
services through the operation of over 230 banking offices in Wisconsin, 13
offices in Arizona and 6 offices in Illinois. The M&I bank and saving
association subsidiaries hold a significant portion of their mortgage and
investment portfolios indirectly through their ownership interest in direct
and indirect subsidiaries. M&I Marshall & Ilsley Bank ("M&I Bank") is M&I's
largest bank subsidiary, with consolidated assets as of December 31, 1998 of
approximately $9.4 billion.
M&I Data Services and three nonbank subsidiaries are major suppliers of
financial and data processing services and software to banking, financial and
related organizations. M&I Data Services provides services and software to
over 650 financial institution customers in the United States, as well as
institutions in numerous foreign countries. M&I's nonbank subsidiaries operate
a variety of bank-related businesses, including those providing investment
management services, insurance services, trust services, equipment lease
financing, commercial and residential mortgage banking, home equity financing,
venture capital, brokerage services and financial advisory services. M&I
Investment Management Corp. offers a full range of asset management services
to M&I's trust company subsidiaries, the Marshall Funds and other individual,
business and institutional customers. M&I's trust company subsidiaries provide
trust and employee benefit plan services to customers in Wisconsin, Arizona
and Florida. M&I First National Leasing Corp. and M&I Leasing Corp. of
Michigan lease a variety of equipment and machinery to large and small
businesses. M&I Dealer Finance, Inc. provides lease financing. M&I Mortgage
Corp. originates, purchases, sells and services residential mortgages. M&I
Home Equity Corp. and M&I Home Equity Corp. of Minnesota provide consumer home
equity loans. The Richter-Schroeder Company originates and services long-term
commercial real estate loans for institutional investors. M&I Capital Markets
Group L.L.C. provides venture capital, financial advisory and strategic
planning services to customers, including assistance in connection with the
private placement of securities, raising funds for expansion, leveraged buy-
outs, divestitures, mergers and acquisitions and small business investment
company transactions. M&I Brokerage Services, Inc., a broker-dealer registered
with the National Association of Securities Dealers and the Securities and
Exchange Commission, provides brokerage and other investment related services
to a variety of retail and commercial customers.
On April 1, 1998, M&I acquired Advantage Bancorp, Inc., a Wisconsin
corporation ("Advantage") and Advantage's federal savings bank affiliate for
3,981,152 shares of M&I Common Stock. The acquisition contributed
approximately $0.5 billion of loans and $0.7 billion of deposits. The
transaction was accounted for as a pooling-of-interests.
1
Principal Sources of Revenue
The table below shows the amount and percentages of M&I's total consolidated
operating revenues resulting from interest on loans and leases, interest on
investment securities and fees for data processing services for each of the
last three years ($ in thousands):
Interest on Fees for Data
Interest on Loans Investment Processing
and Leases Securities Services
-------------------- ------------------ ------------------
Percent Percent Percent
of Total of Total of Total Total
Operating Operating Operating Operating
Year Ended December 31 Amount Revenues Amount Revenues Amount Revenues Revenues
- ---------------------- ---------- --------- -------- --------- -------- --------- ----------
1998.................... $1,085,829 49.6% $346,012 15.8% $412,632 18.8% $2,190,377
1997.................... 921,161 50.4 297,156 16.2 343,846 18.8 1,828,802
1996.................... 804,951 51.7 239,668 15.4 268,526 17.2 1,557,095
M&I business segment information is contained in Note 19 of the Notes to the
Consolidated Financial Statements contained in Item 8, Consolidated Financial
Statements and Supplementary Data.
Competition
M&I and its subsidiaries face substantial competition from hundreds of
competitors in the markets they serve, some of which are larger and have
greater resources than M&I. M&I's bank subsidiaries compete for deposits and
other sources of funds and for credit relationships with other banks, savings
associations, credit unions, finance companies, mutual funds, life insurance
companies (and other long-term lenders) and other financial and non-financial
companies located both within and outside M&I's primary market area, many of
which offer products functionally equivalent to bank products. M&I's non-bank
operations compete with numerous banks, finance companies, data servicing
companies, leasing companies, mortgage bankers, brokerage firms, financial
advisors, trust companies, mutual funds and investment bankers in Wisconsin
and throughout the United States.
The market for the banking technology services offered by M&I Data Services
is national in scope. In any given geographic area, M&I Data Services'
competitors vary in size and include national, regional and local operations.
While historically the bank data processing industry has been highly
decentralized, there is an accelerating trend toward consolidation in the
industry, resulting in fewer companies competing over larger geographic
regions. As consolidation continues, successful companies in this business are
likely to increase substantially in size as the scale of activity necessary to
compete increases.
Employees
As of December 31, 1998, M&I and its subsidiaries employed in the aggregate
approximately 10,756 employees. M&I considers employee relations to be
excellent. None of the employees of M&I or its subsidiaries are represented by
a collective bargaining group.
Supervision and Regulation
As a registered bank holding company, M&I is subject to regulation and
examination by the FRB under the BHCA. M&I's state bank subsidiaries are
subject to regulation and examination by the Wisconsin Department of Financial
Institutions, or in the case of M&I Thunderbird Bank, the Arizona State
Banking Department. In addition, all of M&I's state chartered banks are
regulated by the FRB. M&I's federal savings bank subsidiary is subject to
regulation and examination by the Office of Thrift Supervision. M&I's national
bank subsidiary is subject to regulation and examination by the Office of the
Comptroller of the Currency. In addition, all of M&I's bank subsidiaries are
subject to examination by the FDIC.
2
Under FRB policy, M&I is expected to act as a source of financial strength
to each of its bank subsidiaries and to commit resources to support each bank
subsidiary in circumstances when it might not do so absent such requirements.
In addition, there are numerous federal and state laws and regulations which
regulate the activities of M&I and its bank subsidiaries, including
requirements and limitations relating to capital and reserve requirements,
permissible investments and lines of business, transactions with affiliates,
loan limits, mergers and acquisitions, issuances of securities, dividend
payments, inter-affiliate liabilities, extensions of credit and branch
banking. Information regarding capital requirements for bank holding companies
and tables reflecting M&I's regulatory capital position at December 31, 1998
can be found in Note 13 of the Notes to the Consolidated Financial Statements
contained in Item 8, Consolidated Financial Statements and Supplementary Data.
The federal regulatory agencies have broad power to take prompt corrective
action if a depository institution fails to maintain certain capital levels.
In addition, a bank holding company's controlled insured depository
institutions are liable for any loss incurred by the FDIC in connection with
the default of, or any FDIC-assisted transaction involving, an affiliated
insured bank or savings association. Current federal law provides that
adequately capitalized and managed bank holding companies from any state may
acquire banks and bank holding companies located in any other state, subject
to certain conditions. Banks are permitted to create interstate branching
networks in states that do not "opt out" of interstate branching.
The laws and regulations to which M&I is subject are constantly under review
by Congress, regulatory agencies and state legislatures. These laws and
regulations may be changed dramatically in the future, which could affect the
ability of bank holding companies to engage in certain activities such as
nationwide banking, securities underwriting and insurance, the amount of
capital that banks and bank holding companies must maintain, premiums paid for
deposit insurance and other matters directly affecting earnings. It is not
certain which changes will occur, if any, or the effect such changes will have
on the profitability of M&I, its ability to compete effectively or the
composition of the financial services industry. The earnings and business of
M&I and its bank subsidiaries also are affected by the general economic and
political conditions in the United States and abroad and by the monetary and
fiscal policies of various federal agencies. The FRB impacts the competitive
conditions under which M&I operates by determining the cost of funds obtained
from money market sources for lending and investing and by exerting influence
on interest rates and credit conditions. In addition, legislative and economic
factors can be expected to have an ongoing impact on the competitive
environment within the financial services industry. The impact of fluctuating
economic conditions and federal regulatory policies on the future
profitability of M&I and its subsidiaries cannot be predicted with certainty.
Selected Statistical Information
Statistical information relating to M&I and its subsidiaries on a
consolidated basis is set forth as follows:
(1) Average Balance Sheets and Analysis of Net Interest Income for each of
the last three years is included in Item 7, Management's Discussion and
Analysis of Financial Position and Results of Operations.
(2) Analysis of Changes in Interest Income and Interest Expense for each of
the last two years is included in Item 7, Management's Discussion and
Analysis of Financial Position and Results of Operations.
(3) Nonaccrual, Past Due and Restructured Loans and Leases for each of the
last five years is included in Item 7, Management's Discussion and
Analysis of Financial Position and Results of Operations.
(4) Summary of Loan and Lease Loss Experience for each of the last five
years is included in Item 7, Management's Discussion and Analysis of
Financial Position and Results of Operations.
(5) Return on Average Shareholders' Equity, Return on Average Assets and
other statistical ratios for each of the last five years can be found
in Item 6, Selected Financial Data.
3
The following tables set forth certain statistical information relating to
M&I and its subsidiaries on a consolidated basis.
Investment Securities
The amortized cost of M&I's consolidated investment securities, other than
trading and other short-term investments, at December 31 of each year are ($
in thousands):
1998 1997 1996
---------- ---------- ----------
U.S. Treasury and government agencies......... $3,658,730 $4,051,239 $3,112,647
States and political subdivisions............. 1,051,712 926,129 770,456
Other......................................... 304,174 326,329 287,726
---------- ---------- ----------
$5,014,616 $5,303,697 $4,170,829
========== ========== ==========
The maturities, at amortized cost, and weighted average yields (for tax-
exempt obligations on a fully taxable basis assuming a 35% tax rate) of
investment securities at December 31, 1998 are ($ in thousands):
After One but After Five but
Within Five Within Ten After Ten
Within One Year Years Years Years Total
---------------- ---------------- -------------- -------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------- ----- ---------- ----- -------- ----- -------- ----- ---------- -----
U.S. Treasury and
government agencies.... $1,256,605 6.75% $2,239,892 6.76% $159,962 6.33% $ 2,271 7.24% $3,658,730 6.74%
States and political
subdivisions........... 56,630 6.42 271,140 6.79 339,226 7.02 384,716 7.39 1,051,712 7.06
Other................... 59,613 7.32 94,826 7.10 8,094 7.49 141,641 5.07 304,174 6.21
---------- ---- ---------- ---- -------- ---- -------- ---- ---------- ----
$1,372,848 6.76% $2,605,858 6.78% $507,282 6.81% $528,628 6.77% $5,014,616 6.77%
========== ==== ========== ==== ======== ==== ======== ==== ========== ====
Types of Loans and Leases
M&I's consolidated loans and leases, classified by type, at December 31 of
each year are ($ in thousands):
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- ----------
Commercial, financial
and agricultural....... $ 4,025,663 $ 3,346,101 $2,904,341 $2,917,406 $2,661,190
Industrial development
revenue bonds.......... 52,174 49,126 32,241 29,358 31,796
Real estate:
Construction.......... 425,442 458,670 394,228 386,235 436,582
Mortgage:
Residential......... 4,045,022 4,146,416 2,560,936 2,325,805 2,554,790
Commercial.......... 3,667,924 3,450,897 2,477,652 2,286,537 2,154,212
----------- ----------- ---------- ---------- ----------
Total mortgage.... 7,712,946 7,597,313 5,038,588 4,612,342 4,709,002
Personal................ 1,166,541 1,161,608 1,181,846 1,169,920 1,184,810
Lease financing......... 613,400 489,094 331,505 277,680 256,690
----------- ----------- ---------- ---------- ----------
13,996,166 13,101,912 9,882,749 9,392,941 9,280,070
Less:
Allowance for loan and
lease losses......... 226,052 208,651 161,659 166,815 159,506
----------- ----------- ---------- ---------- ----------
Net loans and leases.... $13,770,114 $12,893,261 $9,721,090 $9,226,126 $9,120,564
=========== =========== ========== ========== ==========
4
Loan and Lease Balances and Maturities
The analysis of selected loan and lease maturities at December 31, 1998 and
the rate structure for the categories indicated are ($ in thousands):
Rate Structure of Loans and
Maturity Leases Due After One Year
-------------------------------------------- ------------------------------
Over One With Pre- With
One Year Year Through Over Five determined Floating
Or Less Five Years Years Total Rate Rate Total
---------- ------------ --------- ---------- ---------- -------- ----------
Commercial, financial
and agricultural....... $2,618,613 $1,285,707 $121,343 $4,025,663 $1,207,999 $199,051 $1,407,050
Industrial development
revenue bonds.......... 18,472 6,880 26,822 52,174 24,914 8,788 33,702
Real estate--
construction........... 240,966 184,476 -- 425,442 99,963 84,513 184,476
Lease financing......... 123,566 430,190 59,644 613,400 485,185 4,649 489,834
---------- ---------- -------- ---------- ---------- -------- ----------
$3,001,617 $1,907,253 $207,809 $5,116,679 $1,818,061 $297,001 $2,115,062
========== ========== ======== ========== ========== ======== ==========
- --------
Notes:
(1) Scheduled repayments are reported in the maturity category in which the
payments are due based on the terms of the loan agreements. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
over-drafts are reported as due in one year or less.
(2) Amounts shown for the rate structure of loans and leases due after one
year include the estimated effect arising from the use of interest rate
swaps.
Nonaccrual, Past Due and Restructured Loans and Leases
Generally, a loan is placed on nonaccrual if payment of interest is more
than 60 days delinquent and the loan has been determined by management to be a
"problem" loan. In addition, loans which are past due 90 days or more as to
interest or principal are also placed on nonaccrual. Exceptions to these rules
are generally only for loans fully collateralized by readily marketable
securities or other relatively risk free collateral.
Potential Problem Loans and Leases
At December 31, 1998 the Corporation had $20.1 million of loans for which
payments are presently current, but the borrowers are experiencing serious
financial problems. These loans are subject to constant management attention
and their classification is reviewed on a quarterly basis.
Deposits
The average amount of and the average rate paid on selected deposit
categories for each of the years ended December 31 is as follows ($ in
thousands):
1998 1997 1996
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
----------- ----- ----------- ----- ----------- -----
Noninterest bearing
demand deposits......... $ 2,545,724 $ 2,301,097 $ 2,116,197
Interest bearing demand
deposits................ 1,129,725 1.85% 1,017,535 1.89% 990,125 1.82%
Savings deposits......... 5,145,798 4.02% 3,921,297 3.88% 3,513,382 3.67%
Time deposits............ 5,935,968 5.67% 4,999,866 5.78% 4,277,808 5.74%
----------- ----------- -----------
Total deposits........... $14,757,215 $12,239,795 $10,897,512
=========== =========== ===========
5
The maturity distribution of time deposits issued in amounts of $100,000 and
over and outstanding at December 31, 1998 ($ in thousands) is:
Three months or less............................................. $ 392,158
Over three and through six months................................ 267,877
Over six and through twelve months............................... 303,061
Over twelve months............................................... 545,523
----------
$1,508,619
==========
At December 31, 1998, time deposits issued by foreign offices totaled $1.18
billion.
Short-Term Borrowings
Information related to M&I's funds purchased and security repurchase
agreements for the last three years is as follows ($ in thousands):
1998 1997 1996
---------- ---------- ----------
Amount outstanding at year end.......... $1,712,165 $1,486,665 $1,418,858
Average amount outstanding during the
year................................... 2,042,371 1,820,744 1,094,464
Maximum amount outstanding at any
month's end............................ 2,541,006 1,987,883 1,585,907
Weighted average interest rate at year
end.................................... 4.39% 5.70% 5.70%
Weighted average interest rate during
the year............................... 5.36% 5.51% 5.27%
Summary of Loan and Lease Loss Experience
The following should be read in conjunction with Item 7, Management's
Discussion and Analysis of Financial Position and Results of Operations.
The overall adequacy of the allowance for loan and lease losses is evaluated
through three levels of analysis. The first level focuses primarily on
assessments of individual credits based on the Corporation's credit grading
system which classifies loans and leases in a manner similar to that of bank
regulatory examiners. Management of the Corporation's affiliate banks, and
leasing subsidiaries are responsible for ongoing updating of assigned credit
grades and are required to perform a formal analysis and report on their
portfolios on a quarterly basis. This analysis considers several factors
including: changes in collateral values as well as detailed reviews of
specific large loan and lease relationships. For loans deemed to be impaired
due to an expectation that all contractual payments will probably not be
received estimates of loss are provided which take into account expected
payment performance and the estimated value of collateral. A formula allowance
is also calculated by applying loss factors to outstanding loans and leases
based on the internal risk grade of the loans or leases. Loss factors are
based on historical loss experience and may be adjusted for significant
factors that, in management's judgment, affect the collectibility of the
portfolio as of the evaluation date. Changes in risk grades of both performing
and nonperforming loans affect the amount of the formula allowance.
The second level of analysis focuses on pools of homogeneous loans and
portfolio segments such as consumer installment, residential mortgage and home
equity and personal leasing. This analysis considers historical loss
experience and trends in payment performance (delinquencies). Loss factors for
pooled loans and leases are based on historical loss experience and may be
adjusted for significant factors that, in management's judgment, affect the
expected losses in the portfolio(s) as of the evaluation date.
The third level of analysis results in an unallocated allowance that
recognizes the model and estimation risk associated with formula and specific
allowances. This element is based on management's evaluation of various
conditions, the effects of which are not directly measurable in determining
the formula and specific allowances.
6
The evaluation of the inherent loss regarding these conditions involves a
higher degree of uncertainty because they are not identified with specific
problem credits or portfolio segments. Such factors existing as of the
evaluation date include: general economic and business conditions affecting
key lending areas, credit quality trends including trends in nonperforming
loans expected to result from existing conditions, collateral values, loan
volumes and concentrations, portfolio seasoning, specific industry conditions
within portfolio segments, recent loss experience in particular segments of
the portfolio and portfolio growth in new markets.
Management's assigned credit grades, quarterly reporting and portfolio
evaluations are subject to independent monitoring by the Corporation's credit
review group. Through periodic review of affiliate credit grading and
administration, analysis of management's quarterly reporting, and ongoing
monitoring of portfolio and economic trends, this group provides support in
confirming the adequacy of the allowance. The adequacy of the allowance is
also reviewed as part of the regulatory examination process.
The allowance for loan and lease losses is based on estimates of probable
losses inherent in the loan and lease portfolio. The amount actually observed
for these losses can vary significantly from the estimated amounts. By
assessing the probable estimated losses on a quarterly basis, management is
able to adjust specific and inherent loss estimates based on recent
information as it becomes available.
Consolidated net charge-offs were $9.7 million in 1998 compared with $13.4
million in 1997 and $ 20.4 million in 1996. Approximately $5.2 million of the
net charge-off activity in 1998 was incurred in the fourth quarter. Excluding
one large recovery, net charge-offs in 1998 would have been approximately
$14.0 million which is consistent with prior years.
The provision for loan and lease losses was $27.1 million in 1998 compared
with $17.6 million in 1997. The increase reflects increased diversity in the
loan portfolio (growth in loan types and newer geographical markets with
higher expected loss factors or losses), loan portfolio growth of $900
million, the general increase in nonaccrual loans throughout the year
(especially in the fourth quarter), increased net charge-offs in the fourth
quarter, the impact of Asian and Latin American economies on selected
customers and signs of softening in the domestic economy. At December 31,
1998, the allowance for loan and lease losses amounted to $226.1 million and
is considered adequate based on the analyses previously discussed.
The Corporation's charge-off level for 1999 will continue to be affected by
the numerous factors previously discussed. The Corporation anticipates charge-
off levels in 1999 to be higher than 1998 and generally higher than recent
historical charge-off levels. There are currently no known material loans
believed to be in imminent danger of deteriorating or defaulting which would
give rise to a large near-term charge-off; however, in the event a large loan
or loans deteriorate unexpectedly or actual losses in industry segments within
the portfolio are negatively impacted by the economy, declining collateral
values or an increase in delinquencies, loss levels could be significantly
adversely affected.
Forward-Looking Statements
This report contains statements that may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements other than historical facts contained or
incorporated by reference in this report. These statements speak of M&I's
plans, goals, beliefs or expectations, refer to estimates or use similar
terms. Future filings by M&I with the Securities and Exchange Commission, and
statements other than historical facts contained in written material, press
releases and oral statements issued by, or on behalf of, M&I may also
constitute forward-looking statements.
Forward-looking statements are subject to significant risks and
uncertainties, and M&I's actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause actual
results to differ from the results discussed in forward-looking statements
include, but are not limited to:
. General economic conditions, either nationally or in the states in which
M&I does business;
7
. Legislation or regulatory changes which adversely affect the businesses
in which M&I is engaged;
. Changes in the interest rate environment which reduce interest margins;
. Changes in securities markets with respect to the market value of
financial assets and the level of volatility in certain markets such as
foreign exchange;
. Significant increases in competition in the banking and financial
services industry resulting from industry consolidation, regulatory
changes and other factors, as well as actions taken by particular
competitors;
. M&I's success in continuing to generate significant levels of new
business in its existing markets and in identifying and penetrating
targeted markets;
. Changes in consumer spending, borrowing and saving habits;
. Technological changes;
. Acquisitions and unanticipated occurrences which delay or reduce the
expected benefits of acquisitions;
. M&I's ability to continue to fund and accomplish technological
innovation, improve processes and controls and attract and retain capable
staff in order to deal with the Year 2000 Issue;
. The ability of M&I's various vendors and others with whom M&I interacts
to address the Year 2000 Issue on a timely basis and in a manner that
allows them to continue normal business operations and furnish products,
services or data to M&I without disruption;
. M&I's ability to increase market share and control expenses;
. The effect of compliance with legislation or regulatory changes;
. The effect of changes in accounting policies and practices; and
. The costs and effects of unanticipated litigation and of unexpected or
adverse outcomes in such litigation.
All forward-looking statements contained in this report are based upon
information presently available and M&I assumes no obligation to update any
forward-looking statement.
ITEM 2. PROPERTIES
M&I and M&I Marshall & Ilsley Bank ("M&I Bank") occupy offices on all or
portions of 16 floors of a 21-story building located at 770 North Water
Street, Milwaukee, Wisconsin. A subsidiary of M&I Bank owns the building and
its adjacent 10-story parking lot and leases the remaining floors to a
professional tenant. In addition, various subsidiaries of M&I lease commercial
office space in downtown Milwaukee office buildings near the 770 North Water
Street facility. M&I Bank also owns or leases various branch offices located
in Milwaukee and in surrounding suburban communities. M&I has 26 subsidiary
banks throughout Wisconsin. M&I Thunderbird Bank, a wholly-owned bank
subsidiary of M&I, is located in Phoenix, Arizona and has 13 offices in
Phoenix and the surrounding Maricopa County communities. M&I Bank FSB, a
federal savings bank subsidiary of M&I, is located in Zion, Illinois and has 6
offices in the northern Chicago, Illinois suburbs. The subsidiary banks and
savings association occupy modern facilities which are owned or leased. M&I
owns a data processing facility located in Brown Deer, a suburb of Milwaukee,
from which M&I Data Services conducts data processing activities. M&I owns an
160,000 square foot facility in Milwaukee that houses the software development
teams of M&I Data Services. Properties leased by M&I for M&I Data Services
also include commercial office space in Brown Deer, a data processing site in
Oak Creek, Wisconsin, and processing centers and sales offices in various
cities throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
M&I is not currently involved in any material pending legal proceedings
other than litigation of a routine nature and various legal matters which are
being defended and handled in the ordinary course of business.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Executive Officers of the Registrant
Name of Officer Office
--------------- ------
J.B. Wigdale Chairman of the Board since December 1992, Chief Executive
Age 62 Officer since October 1992, Director since December 1988,
Vice Chairman of the Board, December 1988 to December 1992,
Marshall & Ilsley Corporation; Chairman of the Board since
January 1989, Chief Executive Officer since 1987, Director
since 1981, M&I Marshall & Ilsley Bank; Director-M&I First
National Leasing Corp., M&I Mortgage Corp., M&I Data
Services, M&I Insurance Services, Inc., M&I Brokerage
Services, Inc., M&I Capital Markets Group L.L.C. and
Marshall & Ilsley Trust Company.
D.J. Kuester Director since February 1994, President since 1987, Marshall
Age 57 & Ilsley Corporation; President and Director since January
1989, M&I Marshall & Ilsley Bank; Chairman of the Board and
Director, M&I Data Services; Director-M&I Support Services
Corp. and M&I New England, Inc.; Director and President-M&I
Insurance Company of Arizona, Inc.
G.H. Gunnlaugsson Director since February 1994, Executive Vice President and
Age 54 Chief Financial Officer since 1987, Marshall & Ilsley
Corporation; Vice President of M&I Marshall & Ilsley Bank
since 1976; Vice President and Director-M&I Insurance
Company of Arizona, Inc.; Director-M&I Mortgage Corp., M&I
Data Services, M&I Insurance Services, Inc., M&I Brokerage
Services, Inc., M&I Capital Markets Group L.L.C. and M&I
Bank FSB.
G.D. Strelow Senior Vice President and Human Resources Director of
Age 64 Marshall & Ilsley Corporation since 1993; Vice President and
Human Resources Director of M&I Marshall & Ilsley Bank since
1980.
M.A. Hatfield Senior Vice President since 1993, Secretary since 1981 and
Age 53 Treasurer from 1986 to May 1995, Marshall & Ilsley
Corporation; Vice President and Secretary, M&I Marshall &
Ilsley Bank; Director-M&I Support Services Corp.; Secretary-
M&I First National Leasing Corp., M&I Capital Markets Group
L.L.C., Marshall & Ilsley Trust Company, M&I Investment
Management Corp., Marshall & Ilsley Trust Company of
Florida, M&I Insurance Services, Inc., M&I EastPoint
Technology, Inc. and M&I Brokerage Services, Inc.; Secretary
and Director-M&I Insurance Company of Arizona, Inc., M&I
Data Services, M&I New England, Inc., Richter-Schroeder
Company, Inc. and M&I Bank FSB; Secretary and Treasurer, M&I
Mortgage Corp.
P.R. Justiliano Senior Vice President since 1994 and Corporate Controller
Age 48 since April 1989, Vice President, 1986 to 1994, Marshall &
Ilsley Corporation; Director and Treasurer, M&I Insurance
Company of Arizona, Inc.; Director-M&I Bank FSB.
J.L. Delgadillo Senior Vice President of Marshall & Ilsley Corporation since
Age 46 1993; Chief Executive Officer since January 1998 and
Director of M&I Data Services since 1994; President and
Chief Operating Officer of M&I Data Services since 1993;
Senior Vice President of M&I Data Services from 1989 to
1993; Director and Executive Vice President-M&I EastPoint
Technology, Inc.; Director and President-M&I New England,
Inc.
D.R. Jones Senior Vice President since December 1993, Vice President
Age 53 and Affiliate Bank Manager since May 1993, Vice President
and South Regional Manager from March 1989 to May 1993,
Marshall & Ilsley Corporation; Director-M&I Support Services
Corp.
T.M. Bolger Senior Vice President and Chief Credit Officer since 1994,
Age 49 Marshall & Ilsley Corporation; Executive Vice President
since 1997, M&I Marshall & Ilsley Bank; Director-Richter-
Schroeder Company, Inc. and M&I Bank FSB.
9
Name of
Officer Office
------- ------
D.H. Wilson Senior Vice President and Treasurer since December 1996, Vice
Age 39 President and Treasurer since 1995, Marshall & Ilsley
Corporation; Vice President, Treasury from June 1992 to May
1995, ABN AMRO/LaSalle National Bank; Director-M&I Custody of
Nevada, Inc.
T.J. O'Neill Senior Vice President since April 1997, Marshall & Ilsley
Age 38 Corporation; Senior Vice President since 1997, Vice President
since 1990, M&I Marshall & Ilsley Bank; President and Director,
M&I Bank FSB and M&I Dealer Finance, Inc.; Director-M&I Support
Services Corp.
J.V. Williams Senior Vice President since December 1997, Marshall & Ilsley
Age 54 Corporation; Executive Vice President and Chief Operating
Officer since January 1999, Marshall & Ilsley Trust Company;
President, Chief Executive Officer and Director since January
1996, M&I Insurance Services, Inc.; Senior Vice President since
1994, M&I Marshall & Ilsley Bank; President, Chief Executive
Officer and Director since February 1989, M&I Brokerage
Services, Inc.; Director-M&I Investment Management Corp. and M&I
Portfolio Services, Inc.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Stock Listing
M&I's common stock is traded under the symbol "MRIS" on the Nasdaq National
Market, and quotations are supplied by the National Association of Securities
Dealers. Common dividends declared and the price range for M&I's common stock
for each of the last five years can be found in Item 8, Consolidated Financial
Statements, Quarterly Financial Information and Supplementary Data.
A discussion of the regulatory restrictions on the payment of dividends can
be found under Item 7, Management's Discussion and Analysis of Financial
Position and Results of Operations, and in Note 13 to Item 8, Consolidated
Financial Statements.
Holders of Common Equity
At December 31, 1998, M&I had approximately 21,410 record holders of its
Common Stock.
10
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Summary of Earnings
Years ended December 31 ($000's except share data)
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
Interest Income:
Loans and Leases......... $1,085,829 $ 921,161 $ 804,951 $817,247 $713,904
Investment Securities:
Taxable................ 280,377 240,238 198,787 146,498 127,927
Tax Exempt............. 52,969 45,420 30,718 18,112 16,693
Other Short-term
Investments............. 14,869 13,514 11,365 14,439 9,590
---------- ---------- ---------- -------- --------
Total Interest
Income.............. 1,434,044 1,220,333 1,045,821 996,296 868,114
Interest Expense:
Deposits................. 564,540 460,418 392,473 363,488 274,211
Short-term Borrowings.... 126,624 111,193 63,892 48,390 39,978
Long-term Borrowings..... 66,810 54,175 53,615 63,701 38,870
---------- ---------- ---------- -------- --------
Total Interest
Expense............. 757,974 625,786 509,980 475,579 353,059
---------- ---------- ---------- -------- --------
Net Interest Income........ 676,070 594,547 535,841 520,717 515,055
Provision for Loan and
Lease Losses.............. 27,090 17,633 15,634 16,558 25,627
---------- ---------- ---------- -------- --------
Net Interest Income After
Provision for Loan and
Lease Losses.............. 648,980 576,914 520,207 504,159 489,428
Other Income:
Data Processing Services. 412,632 343,846 268,526 213,914 159,418
Trust Services........... 88,496 78,595 70,190 64,176 59,720
Net Securities Gains
(Losses)................ 30,783 4,127 15,471 5,189 (5,752)
Other.................... 224,422 181,901 157,087 146,319 151,256
---------- ---------- ---------- -------- --------
Total Other Income... 756,333 608,469 511,274 429,598 364,642
Other Expense:
Salaries and Benefits.... 523,606 460,164 392,711 352,466 330,720
Merger/Restructuring..... 23,373 -- -- -- 75,228
Other.................... 393,049 337,047 320,821 268,353 268,360
---------- ---------- ---------- -------- --------
Total Other Expense.. 940,028 797,211 713,532 620,819 674,308
---------- ---------- ---------- -------- --------
Income Before Taxes........ 465,285 388,172 317,949 312,938 179,762
Provision for Income Taxes. 163,962 131,487 111,314 111,247 77,784
---------- ---------- ---------- -------- --------
Income Before Extraordinary
Items..................... 301,323 256,685 206,635 201,691 101,978
Extraordinary Items........ -- -- -- -- 11,542
---------- ---------- ---------- -------- --------
Net Income........... $ 301,323 $ 256,685 $ 206,635 $201,691 $113,520
========== ========== ========== ======== ========
11
Consolidated Summary of Earnings--continued
Years ended December 31 ($000's except share data)
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Per Share:
Basic Net Income Before Extraordinary
Items............................... $ 2.79 $ 2.62 $ 2.12 $ 2.04 $ 1.01
Basic Net Income After Extraordinary
Items............................... 2.79 2.62 2.12 2.04 1.13
Diluted Net Income Before
Extraordinary Items................. 2.61 2.43 1.98 1.91 0.96
Diluted Net Income After
Extraordinary Items................. 2.61 2.43 1.98 1.91 1.07
Common Dividends Declared............ 0.860 0.785 0.720 0.645 0.590
Other Significant Data:
Year-End Common Stock Price.......... $58.44 $62.13 $34.63 $26.00 $19.00
Return on Average Shareholders'
Equity Before Extraordinary Items... 14.13% 16.49% 15.03% 15.91% 8.63%
Return on Average Shareholders'
Equity After Extraordinary Items.... 14.13 16.49 15.03 15.91 9.61
Return on Average Assets Before
Extraordinary Items................. 1.45 1.51 1.41 1.48 0.78
Return on Average Assets After
Extraordinary Items................. 1.45 1.51 1.41 1.48 0.86
Dividend Payout Ratio................ 32.95 32.30 36.36 33.77 55.14
Average Equity to Average Assets
Ratio............................... 10.26 9.15 9.39 9.27 8.98
Ratio of Earnings to Fixed Charges*
Excluding Interest on Deposits..... 3.25x 3.21x 3.52x 3.62x 3.10x
Including Interest on Deposits..... 1.60x 1.61x 1.61x 1.65x 1.50x
- --------
* See Exhibit 12 for detailed computation of these ratios.
12
Consolidated Average Balance Sheets
Years ended December 31 ($000's except share data)
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- -----------
Assets:
Cash and Due from
Banks................. $ 652,988 $ 614,824 $ 586,985 $ 588,012 $ 621,598
Short-term
Investments........... 247,049 206,295 188,082 237,094 212,503
Trading Securities..... 43,404 40,822 25,264 10,346 4,528
Investment Securities:
Taxable.............. 4,317,668 3,570,225 3,104,010 2,405,046 2,373,398
Tax Exempt........... 1,078,333 913,130 668,913 374,014 351,026
Loans and Leases:
Commercial........... 3,749,518 3,128,568 2,947,631 2,842,688 2,691,284
Real Estate.......... 7,967,626 6,309,818 5,139,926 5,268,669 4,980,686
Personal............. 1,154,110 1,147,203 1,148,511 1,165,852 1,205,786
Lease Financing...... 532,043 394,024 293,448 262,566 256,344
------------ ----------- ----------- ----------- -----------
Total Loans and
Leases................ 13,403,297 10,979,613 9,529,516 9,539,775 9,134,100
Allowance for Loan and
Lease Losses.......... 216,456 174,525 166,886 166,350 150,148
------------ ----------- ----------- ----------- -----------
Net Loans and Leases... 13,186,841 10,805,088 9,362,630 9,373,425 8,983,952
Other Assets........... 1,263,890 851,030 709,803 681,997 601,766
------------ ----------- ----------- ----------- -----------
Total Assets....... $ 20,790,173 $17,001,414 $14,645,687 $13,669,934 $13,148,771
============ =========== =========== =========== ===========
Liabilities and
Shareholders' Equity:
Noninterest Bearing
Deposits.............. $ 2,545,724 $ 2,301,097 $ 2,116,197 $ 2,003,662 $ 2,070,874
Interest Bearing
Deposits:
Savings and NOW
Accounts............ 2,140,380 1,915,888 1,905,775 2,078,354 2,488,347
Money Market Savings. 4,135,143 3,022,944 2,597,732 2,113,550 1,645,052
CDs of $100 or more.. 1,547,816 1,334,532 933,164 693,345 499,941
Other................ 4,388,152 3,665,334 3,344,644 3,393,785 3,440,167
------------ ----------- ----------- ----------- -----------
Total Deposits......... 14,757,215 12,239,795 10,897,512 10,282,696 10,144,381
Short-term Borrowings.. 2,357,161 2,017,829 1,218,177 850,258 973,909
Long-term Borrowings... 1,046,321 787,819 823,397 959,022 594,870
Accrued Expenses and
Other Liabilities..... 496,439 399,605 331,743 310,332 254,442
Shareholders' Equity... 2,133,037 1,556,366 1,374,858 1,267,626 1,181,169
------------ ----------- ----------- ----------- -----------
Total Liabilities
and Shareholders'
Equity............ $ 20,790,173 $17,001,414 $14,645,687 $13,669,934 $13,148,771
============ =========== =========== =========== ===========
Other Significant Data:
Book Value Per Share
at Year End........... $ 19.88 $ 17.94 $ 13.75 $ 13.34 $ 11.38
Average Common Shares
Outstanding........... 105,918,139 95,831,283 95,895,547 97,794,476 99,028,495
Shareholders of Record
at Year End*.......... 21,410 21,157 18,460 18,659 18,919
Employees at Year
End*.................. 10,756 10,227 8,995 9,079 8,634
Historically Reported
Credit Quality Ratios:*
Net Loan and Lease
Charge-offs to
Average Loans and
Leases................ 0.07% 0.13% 0.23% 0.10% 0.05%
Total Nonperforming
Loans and Leases** &
OREO to End of Period
Loans and Leases &
OREO.................. 0.85 0.70 0.81 0.79 0.80
Allowance for Loan and
Lease Losses to End
of Period Loans and
Leases................ 1.62 1.62 1.68 1.82 1.75
Allowance for Loan and
Lease Losses to Total
Nonperforming Loans
and Leases**.......... 206 275 225 261 265
- --------
* Not restated for acquisitions accounted for as pooling of interests.
** Loans and leases nonaccrual, restructured, and past due 90 days or more.
13
Yield & Cost Analysis
Years ended December 31 (Tax equivalent basis)
1998 1997 1996 1995 1994
---- ---- ---- ---- -----
Average Rates Earned:
Loans & Securitized ARMs...................... 8.09% 8.36% 8.41% 8.58% 7.84%
Investment Securities--Taxable................ 6.26 6.62 6.29 6.09 5.39
Investment Securities--Tax Exempt............. 7.44 7.40 6.76 6.89 6.86
Trading Securities............................ 5.13 5.01 4.83 5.05 5.39
Short-term Investments........................ 5.13 5.57 5.40 5.89 4.41
Average Rates Paid:
Interest Bearing Deposits..................... 4.62% 4.63% 4.47% 4.39% 3.40%
Short-term Borrowings......................... 5.37 5.51 5.24 5.69 4.10
Long-term Borrowings.......................... 6.39 6.88 6.51 6.64 6.53
M&I Marshall & Ilsley Bank Average Prime Rate. 8.35 8.44 8.27 8.83 7.15
Summary Yield and Cost Analysis:
(As a % of Average Assets)
Average Yield................................. 7.02% 7.31% 7.25% 7.37% 6.68%
Average Cost.................................. 3.64 3.68 3.48 3.48 2.69
---- ---- ---- ---- -----
Net Interest Income........................... 3.38 3.63 3.77 3.89 3.99
Provision for Loan and Lease Losses........... 0.13 0.10 0.11 0.12 0.19
---- ---- ---- ---- -----
Net Interest Income After Provision for Loan
and Lease Losses............................. 3.25 3.53 3.66 3.77 3.80
Net Securities Gains (Losses)................. 0.15 0.02 0.11 0.04 (0.04)
Other Income.................................. 3.49 3.55 3.39 3.10 2.82
Other Expense................................. 4.52 4.68 4.88 4.54 5.14
---- ---- ---- ---- -----
Income Before Income Taxes.................... 2.37 2.42 2.28 2.37 1.44
Provision for Income Taxes.................... 0.92 0.91 0.87 0.89 0.66
---- ---- ---- ---- -----
Income Before Extraordinary Items............. 1.45% 1.51% 1.41% 1.48% 0.78%
==== ==== ==== ==== =====
Net Income.................................. 1.45% 1.51% 1.41% 1.48% 0.86%
==== ==== ==== ==== =====
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
Net income in 1998 amounted to $301.3 million or $2.61 per share on a
diluted basis. The return on average assets and return on average equity were
1.45% and 14.13%, respectively. By comparison, 1997 net income was $256.7
million, diluted earnings per share was $2.43, the return on average assets
was 1.51% and the return on average equity was 16.49%. For the year ended
December 31, 1996, net income was $206.6 million or $1.98 per share diluted
and the returns on average assets and average equity were 1.41% and 15.03%,
respectively.
On April 1, 1998, the Corporation completed the merger with Advantage
Bancorp, Inc. ("Advantage") a Kenosha, Wisconsin based savings and loan
holding company by issuing 1.2 shares of the Corporation's Common Stock for
each share of Advantage Common Stock. At the time of merger, Advantage had
consolidated assets of $1.0 billion. The transaction was accounted for as a
pooling of interests. In conjunction with this transaction, the Corporation
recorded a merger/restructuring charge of approximately $16.3 million ($23.4
million before-tax). See Note 3 of Notes to Consolidated Financial Statements
for the detailed description of the merger/restructuring charge.
The results of operations and average financial position for 1998 and 1997
also include the effects of the acquisition of Security Capital Corporation
("Security") from the date of merger which was October 1, 1997. M&I paid
approximately $376 million in cash and issued 12.3 million shares of its
common stock in a transaction that was accounted for as a purchase. Security
had approximately $2.2 billion of consolidated loans and $2.3 billion of
consolidated deposits at the time of merger.
Net income for 1996 includes special one-time charges relating to the
Savings Association Insurance Fund (SAIF) recapitalization assessment, the
write-off of in-process research and development costs acquired in conjunction
with the purchase of EastPoint Technology, Inc., and the write-off of
intangibles by Advantage.
The following is a summary of the unusual items reported in 1998 and 1996
and the comparative operating income, earnings per share and return on average
equity based on operating income for 1998, 1997, and 1996.
1998 1997 1996
------ ------ ------
($ in millions,
except per share
data)
Net Income.............................................. $301.3 $256.7 $206.6
Special Charges
Merger/Restructuring Charges.......................... 16.3 -- --
SAIF Assessment....................................... -- -- 4.4
Intangible Asset Writedown............................ -- -- 3.0
Acquired In-Process Research and Development.......... -- -- 7.9
------ ------ ------
Total Special Charges................................... 16.3 -- 15.3
------ ------ ------
Operating Income........................................ $317.6 $256.7 $221.9
====== ====== ======
Operating Income Per Share
Basic................................................. $ 2.94 $ 2.62 $ 2.28
Diluted............................................... $ 2.76 $ 2.43 $ 2.12
Operating Income to Average Equity...................... 14.89% 16.49% 16.14%
The following reconciles operating income to operating income before
amortization of intangibles ("tangible operating income"). Amortization
includes amortization of goodwill and core deposit premiums and is net of
negative goodwill accretion and the income tax benefit or expense, if any,
related to each component. These calculations were specifically formulated by
the Corporation and may not be comparable to similarly titled measures
reported by other companies.
15
Summary Consolidated Tangible Operating Income and Financial Statistics
($ in millions, except per share data)
1998 1997 1996
------ ------ ------
Operating Income........................................ $317.6 $256.7 $221.9
Amortization, Net of Tax................................ 21.0 8.5 4.6
------ ------ ------
Tangible Operating Income............................... $338.6 $265.2 $226.5
====== ====== ======
Tangible Operating Income Per Share
Basic................................................. $ 3.14 $ 2.71 $ 2.33
Diluted............................................... $ 2.94 $ 2.51 $ 2.17
Return on Average Tangible Assets....................... 1.65% 1.57% 1.55%
Return on Average Tangible Equity....................... 18.48% 18.35% 17.02%
Operating Income Statement Components as a Percent of Average Total Assets
The following table presents a summary of the major elements of the
consolidated operating income statements for the years ended December 31,
1998, 1997 and 1996. Each of the elements is stated as a percent of
consolidated average total assets outstanding for the respective year and,
where appropriate, is converted to a fully taxable equivalent basis (FTE). The
results exclude the special charges in 1998 and 1996 as previously discussed.
1998 1997 1996
----- ----- -----
Interest Income............................................ 7.02% 7.31% 7.25%
Interest Expense........................................... (3.64) (3.68) (3.48)
----- ----- -----
Net Interest Income........................................ 3.38 3.63 3.77
Provision for Loan and Lease Losses........................ (0.13) (0.10) (0.11)
Net Securities Gains....................................... 0.15 0.02 0.11
Other Income............................................... 3.49 3.55 3.39
Other Expense.............................................. (4.41) (4.68) (4.71)
----- ----- -----
Income Before Income Taxes................................. 2.48 2.42 2.45
Income Taxes............................................... (0.95) (0.91) (0.93)
----- ----- -----
Operating Income To Average Assets......................... 1.53% 1.51% 1.52%
===== ===== =====
Net Interest Income
Net interest income in 1998 amounted to $676.1 million, an increase of $81.6
million or 13.7% compared with net interest income of $594.5 million in 1997.
Average earning assets in 1998 amounted to $19.1 billion compared to $15.7
billion in 1997, an increase of $3.4 billion or 21.5%. Average loans and
leases, excluding the effect of securitizing adjustable rate mortgage loans
(ARMs) increased $2.7 billion or 23.5% of which, approximately $1.7 billion is
attributable to the Security merger. The remaining growth in average earning
assets was primarily attributable to investment securities. Approximately $840
million of the growth in investment securities is attributable to the Security
merger.
Average interest bearing liabilities increased $2.9 billion or 22.5% in 1998
compared to 1997. Average interest bearing deposits increased $2.3 billion or
22.9%. Average short-term borrowings increased $339 million while average
long-term borrowings increased $259 million. Average noninterest bearing
deposits increased $245 million or 10.6% in 1998 compared to the prior year.
The Security merger accounted for approximately $1.8 billion of the growth in
average deposits, $129 million of the growth in average short-term borrowings
and increased average long-term borrowings by approximately $348 million.
16
In 1998, $132 million of FHLB advances matured. Approximately $75 million
was refinanced with new FHLB advances. During 1997, the holder of the
Corporation's 8.5% convertible subordinated notes converted $16.8 million of
the notes to Series A convertible preferred stock and the remaining $130.0
million of the Corporation's banking subsidiaries' Bank Notes matured and were
refinanced primarily with short-term borrowings and brokered certificates of
deposit. In addition, $104.3 million of the Corporation's Medium Term Notes
Series B and C matured and were refinanced with Medium Term Notes Series C and
D. Medium Term maturities amounted to $1.8 million in 1998.
The growth and composition of the Corporation's average loan and lease
portfolio for the current year and prior two years are reflected in the
following table. The securitized ARM loans that are classified as investment
securities available for sale are included to provide a more meaningful
comparison ($ in millions):
Percent
Growth
-----------
1998 1997
vs vs
1998 1997 1996 1997 1996
--------- --------- --------- ---- -----
Commercial Loans.................... $ 3,749.5 $ 3,128.6 $ 2,947.6 19.8% 6.1%
Real Estate Loans:
Construction...................... 421.3 405.5 308.7 3.9 31.4
Commercial Mortgages.............. 3,545.1 2,787.7 2,341.2 27.2 19.1
Residential Mortgages............. 4,001.3 3,116.6 2,490.1 28.4 25.2
Securitized ARM Loans............. 919.3 618.2 483.5 48.7 27.9
--------- --------- --------- ---- -----
Total Real Estate Loans & ARMs...... 8,887.0 6,928.0 5,623.5 28.3 23.2
Personal Loans:
Student Loans..................... 268.8 280.8 293.0 (4.3) (4.2)
Other Personal Loans.............. 885.3 866.4 855.5 2.2 1.3
--------- --------- --------- ---- -----
Total Personal Loans................ 1,154.1 1,147.2 1,148.5 0.6 (0.1)
Lease Financing Receivables:
Commercial........................ 329.6 292.0 260.5 12.9 12.1
Personal.......................... 202.4 102.0 32.9 98.4 210.0
--------- --------- --------- ---- -----
Total Lease Financing Receivables... 532.0 394.0 293.4 35.0 34.3
========= ========= ========= ==== =====
Total Consolidated Average Loans,
Leases & ARMs...................... $14,322.6 $11,597.8 $10,013.0 23.5% 15.8%
========= ========= ========= ==== =====
Total Consolidated Average Loans and
Leases............................. $13,403.3 $10,979.6 $ 9,529.5 22.1% 15.2%
========= ========= ========= ==== =====
As previously discussed, the annual loan growth is largely attributable to
the Security merger. Adjusting for Security's 1997 pre-merger average balances
total consolidated average loans, leases and ARM's grew approximately $618.0
million or 4.5% in 1998, with commercial loans growing approximately $574.2
million or 18.1%, commercial real estate loans increasing approximately $186.8
million or 5.6%, lease financing receivables growing approximately $124.7
million or 30.6%, and construction loans growing approximately $15.7 million
or 3.9%. Partially offsetting those increases were reductions of approximately
$270.3 million or 5.2% in residential real estate loans and ARMs and
approximately $13.1 million or 1.1% for personal loans. The decrease in
residential real estate and ARM loans reflects the effect of increased
prepayments associated with customer refinancings to fixed rate loans in
response to the recent interest rate environment. Generally, the Corporation
sells fixed rate residential real estate loans in the secondary market. One to
four family residential real estate loans sold to investors amounted to $2.2
billion in 1998 compared to $0.8 billion in 1997 and $0.5 billion in 1996.
During 1998, approximately $259 million of ARM loans were converted into
government guaranteed agency pool securities. ARM loans totaling approximately
$218 million and $224 million were securitized in 1997 and 1996, respectively,
and in 1997 approximately $580 million of securitized ARMs were acquired in
the Security merger.
17
The growth and composition of the Corporation's consolidated average
deposits for the current year and prior two years are reflected below ($ in
millions):
Percent
Growth
-----------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
--------- --------- --------- ---- -----
Noninterest Bearing
Commercial.............. $ 1,658.2 $ 1,499.5 $ 1,370.0 10.6% 9.5%
Personal................ 508.9 452.3 432.6 12.5 4.6
Other................... 378.6 349.3 313.6 8.4 11.4
--------- --------- --------- ---- -----
Total Noninterest Bearing
Deposits................. 2,545.7 2,301.1 2,116.2 10.6 8.7
Interest Bearing
Savings and NOW......... 2,140.4 1,915.9 1,905.8 11.7 0.5
Money Market............ 4,135.1 3,022.9 2,597.7 36.8 16.4
Other CDs & Time........ 4,388.2 3,665.4 3,344.6 19.7 9.6
CDs Greater than
$100,000............... 816.5 703.9 647.6 16.0 8.7
Brokered CDs............ 731.3 630.6 285.6 16.0 120.8
--------- --------- --------- ---- -----
Total Interest Bearing
Deposits................. 12,211.5 9,938.7 8,781.3 22.9 13.2
--------- --------- --------- ---- -----
Total Consolidated Average
Deposits................. $14,757.2 $12,239.8 $10,897.5 20.6% 12.3%
========= ========= ========= ==== =====
Money market savings exhibited the greatest growth when comparing average
deposits in 1998 to average deposits in 1997. Average Money Market savings
increased $1.1 billion in 1998 over 1997, of which, approximately $0.6 billion
of the increase is attributable to the Security merger.
The increase in Other CD's & Time in 1998 compared with 1997 reflects, in
part, issuance of Callable CD's to customers and a $300.4 million or 121.4%
increase in foreign time deposits, primarily eurodollar deposits.
The Corporation has a brokered CD program to acquire longer-term CDs with
maturities of one year or more in order to provide a stable source of funds
that over time is less costly than Bank Notes. During the second quarter of
1997, the Corporation began issuing brokered CDs that are callable at the
option of the Corporation. Concurrently with the callable issues, the
Corporation entered into receive fixed interest rate swaps which are callable
at the option of the counterparties. The call provisions are generally
exercisable one year after issuance. Brokered callable CDs averaged $254.6
million and $34.2 million in 1998 and 1997, respectively, and amounted to
$278.2 million and $124.8 million at December 31 of those years. The brokered
callable CDs together with the interest rate swaps, provide term liquidity at
rates below LIBOR.
During 1997, M&I disposed of seven branches. Deposits and loans aggregating
approximately $64 million and $5 million, respectively were divested in 1997.
As part of the Corporation's banking initiatives, certain bank branches were
voluntarily divested of during the second half of 1996. Such branches disposed
of in 1996 had combined deposits and loans of approximately $26 million and
$14 million, respectively.
The net interest margin (FTE) as a percent of average earning assets was
3.69% in 1998 compared to 3.94% in 1997, a decrease of 25 basis points. The
yield on earning assets decreased 26 basis points from 7.94% in 1997 to 7.68%
in 1998 while the cost of interest bearing liabilities decreased 6 basis
points from 4.91% in 1997 to 4.85% in 1998.
The yield on loans, leases and securitized ARMs was 8.09% in 1998 compared
to 8.36% in 1997, a decrease of 27 basis points. The decline in yield
reflects, in part, continued run-off of higher yielding loans and securitized
ARMs as well as accelerated amortization of purchase accounting premiums
assigned to acquired loans due to prepayments and refinancings in response to
the interest rate environment. Excluding the effects of the premium
amortization, the yields on loans, leases and securitized ARMs would have been
8.17% and 8.36% in 1998 and 1997, respectively. Premium amortization
associated with Security purchase accounting adjustments for fixed rate
mortgage and home equity loans amounted to $11.2 million in 1998 compared to
$0.7 million in 1997. Net
18
interest income may continue to be adversely affected if the current
prepayment experience continues. Loan and lease growth offset the yield
decline and netted approximately $187.8 million or 87% of the increase in
interest on earning assets.
The remaining increase in interest on earning assets is primarily
attributable to investment securities. The total yield on the investment
security portfolio, excluding securitized ARMs, decreased by approximately 27
basis points in 1998 compared to 1997 reducing interest income by $11.9
million; however, the average balance of such investment securities, excluding
fair value adjustments for securities available for sale, increased $585.5
million or 15.3% increasing interest income by $39.9 million. Premium
amortization associated with Security purchase accounting adjustments for
investment securities was $7.9 million in 1998 compared to $1.4 million in
1997.
The net yield on interest earning assets was 3.80% in 1998 and 3.96% in 1997
excluding the Security purchase accounting premium amortization.
The increase in the volume of interest bearing deposits accounted for $100.4
million or 76.0% of the increase in interest paid on interest bearing
liabilities in 1998. The decrease in cost of borrowings was offset by the
increase in the average balance resulting in a net reduction to the interest
margin of $28.1 million.
At December 31, 1998, the Corporation had $725 million in notional amount of
standard receive fixed/pay floating interest rate swaps, $25 million in
notional amount of an interest rate floor and $25 million in notional amount
of an interest rate cap designated as hedges against the interest rate
volatility associated with variable rate loans, variable rate deposits and
variable rate debt. In addition the Corporation had $292 million of notional
value of receive fixed/pay floating rate swaps designated as hedges to offset
fixed rate callable CDs.
For 1998, the effect on net interest income and the yield on interest
earning assets resulting from the swaps, net of cap and floor premium
amortization, was a positive $5.13 million and 3 basis points, respectively,
compared with a positive $2.62 million and 2 basis points, respectively, in
1997.
In late December, 1998, the Corporation purchased $400.0 million of single
premium bank-owned life insurance policies which insure the lives of certain
officers and employees. The Corporation is utilizing this vehicle to fund
future employee benefit obligations. These purchases were funded by the
maturities and sales of investment securities classified as available for
sale. The net realizable values of bank-owned life insurance policies are a
component of other assets in the consolidated balance sheets and periodic
increases in the values are included as a component of other income. These
transactions have the effect of reducing the Corporation's net interest income
(and margin) and increasing its other income. The balance at December 31, 1997
of $54.9 million represents bank-owned life insurance acquired in the Security
merger.
Net interest income in 1997 amounted to $594.5 million, an increase of $58.7
million or 11.0% compared with net interest income of $535.8 million in 1996.
Average earning assets in 1997 amounted to $15.7 billion compared to $13.5
billion in 1996, an increase of $2.2 billion or 16.2%. Average loans and
leases, excluding the effect of securitizing ARMs increased $1.6 billion or
15.8% of which, approximately $580 million is attributable to the Security
merger. The remaining growth in average earning assets was primarily
attributable to investment securities. Approximately $280 million of the
growth is attributable to the Security merger while the remainder reflects the
Corporation's intent to increase the portfolio size with higher yielding and
longer-term securities to adjust the rate sensitivity and leverage of the
consolidated balance sheet. During 1997, the Corporation's banking affiliates
repositioned investment securities through the sale and purchase of
approximately $400 million of securities available for sale.
Average interest bearing liabilities increased $1.9 billion or 17.8% in 1997
compared to 1996. Average interest bearing deposits increased $1.2 billion or
13.2%. Average short-term borrowings increased $799.7 million while average
long-term borrowings decreased $35.6 million. Average noninterest bearing
deposits increased $184.9 million or 8.7% in 1997 compared to the prior year.
The Security merger accounted for approximately $590 million of the growth in
average deposits, $43 million of the growth in average short-term borrowings
and increased average long-term borrowings by approximately $116 million.
19
The net interest margin (FTE) as a percent of average earning assets was
3.94% in 1997 compared to 4.09% in 1996, a decrease of 15 basis points. The
yield on earning assets increased 7 basis points from 7.87% in 1996 to 7.94%
in 1997 while the cost of interest bearing liabilities increased 20 basis
points from 4.71% in 1996 to 4.91% in 1997.
The yield on loans, leases and securitized ARMs decreased 5 basis points in
1997 compared to 1996. Loan and lease growth offset the yield decline and
contributed approximately $132.8 million or 73% of the increase in interest on
earning assets.
The remaining increase in interest on earning assets is primarily
attributable to investment securities. The total yield on the investment
security portfolio, excluding securitized ARMs, increased by approximately 43
basis points in 1997 compared to 1996 and the average balance of such
investment securities, excluding fair value adjustments for securities
available for sale, increased $557.0 million or 17.0%.
The increase in the volume and cost of interest bearing deposits accounted
for $67.9 million or 59% of the increase in interest paid on interest bearing
liabilities in 1997. The decrease in volume of long-term borrowings was offset
by the increase in cost resulting in a net increase in interest paid of $0.6
million. The average cost of short-term borrowings increased 27 basis points
and together with the increase in average volume accounted for $47.3 million
of the increase in interest paid on interest bearing liabilities.
As more fully described in Note 12 to the Consolidated Financial Statements
contained in Item 8 herein, in December 1996 the Corporation formed a Trust
and issued $200 million of 7.65% cumulative preferred capital securities. For
financial statement purposes, the capital securities are classified as long-
term borrowings and the distributions as interest expense that caused, in
part, the average cost of long-term borrowings to increase in 1997 compared to
1996.
20
Average Balance Sheets and Analysis of Net Interest Income
The Corporation's consolidated average balance sheets, interest earned and
interest paid, and the average interest rates earned and paid for each of the
last three years are presented in the following table. Securitized ARM loans
that are classified as investment securities available for sale are included
with loans and leases to provide a more meaningful comparison ($ in
thousands):
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Average Average Average
Yield Yield Yield
Interest or Interest or Interest or
Average Earned/ Cost Average Earned/ Cost Average Earned/ Cost
Balance Paid (3) Balance Paid (3) Balance Paid (3)
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Loans, leases, and
securitized ARMs (1,2). $14,322,551 $1,156,569 8.09% $11,597,804 $ 968,788 8.36% $10,013,023 $ 841,419 8.41%
Investment securities:
Taxable................ 3,398,414 211,562 6.26 2,952,034 194,481 6.62 2,620,503 164,098 6.29
Tax exempt (1)......... 1,078,333 77,212 7.44 913,130 66,372 7.40 668,913 44,984 6.76
Interest bearing
deposits in other
banks.................. 28,704 1,466 5.11 28,838 1,527 5.30 28,767 1,505 5.23
Funds sold and security
resale agreements...... 38,738 2,218 5.73 89,809 5,091 5.67 73,104 4,193 5.74
Trading securities (1).. 43,404 2,225 5.13 40,822 2,046 5.01 25,264 1,221 4.83
Other short-term
investments............ 179,607 8,982 5.00 87,648 4,880 5.57 86,211 4,465 5.18
----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ----
Total interest
earning assets...... 19,089,751 1,460,234 7.68% 15,710,085 1,243,185 7.94% 13,515,785 1,061,885 7.87%
Cash and demand deposits
due from banks......... 652,988 614,824 586,985
Premises and equipment,
net.................... 357,040 334,617 316,382
Other assets............ 906,850 516,413 393,421
Allowance for loan and
lease losses........... (216,456) (174,525) (166,886)
----------- ----------- -----------
Total assets......... $20,790,173 $17,001,414 $14,645,687
=========== =========== ===========
Savings and interest
bearing demand
deposits............... $ 6,275,523 $ 227,795 3.63% $ 4,938,832 $ 171,511 3.47% $ 4,503,507 $ 146,935 3.26%
Other time deposits..... 4,388,152 246,768 5.62 3,665,334 209,651 5.72 3,344,644 191,557 5.73
CDs greater than $100,
brokered and callable
CDs.................... 1,547,816 89,977 5.81 1,334,532 79,256 5.94 933,164 53,981 5.78
----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ----
Total interest bearing
deposits............... 12,211,491 564,540 4.62 9,938,698 460,418 4.63 8,781,315 392,473 4.47
Short-term borrowings... 2,357,161 126,624 5.37 2,017,829 111,193 5.51 1,218,177 63,892 5.24
Long-term borrowings.... 1,046,321 66,810 6.39 787,819 54,175 6.88 823,397 53,615 6.51
----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ----
Total interest
bearing liabilities. 15,614,973 757,974 4.85% 12,744,346 625,786 4.91% 10,822,889 509,980 4.71%
Noninterest bearing
deposits............... 2,545,724 2,301,097 2,116,197
Other liabilities....... 496,439 399,605 331,743
Shareholders' equity.... 2,133,037 1,556,366 1,374,858
----------- ----------- -----------
Total liabilities and
shareholders'
equity.............. $20,790,173 $17,001,414 $14,645,687
=========== =========== ===========
Net interest income.. $ 702,260 $ 617,399 $ 551,905
========== ========== ==========
Net yield on interest
earning assets...... 3.69% 3.94% 4.09%
==== ==== ====
- -------
Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35%
for all years presented, and excluding disallowed interest expense.
(2) Loans and leases on nonaccrual status have been included in the
computation of average balances.
(3) Based on average balances excluding fair value adjustments for available
for sale securities.
21
Analysis of Changes in Interest Income and Interest Expense
The effect on interest income and interest expense due to volume and rate
changes in 1998 and 1997 are outlined in the following table. Changes not due
solely to either volume or rate are allocated to rate ($ in thousands):
1998 versus 1997 1997 versus 1996
------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
due to Change in due to Change in
------------------- -------------------
Average Average Increase Average Average Increase
Volume (2) Rate (Decrease) Volume (2) Rate (Decrease)
---------- -------- ---------- ---------- -------- ----------
Interest on earning
assets:
Loans, leases, and
securitized
ARMs (1)............. $227,138 $(39,357) $187,781 $132,753 $(5,384) $127,369
Investment securities:
Taxable............... 29,393 (12,312) 17,081 20,517 9,866 30,383
Tax-exempt (1)........ 10,469 371 10,840 15,602 5,786 21,388
Interest bearing
deposits in other
banks.................. (7) (54) ( 61) 4 18 22
Funds sold and security
resale agreements...... (2,896) 23 (2,873) 959 (61) 898
Trading securities (1).. 129 50 179 751 74 825
Other short-term
investments............ 5,122 (1,020) 4,102 74 341 415
-------- -------- -------- -------- -------- --------
Total interest
income change...... $269,348 $(52,299) $217,049 $170,660 $ 10,640 $181,300
======== ======== ======== ======== ======== ========
Expense on interest
bearing liabilities:
Savings and interest
bearing demand
deposits............. $ 46,383 $ 9,901 $ 56,284 $ 14,192 $ 10,384 $ 24,576
Other time deposits... 41,345 (4,228) 37,117 18,376 (282) 18,094
CDs greater than $100,
brokered and callable
CDs.................. 12,669 (1,948) 10,721 23,199 2,076 25,275
-------- -------- -------- -------- -------- --------
Total interest bearing
deposits............. 100,397 3,725 104,122 55,767 12,178 67,945
Short-term borrowings. 18,697 (3,266) 15,431 41,902 5,399 47,301
Long-term borrowings.. 17,785 (5,150) 12,635 (2,316) 2,876 560
-------- -------- -------- -------- -------- --------
Total interest
expense change..... $136,879 $ (4,691) $132,188 $ 95,353 $ 20,453 $115,806
======== ======== ======== ======== ======== ========
- --------
Notes:
(1) Fully taxable equivalent basis, assuming a Federal income tax rate of 35%
for all years presented, and excluding disallowed interest expense.
(2) Based on average balances excluding fair value adjustments for available
for sale securities.
Provision for Loan and Lease Losses and Credit Quality
Nonperforming assets at December 31, 1998, were $118.7 million compared to
$92.1 million at December 31, 1997, an increase of $26.6 million or 28.9%.
Nonperforming assets at December 31, 1996 were $80.7 million. At the time of
merger, Security had nonperforming assets of approximately $5.5 million, of
which, approximately $5.0 million was nonaccrual residential real estate
loans. Nonaccrual loans and leases, the largest component of nonperforming
assets increased $34.4 million since year-end 1997 and increased $37.9 million
since December 31, 1996. Renegotiated loans and leases at December 31, 1998
were $1.0 million compared to $1.3 million at December 31, 1997. Loans and
leases past due 90 days or more were $7.6 million at the end of 1998 compared
to $8.2 million at the end of 1997. Other real estate owned amounted to $8.8
million at December 31, 1998, compared to $15.6 million at December 31, 1997,
and $8.1 million at December 31, 1996. At December 31, 1998, 1997, and 1996,
approximately $3.2 million, $11.7 million and $2.2 million, respectively, of
other real estate consisted of closed branch facilities. The increase in 1997
is attributable to the Security merger. The majority of Security's branch and
operations facilities were closed due to customer service and operating
overlap.
22
Throughout 1998, the balance of loans placed on nonaccrual have been
increasing. In addition, in the fourth quarter of 1998, one larger commercial
loan totaling $25.9 million was placed on nonaccrual. Nonaccrual loans secured
by real estate increased $9.5 million compared to 1997. Commercial real estate
loans on nonaccrual accounted for $6.9 million and residential real estate
loans, including home equity, accounted for $2.0 million of the increase.
Nonaccrual lease financing receivables and personal loans decreased compared
to the prior year.
Net charge-offs in 1998 amounted to $9.7 million or .07% of average loans
and leases compared to $13.4 million or .12% of average loans and leases in
1997. Excluding one large recovery in 1998, net charge-offs would have been
$14.0 million or .10% of average loans which is consistent with the prior
year. Net charge-offs in the fourth quarter of 1998 amounted to $5.2 million.
Consolidated Credit Quality Information
December 31, ($000's)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Nonperforming Assets by Type
Loans and Leases:
Nonaccrual................. $101,346 $ 66,945 $ 63,459 $ 52,972 $ 47,842
Renegotiated............... 978 1,338 1,819 3,087 4,172
Past Due 90 Days or More... 7,631 8,238 7,366 8,184 9,093
-------- -------- -------- -------- --------
Total Nonperforming Loans
and Leases................ 109,955 76,521 72,644 64,243 61,107
Other Real Estate Owned...... 8,751 15,573 8,052 11,103 14,720
-------- -------- -------- -------- --------
Total Nonperforming
Assets.................. $118,706 $ 92,094 $ 80,696 $ 75,346 $ 75,827
======== ======== ======== ======== ========
Allowance for Loan and Lease
Losses...................... $226,052 $208,651 $161,659 $166,815 $159,506
======== ======== ======== ======== ========
Consolidated Statistics
Net Charge-offs to Average
Loans and Leases............ 0.07% 0.12% 0.21% 0.10% 0.06%
Total Nonperforming Loans and
Leases to Total Loans and
Leases...................... 0.79 0.58 0.74 0.68 0.66
Total Nonperforming Assets to
Total Loans and Leases and
Other Real Estate Owned..... 0.85 0.70 0.82 0.80 0.82
Allowance for Loan and Lease
Losses to Total Loans and
Leases...................... 1.62 1.59 1.64 1.78 1.72
Allowance for Loan and Lease
Losses to Nonperforming
Loans and Leases............ 206 273 223 260 261
23
Major Categories of Nonaccrual Loans and Leases ($000's)
December 31, 1998 December 31, 1997
--------------------------- ---------------------------
% of % of
Loan % of Loan % of
Nonaccrual Type Nonaccrual Nonaccrual Type Nonaccrual
---------- ---- ---------- ---------- ---- ----------
Commercial
Commercial............... $ 39,131 1.0% 38.6% $12,431 0.4% 18.5%
Lease Financing
Receivables............. 2,895 0.5 2.9 3,855 0.8 5.8
-------- --- ----- ------- --- -----
Total Commercial..... 42,026 0.9 41.5 16,286 0.4 24.3
Real Estate
Construction and Land
Development............. 1,952 0.5 1.9 1,329 0.3 2.0
Commercial Real Estate... 21,586 0.6 21.3 14,696 0.4 22.0
Residential Real Estate.. 33,117 0.8 32.7 31,117 0.8 46.5
-------- --- ----- ------- --- -----
Total Real Estate.... 56,655 0.7 55.9 47,142 0.6 70.5
Personal................. 2,665 0.2 2.6 3,517 0.3 5.2
-------- --- ----- ------- --- -----
Total................ $101,346 0.7% 100.0% $66,945 0.5% 100.0%
======== === ===== ======= === =====
Reconciliation of Consolidated Allowance for Loan and Lease Losses ($000's)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Allowance for Loan and Lease
Losses at Beginning
of Year........................ $208,651 $161,659 $166,815 $159,506 $138,723
Provision for Loan and Lease
Losses......................... 27,090 17,633 15,634 16,558 25,627
Allowance of Banks Acquired..... -- 42,773 -- 2,843 518
Allowance Transfer for Loan
Securitizations................ -- -- (440) (2,275) --
Loans and Leases Charged-off:
Commercial.................... 6,401 8,474 16,294 5,225 3,362
Real Estate--Construction..... 352 87 13 407 737
Real Estate--Mortgage......... 5,115 3,907 3,446 2,914 4,060
Personal...................... 7,886 7,868 6,390 5,783 4,410
Leases........................ 1,191 1,166 2,397 875 907
-------- -------- -------- -------- --------
Total Charge-offs............... 20,945 21,502 28,540 15,204 13,476
Recoveries on Loans and Leases:
Commercial.................... 6,708 4,176 3,231 2,123 3,682
Real Estate--Construction..... 164 53 9 39 6
Real Estate--Mortgage......... 1,369 1,097 2,483 1,035 2,556
Personal...................... 2,690 2,501 2,355 2,167 1,793
Leases........................ 325 261 112 23 77
-------- -------- -------- -------- --------
Total Recoveries................ 11,256 8,088 8,190 5,387 8,114
-------- -------- -------- -------- --------
Net Loans and Leases Charged-
off............................ 9,689 13,414 20,350 9,817 5,362
-------- -------- -------- -------- --------
Allowance for Loan and Lease
Losses at End of Year.......... $226,052 $208,651 $161,659 $166,815 $159,506
======== ======== ======== ======== ========
The amount of the provision for loan and lease losses charged to operating
expense for the year ended December 31, 1998, is the amount necessary to bring
the allowance for loan and lease losses at December 31, 1998, to a level
believed adequate by management to absorb current estimated probable losses in
the loan and lease portfolio. To serve as a basis for determining the
provision, M&I maintains an extensive credit risk monitoring process that
considers several factors including: current economic conditions affecting
loan and lease
24
customers, the payment performance of individual large loans and pools of
homogeneous small loans, portfolio seasoning, changes in collateral values,
and detailed reviews of specific large loan and lease relationships. For large
loans deemed to be impaired due to an expectation that all contractual
payments will probably not be received, impairment is measured by comparing
the recorded investment in the loan to the loans effective interest rate, the
fair value of the collateral or the loans observable market price.
The provision for loan and lease losses amounted to $27.1 million in 1998,
$17.6 million in 1997, and $15.6 million in 1996. The increase in the
provision in 1998 reflects the increase in nonaccrual loans throughout the
year, increased net charge-off levels in the fourth quarter of 1998 (.15% of
average loans), increased diversity in the loan portfolio (loan type and
geographical presence), the impact of Asian and Latin American economies on
selected customers and maintenance of risk-based reserve coverage. See
"Summary of Loan and Lease Loss Experience" contained in Item 1, Part 1 for
additional discussion.
Other Income
Total noninterest income amounted to $756.3 million in 1998 compared to
$608.5 million in 1997, an increase of $147.8 million or 24.3%.
Fees from data processing services increased $68.8 million or 20.0% from
$343.8 million in 1997 to $412.6 million in 1998. Processing fees in 1998
increased $41.0 million or 17.1% over 1997. Software revenue increased $17.6
million or 33.5%. Conversion fees increased $7.1 million. Buyout fees, which
vary from year to year, increased $2.9 million. Fees from other services such
as contract programming and consulting were relatively unchanged. Revenue
growth levels in 1999 may be below historical patterns due to the loss of a
significant customer because of an acquisition, and general reluctance of
potential customers to change their information processing or application
systems with year 2000 rapidly approaching.
Fees from trust services were $88.5 million in 1998 compared to $78.6
million in 1997, an increase of $9.9 million or 12.6%. Personal trust fees
increased 6.8%, or $2.8 million, while all other major categories experienced
revenue growth in excess of 13% over the prior year. Commercial trust fees
increased $3.8 million and outsourcing fees increased $1.4 million.
Fees for other customer services increased $19.1 million or 14.3% from 1997
and amounted to $152.8 million in 1998. Fee income from loans increased $11.3
million due in part to increased loan prepayment penalties and fees received
on fixed rate loans sold in the secondary market. Service charges on deposits
increased $3.8 million. Credit card, debit card and ATM fees increased $3.0
million and brokerage, insurance and annuity fees increased $2.4 million.
Net securities gains in 1998 amounted to $30.8 million. The Corporation's
Capital Markets Group had net realized gains from their security portfolio of
$23.6 million. Also during 1998, the Corporation and its banking affiliates
had net securities gains of $7.2 million from the sale of equity securities
and debt securities available for sale.
Other miscellaneous income amounted to $71.7 million in 1998 compared to
$48.2 million in 1997, an increase of $23.5 million. Gains from the sale of
mortgage loans increased $21.7 million in 1998 and amounted to $34.2 million.
Deposit premiums from sales of bank branches of $7.6 million in 1997 were
offset by increases in gains on sales of fixed assets and earnings on funded
deferred compensation plans. The increase in the net realizable value for
bank-owned life insurance policies amounted to $3.9 million in 1998 compared
to $0.8 million in 1997.
Total noninterest income amounted to $608.5 million in 1997 compared to
$511.3 million in 1996, an increase of $97.2 million or 19.0%.
25
Fees from data processing services increased $75.3 million or 28.0% from
$268.5 million in 1996 to $343.8 million in 1997. Processing fees increased
$55.4 million or 30.2%. Conversion revenue of $14.1 million was relatively
unchanged. Fees from other services such as contract programming and
consulting increased $3.3 million and software revenue increased $11.5 million
or 28.2%. Buyout fees, which vary from year to year, increased $5.1 million
and amounted to $11.3 million in 1997.
Fees from trust services were $78.6 million in 1997 compared to $70.2
million in 1996, an increase of $8.4 million or 12.0%. All major categories
experienced revenue growth in excess of 10% over the prior year. Personal
trust fees increased $4.1 million and commercial trust fees increased $2.8
million.
Fees for other customer services increased $11.1 million or 9.0%. Service
charges on deposits increased $3.1 million and amounted to $57.9 million in
1997. Credit card, debit card and ATM fees of $25.1 million in 1997 increased
$2.4 million. Brokerage and insurance fees increased $2.6 million.
Net securities gains in 1997 amounted to $4.1 million. During 1997 the
Corporation's Capital Markets Group had net realized securities gains of $6.7
million. Also during 1997, the Corporation's banking affiliates had net
securities losses of $4.4 million from the sale of available for sale
investment securities as previously discussed and the Corporation had net
securities gains of $1.8 million from the sale of equity securities.
Other miscellaneous income amounted to $48.2 million in 1997 compared to
$34.5 million in 1996, an increase of $13.7 million. Deposit premiums from
sales of bank branches were $7.6 million in 1997 compared to $1.5 million in
1996. Gains from the sale of mortgage loans increased $4.5 million in 1997 and
amounted to $12.6 million. Foreign exchange revenue increased $1.1 million in
1997 compared to the prior year.
Other Expense
Total other expense before merger/restructuring charges amounted to $916.7
million in 1998, an increase of $119.5 million or 15.0% from $797.2 million in
1997. Including these charges, total other expense for 1998 amounted to $940.0
million. Total other expense, before special charges, amounted to $689.6
million in 1996. See Note 3 to the Consolidated Financial Statements contained
in Item 8 for a description of the 1998 merger/restructuring charges.
The increase in expenses is primarily attributable to the Corporation's
nonbanking businesses, particularly its data processing business segment
("Data Services"). Data Services expense growth of $70.6 million or 19.3% in
1998 compared to 1997 represents approximately 59% of the Corporations total
operating expense growth and reflects the cost of adding processing capacity
and other related costs associated with increased revenue growth as well as
continued work on Year 2000. See "Year 2000" for additional discussion of the
activities and costs related to this project.
Expenses of the Corporation's banking business in 1997 included the cost of
integrating Security into M&I. M&I added approximately 400 full-time
equivalent employees as a direct result of the merger excluding job
opportunities offered former Security employees for open job positions that
existed prior to the merger. In total, it is estimated that 570 M&I positions
were filled by former Security employees. At the time of merger, Security
employed approximately 850 employees on a full-time equivalent basis. During
the fourth quarter of 1997, many former Security employees were temporarily
retained to assist in implementing systems and operations conversions,
attending to special customers needs and other issues to ensure that the
integration was as effective and efficient as possible.
The merger with Security was an in-market acquisition which entailed a
significant amount of customer service and operating overlap. The Corporation
closed the majority of Security's branch and operating facilities in addition
to the reduction in work force described above resulting in lower operating
expenses.
Expenses of the Corporation's banking business in 1996 include the cost of
implementing certain initiatives in the areas of retail and small business
lending, loan and deposit operational support consolidation and product
26
and service distribution networks. These initiatives will enable more
competitive pricing and achieve improved cost efficiencies. In 1996, these
banking initiative expenses amounted to $4.7 million.
Expense control is sometimes measured in the financial services industry by
the efficiency ratio statistic. The efficiency ratio is calculated by taking
total other expense (excluding special charges) divided by the sum of total
other income (excluding securities gains or losses other than for the Capital
Markets Group) and net interest income on a fully taxable equivalent basis.
The Corporation's efficiency ratios for the years ended December 31, 1998,
1997, and 1996 were:
Efficiency Ratios 1998 1997 1996
-------------------------------------------------------- ---- ---- ----
Consolidated Corporation................................ 63.2% 64.9% 64.6%
Consolidated Corporation Excluding Data Services:
Including Intangible Amortization..................... 53.1% 56.1% 56.8%
Excluding Intangible Amortization..................... 48.5% 54.3% 55.8%
Total salaries and benefits expense amounted to $523.6 million for 1998
compared to $460.2 million in 1997, an increase of $63.4 million or 13.8%. The
data processing business contributed approximately $42.5 million or 67% of the
increase. During 1998, Data Services had average full-time equivalent
employees and contract programmers of 3,926 compared to 3,496 in the prior
year. Salaries and benefits of the Corporation's residential mortgage banking
group increased $3.7 million or 41.9%. Loan production in 1998 was $3.4
billion, an increase of 120% from last year. Salaries and benefits for Trust
Services increased $5.5 million or 16.6% compared to 1997 which reflects
increased costs for outsourcing and other services associated with revenue
growth.
Net occupancy and equipment expenses increased $17.8 million in 1998 when
compared to 1997. Data Services activity resulted in approximately $13.7
million or 77% of the 1998 increase in occupancy and equipment costs.
Additional depreciation and maintenance associated with equipment additions
and telecommunications equipment and charges accounted for $11.9 million of
Data Services' increase.
Software expense amounted to $22.2 million in 1998 compared to $19.7 million
in 1997, an increase of $2.5 million or 12.6%. This increase is primarily
related to Data Services growth which accounted for $1.4 million of the
increase. Data Services growth consisted of additional and more costly
operating software associated with CPU upgrades as well as additional
application software including software used for the Year 2000 project.
Professional services increased $8.0 million or 46% over 1997. Data Services
accounted for $2.6 million of the increase. Banking and all others accounted
for the remainder of the increase.
Amortization of intangibles increased $22.1 million primarily as a result of
the Security transaction and accelerated amortization of mortgage servicing
rights due to prepayments associated with refinancings.
Other expenses amounted to $106.9 million in 1998 compared to $104.2 million
in the prior year, an increase of $2.7 million or 2.6%.
Other expense is affected by the capitalization of costs, net of
amortization, associated with software development and data processing
conversions. The amount of capitalized software development costs and
capitalized conversion costs net of their respective amortization declined
$3.3 million and $1.4 million in 1998 compared to 1997. During 1997,
capitalized software impairment writedowns amounted to $2.4 million.
Total other expense amounted to $797.2 million in 1997, an increase of
$107.6 million or 15.6% from $689.6 million in 1996 before the three special
charges as previously discussed. Including these special charges, total other
expense for 1996 amounted to $713.5 million.
27
Total salaries and benefits expense amounted to $460.2 million for 1997
compared to $392.7 million in 1996, an increase of $67.5 million or 17.2%. The
data processing business contributed approximately $46.6 million or 69% of the
increase. During 1997, Data Services had average full-time equivalent
employees and contract programmers of 3,496 compared to 2,810 in the prior
year.
Net occupancy and equipment expenses increased $10.0 million in 1997 when
compared to 1996. Data Services activity resulted in substantially all of this
increase. Additional depreciation and maintenance associated with equipment
additions and telecommunications equipment and charges accounted for $8.1
million of Data Services' increase. Also during 1997, Data Services completed
a 160,000 square foot facility in addition to upgrades to its existing
facilities.
Software expense amounted to $19.7 million in 1997 compared to $15.2 million
in 1996, an increase of $4.5 million or 29.4%. This increase is primarily
related to Data Services growth which accounted for $3.8 million of the
increase. Data Services growth consisted of additional and more costly
operating software associated with CPU upgrades as well as additional
application software including software used for the Year 2000 project.
As previously discussed, the Corporation paid $7.1 million in one-time SAIF
assessments in 1996 which is the primary reason for the decline in payments to
regulatory agencies in 1997 compared to 1996.
Processing charges expense increased $5.5 million or 28.1% from $19.8
million in 1996 to $25.3 million in 1997. Both banking and Data Services
experienced increased costs in processing charges.
Amortization of intangible assets increased $2.5 million in 1997 over 1996
due to an additional $8.0 million expense as a result of the Security
transaction in 1997 which was partially offset by a $4.7 million special, one-
time writedown of intangible assets in 1996 by Advantage Bancorp.
Other expenses amounted to $104.2 million in 1997 compared to $103.7 million
in the prior year, an increase of $0.5 million. Excluding the $12.1 million
write-off of acquired in-process technology attributable to the EastPoint
acquisition in 1996, other expenses increased $12.6 million in 1997 when
compared to the prior year. Other operating expenses associated with Data
Services revenue growth increased $8.4 million. Customer related expense for
banking increased $2.2 million in 1997 compared with 1996. Lease buyouts and
writedowns associated with branch closures decreased $0.8 million.
Other expense is also affected by the capitalization of costs, net of
amortization, associated with software development and customer data
processing conversions. The amount of capitalized software development costs,
net of amortization and impairment writedowns, increased $6.9 million in 1997
compared to the prior year. The impact of capitalized customer conversion
activity, net of amortization, declined $2.2 million as customers continue to
pay for conversions upfront. Capitalized software costs are amortized over
their estimated useful lives. Despite the Corporation's monitoring of its
ability to recover its investment in software, the ever increasing change in
technology increases the possibility of obsolescence and may necessitate
impairment writedowns. As previously discussed, capitalized software
impairment writedowns were $2.4 million in 1997.
Income Tax Provision
The provision for income taxes was $164.0 million in 1998, $131.5 million in
1997 and $111.3 million in 1996. The effective tax rate in 1998 was 35.2%
compared to 33.9% in 1997 and 35.0% in 1996. The increase in the effective tax
rate in 1998 is due, in part, to the increase in amortization and elements of
the merger/restructuring charge which are not deductible for income tax
purposes.
Capital Resources
Shareholders' equity was $2.24 billion or 10.40% of total consolidated
assets at December 31, 1998, compared to $2.02 billion or 9.86% of total
consolidated assets at December 31, 1997. Earnings, net of dividends paid, was
the major source of the increase.
28
The Corporation and its affiliates continue to have a strong capital base
and the Corporation's regulatory capital ratios continue to be significantly
above the defined minimum regulatory ratios. See Note 13 to the Consolidated
Financial Statements contained in Item 8 herein for the Corporation's
comparative capital ratios and the capital ratios of its significant
subsidiaries.
The Corporation's subsidiaries, primarily its banking subsidiaries, are
restricted by regulations from making distributions above prescribed amounts.
In addition, banking subsidiaries are limited in making loans and advances to
the Corporation. At December 31, 1998, approximately $69.9 million and $69.3
million were available for distribution without regulatory approval from the
Corporation's banking and nonbanking subsidiaries, respectively.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to each subsidiary bank in circumstances when it
might not do so absent such policy.
In April 1997, $16.8 million of 8.5% convertible subordinated notes were
converted into 1,922,114 shares of common stock. As provided for in the note
agreement, the noteholder subsequent to conversion, exchanged the common
shares acquired by conversion of the debt for 168,185 shares of the
Corporation's Series A preferred stock.
The Corporation had a Stock Repurchase Program under which up to 6 million
shares could be repurchased annually. In connection with the acquisition of
Advantage Bancorp, Inc., the Company rescinded its stock repurchase program
effective March 16, 1998. The total shares purchased in 1998 were 0.6 million
shares. On January 12, 1999, the Corporation announced its intentions to
purchase up to 6 million shares annually. The shares will be acquired to have
treasury shares available for issuance pursuant to employee benefit plans and
for other corporate needs. Any such purchases may be conducted through open
market or privately negotiated transactions. The price, timing and actual
number of shares purchased will depend on market conditions.
Year 2000
Year 2000 is the term used to describe the fact that many existing computer
programs use only two digits to identify a year in a date field. These
programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000. The term also
refers to devices with imbedded technology that are time sensitive and may
fail to recognize year 2000 correctly. This issue affects virtually all
companies and organizations.
The Corporation recognizes the need to ensure its operations and income
stream will not be adversely impacted by year 2000 related events. The Board
of Directors receive periodic updates on plan revisions, progress achieved
compared to targets and the costs involved. Also, the Corporation Internal
Audit Group is evaluating the processes and procedures used to address the
problem and the progress being made. Proactive "information sharing" is
encouraged by the Corporation, both internally and externally, through an
employee newsletter, written communications and regional workshops with
customers, the Corporation's Web site, trade groups, vendors, utilities and
the government.
The Corporation has made it a priority to resolve any potential business
issues connected with year 2000 and has made solid progress toward protecting
itself from the risks associated with it. However, despite the detailed
planning, execution and verification steps taken by the Corporation, there can
be no assurance that all issues have been identified or successfully resolved.
The following is a summary of the risks, state of readiness, contingency
plans and estimated costs for addressing year 2000. For purposes of this
discussion, the summary has been segregated between Data Services and the
remainder of the Corporation and Subsidiaries. The Corporation's banking
affiliates are heavily reliant on Data Services with respect to their core
processing systems (loans and deposits).
29
DATA SERVICES
Data Services is in the business of developing, maintaining, and running
software serving the financial services industry. Banking institutions
comprise the majority of its customers. Future data processing revenue is
critically dependent upon successfully implementing the necessary changes to
ensure year 2000 compliance.
Data Services began developing its plan to address Year 2000 in 1996. Data
Services employs approximately 150 full-time equivalent employees who are
dedicated to the Year 2000 project and maintains a dedicated code renovation
center and testing facility. Code modifications and testing have been
completed for licensed software and upgrades have been distributed to
customers. Service bureau code modifications were completed in December 1997.
In September and October of 1998 the service bureau core application systems
were converted and are now running on year 2000 compliant software. "19xx"
testing and system verification have been completed by a selected group of
customers. Additional "20xx" testing and verification are currently in process
with customer acceptance expected in March 1999. M&I's banking affiliates are
participants in both of these testing phases. Data Services will continue
testing to ensure other modifications and enhancements implemented prior to
Year 2000 are compliant. Because Data Services is in a technology business, it
is heavily reliant on software and hardware products. Data Services is in the
process of inventorying and validating year 2000 compliance for all third-
party software and computer hardware including mainframe, open systems,
network and desktop equipment.
With the most critical phase of the year 2000 project almost complete, the
physical infrastructure including elevators, security systems, heating and air
conditioning is being assessed. The majority of testing, system modifications
and infrastructure changes will be completed in the second quarter of 1999.
In August 1998 Data Services received ITAA*2000 certification from the
Information Technology Association of America. The program examines processes
and methods used by companies to perform their year 2000 software conversions.
In addition, Data Services progress and plans are subject to periodic review
and evaluation by banking regulatory agencies.
In August 1998 Data Services adopted a "Year 2000 Contingency Strategy" plan
which is an expansion of their pre-existing "Services Continuity Recovery"
plan. This plan includes an analysis of "most reasonably likely year 2000
worst case scenarios" and their planned solutions to those scenarios. The plan
follows all the Federal Financial Institutions Examination Council's (FFIEC)
guidelines. Examples of these scenarios and planned solutions are, a power
interruption at a data processing facility mitigated by an onsite generator,
and simultaneous disasters at all data processing locations mitigated by the
use of a prearranged third party facility.
CORPORATION AND SUBSIDIARIES (Excluding Data Services)
The Corporation and its other affiliates began addressing Year 2000 in 1997.
The overall process is being coordinated through M&I Support Services which
has a dedicated function addressing the issue. Their mission includes
providing an overall plan, communicating and documenting the process and
reporting of progress including periodic reporting to the banking affiliates
primary regulator(s). In addition, a coordinator has been appointed from each
affiliate bank and division of the Corporation. In some cases external
resources or consultants are contracted for assistance with the project or for
specific business line solutions. Planning of the project was completed in
June 1997. The inventory of hardware, software, electronic equipment and
building systems was completed in January 1998. Designated "Mission Critical
Software" has been renovated and is in the validation phase which is projected
to be completed in the first quarter of 1999.
The risk assessment phase of analyzing vendor readiness, and testing
hardware is substantially complete. The plan for renovation of systems is in
process. This phase includes developing an action plan for each inventory
item, developing hardware and "Non-Mission Critical" software upgrades and/or
replacement schedules and implementation. Major items in this group needing
upgrades or replacement include PCs, ATMs
30
and their related networks. The remaining phases include testing of
implementation, certification of hardware, software, office machines and
building systems. The Corporation anticipates this process to be completed in
the second quarter of 1999.
The Corporation also has a risk that major loan customers may incur year
2000 problems that might inhibit their ability to repay their obligations or
affect the Corporation's ability to access collateral in the event of default.
All customers with loans exceeding a specified threshold amount have been sent
a year 2000 questionnaire designed to summarize their state of readiness.
Additional mailings or phone contact is being made with loan customers that
have not responded to initial requests for information. Those responding to
the mail surveys or contacted by phone have been assessed and assigned a risk
factor for year 2000 readiness. These assessments have become a part of the
Corporation's ongoing Credit Review process. Applicants for certain types and
sizes of new loans are required to submit similar information which will be
used in the underwriting and monitoring processes.
Although M&I has had contingency plans (disaster recovery) in place covering
major business disruptions like power outages and communications or computer
system failures for some time, in January 1998, the Corporation began to
revise these plans to specifically include year 2000 issues. As a part of this
process the Corporation is identifying a list of "most reasonably likely worst
case scenarios" and action plans to minimize business disruption if they were
to occur. The major scenarios identified take into account the Corporation's
dependency on utilities, government and customer behavior over which it has
very limited control. Reviews have been made of the year 2000 programs and
contingency plans of the Federal Reserve and major utilities. Periodic updates
of their progress in following their year 2000 readiness timetables are being
made. Contingency plan revisions are expected to be completed in the second
quarter of 1999.
YEAR 2000 RELATED COSTS
The majority of Data Services' contracts do not provide for additional
reimbursement over and above the previously contracted maintenance amounts.
The current estimate of the Corporation's total net direct cost for the year
2000 effort as outlined above is approximately $40 million with Data Services
representing approximately 88% of that amount. Approximately $25 million or
63% has been expensed through December 31, 1998. The cost for the years ended
December 31, 1998, 1997 and 1996 were $15 million, $7 million, and $3 million,
respectively. Prior periods amounts have been restated to conform with the
additional guidance issued by the Securities and Exchange Commission on
November 9, 1998, which, among other things, more clearly defines the types of
expenses that should be disclosed. Replacement equipment and software are
being capitalized or expensed in accordance with the Corporation's normal
accounting policies. The effect of writing off the net book value of equipment
or software that is not Year 2000 compliant is included in the above
estimates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk arises from exposure to changes in interest rates, exchange
rates, commodity prices, and other relevant market rate or price risk. The
Corporation faces market risk through trading and other than trading
activities. While market risk that arises from trading activities in the form
of foreign exchange and interest rate risk is immaterial to the Corporation,
market risk from other than trading activities in the form of interest rate
risk is measured and managed through a number of methods. The Corporation uses
financial modeling techniques which measure the sensitivity of future earnings
and the change in fair value due to changing rate environments to measure
interest rate risk. Policies established by the Corporate Asset/Liability
Committee and approved by the Corporate Board of Directors limit exposure for
both earnings and fair value at risk. General interest rate movements are used
to develop sensitivity as the Corporation feels it has no primary exposure to
a specific point on the yield curve. These limits are based on the
Corporation's exposure to a 100 basis point immediate and sustained parallel
rate move, either upward or downward. The Corporation manages interest rate
risk through the use of a limited array of derivative financial instruments.
These instruments allow the Corporation to produce
31
the desired balance sheet repricing structure while simultaneously meeting the
desired objectives of both its borrowing and depositing customers. For
additional information on the Corporation's derivative financial instruments
and foreign exchange position, see Note 17 to the Consolidated Financial
Statements contained in Item 8 herein.
Interest Rate Risk
In order to measure earnings and fair value sensitivity to changing rates,
the Corporation uses three different measurement tools including static gap
analysis, simulation of earnings, and market value sensitivity (fair value at
risk). The static gap analysis starts with contractual repricing information
for assets, liabilities and off-balance sheet instruments. These items are
then combined with repricing estimations for administered rate (NOW, Savings,
and Money Market accounts) and non rate related products (DDA accounts, Other
Assets and Other Liabilities) to create a baseline repricing balance sheet. In
addition to the contractual information, residential mortgage whole loan
product and mortgage-backed securities are adjusted based on industry
estimates of prepayment speeds that capture the expected prepayment of
principle above the contractual amount based on how far away the contractual
coupon is from market coupon rates. The resulting static gap is the base for
the earnings sensitivity calculation. The following table represents the
Corporation's consolidated static gap position as of December 31, 1998 ($ in
millions):
1-90 91-180 181-270 271-360 1 Year
Days Days Days Days Subtotal + Total
------- ------- ------- ------- -------- ------- -------
Loans and Leases........ $ 5,530 $ 1,079 $ 819 $ 723 $ 8,151 $ 5,619 $13,770
Securities.............. 317 374 378 325 1,394 3,712 5,106
Other Interest Bearing
Assets................. 232 -- -- -- 232 -- 232
Other Assets............ -- -- -- -- -- 2,458 2,458
------- ------- ------- ------- ------- ------- -------
Total Assets........ $ 6,079 $ 1,453 $ 1,197 $ 1,048 $ 9,777 $11,789 $21,566
======= ======= ======= ======= ======= ======= =======
Rate Sensitive
Liabilities............ $ 8,927 $ 1,132 $ 969 $ 638 $11,666 $ 4,316 $15,982
Non Rate Sensitive
Liabilities & Equity... -- -- -- -- -- 5,584 5,584
------- ------- ------- ------- ------- ------- -------
Total Liabilities &
Equity................. $ 8,927 $ 1,132 $ 969 $ 638 $11,666 $ 9,900 $21,566
======= ======= ======= ======= ======= ======= =======
Gap..................... $(2,848) $ 321 $ 228 $ 410 $ 1,889
Cumulative Gap.......... (2,848) (2,527) (2,299) (1,889)
Cumulative Gap as a % of
Total Assets........... (13.21)% (11.72)% (10.66)% (8.76)%
Total Off Balance Sheet. $ (877) $ 150 $ 66 $ 106 $ (555) $ 555 $ --
Gap..................... $(3,725) $ 471 $ 294 $ 516 $ 2,444
Cumulative Gap.......... (3,725) (3,254) (2,960) (2,444)
Cumulative Gap as a % of
Total Assets........... (17.27)% (15.09)% (13.73)% (11.33)%
- --------
Notes:
(1) Off-balance sheet information does not include $50 million of interest
rate caps and floors.
(2) The interest rate sensitivity assumptions for demand deposits, savings
accounts, money market accounts, and NOW accounts are based on current and
historical experiences regarding portfolio retention and interest rate
repricing behavior. Based on these experiences, a portion of these
balances is considered to be long-term and fairly stable and is therefore
included in the "1 year +" category.
The static gap analysis provides a representation of the Corporations
earnings sensitivity to changes in interest rates. Interest rate risk of
embedded positions including prepayment and early withdrawal options, lagged
interest rate changes, administered interest rate products, and cap and floor
options within products require a more dynamic measuring tool to capture
earnings and fair value risk. Earnings simulation and fair value sensitivity
analysis are used to create a more complete assessment of interest rate risk.
32
Along with the static gap analysis, determining the sensitivity of future
earnings to a hypothetical +/- 100 basis point parallel rate shock can be
accomplished through the use of simulation modeling. In addition to the
assumptions used to create the static gap, simulation of earnings includes the
modeling of the balance sheet as an ongoing entity. Future business
assumptions involving administered rate products, prepayments for future rate
sensitive balances, and the reinvestment of maturing assets and liabilities
are included. These items are then modeled to project income based on a
hypothetical change in interest rates. The resulting pretax income for the
next 12 month period is compared to the pretax income amount calculated using
flat rates. This difference represents the Corporation's earnings sensitivity
to a +/- 100 basis point parallel rate shock. The following table illustrates
these amounts as of December 31, 1998, which are within the limits established
by the Corporation:
Hypothetical Change Impact to 1998
in Interest Rates Pretax Net Income
------------------- -----------------
100 basis point Shock Up................................ (8.6%)
100 basis point Shock Down.............................. 5.9%
These results are based solely on immediate and sustained parallel changes
in market rates and do not reflect the earnings sensitivity that may arise
from other factors such as changes in the shape of the yield curve, the change
in spread between key market rates, or accounting recognition for impairment
of certain intangibles. The above results are also considered to be
conservative estimates due to the fact that no management action to mitigate
potential income variances are included within the simulation process. This
action would 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.
Another component of interest rate risk, fair value at risk, is determined
by the Corporation through the technique of simulating the fair value of
equity in changing rate environments. This technique involves determining the
present value of all contractual asset and liability cash flows (adjusted for
prepayments) based on a predetermined discount rate. The net result of all
these balance sheet items determine the fair value of equity. The fair value
of equity resulting from the current flat rate scenario is compared to the
fair value of equity calculated using discount rates +/- 100 basis points from
flat rates to determine the fair value of equity at risk. Currently, fair
value of equity at risk is less than 2.5% of the market value of the
Corporation as of December 31, 1998.
In September 1998 the Corporation began acting as an intermediary for swap
agreements on behalf of its customers. These are derivative financial
instruments and are matched off by the Corporation to eliminate exposure to
market risk. These interest rate swaps held for trading included $35 million
in notional amount of receive fixed and $35 million in notional amount of pay
fixed at December 31, 1998.
Equity Risk
In addition to interest rate risk, the Corporation incurs market risk in the
form of equity risk. M&I's Capital Markets Group invests in private, medium-
sized companies to help establish new businesses or recapitalize existing
ones. Exposure to the change in equity values for the companies that are held
in their portfolio exists, but due to the nature of the investments, cannot be
quantified within acceptable levels of precision.
M&I Trust Services administers more than $47 billion in assets and directly
manages a portfolio of more than $9 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.
In addition to the above market risks, material limitations exist in
determining the overall net market risk exposure of the Corporation.
Computation of prospective effects of hypothetical interest rate changes are
based on many assumptions, including levels of market interest rates,
predicted prepayment speeds, and projected decay rates of core deposits. Other
items, such as post retirement benefit obligations can also have fair value at
risk exposure due to changes in interest rates. Therefore, the above outcomes
should not be relied upon as indicative of actual results.
33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR YEARS
ENDED DECEMBER 31, 1998, 1997, AND 1996
Consolidated Balance Sheets
December 31 ($000's except share data)
1998 1997
----------- -----------
Assets
Cash and Cash Equivalents:
Cash and Due from Banks.............................. $ 760,405 $ 817,491
Funds Sold and Security Resale Agreements............ 34,616 34,586
Money Market Funds................................... 111,717 65,986
----------- -----------
Total Cash and Cash Equivalents........................ 906,738 918,063
Investment Securities:
Trading Securities, at Market Value.................. 34,046 43,644
Other Short-term Investments, at Cost which
Approximates Market Value........................... 51,971 37,018
Other Available for Sale, at Market Value............ 4,049,421 4,208,616
Held to Maturity, Market Value $1,095,048 ($1,203,872
in 1997)............................................ 1,056,233 1,176,688
----------- -----------
Total Investment Securities............................ 5,191,671 5,465,966
Loans and Leases, Net of Unearned Income of $128,680
($98,979 in 1997)..................................... 13,996,166 13,101,912
Less: Allowance for Loan and Lease Losses.............. 226,052 208,651
----------- -----------
Net Loans and Leases................................... 13,770,114 12,893,261
Premises and Equipment................................. 360,345 351,423
Goodwill and Core Deposit Intangibles.................. 317,414 329,592
Other Intangibles...................................... 18,119 27,374
Accrued Interest and Other Assets...................... 1,001,892 516,479
----------- -----------
Total Assets....................................... $21,566,293 $20,502,158
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest Bearing.................................. $ 2,929,195 $ 2,753,320
Interest Bearing..................................... 12,990,724 12,267,008
----------- -----------
Total Deposits..................................... 15,919,919 15,020,328
Short-term Borrowings.................................. 2,077,285 2,047,086
Accrued Expenses and Other Liabilities................. 530,828 516,779
Long-term Borrowings................................... 794,482 895,536
----------- -----------
Total Liabilities.................................. 19,322,514 18,479,729
Shareholders' Equity:
Series A Convertible Preferred Stock, $1.00 par
value, 2,000,000 Shares Authorized; 685,314 Shares
Issued; Liquidation Preference $68,531.............. 685 685
Common Stock, $1.00 par value, 160,000,000 Shares
Authorized; 112,757,546 Shares Issued (113,185,374
in 1997)............................................ 112,757 113,185
Additional Paid-in Capital........................... 621,795 620,899
Retained Earnings.................................... 1,664,123 1,460,646
Less: Treasury Stock, at Cost, 6,654,170 Shares
(7,765,169 in 1997)................................. 194,046 215,787
Deferred Compensation.............................. 19,637 9,297
Net Unrealized Securities Gains
Net of Taxes....................................... 58,102 52,098
----------- -----------
Total Shareholders' Equity......................... 2,243,779 2,022,429
----------- -----------
Total Liabilities and Shareholders' Equity......... $21,566,293 $20,502,158
=========== ===========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
34
Consolidated Statements of Income
Years ended December 31 ($000's except share data)
1998 1997 1996
---------- ---------- ----------
Interest Income
Loans and Leases.............................. $1,085,829 $ 921,161 $ 804,951
Investment Securities:
Taxable..................................... 280,377 240,238 198,787
Exempt from Federal Income Taxes............ 52,969 45,420 30,718
Trading Securities............................ 2,203 2,016 1,202
Other Short-term Investments.................. 12,666 11,498 10,163
---------- ---------- ----------
Total Interest Income..................... 1,434,044 1,220,333 1,045,821
Interest Expense
Deposits...................................... 564,540 460,418 392,473
Short-term Borrowings......................... 126,624 111,193 63,892
Long-term Borrowings.......................... 66,810 54,175 53,615
---------- ---------- ----------
Total Interest Expense.................... 757,974 625,786 509,980
---------- ---------- ----------
Net Interest Income........................... 676,070 594,547 535,841
Provision for Loan and Lease Losses........... 27,090 17,633 15,634
---------- ---------- ----------
Net Interest Income After Provision for Loan
and Lease Losses............................. 648,980 576,914 520,207
Other Income
Data Processing Services...................... 412,632 343,846 268,526
Trust Services................................ 88,496 78,595 70,190
Other Customer Services....................... 152,762 133,658 122,594
Net Securities Gains.......................... 30,783 4,127 15,471
Other......................................... 71,660 48,243 34,493
---------- ---------- ----------
Total Other Income........................ 756,333 608,469 511,274
Other Expense
Salaries and Employee Benefits................ 523,606 460,164 392,711
Net Occupancy................................. 44,181 41,252 40,759
Equipment..................................... 103,180 88,358 78,803
Software Expenses............................. 22,181 19,702 15,222
Payments to Regulatory Agencies............... 4,834 3,518 10,741
Processing Charges............................ 25,286 25,295 19,752
Supplies and Printing......................... 18,679 16,990 16,015
Professional Services......................... 25,326 17,348 17,979
Amortization of Intangibles................... 42,457 20,388 17,867
Merger/Restructuring.......................... 23,373 -- --
Other......................................... 106,925 104,196 103,683
---------- ---------- ----------
Total Other Expense....................... 940,028 797,211 713,532
---------- ---------- ----------
Income Before Income Taxes.................... 465,285 388,172 317,949
Provision for Income Taxes.................... 163,962 131,487 111,314
---------- ---------- ----------
Net Income.................................... $ 301,323 $ 256,685 $ 206,635
========== ========== ==========
Net Income Per Common Share
Basic......................................... $ 2.79 $ 2.62 $ 2.12
Diluted....................................... 2.61 2.43 1.98
The accompanying notes are an integral part of the Consolidated Financial
Statements.
35
Consolidated Statements of Cash Flows
Years ended December 31 ($000's)
1998 1997 1996
----------- ----------- -----------
Cash Flows From Operating Activities
Net Income............................. $ 301,323 $ 256,685 $ 206,635
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Depreciation and Amortization........ 111,392 63,935 56,094
Provision for Loan and Lease Losses.. 27,090 17,633 15,634
Gains on Sales of Assets............. (77,183) (33,585) (31,854)
Proceeds from Sales of Trading
Securities and Loans Held for
Resale.............................. 5,211,992 4,220,597 4,078,854
Purchases of Trading Securities and
Loans Held for Resale............... (5,245,240) (4,237,853) (4,102,499)
Other................................ (59,464) (12,638) 17,326
----------- ----------- -----------
Total Adjustments.................. (31,413) 18,089 33,555
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................ 269,910 274,774 240,190
Cash Flows From Investing Activities
Net (Increase) Decrease in Shorter Term
Securities............................ (14,450) 6,050 52,447
Proceeds from Maturities of Longer Term
Securities............................ 1,461,553 789,324 912,229
Proceeds from Sales of Securities
Available for Sale.................... 160,474 797,270 797,890
Purchases of Longer Term Securities.... (1,054,290) (1,373,780) (2,379,186)
Decrease in Loans Due to Divestitures.. -- 4,546 13,729
Net Increase in Loans.................. (1,016,336) (978,960) (683,065)
Purchases of Assets to be Leased....... (317,862) (295,185) (171,395)
Principal Payments on Lease
Receivables........................... 242,227 197,372 145,095
Purchases of Premises and Equipment,
Net................................... (60,811) (68,829) (53,383)
Acquisitions Accounted for as
Purchases, Net of Cash Equivalents
Acquired (5,170) (236,399) --
Purchase of Bank-Owned Life Insurance.. (400,000) -- --
Other.................................. 14,997 11,741 (18,945)
----------- ----------- -----------
Net Cash Used in Investing Activities.. (989,668) (1,146,850) (1,384,584)
Cash Flows From Financing Activities
Decrease in Deposits Due to
Divestitures.......................... -- (56,294) (25,874)
Net Increase in Deposits............... 899,591 1,064,439 703,019
Proceeds from Issuance of Commercial
Paper................................. 779,653 455,726 641,754
Principal Payments on Commercial Paper. (829,077) (360,374) (669,091)
Net Increase (Decrease) in Other Short-
term Borrowings....................... 41,210 (46,517) 1,022,799
Proceeds from Issuance of Long-term
Debt.................................. 87,573 182,371 317,835
Payment of Long-term Debt.............. (159,963) (346,064) (519,589)
Dividends Paid......................... (97,241) (79,272) (70,966)
Purchase of Common Stock............... (29,633) (64,430) (180,053)
Proceeds from the Issuance of Common
Stock................................. 15,086 23,538 13,305
Other.................................. 1,234 -- 7
----------- ----------- -----------
Net Cash Provided by Financing
Activities............................ 708,433 773,123 1,233,146
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... (11,325) (98,953) 88,752
Cash and Cash Equivalents, Beginning of
Year.................................. 918,063 1,017,016 928,264
----------- ----------- -----------
Cash and Cash Equivalents, End of Year. $ 906,738 $ 918,063 $ 1,017,016
=========== =========== ===========
Supplemental Cash Flow Information:
Cash Paid During the Year for:
Interest............................. $ 759,231 $ 607,614 $ 506,184
Income Taxes......................... 141,553 103,716 103,847
The accompanying notes are an integral part of the Consolidated Financial
Statements.
36
Consolidated Statements of Shareholders' Equity
($000's except share data)
Unrealized
Compre- Additional Treasury Deferred Securities
hensive Preferred Common Paid-in Retained Common Compen- Gains Net
Income Stock Stock Capital Earnings Stock sation of Taxes
-------- --------- -------- ---------- ---------- -------- -------- ----------
Balance, December 31,
1995, As Previously
Reported.............. -- $349 $ 99,494 $190,287 $1,075,789 $128,459 $1,090 $21,247
Adjustment to
Retroactively Restate
for 1998 Business
Combination Accounted
for as a Pooling of
Interests............. -- -- 4,157 20,976 72,304 -- 2,797 2,196
---- -------- -------- ---------- -------- ------ -------
Balance, December 31,
1995, Restated........ -- 349 103,651 211,263 1,148,093 128,459 3,887 23,443
Comprehensive Income:
Net Income............ $206,635 -- -- -- 206,635 -- -- --
Unrealized Gains on
Securities:
Unrealized
Securities Gains
Net of Taxes of
$1,651............. 3,085 -- -- -- -- -- -- --
Reclassification
Adjustment for
Losses Included in
Net Income Net of
Income Tax Benefit
of $970............ 1,822 -- -- -- -- -- -- --
--------
Total Unrealized
Gains on
Securities....... 4,907 -- -- -- -- -- -- 4,907
--------
Comprehensive Income... $211,542 -- -- -- -- -- -- --
========
Transactions by
Affiliates Prior to
Combination........... -- -- -- -- (1,088) -- -- --
Issuance of 1,922,114
Treasury Common Shares
on Conversion of
Convertible Notes..... -- -- -- (25,660) -- (42,517) -- --
Issuance of 168,185
Preferred Shares on
Conversion of
1,922,114 Common
Shares................ -- 168 -- 42,349 -- 42,517 -- --
Issuance of 1,049,700
Common and Treasury
Common Shares Under
Stock Option and
Restricted Stock
Plans................. -- -- 67 (8,637) (315) (22,422) 141 --
Acquisition of
6,218,671 Common
Shares................ -- -- (294) (7,659) -- 173,106 -- --
Dividends Declared on
Preferred Stock--$7.99
Per Share............. -- -- -- -- (3,827) -- -- --
Dividends Declared on
Common Stock--$0.72
Per Share............. -- -- -- -- (66,051) -- -- --
Repayment of ESOP Loan. -- -- -- -- -- -- (281) --
Net Change in Deferred
Compensation.......... -- -- -- 140 -- -- (373) --
Income Tax Benefit for
Compensation Expense
for Tax Purposes in
Excess of Amounts
Recognized for
Financial Reporting
Purposes.............. -- -- -- 6,527 -- -- -- --
Other.................. -- -- -- -- (174) -- -- --
---- -------- -------- ---------- -------- ------ -------
Balance, December 31,
1996.................. $517 $103,424 $218,323 $1,283,273 $279,143 $3,374 $28,350
==== ======== ======== ========== ======== ====== =======
The accompanying notes are an integral part of the Consolidated Financial
Statements.
37
Consolidated Statements of Shareholders' Equity
($000's except share data)
Unrealized
Compre- Additional Treasury Deferred Securities
hensive Preferred Common Paid-in Retained Common Compen- Gains Net
Income Stock Stock Capital Earnings Stock sation of Taxes
-------- --------- -------- ---------- ---------- -------- -------- ----------
Balance, December 31,
1996.................. -- $517 $103,424 $218,323 $1,283,273 $279,143 $3,374 $28,350
Comprehensive Income:
Net Income............ $256,685 -- -- -- 256,685 -- -- --
Unrealized Gains on
Securities:
Unrealized
Securities Gains
Net of Taxes of
$14,254............ 24,945 -- -- -- -- -- -- --
Reclassification
Adjustment for
Gains Included in
Net Income Net of
Taxes of $600...... (1,197) -- -- -- -- -- -- --
--------
Total Unrealized
Gains on
Securities....... 23,748 -- -- -- -- -- -- 23,748
--------
Comprehensive Income... $280,433 -- -- -- -- -- -- --
========
Transactions by
Affiliates Prior to
Combination........... -- -- -- -- (1,297) -- -- --
Issuance of 9,808,255
Common Shares and
2,515,955 Treasury
Common Shares in the
Acquisition of
Security Capital
Corporation
("Security").......... -- -- 9,809 406,726 -- (66,806) -- --
Common Shares Held for
Deferred Compensation
and Retirement Plans
Assumed in the
Acquisition of
Security--148,997
Common Shares......... -- -- -- -- -- -- 5,559 --
Issuance of 1,922,114
Treasury Common Shares
on Conversion of
Convertible Notes..... -- -- -- (33,868) -- (50,725) -- --
Issuance of 168,185
Preferred Shares on
Conversion of
1,922,114 Common
Shares................ -- 168 -- 50,557 -- 50,725 -- --
Issuance of 1,880,929
Common and Treasury
Common Shares Under
Stock Option and
Restricted Stock
Plans................. -- -- 18 (24,623) (40) (48,800) 155 --
Acquisition of
1,298,633 Common
Shares................ -- -- (66) (12,075) -- 52,250 -- --
Dividends Declared on
Preferred Stock--$8.78
Per Share............. -- -- -- -- (5,671) -- -- --
Dividends Declared on
Common Stock--$0.785
Per Share............. -- -- -- -- (72,304) -- -- --
Repayment of ESOP Loan. -- -- -- -- -- -- (332) --
Net Change in Deferred
Compensation.......... -- -- -- 155 -- -- 541 --
Income Tax Benefit for
Compensation Expense
for Tax Purposes in
Excess of Amounts
Recognized for
Financial Reporting
Purposes.............. -- -- -- 15,704 -- -- -- --
---- -------- -------- ---------- -------- ------ -------
Balance, December 31,
1997.................. $685 $113,185 $620,899 $1,460,646 $215,787 $9,297 $52,098
==== ======== ======== ========== ======== ====== =======
The accompanying notes are an integral part of the Consolidated Financial
Statements.
38
Consolidated Statements of Shareholders' Equity
($000's except share data)
Unrealized
Securities
Compre- Additional Treasury Deferred Gains
hensive Preferred Common Paid-in Retained Common Compen- Net of
Income Stock Stock Capital Earnings Stock sation Taxes
-------- --------- -------- ---------- ---------- -------- -------- ----------
Balance, December 31,
1997.................. -- $ 685 $113,185 $620,899 $1,460,646 $215,787 $ 9,297 $52,098
Comprehensive Income:
Net Income............ $301,323 -- -- -- 301,323 -- -- --
Unrealized Gains on
Securities:
Unrealized
Securities Gains
Net of Taxes of
$6,367............. 11,262 -- -- -- -- -- -- --
Reclassification
Adjustment for
Gains Included in
Net Income Net of
Taxes of $2,940.... (5,258) -- -- -- -- -- -- --
--------
Total Unrealized
Gains on
Securities....... 6,004 -- -- -- -- -- -- 6,004
--------
Comprehensive Income... $307,327 -- -- -- -- -- -- --
========
Transactions by
Affiliates Prior to
Combination........... -- -- -- -- (327) -- -- --
Issuance of 526,200
Treasury Common Shares
in the 1998 Business
Combination........... -- -- (526) (14,255) -- (14,781) -- --
Issuance of 1,133,564
Common and Treasury
Common Shares Under
Stock Option and
Restricted Stock
Plans................. -- -- 139 (10,830) (592) (28,151) 1,728 --
Acquisition of 697,247
Common Shares......... -- -- (41) 821 -- 33,770 (486) --
Dividends Declared on
Preferred Stock--$9.63
Per Share............. -- -- -- -- (6,603) -- -- --
Dividends Declared on
Common Stock--$0.86
Per Share............. -- -- -- -- (90,311) -- -- --
Repayment of ESOP Loan. -- -- -- 1,246 -- -- (1,373) --
Merger/Restructuring
Charge................ -- -- -- 9,893 -- -- -- --
Transfer of 246,854
Treasury Common Shares
to Directors' Deferred
Compensation Trust.... -- -- -- -- -- (12,608) 12,608 --
Net Change in Deferred
Compensation.......... -- -- -- 175 (10) 29 (2,136) --
Income Tax Benefit for
Compensation Expense
for Tax Purposes in
Excess of Amounts
Recognized for
Financial Reporting
Purposes.............. -- -- -- 13,846 -- -- -- --
Other.................. -- -- -- -- (3) -- (1) --
----- -------- -------- ---------- -------- ------- -------
Balance, December 31,
1998.................. $ 685 $112,757 $621,795 $1,664,123 $194,046 $19,637 $58,102
===== ======== ======== ========== ======== ======= =======
The accompanying notes are an integral part of the Consolidated Financial
Statements.
39
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996 ($000's except share data)
Marshall & Ilsley Corporation ("M&I" or the "Corporation") is a bank and
savings and loan holding company that provides financial services to a wide
variety of corporate, institutional, government and individual customers. The
Corporation's principal activities consist of banking and data processing
services. Banking services, lending and accepting deposits from retail and
commercial customers, are provided through 26 banks located in Wisconsin, one
federally chartered thrift located in Illinois and one bank in Arizona.
Financial and data processing services and software sales are provided through
the Data Services Division of the Corporation and three other nonbank
subsidiaries. Other financial services provided by M&I include personal
property lease financing; investment management and advisory services;
commercial and residential mortgage banking; venture capital and financial
advisory services; trust services to residents of Wisconsin, Arizona and
Florida; and brokerage and insurance services. M&I's largest affiliates and
principal operations are in Wisconsin however, it has activities in other
markets, particularly in certain neighboring Midwestern states, and in Arizona
and Florida.
1. Summary of Significant Accounting Policies
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those estimates.
Consolidation principles--The Consolidated Financial Statements include the
accounts of Marshall & Ilsley Corporation and all subsidiaries. All
significant intercompany balances and transactions are eliminated in
consolidation. Certain amounts in the 1997 and 1996 Consolidated Financial
Statements have been reclassified to conform with the 1998 presentation.
Cash and cash equivalents--For purposes of the Consolidated Financial
Statements, the Corporation defines cash equivalents as short-term investments
which have an original maturity of three months or less and are readily
convertible into cash.
Securities--Securities, when purchased, are designated as Trading,
Investment Securities Held to Maturity, or Investment Securities Available for
Sale and remain in that category until they are sold or mature. The specific
identification method is used in determining the cost of securities sold.
Investment Securities Held to Maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts. Investment Securities
Available for Sale are carried at fair value with fair value adjustments net
of the related income tax effects reported as a separate component of
shareholders' equity. Short-term Investments, other than Trading Securities,
are carried at cost, which approximates market value. Trading Securities are
carried at fair value, with adjustments to the carrying value reflected in the
Consolidated Statements of Income.
Loans and leases--Interest on loans, other than direct financing leases, is
recognized as income based on the loan principal outstanding during the
period. Unearned income on financing leases is recognized over the lease term
on a basis that results in an approximate level rate of return on the lease
investment. Loans are generally placed on nonaccrual status when they are past
due 90 days as to either interest or principal. When a loan is placed on
nonaccrual status, previously accrued and uncollected interest is charged to
interest income on loans. A nonaccrual loan may be restored to an accrual
basis when interest and principal payments are brought current and
collectibility of future payments is not in doubt.
The Corporation defers and amortizes fees and certain incremental direct
costs, primarily salary and employee benefit expenses, over the contractual
term of the loan or lease as an adjustment to the yield. The unamortized net
fees and costs are reported as part of the loan balance outstanding.
40
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Allowance for loan and lease losses--The allowance for loan and lease losses
is maintained at a level believed adequate by management to absorb estimated
probable losses in the loan and lease portfolio. Management's determination of
the adequacy of the allowance is based on a continual review of the loan and
lease portfolio, loan and lease loss experience, economic conditions, growth
and composition of the portfolio, and other relevant factors. As a result of
management's continual review, the allowance is adjusted through provisions
for loan and lease losses charged against income.
Premises and equipment--Land is recorded at cost. Premises and equipment are
recorded at cost and depreciated principally on the straight-line method with
annual rates varying from 2% to 10% for buildings and 10% to 35% for
equipment. Long-lived assets which are considered impaired are carried at fair
value and long-lived assets to be disposed of are carried at the lower of the
carrying amount or fair value less cost to sell. Maintenance and repairs are
charged to expense and betterments are capitalized.
Other real estate owned--Other real estate owned includes assets that have
been acquired in satisfaction of debts and bank branch premises held for sale.
Other real estate acquired in satisfaction of debts is recorded at fair value,
less estimated selling costs, and bank branch premises are recorded at the
lower of cost or fair value, less estimated selling costs, at the date of
transfer. Valuation adjustments required at the date of transfer for assets
acquired in satisfaction of debts are charged to the allowance for loan and
lease losses, whereas any valuation adjustments on premises are reported in
other expense. Subsequent to transfer, other real estate owned is carried at
the lower of cost or fair value, less estimated selling costs, based upon
periodic evaluations. Rental income from properties and gains on sales are
included in other income, and property expenses, which include carrying costs,
required valuation adjustments and losses on sales, are recorded in other
expense. At December 31, 1998 and 1997, other real estate amounted to $8,751
and $15,573, respectively.
Mortgage servicing--Fees related to the servicing of mortgage loans are
recorded as income when payments are received from mortgagors. Mortgage loans
held for sale to investors are carried at the lower of cost or market,
determined on an aggregate basis, based on outstanding firm commitments
received for such loans or on current market prices. Mortgage loans held for
sale amounted to $137,295 at December 31, 1998 and $74,948 at December 31,
1997.
Data processing services--Data processing and related revenues are accrued
and recognized when earned.
Revenues attributable to the licensing of software are generally recognized
upon delivery and performance of certain contractual obligations, provided
that no significant vendor obligations remain and collection of the resulting
receivable is deemed probable. Service revenues from customer maintenance fees
for ongoing customer support and product updates are recognized ratably over
the term of the maintenance period. Service revenues from training and
consulting are recognized when the services are performed. Conversion revenue
is recognized ratably over the contract period, which may exceed one year.
Direct costs associated with the production of computer software which will
be marketed or used in data processing operations are capitalized and
amortized on the straight-line method over the estimated economic life of the
product, generally four years. Such capitalized costs are periodically
evaluated for impairment and adjusted to net realizable value when impairment
is indicated. Direct costs associated with customer system conversions to the
data services operations are capitalized and amortized on the straight-line
method over the terms, generally five to seven years, of the related servicing
contract. Routine maintenance of software products including maintenance
required for the year 2000, design costs and development costs incurred prior
to establishment of a product's technological feasibility for software to be
sold, are expensed as incurred.
41
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Net unamortized costs at December 31 were:
1998 1997
------- -------
Software................................................. $55,655 $43,426
Conversions.............................................. 12,359 14,729
------- -------
Total.................................................... $68,014 $58,155
======= =======
Amortization expense was $18,340, $15,020, and $9,851, for 1998, 1997, and
1996, respectively.
Intangibles--Unamortized intangibles resulting from acquisitions consists of
goodwill, core deposit premiums, purchased data processing contract rights and
mortgage servicing rights . The Corporation recognizes as separate assets
rights to service mortgage loans when the loans are purchased or originated
and sold with servicing retained. Mortgage servicing rights are amortized over
the periods during which the corresponding mortgage servicing revenues are
anticipated to be generated. Purchased data processing contract rights
represent the costs to acquire the rights to data processing and software
distribution. Such costs are generally amortized over the average contract
lives, which range from 5 to 8 years. Goodwill is amortized on the straight-
line basis over periods ranging from 15 to 25 years while core deposit
premiums are amortized principally on an accelerated basis over periods
ranging up to 10 years. The Corporation continually evaluates whether later
events and circumstances have occurred to indicate that the carrying value of
intangibles should be reduced for possible impairment and utilizes estimates
of undiscounted net income over the remaining life to measure recoverability.
A valuation allowance is established through a charge to income to the extent
that the fair value of any stratum of its mortgage servicing rights is less
than its carrying value.
The Corporation also has negative goodwill included in other liabilities,
the majority of which arose from an acquisition in 1992. Negative goodwill
amounted to $5,932 and $7,494 at December 31, 1998 and 1997, respectively. The
negative goodwill is being accreted on a straight-line basis over a period of
10 years and amounted to $1,562, $1,562, and $1,568 in 1998, 1997, and 1996.
Long-term borrowings--The guaranteed preferred beneficial interest of the
Corporation's special purpose finance subsidiary which holds as its sole
asset, junior subordinated deferrable interest debentures issued by the
Corporation, is classified as long-term borrowings and shown net of its
related discount. The distributions, including the related accretion of
discount, are classified as interest expense for purposes of the Consolidated
Financial Statements.
Interest risk management instruments--As a service to customers and as part
of its asset/liability management activities, the Corporation may enter into
interest rate futures, forwards, swaps, floors, caps and option contracts.
These derivative financial instruments are carried at fair value unless the
instrument qualifies for hedge accounting treatment. Fair value adjustments on
risk management instruments carried at fair value are reflected in other
income. Gains and losses realized on futures and forward contracts qualifying
as hedges are deferred and amortized over the terms of the related assets or
liabilities and are included as adjustments to interest income or expense.
Settlement on interest rate swaps and option contracts are recognized over the
lives of the agreements as adjustments to interest income or expense.
The hedge accounting method is applied to interest rate swaps that meet the
hedge criteria which is discussed below. Under this method, accrued income or
expense associated with the swap is recognized as a component of the interest
income or expense of the hedged asset or liability. Unrealized gains and
losses are recognized on a basis that is consistent with the method of
accounting for the hedged asset or liability. Unrealized gains or losses are
not recognized for hedged assets or liabilities carried at amortized cost.
Unrealized gains and losses on derivative financial instruments which hedge
investment securities available for sale are reported as a component of
shareholders' equity, net of applicable income tax effects.
42
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The criteria to qualify an interest rate swap for the hedge accounting
method is as follows:
1. The swap must be designated as a hedge and reduce the interest rate risk
of the designated asset or liability.
2. The notional amount of the swap must be less than or equal to the
amortized cost of the asset or liability to be hedged.
3. The swap must achieve its intended objective of converting the yield on
the hedged asset or liability to the desired rate. This criteria is
assumed to have been met if the interest rate on the hedged asset or
liability is identical to the offsetting rate on the swap. If the two
rates are not identical, the correlation between the levels of the two
rates since inception of the swap must be measured to ensure that the
swap is meeting its intended objective.
If an interest risk management instrument is terminated or ceases to qualify
for the hedge accounting method, any realized or unrealized gain or loss at
that time is deferred and amortized over the remaining period of the original
hedge. Any subsequent realized or unrealized gains or losses on instruments
that no longer meet the hedge criteria are included in the determination of
net income. If the item being hedged is sold, any deferred or unrealized gain
or loss on the interest risk management instrument at the time of sale is
considered in the determination of the gain or loss on the sale. If the
interest risk management instrument is not terminated, it must be carried at
fair value on a prospective basis, with changes in fair value included in the
determination of periodic net income.
Cash flows from interest risk management instruments are reported in the
Consolidated Statements of Cash Flows as operating activities.
Foreign exchange contracts--Foreign exchange contracts include such
commitments as foreign currency spot, forward, future and option contracts.
Foreign exchange contracts and the premiums on options written or sold are
carried at market value, with realized and unrealized gains and losses
included in other income.
Earnings per share--In February 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." This statement established new standards for
computing and presenting earnings per share which was adopted by the
Corporation in the fourth quarter of 1997. Comparative earnings per share for
prior years and all interim periods presented conform with the computational
requirements of SFAS 128.
New accounting pronouncement--
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges typically allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate,
and assess the effectiveness of transactions that receive hedge accounting
treatment.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any
quarter after issuance. Statement 133 cannot be applied retroactively.
Statement 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 (and, at the
company's election, before January 1, 1998).
43
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The statement could increase volatility in earnings and other comprehensive
income. The Corporation believes that based on their existing derivative
instruments, the impact of adopting Statement 133 on its financial
statements will not be material. The Corporation has not determined the
timing or method of adoption.
2. Earnings Per Share
A reconciliation of the numerators and denominators of the basic and diluted
per share computations are as follows (dollars and shares in thousands, except
per share data):
Year Ended December 31, 1998
--------------------------------
Average Per-
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Income.................................... $301,323
Convertible Preferred Dividends............... (6,603)
--------
Basic Earnings Per Share
Income Available to Common Shareholders..... $294,720 105,810 $2.79
=====
Effect of Dilutive Securities
Convertible Preferred Stock................. 6,603 7,677
Stock Option, Restricted Stock and
Performance Plans.......................... -- 1,753
-------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders Plus
Assumed Conversions........................ $301,323 115,240 $2.61
=====
Year Ended December 31, 1997
--------------------------------
Average Per-
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Income.................................... $256,685
Convertible Preferred Dividends............... (5,671)
--------
Basic Earnings Per Share
Income Available to Common Shareholders..... $251,014 95,651 $2.62
=====
Effect of Dilutive Securities
Convertible Preferred Stock................. 5,671 7,208
8.5% Convertible Debt....................... 233 469
Stock Option, Restricted Stock and
Performance Plans.......................... -- 2,099
Forward Repurchase Contract................. -- 120
-------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders Plus
Assumed Conversions........................ $256,918 105,547 $2.43
=====
44
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Year Ended December 31, 1996
--------------------------------
Average Per-
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Income.................................... $206,635
Convertible Preferred Dividends............... (3,827)
--------
Basic Earnings Per Share
Income Available to Common Shareholders..... $202,808 95,629 $2.12
=====
Effect of Dilutive Securities
Convertible Preferred Stock................. 3,827 5,277
8.5% Convertible Debt....................... 1,161 2,400
Stock Option, Restricted Stock and
Performance Plans.......................... -- 1,724
Forward Repurchase Contract................. -- 4
-------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders Plus
Assumed Conversions........................ $207,796 105,034 $1.98
=====
Options to purchase shares of common stock not included in the computation
of diluted net income per share because the options' exercise price was
greater than the average market price of the common shares for the year ended
December 31, are as follows:
Grant Date Exercise Price 1998 1997 1996
- ---------- -------------- --------- ------- -------
06/05/96............................... $28.333 -- -- 27,071
12/12/96............................... 31.875 -- -- 789,050
10/01/97............................... 50.125 -- 3,500 --
12/11/97............................... 57.000 954,350 996,450 --
04/28/98............................... 57.625 59,000 -- --
06/11/98............................... 53.719 8,000 -- --
--------- ------- -------
Total Options Excluded from Earnings Per Share 1,021,350 999,950 816,121
========= ======= =======
3. Business Combinations
The Corporation has consummated the following business combinations during
the three years ended December 31, 1998:
Consideration
-------------------
Common Method of
Organization Date Consummated Cash Stock Accounting
- ------------ ----------------- -------- ---------- ----------
Moneyline Express.............. December 31, 1998 $ 6,750 -- Purchase
Advantage Bancorp, Inc......... April 1, 1998 -- 3,981,152 Pooling
Security Capital Corporation... October 1, 1997 375,806 12,324,210 Purchase
EastPoint Technology, Inc...... August 7, 1996 25,508 -- Purchase
Moneyline Express, Inc. ("Moneyline"), is a wholly-owned subsidiary of
Travelers Express Company, Inc. that specializes in electronic bill payment.
Moneyline provides consumer bill-payment processing to more than 700 financial
institution customers including M&I's home-banking customers. The Corporation,
through its Data Services Division, acquired certain assets of Moneyline in a
cash transaction accounted for as a purchase. The total purchase price is
contingent on the attainment of agreed-upon objectives.
45
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The April 1, 1998 merger of Advantage Bancorp, Inc. ("Advantage") with and
into the Corporation was a tax-free reorganization accounted for as a pooling
of interests. In accordance with the terms of the merger, each share of
Advantage Common Stock was converted into a right to receive 1.2 shares of the
Corporation's Common Stock.
The accompanying consolidated financial statements have been restated to
give effect to the merger with Advantage. Certain adjustments have been made
to conform the presentation of Advantage's information with that of the
Corporation. A reconciliation of net interest income and net income of the
Corporation as previously reported for that period in the accompanying
Consolidated Financial Statements as restated for the 1998 pooling of
interests is as follows:
Year Ended
December 31,
-----------------
1997 1996
-------- --------
(Unaudited)
Net Interest Income:
Corporation, as previously reported.................... $564,047 $505,719
Advantage Bancorp, Inc................................. 30,500 30,122
-------- --------
Combined............................................... $594,547 $535,841
======== ========
Net Income:
Corporation, as previously reported.................... $245,144 $203,430
Advantage Bancorp, Inc................................. 11,541 3,205
-------- --------
Combined............................................... $256,685 $206,635
======== ========
In conjunction with this transaction the Corporation recorded a
merger/restructuring charge of $23.4 million ($16.3 million after-tax). The
table below summarizes the merger/restructuring charge recorded on April 1,
1998:
$ in Millions
-------------
Severance & Benefits......................................... $15.4
Investment Advisor & Other Professional Fees................. 3.1
System Conversion & Contract Cancellation Fees............... 2.4
Facilities & Equipment....................................... 1.9
Other........................................................ .6
-----
Total Merger/Restructuring Charge........................ $23.4
=====
Severance and benefits include non-cash accelerated benefit vesting of $10.4
million for stock options, $1.2 million for an employee stock ownership plan
(ESOP) and $0.4 million for a bank incentive stock plan. A portion of the
expense was credited to additional paid-in capital. Executive employment
contract payouts were $1.9 million. Severance and retention payments amounted
to $1.5 million. Accrued employment contract and severance expenses included
costs for 114 employees that were not given permanent employment with the
Corporation subsequent to the merger in accordance with the approved plan for
the on-going activities of the combined company. Severance associated with
involuntary terminations was based on M&I's severance policies which was
communicated to all affected employees. All severance was paid in 1998.
Investment advisor fees were $2.0 million and other legal, accounting and
consulting fees were $1.1 million. All professional fees represent amounts
incurred to consummate the merger.
46
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
System conversion costs of $1.5 million represent costs associated with the
one time conversion and standardization of Advantage's records to M&I's data
processing systems. Contract cancellation fees mainly represent fees paid to
service bureaus for early termination of Advantage's long term data processing
contracts.
As part of the merger, duplicative branch, loan production and
administrative facilities were closed and will be sold and in the case of
leases, terminated. In addition, certain excess furniture, computer and other
equipment is in the process of being disposed of.
The plan for the on-going activities of the combined company is
substantially complete and there have not been any material adjustments to the
merger/restructuring charge.
Security Capital Corporation ("Security") was the parent of Security Bank
S.S.B., a community-oriented financial institution. At September 30, 1997,
Security had consolidated assets of approximately $3.6 billion and
consolidated total deposits of approximately $2.3 billion.
This merger was accounted for using the purchase method of accounting. Total
consideration to Security shareholders was approximately $860 million
consisting of cash and Common Stock of the Corporation. Identifiable
intangibles recorded in the transaction amounted to $48.7 million and
consisted of core deposit premiums which are being amortized on an accelerated
basis over approximately ten years and mortgage servicing rights. The amount
of goodwill recorded in the transaction amounted to $255.0 million and is
being amortized on a straight-line basis over twenty five years.
The merger with Security was an in-market acquisition which entailed a
significant amount of customer service and operating overlap. The plan for the
on-going activities of the combined company, as approved, included the
involuntary termination of certain Security employees across all groups,
closure of the majority of Security branch and operations facilities, and
termination of certain duplicative service contracts such as data processing
contracts. Severance associated with involuntary terminations was based on the
severance plan contained in the merger agreement which was communicated to all
affected employees.
The plan is substantially complete except for the disposal of 8 remaining
closed facilities and $4.0 million remaining employment contracts and
severance which will be paid over the terms of the severance agreements.
Such exit costs recognized as liabilities assumed in the merger consisted of
the following:
$ in Millions
-------------
Employment Contracts and Severance from Involuntary
Terminations............................................... $15.8
Lease Terminations/Buyouts.................................. 1.6
Service Contract Terminations/Buyouts (primarily data
processing)................................................ 1.2
-----
Total Liabilities Recognized for Exit Costs............. $18.6
=====
There have not been any material adjustments to the exit cost liabilities
assumed in the merger and there are no known unresolved issues that would
affect the purchase cost allocations.
EastPoint Technology, Inc., purchased in 1996, is a software development
company specializing in client/server technology. The allocation of the
purchase price to the various classes of assets was determined on the basis of
an opinion expressed by a nationally recognized independent appraisal firm.
The value determined for in-process research and development, where
technological feasibility had not yet been established or was not believed to
have an alternative future use, was immediately expensed while the values of
completed technology and other assets, including the resulting goodwill, are
being amortized over their estimated useful lives.
Acquired in-process research and development expensed during 1996 amounted
to $12.1 million and is included in other expense in the Consolidated
Statements of Income.
47
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The results of operations for the acquired companies accounted for as
purchases are included in the Consolidated Financial Statements from the dates
of acquisition. The information below presents, on a pro forma basis, certain
historical information for the Corporation, adjusted for the Security
transaction, as if the transaction had been consummated on the first of
January of the indicated year.
Year Ended December
31,
---------------------
1997 1996
---------- ----------
(Unaudited)
Pro Forma Corporation and Security
Total Revenues (Interest Income plus Other
Income)......................................... $2,042,753 $1,800,923
Net Income....................................... 218,829 202,056
Net Income Per Share
Basic.......................................... $ 2.03 $ 1.84
Diluted........................................ 1.90 1.73
The pro forma net income shown above for 1997 includes certain merger
related expenses incurred by Security prior to consummation of the merger.
Merger related expenses, net of gains from required branch divestitures,
incurred by Security in 1997, prior to the merger, were approximately $47.5
million on an after tax basis or approximately $0.41 on a diluted per share
basis.
4. Cash and Due from Banks
At December 31, 1998, $146,275 of cash and due from banks was restricted,
primarily due to requirements of the Federal Reserve System to maintain
certain reserve balances.
5. Other Short-term Investments
Other short-term investments at December 31 were:
1998 1997
------- -------
Commercial paper......................................... $21,400 $ 6,950
Interest bearing deposits in other banks................. 30,571 30,068
------- -------
Total other short-term investments................... $51,971 $37,018
======= =======
6. Securities
The book and market values of securities at December 31 were:
1998 1997
--------------------- ---------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Investment Securities Available
for Sale:
U.S. Treasury and government
agencies....................... $3,658,730 $3,723,703 $3,882,574 $3,930,884
States and political
subdivisions................... 147 148 485 487
Mortgage backed securities...... 153,892 154,306 31,449 31,816
Other........................... 145,614 171,264 212,501 245,429
---------- ---------- ---------- ----------
Total......................... $3,958,383 $4,049,421 $4,127,009 $4,208,616
========== ========== ========== ==========
Investment Securities Held to
Maturity:
U.S. Treasury and government
agencies....................... $ -- $ -- $ 168,665 $ 171,537
States and political
subdivisions................... 1,051,565 1,090,380 925,644 948,870
Other........................... 4,668 4,668 82,379 83,465
---------- ---------- ---------- ----------
Total......................... $1,056,233 $1,095,048 $1,176,688 $1,203,872
========== ========== ========== ==========
48
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The unrealized gains and losses of securities at December 31 were:
1998 1997
--------------------- ---------------------
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ---------- ---------- ----------
Investment Securities Available
for Sale:
U.S. Treasury and government
agencies....................... $72,791 $7,818 $64,861 $16,551
States and political
subdivisions................... 1 -- 3 1
Mortgage backed securities...... 489 75 367 --
Other........................... 25,831 181 33,227 299
------- ------ ------- -------
Total......................... $99,112 $8,074 $98,458 $16,851
======= ====== ======= =======
Investment Securities Held to
Maturity:
U.S. Treasury and government
agencies....................... $ -- $ -- $ 3,126 $ 254
States and political
subdivisions................... 38,906 91 23,542 316
Other........................... -- -- 1,240 154
------- ------ ------- -------
Total......................... $38,906 $ 91 $27,908 $ 724
======= ====== ======= =======
The book value and market value of securities by contractual maturity at
December 31, 1998 were:
Investment Securities Investment Securities
Available for Sale Held to Maturity
--------------------- ---------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Within one year.................. $1,316,165 $1,337,059 $ 56,683 $ 57,051
From one through five years...... 2,331,250 2,373,215 274,608 282,334
From five through ten years...... 167,256 169,894 340,026 354,671
After ten years.................. 143,712 169,253 384,916 400,992
---------- ---------- ---------- ----------
Total........................ $3,958,383 $4,049,421 $1,056,233 $1,095,048
========== ========== ========== ==========
The gross realized gains and losses amounted to $31,421 and $638 in 1998,
$14,976 and $10,849 in 1997, and $23,045 and $7,574 in 1996, respectively.
At December 31, 1998, securities with a value of approximately $859,418 were
pledged to secure public deposits, short-term borrowings, and for other
purposes required by law.
During 1998 and 1997, approximately $259 million and $218 million,
respectively, of adjustable rate mortgage loans (ARMs) were securitized and
transferred to investment securities available for sale. The Corporation has
agreed to guarantee the first 4% of the loan pools securitized through
government agencies against potential loss. Since inception of the program,
approximately $1,155 million of ARMs have been securitized by M&I and no
losses have been incurred. These are noncash transactions for purposes of the
Consolidated Statements of Cash Flows.
49
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
7. Loans and Leases
Loans and Leases at December 31 were:
1998 1997
----------- -----------
Commercial, financial, and agricultural.......... $ 4,077,837 $ 3,395,227
Real estate:
Construction................................... 425,442 458,670
Residential mortgage........................... 4,045,022 4,146,416
Commercial mortgage............................ 3,667,924 3,450,897
Personal......................................... 1,166,541 1,161,608
Lease financing.................................. 613,400 489,094
----------- -----------
Total loans and leases....................... $13,996,166 $13,101,912
=========== ===========
The Corporation's lending activities are concentrated primarily in the
Midwest. Approximately 4% of its portfolio consists of loans granted to
customers located in Arizona. The Corporation had $0.3 million in foreign
credits at December 31, 1998. The Corporation's loan portfolio consists of
business loans extending across many industry types, as well as loans to
individuals. As of December 31, 1998, total loans to any group of customers
engaged in similar activities and having similar economic characteristics, as
defined by standard industrial classifications, did not exceed 10% of total
loans.
The Corporation evaluates the credit risk of each customer on an individual
basis and, where deemed appropriate, collateral is obtained. Collateral varies
by individual loan customer but may include accounts receivable, inventory,
real estate, equipment, deposits, personal and government guaranties, and
general security agreements. Access to collateral is dependent upon the type
of collateral obtained. On an on-going basis, the Corporation monitors its
collateral and the collateral value related to the loan balance outstanding.
An analysis of loans outstanding to directors and officers, including their
related interests, of the Corporation and its significant subsidiaries for
1998 is presented below. All of these loans were made in the ordinary course
of business with normal credit terms, including interest rates and collateral.
The beginning balance has been adjusted to reflect the activity of newly-
appointed directors and executive officers.
Loans to Directors and Executive Officers:
Balance, beginning of year.................................... $ 170,408
New loans..................................................... 194,539
Repayments.................................................... (125,459)
---------
Balance, end of year.......................................... $ 239,488
=========
8. Allowance for Loan and Lease Losses
An analysis of the allowance for loan and lease losses follows:
1998 1997 1996
-------- -------- --------
Balance, beginning of year.................. $208,651 $161,659 $166,815
Allowance of banks acquired................. -- 42,773 --
Provision charged to expense................ 27,090 17,633 15,634
Loan securitization transfer................ -- -- (440)
Charge-offs................................. (20,945) (21,502) (28,540)
Recoveries.................................. 11,256 8,088 8,190
-------- -------- --------
Balance, end of year........................ $226,052 $208,651 $161,659
======== ======== ========
50
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
As of December 31, 1998 and 1997, nonaccrual loans and leases totaled
$101,346 and $66,945, respectively.
At December 31, 1998 and 1997 the Corporation's recorded investment in
impaired loans and leases and the related valuation allowance are as follows:
1998 1997
-------------------- --------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
Total impaired loans and leases
(Nonaccrual and renegotiated)....... $102,324 $ 68,283
Loans and leases excluded from
individual evaluation............... (39,655) (39,827)
-------- --------
Impaired loans evaluated............. $ 62,669 $ 28,456
======== ========
Valuation allowance required......... $ 4,132 $836 $ 6,124 $2,666
No valuation allowance required...... 58,537 -- 22,332 --
-------- ---- -------- ------
Impaired loans evaluated............. $ 62,669 $836 $ 28,456 $2,666
======== ==== ======== ======
The recorded investment in impaired loans for which no allowance is required
is net of applications of cash interest payments and net of previous direct
writedowns of $4,813 in 1998 and $6,137 in 1997 against the loan balance
outstanding. The required valuation allowance is included in the allowance for
loan and lease losses in the Consolidated Balance Sheets.
The average recorded investment in total impaired loans and leases for the
years ended December 31, 1998 and 1997 amounted to $81,154 and $66,285,
respectively.
Interest payments received on impaired loans and leases are recorded as
interest income unless collection of the remaining recorded investment is
doubtful at which time payments received are recorded as reductions of
principal. Interest income recognized on total impaired loans and leases
amounted to $6,808 in 1998, $3,678 in 1997, and $6,585 in 1996. The gross
income that would have been recognized had such loans and leases been
performing in accordance with their original terms would have been $8,795 in
1998, $6,328 in 1997, and $10,074 in 1996.
9. Premises and Equipment
The composition of premises and equipment at December 31 was:
1998 1997
-------- --------
Land................................................... $ 46,557 $ 45,823
Buildings and leasehold improvements................... 312,349 295,350
Furniture and equipment................................ 405,303 369,353
-------- --------
764,209 710,526
Less accumulated depreciation.......................... 403,864 359,103
-------- --------
Total premises and equipment....................... $360,345 $351,423
======== ========
Depreciation expense was $66,107 in 1998, $59,254 in 1997, and $53,726 in
1996.
The Corporation leases certain of its facilities and equipment. Rent expense
under such operating leases was $39,338 in 1998, $30,723 in 1997, and $26,263
in 1996, respectively.
51
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The future minimum lease payments under operating leases that have initial
or remaining noncancellable lease terms in excess of one year for 1999 through
2003 are $15,902, $11,465, $8,673, $7,017, and $6,477, respectively.
10. Deposits
The composition of deposits at December 31 was:
1998 1997
----------- -----------
Noninterest bearing demand....................... $ 2,929,195 $ 2,753,320
Savings and NOW.................................. 6,768,523 5,858,845
Other time deposits $100 and over................ 1,508,619 1,463,643
Other time deposits under $100................... 4,713,582 4,944,520
----------- -----------
Total deposits............................... $15,919,919 $15,020,328
=========== ===========
At December 31, 1998, the scheduled maturities for other time deposits were:
1999........................................................... $4,932,838
2000........................................................... 648,233
2001........................................................... 224,404
2002........................................................... 85,476
2003 and thereafter............................................ 331,250
----------
$6,222,201
==========
11. Short-term Borrowings
Short-term borrowings at December 31 were:
1998 1997
---------- ----------
Funds purchased and security repurchase
agreements....................................... $1,712,165 $1,486,665
U.S. Treasury demand notes........................ 58,618 229,245
Commercial paper.................................. 60,162 109,586
Current maturities of long-term borrowings........ 242,735 204,322
Other............................................. 3,605 17,268
---------- ----------
Total short-term borrowings................... $2,077,285 $2,047,086
========== ==========
Unused lines of credit, primarily to support commercial paper borrowings,
were $40,000 at December 31, 1998 and 1997, respectively.
52
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
12. Long-term Borrowings
Long-term borrowings at December 31 were:
1998 1997
---------- ----------
Corporation:
6.375% subordinated notes due in 2003.............. $ 99,654 $ 99,590
Medium-term Series B, C and D notes................ 101,930 103,680
7.65% cumulative company-obligated mandatorily
redeemable capital trust pass-through securities.. 199,096 199,063
Other.............................................. 13,090 15,676
Subsidiaries:
Borrowings from Federal Home Loan Bank (FHLB):
Floating rate advances........................... 300,000 350,000
Fixed rate advances.............................. 280,487 287,677
Nonrecourse notes.................................. 26,830 27,704
9.75% obligation under capital lease due through
2006.............................................. 3,825 4,145
Other.............................................. 12,305 12,323
---------- ----------
1,037,217 1,099,858
Less current maturities............................ 242,735 204,322
---------- ----------
Total long-term borrowings..................... $ 794,482 $ 895,536
========== ==========
The 6.375% subordinated notes are not redeemable prior to maturity and
qualify as "Tier 2" or supplementary capital for regulatory capital purposes.
Interest is payable semiannually.
The Corporation has filed registration statements with the Securities and
Exchange Commission to issue medium-term unsecured and unsubordinated series
notes. These issues may have maturities which range from 9 months to 30 years
from the date of issue, at a fixed or floating rate.
At December 31, 1998, there were $27,130 of medium-term Series C notes
outstanding. The medium-term Series C notes have fixed interest rates of 6.26%
to 6.75% and mature at various amounts and times through 2002. No additional
borrowings may occur under the Series C notes. At December 31, 1998, medium-
term Series D notes outstanding amounted to $74,800 with fixed interest rates
of 6.11% to 6.64%. Series D notes mature at various times and amounts in 1999
through 2002. Approximately $75.2 million of unissued Series D notes are
remaining and available to be issued in the future.
In December 1996, the Corporation formed M&I Capital Trust A (the "Trust")
and issued $200 million in liquidation or principal amount of cumulative
preferred capital securities. Holders of the capital securities are entitled
to receive cumulative cash distributions at an annual rate of 7.65% payable
semiannually.
Concurrently with the issuance of the capital securities, the Trust invested
the proceeds, together with the consideration paid by the Corporation for the
common interest in the Trust, in junior subordinated deferrable interest
debentures ("subordinated debt") issued by the Corporation. The subordinated
debt, which represents the sole asset of the Trust, bears interest at an
annual rate of 7.65% payable semiannually and matures on December 1, 2026.
The subordinated debt is junior in right of payment to all present and
future senior indebtedness of the Corporation. The Corporation may redeem the
subordinated debt in whole or in part at any time on or after December 1, 2006
at specified call premiums, and at par on or after December 1, 2016. In
addition, in certain circumstances the subordinated debt may be redeemed at
par upon the occurrence of certain events. The Corporation's right to redeem
the subordinated debt is subject to regulatory approval.
53
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The Corporation has the right, subject to certain conditions, to defer
payments of interest on the subordinated debt for extension periods, each
period not exceeding ten consecutive semiannual periods. As a consequence of
the Corporation's extension of the interest payment period, distributions on
the capital securities would be deferred. In the event the Corporation
exercises its right to extend an interest payment period, the Corporation is
prohibited from making dividend or any other equity distributions during such
extension period.
The payment of distributions, liquidation of the Trust or payment upon the
redemption of the capital securities are guaranteed by the Corporation.
The Corporation, as owner of the common interest in the Trust, has the right
at any time to terminate the Trust, subject to certain conditions. In
circumstances other than maturity or redemption of the subordinated debt, the
subordinated debt would be distributed to the holders of the Trust securities
on a pro rata basis in liquidation of the holders' interests in the Trust.
The capital securities qualify as "Tier 1" capital for regulatory capital
purposes.
Fixed rate FHLB advances were assumed in conjunction with the April 1, 1998
Advantage merger and mature at various times in 1999 through 2007. A portion
of the advances are subject to periodic principal payments. $28.5 million may
be repaid without penalty at six month intervals. All other advances are
subject to a prepayment penalty if they are repaid prior to maturity.
Borrowings from FHLB were also assumed in conjunction with the October 1, 1997
Security merger.
The floating rate advances mature in increments of $50 million at various
times in 1999 through 2001. The interest rate is reset monthly based on the
London Interbank Offered Rate (LIBOR). One floating rate advance in the amount
of $50 million is callable by FHLB semiannually after November 1997 upon ten
days notice. The fixed rate advances have interest rates which range from
5.03% to 8.86% and mature at various times in 1999 through 2012. A portion of
the fixed rate advances are subject to periodic principal payments. Fixed rate
advances in the amount of $100 million are callable every three months
beginning in February 1998 upon five days notice. A portion of the FHLB
borrowings can be prepaid.
The Corporation is required to maintain unencumbered first mortgage loans
and mortgage-related securities such that the outstanding balance of FHLB
advances does not exceed 60% of the book value of this collateral. In
addition, a portion of these advances are collaterized by all FHLB stock.
The nonrecourse notes are reported net of prepaid interest and represent
borrowings by the leasing subsidiary from banks and other financial
institutions. These notes have a weighted average interest rate of 8.44% at
December 31, 1998 and are due in installments over varying periods through
2005. Lease financing receivables at least equal to the amount of the notes
are pledged as collateral.
During 1997, $16,819 of the Corporation's 8.5% convertible subordinated
notes were converted by the holder into 1,922,114 shares of the Corporation's
common stock. The common stock acquired by the conversions of the notes were
exchanged for 168,185 shares of the Corporation's Series A convertible
preferred stock. These are noncash transactions for purposes of the
Consolidated Statements of Cash Flows.
Scheduled maturities of long-term borrowings are: $313,874, $139,665,
$28,638, and $102,376 for 2000 through 2003, respectively.
13. Shareholders' Equity
The Corporation has 5,000,000 shares of preferred stock authorized, of which
the Board of Directors has designated 2,000,000 shares as Series A
convertible, with a $100 value per share for conversion purposes. Series
54
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
A is nonvoting preferred stock. The same cash dividends will be paid on Series
A as would have been paid on the common stock exchanged for Series A. Except
under limited circumstances, the holder may not sell, transfer or otherwise
dispose of stock acquired by conversion, and then, only under prescribed
conditions and subject to the Corporation's right of first refusal.
The holder has the option to convert Series A into common stock at the same
ratio that the common stock was exchanged for Series A. The Corporation has
issued 685,314 shares of its Series A convertible preferred stock in exchange
for 7,677,185 shares of common stock.
The preferred stock is treated as a common stock equivalent in all
applicable per share calculations.
In 1998, the Corporation began sponsoring a deferred compensation plan for
its non-employee directors and the non-employee directors of its affiliates.
Participants may elect to have their deferred fees used to purchase M&I common
stock with dividend reinvestment. Such shares will be distributed to plan
participants in accordance with the plan provisions. At December 31, 1998,
246,854 shares of M&I common stock were held in a grantor trust. The aggregate
cost of such shares is included in Deferred Compensation as a reduction of
shareholders' equity in the Consolidated Balance Sheets and amounted to
$12,608 at December 31, 1998.
In conjunction with the Security merger, the Corporation assumed certain
deferred compensation and nonqualified retirement plans for former directors
and executive officers of Security. At December 31, 1998 and 1997, 119,069 and
157,821 common shares of M&I Stock were maintained in a grantor trust with
such shares to be distributed to plan participants in accordance with the
provisions of the plans. The aggregate cost of such shares of $5,065 and
$6,166 at December 31, 1998 and 1997, respectively is included in Deferred
Compensation as a reduction of shareholders' equity in the Consolidated
Balance Sheets.
Federal banking regulatory agencies have established capital adequacy rules
which take into account risk attributable to balance sheet assets and off-
balance sheet activities. All banks and bank holding companies must meet a
minimum total risk-based capital ratio of 8%. Of the 8% required, at least
half must be comprised of core capital elements defined as Tier 1 capital. The
federal banking agencies also have adopted leverage capital guidelines which
banking organizations must meet. Under these guidelines, the most highly rated
banking organizations must meet a minimum leverage ratio of at least 3% Tier 1
capital to total assets, while lower rated banking organizations must maintain
a ratio of at least 4% to 5%. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Consolidated Financial Statements.
At December 31, 1998 and 1997, the most recent notification from the Federal
Reserve Board categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
Corporation's category.
To be well capitalized under the regulatory framework, the Tier 1 capital
ratio must meet or exceed 6%, the Total capital ratio must meet or exceed 10%
and the leverage ratio must meet or exceed 5%.
55
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The Corporation's risk-based capital and leverage ratios are as follows ($
in millions):
Risk-Based Capital Ratios
----------------------------------------------------
As of December 31, 1998 As of December 31, 1997
-------------------------- ------------------------
Amount Ratio Amount Ratio
---------------- --------- -------------- ---------
Tier 1 capital........... $ 2,059.9 12.78% $ 1,821.7 12.34%
Tier 1 capital adequacy
minimum requirement..... 644.8 4.00 590.5 4.00
---------------- --------- -------------- ---------
Excess................... $ 1,415.1 8.78% $ 1,231.2 8.34%
================ ========= ============== =========
Total capital............ $ 2,341.7 14.53% $ 2,106.5 14.27%
Total capital adequacy
minimum requirement..... 1,289.6 8.00 1,180.9 8.00
---------------- --------- -------------- ---------
Excess................... $ 1,052.1 6.53% $ 925.6 6.27%
================ ========= ============== =========
Risk-adjusted assets..... $ 16,120.5 $ 14,761.7
================ ==============
Leverage Ratio
----------------------------------------------------
As of December 31, 1998 As of December 31, 1997
-------------------------- ------------------------
Amount Ratio Amount Ratio
---------------- --------- -------------- ---------
Tier 1 capital to
adjusted total assets... $ 2,059.9 9.86% $ 1,821.7 9.21%
Minimum leverage adequacy
requirement............. 626.9-1,044.8 3.00-5.00 593.5-989.2 3.00-5.00
---------------- --------- -------------- ---------
Excess................... $1,433.0-1,015.1 6.86-4.86% $1,228.2-832.5 6.21-4.21%
================ ========= ============== =========
Adjusted average total
assets.................. $ 20,896.2 $ 19,784.3
================ ==============
All of the Corporation's banking subsidiaries' risk-based capital and
leverage ratios meet or exceed the defined minimum requirements, and have been
deemed well capitalized as of December 31, 1998 and 1997. The following table
presents the risk-based capital ratios for the Corporation's significant
banking subsidiaries:
Tier
Subsidiary 1 Total Leverage
---------- ----- ----- --------
M&I Marshall & Ilsley Bank
December 31, 1998................................ 9.42% 10.67% 7.14%
December 31, 1997................................ 10.56 11.85 7.95
M&I Bank of Southern Wisconsin
December 31, 1998................................ 9.23 10.48 7.47
December 31, 1997................................ 9.65 10.90 7.70
Banking subsidiaries are restricted by banking regulations from making
dividend distributions above prescribed amounts and are limited in making
loans and advances to the Corporation. At December 31, 1998, the retained
earnings of subsidiaries available for distribution as dividends without
regulatory approval was approximately $139.2 million.
14. Income Taxes
Total income tax expense for the years ended December 31, 1998, 1997, and
1996 was allocated as follows:
1998 1997 1996
-------- -------- --------
Income before income taxes................. $163,962 $131,487 $111,314
Shareholders' Equity:
Compensation expense for tax purposes in
excess of amounts recognized for
financial reporting purposes............ (13,846) (15,704) (6,527)
Unrealized gains on investment securities
available for sale...................... 3,427 13,654 2,621
-------- -------- --------
$153,543 $129,437 $107,408
======== ======== ========
56
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The current and deferred portions of the provision for income taxes were:
1998 1997 1996
-------- -------- --------
Current:
Federal.................................... $140,649 $109,942 $ 99,226
State...................................... 20,556 9,766 13,274
-------- -------- --------
161,205 119,708 112,500
Deferred:
Federal.................................... 3,565 4,847 (1,682)
State...................................... (808) 6,932 496
-------- -------- --------
2,757 11,779 (1,186)
-------- -------- --------
Total provision for income taxes......... $163,962 $131,487 $111,314
======== ======== ========
The following is a reconciliation between the amount of the provision for
income taxes and the amount of tax computed by applying the statutory Federal
income tax rate (35%):
1998 1997 1996
-------- -------- --------
Tax computed at statutory rates............ $162,850 $135,860 $111,282
Increase (decrease) in taxes resulting
from:
Federal tax-exempt income................ (15,836) (13,224) (9,547)
State income taxes, net of Federal tax
benefit................................. 13,082 10,853 9,079
Other.................................... 3,866 (2,002) 500
-------- -------- --------
Total provision for income taxes....... $163,962 $131,487 $111,314
======== ======== ========
The tax effects of temporary differences that give rise to significant
elements of the deferred tax assets and deferred tax liabilities at December
31, are as follows:
1998 1997
-------- --------
Deferred tax assets:
Deferred compensation.............................. $ 29,856 $ 29,227
Allowance for loan and lease losses................ 82,922 74,853
Accrued postretirement benefits.................... 23,830 21,483
Other.............................................. 44,229 45,993
-------- --------
Total deferred tax assets before valuation
allowance....................................... 180,837 171,556
Valuation allowance................................ (11,341) (10,467)
-------- --------
Net deferred tax assets.......................... 169,496 161,089
Deferred tax liabilities:
Lease revenue reporting............................ 61,317 40,754
Deferred expense, net of unearned income........... 22,339 19,953
Premises and equipment, principally due to
depreciation...................................... 15,090 18,115
Pension funding versus expense..................... 5,234 5,105
Purchase accounting adjustments.................... 21,039 39,724
Unrealized gains and losses........................ 32,936 29,509
Other.............................................. 28,282 25,592
-------- --------
Total deferred tax liabilities................... 186,237 178,752
-------- --------
Net deferred tax liability....................... $ 16,741 $ 17,663
======== ========
57
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The valuation allowance has been provided to reduce certain state deferred
tax assets to the amount of tax benefit management believes it will more
likely than not realize.
The amount of income tax expense related to net securities gains or losses
amounted to $11,136, $1,630, and $6,441, in 1998, 1997, and 1996,
respectively.
15. Stock Option and Restricted Stock Plans
The Corporation has Executive Stock Option and Restricted Stock Plans which
provide for the grant of nonqualified and incentive stock options, stock
appreciation rights and rights to purchase restricted shares to key employees
at prices ranging from not less than the par value of the common shares to the
market value of the shares at the date of grant.
The nonqualified and incentive stock option plans generally provide for the
grant of options to purchase shares of the Corporation's common stock for a
period of ten years from the date of grant. Options granted generally become
exercisable over a period of two years from the date of grant however, options
granted to Directors of the Corporation vest immediately and options granted
after 1996 provide accelerated or immediate vesting for grants to individuals
who meet certain age and years of service criteria at the date of grant.
Activity relating to nonqualified and incentive stock options was:
Weighted-
Average
Number Option Price Exercise
of Shares Per Share Price
---------- ------------ ---------
Shares under option at December 31,
1995................................... 6,590,960 $ 5.19-26.19 $16.31
Options granted......................... 881,392 25.63-31.88 31.33
Options lapsed or surrendered........... (70,038) 8.54-26.19 18.90
Options exercised....................... (1,040,700) 5.19-26.19 12.85
---------- ------------ ------
Shares under option at December 31,
1996................................... 6,361,614 $ 5.19-31.88 $18.93
Options granted......................... 1,635,755 11.56-57.00 40.10
Options lapsed or surrendered........... (35,338) 19.25-31.88 28.97
Options exercised....................... (1,862,429) 5.19-31.88 13.53
---------- ------------ ------
Shares under option at December 31,
1997................................... 6,099,602 $ 7.67-57.00 $26.19
Options granted......................... 1,312,150 45.88-57.63 52.06
Options lapsed or surrendered........... (59,003) 7.67-57.63 49.57
Options exercised....................... (1,102,814) 7.67-40.13 15.01
---------- ------------ ------
Shares under option at December 31,
1998................................... 6,249,935 $ 7.67-57.63 $33.38
========== ============ ======
58
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The range of options outstanding at December 31, 1998 were:
Weighted-
Average
Weighted-Average Remaining
Number of Shares Exercise Price Contractual
Price ----------------------- ---------------- Life
Range Outstanding Exercisable Outstanding Exercisable (In Years)
----- ----------- ----------- ----------- ----------- -----------
$ 5-12 429,783 429,783 $10.75 $10.75 1.3
13-18 889,770 889,770 16.21 16.21 3.0
19-25 1,350,412 1,350,412 20.73 20.73 5.3
26-32 1,278,470 1,278,470 29.34 29.34 7.5
33-50 39,000 31,500 39.24 37.82 8.6
Over $50 2,262,500 779,600 54.15 55.46 9.5
--------- --------- ------ ------ ---
6,249,935 4,759,535 $33.38 $27.10 6.7
========= ========= ====== ====== ===
Options exercisable at December 31, 1997 and 1996 were 4,845,927 and
5,199,113, respectively. The weighted average exercise price for options
exercisable was $20.26 at December 31, 1997 and $16.47 at December 31, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation." This standard established financial accounting and
reporting standards for stock based employee compensation plans.
SFAS 123 defines a fair value based method of accounting for employee stock
option or similar equity instruments. Under the fair value based method,
compensation cost is measured at the grant date based on the fair value of the
award using an option-pricing model that takes into account the stock price at
the grant date, the exercise price, the expected life of the option, the
volatility of the underlying stock, expected dividends and the risk-free
interest rate over the expected life of the option. The resulting compensation
cost is recognized over the service period, which is usually the vesting
period.
Compensation cost can also be measured and accounted for using the intrinsic
value based method of accounting prescribed in Accounting Principles Board
Opinion No. 25 (APBO 25), "Accounting for Stock Issued to Employees." Under
the intrinsic value based method, compensation cost is the excess, if any, of
the quoted market price of the stock at grant date or other measurement date
over the amount paid to acquire the stock.
The largest difference between SFAS 123 and APBO 25 as it relates to the
Corporation is the amount of compensation cost attributable to the
Corporation's fixed stock option plans. Under APBO 25 no compensation cost is
recognized for fixed stock option plans because the exercise price is equal to
the quoted market price at the date of grant and therefore there is no
intrinsic value. SFAS 123 compensation cost would equal the calculated fair
value of the options granted.
As permitted by SFAS 123, the Corporation continues to measure compensation
cost for such plans using the accounting method prescribed by APBO 25.
59
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Had compensation cost for the Corporation's options granted after January 1,
1995 been determined consistent with SFAS 123, the Corporation's net income
and earnings per share would have been reduced to the following pro forma
amounts:
1998 1997 1996
-------- -------- --------
Net income
As reported................................. $301,323 $256,685 $206,635
Pro forma................................... 292,227 251,310 203,896
Basic earnings per share
As reported................................. $ 2.79 $ 2.62 $ 2.12
Pro forma................................... 2.70 2.57 2.09
Diluted earnings per share
As reported................................. $ 2.61 $ 2.43 $ 1.98
Pro forma................................... 2.54 2.39 1.96
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes option pricing model. The resulting compensation cost
was amortized over the vesting period. The fair value of options assumed in
the Security merger were included in the determination of total consideration.
No compensation cost associated with such options was included in determining
pro forma net income in 1998 and 1997.
The grant date fair values and assumptions used to determine such value are
as follows:
1998 1997 1996
----------- ----------- -----------
Weighted-average grant date fair
value........................... $ 13.31 $ 14.80 $ 8.17
Assumptions:
Risk-free interest rates....... 4.53-5.88% 5.75-6.81% 5.48-6.91%
Expected volatility............ 18.38-22.01% 17.03-18.47% 19.30-20.72%
Expected term (in years)....... 6.0 6.0 6.0
Expected dividend yield........ 1.69% 1.42% 2.25%
Activity relating to the Corporation's Restricted Purchase Rights was:
December 31
---------------------------
1998 1997 1996
-------- -------- -------
Restricted stock purchase rights
outstanding--Beginning of Year............ 10,500 15,000 5,000
Restricted stock purchase rights granted... 20,250 14,000 19,000
Restricted stock purchase rights exercised. (30,750) (18,500) (9,000)
-------- -------- -------
Restricted stock purchase rights
outstanding--End of Year.................. -- 10,500 15,000
Weighted-average grant date market value... $ 56.40 $ 54.08 $ 30.08
Aggregate compensation expense............. $ 556 $ 474 $ 444
Unamortized deferred compensation.......... $ 1,964 $ 966 $ 825
Restrictions on stock issued pursuant to the exercise of stock purchase
rights lapse within a seven year period. Accordingly, the compensation related
to issuance of the rights is deferred and amortized over the vesting period.
Unamortized deferred compensation is reflected as a reduction of shareholders'
equity.
Shares reserved for the granting of options and stock purchase rights at
December 31, 1998 were 3,363,939.
60
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The Corporation also has a Long-term Incentive Plan. Under the plan,
performance units may be awarded from time to time. Once awarded, additional
performance units will be credited to each participant based on dividends paid
by the Corporation on its common stock. At the end of a designated vesting
period, participants will receive an amount equal to some percent (0%-275%) of
the initial performance units credited plus those additional units credited as
dividends based on the established performance criteria. Units awarded to
certain executives of the Corporation were 103,250 in 1998, 104,750 in 1997,
and 88,650 in 1996. The vesting period is three years from the date the
performance units were awarded. At December 31, 1998, based on the performance
criteria, without regard to the vesting, approximately $5,679 would be due to
the participants under the 1997 and 1998 awards. In addition, the amount
payable to participants under the 1996 award which was fully vested, was
$4,147 at December 31, 1998.
Compensation expense in 1998 associated with the accelerated vesting of
Advantage's stock options outstanding amounted to $10,372 which is included in
Merger/Restructuring in the Consolidated Statements of Income.
16. Employee Retirement and Health Plans
The Corporation has a defined contribution retirement plan and an incentive
savings plan for substantially all employees. The retirement plan provides for
a guaranteed contribution to eligible participants equal to 2% of
compensation. At the Corporation's option, a profit sharing amount may also be
contributed and may vary from year to year up to a maximum of 6% of eligible
compensation. Under the incentive savings plan, employee contributions up to
6% of eligible compensation are matched up to 50% by the Corporation based on
the Corporation's return on equity as defined by the plan. Total expense
relating to these plans was $32,108, $31,804, and $24,410 in 1998, 1997, and
1996, respectively.
The Corporation also has supplemental retirement plans to provide retirement
benefits to certain of its key executives. Total expense relating to these
plans amounted to $1,393 in 1998, $1,567 in 1997, and $1,456 in 1996.
Security sponsored a trusteed defined benefit pension plan, and defined
contribution ESOP plan for substantially all of its employees. In conjunction
with the merger, such plans were terminated for accounting purposes. During
1998, distributions of approximately $91.1 million were made to former
participants of the plans in the form of lump sum payments and annuity
purchases. Final distributions to former participants in the plan are in the
process of being completed. Security also sponsored a defined contribution
401(k) plan that merged with the Corporation's incentive savings plan in
October of 1998.
Advantage also sponsored a defined contribution ESOP plan for substantially
all of its employees. In conjunction with the merger, such plan was terminated
and distributions were made to the former participants in the plan. Advantage
sponsored a defined contribution 401(k) plan that merged with the
Corporation's incentive savings plan at October 1, 1998. Total expense
relating to these plans amounted to $127, $319, and $325 in 1998, 1997 and
1996, respectively. In addition, expense associated with the termination of
the ESOP in 1998 amounted to $1,246 which is included in Merger/Restructuring
in the Consolidated Statements of Income.
The Corporation sponsors a defined benefit health plan that provides health
care benefits to eligible current and retired employees. Eligibility for
retiree benefits is dependent upon age, years of service, and participation in
the health plan during active service. The plan is contributory and in 1997
the plan was amended. Employees hired or retained from mergers after September
1, 1997 will be granted access to the Corporation's plan upon retirement
however, such retirees must pay 100% of the cost of health care benefits. The
plan continues to contain other cost-sharing features such as deductibles and
coinsurance. The plan is not funded.
61
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The changes during the year of the accumulated postretirement benefit
obligation (APBO) for retiree health benefits are as follows:
1998 1997
------- -------
APBO, beginning of year................................ $51,702 $43,495
Service cost........................................... 3,475 2,794
Interest cost on APBO.................................. 3,804 3,158
Plan amendments........................................ -- (2,264)
Actuarial (gains) / losses............................. (8,268) 4,490
Change due to acquisitions/divestitures................ (58) 1,154
Benefits paid.......................................... (1,479) (1,125)
------- -------
APBO, end of year...................................... 49,176 51,702
Unrecognized net gain / (loss)......................... 5,100 (3,168)
Unrecognized prior service cost........................ 1,992 2,197
------- -------
Accrued postretirement benefit cost.................... $56,268 $50,731
======= =======
Weighted average discount rate used in determining
APBO.................................................. 7.00% 7.50%
======= =======
The assumed health care cost trend for 1999 was 6.75%. The rate was assumed
to decrease gradually to 5.00% for 2006 and remain at that level thereafter.
Net periodic postretirement benefit cost for the years ended December 31,
1998, 1997, and 1996 includes the following components:
1998 1997 1996
------ ------ ------
Service cost...................................... $3,475 $2,794 $3,553
Interest on APBO.................................. 3,804 3,158 3,322
Net amortization and deferral..................... (263) (89) 146
------ ------ ------
$7,016 $5,863 $7,021
====== ====== ======
The assumed health care cost trend rate has a significant effect on the
amounts reported for the health care plans. A one percentage point change on
assumed health care cost trend rates would have the following effects:
One One
Percentage Percentage
Point Point
Increase Decrease
---------- ----------
Effect on total of service and interest cost
components....................................... $1,416 $(1,146)
Effect on postretirement benefit obligation....... 7,946 (6,430)
62
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
17. Financial Instruments with Off-Balance Sheet Risk
Financial instruments with off-balance sheet risk at December 31 were:
1998 1997
---------- ----------
Financial instruments whose amounts represent
credit risk:
Commitments to extend credit:
To commercial customers....................... $5,684,137 $5,036,705
To individuals................................ 1,368,879 1,233,196
Standby letters of credit, net of
participations................................. 426,905 383,510
Commercial letters of credit.................... 16,361 14,533
Mortgage loans sold with recourse............... 2,502 3,419
Financial instruments whose amounts exceed the
amount of credit risk:
Foreign exchange contracts:
Commitments to purchase foreign exchange...... 506,191 418,871
Commitments to deliver foreign exchange....... 510,690 421,575
Options written/purchased..................... 7,603 5,338
Interest risk management instruments:
Interest rate swaps............................. 1,017,000 665,000
Interest rate floor............................. 25,000 25,000
Interest rate cap............................... 25,000 25,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates and may require payment of a
fee. The majority of the Corporation's commitments to extend credit generally
provide for the interest rate to be determined at the time the commitment is
utilized. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
The Corporation evaluates each customer's credit worthiness on an individual
basis. Collateral obtained, if any, upon extension of credit, is based upon
management's credit evaluation of the customer. Collateral requirements and
the ability to access collateral is generally similar to that required on
loans outstanding as discussed in Note 7.
Standby and commercial letters of credit are contingent commitments issued
by the Corporation to support the financial obligations of a customer to a
third party. Standby letters of credit are issued to support public and
private financing, and other financial or performance obligations of
customers. Commercial letters of credit are issued to support payment
obligations of a customer as buyer in a commercial contract for the purchase
of goods. Letters of credit have maturities which generally reflect the
maturities of the underlying obligations. The credit risk involved in issuing
letters of credit is the same as that involved in extending loans to
customers. If deemed necessary, the Corporation holds various forms of
collateral to support letters of credit.
Certain mortgage loans sold to government agencies have limited recourse
provisions.
Foreign exchange contracts are commitments to purchase or deliver foreign
currency at a specified exchange rate. The Corporation enters into foreign
exchange contracts primarily in connection with trading activities to enable
customers involved in international trade to hedge their exposure to foreign
currency fluctuations and to minimize the Corporation's own exposure to
foreign currency fluctuations resulting from the above. Foreign exchange
contracts include such commitments as foreign currency spot, forward, future
and, to a much lesser
63
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
extent, option contracts. The risks in these transactions arise from the
ability of the counterparties to perform under the terms of the contracts and
the risk of trading in a volatile commodity. The Corporation actively monitors
all transactions and positions against predetermined limits established on
traders and types of currency to ensure reasonable risk taking.
The Corporation's market risk from unfavorable movements in currency
exchange rates is minimized by essentially matching commitments to deliver
foreign currencies with commitments to purchase foreign currencies.
At December 31, 1998, the Corporation's foreign currency position resulting
from foreign exchange contracts by major currency was as follows ($000's US):
Commitments Commitments
To Deliver To Purchase
Foreign Foreign
Exchange Exchange
----------- -----------
Currency
Deutsche Mark.................................... $135,168 $134,455
English Pound Sterling........................... 90,363 90,132
Japanese Yen..................................... 75,370 72,496
Netherland Guilder............................... 62,876 62,850
Swiss Franc...................................... 29,471 29,333
Canadian Dollar.................................. 27,397 27,298
Norwegian Kroner................................. 23,585 23,582
French Franc..................................... 20,042 20,121
Belgian Franc.................................... 12,256 12,196
Swedish Kronor................................... 9,763 9,761
Australian Dollar................................ 9,436 9,406
Italian Lire..................................... 7,261 6,929
Finnish Markka................................... 2,000 2,000
New Zealand Dollar............................... 1,231 1,205
Danish Kronor.................................... 1,197 1,211
Portuguese Escudo................................ 1,184 1,183
All Other........................................ 2,090 2,033
-------- --------
Total........................................ $510,690 $506,191
======== ========
Average Amount of Contracts To Deliver/Purchase
Foreign Exchange................................ $598,852 $594,170
======== ========
These amounts do not represent the actual credit or market exposure.
Interest rate swaps are contractual agreements between counterparties to
exchange interest payment streams based on notional principal amounts over a
set period of time. Swap agreements normally involve the exchange of fixed and
floating rate payment obligations without the exchange of the underlying
principal amounts.
64
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The Corporation enters into interest rate swaps to manage the interest rate
volatility associated with variable rate loans and brokered callable CDs at
the Corporation's affiliate banks. The Corporation also enters into interest
swaps in connection with trading activities to enable customers to manage
their interest rate risks. The Corporation's market risk from unfavorable
movements in interest rates associated with trading swaps is minimized by
concurrently entering into offsetting positions with nearly identical notional
values, terms and indexes. Interest rate swaps held for Trading consisted of
$35 million in notional amount of received fixed and $35 million in notional
amount of pay fixed at December 31, 1998. At December 31, 1998, the
Corporation's interest rate swap portfolio held for other than trading
consisted of the following ($ in millions):
Remaining Maturity in Years
----------------------------------------------------
Over
5
Other 0-1 Yrs 1-2 Yrs 2-3 Yrs 3-4 Yrs 4-5 Yrs Yrs Total
----- ------- ------- ------- ------- ------- ---- ------
Notional value.......... $210 $120 $171 $ 75 $194 $247 $1,017
Weighted average receive
rate................... 6.22% 6.13% 6.34% 5.38% 5.79% 6.09% 6.05%
Weighted average pay
rate (variable)........ 5.29% 5.23% 5.25% 5.34% 5.24% 5.18% 5.24%
The impact on net interest income from interest rate swaps in 1998 and 1997
was a positive $5.21 million and $2.52 million, respectively.
Interest caps and floors are contracts with notional principal amounts that
require the seller, in exchange for a fee, to make payments to the purchaser
if a specified market rate rises/falls above/below the fixed ceiling or floor
or index rate on specified future dates.
The Corporation purchases standard interest rate caps and floors to manage
the interest volatility associated with variable rate loans and variable rate
borrowings. At December 31, 1998, the Corporation was party to one interest
rate floor contract and one interest rate cap contract which are summarized as
follows ($ in millions):
Weighted-Average
---------------------------
Notional Strike Remaining
Type Amount Rate Index Term (years)
---- -------- ------ ----- ------------
Floor................................. $25.0 5.250% 5.250% 2.98
Cap................................... 25.0 6.000 5.313 0.76
No payments were received in 1998 and the effect of amortization of the fee
premiums were not material.
The market risk due to potential fluctuations in interest rates is inherent
in swap, cap and floor agreements. Credit risk arises from the potential
failure of counterparties to perform in accordance with the terms of the
contracts. The Corporation maintains risk management policies that define
parameters of acceptable market risk within the framework of its overall
asset/liability management strategies and monitor and limit exposure to credit
risk. The Corporation believes its credit and settlement procedures serve to
minimize its exposure to credit risk. Credit exposure resulting from swaps,
caps and floors is represented by their fair value amounts, increased by an
estimate of potential adverse position exposure arising from changes over time
in interest rates, maturities and other relevant factors. At December 31, 1998
the estimated credit exposure arising from swaps, caps and floors was
approximately $19.4 million.
65
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
18. Fair Value of Financial Instruments
The book values and estimated fair values for on and off-balance sheet
financial instruments as of December 31, 1998 and 1997 are reflected below:
Balance Sheet Financial Instruments ($ in millions)
1998 1997
------------------- -------------------
Book Fair Book Fair
Value Value Value Value
--------- --------- --------- ---------
Financial Assets:
Cash and short-term investments...... $ 958.7 $ 958.7 $ 955.1 $ 955.1
Trading securities................... 34.0 34.0 43.6 43.6
Investment securities available for
sale................................ 4,049.4 4,049.4 4,208.6 4,208.6
Investment securities held to
maturity............................ 1,056.2 1,095.0 1,176.7 1,203.9
Net loans............................ 13,770.1 14,338.5 12,893.3 13,222.3
Interest receivable.................. 179.3 179.3 152.7 152.7
Financial Liabilities:
Deposits............................. 15,919.9 16,061.5 15,020.3 15,105.1
Short-term borrowings................ 1,834.6 1,834.6 1,842.8 1,842.8
Long-term borrowings................. 1,037.2 1,100.4 1,099.9 1,120.2
Interest payable..................... 97.2 97.2 98.5 98.5
Where readily available, quoted market prices were utilized by the
Corporation. If quoted market prices were not available, fair values were
based on estimates using present value or other valuation techniques. These
techniques were significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The calculated fair value
estimates, therefore, cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized upon immediate settlement of
the instrument. SFAS 107 excludes certain financial instruments and all
nonfinancial assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the entire Corporation.
The following methods and assumptions were used in estimating the fair value
for financial instruments.
Cash and Short-term Investments
The carrying amounts reported for cash and short-term investments
approximates the fair values for those assets.
Trading and Investment Securities
Fair value is based on quoted market prices or dealer quotes. See Note 6,
Securities, for additional information.
Loans
Loans that reprice or mature within three months of December 31 were
assigned fair values based on their book value. Market values were used on
performing loans where available. Most remaining loan balances were assigned
fair values based on a discounted cash flow analysis. The discount rate was
based on the treasury yield curve, with rate adjustments for credit quality,
cost and profit factors.
66
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Deposits
The fair value for demand deposits or any interest bearing deposits with no
fixed maturity date was considered to be equal to the carrying value. Time
deposits with defined maturity dates were considered to have a fair value
equal to the book value if the maturity date was within three months of
December 31. The remaining time deposits were assigned fair values based on a
discounted cash flow analysis using discount rates which approximate interest
rates currently being offered on time deposits with comparable maturities.
Borrowings
Short-term borrowings are carried at cost which approximates fair value.
Long-term debt was generally valued using a discounted cash flow analysis with
a discount rate based on current incremental borrowing rates for similar types
of arrangements or, if not readily available, based on a build up approach
similar to that used for loans and deposits. Long-term borrowings include
their related current maturities.
Off-Balance Sheet Financial Instruments ($ in millions)
Fair values of loan commitments and letters of credit have been estimated
based on the equivalent fees, net of expenses, that would be charged for
similar contracts and customers at December 31.
1998 1997
---- ----
Loan commitments................................................ $1.3 $0.7
Letters of credit............................................... 3.3 2.2
Foreign exchange contracts are carried at market value (U.S. dollar
equivalent of the underlying contract). The fair value of options
written/purchased are based on the market value as of the reporting date.
1998 1997
------ ------
Commitments to purchase foreign exchange................... $506.2 $418.9
Commitments to deliver foreign exchange.................... 510.7 421.6
Options written/purchased.................................. 1.8 0.0
Interest rate swaps, caps and floors are assigned a value based on a
discounted cash flow analysis utilizing the forward yield curve.
1998 1997
----- ----
Interest rate swaps............................................ $13.1 $4.2
Interest rate floor............................................ 0.4 0.2
Interest rate cap.............................................. 0.0 0.1
See Note 17 for additional information on off-balance sheet financial
instruments.
19. Business Segments
Effective January 1, 1998, M&I adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131). SFAS 131 superseded SFAS 14, Financial Reporting for
Segments of a Business Enterprise. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of SFAS 131 did
not affect results of operations or financial position, but did affect the
disclosure of segment information.
67
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Generally, the Corporation organizes its segments based on legal entities
and segregates the Data Services Division of the Corporation. Each entity
offers a variety of products and services to meet the needs of its customers
and the particular market served. Each entity or division has its own
president and is separately managed subject to adherence to Corporate
policies. Discrete financial information is reviewed by senior management to
assess performance on a monthly basis. Certain segments are combined and
consolidated for purposes of assessing financial performance.
The Corporation evaluates the profit or loss performance of its segments
based on operating income. Operating income is after-tax income excluding
nonrecurring charges and charges for services from the holding company,
excluding its Data Services Division. Operating income for the banking
entities and certain other entities also excludes certain assets, liabilities,
equity, revenues and expenses associated with adjustments, charges or credits
arising from acquisitions accounted for as purchases (hereinafter called
acquisition costs). The accounting policies of the Corporation's segments are
the same as those described in Note 1. Intersegment revenues may be based on
cost, current market prices or negotiated prices between the providers and
receivers of services.
Based on the way the Corporation organizes its segments and the requirements
of SFAS 131 the Corporation has determined that it has two reportable
segments. Information with respect to M&I's segments is as follows ($ in
millions):
Banking
Banking represents the aggregation of twenty-six separately chartered banks
located in Wisconsin, one bank in Arizona, one federally chartered thrift
headquartered in Illinois and an operational support subsidiary. Banking
consists of accepting deposits, making loans and providing other services such
as cash management, foreign exchange and correspondent banking to a variety of
commercial and retail customers. Products and services are provided through a
variety of delivery channels including traditional branches, supermarket
branches, telephone centers, ATMs and the internet. In addition, the
Corporation's larger affiliate banks provide numerous services such as cash
management, regional credit, and centralized accounting to M&I's community
banking affiliates. Intrasegment revenues, expenses and assets have been
eliminated in the following information.
1998 1997 1996
--------- --------- ---------
Revenue:
Net interest income......... $ 664.8 $ 579.6 $ 520.8
Other revenues:
Unaffiliated customers.... 167.4 133.3 121.9
Affiliated customers...... 13.5 8.4 8.3
--------- --------- ---------
Total revenues.......... 845.7 721.3 651.0
Expenses:
Intersegment charges........ 91.1 77.5 69.7
Other operating expense..... 297.6 278.8 274.5
--------- --------- ---------
Total expenses.......... 388.7 356.3 344.2
Provision for loan and lease
losses....................... 26.1 16.7 15.3
Income tax expense............ 145.9 117.5 99.9
--------- --------- ---------
Operating income.............. $ 285.0 $ 230.8 $ 191.6
========= ========= =========
Identifiable assets........... $20,215.8 $19,270.1 $14,898.4
========= ========= =========
Net purchases of premises and
equipment.................... $ 28.3 $ 29.9 $ 17.8
========= ========= =========
Return on Tangible Equity..... 18.2% 18.9% 17.6%
========= ========= =========
68
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
The following tables present revenue and operating income by line of
business for Banking. This information is based on the Corporation's product
profitability measurement system and is an aggregation of the revenues and
expenses associated with the products and services within each line of
business. Net interest income is derived from the Corporation's internal funds
transfer pricing system, expenses are allocated based on available transaction
volumes and the provision for loan and lease losses is allocated based on
credit risk. Equity is assigned to products and services on a basis that
considers market, operational and reputation risk. Information for 1996 is not
available ($ in millions) :
Commercial Retail Investments Total
1998 Banking Banking and Other Banking
---- ---------- ------- ----------- -------
Revenue:
Net interest income............. $303.7 $289.4 $ 71.7 $664.8
Other revenue................... 49.0 70.3 61.6 180.9
------ ------ ------ ------
Total revenues................ $352.7 $359.7 $133.3 $845.7
====== ====== ====== ======
Percent of Total.................. 41.7% 42.5% 15.8% 100.0%
====== ====== ====== ======
Operating Income.................. $148.5 $ 91.2 $ 45.3 $285.0
====== ====== ====== ======
Percent of Total.................. 52.1% 32.0% 15.9% 100.0%
====== ====== ====== ======
Return on Tangible Equity......... 23.1% 20.1% 18.2%
====== ====== ======
1997
----
Revenue:
Net interest income............. $266.9 $254.5 $ 58.2 $579.6
Other revenue................... 45.1 55.5 41.1 141.7
------ ------ ------ ------
Total revenues................ $312.0 $310.0 $ 99.3 $721.3
====== ====== ====== ======
Percent of Total.................. 43.3% 43.0% 13.7% 100.0%
====== ====== ====== ======
Operating Income.................. $132.7 $ 75.0 $ 23.1 $230.8
====== ====== ====== ======
Percent of Total.................. 57.5% 32.5% 10.0% 100.0%
====== ====== ====== ======
Return on Tangible Equity......... 24.5% 20.4% 18.9%
====== ====== ======
69
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Data Services
Data Services includes the Data Services Division of the Corporation as well
as three nonbank subsidiaries. Data Services provides data processing
services, develops and sells software and provides consulting services to M&I
affiliates as well as banks, thrifts, credit unions, trust companies and other
financial services companies throughout the world although its activities are
primarily domestic. In addition, Data Services derives revenue from the
Corporation's credit card merchant operations. The majority of Data Services
revenue is derived from internal and external processing. Intrasegment
revenues, expenses and assets have been eliminated in the following
information.
1998 1997 1996
------- ------- -------
Revenue:
Net interest expense....................... $ (2.5) $ (2.8) $ (3.5)
Other revenues:
Unaffiliated customers................... 424.8 354.3 269.1
Affiliated customers..................... 85.1 77.7 77.1
------- ------- -------
Total revenues......................... 507.4 429.2 342.7
Expenses:
Intersegment charges....................... 2.3 2.0 1.4
Other operating expense.................... 437.2 366.6 297.3
------- ------- -------
Total expenses......................... 439.5 368.6 298.7
Income tax expense........................... 28.2 24.9 18.0
------- ------- -------
Operating income............................. $ 39.7 $ 35.7 $ 26.0
======= ======= =======
Identifiable assets.......................... $ 361.0 $ 327.3 $ 289.5
======= ======= =======
Net purchases of premises and equipment...... $ 29.2 $ 33.4 $ 31.7
======= ======= =======
Return on Equity............................. 20.5% 21.8% 20.4%
======= ======= =======
70
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
All Others
M&I's primary other operating segments includes Trust Services, Mortgage
Banking (residential and commercial), Capital Markets Group, Brokerage and
Insurance Services and Commercial Leasing. Trust Services provide investment
management and advisory services as well as personal, commercial and corporate
trust services in Wisconsin, Florida and Arizona. Capital Markets Group
provide venture capital and advisory services. Intrasegment revenues, expenses
and assets for the entities that comprise Trust Services and Capital Markets
Group have been eliminated in the following information.
1998 1997 1996
------ ------ ------
Revenue:
Net interest income............................. $ 34.6 $ 28.1 $ 22.7
Other revenues:
Unaffiliated customers........................ 157.8 116.1 118.6
Affiliated customers.......................... 23.0 13.6 8.7
------ ------ ------
Total revenues.............................. 215.4 157.8 150.0
Expenses:
Intersegment charges............................ 28.3 20.5 19.0
Other operating expense......................... 104.9 81.8 71.7
------ ------ ------
Total expenses.............................. 133.2 102.3 90.7
Provision for loan and lease losses............... 1.0 0.9 0.3
Income tax expense................................ 31.9 21.0 23.3
------ ------ ------
Operating income.................................. $ 49.3 $ 33.6 $ 35.7
====== ====== ======
Identifiable assets............................... $647.9 $592.2 $487.6
====== ====== ======
Net purchases of premises and equipment........... $ 1.3 $ 4.2 $ 2.9
====== ====== ======
Return on Tangible Equity......................... 26.2% 20.1% 24.7%
====== ====== ======
Total Revenues by type in All Others consist of the following:
1998 1997 1996
------ ------ ------
Trust Services....................................... $ 90.4 $ 78.9 $ 70.6
Residential Mortgage Banking......................... 48.6 28.3 23.7
Capital Markets...................................... 33.4 14.9 25.1
Brokerage and Insurance.............................. 18.1 15.0 11.3
Commercial Leasing................................... 13.7 12.5 12.7
Commercial Mortgage Banking.......................... 7.3 4.7 3.5
Others............................................... 3.9 3.5 3.1
------ ------ ------
Total.......................................... $215.4 $157.8 $150.0
====== ====== ======
71
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Segment information reconciled to the Consolidated Financial Statements is as
follows ($ in millions):
1998 1997 1996
-------- -------- --------
Revenues:
Banking................. $ 845.7 $ 721.3 $ 651.0
Data Services........... 507.4 429.2 342.7
All Others.............. 215.4 157.8 150.0
Corporate overhead...... (4.9) (8.0) (3.6)
Acquisition costs....... (10.2) 1.2 1.9
Intersegment
eliminations........... (121.0) (98.5) (94.9)
-------- -------- --------
Consolidated revenues..... $1,432.4 $1,203.0 $1,047.1
======== ======== ========
Expenses:
Banking................. $ 388.7 $ 356.3 $ 344.2
Data Services........... 439.5 368.6 298.7
All Others.............. 133.2 102.3 90.7
Corporate overhead...... 49.5 57.6 44.6
Acquisition costs....... 26.7 10.9 6.3
Merger/restructuring.... 23.4 -- --
Purchased research and
development............ -- -- 12.1
SAIF assessment......... -- -- 7.1
Write-off intangibles... -- -- 4.7
Intersegment
eliminations........... (121.0) (98.5) (94.9)
======== ======== ========
Consolidated expenses..... $ 940.0 $ 797.2 $ 713.5
======== ======== ========
Provision for loan and
lease losses:
Banking................. $ 26.1 $ 16.7 $ 15.3
All Others.............. 1.0 0.9 0.3
-------- -------- --------
Consolidated provision for
loan and lease losses.... $ 27.1 $ 17.6 $ 15.6
======== ======== ========
Income tax expense
(benefit):
Banking................. $ 145.9 $ 117.5 $ 99.9
Data Services........... 28.2 24.9 18.0
All Others.............. 31.9 21.0 23.3
Corporate overhead...... (24.9) (29.7) (20.0)
Acquisition costs....... (10.0) (2.2) (1.2)
Merger/restructuring.... (7.1) -- --
Purchased research and
development............ -- -- (4.2)
SAIF assessment......... -- -- (2.7)
Write-off intangibles... -- -- (1.8)
-------- -------- --------
Consolidated income tax
expense.................. $ 164.0 $ 131.5 $ 111.3
======== ======== ========
72
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
1998 1997 1996
--------- --------- ---------
Net income (loss):
Operating income:
Banking.................................... $ 285.0 $ 230.8 $ 191.6
Data Services.............................. 39.7 35.7 26.0
All Others................................. 49.3 33.6 35.7
Corporate overhead........................... (29.5) (35.9) (28.2)
Acquisition costs............................ (26.9) (7.5) (3.2)
Merger/restructuring......................... (16.3) -- --
Purchased research and development........... -- -- (7.9)
SAIF assessment.............................. -- -- (4.4)
Write-off intangibles........................ -- -- (3.0)
--------- --------- ---------
Consolidated net income........................ $ 301.3 $ 256.7 $ 206.6
========= ========= =========
Assets:
Banking...................................... $20,215.8 $19,270.1 $14,898.4
Data Services................................ 361.0 327.3 289.5
All Others................................... 647.9 592.2 487.6
Corporate overhead........................... 196.6 160.5 217.0
Acquisition costs............................ 290.7 303.8 41.0
Intersegment eliminations.................... (145.7) (151.7) (137.6)
--------- --------- ---------
Consolidated assets............................ $21,566.3 $20,502.2 $15,795.9
========= ========= =========
Depreciation and amortization:
Banking...................................... $ 19.1 $ 12.2 $ 22.4
Data Services................................ 67.6 62.2 50.2
All Others................................... (15.6) (23.8) (24.0)
Corporate overhead........................... 3.2 3.7 2.9
Acquisition costs............................ 37.1 9.6 4.6
--------- --------- ---------
Consolidated depreciation and amortization..... $ 111.4 $ 63.9 $ 56.1
========= ========= =========
Purchases of premises and equipment, net:
Banking...................................... $ 28.3 $ 29.9 $ 17.8
Data Services................................ 29.2 33.4 31.7
All Others................................... 1.3 4.2 2.9
Corporate overhead........................... 2.0 1.3 1.0
--------- --------- ---------
Consolidated purchases of premises
and equipment, net............................ $ 60.8 $ 68.8 $ 53.4
========= ========= =========
73
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
20. Condensed Financial Information--Parent Corporation Only
Condensed Balance Sheets
December 31
1998 1997
---------- ----------
Assets
Cash and cash equivalents................................ $ 77,036 $ 64,275
Data processing services receivables..................... 101,826 88,969
Indebtedness of nonbank affiliates....................... 330,152 275,786
Investments in affiliates:
Banks.................................................. 1,825,131 1,793,153
Nonbanks............................................... 261,317 233,048
Premises and equipment, net.............................. 125,345 124,502
Other assets............................................. 204,339 165,459
---------- ----------
Total assets......................................... $2,925,146 $2,745,192
========== ==========
Liabilities and Shareholders' Equity
Commercial paper issued.................................. $ 60,162 $ 109,586
Other liabilities........................................ 201,249 188,981
Long-term borrowings:
7.65% Junior Subordinated Deferrable Interest
Debentures due to M&I Capital Trust A................. 205,282 205,249
Other.................................................. 214,674 218,947
---------- ----------
Total Long-term borrowings........................... 419,956 424,196
---------- ----------
Total liabilities.................................... 681,367 722,763
Shareholders' equity..................................... 2,243,779 2,022,429
---------- ----------
Total liabilities and shareholders' equity........... $2,925,146 $2,745,192
========== ==========
Scheduled maturities of long-term borrowings are $32,497 in 1999, $24,328 in
2000, $33,469 in 2001, $24,616 in 2002, and $100,111 in 2003. See Note 12 for
a description of the junior subordinated debt due to M&I Capital Trust A.
74
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Condensed Statements of Income
Years Ended December 31
1998 1997 1996
-------- -------- --------
Income
Cash dividends:
Bank affiliates................................ $186,149 $255,670 $225,425
Nonbank affiliates............................. 67,114 37,034 11,687
Interest from affiliates......................... 19,061 16,846 13,560
Data processing income........................... 476,543 406,594 335,127
Service fees and other........................... 64,406 52,983 38,215
-------- -------- --------
Total income................................. 813,273 769,127 624,014
Expense
Interest......................................... 32,979 33,416 23,016
Salaries and employee benefits................... 270,704 237,647 180,574
Administrative and general....................... 213,596 171,039 151,939
-------- -------- --------
Total expense................................ 517,279 442,102 355,529
Income before income taxes and equity in
undistributed net income of affiliates.......... 295,994 327,025 268,485
Provisions for income taxes...................... 17,034 10,864 11,669
-------- -------- --------
Income before equity in undistributed net income
of affiliates................................... 278,960 316,161 256,816
Equity in undistributed net income of affiliates,
net of dividends paid:
Banks.......................................... 44,611 (54,404) (64,352)
Nonbanks....................................... (22,248) (5,072) 14,171
-------- -------- --------
Net income................................... $301,323 $256,685 $206,635
======== ======== ========
75
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 ($000's except share data)
Condensed Statements of Cash Flows
Years Ended December 31
1998 1997 1996
---------- -------- --------
Cash Flows From Operating Activities
Net income..................................... $ 301,323 $256,685 $206,635
Noncash items included in income:
Equity in undistributed net income of
affiliates.................................. (22,363) 59,476 50,181
Depreciation and amortization................ 68,059 62,996 51,515
Merger/Restructuring......................... 11,615 -- --
Other........................................ (56,698) (2,456) 14,761
---------- -------- --------
Net cash provided by operating activities...... 301,936 376,701 323,092
Cash Flows From Investing Activities
Increases in indebtedness of affiliates...... (1,463,424) (822,662) (140,684)
Decreases in indebtedness of affiliates...... 1,409,058 730,926 135,324
Increases in investments in affiliates....... (5,434) (24) (27,756)
Net capital expenditures..................... (30,850) (22,049) (44,292)
Acquisitions accounted for as purchases, net
of cash equivalents acquired................ (5,170) (259,462) --
Purchase of Bank-Owned Life Insurance........ (32,625) -- --
Other........................................ 14,420 17,575 (73,837)
---------- -------- --------
Net cash used in investing activities.......... (114,025) (355,696) (151,245)
Cash Flows From Financing Activities
Dividends paid............................... (97,241) (79,272) (70,966)
Proceeds from issuance of commercial paper... 779,653 455,726 641,754
Principal payments on commercial paper....... (829,077) (360,374) (669,091)
Proceeds from issuance of long-term debt..... -- 101,131 197,628
Payments on long-term debt................... (13,913) (114,414) (72,417)
Purchase of common stock..................... (29,633) (64,430) (180,053)
Proceeds from exercise of stock options...... 15,086 23,538 13,305
Other........................................ (25) 960 632
---------- -------- --------
Net cash used in financing activities.......... (175,150) (37,135) (139,208)
---------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 12,761 (16,130) 32,639
Cash and cash equivalents, beginning of year... 64,275 80,405 47,766
---------- -------- --------
Cash and cash equivalents, end of year......... $ 77,036 $ 64,275 $ 80,405
========== ======== ========
76
Quarterly Financial Information (Unaudited)
December 31, 1998, 1997 and 1996 ($000's except share data)
Following is unaudited financial information for each of the calendar
quarters during the years ended December 31, 1998 and 1997.
Quarter Ended
-----------------------------------
Dec. 31 Sept. 30 June 30 March 31
-------- -------- -------- --------
1998
Total Interest
Income........ $358,701 $362,509 $358,747 $354,087
Net Interest
Income........ 173,989 169,467 168,013 164,601
Provision for
Loan Losses... 12,588 4,769 4,868 4,865
Income before
Income Taxes.. 128,153 122,613 96,645 117,874
Net Income..... 83,470 80,155 62,192 75,506
Net Income Per
Share:*
Basic........ $ 0.77 $ 0.74 $ 0.57 $ 0.70
Diluted...... 0.72 0.70 0.54 0.66
1997
Total Interest
Income........ $363,257 $294,020 $286,402 $276,654
Net Interest
Income........ 173,398 143,284 140,884 136,981
Provision for
Loan Losses... 4,478 4,348 4,396 4,411
Income before
Income Taxes.. 114,950 97,877 89,266 86,079
Net Income..... 75,165 64,780 59,404 57,336
Net Income Per
Share:*
Basic........ $ 0.70 $ 0.68 $ 0.63 $ 0.61
Diluted...... 0.65 0.63 0.58 0.56
1998 1997 1996 1995 1994
----- ------ ------ ------ -----
Common Dividends Declared
First Quarter.................................. $0.20 $0.185 $0.165 $0.150 $0.14
Second Quarter................................. 0.22 0.200 0.185 0.165 0.15
Third Quarter.................................. 0.22 0.200 0.185 0.165 0.15
Fourth Quarter................................. 0.22 0.200 0.185 0.165 0.15
----- ------ ------ ------ -----
$0.86 $0.785 $0.720 $0.645 $0.59
===== ====== ====== ====== =====
- --------
* May not add due to rounding
Price Range of Stock
(Low and High Close)
1998 1997 1996 1995 1994
-------- -------- ------- ------- --------
First Quarter
Low................................ $53 1/4 $32 3/4 $24 5/8 $18 1/8 $20
High............................... 59 1/2 40 1/4 26 1/4 21 3/4 23 3/4
Second Quarter
Low................................ 50 7/16 35 1/16 24 7/8 19 7/8 19 1/4
High............................... 61 5/8 42 1/2 28 1/8 22 3/4 22 1/4
Third Quarter
Low................................ 44 40 7/8 25 1/2 22 1/8 19 5/8
High............................... 59 52 5/8 30 1/8 26 1/4 21 3/4
Fourth Quarter
Low................................ 40 1/2 50 1/16 30 24 18
High............................... 58 7/16 62 1/8 35 3/8 26 3/8 20 9/16
77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of Marshall & Ilsley
Corporation:
We have audited the accompanying consolidated balance sheets of Marshall &
Ilsley Corporation (a Wisconsin corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31, 1998,
1997 and 1996. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Marshall &
Ilsley Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin,
January 29, 1999
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to M&I's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 27, 1999, except for
information as to executive officers which is set forth in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to M&I's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 27, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to M&I's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 27, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to M&I's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 27, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements
Consolidated Financial Statements:
Balance Sheets--December 31, 1998 and 1997
Statements of Income--years ended December 31, 1998, 1997, and
1996
Statements of Cash Flows--years ended December 31, 1998, 1997,
and 1996
Statements of Shareholders' Equity--years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
All schedules are omitted because they are not required, not
applicable or the required information is contained elsewhere.
3. Exhibits
See Index to Exhibits of this Form 10-K which is incorporated herein
by reference.
(b)Reports on Form 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
/s/ J. B. Wigdale
By: _________________________________
J. B. Wigdale
Chairman of the Board
Date: March 1, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ J. B. Wigdale Chairman of the Date: March 1,
- ------------------------------------- Board and a 1999
J. B. Wigdale Director (Chief
Executive
Officer)
/s/ G. H. Gunnlaugsson Executive Vice Date: March 1,
- ------------------------------------- President and a 1999
G. H. Gunnlaugsson Director (Chief
Financial
Officer)
/s/ P. R. Justiliano Senior Vice Date: March 1,
- ------------------------------------- President and 1999
P. R. Justiliano Corporate
Controller
(Principal
Accounting
Officer)
Directors: Richard A. Abdoo, Oscar C. Boldt, Wendell F. Bueche, Jon F. Chait,
Glenn A. Francke, G. H. Gunnlaugsson, Burleigh E. Jacobs, D.J.
Kuester, Katharine C. Lyall, Edward L. Meyer, Jr., Don R. O'Hare,
San W. Orr, Jr., Peter M. Platten, III, J.A. Puelicher, Robert A.
Schaefer, Stuart W. Tisdale, J. B. Wigdale, James O. Wright and Gus
A. Zuehlke.
/s/ M. A. Hatfield
By___________________________________ Date: March 1, 1999
M. A. Hatfield
As Attorney-in-Fact*
- --------
*Pursuant to authority granted by powers of attorney, copies of which are
filed herewith.
80
MARSHALL & ILSLEY CORPORATION
INDEX TO EXHIBITS
(Item 14(a)3)
ITEM
----
(3) (a) Restated Articles of Incorporation, incorporated by reference to M&I's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, SEC
File No. 0-1220
(b) By-laws, as amended, incorporated by reference to M&I's Annual Report
on Form 10-K for the year ended December 31, 1995, SEC File No. 0-1220
(4) (a) Indenture between M&I and Chemical Bank (as successor to Manufacturers
Hanover Trust Company) dated as of November 15, 1985 ("Senior
Indenture"), incorporated by reference to M&I's Registration Statement
on Form S-3 (Registration No. 33-21377), as supplemented by the First
Supplemental Indenture to the Senior Indenture dated as of May 31,
1990, incorporated by reference to M&I's Current Report on Form 8-K
dated May 31, 1990, and as supplemented by the Second Supplemental
Indenture to the Senior Indenture dated as of July 15, 1993,
incorporated by reference to M&I's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993, SEC File No. 0-1220
(b) Form of Medium Term Notes, Series C, and Series D issued pursuant to
the Senior Indenture, included in Exhibit 4(a)
(c) Indenture between M&I and Chemical Bank dated as of July 15, 1993
("Subordinated Indenture"), incorporated by reference to M&I's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, SEC
File No. 0-1220
(d) Form of Subordinated Note issued pursuant to the Subordinated
Indenture, included in Exhibit 4(c)
(e) Investment Agreement between M&I and The Northwestern Mutual Life
Insurance Company dated August 30, 1985, incorporated by reference to
M&I's Current Report on Form 8-K dated May 20, 1985, SEC File No. 0-
1220
(f) Designation of Rights and Preferences of holders of Series A Preferred
Stock, incorporated by reference to M&I's Current Report on Form 8-K
dated May 20, 1985, SEC File No. 0-1220
(g) Amended and Restated Declaration of Trust dated as of December 9, 1996
among Marshall & Ilsley Corporation, as Sponsor, The Chase Manhattan
Bank, as Institutional Trustee, Chase Manhattan Bank Delaware, as
Delaware Trustee, the Regular Trustees identified thereon, and the
holders from time to time of undivided interests in the assets of the
Trust, incorporated by reference to M&I's Registration Statement on
Form S-4 dated January 15, 1997, SEC Reg. No. 333-19809
(h) Indenture, dated as of December 9, 1996, between Marshall & Ilsley
Corporation and The Chase Manhattan Bank, as Indenture Trustee,
incorporated by reference to M&I's Registration Statement on Form S-4
dated January 15, 1997, SEC Reg. No. 333-19809
(i) First Supplemental Indenture, dated as of December 9, 1996, between
Marshall & Ilsley Corporation and The Chase Manhattan Bank, as
Indenture Trustee, incorporated by reference to M&I's Registration
Statement on Form S-4 dated January 15, 1997, SEC Reg. No. 333-19809
(j) Form of Capital Security Certificate for M&I Capital Trust A, included
as Exhibit A-2 to Exhibit 4(h)
(k) Capital Securities Guarantee Agreement, dated as of December 9, 1996,
between Marshall & Ilsley Corporation and The Chase Manhattan Bank, as
Guarantee Trustee, incorporated by reference to M&I's Registration
Statement on Form S-4 dated January 15, 1997, SEC Reg. No. 333-19809
(l) Registration Rights Agreement dated December 2, 1996, by and among
Marshall & Ilsley Corporation, M&I Capital Trust A and Salomon
Brothers Inc, as Representative of the Initial Purchasers,
incorporated by reference to M&I's Registration Statement on Form S-4
dated January 15, 1997, SEC Reg. No. 333-19809
(m) Form of Subordinated Debt Security, included as part of Exhibit 4(j)
(10) (a) 1983 Executive Stock Option and Restricted Stock Plan, as amended,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, SEC File No. 0-1220*
(b) 1985 Executive Stock Option and Restricted Stock Plan, as amended,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, SEC File No. 0-1220*
(c) M&I Marshall & Ilsley Bank Supplementary Retirement Benefits Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1983, SEC File No. 0-1220*
(d) Consulting Agreement and Supplemental Retirement Plan dated as of
October 1, 1986 between M&I and Mr. J.A. Puelicher, incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1986, SEC File No. 0-1220*
(e) Amendment to Consulting Agreement and Supplemental Retirement Plan
dated as of August 13, 1992, between M&I and Mr. J.A. Puelicher,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, SEC File No. 0-1220*
(f) Deferred Compensation Trust between Marshall & Ilsley Corporation and
Bessemer Trust Company dated April 28, 1987, as amended, incorporated
by reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, SEC File No. 0-1220*
(g) 1986 Non-Qualified Stock Option Plan of M&I and related Stock Option
Agreement between M&I and Mr. J.A. Puelicher, incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1986, SEC File No. 0-1220*
(h) Form of employment agreements, dated November 5, 1990, between M&I and
Messrs. Gunnlaugsson, Kuester, Strelow and Wigdale incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, SEC File No. 0-1220*
(i) Employment agreement, dated November 5, 1990, between M&I and Mr.
Michael A. Hatfield incorporated by reference to M&I's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990, SEC File No.
0-1220*
2
(j) Restricted Stock Plan of Marshall & Ilsley Corporation, incorporated
by reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, SEC File No. 0-1220*
(k) 1989 Executive Stock Option and Restricted Stock Plan, incorporated by
reference to M&I's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, as amended by M&I's Annual Report on Form 10-
K for the fiscal year ended December 31, 1990, SEC File No. 0-1220*
(l) Marshall & Ilsley Corporation Nonqualified Retirement Benefit Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, SEC File No. 0-1220*
(m) Marshall & Ilsley Corporation Supplemental Retirement Benefits Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, SEC File No. 0-1220*
(n) Marshall & Ilsley Trust Company Supplemental Retirement Benefits Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, SEC File No. 0-1220*
(o) Supplemental Retirement Agreement dated December 10, 1992, between M&I
and Mr. J.A. Puelicher, incorporated by reference to M&I's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992, SEC
File No. 0-1220*
(p) Amendment to Supplemental Retirement Agreement dated December 16,
1993, between M&I and Mr. J.A. Puelicher, incorporated by reference to
M&I's Annual Report on Form 10-K for the fiscal year ended December
31, 1993, SEC File No. 0-1220*
(q) Marshall & Ilsley Corporation 1993 Executive Stock Option Plan, as
amended, incorporated by reference to M&I's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, SEC File No. 0-1220.*
(r) Marshall & Ilsley Corporation 1995 Directors Stock Option Plan,
incorporated by reference to M&I's Proxy Statement for the 1995 Annual
Meeting of Shareholders, SEC File No. 0-1220*
(s) Marshall & Ilsley Corporation Assumption Agreement dated May 31, 1994
assuming rights, obligations and interests of Valley Bancorporation
under various stock option plans, incorporated by reference to M&I's
Registration Statement on Form S-8 (Reg. No. 33-53897)*
(t) Valley Bancorporation 1992 Outside Directors' Stock Option Plan,
incorporated by reference to the Valley 1992 Proxy Statement*
(u) Employment agreement between M&I and Mr. Peter M. Platten, III,
incorporated by reference to M&I's Registration Statement on Form S-4
(Reg. No. 33-51753)*
(v) Letter agreement dated January 25, 1994 between Valley Bancorporation
and Mr. Peter M. Platten, III incorporated by reference to M&I's
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, SEC File No. 0-1220*
(w) Employment agreement, dated as of December 14, 1995, between M&I and
Ms. Patricia R. Justiliano incorporated by reference to M&I's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, SEC
File No. 0-1220*
3
(x) Marshall & Ilsley Corporation 1997 Executive Stock Option and
Restricted Stock Plan, incorporated by reference to M&I's Proxy
Statement for the 1997 Annual Meeting of Shareholders*
(y) Marshall & Ilsley Corporation Executive Deferred Compensation Plan,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, SEC File No. 0-1220*
(z) Deferred Compensation Trust II between Marshall & Ilsley Corporation
and Marshall & Ilsley Trust Company, incorporated by reference to
M&I's Annual Report on Form 10-K for the fiscal year ended December
31, 1996, SEC File No. 0-1220*
(aa) Marshall & Ilsley Corporation Annual Executive Incentive Compensation
Plan, incorporated by reference to M&I's Proxy Statement for the 1997
Annual Meeting of Shareholders*
(bb) Marshall & Ilsley Corporation Amended and Restated Supplementary
Retirement Benefits Plan, incorporated by reference to M&I's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, SEC
File No. 0-1220*
(cc) Security Capital Corporation 1993 Incentive Stock Option Plan,
incorporated by reference to M&I's Registration Statement on Form S-8
(Reg. No. 333-36909)*
(dd) Security Bank S.S.B. Deferred Compensation Plans for Key Executive
Officers and Directors, incorporated by reference to Security Capital
Corporation's Registration Statement on Form S-1 (Reg. No. 33-68982)*
(ee) Security Bank S.S.B. Supplemental Pension Plan, incorporated by
reference to Security Capital Corporation's Registration Statement on
Form S-1 (Reg. No. 33-68982)*
(ff) Directors Deferred Compensation Plan, incorporated by reference to
M&I's Proxy Statement for the 1998 Annual Meeting of Shareholders*
(gg) Marshall & Ilsley Corporation 1994 Long-Term Incentive Plan for
Executives, as amended, incorporated by reference to M&I's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, SEC
File No. 0-1220*
(hh) Amendment to Consulting Agreement and Supplemental Retirement Plan
dated as of December 11, 1997, between M&I and Mr. J.A. Puelicher,
incorporated by reference to M&I's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, SEC File No. 0-1220*
(ii) Employment agreement, dated December 11, 1997, between M&I and Mr.
Delgadillo, incorporated by reference to M&I's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, SEC File No. 0-1220*
(jj) Employment agreement, dated November 5, 1990, between M&I and Mr. D.R.
Jones, incorporated by reference to M&I's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, SEC File No. 0-1220*
(kk) Amendment to Employment Agreement dated April 3, 1995, between M&I and
Mr. D.R. Jones, incorporated by reference to M&I's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, SEC File No. 0-
1220*
(ll) Employment agreement, dated June 12, 1997, between M&I and Mr. T.M.
Bolger, incorporated by reference to M&I's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, SEC File No. 0-1220*
4
(mm) Employment agreement, dated October 16, 1997, between M&I and Mr. D.H.
Wilson, incorporated by reference to M&I's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, SEC File No. 0-1220*
(nn) Employment agreement, dated January 12, 1999, between M&I and Mr. T.M.
Bolger*
(oo) Form of Employment agreements between M&I and Messrs. O'Neill and
Williams*
(11) Computation of Net Income Per Common Share, incorporated by reference to
Note 2 of Notes to Consolidated Financial Statements included in Item 8,
Consolidated Financial Statements.
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries
(23) Consent of Arthur Andersen LLP
(24) Powers of Attorney
(27) Financial Data Schedule
M&I will provide a copy of any instrument defining the rights of holders of
long-term debt to the Commission upon request.
_____________
* Management contract or compensatory plan or arrangement.
5