<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 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 offices) (Zip Code)
(414) 765 - 7801
----------------
(Registrant's telephone number, including area code)
None
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class October 31, 1998
----- ----------------
Common Stock, $1.00 Par Value 106,065,959
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
Assets 1998 1997 1997
- ------ ------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 596,478 $ 817,491 $ 809,321
Federal funds sold and
security resale agreements 51,498 34,586 99,358
Money market funds 280,952 65,986 49,458
------------------------------------------
Total cash and cash equivalents 928,928 918,063 958,137
Investment Securities:
Trading securities 57,219 43,644 39,303
Short-term investments, available for sale 49,796 37,018 43,289
Other available for sale at market value 4,359,883 4,208,616 3,188,488
Held to maturity, market value $1,099,744
($1,203,872 December 31, and $1,128,632
September 30, 1997) 1,058,452 1,176,688 1,109,218
------------------------------------------
Total investment securities 5,525,350 5,465,966 4,380,298
Loans and leases 13,729,765 13,101,912 10,814,322
Less: Allowance for loan and lease losses 218,706 208,651 163,690
------------------------------------------
Net loans and leases 13,511,059 12,893,261 10,650,632
Premises and equipment, net 360,096 351,423 331,021
Accrued interest and other assets 882,748 873,445 432,998
------------------------------------------
Total Assets $ 21,208,181 $ 20,502,158 $ 16,753,086
==========================================
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 2,629,976 $ 2,753,320 $ 2,501,039
Interest bearing 11,866,461 12,267,008 9,459,592
------------------------------------------
Total deposits 14,496,437 15,020,328 11,960,631
Funds purchased and security
repurchase agreements 2,298,997 1,486,663 1,714,538
Other short-term borrowings 847,033 658,597 671,592
Accrued expenses and other liabilities 504,494 516,779 426,457
Long-term borrowings 866,563 797,362 501,450
------------------------------------------
Total liabilities 19,013,524 18,479,729 15,274,668
Shareholders' equity:
Series A convertible preferred stock,
$1.00 par value; 685,314 shares issued 685 685 685
Common stock, $1.00 par value; 112,757,546
shares issued (113,185,374 December 31,
and 103,377,331 September 30, 1997) 112,757 113,185 103,377
Additional paid-in capital 610,577 620,899 208,035
Retained earnings 1,605,680 1,460,646 1,407,692
Less: Treasury common stock, at cost;
6,581,090 shares (7,765,169 December 31,
and 10,621,925 September 30, 1997) 186,692 215,787 282,069
Deferred compensation 15,321 9,297 3,259
Net unrealized gains on securities
available for sale, net of related taxes 66,971 52,098 43,957
------------------------------------------
Total shareholders' equity 2,194,657 2,022,429 1,478,418
------------------------------------------
Total Liabilities and
Shareholders' Equity $ 21,208,181 $ 20,502,158 $ 16,753,086
==========================================
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
Three Months Ended September 30,
--------------------------------
Interest income 1998 1997
- --------------- ----------------------------
Loans and leases $ 274,529 $ 223,275
Investment securities:
Taxable 71,421 56,501
Exempt from Federal income taxes 13,345 11,268
Trading securities 657 506
Short-term investments 2,557 2,470
----------------------------
Total interest income 362,509 294,020
Interest expense
- ----------------
Deposits 142,183 111,071
Short-term borrowings 34,085 27,765
Long-term borrowings 16,774 11,900
----------------------------
Total interest expense 193,042 150,736
----------------------------
Net interest income 169,467 143,284
Provision for loan and lease losses 4,769 4,348
----------------------------
Net interest income after
provision for loan and lease losses 164,698 138,936
Other income
- ------------
Data processing services 102,205 86,653
Trust services 23,807 20,072
Other customer services 38,146 34,092
Net securities gains 3,568 196
Other 15,975 13,664
----------------------------
Total other income 183,701 154,677
Other expense
- -------------
Salaries and employee benefits 131,217 113,724
Net occupancy 11,271 10,070
Equipment 26,212 22,148
Software expenses 5,591 5,037
Payments to regulatory agencies 1,193 776
Processing charges 6,190 6,812
Supplies and printing 4,430 3,828
Professional services 6,049 4,434
Other 33,633 28,907
----------------------------
Total other expense 225,786 195,736
----------------------------
Income before income taxes 122,613 97,877
Provision for income taxes 42,458 33,097
----------------------------
Net income $ 80,155 $ 64,780
============================
Net income per common share
- ---------------------------
Basic $ 0.74 $ 0.68
Diluted 0.70 0.63
Dividends paid per common share $ 0.220 $ 0.200
Weighted average common shares outstanding:
Basic 106,043 92,486
Diluted 115,329 102,273
See notes to financial statements.
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
Nine Months Ended September 30,
-------------------------------
Interest income 1998 1997
- --------------- ----------------------------
Loans and leases $ 811,904 $ 646,399
Investment securities:
Taxable 215,691 168,877
Exempt from Federal income taxes 38,516 31,916
Trading securities 1,684 1,493
Short-term investments 7,548 8,391
----------------------------
Total interest income 1,075,343 857,076
Interest expense
- ----------------
Deposits 426,221 319,396
Short-term borrowings 96,806 80,664
Long-term borrowings 50,235 35,867
----------------------------
Total interest expense 573,262 435,927
----------------------------
Net interest income 502,081 421,149
Provision for loan and lease losses 14,502 13,155
----------------------------
Net interest income after
provision for loan and lease losses 487,579 407,994
Other income
- ------------
Data processing services 298,131 249,074
Trust services 67,314 57,801
Other customer services 114,244 96,351
Net securities gains 18,262 1,362
Other 49,544 30,475
----------------------------
Total other income 547,495 435,063
Other expense
- -------------
Salaries and employee benefits 387,204 332,069
Net occupancy 33,260 30,782
Equipment 76,148 65,382
Software expenses 15,659 14,294
Payments to regulatory agencies 3,704 2,335
Processing charges 18,443 19,573
Supplies and printing 13,722 12,389
Professional services 16,308 12,769
Merger /Restructuring 23,373 --
Other 110,121 80,242
----------------------------
Total other expense 697,942 569,835
----------------------------
Income before income taxes 337,132 273,222
Provision for income taxes 119,279 91,702
----------------------------
Net income $ 217,853 $ 181,520
============================
Net income per common share
- ---------------------------
Basic $ 2.01 $ 1.92
Diluted 1.89 1.78
Dividends paid per common share $ 0.640 $ 0.585
Weighted average common shares outstanding:
Basic 105,758 92,443
Diluted 115,270 102,259
See notes to financial statements.
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Nine Months Ended September 30,
-------------------------------
1998 1997
----------------------------
Net Cash Provided by Operating Activities $ 259,838 $ 233,956
Cash Flows From Investing Activities:
- -------------------------------------
Net increase in securities with
maturities of three months or less (12,500) (200)
Proceeds from sales of securities
available for sale 149,995 432,140
Proceeds from maturities of longer
term securities 1,098,190 495,489
Purchases of longer term securities (987,206) (979,461)
Net increase in loans (893,358) (874,029)
Purchases of assets to be leased (207,141) (191,029)
Principal payments on lease receivables 172,863 131,865
Fixed asset purchases, net (48,705) (44,025)
Other 11,448 9,166
----------------------------
Net cash used in
investing activities (716,414) (1,020,084)
----------------------------
Cash Flows From Financing Activities:
- -------------------------------------
Net increase (decrease) in deposits (523,891) 314,058
Proceeds from issuance of commercial paper 542,348 299,710
Payments for maturity of commercial paper (641,501) (208,507)
Net increase in other short-term
borrowings 1,215,977 502,844
Proceeds from issuance of long-term debt 85,886 123,026
Payments of long-term debt (139,539) (214,600)
Dividends paid (72,215) (57,066)
Purchases of treasury stock (13,296) (48,751)
Other 13,672 16,535
----------------------------
Net cash provided by financing
activities 467,441 727,249
----------------------------
Net increase (decrease)
in cash and cash equivalents 10,865 (58,879)
Cash and cash equivalents,
beginning of year 918,063 1,017,016
----------------------------
Cash and cash equivalents,
end of period $ 928,928 $ 958,137
============================
Supplemental cash flow information:
- -----------------------------------
Cash paid during the period for:
Interest $ 577,029 $ 423,511
Income taxes 101,812 73,752
See notes to financial statements.
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
September 30, 1998 & 1997 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("Corporation")
1997 Annual Report on Form 10-K. The unaudited financial information
included in this report reflects all adjustments (consisting only of
normal recurring accruals) which are necessary for a fair statement of
the financial position and results of operations as of and for the three
and nine months ended September 30, 1998 and 1997. The results of
operations for the three and nine months ended September 30, 1998 and
1997 are not necessarily indicative of results to be expected for the
entire year. Certain amounts in the 1997 consolidated financial
statements and analyses have been reclassified to conform with the 1998
presentation.
2. 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 and liquidation
purposes.
The Corporation has 160,000,000 shares of its $1.00 par value common
stock authorized.
3. A reconciliation of the numerators and denominators of the basic and
diluted per share computations are as follows (dollars and shares in
thousands, except per share data):
Three Months Ended September 30, 1998
-------------------------------------
Per
Income Average Shares Share
(Numerator)(Denominator) Amount
---------------------------------
Net Income $ 80,155
Convertible Preferred Dividends (1,689)
----------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 78,466 106,043 $ 0.74
Effect of Dilutive Securities
Convertible Preferred Stock 1,689 7,677
Stock Options and
Restricted Stock Plans -- 1,609
---------- ------------
Diluted Earnings Per Share
Income Available to
Common Shareholders
Plus Assumed Conversions $ 80,155 115,329 $ 0.70
Three Months Ended September 30, 1997
-------------------------------------
Per
Income Average Shares Share
(Numerator)(Denominator) Amount
---------------------------------
Net Income $ 64,780
Convertible Preferred Dividends (1,535)
----------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 63,245 92,486 $ 0.68
Effect of Dilutive Securities
Convertible Preferred Stock 1,535 7,677
Stock Options, Restricted Stock
and Performance Plan -- 2,110
---------- ------------
Diluted Earnings Per Share
Income Available to
Common Shareholders
Plus Assumed Conversions $ 64,780 102,273 $ 0.63
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 1998 & 1997 (Unaudited)
Nine Months Ended September 30, 1998
------------------------------------
Per
Income Average Shares Share
(Numerator)(Denominator) Amount
---------------------------------
Net Income $ 217,853
Convertible Preferred Dividends (4,913)
----------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 212,940 105,758 $ 2.01
Effect of Dilutive Securities
Convertible Preferred Stock 4,913 7,677
Stock Options and
Restricted Stock Plans -- 1,835
---------- ------------
Diluted Earnings Per Share
Income Available to
Common Shareholders
Plus Assumed Conversions $ 217,853 115,270 $ 1.89
Nine Months Ended September 30, 1997
------------------------------------
Per
Income Average Shares Share
(Numerator)(Denominator) Amount
---------------------------------
Net Income $ 181,520
Convertible Preferred Dividends (4,135)
----------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 177,385 92,443 $ 1.92
Effect of Dilutive Securities
Convertible Preferred Stock 4,135 7,051
8.5% Convertible Debt 232 627
Stock Options, Restricted Stock
and Performance Plans -- 1,978
Forward Repurchase Contract -- 160
---------- ------------
Diluted Earnings Per Share
Income Available to
Common Shareholders
Plus Assumed Conversions $ 181,752 102,259 $ 1.78
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 1998 & 1997 (Unaudited)
4. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
<TABLE>
<CAPTION>
September 30, December 31, September 30
1998 1997 1997
------------------------------------------
<S> <C> <C> <C>
Other investment securities available for sale:
U.S. treasury and
government agencies $ 3,990,061 $ 3,880,813 $ 3,016,852
State and political subdivisions 1,434 487 298
Other 368,388 327,316 171,338
------------------------------------------
Other available for sale $ 4,359,883 $ 4,208,616 $ 3,188,488
==========================================
Investment securities held to maturity:
U.S. treasury and
government agencies $ -- $ 168,665 $ 148,579
State and political subdivisions 1,054,152 925,644 878,025
Other 4,300 82,379 82,614
------------------------------------------
Held to maturity $ 1,058,452 $ 1,176,688 $ 1,109,218
==========================================
</TABLE>
5. The Corporation's loan and lease portfolio consists of the following
($000's):
<TABLE>
<CAPTION>
September 30, December 31, September 30
1998 1997 1997
------------------------------------------
<S> <C> <C> <C>
Commercial, financial & agricultural $ 4,007,022 $ 3,395,227 $ 3,269,988
Real estate:
Construction 419,520 458,671 413,810
Residential Mortgage 3,985,730 4,146,416 2,923,711
Commercial Mortgage 3,591,558 3,450,896 2,650,774
------------------------------------------
Total real estate 7,996,808 8,055,983 5,988,295
Personal 1,167,002 1,161,608 1,135,723
Lease financing 558,933 489,094 420,316
------------------------------------------
$ 13,729,765 $ 13,101,912 $ 10,814,322
==========================================
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 1998 & 1997 (Unaudited)
6. The Corporation's deposit liabilities consists of the following ($000's):
<TABLE>
<CAPTION>
September 30, December 31, September 30
1998 1997 1997
------------------------------------------
<S> <C> <C> <C>
Noninterest bearing demand $ 2,629,976 $ 2,753,320 $ 2,501,039
Savings and NOW 6,348,828 5,858,845 4,648,179
Other time deposits $100 and over 1,602,204 1,463,643 1,347,485
Other time deposits under $100 3,915,429 4,944,520 3,463,928
------------------------------------------
$ 14,496,437 $ 15,020,328 $ 11,960,631
==========================================
</TABLE>
7. On March 31, 1997, $16.8 million 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 conversion
of the notes was exchanged for 168,185 shares of the Corporation's
Series A convertible preferred stock. This is a noncash transaction for
purposes of the Consolidated Statements of Cash Flows.
8. The accompanying unaudited consolidated financial statements have been
restated to give effect to the merger of Advantage Bancorp, Inc.
("Advantage") with and into the Corporation. Certain adjustments have
been made to conform the presentation of Advantage's financial
information with that of the Corporation. In accordance with the terms
of the merger, which was consummated April 1, 1998, each share of
Advantage Common Stock was converted into a right to receive 1.2 shares
of the Corporation's Common Stock (approximately 4.0 million shares) in
a tax-free reorganization which was accounted for as a pooling of
interests.
Net interest income and net income of the previously separate enterprises
for the three months ended March 31, 1998 prior to the consummation of
the merger and a reconciliation of the net interest income and net income
of the Corporation as previously reported for the three months and nine
months ended September 30, 1997 to the amounts for those periods in the
accompanying consolidated financial statements as restated for the
pooling of interests are as follows ($000's):
Three Three Nine
Months Months Months
Ended Ended Ended
March 31, September 30, September 30,
1998 1997 1997
----------------------------------------
Net interest income:
Corporation $ 156,637 $ 135,518 $ 398,400
Advantage Bancorp 7,964 7,766 22,749
------------ ------------ ------------
Combined $ 164,601 $ 143,284 $ 421,149
============ ============ ============
Net income:
Corporation $ 72,931 $ 61,864 $ 173,285
Advantage Bancorp 2,575 2,916 8,235
------------ ------------ ------------
Combined $ 75,506 $ 64,780 $ 181,520
============ ============ ============
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 1998 & 1997 (Unaudited)
9. Comprehensive Income
On January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and display of
comprehensive income and its components in a complete set of financial
statements. Comprehensive income is the total of reported net income and
all other revenues, expenses, gains and losses that under generally
accepted accounting principles are not includable in reported net income
but are reflected in shareholders' equity. The standard permits the
statement of changes in shareholders' equity to be used and requires
companies to report comparative totals for comprehensive income in
interim reports. The following table presents the Corporation's
comprehensive income ($000's):
Three Months Ended
-----------------------------------
September 30, September 30,
1998 1997
------------ ------------
Net income $ 80,155 $ 64,780
Other comprehensive income
Unrealized gains (losses) on
securities, net of tax:
Arising during the period 25,020 14,767
Reclassification for securities
transactions included in
net income (1,779) (57)
------------ ------------
23,241 14,710
------------ ------------
Total comprehensive income $ 103,396 $ 79,490
============ ============
Nine Months Ended
-----------------------------------
September 30, September 30,
1998 1997
------------ ------------
Net income $ 217,853 $ 181,520
Other comprehensive income
Unrealized gains (losses) on
securities, net of tax:
Arising during the period 18,373 14,979
Reclassification for securities
transactions included in
net income (3,500) 630
------------ ------------
14,873 15,609
------------ ------------
Total comprehensive income $ 232,726 $ 197,129
============ ============
Other comprehensive income as shown is net of deferred income tax
expenses of $13,298 and $8,584 for the three months and $8,464 and $9,075
for the nine months ended September 30, 1998 and 1997, respectively.
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 1998 & 1997 (Unaudited)
10. 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 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).
To the extent derivative instruments do not qualify for hedge accounting
treatment, the statement could increase volatility in earnings and other
comprehensive income. The Corporation believes their existing derivative
instruments will qualify for hedge accounting and therefore the impacts
of adopting Statement 133 on its financial statements will not be
material. The Corporation has not determined the timing or method of
adoption.
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended September 30,
--------------------------------
Assets 1998 1997
- ------ ----------------------------
Cash and due from banks $ 640,704 $ 617,092
Trading securities 51,050 40,549
Short-term investments 191,666 179,385
Other investment securities:
Taxable 4,461,150 3,339,556
Tax-exempt 1,107,902 938,949
----------------------------
Total investment securities 5,811,768 4,498,439
Loans and leases:
Commercial 3,857,381 3,163,275
Real estate 7,863,491 5,889,056
Personal 1,153,680 1,128,613
Lease financing 541,679 401,019
----------------------------
13,416,231 10,581,963
Less: Allowance for loan and lease losses 217,847 163,066
----------------------------
Total loans and leases 13,198,384 10,418,897
Premises and equipment, net 357,903 334,154
Accrued interest and other assets 895,205 411,916
----------------------------
Total Assets $ 20,903,964 $ 16,280,498
============================
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 2,583,802 $ 2,308,471
Interest bearing 12,205,667 9,480,431
----------------------------
Total deposits 14,789,469 11,788,902
Funds purchased and security repurchase
agreements 2,278,791 1,802,359
Other short-term borrowings 168,448 178,425
Long-term borrowings 1,033,687 659,642
Accrued expenses and other liabilities 479,417 392,725
----------------------------
Total liabilities 18,749,812 14,822,053
Shareholders' equity 2,154,152 1,458,445
----------------------------
Total Liabilities and Shareholders' Equity $ 20,903,964 $ 16,280,498
============================
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Nine Months Ended September 30,
-------------------------------
Assets 1998 1997
- ------ ----------------------------
Cash and due from banks $ 648,964 $ 601,077
Trading securities 43,669 40,567
Short-term investments 184,724 200,631
Other investment securities:
Taxable 4,381,673 3,340,644
Tax-exempt 1,069,575 894,612
--------------------------
Total investment securities 5,679,641 4,476,454
Loans and leases:
Commercial 3,658,059 3,069,145
Real estate 7,932,551 5,690,128
Personal 1,150,182 1,143,223
Lease financing 515,441 371,080
--------------------------
13,256,233 10,273,576
Less: Allowance for loan and lease losses 215,227 162,733
--------------------------
Total loans and leases 13,041,006 10,110,843
Premises and equipment, net 355,669 331,685
Accrued interest and other assets 889,042 412,026
--------------------------
Total Assets $ 20,614,322 $ 15,932,085
==========================
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 2,490,592 $ 2,206,138
Interest bearing 12,138,017 9,304,694
--------------------------
Total deposits 14,628,609 11,510,832
Funds purchased and security repurchase
agreements 1,996,051 1,784,571
Other short-term borrowings 350,168 179,720
Long-term borrowings 1,046,196 676,081
Accrued expenses and other liabilities 487,338 371,740
--------------------------
Total liabilities 18,508,362 14,522,944
Shareholders' equity 2,105,960 1,409,141
--------------------------
Total Liabilities and Shareholders' Equity $ 20,614,322 $ 15,932,085
==========================
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------
Net income for the third quarter of 1998 amounted to $80.2 million compared to
$64.8 million for the same period in the prior year. Basic and diluted earnings
per share were $.74 and $.70 respectively for the three months ended September
30, 1998, compared with $.68 and $.63, respectively for the three months ended
September 30, 1997. The return on average assets and average equity were 1.52%
and 14.76% for the quarter ended September 30, 1998 and 1.58% and 17.62% for the
quarter ended September 30, 1997.
The Corporation's results of operations and financial position for 1998 include
the effects of the merger with Security Capital Corporation ("Security") which
was completed on October 1, 1997 and accounted for as a purchase. Security had
approximately $2.2 billion of loans and $2.3 billion of deposits at the time of
merger.
The following tables present a summary of each of the major elements of the
consolidated operating income statement, certain financial statistics and a
summary of the major operating income statement elements stated as a percent of
average consolidated assets - converted to a fully taxable equivalent basis
(FTE) where appropriate - for the current quarter and previous four quarters.
Operating income for the second quarter of 1998 excluded the
merger/restructuring charge of $16.3 million ($23.4 million before-tax)
associated with the merger with Advantage.
SUMMARY CONSOLIDATED OPERATING INCOME STATEMENTS AND FINANCIAL STATISTICS
- -------------------------------------------------------------------------
($000' except per share data)
- -----------------------------
1998 1997
------------------------------- --------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
Interest Income $ 362,509 $ 358,747 $ 354,087 $ 363,257 $ 294,020
Interest Expense (193,042) (190,734) (189,486) (189,859) (150,736)
--------- --------- --------- --------- ---------
Net Interest Income 169,467 168,013 164,601 173,398 143,284
Provision for Loan Losses (4,769) (4,868) (4,865) (4,478) (4,348)
Net Securities Gains 3,568 8,031 6,663 2,765 196
Other Income 180,133 176,471 172,629 170,641 154,481
Other Expense (225,786) (227,629) (221,154) (227,376) (195,736)
--------- --------- --------- --------- ---------
Income Before Taxes 122,613 120,018 117,874 114,950 97,877
Income Tax Provision (42,458) (41,558) (42,368) (39,785) (33,097)
--------- --------- --------- --------- ---------
Operating Income $ 80,155 $ 78,460 $ 75,506 $ 75,165 $ 64,780
========= ========= ========= ========= =========
Per Common Share
Operating Income Per Share
Basic $ 0.74 $ 0.73 $ 0.70 $ 0.70 $ 0.68
Diluted 0.70 0.68 0.66 0.65 0.63
Dividends 0.220 0.220 0.200 0.200 0.200
Return on Average Equity
Based on Operating Income 14.76% 14.96% 14.87% 14.96% 17.62%
<PAGE>
CONSOLIDATED OPERATING INCOME STATEMENT COMPONENTS AS A PERCENT OF AVERAGE
- --------------------------------------------------------------------------
TOTAL ASSETS
- ------------
1998 1997
------------------------------- ---------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
Interest Income (FTE) 7.01% 7.10% 7.19% 7.28% 7.30%
Interest Expense (3.67) (3.71) (3.78) (3.73) (3.67)
--------- --------- --------- --------- ---------
Net Interest Income 3.34 3.39 3.41 3.55 3.63
Provision for Loan Losses (0.09) (0.09) (0.10) (0.09) (0.11)
Net Securities Gains 0.07 0.16 0.13 0.05 0.00
Other Income 3.42 3.44 3.44 3.36 3.76
Other Expense (4.29) (4.44) (4.40) (4.47) (4.76)
--------- --------- --------- --------- ---------
Income Before Taxes 2.45 2.46 2.48 2.40 2.52
Income Tax Provision (0.93) (0.93) (0.97) (0.92) (0.94)
--------- --------- --------- --------- ---------
Return on Average Assets
Based on Operating Income 1.52% 1.53% 1.51% 1.48% 1.58%
========= ========= ========= ========= =========
The following table 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 expense or benefit, 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.
SUMMARY CONSOLIDATED TANGIBLE OPERATING INCOME AND FINANCIAL STATISTICS
- -----------------------------------------------------------------------
($000' except per share data)
- -----------------------------
1998 1997
------------------------------- --------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
Operating Income $ 80,155 $ 78,460 $ 75,506 $ 75,165 $ 64,780
Amortization, net of tax 5,199 5,206 5,379 5,292 1,064
--------- --------- --------- --------- ---------
Tangible Operating
Income $ 85,354 $ 83,666 $ 80,885 $ 80,457 $ 65,844
========= ========= ========= ========= =========
Tangible Operating Income Per Share
Basic $ 0.76 $ 0.76 $ 0.75 $ 0.75 $ 0.70
Diluted 0.74 0.73 0.70 0.70 0.64
Return on Average
Tangible Assets 1.64% 1.65% 1.64% 1.61% 1.61%
Tangible Equity 18.26 18.66 18.66 18.96 18.46
<PAGE>
NET INTEREST INCOME
- -------------------
Net interest income for the third quarter of 1998 amounted to $169.5 million,
an increase of $26.2 million or 18.3% from the $143.3 million reported for the
third quarter of 1997. The increase in the volume of average earning assets
contributed approximately $83.7 million while the decrease in yield on earning
assets, primarily loans, decreased interest income by approximately $15.2
million. The increase in the volume of average interest bearing liabilities
contributed approximately $43.2 million to the increase in interest expense and
was partially offset by the decrease in the rate of interest bearing liabilities
which reduced interest expense by approximately $.9 million. The large changes
attributable to volume reflect the effect of the acquisition of Security in the
fourth quarter of 1997.
Average earning assets increased $4.1 billion or 27.5% in the third quarter of
1998 compared to the same period a year ago and increased $0.3 billion since the
second quarter of 1998. Including securitized adjustable rate mortgage loans
(ARMS), average loans grew approximately $3.3 billion or 30.2% compared to the
third quarter of last year and increased .8% since the second quarter of 1998.
Average securities, excluding securitized ARMs, increased $0.8 billion for the
three months ended September 30, 1998 compared with the same period in the prior
year and increased $0.2 billion since the second quarter of 1998.
Average interest bearing liabilities increased $3.6 billion or 29.4% in the
third quarter of 1998 compared to the same period in 1997 and increased $163.6
million since the second quarter of 1998. Since the second quarter of 1998,
average interest bearing deposits increased $63.8 million or .5% while average
total borrowings increased $99.8 million. Average noninterest bearing deposits
increased $275.3 million or 11.9% from the quarter ended September 30, 1997 to
the quarter ended September 30, 1998 and $90.0 million from the prior quarter
in 1998.
<PAGE>
The growth and composition of the Corporation's quarterly average loan portfolio
for the current quarter and previous four quarters are reflected in the
following table. Securitized ARM loans which are classified in the consolidated
balance sheets as investment securities available for sale are included to
provide a more meaningful comparison ($ in millions):
Marshall & Ilsley Corporation's quarterly average loan and lease portfolio
<TABLE>
<CAPTION>
Growth Pct.
---------------------
1998 1997 Third Qtr.
----------------------------- ------------------- 1998 Vs.
Third Second First Fourth Third Second Qtr
Quarter Quarter Quarter Quarter Quarter Annual 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial Loans $ 3,857 $ 3,711 $ 3,400 $ 3,305 $ 3,163 21.9 % 3.9 %
Real Estate Loans
Residential Mortgages 3,915 3,979 4,081 4,293 2,863 36.7 (1.6)
Securitized ARM loans 933 929 1,025 972 437 113.5 0.4
--------- --------- --------- --------- --------- --------- ---------
Residential Mortgages 4,848 4,908 5,106 5,265 3,300 46.9 (1.2)
Construction 404 409 448 453 397 1.8 (1.2)
Commercial Mortgages 3,544 3,543 3,476 3,403 2,629 34.8 0.0
--------- --------- --------- --------- --------- --------- ---------
Total Real Estate Loans 8,796 8,860 9,030 9,121 6,326 39.0 (0.7)
Personal Loans
Personal Loans 895 877 862 881 857 4.4 2.1
Student Loans 259 274 284 278 272 (4.8) (5.5)
--------- --------- --------- --------- --------- --------- ---------
Total Personal Loans 1,154 1,151 1,146 1,159 1,129 2.2 0.3
Lease Financing Receivables
Commercial 331 335 322 321 287 15.3 (1.2)
Personal 211 184 163 141 114 85.1 14.7
--------- --------- --------- --------- --------- --------- ---------
Lease Financing Receivables 542 519 485 462 401 35.2 4.4
--------- --------- --------- --------- --------- --------- ---------
Total Consolidated
Average Loans, Leases
and ARMs $ 14,349 $ 14,241 $ 14,061 $ 14,047 $ 11,019 30.2 % 0.8 %
========= ========= ========= ========= ========= ========= =========
Total Consolidated
Average Loans and Leases $ 13,416 $ 13,312 $ 13,036 $ 13,075 $ 10,582 26.8 % 0.8 %
========= ========= ========= ========= ========= ========= =========
</TABLE>
As previously discussed, the annual growth is largely attributable to the
Security merger.
In the first six months of 1998, approximately $259 million of ARM loans were
converted into government guaranteed agency pool securities. There were no
securitizations in the quarter ended September 30, 1998 and approximately $218
million in all of 1997. In addition, approximately $580 million of securitized
ARMs were acquired in the Security merger.
Compared with the second quarter of 1998, total consolidated average loans,
leases and securitized ARMs increased $108 million. The growth in commercial
loans of approximately $146 million and lease financing receivables of $23
million were partially offset by a decline in residential real estate loans and
securitized ARMs of $64 million. The decrease in residential real estate loans
and securitized ARMs 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 $443 million in the
third quarter of 1998 compared to $245 million in the third quarter of 1997.
For the nine months ended September 30, 1998 sales to investors amounted to $1.4
billion compared to $461 million in the first nine months of 1997.
<PAGE>
The growth and composition of the Corporation's quarterly average deposits for
the current and prior year's quarters are as follows ($ in millions):
<TABLE>
<CAPTION>
Growth Pct.
--------------------
1998 1997 Third Qtr.
----------------------------- ------------------- 1998 Vs.
Third Second First Fourth Third Second Qtr
Quarter Quarter Quarter Quarter Quarter Annual 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest Bearing
Commercial $ 1,670 $ 1,599 $ 1,562 $ 1,696 $ 1,502 11.2 % 4.4 %
Personal 507 512 487 475 449 12.9 (1.0)
Other 407 383 343 412 358 13.7 6.3
--------- --------- --------- --------- --------- --------- ---------
Total Noninterest
Bearing Deposits 2,584 2,494 2,392 2,583 2,309 11.9 3.6
Interest Bearing
Savings & NOW 2,152 2,160 2,131 2,149 1,843 16.8 (0.4)
Money Market 4,233 4,021 3,805 3,676 2,849 48.6 5.3
Other CDs & Time Deposits 4,231 4,397 4,626 4,547 3,430 23.4 (3.8)
CDs Greater than $100,000 810 844 834 780 682 18.8 (4.0)
Brokered CDs 779 720 669 668 676 15.2 8.2
--------- --------- --------- --------- --------- --------- ---------
Total Interest
Bearing Deposits 12,205 12,142 12,065 11,820 9,480 28.7 0.5
--------- --------- --------- --------- --------- --------- ---------
Total Consolidated
Average Deposits $ 14,789 $ 14,636 $ 14,457 $ 14,403 $ 11,789 25.4 % 1.0 %
========= ========= ========= ========= ========= ========= =========
</TABLE>
Compared with the second quarter of 1998, average deposit growth amounted to
$153 million or 1.05%. Money market, noninterest bearing and brokered CDs
exhibited the largest growth and accounted for approximately $361 million of the
growth in average deposits. Offsetting this growth were declines in other CDs
and time deposits of $166 million. This shift in deposit mix reflects, in part,
the maturity of special CD products which were offered at the time of the
Security merger, and had a positive impact on the net interest margin.
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current quarter,
prior quarter and prior year third quarter are presented in the following table.
Securitized ARM loans that are classified in the balance sheet as investment
securities available for sale are included with loans to make the comparative
information more meaningful.
<PAGE>
YIELD & COST ANALYSIS ($ in millions)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
------------------------- ------------------------- --------------------------
September 30, 1998 June 30, 1998 September 30, 1997
------------------------- ------------------------- --------------------------
Average Average Average
Average Yield or Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b) Balance Interest Cost (b)
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and Leases (a) $14,348.9 $ 292.4 8.10%$14,241.4 $ 290.6 8.19%$11,018.1 $ 231.9 8.36%
Investment Securities:
Taxable 3,528.5 54.0 6.14 3,376.1 52.7 6.32 2,903.4 48.3 6.67
Tax Exempt (a) 1,107.9 19.4 7.05 1,067.5 18.7 7.17 938.9 16.4 7.07
Other Short-term
Investments (a) 242.7 3.3 5.39 229.7 3.1 5.48 220.0 3.0 5.04
-------------------------- -------------------------- --------------------------
Total Interest
Earning Assets $19,228.0 $ 369.1 7.65%$18,914.7 $ 365.1 7.77%$15,080.4 $ 299.6 7.91%
========================== ========================== ==========================
Money Market Savings $ 4,232.8 $ 48.6 4.55%$ 4,021.0 $ 45.6 4.55%$ 2,849.1 $ 31.2 4.34%
Regular Savings
& NOW 2,151.9 10.5 1.94 2,160.2 11.6 2.16 1,843.1 10.0 2.16
Other CDs & Time
Deposits 4,231.6 59.9 5.61 4,397.2 62.3 5.68 3,430.3 49.5 5.73
CDs Greater than
$100 & Brokered CDs 1,589.4 23.2 5.79 1,563.4 22.8 5.85 1,358.0 20.4 5.96
-------------------------- -------------------------- --------------------------
Total Interest
Bearing Deposits 12,205.7 142.2 4.62 12,141.8 142.3 4.70 9,480.5 111.1 4.65
Short-term
Borrowings 2,447.2 34.1 5.53 2,360.7 31.9 5.42 1,980.8 27.7 5.56
Long-term
Borrowings 1,033.7 16.8 6.44 1,020.5 16.5 6.48 659.6 11.9 7.14
-------------------------- -------------------------- --------------------------
Total Interest
Bearing Liabilities $15,686.6 $ 193.1 4.88%$15,523.0 $ 190.7 4.93%$12,120.9 $ 150.7 4.93%
========================== ========================== ==========================
Net Interest Margin
(FTE) as a Percent
of Average Earning
Assets $ 176.0 3.65% $ 174.4 3.71% $ 148.9 3.93%
================ ================ ================
(a) Fully taxable equivalent basis (FTE), assuming a Federal income tax rate
of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for available
for sale securities.
The net interest margin as a percent of average earning assets declined 28 basis
points since the third quarter of 1997 and decreased 6 basis points from 3.71%
in the second quarter of 1998 to 3.65% in the current quarter. The yield on
average earning assets decreased 12 basis points since the second quarter of
1998. This decline in yield reflects continued run-off of higher yielding loans
and securitized ARMs and investment securities as well as accelerated
amortization of purchase accounting premiums assigned to acquired loans and
investment securities due to prepayments and refinancings in response to the
interest rate environment. The yield on loans and securitized ARMs, the largest
earning asset, declined 9 basis points which had a negative impact on net
interest income of approximately $32.6 million compared with the second quarter
of 1998. Net interest income may continue to be adversely affected if the
current prepayment experience continues. The cost of interest bearing deposits
decreased 8 basis points from the previous quarter which reflects the shift in
deposit mix previously discussed along with the reduction of interest paid on
selected deposit account types. Short-term borrowing costs increased 11 basis
points and long-term borrowing costs decreased 4 basis points, respectively,
compared with the second quarter of 1998. The increase in short-term borrowing
costs compared to the prior quarter reflects a shift in the mix of funding
sources from special programs which were available during the second quarter.
At September 30, 1998, the Corporation had standard receive fixed/pay floating
interest rate swaps and interest rate caps and floors designated as hedges to
manage the interest rate volatility associated with variable rate loans and
variable rate debt. In addition, the Corporation had callable receive fixed /
pay floating interest rate swaps designated as hedges to offset callable CDs.
<PAGE>
The Corporation's position with respect to interest rate swaps and interest rate
caps and floors designated as hedges at September 30, 1998 consisted of the
following ($ in millions):
Interest Rate Swaps
-------------------
Notional Value $675
Weighted average receive rate 6.16%
Weighted average pay rate 5.62%
Weighted average remaining term (in years) 2.24
Estimated fair value $16.73
Callable Interest Rate Swaps
----------------------------
Notional Value $297
Weighted average receive rate 6.34%
Weighted average pay rate 5.48%
Weighted average remaining term (in years) 7.50
Estimated fair value $3.36
Interest Rate Caps/Floors
-------------------------
Notional Value $50
Strike Rate 5.63%
Index 5.59%
Weighted average remaining term (in years) 2.13
Estimated fair value $0.51
Unamortized premium $0.25
For the three months ended September 30, 1998, the effect on net interest income
resulting from the swaps, net of cap and floor premium amortization, was a
positive $1.2 million compared with a positive $.6 million in the same period
in 1997. See also the discussion of derivative financial instruments entered
into on behalf of customers and the Corporation's related offsetting positions
under "Other Income."
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
- ------------------------------------------------------
At September 30, 1998, nonperforming assets were $100.2 million compared to
$98.4 million at June 30, 1998 and $79.2 million at September 30, 1997.
Nonaccrual loans and leases, the largest component of nonperforming assets, were
relatively unchanged compared to the second quarter. Other real estate owned
increased $1.4 million and loans and leases past due 90 days or more increased
$.4 million since the second quarter of 1998. The increase in other real estate
is primarily due to the closure of a former Advantage administrative facility.
Other real estate owned increased $6.8 million since September 30, 1997, which
is primarily due to branch closures associated with the Security merger which
occurred in the fourth quarter of 1997.
Net charge-offs in the third quarter of 1998 amounted to $2.1 million or .06%
of average loans and leases compared to net charge-offs of $4.3 million or .13%
of average loans and leases in the second quarter of 1998 and net charge-offs
of $2.1 million or .08% of average loans and leases in the third quarter of
1997. The Corporation's lead bank had one large commercial loan that accounted
for $2.1 million of the charge-offs in the second quarter of 1998.
The allowance for loan and lease losses amounted to $218.7 million or 1.59% of
total loans and leases at September 30, 1998 compared to $216.0 million or 1.61%
at June 30, 1998 and $163.7 million or 1.51% at September 30, 1997. The
coverage ratio of the allowance for loan and lease losses to nonperforming loans
and leases was 248% at September 30, 1998 compared with 247% at June 30, 1998
and 222% at September 30, 1997.
The provision for loan and lease losses amounted to $4.8 million in the third
quarter of 1998 compared to $4.3 million in the third quarter of 1997. The
increase is primarily due to loan growth.
<PAGE>
CONSOLIDATED CREDIT QUALITY INFORMATION
- ---------------------------------------
NONPERFORMING ASSETS ($000's)
------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
----------------------------- -------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Nonaccrual $ 79,645 $ 79,594 $ 71,399 $ 66,945 $ 64,846
Renegotiated 1,129 1,192 1,241 1,338 1,242
Past Due 90 Days or More 7,249 6,809 7,117 8,238 7,721
--------- --------- --------- --------- ---------
Total Nonperforming Loans
and Leases 88,023 87,595 79,757 76,521 73,809
Other Real Estate Owned 12,212 10,807 11,504 15,573 5,430
--------- --------- --------- --------- ---------
Total Nonperforming Assets $ 100,235 $ 98,402 $ 91,261 $ 92,094 $ 79,239
========= ========= ========= ========= =========
ALLOWANCE FOR LOAN AND
LEASE LOSSES $ 218,706 $ 216,014 $ 215,481 $ 208,651 $ 163,690
========= ========= ========= ========= =========
CONSOLIDATED STATISTICS
-----------------------
Net Charge-offs (Recoveries)
to Average Loans and Leases
Annualized 0.06% 0.13% (0.06)% 0.07% 0.08%
Total Nonperforming Loans and Leases
to Total Loans and Leases 0.64 0.65 0.61 0.58 0.68
Total Nonperforming Assets
to Total Loans and Other
Real Estate Owned 0.73 0.73 0.69 0.70 0.73
Allowance for Loan and Lease Losses
to Total Loans and Leases 1.59 1.61 1.63 1.59 1.51
Allowance for Loan and Lease Losses
to Nonperforming Loans and Leases 248 247 270 273 222
</TABLE>
<PAGE>
NONACCRUAL LOANS AND LEASES BY TYPE ($000's)
---------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------------------------- -------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial
Commercial, Financial &
Agricultural $ 14,506 $ 19,322 $ 16,659 $ 12,431 $ 17,280
Lease Financing
Receivables 2,812 2,171 2,648 3,855 2,073
--------- --------- --------- --------- ---------
Total Commercial 17,318 21,493 19,307 16,286 19,353
Real Estate
Construction and Land
Development 2,901 2,032 2,152 1,329 856
Commercial Mortgage 22,244 21,967 17,472 14,696 20,277
Residential Mortgage 34,797 31,424 29,327 31,117 20,644
--------- --------- --------- --------- ---------
Total Real Estate 59,942 55,423 48,951 47,142 41,777
Personal 2,385 2,678 3,141 3,517 3,716
--------- --------- --------- --------- ---------
Total Nonaccrual Loans and Leases $ 79,645 $ 79,594 $ 71,399 $ 66,945 $ 64,846
========= ========= ========= ========= =========
</TABLE>
RECONCILIATION OF CONSOLIDATED ALLOWANCE FOR LOAN AND LEASE LOSSES ($000's)
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------------------------- -------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Beginning Balance $ 216,014 $ 215,481 $ 208,651 $ 163,690 $ 161,426
Provision for Loan and Lease Losses 4,769 4,868 4,865 4,478 4,348
Allowance of Bank Acquired -- -- -- 42,773 --
Loans and Leases Charged-off
Commercial 510 3,237 1,153 1,273 1,123
Real Estate 1,369 815 906 925 1,109
Personal 1,714 1,768 2,426 2,058 1,962
Leases 131 194 165 416 208
--------- --------- --------- --------- ---------
Total Charge-offs 3,724 6,014 4,650 4,672 4,402
Recoveries on Loans and Leases
Commercial 274 373 5,704 1,387 1,338
Real Estate 717 385 146 326 249
Personal 633 644 760 635 597
Leases 23 277 5 34 134
--------- --------- --------- --------- ---------
Total Recoveries 1,647 1,679 6,615 2,382 2,318
--------- --------- --------- --------- ---------
Net Loans and Leases
Charge-offs (Recoveries) 2,077 4,335 (1,965) 2,290 2,084
--------- --------- --------- --------- ---------
Ending Balance $ 218,706 $ 216,014 $ 215,481 $ 208,651 $ 163,690
========= ========= ========= ========= =========
</TABLE>
<PAGE>
OTHER INCOME
- ------------
Total other income in the third quarter of 1998 amounted to $183.7 million, an
increase of $29.0 million or 18.7%, compared to $154.7 million in the same
period last year.
Data processing revenue increased $15.6 million or 17.9% from $86.7 million in
the third quarter of 1997 to $102.2 million in the current quarter. Processing
revenue increased $11.8 million or 19.5%. Software revenue increased $2.2
million or 15.8%. Conversion fees increased $1.4 million. All other revenue
including buyout fees, which can vary from period to period, were relatively
unchanged. Compared to the second quarter of 1998, revenue from data processing
services increased $3.1 million or 3.1%. 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.
Trust services revenue amounted to $23.8 million in the third quarter of 1998,
an increase of $3.7 million or 18.6% compared to $20.1 million in the third
quarter of 1997.
Other customer services revenue amounted to $38.1 million in the third quarter
of 1998 compared with $37.9 million in the second quarter of 1998 and $34.1
million in the third quarter of 1997. Other customer services revenue in 1998
includes the effect of the Security merger.
Net securities gains in the third quarter of 1998 amounted to $3.6 million
compared with $.2 million in the third quarter of 1997. During the third
quarter of 1998, the holding company sold equity securities for a gain of $1.3
million. In addition, the Corporation's banking affiliates sold available for
sale treasury securities for a gain of $2.4 million.
All other income amounted to $16.0 million in the third quarter of 1998 compared
to $13.7 million in the third quarter of 1997. Gains from the sale of
residential mortgage loans, which includes the servicing rights, increased $3.4
million. Revenue from bank-owned life insurance acquired in the Security merger
amounted to $.8 million for the three months ended September 30, 1998. Rent
income was $.5 million larger than the 1997 same quarter due to additional
rental space from the Security merger. Gain on fixed asset dispositions
decreased $3.0 million from the third quarter of 1997 primarily due to branch
deposit and facilities sales made in 1997.
In addition to utilizing interest rate swaps, caps and floors for hedging
purposes as discussed previously under "Net Interest Income", in September 1998,
the Corporation began trading in swap agreements for its customers. The
Corporation's market risk from these transactions is minimized by concurrently
entering into offsetting positions with nearly identical notional values, terms
and indexes. The Corporation's position with respect to interest rate swaps
held for trading purposes at September 30, 1998 consisted of the following ($
in millions):
Customer Trading Interest Rate Swaps
------------------------------------
Received Fixed
Notional Value $30
Weighted average receive rate 5.70%
Weighted average pay rate 5.31%
Weighted average remaining term (in years) 6.08
Estimated fair value $1.04
Pay Fixed
Notional Value $30
Weighted average receive rate 5.31%
Weighted average pay rate 5.65%
Weighted average remaining term (in years) 6.08
Estimated fair value ($0.96)
Market value changes on trading interest rate swaps are recognized as a
component of "Other Income" in the period of change. The impact of these
transactions were not material for the quarter ended September 30, 1998.
OTHER EXPENSE
- -------------
Total other expense in the third quarter of 1998 amounted to $225.8 million
compared with $227.6 million in the second quarter of 1998 and $195.7 million
in the third quarter of 1997.
<PAGE>
Expenses of the Corporation's banking business in the third quarter of 1998
include the effects of the Security merger. The Corporation added approximately
400 full-time equivalent employees as a direct result of the merger.
The Corporation's nonbanking businesses, especially its Data Services segment
("Data Services"), continue to be the primary contributors to operating expense
growth. Data Services expense growth represents over half of the consolidated
operating expense growth and reflects the cost of adding processing capacity
and other related costs associated with increased revenue growth and maintenance
activities for Year 2000. Expense growth of Trust Services reflects increased
activity in its outsourcing services business and expense growth of the
Corporation's residential mortgage banking reflects the significant increase in
volume of originations and accelerated amortization of mortgage servicing rights
due to increased prepayments.
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 nonrecurring charges) divided by the sum of total other
income (excluding securities gains or losses) and net interest income on a fully
taxable equivalent basis. The Corporation's efficiency ratios for the three
months ended September 30, 1998 and June 30, 1998 and the year ended December
31, 1997 are:
Three Months Three Months Year
Ended Ended Ended
September 30, June 30, December 31,
Efficiency Ratios 1998 1998 1997
- ---------------------- ----------- ----------- -------------
Consolidated Corporation 63.4% 64.9% 65.7 %
Consolidated Corporation
Excluding Data Service 53.3% 54.4% 57.1 %
Salaries and employee benefits expense amounted to $131.2 million in the third
quarter of 1998 compared to $113.7 million in the third quarter of 1997, an
increase of $17.5 million or 15.4%. Salaries and employee benefits expense of
Data Services increased $9.1 million or 16.4% in the current quarter compared
to the same period last year. At September 30, 1998 Data Services had on
average approximately 268 more full time equivalent employees when compared to
September 30, 1997 which reflects, in part, additional processing and service
centers. Compared to the third quarter of 1997, expense growth in the current
quarter in salaries and employee benefits amounted to $5.1 million for banking
and Support Services, $1.9 million for Trust Services and $0.9 for residential
mortgage banking.
Data Services expense growth accounted for approximately $3.7 million or 64.3%
of the increase in net occupancy, equipment and software expenses in the third
quarter of 1998 compared to the third quarter of 1997.
The increase in payments to regulatory agencies in the third quarter of 1998
compared to the like period in the prior year reflects the additional deposits
acquired in the Security merger.
The increase in professional services expense in the third quarter of 1998
compared to 1997 of $1.6 million or 36.4% is attributable to fees associated
with job placement, loan originations and refinancings and other consultants.
Data Services accounted for approximately $.4 million of the increase in
professional services expense.
Other expense amounted to $33.6 million in the third quarter of 1998, an
increase of $4.7 million or 16.3% compared to the third quarter of 1997. Other
expenses associated with Data Services accounted for approximately $1.3 million
of the increase. Amortization expense for goodwill, core deposit premiums and
mortgage servicing rights, primarily attributable to the Security merger,
increased $6.7 million and includes accelerated amortization for mortgage
servicing rights due to the increase in prepayments associated with refinancings
which is expected to continue. Advertising, promotion and development and
customer related expense of the Corporation and its affiliates excluding Data
Services increased $.7 million. These increases were partially offset by a $2.3
million decrease in expense for deferred liabilities tied to the value of the
Corporation's Common Stock due to the rapid increase in the stock price in 1997
and the revision and funding of this plan in 1998. Due to accelerated
prepayment activity, the Corporation reduced its recourse obligations associated
with securitized ARM's by $2.4 million in the third quarter of 1998.
<PAGE>
INCOME TAXES
- ------------
The provision for income taxes for the three months ended September 30, 1998
amounted to $42.5 million or 34.6% of pre-tax income compared to $33.1 million
or 33.8% of pre-tax income for the three months ended September 30, 1997. The
change in the effective tax is primarily due to the increase in non-deductible
goodwill amortization expense in the current quarter compared to the prior year
quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------------
Net income for the nine months ended September 30, 1998 amounted to $217.9
million compared to $181.5 million in the same period of 1997. Basic and
diluted earnings per share were $2.01 and $1.89, respectively for the nine
months ended September 30, 1998 compared to $1.92 and $1.78, respectively for
the same period last year. The year to date return on average equity was 13.83%
in the current period and 17.22% for the nine months ended September 30, 1997.
The Corporation's results of operations for the nine months ended September 30,
1998 include the impact of the Security merger as previously discussed. 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. 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)
in the quarter ended June 30, 1998. A detailed discussion of the components of
the merger / restructuring is contained in the Corporation's Quarterly Report
on Form 10-Q for the Quarterly period ended June 30, 1998. The charge as
recorded has not materially changed.
Operating income for the first nine months of 1998 was $234.1 million and basic
and diluted earnings per share amounted to $2.17 and $2.03 per share,
respectively, excluding the merger / restructuring charge for the Advantage
merger. The return on average equity based on operating income was 1.52% for
the nine months ended September 30, 1998.
The following table presents a summary of each of the major elements of the
consolidated income statement for the first nine months of 1998 and 1997,
excluding the merger / restructuring charges, stated as a percent of average
consolidated assets - converted to a fully taxable equivalent basis (FTE) where
appropriate.
Nine Months Ended
September 30,
--------------------- ROA
1998 1997 Impact
--------- --------- --------
Interest Income 7.10% 7.33% (0.23)%
Interest Expense (3.72) (3.66) (0.06)
--------- --------- --------
Net Interest Income 3.38 3.67 (0.29)
Provision for Loan
and Lease Losses (0.09) (0.11) 0.02
Net Securities Gains 0.12 0.01 0.11
Other Income 3.43 3.64 (0.21)
Other Expense (4.38) (4.79) 0.41
--------- --------- --------
Income Before Taxes 2.46 2.42 0.04
Income Taxes (0.94) (0.90) (0.04)
--------- --------- --------
Return on Average Assets 1.52% 1.52% (0.00)%
========= ========= ========
The increase in operating income is largely due to growth in noninterest revenue
of $112.4 million, including $49.1 million in data processing services, $17.9
million in other customer services, $16.9 million in net securities gains and
$9.5 million in Trust services. Approximately $4.9 million of the increase in
net securities gains were attributable to the Capital Markets Group. Net
interest income increased $80.9 million. Growth in other expense, which is
driven primarily by Data Services, was $104.7 million excluding the merger /
restructuring charge.
<PAGE>
CAPITAL RESOURCES
- -----------------
Shareholders' equity was $2.19 billion at September 30, 1998 compared to $2.02
billion at December 31, 1997 and $1.48 billion at September 30, 1997.
The Company has net unrealized gains on securities available for sale at
September 30, 1998 of $67.0 million, an increase of $14.9 million compared to
December 31, 1997.
The increase in deferred compensation of $6.0 million from $9.3 million at
December 31, 1997 to $15.3 million at September 30, 1998 reflects the partial
funding of the Corporation's Directors Deferred Compensation Plan for $7.9
million, partially offset by the accelerated vesting of the Advantage bank
incentive plan of $.4 million and the termination of Advantage's ESOP at $1.2
million.
In connection with the acquisition of Advantage Bancorp, Inc., the Company
rescinded its stock repurchase program effective March 16, 1998. During the
third quarter of 1998, the Company did not repurchase any shares of its own
common stock. Based on recent market conditions, the Corporation intends to
begin acquiring its common stock to fund benefit plans and for other business
purposes. Any such purchases may be conducted through open market or privately
negotiated transactions. The price, timing and actual number of shares
purchased will depend on market conditions.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in the
following tables.
RISK-BASED CAPITAL RATIOS ($IN MILLIONS)
- -----------------------------------------
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------ -----------------------------------
Amount Ratio Amount Ratio
------------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 1,998.1 12.89 % $ 1,821.7 12.34 %
Tier 1 Capital
Minimum Requirement 620.0 4.00 590.5 4.00
--------- -------- --------- --------
Excess $ 1,378.1 8.89 % $ 1,231.2 8.34 %
========= ======== ========= ========
Total Capital $ 2,272.2 14.66 % $ 2,106.5 14.27 %
Total Capital
Minimum Requirement 1,240.0 8.00 1,180.9 8.00
--------- -------- --------- --------
Excess $ 1,032.2 6.66 % $ 925.6 6.27 %
========= ======== ========= ========
Risk-Adjusted Assets $15,499.6 $14,761.7
========= =========
</TABLE>
LEVERAGE RATIOS ($IN MILLIONS)
- -------------------------------
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------ -----------------------------------
Amount Ratio Amount Ratio
------------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Capital $ 1,998.1 9.75 % $ 1,821.7 9.21 %
Minimum Leverage Requirement 614.9 - 1,024.8 3.00 - 5.00 593.5 - 989.2 3.00 - 5.00
------------------- ---------------- ------------------ ----------------
Excess $ 1,383.2 - 973.3 6.75 - 4.75 % $ 1,228.2 - 832.5 6.21 - 4.21 %
=================== ================ ================== ================
Adjusted Average Total Assets $20,496.2 $19,784.3
========= =========
</TABLE>
<PAGE>
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 reviews the plans associated with this problem. They 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).
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 are 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.
<PAGE>
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 meets 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 fourth quarter of 1998.
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 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
ongoing Credit Review process and the risk factor assigned is a component in
assessing the adequacy of the allowance for loan and lease losses. 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 for 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.
<PAGE>
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 $39 million with Data Services
representing approximately 88% of that amount. Approximately $21 million or 53%
has been expensed through September 30, 1998. The cost for the three and nine
months ended September 30, 1998 were $5 million and $11 million, respectively.
Costs for the comparable three and nine months in 1997 were approximately $2
million and $6 million, respectively. It is estimated that total 1998 net
expense will be approximately $14 million. 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.
Forward-Looking Statements
--------------------------
This Management's Discussion and Analysis of Financial Position contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 including, without limitation, statements
regarding M&I's risks, state of readiness, contingency plans and estimated costs
for addressing Year 2000 issues. 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
such forward-looking statements include, but are not limited to: (1)
unanticipated problems or delays encountered in making information systems Year
2000 compliant, (2) higher than anticipated costs in attaining Year 2000
compliance, (3) unanticipated litigation or other disputes with customers,
suppliers or others involving Year 2000 issues, (4) erroneous certifications
from third parties as to Year 2000 compliance, and (5) those factors set under
"Forward-Looking Statements" in Part I of M&I's Annual Report on Form 10-K for
the year ended December 31, 1997 which are incorporated herein by reference.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------------------
For a detailed discussion of market risk, see Item 7A. Quantitative and
Qualitative Disclosures about Market Risk in the Corporation's Annual Report on
Form 10K for the year ended December 31, 1997. For additional information on the
Corporation's derivative financial instruments, see Management's Discussion and
Analysis of Financial Position and Results of Operations.
Interest Rate Risk
- ------------------
The Corporation's consolidated static gap position as of September 30, 1998 has
not materially changed since December 31, 1997.
Along with the static gap analysis, determining the sensitivity of future
earnings to a hypothetical +/- 100 basis point parallel rate shock is
accomplished through the use of simulation modeling. The following table
illustrates these amounts as of September 30 and June 30, 1998, and December 31,
1997, which are within the limits established by the Corporation:
Hypothetical Change Impact to Pretax Net Income
in Interest Rates --------------------------------------------
- ------------------- September 30, June 30, December 31,
1998 1998 1997
------------- ------------- ------------
100 basis point Shock Up (7.2%) (7.4%) (7.1%)
100 basis point Shock Down 4.9% 5.9% 6.1%
These results are based solely on the repricing characteristics of the balance
sheet, adjusted for expected prepayments, due to 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. The fair value of equity at risk
is less than 1.5% of the market value of the Corporation as of September 30,
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. For a more detailed discussion of these items, see the discussion
of derivative financial instruments under "Other Income."
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibits:
Exhibit 11 - Statements - Computation of Earnings Per Share
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
(Registrant)
/s/ P.R. Justiliano
______________________________________
P.R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ J.E. Sandy
______________________________________
J.E. Sandy
Vice President
November 16, 1998
<PAGE>
EXHIBIT 11
<PAGE>
EXHIBIT 11
MARSHALL & ILSLEY CORPORATION
COMPUTATION OF EARNINGS PER SHARE
($000's except per share data)
Three Months Ended September 30,
--------------------------------
BASIC 1998 1997
- ----- ------------ ------------
Earnings:
Net income $ 80,155 $ 64,780
Less: Convertible preferred dividends (1,689) (1,535)
------------ ------------
Income available to common shareholders $ 78,466 $ 63,245
============ ============
Shares:
Weighted average number of common shares
outstanding 106,144 92,652
Less: Unvested restricted stock (101) (166)
------------ ------------
Total average basic shares outstanding 106,043 92,486
============ ============
Basic earnings per share $ 0.74 $ 0.68
============ ============
DILUTED
- -------
Earnings:
Income available to common shareholders
plus conversions $ 80,155 $ 64,780
============ ============
Shares:
Weighted average number of common shares
outstanding 106,144 92,652
Additional shares relating to:
Convertible preferred stock 7,677 7,677
Stock options, restricted stock and
performance plans 1,508 1,944
------------ ------------
Total average diluted shares outstanding 115,329 102,273
============ ============
Diluted earnings per share $ 0.70 $ 0.63
============ ============
<PAGE>
EXHIBIT 11
MARSHALL & ILSLEY CORPORATION
COMPUTATION OF EARNINGS PER SHARE
($000's except per share data)
Nine Months Ended September 30,
-------------------------------
BASIC 1998 1997
- ----- ------------ ------------
Earnings:
Net income $ 217,853 $ 181,520
Less: Convertible preferred dividends (4,913) (4,135)
------------ ------------
Income available to common shareholders $ 212,940 $ 177,385
============ ============
Shares:
Weighted average number of common shares
outstanding 105,871 92,628
Less: Unvested restricted stock (113) (185)
------------ ------------
Total average basic shares outstanding 105,758 92,443
============ ============
Basic earnings per share $ 2.01 $ 1.92
============ ============
DILUTED
- -------
Earnings:
Net income $ 217,853 $ 181,520
Add: Interest on convertible notes,
net of income tax effect -- 232
------------ ------------
Income available to common shareholders
plus conversions $ 217,853 $ 181,752
============ ============
Shares:
Weighted average number of common shares
outstanding 105,871 92,628
Additional shares relating to:
Convertible preferred stock 7,677 7,051
8.5% convertible debt -- 627
Stock options, restricted stock and
performance plans 1,722 1,793
Forward repurchase contract -- 160
------------ ------------
Total average diluted shares outstanding 115,270 102,259
============ ============
Diluted earnings per share $ 1.89 $ 1.78
============ ============
<PAGE>
EXHIBIT 12
<PAGE>
EXHIBIT 12
MARSHALL & ILSLEY CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($000's)
<TABLE>
<CAPTION>
Nine
Months
Ended Years Ended December 31,
September 30,----------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Earnings before income taxes, extraordinary
items and cumulative effect of changes
in accounting principles $ 337,132 $ 388,172 $ 317,949 $ 312,938 $ 179,762 $ 276,163
Fixed charges, excluding interest on deposits 154,722 175,609 126,188 119,424 85,768 55,740
---------- ---------- ---------- ---------- ---------- ----------
Earnings including fixed charges but
excluding interest on deposits 491,854 563,781 444,137 432,362 265,530 331,903
Interest on deposits 426,221 460,418 392,504 363,488 274,211 288,397
---------- ---------- ---------- ---------- ---------- ----------
Earnings including fixed charges and
interest on deposits $ 918,075 $ 1,024,199 $ 836,641 $ 795,850 $ 539,741 $ 620,300
========== ========== ========== ========== ========== ==========
Fixed Charges:
Interest Expense:
Short-term borrowings $ 96,806 $ 112,794 $ 62,071 $ 47,740 $ 39,681 $ 18,010
Long-term borrowings 50,235 52,574 55,363 64,363 39,168 30,860
One-third of rental expense for all operating
leases (the amount deemed representative
of the interest factor) 7,681 10,241 8,754 7,321 6,919 6,870
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges excluding interest on deposits 154,722 175,609 126,188 119,424 85,768 55,740
Interest on deposits 426,221 460,418 392,504 363,488 274,211 288,397
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges including interest on deposits $ 580,943 $ 636,027 $ 518,692 $ 482,912 $ 359,979 $ 344,137
========== ========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges:
Excluding interest on deposits 3.18 x 3.21 x 3.52 x 3.62 x 3.10 x 5.95 x
Including interest on deposits 1.58 x 1.61 x 1.61 x 1.65 x 1.50 x 1.80 x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 596,478
<INT-BEARING-DEPOSITS> 330,748
<FED-FUNDS-SOLD> 51,498
<TRADING-ASSETS> 57,219
<INVESTMENTS-HELD-FOR-SALE> 4,359,883
<INVESTMENTS-CARRYING> 1,058,452
<INVESTMENTS-MARKET> 1,099,744
<LOANS> 13,729,765
<ALLOWANCE> 218,706
<TOTAL-ASSETS> 21,208,181
<DEPOSITS> 14,496,437
<SHORT-TERM> 3,146,030
<LIABILITIES-OTHER> 504,494
<LONG-TERM> 866,563
0
685
<COMMON> 112,757
<OTHER-SE> 2,081,215
<TOTAL-LIABILITIES-AND-EQUITY> 21,208,181
<INTEREST-LOAN> 811,904
<INTEREST-INVEST> 254,207
<INTEREST-OTHER> 9,232
<INTEREST-TOTAL> 1,075,343
<INTEREST-DEPOSIT> 426,221
<INTEREST-EXPENSE> 573,262
<INTEREST-INCOME-NET> 502,081
<LOAN-LOSSES> 14,502
<SECURITIES-GAINS> 18,262
<EXPENSE-OTHER> 697,942
<INCOME-PRETAX> 337,132
<INCOME-PRE-EXTRAORDINARY> 217,853
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 217,853
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 1.89
<YIELD-ACTUAL> 3.65
<LOANS-NON> 79,645
<LOANS-PAST> 7,249
<LOANS-TROUBLED> 1,129
<LOANS-PROBLEM> 88,023
<ALLOWANCE-OPEN> 208,651
<CHARGE-OFFS> 14,388
<RECOVERIES> 9,941
<ALLOWANCE-CLOSE> 218,706
<ALLOWANCE-DOMESTIC> 218,706
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
