<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 March 31, 1999
---------------------------------------------
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 April 30, 1999
----- --------------
Common Stock, $1.00 Par Value 104,497,982
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
Assets 1999 1998 1998
- ------ --------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 641,648 $ 760,405 $ 708,818
Federal funds sold and
security resale agreements 16,954 34,616 98,758
Money market funds 71,408 111,717 90,124
------------- ------------- -------------
Total cash and cash equivalents 730,010 906,738 897,700
Investment securities:
Trading securities, at market value 33,234 34,046 39,080
Short-term investments, at cost which
approximates market value 54,571 51,971 47,035
Available for sale at market value 4,402,071 4,049,421 4,249,971
Held to maturity at amortized cost,
market value $1,147,979 ($1,095,048
December 31, and $1,242,228
March 31, 1998) 1,112,843 1,056,233 1,216,367
------------- ------------- -------------
Total investment securities 5,602,719 5,191,671 5,552,453
Loans and leases 14,260,672 13,996,166 13,181,526
Less: Allowance for loan and lease losses 229,669 226,052 215,481
------------- ------------- -------------
Net loans and leases 14,031,003 13,770,114 12,966,045
Premises and equipment 354,504 360,345 355,701
Intangible assets 321,157 335,533 357,944
Accrued interest and other assets 950,216 1,001,892 519,395
------------- ------------- -------------
Total Assets $ 21,989,609 $ 21,566,293 $ 20,649,238
============= ============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 2,681,922 $ 2,929,195 $ 2,644,163
Interest bearing 12,793,158 12,990,724 12,280,923
------------- ------------- -------------
Total deposits 15,475,080 15,919,919 14,925,086
Funds purchased and security
repurchase agreements 2,609,501 1,712,165 1,930,361
Other short-term borrowings 549,492 365,120 361,824
Accrued expenses and other liabilities 498,068 530,828 490,087
Long-term borrowings 680,236 794,482 867,576
------------- ------------- -------------
Total liabilities 19,812,377 19,322,514 18,574,934
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 (113,284,153 March 31, 1998 112,757 112,757 113,284
Additional paid-in capital 618,466 621,795 619,169
Retained earnings 1,724,779 1,664,123 1,513,348
Net unrealized gains on securities
available for sale, net of related taxes 40,601 58,102 48,243
Less: Treasury common stock, at cost;
8,385,347 shares (6,654,170
December 31, and 7,522,162
March 31, 1998) 301,529 194,046 211,312
Deferred compensation 18,527 19,637 9,113
------------- ------------- -------------
Total shareholders' equity 2,177,232 2,243,779 2,074,304
------------- ------------- -------------
Total Liabilities and
Shareholders' Equity $ 21,989,609 $ 21,566,293 $ 20,649,238
============= ============= =============
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
Interest income 1999 1998
- --------------- ----------------------------
<S> <C> <C>
Loans and leases $ 271,977 $ 264,824
Investment securities:
Taxable 64,300 74,077
Exempt from Federal income taxes 13,674 12,306
Trading securities 399 488
Short-term investments 2,236 2,392
------------- -------------
Total interest income 352,586 354,087
Interest expense
- ----------------
Deposits 133,651 141,695
Short-term borrowings 30,282 30,810
Long-term borrowings 15,836 16,981
------------- -------------
Total interest expense 179,769 189,486
------------- -------------
Net interest income 172,817 164,601
Provision for loan and lease losses 4,873 4,865
------------- -------------
Net interest income after
provision for loan and lease losses 167,944 159,736
Other income
- ------------
Data processing services 109,394 96,838
Trust services 23,872 21,464
Other customer services 38,548 38,196
Capital Markets net equity securities gains 1,510 6,369
Net investment securities gains -- 294
Other 22,036 16,131
------------- -------------
Total other income 195,360 179,292
Other expense
- -------------
Salaries and employee benefits 134,123 126,432
Net occupancy 12,093 11,274
Equipment 26,474 24,741
Software expenses 6,103 5,199
Processing charges 7,923 6,381
Supplies and printing 4,515 4,472
Professional services 7,213 4,541
Amortization of intangibles 15,025 11,000
Other 20,826 27,114
------------- -------------
Total other expense 234,295 221,154
------------- -------------
Income before income taxes 129,009 117,874
Provision for income taxes 43,478 42,368
------------- -------------
Net income $ 85,531 $ 75,506
============= =============
Net income per common share
- ---------------------------
Basic $ 0.79 $ 0.70
Diluted 0.75 0.66
Dividends paid per common share $ 0.22 $ 0.20
Weighted average common shares outstanding:
Basic 105,466 105,427
Diluted 114,743 115,195
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 249,179 $ 86,868
Cash Flows From Investing Activities:
- -------------------------------------
Net increase in securities with
maturities of three months or less (2,480) (10,050)
Proceeds from sales of securities
available for sale -- 6,365
Proceeds from maturities of longer
term securities 288,712 355,096
Purchases of longer term securities (726,903) (326,584)
Net increase in loans (344,688) (224,893)
Purchases of assets to be leased (93,486) (51,039)
Principal payments on lease receivables 73,006 56,730
Fixed asset purchases, net (9,820) (19,323)
Other 2,606 5,464
------------- -------------
Net cash used in
investing activities (813,053) (208,234)
------------- -------------
Cash Flows From Financing Activities:
- -------------------------------------
Net decrease in deposits (444,839) (95,242)
Proceeds from issuance of commercial paper 230,453 302,922
Payments for maturity of commercial paper (132,960) (299,210)
Net increase in other short-term
borrowings 893,964 288,670
Proceeds from issuance of long-term debt 4,361 2,844
Payments of long-term debt (28,385) (78,250)
Dividends paid (24,876) (22,211)
Purchases of treasury stock (116,512) (4,638)
Other 5,940 6,118
------------- -------------
Net cash provided by financing
activities 387,146 101,003
------------- -------------
Net increase (decrease) in
cash and cash equivalents (176,728) (20,363)
Cash and cash equivalents, beginning of year 906,738 918,063
------------- -------------
Cash and cash equivalents, end of period $ 730,010 $ 897,700
============= =============
Supplemental cash flow information:
- -----------------------------------
Cash paid/(received) during the period for:
Interest $ 181,667 $ 189,567
Income taxes 3,921 (1,633)
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 1999 & 1998 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I or
Corporation") 1998 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 months ended March 31, 1999 and 1998. The results of
operations for the three months ended March 31, 1999 and 1998 are not
necessarily indicative of results to be expected for the entire year.
Certain amounts in the 1998 consolidated financial statements and
analyses have been reclassified to conform with the 1999 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):
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
---------------------------------
Per
Income Average Shares Share
(Numerator) (Denominator) Amount
---------------------------------
<S> <C> <C> <C>
Net Income $ 85,531
Convertible Preferred Dividends (1,689)
-----------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 83,842 105,466 $ 0.79
======
Effect of Dilutive Securities
Convertible Preferred Stock 1,689 7,677
Stock Options and
Restricted Stock Plans -- 1,600
----------- ------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 85,531 114,743 $ 0.75
======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
---------------------------------
Per
Income Average Shares Share
(Numerator) (Denominator) Amount
---------------------------------
<S> <C> <C> <C>
Net Income $ 75,506
Convertible Preferred Dividends (1,535)
-----------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 73,971 105,427 $ 0.70
======
Effect of Dilutive Securities
Convertible Preferred Stock 1,535 7,677
Stock Options and
Restricted Stock Plans -- 2,091
----------- ------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 75,506 115,195 $ 0.66
======
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 1999 & 1998 (Unaudited)
4. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
----------------------------------------
<S> <C> <C> <C>
Other investment securities available for sale:
U.S. treasury and
government agencies $ 4,059,856 $ 3,723,703 $ 3,950,074
State and political subdivisions 153 148 224
Other 342,062 325,570 299,673
------------ ------------ ------------
Other available for sale $ 4,402,071 $ 4,049,421 $ 4,249,971
============ ============ ============
Investment securities held to maturity:
U.S. treasury and
government agencies $ 58 $ -- $ 232,793
State and political subdivisions 1,108,128 1,051,565 979,153
Other 4,657 4,668 4,421
------------ ------------ ------------
Held to maturity $ 1,112,843 $ 1,056,233 $ 1,216,367
============ ============ ============
</TABLE>
5. The Corporation's loan and lease portfolio consists of the following
($000's):
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
-------------------------------------
<S> <C> <C> <C>
Commercial, financial & agricultural $ 4,228,402 $ 4,077,837 $ 3,587,844
Real estate:
Construction 395,718 425,442 433,832
Residential mortgage 4,081,788 4,045,022 4,002,355
Commercial mortgage 3,750,583 3,667,924 3,524,539
----------- ----------- -----------
Total real estate 8,228,089 8,138,388 7,960,726
Personal 1,154,191 1,166,541 1,140,694
Lease financing 649,990 613,400 492,262
----------- ----------- -----------
$ 14,260,672 $ 13,996,166 $ 13,181,526
=========== =========== ===========
</TABLE>
6. The Corporation's deposit liabilities consists of the following ($000's):
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
-------------------------------------
<S> <C> <C> <C>
Noninterest bearing demand $ 2,681,922 $ 2,929,195 $ 2,644,163
Savings and NOW 6,860,544 6,768,523 6,073,777
CD's $100,000 and over 1,596,154 1,497,315 1,536,268
Other time deposits 3,428,472 3,544,614 4,064,297
Foreign Deposits 907,988 1,180,272 606,581
----------- ----------- -----------
$ 15,475,080 $ 15,919,919 $ 14,925,086
=========== =========== ===========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 1999 & 1998 (Unaudited)
7. Comprehensive Income
The following table presents the Corporation's comprehensive income
($000's):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
Net income $ 85,531 $ 75,506
Other comprehensive income
Unrealized gains (losses) on
securities, net of tax:
Arising during the period (17,501) (3,668)
Reclassification for securities
transactions included in net income -- (187)
----------- -----------
(17,501) (3,855)
----------- -----------
Total comprehensive income $ 68,030 $ 71,651
=========== ===========
</TABLE>
Other comprehensive income as shown is net of deferred income tax
benefits of $10,705 and $2,073 for the three months ended March 31, 1999
and 1998, respectively.
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 1999 & 1998 (Unaudited)
8. Segments
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. No changes have been made in the organization or reporting
of the Corporation's segments since the 1998 Annual Report.
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 to the
Corporation's Annual Report on Form 10K, Item 8. 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 Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
the Corporation has determined that it has two reportable segments.
Information with respect to M&I's segments is as follows:
Banking
-------
Banking represents the aggregation of twenty-six separately chartered
banks located in Wisconsin, one bank in Arizona, one federally chartered
thrift headquartered in Nevada 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. ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenue:
Net interest income $ 171.0 $ 163.2
Other revenues:
Unaffiliated customers 45.2 38.9
Affiliated customers 3.6 3.1
---------- ----------
Total revenues 219.8 205.2
Expenses:
Intersegment charges 22.4 20.5
Other operating expense 78.3 77.3
---------- ----------
Total expenses 100.7 97.8
Provision for loan and lease losses 4.7 4.7
Income tax expense 36.4 35.3
---------- ----------
Operating income $ 78.0 $ 67.4
========== ==========
Identifiable assets $ 20,820.5 $ 19,516.9
========== ==========
Return on tangible equity 19.9 % 17.6 %
========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 1999 & 1998 (Unaudited)
Banking (continued)
-------------------
The following tables present revenue and operating income by line of
business for Banking. This information is based on the Corporation's
product profitability measurement system and is an aggregation of the
revenues and expenses associated with the products and services within
each line of business. Net interest income is derived from the
Corporation's internal funds transfer pricing system, expenses are
allocated based on available transaction volumes and the provision for
loan and lease losses is allocated based on credit risk. Equity is
assigned to products and services on a basis that considers market,
operational and reputation risk. ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Banking revenues:
Commercial Banking $ 89.8 $ 87.5
Retail Banking 94.7 86.1
Investments and Other 35.3 31.6
---------- ----------
Total banking revenues $ 219.8 $ 205.2
========== ==========
Percent of total banking revenue:
Commercial Banking 40.8 % 42.6 %
Retail Banking 43.1 42.0
Investments and Other 16.1 15.4
---------- ----------
Total banking revenues 100.0 % 100.0 %
========== ==========
Operating banking income
Commercial Banking $ 42.3 $ 36.9
Retail Banking 25.4 20.5
Investments and Other 10.3 10.0
---------- ----------
Total operating banking income $ 78.0 $ 67.4
========== ==========
Percent of total operating banking income:
Commercial Banking 54.3 % 54.8 %
Retail Banking 32.5 30.4
Investments and Other 13.2 14.8
---------- ----------
Total operating banking income 100.0 % 100.0 %
========== ==========
Banking return on tangible equity
Commercial Banking 25.5 % 23.5 %
Retail Banking 22.7 18.4
---------- ----------
Total banking return on tangible equity 19.9 % 17.6 %
========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 1999 & 1998 (Unaudited)
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.
($ in millions):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenue:
Net interest expense $ (0.6) $ (0.6)
Other revenues:
Unaffiliated customers 112.7 99.7
Affiliated customers 21.5 19.8
---------- ----------
Total revenues 133.6 118.9
Expenses:
Intersegment charges 0.1 0.3
Other operating expense 114.4 102.7
---------- ----------
Total expenses 114.5 103.0
Income tax expense 8.3 6.7
---------- ----------
Operating income $ 10.8 $ 9.2
========== ==========
Identifiable assets $ 426.8 $ 327.5
========== ==========
Return on equity 19.9 % 20.6 %
========== ==========
</TABLE>
Data Services revenue from unaffiliated customers consist of the
following ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Data Processing Services $ 109.4 $ 96.8
Merchant credit card and
other customer services 3.0 2.8
Other 0.3 0.1
---------- ----------
Total unaffiliated customer revenue $ 112.7 $ 99.7
========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 1999 & 1998 (Unaudited)
All Others
----------
M&I's primary other operating segments includes Trust Services, Mortgage
Banking (residential and commercial), Capital Markets Group, Brokerage
and Insurance Services and Commercial Leasing. Trust Services provide
investment management and advisory services as well as personal,
commercial and corporate trust services in Wisconsin, Florida and
Arizona. Capital Markets Group provide venture capital and advisory
services. Intrasegment revenues, expenses and assets for the entities
that comprise Trust Services and Capital Markets Group have been
eliminated in the following information. ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenue:
Net interest income $ 5.8 $ 8.9
Other revenues:
Unaffiliated customers 36.2 39.8
Affiliated customers 5.2 5.1
---------- ----------
Total revenues 47.2 53.8
Expenses:
Intersegment charges 6.3 6.2
Other operating expense 25.8 25.9
---------- ----------
Total expenses 32.1 32.1
Provision for loan and lease losses 0.2 0.2
Income tax expense 5.9 8.5
---------- ----------
Operating income $ 9.0 $ 13.0
========== ==========
Identifiable assets $ 678.4 $ 714.5
========== ==========
Return on tangible equity 18.0 % 29.6 %
========== ==========
</TABLE>
Total Revenues by type in All Others consist of the following
($ in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
Trust Services $ 24.5 $ 21.6
Residential Mortgage Banking 10.8 11.6
Capital Markets 2.7 10.7
Brokerage and Insurance 5.0 5.0
Commercial Leasing 2.7 3.2
Commercial Mortgage Banking 0.3 1.3
Others 1.2 0.4
---------- ----------
Total revenues $ 47.2 $ 53.8
========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 1999 & 1998 (Unaudited)
Segment information reconciled to the Consolidated Financial Statements
is as follows ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Banking $ 219.8 $ 205.2
Data Services 133.6 118.9
All Others 47.2 53.8
Corporate overhead (1.6) (2.1)
Acquisition costs (0.4) (3.6)
Intersegment eliminations (30.4) (28.3)
---------- ----------
Consolidated revenues $ 368.2 $ 343.9
========== ==========
Expenses:
Banking $ 100.7 $ 97.8
Data Services 114.5 103.0
All Others 32.1 32.1
Corporate overhead 11.7 9.8
Acquisition costs 5.7 6.8
Intersegment eliminations (30.4) (28.3)
---------- ----------
Consolidated expenses $ 234.3 $ 221.2
========== ==========
Net income (loss):
Operating income:
Banking $ 78.0 $ 67.4
Data Services 10.8 9.2
All Others 9.0 13.0
Corporate overhead (7.5) (6.6)
Acquisition costs (4.8) (7.5)
---------- ----------
Consolidated net income $ 85.5 $ 75.5
========== ==========
Assets:
Banking $ 20,820.5 $ 19,516.9
Data Services 426.8 327.5
All Others 678.4 714.5
Corporate overhead 173.3 141.2
Acquisition costs 283.3 307.9
Intersegment eliminations (392.7) (358.8)
---------- ----------
Consolidated assets $ 21,989.6 $ 20,649.2
========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
Assets 1999 1998
- ------ ----------------------------
<S> <C> <C>
Cash and due from banks $ 658,996 $ 658,191
Trading securities 32,093 37,727
Short-term investments 190,542 174,668
Other investment securities:
Taxable 4,092,000 4,377,500
Tax-exempt 1,128,932 1,032,491
------------- -------------
Total investment securities 5,443,567 5,622,386
Loans and leases:
Commercial 4,132,882 3,400,387
Real estate 8,156,151 8,005,512
Personal 1,154,323 1,145,726
Lease financing 627,461 484,706
------------- -------------
14,070,817 13,036,331
Less: Allowance for loan and lease losses 228,619 210,898
------------- -------------
Total loans and leases 13,842,198 12,825,433
Premises and equipment, net 357,233 352,609
Accrued interest and other assets 1,294,022 869,643
------------- -------------
Total Assets $ 21,596,016 $ 20,328,262
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 2,567,832 $ 2,392,052
Interest bearing 12,718,488 12,065,001
------------- -------------
Total deposits 15,286,320 14,457,053
Funds purchased and security repurchase
agreements 2,447,332 2,023,663
Other short-term borrowings 121,809 204,689
Long-term borrowings 1,028,593 1,084,961
Accrued expenses and other liabilities 480,806 498,232
------------- -------------
Total liabilities 19,364,860 18,268,598
Shareholders' equity 2,231,156 2,059,664
------------- -------------
Total Liabilities and Shareholders' Equity $ 21,596,016 $ 20,328,262
============= =============
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
------------------------------------------
Net income for the first quarter of 1999 amounted to $85.5 million compared to
$75.5 million for the same period in the prior year. Basic and diluted
earnings per share were $.79 and $.75 respectively for the three months ended
March 31, 1999, compared with $.70 and $.66, respectively for the three months
ended March 31, 1998. The return on average assets and average equity were 1.61%
and 15.55% for the quarter ended March 31, 1999 and 1.51% and 14.87% for the
quarter ended March 31, 1998.
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 excludes the merger/restructuring charge
of $23.4 million ($16.3 million after-tax) associated with the April 1, 1998,
merger with Advantage Bancorp. "Cash operating income" and related statistics
is operating income before amortization of intangibles. 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 OPERATING INCOME STATEMENTS AND FINANCIAL STATISTICS
-------------------------------------------------------------------------
($000's except per share data)
<TABLE>
<CAPTION>
1999 1998
---------- ----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income $ 352,586 $ 358,701 $ 362,509 $ 358,747 $ 354,087
Interest expense (179,769) (184,712) (193,042) (190,734) (189,486)
---------- ---------- ---------- ---------- ----------
Net interest income 172,817 173,989 169,467 168,013 164,601
Provision for loan and lease losses (4,873) (12,588) (4,769) (4,868) (4,865)
Total net securities gains 1,510 12,521 3,568 8,031 6,663
Other income 193,850 196,317 180,133 176,471 172,629
Other expense (234,295) (242,086) (225,786) (227,629) (221,154)
---------- ---------- ---------- ---------- ----------
Income before taxes 129,009 128,153 122,613 120,018 117,874
Income tax provision (43,478) (44,683) (42,458) (41,558) (42,368)
---------- ---------- ---------- ---------- ----------
Operating income $ 85,531 $ 83,470 $ 80,155 $ 78,460 $ 75,506
========== ========== ========== ========== ==========
Cash operating income $ 94,372 $ 88,679 $ 85,354 $ 83,666 $ 80,885
========== ========== ========== ========== ==========
Per Common Share
Operating income
Basic $ 0.79 $ 0.77 $ 0.74 $ 0.73 $ 0.70
Diluted 0.75 0.72 0.70 0.68 0.66
Cash Operating income
Basic $ 0.88 $ 0.82 $ 0.79 $ 0.77 $ 0.75
Diluted 0.82 0.77 0.74 0.73 0.70
Dividends 0.22 0.22 0.22 0.22 0.20
Return on Average Equity
Operating income 15.55 % 14.96 % 14.76 % 14.96 % 14.87 %
Cash Operating income 19.78 18.35 18.26 18.66 18.66
</TABLE>
<PAGE>
SUMMARY CONSOLIDATED OPERATING INCOME STATEMENT COMPONENTS
----------------------------------------------------------
AS A PERCENT OF AVERAGE TOTAL ASSETS
------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------- ----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income (FTE) 6.75 % 6.81 % 7.01 % 7.10 % 7.19 %
Interest expense (3.38) (3.44) (3.67) (3.71) (3.78)
---------- ---------- ---------- ---------- ----------
Net interest income 3.37 3.37 3.34 3.39 3.41
Provision for loan and lease losses (0.09) (0.23) (0.09) (0.09) (0.10)
Total net securities gains 0.03 0.23 0.07 0.16 0.13
Other income 3.64 3.65 3.42 3.44 3.44
Other expense (4.40) (4.50) (4.29) (4.44) (4.40)
---------- ---------- ---------- ---------- ----------
Income before taxes 2.55 2.52 2.45 2.46 2.48
Income tax provision (0.94) (0.97) (0.93) (0.93) (0.97)
---------- ---------- ---------- ---------- ----------
Return on average assets
based on operating income 1.61 % 1.55 % 1.52 % 1.53 % 1.51 %
========== ========== ========== ========== ==========
Return on tangible
average assets based on
cash operating income 1.80 % 1.67 % 1.64 % 1.65 % 1.64 %
========== ========== ========== ========== ==========
</TABLE>
The increase in earnings in the first quarter of 1999 compared to the same
period last year is due to an increase in net interest income which was
driven by loan growth and favorable shifts in the mix of funding sources,
noninterest revenue growth particularly from nonbank subsidiaries and slower
expense growth which was offset, in part, by a decrease in securities gains
which is all discussed in further detail on the following pages.
NET INTEREST INCOME
-------------------
Net interest income for the first quarter of 1999 amounted to $172.8 million,
an increase of $8.2 million or 5.0% from the $164.6 million reported for the
first quarter of 1998. Net interest income arising from the increase in the
volume of average earning assets was offset by the decline in yield on
earning assets. The decrease in the rate of interest bearing liabilities due
to the decline in rates generally and the favorable shift in funding sources,
reduced interest expense by approximately $20.5 million, however, the
increase in the volume of average interest bearing liabilities contributed
approximately $10.8 million of increase to interest expense.
Compared to the fourth quarter of 1998, net interest income declined
approximately $1.2 million. Average earning assets and net interest income
in the first quarter of 1999 declined, in part, due to the effect of the
acquisition of approximately $400 million of bank-owned life insurance in
late December, 1998.
Average earning assets in the first quarter of 1999 were relatively unchanged
from the fourth quarter of 1998 but increased $855.7 million or 4.6% compared
to the same period a year ago. Average loans, including securitized
adjustable rate mortgage loans (ARMs), grew approximately $658.4 million or
4.7% compared to the first quarter of last year. Average securities,
excluding securitized ARMs, increased $187.0 million for the three months
ended March 31, 1999 compared with the same period in the prior year while
other earning assets were relatively unchanged.
Average interest bearing liabilities increased $937.9 million or 6.1% in the
first quarter of 1999 compared to the same period in 1998. Since the first
quarter of 1998, average interest bearing deposits increased $653.5 million
or 5.4% while average total borrowings increased $284.4 million.
<PAGE>
Average noninterest bearing deposits increased $175.8 million or 7.3% in the
current quarter compared to the same period last year.
The growth and composition of the Corporation's quarterly average loan
portfolio for the current quarter and previous four quarters are reflected in
the following table. Securitized ARM loans which are classified in the
consolidated balance sheets as investment securities available for sale are
included to provide a more meaningful comparison ($ in millions):
<TABLE>
<CAPTION>
Consolidated Average Loans, Leases and Securitized ARMs
- -------------------------------------------------------
1999 1998 Growth Pct.
------- ---------------------------------- -----------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 4,133 $ 4,021 $ 3,857 $ 3,711 $ 3,400 21.5 % 2.8 %
Real Estate
Construction
Commercial 305 309 284 278 274 11.2 (1.4)
Residential 107 115 120 131 174 (38.4) (6.8)
------- ------- ------- ------- ------- ------- -------
Total Construction 412 424 404 409 448 (8.1) (2.9)
Commercial Mortgages 3,717 3,616 3,544 3,543 3,476 6.9 2.8
Residential
Residential mortgages 2,333 2,423 2,410 2,540 2,626 (11.2) (3.7)
Home equity loans and lines 1,694 1,609 1,505 1,439 1,455 16.4 5.3
Securitized ARM loans 649 792 933 929 1,025 (36.7) (18.1)
------- ------- ------- ------- ------- ------- -------
Total Residential 4,676 4,824 4,848 4,908 5,106 (8.4) (3.1)
------- ------- ------- ------- ------- ------- -------
Total Real Estate 8,805 8,864 8,796 8,860 9,030 (2.5) (0.7)
Personal
Student 264 259 259 274 284 (6.9) 2.0
Credit card 137 137 133 127 129 6.8 0.1
Other 753 770 762 750 733 2.7 (2.2)
------- ------- ------- ------- ------- ------- -------
Total Personal 1,154 1,166 1,154 1,151 1,146 0.8 (1.0)
Lease financing
Commercial 335 330 331 335 322 4.0 1.5
Personal 293 251 211 184 163 79.9 16.5
------- ------- ------- ------- ------- ------- -------
Total Lease Financing 628 581 542 519 485 29.5 7.9
------- ------- ------- ------- ------- ------- -------
Total Consolidated Average
Loans, Leases and ARMs $ 14,720 $ 14,632 $ 14,349 $ 14,241 $ 14,061 4.7 % 0.6 %
======= ======= ======= ======= ======= ======= =======
Total Consolidated Average
Loans, Leases and ARMs
Commercial Banking $ 8,490 $ 8,276 $ 8,016 $ 7,867 $ 7,472 13.6 % 2.6 %
Retail Banking 6,230 6,356 6,333 6,374 6,589 (5.4) (2.0)
------- ------- ------- ------- ------- ------- -------
Total Consolidated Average
Loans, Leases and ARMs $ 14,720 $ 14,632 $ 14,349 $ 14,241 $ 14,061 4.7 % 0.6 %
======= ======= ======= ======= ======= ======= =======
Total Consolidated Average
Loans and Leases $ 14,071 $ 13,840 $ 13,416 $ 13,312 $ 13,036 7.9 % 1.7 %
======= ======= ======= ======= ======= ======= =======
</TABLE>
Compared with the first quarter of 1998, total consolidated average loans,
leases and securitized ARMs increased $659 million or 4.7%. Loan growth was
primarily attributable to commercial banking. Total loan growth in commercial
banking amounted $1.0 billion or 13.6% and was driven by commercial loan
growth of $733 million and commercial real estate loan growth of $241
million. Retail Banking loan growth of $239 million in home equity loans and
lines and $129 million in lease financing receivables were offset by a
decline in residential real estate loans and securitized ARMs of $669
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 throughout 1998 and early 1999 due to the
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 $530 million in
the first quarter of 1999 compared to $520 million in the first quarter of
1998 and $2.2 billion in all of 1998.
<PAGE>
The growth and composition of the Corporation's quarterly average deposits for
the current and prior year's quarters are as follows ($ in millions):
<TABLE>
<CAPTION>
1999 1998 Growth Pct.
------- ------------------------------- --------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
------- ------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing deposits
Commercial $ 1,655 $ 1,779 $ 1,670 $ 1,599 $ 1,562 6.0 % (7.0)%
Personal 549 529 507 512 487 12.5 3.8
Other 364 401 407 383 343 6.2 (9.2)
------- ------- ------- ------- ------- ------ ------
Total noninterest
bearing deposits 2,568 2,709 2,584 2,494 2,392 7.3 (5.2)
Interest bearing deposits
Savings & NOW 2,082 2,118 2,152 2,160 2,131 (2.3) (1.7)
Money market 4,697 4,474 4,233 4,021 3,805 23.5 5.0
Other CDs & time deposits 4,422 4,303 4,231 4,397 4,626 (4.4) 2.8
CDs greater than $100,000 762 780 810 844 834 (8.6) (2.3)
Brokered CDs 755 755 779 720 669 12.8 0.0
------- ------- ------- ------- ------- ------ ------
Total interest
bearing deposits 12,718 12,430 12,205 12,142 12,065 5.4 2.3
------- ------- ------- ------- ------- ------ ------
Total consolidated
average deposits $15,286 $15,139 $14,789 $14,636 $14,457 5.7 % 1.0 %
======= ======= ======= ======= ======= ====== ======
</TABLE>
Compared with the first quarter of 1998, average deposit growth amounted to $829
million or 5.7%. Money market, which exhibited the largest growth, along with
noninterest bearing deposits and brokered CDs accounted for approximately $1,154
million of the growth in average deposits. Partially, offsetting this growth
were declines in CDs and time deposits of $276 million. This shift in deposit
mix from CDs to other transaction accounts had a positive impact on the net
interest income in the first quarter of 1999 compared to the same period in the
prior year.
<PAGE>
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current quarter
and prior year first quarter are presented in the following table. Securitized
ARM loans that are classified in the balance sheet as investment securities
available for sale are included with loans to provide a more meaningful
comparison ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
---------------------------- ----------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
---------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (a) $ 14,719.6 $ 284.4 7.84 % $ 14,061.2 $ 284.7 8.23 %
Investment securities:
Taxable 3,443.2 52.4 6.24 3,352.6 54.7 6.70
Tax Exempt (a) 1,128.9 19.9 7.26 1,032.5 17.9 7.19
Other short-term
investments (a) 222.7 2.6 4.81 212.4 2.9 5.04
---------- -------- -------- ---------- -------- --------
Total interest
earning assets $ 19,514.4 $ 359.3 7.50 % $ 18,658.7 $ 360.2 7.86 %
========== ======== ======== ========== ======== ========
Money market savings $ 4,697.3 $ 47.7 4.12 % $ 3,804.8 $ 42.4 4.52 %
Regular savings & NOW 2,081.9 8.6 1.68 2,131.1 11.4 2.18
Other CDs & time
deposits 4,422.1 56.9 5.22 4,626.2 65.8 5.77
CDs greater than
$100 & Brokered CDs 1,517.2 20.5 5.47 1,502.9 22.1 5.96
---------- -------- -------- ---------- -------- --------
Total interest
bearing deposits 12,718.5 133.7 4.26 12,065.0 141.7 4.76
Short-term borrowings 2,569.1 30.3 4.78 2,262.8 30.8 5.52
Long-term borrowings 1,028.6 15.8 6.24 1,050.5 17.0 6.56
---------- -------- -------- ---------- -------- --------
Total interest
bearing liabilities $ 16,316.2 $ 179.8 4.47 % $ 15,378.3 $ 189.5 5.00 %
========== ======== ======== ========== ======== ========
Net interest margin (FTE)
as a percent of average
earning assets $ 179.5 3.75 % $ 170.7 3.73 %
======== ======== ======== ========
</TABLE>
(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 yield on average earning assets decreased 36 basis points since the first
quarter of 1998. This decline in yield reflects the run-off experienced
throughout 1998 of higher yielding loans and investment securities which was
offset by a slowing in the first quarter of 1999 of accelerated amortization of
purchase accounting premiums assigned to acquired loans and investment
securities due to prepayments and refinancings. Excluding accelerated
amortization of purchase accounting adjustments, the yield on earning assets was
7.51% in the current quarter compared to 7.92% in the first quarter of the prior
year. The yield on loans and securitized ARMs, the largest earning asset,
declined 39 basis points which had a negative impact on net interest income of
approximately $13.8 million compared with the first quarter of 1998. Net
interest income may continue to be adversely affected if recent prepayment
experience continues. The cost of interest bearing deposits decreased 50 basis
points from the same quarter of the previous year which reflects the general
interest rate environment and the favorable shift in the mix of deposit types.
Short-term borrowing costs decreased 74 basis points and long-term borrowing
costs decreased 32 basis points, respectively, compared with the first quarter
of 1998. The decrease in borrowing costs compared to the prior year first
quarter reflects the refinancing of maturities at favorable rates. The increase
in average borrowings reflects balance sheet growth and the effect of Treasury
stock repurchases.
<PAGE>
At March 31, 1999, the Corporation had standard receive fixed/pay floating
interest rate swaps and interest rate caps and floors designated as hedges to
manage the interest rate volatility associated with variable rate loans and
variable rate debt. In addition, the Corporation had callable receive fixed /
pay floating interest rate swaps designated as hedges to offset callable CDs.
The Corporation's position with respect to interest rate swaps and interest rate
caps and floors designated as hedges at March 31, 1999 consisted of the
following ($ in millions):
<TABLE>
<CAPTION>
Interest Rate Swaps
-------------------
<S> <C>
Notional value $765
Weighted average receive rate 6.01%
Weighted average pay rate 5.01%
Weighted average remaining term (in years) 2.35
Estimated fair value $5.58
Callable Interest Rate Swaps
----------------------------
Notional value $257
Weighted average receive rate 6.09%
Weighted average pay rate 4.85%
Weighted average remaining term (in years) 8.19
Estimated fair value ($2.12)
Interest Rate Caps/Floors
-------------------------
Notional value $50
Strike rate 5.63%
Index 5.03%
Weighted average remaining term (in years) 1.63
Estimated fair value $0.19
Unamortized premium $0.19
</TABLE>
For the three months ended March 31, 1999, the effect on net interest income
resulting from the swaps, net of cap and floor premium amortization, was a
positive $2.3 million compared with a positive $1.0 million in the same period
in 1998.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
At March 31, 1999, nonperforming assets were $134.0 million compared to $118.7
million at December 31, 1998 and $91.3 million at March 31, 1998. Nonaccrual
loans and leases, the largest component of nonperforming assets, increased $15.3
million since year-end 1998 and was primarily due to increases in nonaccrual
commercial and commercial real estate loans. Other real estate owned increased
$0.5 million while renegotiated loans and leases and loans and leases past due
90 days or more decreased $0.1 million and $0.4 million, respectively, since
December 31, 1998.
Net charge-offs in the first quarter of 1999 amounted to $1.3 million or .04%
of average loans and leases compared to net charge-offs of $5.2 million or .15%
of average loans and leases in the fourth quarter of 1998 and net recoveries of
$2.0 million in the first quarter of 1998. Personal loans accounted for the
majority of charge-off activity in the first quarter of 1999.
The allowance for loan and lease losses amounted to $229.7 million or 1.61% of
total loans and leases at March 31, 1999 compared to $226.1 million or 1.62% at
December 31, 1998 and $215.5 million or 1.63% at March 31, 1998. The coverage
ratio of the allowance for loan and lease losses to nonperforming loans and
leases was 184% at March 31, 1999 compared with 206% at December 31, 1998 and
270% at March 31, 1998.
The provision for loan and lease losses of $4.9 million in the first quarter of
1999 was unchanged compared to the first quarter of 1998.
<PAGE>
NONPERFORMING ASSETS
--------------------
($000's)
<TABLE>
<CAPTION>
1999 1998
--------- ---------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Nonaccrual $ 116,632 $ 101,346 $ 79,645 $ 79,594 $ 71,399
Renegotiated 878 978 1,129 1,192 1,241
Past due 90 days or more 7,275 7,631 7,249 6,809 7,117
--------- --------- --------- --------- ---------
Total nonperforming loans and leases 124,785 109,955 88,023 87,595 79,757
Other real estate owned 9,245 8,751 12,212 10,807 11,504
--------- --------- --------- --------- ---------
Total nonperforming assets $ 134,030 $ 118,706 $ 100,235 $ 98,402 $ 91,261
========= ========= ========= ========= =========
Allowance for loan and lease losses $ 229,669 $ 226,052 $ 218,706 $ 216,014 $ 215,481
========= ========= ========= ========= =========
</TABLE>
CONSOLIDATED STATISTICS
-----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Charge-offs (Recoveries) to
average loans and leases annualized 0.04 % 0.15 % 0.06 % 0.13 % (0.06)%
Total nonperforming loans and leases
to total loans and leases 0.88 0.79 0.64 0.65 0.61
Total nonperforming assets to
total loans and leases and
other real estate owned 0.94 0.85 0.73 0.73 0.69
Allowance for loan and lease losses
to total loans and leases 1.61 1.62 1.59 1.61 1.63
Allowance for loan and lease losses
to nonperforming loans and leases 184 206 248 247 270
</TABLE>
<PAGE>
NONACCRUAL LOANS AND LEASES BY TYPE
-----------------------------------
($000's)
<TABLE>
<CAPTION>
1999 1998
--------- ---------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial
Commercial, financial &
agricultural $ 51,472 $ 39,131 $ 14,506 $ 19,322 $ 16,659
Lease financing receivables 3,046 2,895 2,812 2,171 2,648
--------- --------- --------- --------- ---------
Total commercial 54,518 42,026 17,318 21,493 19,307
Real estate
Construction & land development 1,498 1,952 2,901 2,032 2,152
Commercial mortgage 24,865 21,586 22,244 21,967 17,472
Residential mortgage 33,517 33,117 34,797 31,424 29,327
--------- --------- --------- --------- ---------
Total real estate 59,880 56,655 59,942 55,423 48,951
Personal 2,234 2,665 2,385 2,678 3,141
--------- --------- --------- --------- ---------
Total nonaccrual loans and leases $ 116,632 $ 101,346 $ 79,645 $ 79,594 $ 71,399
========= ========= ========= ========= =========
</TABLE>
RECONCILIATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
-----------------------------------------------------
($000's)
<TABLE>
<CAPTION>
1999 1998
--------- ---------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 226,052 $ 218,706 $ 216,014 $ 215,481 $ 208,651
Provision for loan and lease losses 4,873 12,588 4,769 4,868 4,865
Loans and leases charged-off
Commercial 556 1,501 510 3,237 1,153
Real estate 1,250 2,377 1,369 815 906
Personal 1,697 1,978 1,714 1,768 2,426
Leases 196 701 131 194 165
--------- --------- --------- --------- ---------
Total charge-offs 3,699 6,557 3,724 6,014 4,650
Recoveries on loans and leases
Commercial 973 357 274 373 5,704
Real estate 561 285 717 385 146
Personal 704 653 633 644 760
Leases 205 20 23 277 5
--------- --------- --------- --------- ---------
Total Recoveries 2,443 1,315 1,647 1,679 6,615
--------- --------- --------- --------- ---------
Net loans and leases
charge-offs (recoveries) 1,256 5,242 2,077 4,335 (1,965)
--------- --------- --------- --------- ---------
Ending balance $ 229,669 $ 226,052 $ 218,706 $ 216,014 $ 215,481
========= ========= ========= ========= =========
</TABLE>
<PAGE>
OTHER INCOME
------------
Total other income in the first quarter of 1999 amounted to $195.4 million, an
increase of $16.1 million or 9.0%, compared to $179.3 million in the same period
last year.
Data processing revenue increased $12.6 million or 13.0% from $96.8 million in
the first quarter of 1998 to $109.4 million in the current quarter. Processing
and conversion revenue increased $13.2 million or 18.8%. Software and
consulting revenue decreased $0.8 million and $1.2 million, respectively. Buyout
fees increased $1.4 million. Compared to the fourth quarter of 1998, revenue
from data processing services decreased $5.1 million, which was largely due to
the $4.8 million decrease in buyout fees which can vary from period to period.
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 $23.9 million in the first quarter of 1999,
an increase of $2.4 million or 11.2% compared to $21.5 million in the first
quarter of 1998.
Other customer services revenue amounted to $38.5 million in the first quarter
of 1999 compared with $38.2 million in the first quarter of 1998. Service
charges on deposits increased $1.4 million, other commissions and fees increased
$0.4 million while loan and late fees decreased $1.5 million in the current
quarter compared to like period last year.
Net equity securities gains from the Corporation's Capital Markets Group
amounted to $1.5 million this quarter compared to $6.4 million in the first
quarter of 1998.
All other income amounted to $22.0 million in the first quarter of 1999 compared
to $16.1 million in the first quarter of 1998. Gains from the sale of
residential mortgage loans, which includes the servicing rights, of $7.9 million
was unchanged. Revenue from bank-owned life insurance acquired late in December,
1998, amounted to $5.4 million.
OTHER EXPENSE
-------------
Total other expense in the first quarter of 1999 amounted to $234.3 million
compared with $221.2 million in the first quarter of 1998.
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 approximately 89% of the
consolidated operating expense growth and reflects the cost of adding
processing capacity and other related costs associated with increased revenue
growth, costs associated with acquiring and developing new products and services
and maintenance activities for Year 2000.
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 (including Capital Markets net equity securities gains or losses but
excluding investment securities gains or losses) and net interest income on a
fully taxable equivalent basis. The Corporation's efficiency ratios for the
three months ended March 31, 1999 and 1998 and the year ended December 31, 1998
are:
<TABLE>
<CAPTION>
Three Months Year Three Months
Ended Ended Ended
March 31, December 31, March 31,
1999 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Consolidated Corporation 62.5 % 63.2 % 63.2 %
Consolidated Corporation
Excluding Data Services
Including Intangible Amortization 52.2 % 53.1 % 53.6 %
Excluding Intangible Amortization 48.6 % 48.5 % 48.6 %
</TABLE>
<PAGE>
Salaries and employee benefits expense amounted to $134.1 million in the first
quarter of 1999 compared to $126.4 million in the first quarter of 1998, an
increase of $7.7 million or 6.1%. Salaries and employee benefits expense of
Data Services increased $5.6 million which was offset by a decrease in contract
programmers of $2.5 million in the current quarter compared to the same period
last year. At March 31, 1999, Data Services had on average approximately 134
more full time equivalent employees when compared to March 31, 1998 which
reflects increases in e-commerce and technology services. Compared to the first
quarter of 1998, expense growth in the current quarter in salaries and employee
benefits was 2.6% for the banking segment while all others were relatively
unchanged.
Data Services expense growth accounted for approximately $3.8 million or 77% of
the increase in net occupancy, equipment, software and processing expenses in
the first quarter of 1999 compared to the first quarter of 1998.
Data Services also accounted for approximately $1.8 million or 72% of the
increase in professional services expense which represents Year 2000 activity
and new product development initiatives.
Other expense amounted to $35.9 million in the first quarter of 1999, a decrease
of $2.3 million or 6.0% compared to the first quarter of 1998. Amortization
expense for goodwill and other intangibles increased $4.0 million and amounted
to $15.0 million in the first quarter of 1999. Advertising, promotion and
development and customer related expense decreased $1.4 million. Due to
accelerated prepayment activity, the Corporation reduced its recourse
obligations associated with securitized ARM's by $0.8 million in the first
quarter of 1999.
Other expense is also affected by the capitalization of costs, net of
amortization associated with software development and customer data processing
conversions. During the first quarter of 1999, capitalization, net of
amortization, increased $1.4 million for conversions and $2.5 million for
software development, respectively, which decreased other expenses by $3.9
million compared to the first quarter of 1998.
INCOME TAXES
------------
The provision for income taxes for the three months ended March 31, 1999
amounted to $43.5 million or 33.7% of pre-tax income compared to $42.4 million
or 35.9% of pre-tax income for the three months ended March 31, 1998. The change
in the effective tax is primarily due to the increase in tax-exempt income.
CAPITAL RESOURCES
-----------------
Shareholders' equity was $2.18 billion at March 31, 1999 compared to $2.24
billion at December 31, 1998 and $2.07 billion at March 31, 1998.
The Company has net unrealized gains on securities available for sale at March
31, 1999 of $40.6 million, a decrease of $17.5 million compared to December 31,
1998.
During the first quarter of 1999, M&I repurchased 2.03 million shares of its
Common Stock under the authorization by the Board of Directors to repurchase up
to 6.0 million common shares annually. The aggregate cost of the shares
repurchased was $116.5 million.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in the
following tables.
<PAGE>
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------------- -----------------------------
Amount Ratio Amount Ratio
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 2,024 12.37 % $ 2,060 12.78 %
Tier 1 Capital
Minimum Requirement 655 4.00 645 4.00
--------------- ------------- --------------- -------------
Excess $ 1,369 8.37 % $ 1,415 8.78 %
=============== ============= =============== =============
Total Capital $ 2,309 14.11 % $ 2,342 14.53 %
Total Capital
Minimum Requirement 1,309 8.00 1,290 8.00
--------------- ------------- --------------- -------------
Excess $ 1,000 6.11 % $ 1,052 6.53 %
=============== ============= =============== =============
Risk-Adjusted Assets $ 16,367 $ 16,121
=============== ===============
</TABLE>
LEVERAGE RATIOS
---------------
($ in millions)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------------- -----------------------------
Amount Ratio Amount Ratio
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 2,024 9.55 % $ 2,060 9.86 %
Minimum Leverage
Requirement 636 - 1,060 3.00 - 5.00 627 - 1,045 3.00 - 5.00
--------------- ------------- --------------- -------------
Excess $ 1,388 - 964 6.55 - 4.55 % $ 1,433 - 1,015 6.86 - 4.86 %
=============== ============= =============== =============
Adjusted Average
Total Assets $ 21,200 $ 20,896
=============== ===============
</TABLE>
YEAR 2000 Update
- ----------------
The following is an update of the state of readiness, contingency plans and
estimated costs for addressing year 2000. This update should be read in
conjunction with the discussion on Year 2000 contained in the Corporation's 1998
Annual Report on Form 10-K. For purposes of this discussion, the summary has
been segregated between Data Services and the remainder of the Corporation and
Subsidiaries.
DATA SERVICES
-------------
As previously reported, 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 was completed by a selected
group of customers. In February, 1999, Data Services completed the internal
phase of "20xx" testing and in March, 1999, customer proxy testing was
completed. Customers were involved in the development of the test scope which
included development of test plans, test scripts and related infrastructure
environment guidelines. Approximately 58 financial institution customers
participated in the testing. M&I's banking affiliates were participants in both
of these testing phases. In addition, the process was reviewed and monitored
by an independent third party to help ensure; (1) the test plans and cases were
developed based on customer input; (2) the tests were executed and validated by
customers; (3) the tests were conducted using Year 2000 renovated software; (4)
test results were documented and reviewed to determine their reliability and;
(5) a representative cross section of customers participated in the tests. All
issues which emerged from the tests have been satisfactorily resolved. 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 continuing to validate year 2000 compliance for all third-party
software and computer hardware including mainframe, open systems, network and
desktop equipment and is validating the risks and state of readiness for year
2000 with respect to recently acquired businesses.
<PAGE>
With this critical phase of the year 2000 project substantially complete, Data
Services focus will be on assessing its physical infrastructure, perform ongoing
testing and continue work on contingency strategies. Of the approximately 600
identified areas/ products, Data Services has documented contingency plans for
98%, documented contingency test plans for 96% and executed 70% of the test
plans as of March 31, 1999.
Future data processing revenue is critically dependent upon successfully
implementing the necessary changes to ensure year 2000 compliance.
CORPORATION AND SUBSIDIARIES (Excluding Data Services)
------------------------------------------------------
Designated "Mission Critical" software has been renovated and validated.
The risk assessment phase of assessing vendor readiness and testing hardware has
been completed. Certification of "Non-Mission Critical" hardware, software,
office machines and building systems is underway and is anticipated to be
completed in the second quarter of 1999.
The risk assessment for customer readiness has been completed. Customers who
have been assigned a moderate or high risk factor are being monitored on an
ongoing basis.
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 has identified 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 and testing of contingency plans is expected to begin in the third
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 is approximately $45 million with Data Services representing
approximately 90% of that amount. The current estimate represents an increase
of approximately $5 million since year-end 1998. Approximately $28.4 million
has been expensed through March 31, 1999. The cost for the three months ended
March 31, 1999 and 1998 were $3.1 million and $2.5 million, respectively.
Replacement equipment and software are being capitalized or expensed in
accordance with the Corporation's normal accounting policies. Write-offs of the
net book value of equipment or software that is not Year 2000 compliant is
included in the above estimates.
Recent Developments
- -------------------
On April 1, 1999, the Corporation, through its Data Services Division, completed
the purchase acquisition of the assets, operational processes and customer
relationships of the Electronic Banking Services business unit of ADP for
approximately $70 million in cash. The acquired software products and
outsourcing solutions are designed to provide businesses with access to their
banking information and transactions through a spectrum of delivery methods
including an internet web browser, a direct PC connection or telephone.
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
<PAGE>
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, 1998 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, 1998. 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 March 31, 1999 has not
materially changed since December 31, 1998.
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 March 31, 1999, and December 31, 1998, which are
within the limits established by the Corporation:
<TABLE>
<CAPTION>
Impact to Pretax Income
-----------------------------
Hypothetical Change in Interest Rate March 31, 1999 December 31,
- ------------------------------------ -------------- -------------
<S> <C> <C>
100 basis point Shock Up (11.8) % (8.6)%
100 basis point Shock Down 9.2 % 5.9 %
</TABLE>
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 4.0% of the market value of the Corporation as of March 31,
1999.
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. Interest rate swaps held for trading included $30 million in
notional amount of receive fixed and $30 million in notional amount of pay fixed
at March 31, 1999.
<PAGE>
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
- ---------------------------------------------------
As of March 31, 1999, Northwestern Mutual Life Insurance Company ("NML")
beneficially owned 8,665,374 shares of the Registrant's common stock (the
"Common Stock"). NML's ownership consists of 988,188 shares of Common
Stock and 685,314 shares of the Registrant's Preferred Stock. The
Preferred Stock is convertible into 7,677,185 shares of Common Stock.
This information is based on Amendment No. 10 to Schedule 13G filed by
NML on February 10, 1998. The Investment Agreement between the
Registrant and NML pursuant to which NML originally invested in the
Registrant's securities has expired. Therefore, certain rights and
restrictions relating to NML's ownership of the Registrant's securities
have expired, including the right to exchange shares of Common Stock for
shares of Preferred Stock, the right to purchase up to 24.9% of the
Common Stock on a fully diluted basis, and the right to require the
Company to repurchase its stock at not less than prescribed prices after
a "change-in-control" or upon the occurrence of a "business combination."
However, NML is subject to the limitations set forth in the December 27,
1985 letter to NML from the Board of Governors of the Federal Reserve
Board, including limitations as to NML's voting power, dispositive power,
and aggregate amount beneficially owned.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibits:
Exhibit 11 - Statements - Computation of Earnings Per Share
Incorporated by Reference to NOTE 3 of Notes to
Financial Statements contained in Item 1-Financial
Statements (unaudited) of Part 1-Financial Information
herein.
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
May 14, 1999
<PAGE>
EXHIBIT 12
<PAGE>
EXHIBIT 12
MARSHALL & ILSLEY CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($000's)
<TABLE>
<CAPTION>
Three
Months
Ended Years Ended December 31,
March 31, ----------------------------------------------------------
Earnings: 1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings before income taxes, extraordinary
items and cumulative effect of changes
in accounting principles $ 129,009 $ 465,285 $ 388,172 $ 317,949 $ 312,938 $ 179,762
Fixed charges, excluding interest on deposits 49,396 206,546 175,609 126,261 119,412 85,767
---------- ---------- ---------- ---------- ---------- ----------
Earnings including fixed charges but
excluding interest on deposits 178,405 671,831 563,781 444,210 432,350 265,529
Interest on deposits 133,651 564,540 460,418 392,473 363,488 274,211
---------- ---------- ---------- ---------- ---------- ----------
Earnings including fixed charges and
interest on deposits $ 312,056 $ 1,236,371 $ 1,024,199 $ 836,683 $ 795,838 $ 539,740
========== ========== ========== ========== ========== ==========
Fixed Charges:
Interest Expense:
Short-term borrowings $ 30,282 $ 126,624 $ 111,193 $ 63,892 $ 48,390 $ 39,978
Long-term borrowings 15,836 66,810 54,175 53,615 63,701 38,870
One-third of rental expense for all operating
leases (the amount deemed representative
of the interest factor) 3,278 13,112 10,241 8,754 7,321 6,919
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges excluding interest on deposits 49,396 206,546 175,609 126,261 119,412 85,767
Interest on deposits 133,651 564,540 460,418 392,473 363,488 274,211
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges including interest on deposits $ 183,047 $ 771,086 $ 636,027 $ 518,734 $ 482,900 $ 359,978
========== ========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges:
Excluding interest on deposits 3.61 x 3.25 x 3.21 x 3.52 x 3.62 x 3.10 x
Including interest on deposits 1.70 x 1.60 x 1.61 x 1.61 x 1.65 x 1.50 x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 641,648
<INT-BEARING-DEPOSITS> 125,979
<FED-FUNDS-SOLD> 16,954
<TRADING-ASSETS> 33,234
<INVESTMENTS-HELD-FOR-SALE> 4,402,071
<INVESTMENTS-CARRYING> 1,112,843
<INVESTMENTS-MARKET> 1,147,979
<LOANS> 14,260,672
<ALLOWANCE> 229,669
<TOTAL-ASSETS> 21,989,609
<DEPOSITS> 15,475,080
<SHORT-TERM> 3,158,993
<LIABILITIES-OTHER> 498,068
<LONG-TERM> 680,236
0
685
<COMMON> 112,757
<OTHER-SE> 2,063,790
<TOTAL-LIABILITIES-AND-EQUITY> 21,989,609
<INTEREST-LOAN> 271,977
<INTEREST-INVEST> 77,974
<INTEREST-OTHER> 2,635
<INTEREST-TOTAL> 352,586
<INTEREST-DEPOSIT> 133,651
<INTEREST-EXPENSE> 179,769
<INTEREST-INCOME-NET> 172,817
<LOAN-LOSSES> 4,873
<SECURITIES-GAINS> 1,510
<EXPENSE-OTHER> 234,295
<INCOME-PRETAX> 129,009
<INCOME-PRE-EXTRAORDINARY> 85,531
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,531
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 3.75
<LOANS-NON> 116,632
<LOANS-PAST> 7,275
<LOANS-TROUBLED> 878
<LOANS-PROBLEM> 124,785
<ALLOWANCE-OPEN> 226,052
<CHARGE-OFFS> 3,699
<RECOVERIES> 2,443
<ALLOWANCE-CLOSE> 229,669
<ALLOWANCE-DOMESTIC> 229,669
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
