<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 June 30, 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 July 31, 1999
----- --------------
Common Stock, $1.00 Par Value 103,137,325
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Assets 1999 1998 1998
- ------ -----------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 665,870 $ 760,405 $ 726,772
Federal funds sold and
security resale agreements 87,713 34,616 76,812
Money market funds 49,832 111,717 54,459
------------ ------------ ------------
Total cash and cash equivalents 803,415 906,738 858,043
Investment securities:
Trading securities, at market value 33,409 34,046 46,389
Short-term investments, at cost which
approximates market value 31,157 51,971 53,259
Available for sale at market value 4,353,137 4,049,421 4,573,344
Held to maturity at amortized cost,
market value $1,181,325 ($1,095,048
December 31, and $1,055,306 June 30, 1998) 1,179,310 1,056,233 1,031,812
------------ ------------ ------------
Total investment securities 5,597,013 5,191,671 5,704,804
Loans and leases 14,899,052 13,996,166 13,402,285
Less: Allowance for loan and lease losses 225,277 226,052 216,014
------------ ------------ ------------
Net loans and leases 14,673,775 13,770,114 13,186,271
Premises and equipment 358,402 360,345 356,579
Intangible assets 370,647 335,533 348,150
Accrued interest and other assets 989,247 1,001,892 529,360
------------ ------------ ------------
Total Assets $ 22,792,499 $ 21,566,293 $ 20,983,207
============ ============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 2,708,405 $ 2,929,195 $ 2,774,190
Interest bearing 13,189,064 12,990,724 11,833,028
------------ ------------ ------------
Total deposits 15,897,469 15,919,919 14,607,218
Funds purchased and security
repurchase agreements 2,331,164 1,712,165 1,257,335
Other short-term borrowings 894,082 365,120 1,656,626
Accrued expenses and other liabilities 557,518 530,828 455,786
Long-term borrowings 976,093 794,482 890,826
------------ ------------ ------------
Total liabilities 20,656,326 19,322,514 18,867,791
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 112,757 112,757 112,757
Additional paid-in capital 613,192 621,795 611,931
Retained earnings 1,785,500 1,664,123 1,550,516
Net unrealized gains on securities
available for sale, net of related taxes 14,757 58,102 43,730
Less: Treasury common stock, at cost;
9,259,433 shares (6,654,170 December 31,
and 6,816,459 June 30, 1998) 371,218 194,046 196,707
Deferred compensation 19,500 19,637 7,496
------------ ------------ ------------
Total shareholders' equity 2,136,173 2,243,779 2,115,416
------------ ------------ ------------
Total Liabilities and
Shareholders' Equity $ 22,792,499 $ 21,566,293 $ 20,983,207
============ ============ ============
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 June 30,
---------------------------
Interest income 1999 1998
- --------------- --------------------------
<S> <C> <C>
Loans and leases $ 279,541 $ 272,551
Investment securities:
Taxable 68,272 70,193
Exempt from Federal income taxes 14,217 12,865
Trading securities 381 539
Short-term investments 2,291 2,599
------------ ------------
Total interest income 364,702 358,747
Interest expense
- ----------------
Deposits 136,936 142,343
Short-term borrowings 34,528 31,911
Long-term borrowings 15,496 16,480
------------ ------------
Total interest expense 186,960 190,734
------------ ------------
Net interest income 177,742 168,013
Provision for loan and lease losses 4,811 4,868
------------ ------------
Net interest income after
provision for loan and lease losses 172,931 163,145
Other income
- ------------
Data processing services
Processing 62,991 56,458
Software and consulting 17,834 23,143
E-commerce 36,813 19,487
------------ ------------
Total data processing services 117,638 99,088
Internet banking 553 --
Trust services 25,059 22,043
Service charges on deposits 17,019 15,230
Mortgage banking 7,453 12,381
Capital Markets revenue 2,146 6,208
Net investment securities gains 355 1,912
Other 38,242 27,640
------------ ------------
Total other income 208,465 184,502
Other expense
- -------------
Salaries and employee benefits 149,666 129,555
Net occupancy 12,253 10,715
Equipment 26,906 25,195
Software expenses 6,786 4,869
Processing charges 7,501 5,872
Supplies and printing 5,182 4,820
Professional services 7,320 5,718
Amortization of intangibles 8,502 10,610
Merger/Restructuring -- 23,373
Other 23,767 30,275
------------ ------------
Total other expense 247,883 251,002
------------ ------------
Income before income taxes 133,513 96,645
Provision for income taxes 45,995 34,453
------------ ------------
Net income $ 87,518 $ 62,192
============ ============
Net income per common share
- ---------------------------
Basic $ 0.82 $ 0.57
Diluted 0.77 0.54
Dividends paid per common share $ 0.24 $ 0.22
Weighted average common shares outstanding:
Basic 104,123 105,790
Diluted 113,544 115,278
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
Interest income 1999 1998
- --------------- --------------------------
<S> <C> <C>
Loans and leases $ 551,518 $ 537,375
Investment securities:
Taxable 132,572 144,270
Exempt from Federal income taxes 27,891 25,171
Trading securities 780 1,027
Short-term investments 4,527 4,991
------------ ------------
Total interest income 717,288 712,834
Interest expense
- ----------------
Deposits 270,587 284,038
Short-term borrowings 64,810 62,721
Long-term borrowings 31,332 33,461
------------ ------------
Total interest expense 366,729 380,220
------------ ------------
Net interest income 350,559 332,614
Provision for loan and lease losses 9,684 9,733
------------ ------------
Net interest income after
provision for loan and lease losses 340,875 322,881
Other income
- ------------
Data processing services
Processing 126,234 112,238
Software and consulting 39,593 47,086
E-commerce 61,205 36,602
------------ ------------
Total data processing services 227,032 195,926
Internet banking 1,072 --
Trust services 48,931 43,507
Service charges on deposits 33,472 30,244
Mortgage banking 18,639 25,159
Capital Markets revenue 3,728 13,429
Net investment securities gains 355 2,206
Other 70,596 53,323
------------ ------------
Total other income 403,825 363,794
Other expense
- -------------
Salaries and employee benefits 283,789 255,987
Net occupancy 24,346 21,989
Equipment 53,380 49,936
Software expenses 12,889 10,068
Processing charges 15,424 12,253
Supplies and printing 9,697 9,292
Professional services 14,533 10,259
Amortization of intangibles 23,527 21,610
Merger/Restructuring -- 23,373
Other 44,593 57,389
------------ ------------
Total other expense 482,178 472,156
------------ ------------
Income before income taxes 262,522 214,519
Provision for income taxes 89,473 76,821
------------ ------------
Net income $ 173,049 $ 137,698
============ ============
Net income per common share
- ---------------------------
Basic $ 1.62 $ 1.27
Diluted 1.52 1.19
Dividends paid per common share $ 0.46 $ 0.42
Weighted average common shares outstanding:
Basic 104,791 105,612
Diluted 114,150 115,238
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 400,310 $ 162,593
Cash Flows From Investing Activities:
- -------------------------------------
Net (increase)/decrease in securities with
maturities of three months or less 21,400 (16,250)
Proceeds from sales of securities
available for sale 96,494 80,194
Proceeds from maturities of longer
term securities 557,615 796,949
Purchases of longer term securities (1,150,393) (840,117)
Net increase in loans (950,829) (596,115)
Purchases of assets to be leased (207,646) (136,771)
Principal payments on lease receivables 143,858 114,415
Fixed asset purchases, net (25,844) (33,970)
Acquisitions accounted for as purchases (67,120) --
Other 7,045 9,882
------------ ------------
Net cash used in
investing activities (1,575,420) (621,783)
------------ ------------
Cash Flows From Financing Activities:
- -------------------------------------
Net decrease in deposits (18,251) (413,110)
Proceeds from issuance of commercial paper 574,986 448,497
Payments for maturity of commercial paper (480,536) (518,994)
Net increase in other short-term
borrowings 1,296,246 997,320
Proceeds from issuance of long-term debt 30,781 30,654
Payments of long-term debt (93,854) (97,655)
Dividends paid (51,654) (47,225)
Purchases of treasury stock (198,163) (12,703)
Other 12,232 12,386
------------ ------------
Net cash provided by
financing activities 1,071,787 399,170
------------ ------------
Net increase (decrease) in cash
and cash equivalents (103,323) (60,020)
Cash and cash equivalents,
beginning of year 906,738 918,063
------------ ------------
Cash and cash equivalents,
end of period $ 803,415 $ 858,043
============ ============
Supplemental cash flow information:
- -----------------------------------
Cash paid/(received) during the period for:
Interest $ 378,796 $ 389,166
Income taxes 16,801 70,572
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 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 and six months ended June 30, 1999 and 1998. The results
of operations for the three and six months ended June 30, 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 June 30, 1999
--------------------------------------
Per
Income Average Shares Share
(Numerator) (Denominator) Amount
--------------------------------------
<S> <C> <C> <C>
Net Income $ 87,518
Convertible Preferred Dividends (1,843)
------------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 85,675 104,123 $ 0.82
========
Effect of Dilutive Securities
Convertible Preferred Stock 1,843 7,677
Stock Options and
Restricted Stock Plans -- 1,744
------------ ---------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 87,518 113,544 $ 0.77
========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
--------------------------------------
Per
Income Average Shares Share
(Numerator) (Denominator) Amount
--------------------------------------
<S> <C> <C> <C>
Net Income $ 62,192
Convertible Preferred Dividends (1,689)
------------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 60,503 105,790 $ 0.57
========
Effect of Dilutive Securities
Convertible Preferred Stock 1,689 7,677
Stock Options and
Restricted Stock Plans -- 1,811
------------ ---------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 62,192 115,278 $ 0.54
========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 1999 & 1998 (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
--------------------------------------
Per
Income Average Shares Share
(Numerator) (Denominator) Amount
--------------------------------------
<S> <C> <C> <C>
Net Income $ 173,049
Convertible Preferred Dividends (3,532)
------------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 169,517 104,791 $ 1.62
========
Effect of Dilutive Securities
Convertible Preferred Stock 3,532 7,677
Stock Options, Restricted Stock and
Performance Plans -- 1,682
------------ ---------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 173,049 114,150 $ 1.52
========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
--------------------------------------
Per
Income Average Shares Share
(Numerator) (Denominator) Amount
--------------------------------------
<S> <C> <C> <C>
Net Income $ 137,698
Convertible Preferred Dividends (3,224)
------------
Basic Earnings Per Share
Income Available to
Common Shareholders $ 134,474 105,612 $ 1.27
========
Effect of Dilutive Securities
Convertible Preferred Stock 3,224 7,677
Stock Options and
Restricted Stock Plans -- 1,949
------------ ---------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 137,698 115,238 $ 1.19
========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 1999 & 1998 (Unaudited)
4. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1999 1998 1998
----------------------------------------
<S> <C> <C> <C>
Other investment securities available for sale:
U.S. treasury and
government agencies $ 3,968,036 $ 3,723,703 $ 4,171,767
State and political subdivisions 149 148 223
Other 384,952 325,570 401,354
------------ ------------ ------------
Other available for sale $ 4,353,137 $ 4,049,421 $ 4,573,344
============ ============ ============
Investment securities held to maturity:
U.S. treasury and
government agencies $ 44 $ -- $ --
State and political subdivisions 1,174,099 1,051,565 1,027,337
Other 5,167 4,668 4,475
------------ ------------ ------------
Held to maturity $ 1,179,310 $ 1,056,233 $ 1,031,812
============ ============ ============
</TABLE>
5. The Corporation's loan and lease portfolio consists of the following
($000's):
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1999 1998 1998
----------------------------------------
<S> <C> <C> <C>
Commercial, financial
& agricultural $ 4,394,154 $ 4,077,837 $ 3,894,203
Real estate:
Construction 424,284 425,442 398,140
Residential mortgage 4,310,828 4,045,022 3,891,697
Commercial mortgage 3,847,438 3,667,924 3,518,845
------------ ------------ ------------
Total real estate 8,582,550 8,138,388 7,808,682
Personal 1,213,936 1,166,541 1,166,381
Lease financing 708,412 613,400 533,019
------------ ------------ ------------
$ 14,899,052 $ 13,996,166 $ 13,402,285
============ ============ ============
</TABLE>
6. The Corporation's deposit liabilities consists of the following ($000's):
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1999 1998 1998
----------------------------------------
<S> <C> <C> <C>
Noninterest bearing demand $ 2,708,405 $ 2,929,195 $ 2,774,190
Savings and NOW 6,764,346 6,768,523 6,210,006
CD's $100,000 and over 1,740,917 1,497,315 1,587,941
Other time deposits 3,420,091 3,544,614 3,795,610
Foreign Deposits 1,263,710 1,180,272 239,471
------------ ------------ ------------
$ 15,897,469 $ 15,919,919 $ 14,607,218
============ ============ ============
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 1999 & 1998 (Unaudited)
7. Comprehensive Income
The following table presents the Corporation's comprehensive income
($000's):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Net income $ 87,518 $ 62,192
Other comprehensive income
Unrealized gains (losses) on
securities, net of tax:
Arising during the period (25,370) (2,524)
Reclassification for securities
transactions included in net income (474) (1,989)
------------ ------------
(25,844) (4,513)
------------ ------------
Total comprehensive income $ 61,674 $ 57,679
============ ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Net income $ 173,049 $ 137,698
Other comprehensive income
Unrealized gains (losses) on
securities, net of tax:
Arising during the period (42,536) (6,141)
Reclassification for securities
transactions included in net income (809) (2,227)
------------ ------------
(43,345) (8,368)
------------ ------------
Total comprehensive income $ 129,704 $ 129,330
============ ============
</TABLE>
Other comprehensive income as shown is net of deferred income tax
benefits of $15,078 and $2,760 for the three months and $25,783 and
$4,834 for the six months ended June 30, 1999 and 1998, respectively.
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 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 Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Net interest income $ 176.6 $ 163.5 $ 347.6 $ 326.7
Other revenues:
Unaffiliated customers 48.7 42.2 93.9 81.1
Affiliated customers 4.1 3.9 7.7 7.0
---------- ---------- ---------- ----------
Total revenues 229.4 209.6 449.2 414.8
Expenses:
Intersegment charges 24.9 25.2 47.3 45.7
Other operating expense 77.4 73.0 155.7 150.3
---------- ---------- ---------- ----------
Total expenses 102.3 98.2 203.0 196.0
Provision for loan and lease losses 4.7 4.6 9.4 9.3
Income tax expense 39.3 35.6 75.7 71.0
---------- ---------- ---------- ----------
Operating income $ 83.1 $ 71.2 $ 161.1 $ 138.5
========== ========== ========== ==========
Identifiable assets $ 21,591.0 $ 19,884.1 $ 21,591.0 $ 19,884.1
========== ========== ========== ==========
Return on tangible equity 20.7 % 18.8 % 20.3 % 18.1 %
========== ========== ========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 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 Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Banking revenues:
Commercial Banking $ 95.3 $ 92.1 $ 191.9 $ 186.6
Retail Banking 94.5 91.6 190.4 180.1
Investments and Other 39.6 25.9 66.9 48.1
---------- ---------- ---------- ----------
Total banking revenues $ 229.4 $ 209.6 $ 449.2 $ 414.8
========== ========== ========== ==========
Percent of total banking revenue:
Commercial Banking 41.5 % 43.9 % 42.7 % 45.0 %
Retail Banking 41.2 43.7 42.4 43.4
Investments and Other 17.3 12.4 14.9 11.6
---------- ---------- ---------- ----------
Total banking revenues 100.0 % 100.0 % 100.0 % 100.0 %
========== ========== ========== ==========
Operating banking income
Commercial Banking $ 39.0 $ 37.1 $ 78.6 $ 74.0
Retail Banking 21.7 22.0 45.4 42.4
Investments and Other 22.4 12.1 37.1 22.1
---------- ---------- ---------- ----------
Total operating banking income $ 83.1 $ 71.2 $ 161.1 $ 138.5
========== ========== ========== ==========
Percent of total operating banking income:
Commercial Banking 46.9 % 52.1 % 48.8 % 53.4 %
Retail Banking 26.1 30.9 28.2 30.6
Investments and Other 27.0 17.0 23.0 16.0
---------- ---------- ---------- ----------
Total operating banking income 100.0 % 100.0 % 100.0 % 100.0 %
========== ========== ========== ==========
Banking return on tangible equity
Commercial Banking 24.6 % 22.2 % 24.6 % 23.6 %
Retail Banking 20.2 18.3 21.0 18.9
---------- ---------- ---------- ----------
Total banking return on tangible equity 20.7 % 18.8 % 20.3 % 18.1 %
========== ========== ========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 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 Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Net interest expense $ (1.4) $ (0.7) $ (2.0) $ (1.3)
Other revenues:
Unaffiliated customers 121.1 101.8 233.7 201.5
Affiliated customers 21.8 22.5 43.4 42.3
---------- ---------- ---------- ----------
Total revenues 141.5 123.6 275.1 242.5
Expenses:
Intersegment charges 0.3 1.0 0.4 1.3
Other operating expense 120.8 109.9 235.2 212.6
---------- ---------- ---------- ----------
Total expenses 121.1 110.9 235.6 213.9
Income tax expense 8.7 5.3 17.0 12.0
---------- ---------- ---------- ----------
Operating income $ 11.7 $ 7.4 $ 22.5 $ 16.6
========== ========== ========== ==========
Identifiable assets $ 456.7 $ 343.2 $ 456.7 $ 343.2
========== ========== ========== ==========
Return on equity 20.6 % 15.6 % 20.3 % 18.0 %
========== ========== ========== ==========
</TABLE>
Data Services revenue from unaffiliated customers consist of the
following ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Data Processing Services $ 117.6 $ 99.1 $ 227.0 $ 195.9
Merchant credit card and other
customer services 3.4 2.7 6.4 5.5
Other 0.1 -- 0.3 0.1
---------- ---------- ---------- ----------
Total unaffiliated customer revenue $ 121.1 $ 101.8 $ 233.7 $ 201.5
========== ========== ========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 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 Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Net interest income $ 6.2 $ 8.1 $ 12.0 $ 17.1
Other revenues:
Unaffiliated customers 37.2 39.5 73.4 79.3
Affiliated customers 4.0 6.4 9.3 11.4
---------- ---------- ---------- ----------
Total revenues 47.4 54.0 94.7 107.8
Expenses:
Intersegment charges 5.8 7.0 12.2 13.3
Other operating expense 25.1 26.1 50.8 51.9
---------- ---------- ---------- ----------
Total expenses 30.9 33.1 63.0 65.2
Provision for loan and lease losses 0.1 0.2 0.3 0.4
Income tax expense 6.5 8.2 12.4 16.7
---------- ---------- ---------- ----------
Operating income $ 9.9 $ 12.5 $ 19.0 $ 25.5
========== ========== ========== ==========
Identifiable assets $ 667.8 $ 722.1 $ 667.8 $ 722.1
========== ========== ========== ==========
Return on tangible equity 19.1 % 26.7 % 18.6 % 28.1 %
========== ========== ========== ==========
</TABLE>
Total Revenues by type in All Others consist of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Trust Services $ 25.7 $ 22.6 $ 50.2 $ 44.2
Residential Mortgage Banking 9.6 12.5 20.4 24.1
Capital Markets 3.0 7.7 5.7 18.4
Brokerage and Insurance 5.3 5.3 10.3 9.7
Commercial Leasing 2.6 3.3 5.3 6.5
Commercial Mortgage Banking 0.3 1.8 0.6 3.1
Others 0.9 0.8 2.2 1.8
---------- ---------- ---------- ----------
Total revenues $ 47.4 $ 54.0 $ 94.7 $ 107.8
========== ========== ========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 1999 & 1998 (Unaudited)
Segment information reconciled to the Consolidated Financial Statements
is as follows ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Banking $ 229.4 $ 209.6 $ 449.2 $ 414.8
Data Services 141.5 123.6 275.1 242.5
All Others 47.4 54.0 94.7 107.8
Corporate overhead (2.4) (2.1) (4.0) (4.1)
Acquisition costs (0.1) (0.8) (0.5) (4.5)
Intersegment eliminations (29.6) (31.8) (60.1) (60.1)
---------- ---------- ---------- ----------
Consolidated revenues $ 386.2 $ 352.5 $ 754.4 $ 696.4
========== ========== ========== ==========
Expenses:
Banking $ 102.3 $ 98.2 $ 203.0 $ 196.0
Data Services 121.1 110.9 235.6 213.9
All Others 30.9 33.1 63.0 65.2
Corporate overhead 17.5 10.6 29.2 20.4
Acquisition costs 5.7 6.6 11.5 13.4
Merger / Restructuring -- 23.4 -- 23.4
Intersegment eliminations (29.6) (31.8) (60.1) (60.1)
---------- ---------- ---------- ----------
Consolidated expenses $ 247.9 $ 251.0 $ 482.2 $ 472.2
========== ========== ========== ==========
Net income (loss):
Operating income:
Banking $ 83.1 $ 71.2 $ 161.1 $ 138.5
Data Services 11.7 7.4 22.5 16.6
All Others 9.9 12.5 19.0 25.5
Corporate overhead (12.5) (7.0) (20.0) (13.6)
Acquisition costs (4.7) (5.6) (9.6) (13.0)
Merger / Restructuring -- (16.3) -- (16.3)
---------- ---------- ---------- ----------
Consolidated net income $ 87.5 $ 62.2 $ 173.0 $ 137.7
========== ========== ========== ==========
Assets:
Banking $ 21,591.0 $ 19,884.1 $ 21,591.0 $ 19,884.1
Data Services 456.7 343.2 456.7 343.2
All Others 667.8 722.1 667.8 722.1
Corporate overhead 135.6 114.2 135.6 114.1
Acquisition costs 279.9 301.9 279.9 301.9
Intersegment eliminations (338.5) (382.3) (338.5) (382.2)
---------- ---------- ---------- ----------
Consolidated assets $ 22,792.5 $ 20,983.2 $ 22,792.5 $ 20,983.2
========== ========== ========== ==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 1999 & 1998 (Unaudited)
9. Acquisitions / Acquisition Update
On April 1, 1999, the Corporation, through its Data Services Division,
completed the acquisition of the assets, operational processes and
customer relationships of the Electronic Banking Services business unit
of ADP in a cash transaction using the purchase method of accounting.
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. The total purchase
price amounted to $67.12 million. Initial goodwill, subject to the
completion of appraisals and valuations of the assets acquired and
liabilities assumed, amounted to $52.27 million and is being amortized on
a straight-line basis over twenty five years. There was no in-process
research and development acquired in this transaction. The results of
operations of this acquired business is included in the consolidated
financial statements from the date of acquisition.
On December 31, 1998, as previously reported, the Corporation, through
its Data Services Division completed the acquisition of certain assets of
Moneyline Express for $6.75 million in cash in a transaction accounted
for as a purchase. During the second quarter final appraisals and
valuations for the assets acquired were completed. Goodwill recorded in
this transaction amounted to $5.4 million and is being amortized on a
straight-line basis over fifteen years. There was no in-process research
and development acquired in this transaction.
In conjunction with the April 1, 1998 merger with Advantage Bancorp, Inc.
the Corporation recorded a merger/restructuring charge of $23.4 million.
As of June 30, 1999, the remaining liability related to that charge
amounted to $0.7 million and consists of accrued monthly lease costs
associated with a closed facility.
In conjunction with the October 1, 1997 purchase acquisition of Security
Capital Corporation, $18.6 million of exit costs were recorded as
liabilities assumed in the acquisition. As of June 30, 1999, the
remaining liability amounted to $1.4 million which consists of unpaid
severance. Periodic severance payments will continue through 2002.
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
Assets 1999 1998
- ------ --------------------------
<S> <C> <C>
Cash and due from banks $ 626,668 $ 648,189
Trading securities 30,871 42,084
Short-term investments 186,480 187,650
Other investment securities:
Taxable 4,272,000 4,305,451
Tax-exempt 1,183,276 1,067,502
------------ ------------
Total investment securities 5,672,627 5,602,687
Loans and leases:
Commercial 4,311,352 3,711,387
Real estate 8,375,500 7,930,213
Personal 1,169,117 1,151,053
Lease financing 677,853 519,311
------------ ------------
14,533,822 13,311,964
Less: Allowance for loan and lease losses 231,059 216,846
------------ ------------
Total loans and leases 14,302,763 13,095,118
Premises and equipment, net 355,598 356,436
Accrued interest and other assets 1,364,881 901,984
------------ ------------
Total Assets $ 22,322,537 $ 20,604,414
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 2,620,695 $ 2,493,817
Interest bearing 13,112,566 12,141,835
------------ ------------
Total deposits 15,733,261 14,635,652
Funds purchased and security repurchase
agreements 2,474,485 1,682,896
Other short-term borrowings 412,424 677,764
Long-term borrowings 1,003,840 1,020,505
Accrued expenses and other liabilities 510,123 484,573
------------ ------------
Total liabilities 20,134,133 18,501,390
Shareholders' equity 2,188,404 2,103,024
------------ ------------
Total Liabilities and
Shareholders' Equity $ 22,322,537 $ 20,604,414
============ ============
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
Assets 1999 1998
- ------ --------------------------
<S> <C> <C>
Cash and due from banks $ 642,742 $ 653,163
Trading securities 31,478 39,918
Short-term investments 188,501 181,195
Other investment securities:
Taxable 4,182,498 4,341,282
Tax-exempt 1,156,254 1,050,088
------------ ------------
Total investment securities 5,558,731 5,612,483
Loans and leases:
Commercial 4,222,610 3,556,746
Real estate 8,266,431 7,967,656
Personal 1,161,762 1,148,403
Lease financing 652,796 502,104
------------ ------------
14,303,599 13,174,909
Less: Allowance for loan and lease losses 229,846 213,896
------------ ------------
Total loans and leases 14,073,753 12,961,013
Premises and equipment, net 356,411 354,533
Accrued interest and other assets 1,329,647 885,910
------------ ------------
Total Assets $ 21,961,284 $ 20,467,102
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 2,594,410 $ 2,443,215
Interest bearing 12,916,615 12,103,631
------------ ------------
Total deposits 15,511,025 14,546,846
Funds purchased and security repurchase
agreements 2,460,983 1,852,338
Other short-term borrowings 267,920 442,534
Long-term borrowings 1,016,149 1,052,555
Accrued expenses and other liabilities 495,545 491,365
------------ ------------
Total liabilities 19,751,622 18,385,638
Shareholders' equity 2,209,662 2,081,464
------------ ------------
Total Liabilities and
Shareholders' Equity $ 21,961,284 $ 20,467,102
============ ============
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
-----------------------------------------
Net income for the second quarter of 1999 amounted to $87.5 million compared to
$62.2 million for the same period in the prior year. Basic and diluted earnings
per share were $.82 and $.77 respectively for the three months ended June 30,
1999, compared with $.57 and $.54, respectively for the three months ended June
30, 1998. The return on average assets and average equity were 1.57% and 16.04%
for the quarter ended June 30, 1999 and 1.21% and 11.86% for the quarter ended
June 30, 1998.
Net income for the second quarter of 1998 includes a merger/restructuring charge
of $23.4 million ($16.3 million after-tax) associated with the April 1, 1998,
acquisition of Advantage Bancorp, Inc. ("Advantage"). Excluding the
merger/restructuring charge, operating income for the three months ended June
30, 1998 was $78.5 million and basic and diluted earnings per share amounted to
$.73 and $.68, respectively. The quarterly returns on average assets and
average equity based on operating income were 1.53% and 14.96%, respectively.
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
previously discussed. "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
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income $ 364,702 $ 352,586 $ 358,701 $ 362,509 $ 358,747
Interest expense (186,960) (179,769) (184,712) (193,042) (190,734)
---------- ---------- ---------- ---------- ----------
Net interest income 177,742 172,817 173,989 169,467 168,013
Provision for loan and lease losses (4,811) (4,873) (12,588) (4,769) (4,868)
Net investment securities gains 355 -- 1,179 3,760 1,912
Other income 208,110 195,360 207,659 179,941 182,590
Other expense (247,883) (234,295) (242,086) (225,786) (227,629)
---------- ---------- ---------- ---------- ----------
Income before taxes 133,513 129,009 128,153 122,613 120,018
Income tax provision (45,995) (43,478) (44,683) (42,458) (41,558)
---------- ---------- ---------- ---------- ----------
Operating income $ 87,518 $ 85,531 $ 83,470 $ 80,155 $ 78,460
========== ========== ========== ========== ==========
Cash operating income $ 92,475 $ 94,372 $ 88,679 $ 85,354 $ 83,666
========== ========== ========== ========== ==========
Per Common Share
Operating income
Basic $ 0.82 $ 0.79 $ 0.77 $ 0.74 $ 0.73
Diluted 0.77 0.75 0.72 0.70 0.68
Cash Operating income
Basic $ 0.86 $ 0.88 $ 0.82 $ 0.79 $ 0.77
Diluted 0.81 0.82 0.77 0.74 0.73
Dividends 0.24 0.22 0.22 0.22 0.22
Return on Average Equity
Operating income 16.04 % 15.55 % 14.96 % 14.76 % 14.96 %
Cash Operating income 20.04 19.78 18.35 18.26 18.66
</TABLE>
<PAGE>
CONSOLIDATED OPERATING INCOME STATEMENT COMPONENTS
--------------------------------------------------
AS A PERCENT OF AVERAGE TOTAL ASSETS
------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income (FTE) 6.68 % 6.75 % 6.81 % 7.01 % 7.10 %
Interest expense (3.36) (3.38) (3.44) (3.67) (3.71)
---------- ---------- ---------- ---------- ----------
Net interest income 3.32 3.37 3.37 3.34 3.39
Provision for loan and lease losses (0.09) (0.09) (0.23) (0.09) (0.09)
Net investment securities gains 0.01 -- 0.02 0.07 0.04
Other income 3.74 3.67 3.87 3.42 3.55
Other expense (4.46) (4.40) (4.51) (4.29) (4.43)
---------- ---------- ---------- ---------- ----------
Income before taxes 2.52 2.55 2.52 2.45 2.46
Income tax provision (0.95) (0.94) (0.97) (0.93) (0.93)
---------- ---------- ---------- ---------- ----------
Return on average assets
based on operating income 1.57 % 1.61 % 1.55 % 1.52 % 1.53 %
========== ========== ========== ========== ==========
Return on tangible
average assets based on
cash operating income 1.69 % 1.80 % 1.67 % 1.64 % 1.65 %
========== ========== ========== ========== ==========
</TABLE>
The increase in operating earnings in the second 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 noninterest revenue growth particularly from nonbank
segments and their recent acquisitions, which was offset, in part, by an
increase in operating expenses which is all discussed in further detail on the
following pages.
NET INTEREST INCOME
-------------------
Net interest income for the second quarter of 1999 amounted to $177.7 million,
an increase of $9.7 million or 5.8% from the $168.0 million reported for the
second quarter of 1998. Net interest income arising from the increase in the
volume of average earning assets was partially offset by the decline in yield
on earning assets. The decrease in the rate on interest bearing liabilities due
to the decline in rates generally reduced interest expense by approximately
$42.5 million, however, the increase in the volume of average interest bearing
liabilities contributed approximately $38.7 million of increase to interest
expense.
Average earning assets in the second quarter of 1999 increased $1.3 billion or
6.8% compared to the same period a year ago. Average loans, including
securitized adjustable rate mortgage loans (ARMs), grew approximately $852.7
million or 6.0% compared to the second quarter of last year. Average investment
securities, excluding securitized ARMs, increased $451.4 million for the three
months ended June 30, 1999 compared with the same period in the prior year while
other earning assets decreased $12.4 million or 5.4%.
Average interest bearing liabilities increased $1.5 billion or 9.5% in the
second quarter of 1999 compared to the same period in 1998. Since the second
quarter of 1998, average interest bearing deposits increased $970.8 million or
8.0% while average total borrowings, primarily short-term borrowings, increased
$509.5 million.
Average noninterest bearing deposits increased $126.9 million or 5.1% in the
current quarter compared to the same period last year.
<PAGE>
The growth and composition of the Corporation's quarterly average loan portfolio
for the current quarter and previous four quarters are reflected in the
following table. Securitized ARM loans which are classified in the consolidated
balance sheets as investment securities available for sale are included to
provide a more meaningful comparison ($ in millions):
<TABLE>
<CAPTION>
1999 1998 Growth Pct.
-------------------- ------------------------------- ------------------
Consolidated Average Loans, Second First Fourth Third Second Prior
Leases and Securitized ARMs Quarter Quarter Quarter Quarter Quarter Annual Quarter
- -------------------------------- --------- --------- --------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 4,311 $ 4,133 $ 4,021 $ 3,857 $ 3,711 16.2 % 4.3 %
Real Estate
Construction
Commercial 304 305 309 284 278 9.5 (0.2)
Residential 101 107 115 120 131 (23.1) (6.2)
--------- --------- --------- --------- --------- ------- --------
Total Construction 405 412 424 404 409 (0.9) (1.8)
Commercial Mortgages 3,792 3,717 3,616 3,544 3,543 7.0 2.0
Residential
Residential mortgages 2,334 2,333 2,423 2,410 2,540 (8.1) 0.1
Home equity loans and lines 1,845 1,694 1,609 1,505 1,439 28.2 8.9
Securitized ARM loans 560 649 792 933 929 (39.7) (13.6)
--------- --------- --------- --------- --------- ------- --------
Total Residential 4,739 4,676 4,824 4,848 4,908 (3.4) 1.4
--------- --------- --------- --------- --------- ------- --------
Total Real Estate 8,936 8,805 8,864 8,796 8,860 0.9 1.5
Personal
Student 255 264 259 259 274 (6.9) (3.5)
Credit card 137 137 137 133 127 7.8 (0.3)
Other 777 753 770 762 750 3.6 3.2
--------- --------- --------- --------- --------- ------- --------
Total Personal 1,169 1,154 1,166 1,154 1,151 1.6 1.3
Lease financing
Commercial 333 335 330 331 335 (0.5) (0.5)
Personal 345 293 251 211 184 86.9 17.8
--------- --------- --------- --------- --------- ------- --------
Total Lease Financing 678 628 581 542 519 30.5 8.0
--------- --------- --------- --------- --------- ------- --------
Total Consolidated Average
Loans, Leases and ARMs $ 15,094 $ 14,720 $ 14,632 $ 14,349 $ 14,241 6.0 % 2.5 %
========= ========= ========= ========= ========= ======= ========
Total Consolidated Average
Loans, Leases and ARMs
Commercial Banking $ 8,740 $ 8,490 $ 8,276 $ 8,016 $ 7,867 11.1 % 2.9 %
Retail Banking 6,354 6,230 6,356 6,333 6,374 (0.3) 2.0
--------- --------- --------- --------- --------- ------- --------
Total Consolidated Average
Loans, Leases and ARMs $ $15,094 $ $14,720 $ $14,632 $ $14,349 $ $14,241 6.0 % 2.5 %
========= ========= ========= ========= ========= ======= ========
Total Consolidated Average
Loans and Leases $ 14,534 $ 14,071 $ 13,840 $ 13,416 $ 13,312 9.2 % 3.3 %
========= ========= ========= ========= ========= ======= ========
</TABLE>
Compared with the second quarter of 1998, total consolidated average loans,
leases and securitized ARMs increased $853 million or 6.0%. Loan growth was
primarily attributable to commercial banking. Total loan growth in commercial
banking amounted to $873 million or 11.1% and was driven by commercial loan
growth of $600 million and commercial mortgage loan growth of $249 million.
Retail Banking loan growth of $406 million in home equity loans and lines and
$161 million in lease financing receivables were offset by a decline in
residential real estate mortgage loans and securitized ARMs of $575 million.
The decrease in residential real estate mortgage 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. During the second quarter of 1999, prepayment
activity began to decrease. Compared to the first quarter of 1999, residential
real estate loans were relatively unchanged and securitized ARM run-off
decreased $49.3 million. One to four family residential real estate loans sold
to investors amounted to $354 million in the second quarter of 1999 compared to
$530 million in the first quarter of 1999 and $1.0 billion in the first half of
1998.
<PAGE>
The growth and composition of the Corporation's quarterly average deposits for
the current and prior year's quarters are as follows ($ in millions):
<TABLE>
<CAPTION>
1999 1998 Growth Pct.
------------------- ----------------------------- -----------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing deposits
Commercial $ 1,682 $ 1,655 $ 1,779 $ 1,670 $ 1,599 5.2 % 1.6 %
Personal 567 549 529 507 512 10.7 3.3
Other 372 364 401 407 383 (2.8) 2.2
--------- --------- --------- --------- --------- -------- --------
Total noninterest
bearing deposits 2,621 2,568 2,709 2,584 2,494 5.1 2.1
Interest bearing deposits
Savings & NOW 2,054 2,082 2,118 2,152 2,160 (4.9) (1.3)
Money market 4,762 4,697 4,474 4,233 4,021 18.4 1.4
Other CDs & time deposits 4,671 4,422 4,303 4,231 4,397 6.2 5.6
CDs greater than $100,000 780 762 780 810 844 (7.5) 2.3
Brokered CDs 845 755 755 779 720 17.4 12.0
--------- --------- --------- --------- --------- -------- --------
Total interest
bearing deposits 13,112 12,718 12,430 12,205 12,142 8.0 3.1
--------- --------- --------- --------- --------- -------- --------
Total consolidated
average deposits $ 15,733 $ 15,286 $ 15,139 $ 14,789 $ 14,636 7.5 % 2.9 %
========= ========= ========= ========= ========= ======== ========
</TABLE>
Compared with the second quarter of 1998, average deposit growth amounted to
$1,097 million or 7.5%. Money market, which exhibited the largest growth, along
with noninterest bearing accounted for approximately $868 million of the growth
in average deposits. Partially, offsetting this growth were declines in Savings
and NOW and large CDs. The growth in other CDs & time deposits is largely
attributable to foreign time which increased $776 million compared to the second
quarter of 1998. Brokered CDs also increased $125 million or 17.4%. Average
deposit growth in the second quarter of 1999 compared with the first quarter of
1999 is largely attributable to wholesale deposits which were used to fund loan
growth and reflects the Corporation's experience in seasonality of deposit
activity in the second quarter. In addition, during the second quarter of 1999
the corporation divested six branches with deposits aggregating $53.2 million
which had a negative impact on average deposits of approximately $29 million.
<PAGE>
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current quarter
and prior year second quarter are presented in the following table. Securitized
ARM loans that are classified in the balance sheet as investment securities
available for sale are included with loans to provide a more meaningful
comparison ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 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) $ 15,094.1 $ 290.4 7.72 % $ 14,241.4 $ 290.6 8.19 %
Investment securities:
Taxable 3,711.7 57.9 6.29 3,376.1 52.7 6.32
Tax Exempt (a) 1,183.3 20.7 7.13 1,067.5 18.7 7.17
Other short-term
investments (a) 217.3 2.7 4.94 229.7 3.1 5.48
---------- -------- --------- ---------- -------- ---------
Total interest
earning assets $ 20,206.4 $ 371.7 7.40 % $ 18,914.7 $ 365.1 7.77 %
========== ======== ========= ========== ======== =========
Money market savings $ 4,762.6 $ 48.1 4.05 % $ 4,021.0 $ 45.6 4.55 %
Regular savings & NOW 2,053.9 8.3 1.63 2,160.2 11.6 2.16
Other CDs & time
deposits 4,670.7 58.9 5.05 4,397.2 62.3 5.68
CDs greater than
$100 & Brokered CDs 1,625.4 21.6 5.33 1,563.4 22.8 5.85
---------- -------- --------- ---------- -------- ---------
Total interest
bearing deposits 13,112.6 136.9 4.19 12,141.8 142.3 4.70
Short-term borrowings 2,886.9 34.6 4.80 2,360.7 31.9 5.42
Long-term borrowings 1,003.8 15.5 6.19 1,020.5 16.5 6.48
---------- -------- --------- ---------- -------- ---------
Total interest
bearing liabilities $ 17,003.3 $ 187.0 4.41 % $ 15,523.0 $ 190.7 4.93 %
========== ======== ========= ========== ======== =========
Net interest margin (FTE)
as a percent of average
earning assets $ 184.7 3.68 % $ 174.4 3.71 %
======== ========= ======== =========
</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 37 basis points since the second
quarter of 1998. This decline in yield reflects the run-off experienced
throughout 1998 of higher yielding loans and investment securities which was
somewhat offset by a slowing in the second quarter of 1999 of accelerated
amortization of purchase accounting premiums assigned to acquired loans and
investment securities due to prepayments and refinancings. Excluding
amortization of purchase accounting adjustments, the yield on earning assets was
7.43% in the current quarter compared to 7.84% in the second quarter of the
prior year. The yield on loans and securitized ARMs, the largest earning asset,
declined 47 basis points which had a negative impact on net interest income of
approximately $35.0 million compared with the second quarter of 1998. The cost
of interest bearing deposits decreased 51 basis points from the same quarter of
the previous year which reflects the general interest rate environment. Short-
term borrowing costs decreased 62 basis points and long-term borrowing costs
decreased 29 basis points, respectively, compared with the second quarter of
1998. The decrease in borrowing costs compared to the prior year second quarter
reflects the refinancing of maturities at favorable rates. The increase in
average borrowings reflects balance sheet growth and the effect of Treasury
stock repurchases.
<PAGE>
<PAGE>
At June 30, 1999, the Corporation had standard receive fixed/pay floating
interest rate swaps and interest rate caps and floors designated as hedges to
manage the interest rate volatility associated with variable rate loans and
variable rate debt. In addition, the Corporation had callable receive fixed /
pay floating interest rate swaps designated as hedges to offset callable CDs.
The Corporation's position with respect to interest rate swaps and interest rate
caps and floors designated as hedges at June 30, 1999 consisted of the following
($ in millions):
<TABLE>
<CAPTION>
<S> <C>
Interest Rate Swaps
-------------------
Notional value $665
Weighted average receive rate 5.97%
Weighted average pay rate 5.07%
Weighted average remaining term (in years) 2.45
Estimated fair value ($3.38)
Callable Interest Rate Swaps
----------------------------
Notional value $332
Weighted average receive rate 6.09%
Weighted average pay rate 4.89%
Weighted average remaining term (in years) 7.89
Estimated fair value ($11.91)
Interest Rate Caps/Floors
-------------------------
Notional value $50
Strike rate 5.63%
Index 5.09%
Weighted average remaining term (in years) 1.38
Estimated fair value $0.07
Unamortized premium $0.16
</TABLE>
For the three months ended June 30, 1999, the effect on net interest income
resulting from the swaps, net of cap and floor premium amortization, was a
positive $2.4 million compared with a positive $1.2 million in the same period
in 1998.
<PAGE>
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of June 30, 1999 and the prior four quarters.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
--------------------
($000's)
--------
1999 1998
---------------------- --------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual $ 122,561 $ 116,632 $ 101,346 $ 79,645 $ 79,594
Renegotiated 746 878 978 1,129 1,192
Past due 90 days or more 6,525 7,275 7,631 7,249 6,809
---------- ---------- ---------- ---------- ----------
Total nonperforming loans and leases 129,832 124,785 109,955 88,023 87,595
Other real estate owned 6,766 9,245 8,751 12,212 10,807
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 136,598 $ 134,030 $ 118,706 $ 100,235 $ 98,402
========== ========== ========== ========== ==========
Allowance for loan and lease losses $ 225,277 $ 229,669 $ 226,052 $ 218,706 $ 216,014
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATISTICS
-----------------------
1999 1998
---------------------- --------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Charge-offs (Recoveries) to
average loans and leases annualized 0.25 % 0.04 % 0.15 % 0.06 % 0.13
Total nonperforming loans and leases
to total loans and leases 0.87 0.88 0.79 0.64 0.65
Total nonperforming assets to
total loans and leases and
other real estate owned 0.92 0.94 0.85 0.73 0.73
Allowance for loan and lease losses
to total loans and leases 1.51 1.61 1.62 1.59 1.61
Allowance for loan and lease losses
to nonperforming loans and leases 174 184 206 248 247
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NONACCRUAL LOANS AND LEASES BY TYPE
-----------------------------------
($000's)
--------
1999 1998
---------------------- --------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial
Commercial, financial &
agricultural $ 57,524 $ 51,472 $ 39,131 $ 14,506 $ 19,322
Lease financing receivables 4,041 3,046 2,895 2,812 2,171
---------- ---------- ---------- ---------- ----------
Total commercial 61,565 54,518 42,026 17,318 21,493
Real estate
Construction & land development 3,004 1,498 1,952 2,901 2,032
Commercial mortgage 25,763 24,865 21,586 22,244 21,967
Residential mortgage 30,154 33,517 33,117 34,797 31,424
---------- ---------- ---------- ---------- ----------
Total real estate 58,921 59,880 56,655 59,942 55,423
Personal 2,075 2,234 2,665 2,385 2,678
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and leases $ 122,561 $ 116,632 $ 101,346 $ 79,645 $ 79,594
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF CONSOLIDATED ALLOWANCE FOR LOAN AND LEASE LOSSES
------------------------------------------------------------------
($000's)
--------
1999 1998
---------------------- --------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 229,669 $ 226,052 $ 218,706 $ 216,014 $ 215,481
Provision for loan and lease losses 4,811 4,873 12,588 4,769 4,868
Loans and leases charged-off
Commercial 7,117 556 1,700 311 3,237
Real estate 1,475 1,250 2,178 1,568 815
Personal 1,544 1,697 1,978 1,714 1,768
Leases 686 196 701 131 194
---------- ---------- ---------- ---------- ----------
Total charge-offs 10,822 3,699 6,557 3,724 6,014
Recoveries on loans and leases
Commercial 389 973 357 274 373
Real estate 405 561 285 717 385
Personal 611 704 653 633 644
Leases 214 205 20 23 277
---------- ---------- ---------- ---------- ----------
Total Recoveries 1,619 2,443 1,315 1,647 1,679
---------- ---------- ---------- ---------- ----------
Net loans and leases
charge-offs (recoveries) 9,203 1,256 5,242 2,077 4,335
---------- ---------- ---------- ---------- ----------
Ending balance $ 225,277 $ 229,669 $ 226,052 $ 218,706 $ 216,014
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Nonperforming assets consist of nonperforming loans and other real estate
owned (OREO).
OREO is comprised of commercial and residential properties acquired in
partial or total satisfaction of problem loans and branch premises held for
sale. At June 30, 1999, OREO acquired in satisfaction of debts amounted to
$5.6 million and branch premises held for sale amounted to $1.2 million.
Nonperforming loans and leases consist of nonaccrual, renegotiated or
restructured loans, and loans and leases that are delinquent 90 days or more
and still accruing interest. The balance of nonperforming loans and leases
can fluctuate widely based on the timing of cash collections, renegotiations
and renewals.
Maintaining nonperforming assets at an acceptable level is important to the
ongoing success of a financial services institution. The Corporation's
comprehensive credit review and approval process is critical to ensuring that
the amount of nonperforming assets on a long-term basis is minimized within
the overall framework of acceptable levels of credit risk. In addition to
the negative impact on net interest income and credit losses, nonperforming
assets also increase operating costs due to the expense associated with
collection efforts.
At June 30, 1999, nonperforming loans and leases amounted to $129.8 million
or .87% of consolidated loans and leases of $14.9 billion, an increase of
$5.0 million since March 31, 1999 and an increase of $42.2 million since June
30, 1998. Nonaccrual loans and leases, primarily commercial and commercial
real estate, have shown the largest increases in the periods presented.
Approximately $35.9 million of the increase since June 30, 1998 is due to two
larger commercial loans placed on nonaccrual, one in the fourth quarter of
1998 and one in the second quarter of 1999.
Net charge-offs amounted to $9.2 million or .25% of average loans in the
second quarter of 1999 compared with $1.3 million or .04% of average loans in
the first quarter of 1999 and $4.3 million or .13% of average loans in the
second quarter of 1998. Approximately $6.5 million of second quarter net
charge-offs is due to a partial charge-off of one larger commercial loan. The
remaining balance was placed on nonaccrual as previously discussed.
The allowance for loan and lease losses represents management's estimate of
probable inherent losses which have occurred as of the date of the financial
statements. In determining the adequacy of the reserve the Corporation
evaluates the reserves necessary for specific nonperforming loans and also
estimates losses inherent in other loans and leases. As a result, the
allowance for loans and leases contains the following components:
Specific Reserve. The amount of specific reserves is determined
through a loan-by-loan analysis of nonperforming loans that considers
expected future cash flows, the value of collateral and other factors
that may impact the borrower's ability to make payments when due.
Included in this group are those nonaccrual or renegotiated loans which
meet the criteria as being "impaired" under the definition in SFAS 114.
A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Allocated inherent reserve. The amount of the allocated portion of the
inherent loss reserve is determined by reserving factors assigned to
loans and leases based on the Corporation's internal loan grading
system. Line officers and loan committees are responsible for
continually assigning grades to commercial loan types based on
standards established in the Corporation's loan policies and adherence
to the standards is closely monitored by the Corporation's Loan Review
Group. Loan grades are similar to, but generally more conservative
than, regulatory classifications. In addition, reserving factors are
applied to retail and smaller balance ungraded credits as well as
specialty loan products such as credit card, student loans and
mortgages. Reserving factors are derived and are determined based on
such factors as historical charge-off experience, remaining life, and
industry practice for reserve levels. The use of industry practice is
intended to prevent an understatement of reserves based upon an over-
reliance on historical charge-offs during favorable economic
conditions.
Unallocated inherent reserve. Management determines the unallocated
portion of the inherent loss reserve based on factors that cannot be
associated with a specific credit or loan categories. These factors
include management's subjective evaluation of local, national and
international economic and business conditions, changes to underwriting
standards and marketing channels such as use of centralized retail and
small business credit centers, trends towards higher advance rates and
longer amortization periods and the impact of acquisitions on the
Corporation's credit risk profile. The unallocated portion of the
inherent loss reserve also reflects management's attempt to ensure that
the overall reserve appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
<PAGE>
Management's evaluation of the factors described above resulted in an
allowance for loan and lease losses of $225.3 million at June 30, 1999
compared to $229.7 million at March 31, 1999 and $226.1 million at December
31, 1998. The level of reserve reflects management's belief that losses
inherent in the loan and lease portfolio were larger than would otherwise be
suggested by the Corporation's favorable charge-off experience in recent
years; the Corporation's experience, as most recently evidenced this quarter,
of larger losses in commercial and commercial real estate loans in brief
periods at particular points in economic cycles; and the view that the
absolute level of the allowance should not decline appreciably given
continuing loan growth and the potential for the unprecedented period of
economic prosperity to come to an end.
The resulting provision for loan and lease losses amounted to $4.8 million
for the three months ended June 30, 1999, while net charge-offs totaled $9.2
million.
OTHER INCOME
------------
Total other income in the second quarter of 1999 amounted to $208.5 million,
an increase of $24.0 million or 13.0%, compared to $184.5 million in the same
period last year.
Total data processing services revenue increased $18.5 million or 18.7% from
$99.1 million in the second quarter of 1998 to $117.6 million in the current
quarter. Processing revenue which includes processing, conversions, contract
buyouts and equipment sales increased $6.5 million or 11.6% and amounted to
$63.0 million. Growth in processing of $10.5 million was offset by $2.5 million
of declines in conversion revenue and equipment sales and a decline of $1.5
million in buyout fees, which vary from period to period. Software and
consulting revenue decreased $5.3 million in the current quarter compared to the
same period last year. The increase in consulting revenue of $0.9 million was
offset by a decline in software revenue of $6.2 million. E-commerce revenue
which includes electronic funds transfer, electronic banking, cash management,
home banking, internet banking and electronic payment services increased $17.3
million or 89% from $19.5 million in the second quarter of 1998 to $36.8 million
in the current quarter. Revenue from electronic payment services, primarily
from the fourth quarter 1998 acquisition of Moneyline Express, and electronic
banking services, primarily from the April 1, 1999 acquisition of the electronic
banking services business from ADP, accounted for $11.7 million of the increase.
New processing contract signings in the second quarter were strong however,
revenue growth levels for consulting and software in 1999 may be below
historical patterns.
Revenue from internet banking, primarily the Corporation's internet mortgage
activities which began in the fourth quarter of 1998, amounted to $0.6 million
compared to $0.5 million in the first quarter of 1999 and $0.1 million in the
fourth quarter of 1998. During the third and fourth quarters of 1999 the
Corporation will be expanding its internet offerings to include savings and home
equity.
Trust services revenue amounted to $25.0 million in the second quarter of 1999,
an increase of $3.0 million or 13.7% compared to $22.0 million in the second
quarter of 1998. Revenue growth in personal trust, commercial trust and
outsourcing services accounted for $2.0 million of the increase.
For the three months ended June 30, 1999, service charges on deposits amounted
to $17.0 million, an increase of $1.8 million or 11.7% compared to $15.2 million
in the three months ended June 30, 1998. The increase was attributable to
service charges associated with commercial demand accounts.
Mortgage banking revenue amounted to $7.5 million in the second quarter of 1999
compared with $12.4 million in the second quarter of 1998. While all sources of
mortgage banking revenue decreased compared to the prior year, gains on the sale
of mortgages accounted for $3.5 million of the decline which reflects the
slowing of refinancings to fixed rate mortgages.
The decrease in Capital Markets revenue is due to lower gains from the sale of
investments. Net securities gains from Capital Markets investments, which can
vary from period to period, amounted to $1.7 million in the current quarter
compared to $6.1 million in the comparative quarter of the prior year.
Other income in the second quarter of 1999 amounted to $38.2 million compared
to $27.6 million in the second quarter of 1998, an increase of $10.6 million or
38.3%. Revenue from bank-owned life insurance increased $5.5 million due to
additional purchases of insurance late in the fourth quarter of 1998. During
the second quarter of 1999, the Corporation disposed of six branches with loans
and deposits aggregating approximately $22.6 million and $53.2 million,
respectively and realized gains of $4.2 million.
<PAGE>
OTHER EXPENSE
-------------
Total other expense in the second quarter of 1999 amounted to $247.9 million
compared with $251.0 million in the second quarter of 1998. Expenses for the
second quarter of 1998 included a merger/restructuring charge of $23.4 million
associated with the April 1, 1998 merger with Advantage Bancorp, Inc. Excluding
this charge total operating expenses in the second quarter of 1998 amounted to
$227.6 million.
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 54% 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 developing new products and services, operating
expenses associated with the Moneyline and ADP acquisitions 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 revenue but excluding investment securities
gains or losses) and net interest income on a fully taxable equivalent basis.
The Corporation's efficiency ratios for the three months ended June 30, 1999 and
1998 and the year ended December 31, 1998 are:
<TABLE>
<CAPTION>
Three Months Year Three Months
Ended Ended Ended
June 30, December 31, June 30,
1999 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Consolidated Corporation 63.1 % 63.2 % 63.8 %
Consolidated Corporation
Excluding Data Services
Including Intangible Amortization 52.9 % 53.1 % 53.0 %
Excluding Intangible Amortization 50.0 % 48.5 % 48.7 %
</TABLE>
Salaries and employee benefits expense amounted to $149.7 million in the second
quarter of 1999 compared to $129.6 million in the second quarter of 1998, an
increase of $20.1 million or 15.5%. Salaries and employee benefits expense of
Data Services increased $13.0 million which was offset by a decrease in contract
programmers of $2.1 million in the current quarter compared to the same period
last year. At June 30, 1999, Data Services had on average approximately 287
more full time equivalent employees when compared to June 30, 1998 which
reflects increases in e-commerce (234 including acquisitions) and technology
services. Compared to the second quarter of 1998, expense growth in the current
quarter in salaries and employee benefits was 3.0 million or 6.6% for the
banking segment while all others were relatively unchanged. Salaries and
benefits which includes incentive compensation based on the Corporation's Common
Stock performance increased $5.8 million.
Data Services expense growth accounted for approximately $5.4 million or 76% of
the increase in net occupancy, equipment, software, supplies and printing and
processing expenses in the second quarter of 1999 compared to the second quarter
of 1998.
Data Services also accounted for approximately $0.8 million or 54% of the
increase in professional services expense which represents Year 2000 activity
and new product development initiatives.
Amortization of intangibles decreased $2.1 million. Approximately $1.6 million
of the decrease is due to lower amortization of mortgage servicing rights which
reflects the second quarter slowing of prepayments in the servicing portfolio.
Other expense amounted to $23.8 million in the second quarter of 1999, a
decrease of $6.5 million or 21.5% compared to the second quarter of 1998. Other
expense is affected by the capitalization of costs, net of amortization
associated with software development and customer data processing conversions.
During the second quarter of 1999, capitalization, net of amortization,
increased $2.1 million for conversions and $3.9 million for software
development, respectively, which decreased other expenses by $6.0 million
compared to the second quarter of 1998.
INCOME TAXES
------------
The provision for income taxes for the three months ended June 30, 1999 amounted
to $46.0 million or 34.4% of pre-tax income compared to $34.5 million or 35.6%
of pre-tax income for the three months ended June 30, 1998. The change in the
effective tax is primarily due to the increase in tax-exempt income in 1999 and
the nondeductible portion of the merger / restructuring charge recorded in the
second quarter of the prior year.
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
---------------------------------------
Net Income for the six months ended June 30, 1999 amounted to $173.0 million
compared to $137.7 million for the first half of 1998. Basic and diluted
earnings per share were $1.62 and $1.52, respectively for the first half of 1999
and $1.27 and $1.19, respectively, for the six months ended June 30, 1998. The
year to date return on average equity was 15.79% in the current period and
13.34% for the first half of 1998.
Results of operations for the six months ended June 30, 1998 include the
merger/restructuring charge associated with the Advantage merger. Excluding
this charge, operating income for the first half of 1998 was $154.0 million.
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 six months ended June 30, 1999 and 1998. Operating
income for the first half of 1998 excludes the merger/restructuring charge
previously discussed. "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.
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED OPERATING INCOME STATEMENTS AND STATISTICS
---------------------------------------------------------------
($000's, except per share data)
-------------------------------
Six Months Ended June 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest income $ 717,288 $ 712,834
Interest expense (366,729) (380,220)
---------- ----------
Net interest income 350,559 332,614
Provision for loan and lease losses (9,684) (9,733)
Net investment securities gains 355 2,206
Other income 403,470 361,588
Other expense (482,178) (448,783)
---------- ----------
Income before taxes 262,522 237,892
Income tax provision (89,473) (83,926)
---------- ----------
Operating income $ 173,049 $ 153,966
========== ==========
Cash operating income $ 186,847 $ 164,552
========== ==========
Per Common Share
Operating income
Basic $ 1.62 $ 1.43
Diluted 1.52 1.34
Cash Operating income
Basic $ 1.75 $ 1.53
Diluted 1.64 1.43
Dividends 0.46 0.42
Return on Average Equity
Operating income 15.79 % 14.92 %
Cash Operating income 19.91 18.66
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED OPERATING INCOME STATEMENT COMPONENTS
--------------------------------------------------
AS A PERCENT OF AVERAGE TOTAL ASSETS
------------------------------------
Six Months Ended June 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest income (FTE) 6.71 % 7.15 %
Interest expense (3.36) (3.75)
---------- ----------
Net interest income 3.35 3.40
Provision for loan and lease losses (0.09) (0.10)
Net investment securities gains 0.00 0.02
Other income 3.70 3.56
Other expense (4.42) (4.41)
---------- ----------
Income before taxes 2.54 2.47
Income tax provision (0.95) (0.95)
---------- ----------
Return on average assets
based on operating income 1.59 % 1.52 %
========== ==========
Return on tangible
average assets based on
cash operating income 1.74 % 1.65 %
========== ==========
</TABLE>
The increase in operating income is due to growth in noninterest revenues of
$41.9 million which includes revenue growth of $31.1 million by the Data
Services segment and growth in net interest income of $17.9 million primarily
due to the lower cost of interest bearing liabilities and loan growth which was
offset operating expense growth which is primarily driven by the Data Services
segment and lower securities gains.
CAPITAL RESOURCES
-----------------
Shareholders' equity was $2.14 billion at June 30, 1999 compared to $2.24
billion at December 31, 1998 and $2.12 billion at June 30, 1998.
The Corporation has net unrealized gains on securities available for sale at
June 30, 1999 of $14.8 million, a decrease of $43.3 million compared to
December 31, 1998.
During the second quarter of 1999, M&I repurchased 1.2 million shares of its
Common Stock under the authorization by the Board of Directors to repurchase up
to 6.0 million common shares annually and has cumulatively repurchased 3.2
million shares in the first half of 1999. The aggregate cost of the shares
repurchased was $81.6 million in the second quarter and $198.0 million since the
beginning of 1999.
<PAGE>
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in the
following tables.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
---------------
June 30, 1999 December 31, 1998
----------------------- -----------------------
Amount Ratio Amount Ratio
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 1,959 11.88 % $ 2,060 12.78 %
Tier 1 Capital Minimum Requirement 660 4.00 645 4.00
------------ ------------ ----------- -----------
Excess $ 1,299 7.88 % $ 1,415 8.78 %
============ ============ =========== ===========
Total Capital $ 2,246 13.61 % $ 2,342 14.53 %
Total Capital Minimum Requirement 1,320 8.00 1,290 8.00
------------ ------------ ----------- -----------
Excess $ 926 5.61 % $ 1,052 6.53 %
============ ============ =========== ===========
Risk-Adjusted Assets $ 16,494 $ 16,121
============ ===========
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIOS
---------------
($ in millions)
---------------
June 30, 1999 December 31, 1998
------------------------------- -------------------------------
Amount Ratio Amount Ratio
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Capital $ 1.959 8.94 % $ 2,060 9.86 %
Minimum Leverage Requirement 657 - 1,096 3.00 - 5.00 627 - 1,045 3.00 - 5.00
--------------- --------------- --------------- ---------------
Excess $ 1,302 - 863 5.94 - 3.94 % $ 1,433 - 1,015 6.86 - 4.86 %
=============== =============== =============== ===============
Adjusted Average Total Assets $ 21,912 $ 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 and Quarterly Report on Form 10-Q for the three
months ended March 31, 1999. For purposes of this discussion, the summary has
been segregated between Data Services and the remainder of the Corporation and
Subsidiaries.
DATA SERVICES
-------------
June 30, 1999, represented a significant target date. Federal Financial
Institutions Examination Council (FFIEC) guidelines called for a certain level
of progress with respect to Y2K readiness to be made by this date including; (1)
completed testing of mission critical systems, (2) substantial completion of
implementation of mission critical systems and (3) Y2K contingency test plans
should be executed however, in May, 1999, the FFEIC released additional guidance
allowing execution of contingency test plans to extend into the third and fourth
quarters, where necessary. Of the 112 Application / Open Systems Inventory, 96%
have completed their 20xx testing and 93% have completed implementation of Year
2000-ready code. Of the 653 identified areas/ products, 98% Y2K contingency
test plans have been executed.
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>
Data Services is also continuing to focus on the clean management process and
document retention, assessing its physical infrastructure, customer
communications and needs assessments, and continued work on contingency
strategies such as capacity plans.
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 was 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 plans and business resumption plans are in place for each
affiliate. Testing of contingency plans is expected to be completed 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. Additional costs associated with desktop
renovation, router upgrades, security system upgrades, clean management and
document preparation and retention, capacity planning, and other infrastructure
and customer issues has resulted in an increase in the current estimate of
approximately $5 million since year-end 1998. Approximately $31.4 million has
been expensed through June 30, 1999. The cost for the three months ended June
30, 1999 and 1998 were $3.0 million and $2.9 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.
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, 1998 which are incorporated herein by reference.
<PAGE>
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 June 30, 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 June 30, 1999, 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 June 30, 1999 March 31, 1999 Dec. 31, 1998
- -------------------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
100 basis point Shock Up (12.9) % (11.8) % (8.6)%
100 basis point Shock Down 11.1 % 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 June 30, 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 $47.5 million in
notional amount of receive fixed and $47.5 million in notional amount of pay
fixed at June 30, 1999.
<PAGE>
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
- --------------------------------------------------
C. During the period covered by this report, 25,000 shares of the
Registrant's Common Stock were issued pursuant to employee stock options
which had been gifted to family members of the original option holder.
The option exercise price was $51.8125 per share. The issuance of the
securities was exempt from the registration provisions of the Securities
Act of 1933, as amended, as a transaction not involving a public
offering.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
A. The Corporation held its Annual Meeting of Shareholders on April 27,
1999.
B. Votes cast for the election of seven directors to serve until the 2002
Annual Meeting of Shareholders are as follows:
Director For Against Abstentions Non-Vote
-------------------- ---------- --------- ----------- --------
Oscar C. Boldt 86,945,837 987,340 -- --
Timothy E. Hoeksema 87,065,012 868,165 -- --
Burleigh E Jacobs 86,873,315 1,059,862 -- --
James F. Kress 87,074,756 858,421 -- --
Robert A. Schaefer 87,119,704 813,473 -- --
John S. Shiely 87,132,970 800,206 -- --
Gus A. Zuehlke 86,859,033 1,074,144 -- --
Votes cast for the election of one director to serve until the 2001
Annual Meeting of Shareholders are as follows:
Director For Against Abstentions Non-Vote
-------------------- ---------- --------- ----------- --------
George E. Wardeberg 87,091,676 841,501 -- --
The continuing Directors of the Corporation are as follows:
Richard A. Abdoo Jon F. Chait
Wendell F. Bueche D.J. Kuester
G.H. Gunnlaugsson Edward L. Meyer, Jr.
Jack F. Kellner Don R. O'Hare
Katharine C. Lyall San W. Orr, Jr.
P.M. Platten, III J.A. Puelicher
J.B. Wigdale Stuart W. Tisdale
James O. Wright
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
August 13, 1999
<PAGE>
EXHIBIT 12
<PAGE>
MARSHALL & ILSLEY CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($000's)
<TABLE>
<CAPTION>
Six
Months
Ended Years Ended December 31,
June 30, ----------------------------------------------------------
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 $ 262,522 $ 465,285 $ 388,172 $ 317,949 $ 312,938 $ 179,762
Fixed charges, excluding interest on deposits 102,698 206,546 175,609 126,261 119,412 85,767
---------- ---------- ---------- ---------- ---------- ----------
Earnings including fixed charges but
excluding interest on deposits 365,220 671,831 563,781 444,210 432,350 265,529
Interest on deposits 270,587 564,540 460,418 392,473 363,488 274,211
---------- ---------- ---------- ---------- ---------- ----------
Earnings including fixed charges and
interest on deposits $ 635,807 $ 1,236,371 $ 1,024,199 $ 836,683 $ 795,838 $ 539,740
========== ========== ========== ========== ========== ==========
Fixed Charges:
Interest Expense:
Short-term borrowings $ 64,810 $ 126,624 $ 111,193 $ 63,892 $ 48,390 $ 39,978
Long-term borrowings 31,332 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) 6,556 13,112 10,241 8,754 7,321 6,919
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges excluding interest on deposits 102,698 206,546 175,609 126,261 119,412 85,767
Interest on deposits 270,587 564,540 460,418 392,473 363,488 274,211
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges including interest on deposits $ 373,285 $ 771,086 $ 636,027 $ 518,734 $ 482,900 $ 359,978
========== ========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges:
Excluding interest on deposits 3.56 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 665,870
<INT-BEARING-DEPOSITS> 80,989
<FED-FUNDS-SOLD> 87,713
<TRADING-ASSETS> 33,409
<INVESTMENTS-HELD-FOR-SALE> 4,353,137
<INVESTMENTS-CARRYING> 1,179,310
<INVESTMENTS-MARKET> 1,181,325
<LOANS> 14,899,052
<ALLOWANCE> 225,277
<TOTAL-ASSETS> 22,792,499
<DEPOSITS> 15,897,469
<SHORT-TERM> 3,225,246
<LIABILITIES-OTHER> 557,518
<LONG-TERM> 976,093
0
685
<COMMON> 112,757
<OTHER-SE> 2,022,731
<TOTAL-LIABILITIES-AND-EQUITY> 22,792,499
<INTEREST-LOAN> 551,518
<INTEREST-INVEST> 160,463
<INTEREST-OTHER> 5,307
<INTEREST-TOTAL> 717,288
<INTEREST-DEPOSIT> 270,587
<INTEREST-EXPENSE> 366,729
<INTEREST-INCOME-NET> 350,559
<LOAN-LOSSES> 9,684
<SECURITIES-GAINS> 3,568
<EXPENSE-OTHER> 482,178
<INCOME-PRETAX> 262,522
<INCOME-PRE-EXTRAORDINARY> 173,049
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173,049
<EPS-BASIC> 1.62
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 3.71
<LOANS-NON> 122,561
<LOANS-PAST> 6,525
<LOANS-TROUBLED> 746
<LOANS-PROBLEM> 129,832
<ALLOWANCE-OPEN> 226,052
<CHARGE-OFFS> 14,521
<RECOVERIES> 4,062
<ALLOWANCE-CLOSE> 225,277
<ALLOWANCE-DOMESTIC> 225,277
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
