<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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)
Registrant's telephone number, including area code: (414) 765-7801
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate 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, 2000
----- --------------
Common Stock, $1.00 Par Value 103,977,579
===============================================================================
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
--------------------------------------------
<S> <C> <C> <C>
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 699,804 $ 705,293 $ 665,870
Federal funds sold and security resale agreements 102,078 101,922 87,713
Money market funds 84,212 72,641 49,832
-------------- -------------- --------------
Total cash and cash equivalents 886,094 879,856 803,415
Investment securities:
Trading securities, at market value 31,087 40,334 33,409
Short-term investments, at cost which approximates market value 7,419 6,828 31,157
Available for sale at market value 4,163,535 4,357,196 4,353,137
Held to maturity at amortized cost, market value $1,117,970
($1,137,126 December 31, and $1,181,325 June 30, 1999) 1,140,340 1,170,734 1,179,310
-------------- -------------- --------------
Total investment securities 5,342,381 5,575,092 5,597,013
Loans and leases 17,394,515 16,335,061 14,899,052
Less: Allowance for loan and lease losses 234,119 225,862 225,277
-------------- -------------- --------------
Net loans and leases 17,160,396 16,109,199 14,673,775
Premises and equipment 372,157 370,534 358,402
Intangible assets 348,680 366,416 370,647
Accrued interest and other assets 1,064,174 1,068,626 989,247
-------------- -------------- --------------
Total Assets $ 25,173,882 $ 24,369,723 $ 22,792,499
============== ============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 2,805,295 $ 2,830,960 $ 2,708,405
Interest bearing 14,101,144 13,604,222 13,189,064
-------------- -------------- --------------
Total deposits 16,906,439 16,435,182 15,897,469
Funds purchased and security repurchase agreements 934,952 1,402,077 2,331,164
Other short-term borrowings 3,635,282 3,138,178 894,082
Accrued expenses and other liabilities 605,018 612,336 557,518
Long-term borrowings 961,919 665,024 976,093
-------------- -------------- --------------
Total liabilities 23,043,610 22,252,797 20,656,326
Shareholders' equity:
---------------------
Series A convertible preferred stock, $1.00 par value;
336,370 shares issued (685,314 June 30, 1999) 336 336 685
Common stock, $1.00 par value; 112,757,546 shares issued 112,757 112,757 112,757
Additional paid-in capital 454,332 457,097 613,192
Retained earnings 2,040,606 1,914,128 1,785,500
Net unrealized (losses) gains on securities
available for sale, net of related taxes (50,246) (32,749) 14,757
Less: Treasury common stock, at cost: 8,796,387 shares
(6,941,684 December 31, and 9,259,433 June 30, 1999) 407,851 314,513 371,218
Deferred compensation 19,662 20,130 19,500
-------------- -------------- --------------
Total shareholders' equity 2,130,272 2,116,926 2,136,173
Total Liabilities and Shareholders' Equity $ 25,173,882 $ 24,369,723 $ 22,792,499
============== ============== ==============
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
<TABLE>
<CAPTION>
Three Months Ended June 30
---------------------------
2000 1999
---------------------------
<S> <C> <C>
Interest income
---------------
Loans and leases $ 344,685 $ 279,541
Investment securities:
Taxable 66,225 68,272
Exempt from Federal income taxes 16,523 14,217
Trading securities 484 381
Short-term investments 4,672 2,291
-------------- ------------
Total interest income 432,589 364,702
Interest expense
----------------
Deposits 185,606 136,936
Short-term borrowings 60,580 34,528
Long-term borrowings 21,348 15,496
-------------- ------------
Total interest expense 267,534 186,960
Net interest income 165,055 177,742
Provision for loan and lease losses 9,616 4,811
-------------- ------------
Net interest income after provision for loan and lease losses 155,439 172,931
Other income
------------
Data processing services:
Processing 72,576 66,152
Software and consulting 20,203 17,834
E-commerce 43,173 36,961
Other 5,803 5,453
-------------- ------------
Total data processing services 141,755 126,400
Internet banking 519 553
Trust services 29,967 25,059
Service charges on deposits 18,549 17,019
Mortgage banking 3,905 7,453
Capital Markets revenue 2,156 2,146
Net investment securities gains 1,281 355
Life insurance revenue 7,360 6,381
Other 41,503 29,038
-------------- ------------
Total other income 246,995 214,404
Other expense
-------------
Salaries and employee benefits 157,868 149,666
Net occupancy 13,719 12,253
Equipment 27,736 26,906
Software expenses 7,033 6,786
Processing charges 7,443 7,501
Supplies and printing 5,099 5,182
Professional services 9,583 7,320
Shipping and handling 9,642 8,453
Amortization of intangibles 7,157 8,502
Other 24,076 21,253
-------------- ------------
Total other expense 269,356 253,822
Income before income taxes 133,078 133,513
Provision for income taxes 42,793 45,995
-------------- ------------
Net income $ 90,285 $ 87,518
============== ============
Net income per common share
Basic $ 0.86 $ 0.82
Diluted 0.83 0.77
Dividends paid per common share $ 0.265 $ 0.240
Weighted average common shares outstanding:
Basic 103,895 104,123
Diluted 108,742 113,544
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
---------------------------
<S> <C> <C>
Interest income
---------------
Loans and leases $ 671,163 $ 551,518
Investment securities:
Taxable 134,115 132,572
Exempt from Federal income taxes 32,970 27,891
Trading securities 1,011 780
Short-term investments 7,955 4,527
-------------- ------------
Total interest income 847,214 717,288
Interest expense
----------------
Deposits 358,184 270,587
Short-term borrowings 117,619 64,810
Long-term borrowings 37,235 31,332
-------------- ------------
Total interest expense 513,038 366,729
Net interest income 334,176 350,559
Provision for loan and lease losses 15,435 9,684
Net interest income after provision for loan and lease losses 318,741 340,875
Other income
------------
Data processing services:
Processing 144,717 132,889
Software and consulting 40,128 39,593
E-commerce 82,778 63,381
Other 15,010 11,898
-------------- ------------
Total data processing services 282,633 247,761
Internet banking 1,024 1,072
Trust services 57,775 48,931
Service charges on deposits 37,063 33,472
Mortgage banking 6,817 18,639
Capital Markets revenue 17,267 3,728
Net investment securities gains 1,281 355
Life insurance revenue 14,032 12,606
Other 68,980 52,514
-------------- ------------
Total other income 486,872 419,078
Other expense
-------------
Salaries and employee benefits 314,088 283,789
Net occupancy 27,047 24,346
Equipment 55,098 53,380
Software expenses 13,898 12,889
Processing charges 14,983 15,424
Supplies and printing 9,951 9,697
Professional services 17,157 14,533
Shipping and handling 21,027 17,267
Amortization of intangibles 14,863 23,527
Other 47,924 42,579
-------------- ------------
Total other expense 536,036 497,431
Income before income taxes 269,577 262,522
Provision for income taxes 88,710 89,473
-------------- ------------
Net income $ 180,867 $ 173,049
============== ============
Net income per common share
Basic $ 1.72 $ 1.62
Diluted 1.66 1.52
Dividends paid per common share $ 0.505 $ 0.460
Weighted average common shares outstanding:
Basic 104,276 104,791
Diluted 109,153 114,150
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,
---------------------------
2000 1999
---------------------------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 351,058 $ 400,310
Cash Flows From Investing Activities:
Net (increase)/decrease in securities with
maturities of three months or less -- 21,400
Proceeds from sales of securities available for sale 17,329 96,494
Proceeds from maturities of longer term securities 346,595 557,615
Purchases of longer term securities (146,329) (1,150,393)
Net increase in loans (1,123,858) (950,829)
Purchases of assets to be leased (233,584) (207,646)
Principal payments on lease receivables 163,711 143,858
Fixed asset purchases, net (29,458) (25,844)
Acquisitions and investments in joint ventures (265) (67,120)
Other 5,806 7,045
-------------- --------------
Net cash used in investing activities (1,000,053) (1,575,420)
Cash Flows From Financing Activities:
Net increase /(decrease) in deposits 479,760 (18,251)
Proceeds from issuance of commercial paper 1,615,801 574,986
Payments for maturity of commercial paper (1,465,293) (480,536)
Net increase /(decrease) in other short-term borrowings (144,738) 1,296,246
Proceeds from issuance of long-term debt 381,641 30,781
Payments of long-term debt (61,661) (93,854)
Dividends paid (54,389) (51,654)
Purchases of treasury stock (98,209) (198,163)
Other 2,321 12,232
-------------- --------------
Net cash provided by financing activities 655,233 1,071,787
Net increase (decrease) in cash and cash equivalents 6,238 (103,323)
Cash and cash equivalents, beginning of year 879,856 906,738
-------------- --------------
Cash and cash equivalents, end of period $ 886,094 $ 803,415
============== ==============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 465,855 $ 378,796
Income taxes 67,348 16,801
See notes to financial statements.
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2000 & 1999 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I" or
"Corporation") 1999 Annual Report on Form 10-K. The unaudited financial
information included in this report reflects all adjustments (consisting
only of normal recurring accruals) which are necessary for a fair
statement of the financial position and results of operations as of and
for the three months and six months ended June 30, 2000 and 1999. The
results of operations for the three months and six months ended June 30,
2000 and 1999 are not necessarily indicative of results to be expected
for the entire year. Certain amounts in the 1999 consolidated financial
statements and analyses have been reclassified to conform with the 2000
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 320,000,000 shares of its $1.00 par value common
stock authorized.
3. New Accounting Pronouncements
Derivatives - In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet
as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivatives fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative instrument's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
Statement 133, as amended, is effective for fiscal years beginning after
June 15, 2000. A company may also implement the Statement as of the
beginning of any quarter after issuance. Statement 133 cannot be applied
retroactively. Statement 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts.
The Corporation has not determined the timing of adoption. Presented in
Item 2, Management's Discussion and Analysis of Financial Position and
Results of Operations, is the fair value of the freestanding derivatives
held by the Corporation as of June 30, 2000. Statement 133 would
require that those derivative instruments be recognized in the
Corporation's Consolidated Balance Sheets as assets or liabilities at
their fair value. The Corporation has not yet completed quantifying the
other effects of adopting Statement 133 on its consolidated financial
statements nor has it completed its determination of which of the
freestanding derivatives qualify for hedge accounting prescribed by the
statement. However, the Statement could increase volatility in earnings
and other comprehensive income.
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2000 & 1999 (Unaudited)
Revenue Recognition - In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements" ("SAB 101"). SAB 101 provides guidance on a
variety of revenue recognition matters and must be adopted no later than
the fourth quarter of 2000. Based on its present assessment, the
Corporation does not currently believe that the adoption of SAB 101 will
have a material impact on its consolidated financial statements.
Shipping and Handling Costs - Beginning in the second quarter of 2000,
the Corporation began classifying shipping and handling costs associated
with the income producing activities of its Data Services segment as
revenue in accordance with the provisions of Emerging Issues Task Force
Issue No. 00-10, ("EITF 00-10"), "Accounting for Shipping and Handling
Fees and Costs". Previously, amounts charged to customers for shipping
and handling were netted against the related cost for financial statement
purposes. Consolidated Statements of Income for the three months and six
months ended June 30, 1999, have been restated in accordance with EITF
00-10.
4. A reconciliation of the numerators and denominators of the basic and
diluted per share computations are as follows (dollars and shares in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
-----------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------
<S> <C> <C> <C>
Net Income $ 90,285
Convertible Preferred Dividends (1,019)
-------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 89,266 103,895 $ 0.86
==========
Effect of Dilutive Securities
Convertible Preferred Stock 1,019 3,844
Stock Options and Restricted Stock Plans -- 1,003
-------------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 90,285 108,742 $ 0.83
==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
-----------------------------------------
Income Average Shares Per 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>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2000 & 1999 (Unaudited)
4. Earnings Per Share - (dollars and shares in thousands, except per share
data):
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
-----------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------
<S> <C> <C> <C>
Net Income $ 180,867
Convertible Preferred Dividends (1,941)
-------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 178,926 104,276 $ 1.72
==========
Effect of Dilutive Securities
Convertible Preferred Stock 1,941 3,844
Stock Options and Restricted Stock Plans -- 1,033
-------------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 180,867 109,153 $ 1.66
==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
-----------------------------------------
Income Average Shares Per 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 and Restricted Stock Plans -- 1,682
-------------- --------------
Diluted Earnings Per Share
Income Available to Common Shareholders
Plus Assumed Conversions $ 173,049 114,150 $ 1.52
==========
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2000 & 1999 (Unaudited)
5. Selected investment securities, by type, held by the Corporation are as
follows ($000's):
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
--------------------------------------------
<S> <C> <C> <C>
Other investment securities available for sale:
U.S. treasury and government agencies $ 3,622,576 $ 3,852,731 $ 3,968,036
State and political subdivisions 147,525 109,971 149
Other 393,434 394,494 384,952
-------------- -------------- --------------
Total $ 4,163,535 $ 4,357,196 $ 4,353,137
============== ============== ==============
Investment securities held to maturity:
U.S. treasury and government agencies $ -- $ 9 $ 44
State and political subdivisions 1,135,147 1,165,756 1,174,099
Other 5,193 4,969 5,167
-------------- -------------- --------------
Total $ 1,140,340 $ 1,170,734 $ 1,179,310
============== ============== ==============
</TABLE>
6. The Corporation's loan and lease portfolio consists of the following
($000's):
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
--------------------------------------------
<S> <C> <C> <C>
Commercial, financial & agricultural $ 5,068,961 $ 4,754,857 $ 4,394,154
Real estate:
Construction 542,958 494,558 424,284
Residential mortgage 5,377,244 4,941,450 4,310,828
Commercial mortgage 4,242,058 4,034,771 3,847,438
-------------- -------------- --------------
Total real estate 10,162,260 9,470,779 8,582,550
Personal 1,248,109 1,299,416 1,213,936
Lease financing 915,185 810,009 708,412
-------------- -------------- --------------
Total $ 17,394,515 $ 16,335,061 $ 14,899,052
============== ============== ==============
</TABLE>
7. The Corporation's deposit liabilities consists of the following ($000's):
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
--------------------------------------------
<S> <C> <C> <C>
Noninterest bearing demand $ 2,805,295 $ 2,830,960 $ 2,708,405
Savings and NOW 6,920,968 6,966,423 6,764,346
CD's $100,000 and over 2,272,079 1,885,933 1,740,917
Other time deposits 3,420,918 3,419,333 3,420,091
Foreign Deposits 1,487,179 1,332,533 1,263,710
-------------- -------------- --------------
$ 16,906,439 $ 16,435,182 $ 15,897,469
============== ============== ==============
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2000 & 1999 (Unaudited)
8. Comprehensive Income
The following table presents the Corporation's comprehensive income
($000's):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Net income $ 90,285 $ 87,518
Other comprehensive income
Unrealized gains (losses) on securities, net of tax:
Arising during the period (5,942) (25,370)
Reclassification for securities
transactions included in net income 753 (474)
-------------- --------------
(5,189) (25,844)
-------------- --------------
Total comprehensive income $ 85,096 $ 61,674
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Net income $ 180,867 $ 173,049
Other comprehensive income
Unrealized gains (losses) on securities, net of tax:
Arising during the period (26,217) (42,536)
Reclassification for securities
transactions included in net income 8,720 (809)
-------------- --------------
(17,497) (43,345)
-------------- --------------
Total comprehensive income $ 163,370 $ 129,704
============== ==============
</TABLE>
Other comprehensive income as shown is net of deferred income tax
benefits of $2,787 and $15,078 for the three months and $9,432 and
$25,783 for the six months ended June 30, 2000 and 1999, respectively.
9. 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 1999 Annual Report.
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2000 & 1999 (Unaudited)
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 June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Net interest income $ 167.4 $ 176.6 $ 338.3 $ 347.6
Other revenues:
Unaffiliated customers 61.6 48.5 105.4 93.7
Affiliated customers 4.5 4.1 9.1 7.7
------------- ------------- ------------- -------------
Total revenues 233.5 229.2 452.8 449.0
Expenses:
Intersegment charges 25.9 25.5 45.5 48.6
Other operating expense 79.1 76.8 159.9 154.4
------------- ------------- ------------- -------------
Total expenses 105.0 102.3 205.4 203.0
Provision for loan
and lease losses 9.5 4.7 15.3 9.4
Income tax expense 36.2 39.3 71.1 75.7
------------- ------------- ------------- -------------
Operating income $ 82.8 $ 82.9 $ 161.0 $ 160.9
============= ============= ============= =============
Identifiable assets $ 23,871.8 $ 21,560.8 $ 23,871.8 $ 21,560.8
============= ============= ============= =============
Return on tangible equity 19.5 % 20.7 % 19.3 % 20.3 %
============= ============= ============= =============
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2000 & 1999 (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 June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Banking revenues:
Commercial Banking $ 101.6 $ 95.2 $ 200.2 $ 191.9
Retail Banking 105.9 94.5 201.0 190.4
Investments and Other 26.0 39.5 51.6 66.7
------------- ------------- ------------- -------------
Total banking revenues $ 233.5 $ 229.2 $ 452.8 $ 449.0
============= ============= ============= =============
Percent of total banking revenue:
Commercial Banking 43.5 % 41.5 % 44.2 % 42.7 %
Retail Banking 45.3 41.2 44.4 42.4
Investments and Other 11.2 17.3 11.4 14.9
------------- ------------- ------------- -------------
Total banking revenues 100.0 % 100.0 % 100.0 % 100.0 %
============= ============= ============= =============
Operating banking income
Commercial Banking $ 42.7 $ 39.0 $ 83.0 $ 78.6
Retail Banking 29.3 21.7 53.7 45.4
Investments and Other 10.8 22.2 24.3 36.9
------------- ------------- ------------- -------------
Total operating
banking income $ 82.8 $ 82.9 $ 161.0 $ 160.9
============= ============= ============= =============
Percent of total operating banking income:
Commercial Banking 51.6 % 47.0 % 51.6 % 48.8 %
Retail Banking 35.4 26.1 33.4 28.2
Investments and Other 13.0 26.9 15.0 23.0
------------- ------------- ------------- -------------
Total operating
banking income 100.0 % 100.0 % 100.0 % 100.0 %
============= ============= ============= =============
Banking return on tangible equity
Commercial Banking 22.8 % 29.1 % 22.4 % 24.6 %
Retail Banking 22.7 20.2 21.1 21.0
------------- ------------- ------------- -------------
Total banking return on tangible 19.5 % 20.7 % 19.3 % 20.3 %
============= ============= ============= =============
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2000 & 1999 (Unaudited)
Data Services
-------------
Data Services includes the Data Services Division of the Corporation as
well as two 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. See Recent Developments. Intrasegment
revenues, expenses and assets have been eliminated in the following
information. ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Net interest expense $ (1.1) $ (1.4) $ (2.4) $ (2.0)
Other revenues:
Unaffiliated customers 142.3 127.0 283.8 249.0
Affiliated customers 23.8 22.5 47.9 44.8
------------- ------------- ------------- -------------
Total revenues 165.0 148.1 329.3 291.8
Expenses:
Intersegment charges 1.0 0.3 1.3 0.4
Other operating expense 143.0 127.5 285.2 251.9
------------- ------------- ------------- -------------
Total expenses 144.0 127.8 286.5 252.3
Income tax expense 8.8 8.6 17.9 17.0
------------- ------------- ------------- -------------
Operating income $ 12.2 $ 11.7 $ 24.9 $ 22.5
============= ============= ============= =============
Identifiable assets $ 532.0 $ 456.7 $ 532.0 $ 456.7
============= ============= ============= =============
Return on equity 18.2 % 20.6 % 18.9 % 20.3 %
============= ============= ============= =============
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2000 & 1999 (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 June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Net interest income $ 5.4 $ 6.2 $ 10.4 $ 12.0
Other revenues:
Unaffiliated customers 41.2 37.2 94.1 73.4
Affiliated customers 3.8 4.0 6.6 9.3
------------- ------------- ------------- -------------
Total revenues 50.4 47.4 111.1 94.7
Expenses:
Intersegment charges 7.5 6.0 14.7 12.4
Other operating expense 26.6 24.9 52.5 50.6
------------- ------------- ------------- -------------
Total expenses 34.1 30.9 67.2 63.0
Provision for loan
and lease losses 0.1 0.1 0.1 0.3
Income tax expense 6.4 6.5 17.5 12.5
------------- ------------- ------------- -------------
Operating income $ 9.8 $ 9.9 $ 26.3 $ 18.9
============= ============= ============= =============
Identifiable assets $ 723.0 $ 667.8 $ 723.0 $ 667.8
============= ============= ============= =============
Return on tangible equity 17.5 % 19.1 % 24.0 % 18.6 %
============= ============= ============= =============
</TABLE>
Total Revenues by type in All Others consist of the following:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C>
All Others Revenues:
Trust Services $ 30.6 $ 25.7 $ 59.1 $ 50.2
Residential Mortgage Banking 6.8 9.0 12.5 19.3
Capital Markets 2.6 3.0 18.1 5.7
Brokerage and Insurance 5.8 5.3 12.2 10.3
Commercial Leasing 2.6 2.6 5.0 5.3
Commercial Mortgage Banking 0.4 0.3 0.8 0.6
Others 1.6 1.5 3.4 3.3
------------- ------------- ------------- -------------
Total All Others revenues $ 50.4 $ 47.4 $ 111.1 $ 94.7
============= ============= ============= =============
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2000 & 1999 (Unaudited)
Segment information reconciled to the Consolidated Financial Statements
is as follows ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Banking $ 233.5 $ 229.2 $ 452.8 $ 449.0
Data Services 165.0 148.1 329.3 291.8
All Others 50.4 47.4 111.1 94.7
Corporate overhead (5.1) (2.2) (9.3) (3.9)
Acquisition costs 0.4 (0.1) 0.7 (0.5)
Intersegment eliminations (32.1) (30.3) (63.6) (61.5)
------------- ------------- ------------- -------------
Consolidated revenues $ 412.1 $ 392.1 $ 821.0 $ 769.6
============= ============= ============= =============
Expenses:
Banking $ 105.0 $ 102.3 $ 205.4 $ 203.0
Data Services 144.0 127.8 286.5 252.3
All Others 34.1 30.9 67.2 63.0
Corporate overhead 13.5 17.4 30.7 29.2
Acquisition costs 4.9 5.7 9.8 11.4
Intersegment eliminations (32.1) (30.3) (63.6) (61.5)
------------- ------------- ------------- -------------
Consolidated expenses $ 269.4 $ 253.8 $ 536.0 $ 497.4
============= ============= ============= =============
Net income (loss):
Operating income:
Banking $ 82.8 $ 82.9 $ 161.0 $ 160.9
Data Services 12.2 11.7 24.9 22.5
All Others 9.8 9.9 26.3 18.9
Corporate overhead (10.7) (12.3) (23.6) (19.8)
Acquisition costs (3.8) (4.7) (7.7) (9.5)
------------- ------------- ------------- -------------
Consolidated net income $ 90.3 $ 87.5 $ 180.9 $ 173.0
============= ============= ============= =============
Assets:
Banking $ 23,871.8 $ 21,560.8 $ 23,871.8 $ 21,560.8
Data Services 532.0 456.7 532.0 456.7
All Others 723.0 667.8 723.0 667.8
Corporate overhead 290.4 135.6 290.4 135.6
Acquisition costs 259.3 279.9 259.3 279.9
Intersegment eliminations (502.6) (308.3) (502.6) (308.3)
------------- ------------- ------------- -------------
Consolidated assets $ 25,173.9 $ 22,792.5 $ 25,173.9 $ 22,792.5
============= ============= ============= =============
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Assets
------
Cash and due from banks $ 614,749 $ 626,668
Investment securities:
Trading securities 38,874 30,871
Short-term investments 279,762 186,480
Other investment securities:
Taxable 4,018,607 4,272,000
Tax-exempt 1,333,331 1,183,276
-------------- --------------
Total investment securities 5,670,574 5,672,627
Loans and leases:
Commercial 5,013,395 4,311,352
Real estate 9,918,905 8,375,500
Personal 1,350,883 1,169,117
Lease financing 876,449 677,853
-------------- --------------
Total loans and leases 17,159,632 14,533,822
Less: Allowance for loan and lease losses 234,395 231,059
-------------- --------------
Net loans and leases 16,925,237 14,302,763
Premises and equipment, net 371,908 355,598
Accrued interest and other assets 1,410,526 1,364,881
-------------- --------------
Total Assets $ 24,992,994 $ 22,322,537
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 2,618,845 $ 2,620,695
Interest bearing 14,573,829 13,112,566
-------------- --------------
Total deposits 17,192,674 15,733,261
Funds purchased and security repurchase agreements 1,862,392 2,474,485
Other short-term borrowings 1,944,267 412,424
Long-term borrowings 1,309,830 1,003,840
Accrued expenses and other liabilities 583,683 510,123
-------------- --------------
Total liabilities 22,892,846 20,134,133
Shareholders' equity 2,100,148 2,188,404
-------------- --------------
Total Liabilities and Shareholders' Equity $ 24,992,994 $ 22,322,537
============== ==============
</TABLE>
<PAGE>
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Assets
------
Cash and due from banks $ 622,431 $ 642,742
Investment securities:
Trading securities 40,214 31,478
Short-term investments 257,098 188,501
Other investment securities:
Taxable 4,075,637 4,182,498
Tax-exempt 1,337,611 1,156,254
-------------- --------------
Total investment securities 5,710,560 5,558,731
Loans and leases:
Commercial 4,955,041 4,222,610
Real estate 9,759,153 8,266,431
Personal 1,332,301 1,161,762
Lease financing 850,874 652,796
-------------- --------------
Total loans and leases 16,897,369 14,303,599
Less: Allowance for loan and lease losses 231,429 229,846
Net loans and leases 16,665,940 14,073,753
Premises and equipment, net 372,104 356,411
Accrued interest and other assets 1,404,723 1,329,647
-------------- --------------
Total Assets $ 24,775,758 $ 21,961,284
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 2,613,962 $ 2,594,410
Interest bearing 14,498,268 12,916,615
-------------- --------------
Total deposits 17,112,230 15,511,025
Funds purchased and security repurchase agreements 2,306,975 2,460,983
Other short-term borrowings 1,543,886 267,920
Long-term borrowings 1,160,157 1,016,149
Accrued expenses and other liabilities 562,146 495,545
-------------- --------------
Total liabilities 22,685,394 19,751,622
Shareholders' equity 2,090,364 2,209,662
-------------- --------------
Total Liabilities and Shareholders' Equity $ 24,775,758 $ 21,961,284
============== ==============
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
-----------------------------------------
Net income for the second quarter of 2000 amounted to $90.3 million compared
to $87.5 million for the same period in the prior year. Basic and diluted
earnings per share were $.86 and $.83 respectively for the three months ended
June 30, 2000, compared with $.82 and $.77 respectively for the three months
ended June 30, 1999. The return on average assets and average equity were
1.45% and 17.29% for the quarter ended June 30, 2000 and 1.57% and 16.04% for
the quarter ended June 30, 1999.
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.
"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>
2000 1999
------------------------ --------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 432,589 $ 414,625 $ 398,819 $ 380,477 $ 364,702
Interest expense (267,534) (245,504) (221,900) (202,674) (186,960)
----------- ------------ ------------ ------------ ------------
Net interest income 165,055 169,121 176,919 177,803 177,742
Provision for loan and lease losses (9,616) (5,819) (10,938) (4,797) (4,811)
Net investment securities gains (losses) 1,281 -- (4,513) 59 355
Other income 245,714 239,877 234,603 229,318 214,049
Other expense (269,356) (266,680) (266,033) (267,004) (253,822)
----------- ------------ ------------ ------------ ------------
Income before taxes 133,078 136,499 130,038 135,379 133,513
Income tax provision (42,793) (45,917) (39,412) (44,543) (45,995)
----------- ------------ ------------ ------------ ------------
Operating income $ 90,285 $ 90,582 $ 90,626 $ 90,836 $ 87,518
=========== ============ ============ ============ ============
Cash operating income $ 94,845 $ 95,071 $ 95,664 $ 95,796 $ 92,475
=========== ============ ============ ============ ============
Per Common Share
Operating income
Basic $ 0.86 $ 0.86 $ 0.84 $ 0.86 $ 0.82
Diluted 0.83 0.83 0.81 0.81 0.77
Cash Operating income
Basic $ 0.90 $ 0.90 $ 0.89 $ 0.91 $ 0.87
Diluted 0.87 0.87 0.86 0.85 0.81
Dividends 0.265 0.240 0.240 0.240 0.240
Return on Average Equity
Operating income 17.29 % 17.51 % 16.86 % 16.85 % 16.04 %
Cash Operating income 21.40 21.86 21.14 21.04 20.04
</TABLE>
<PAGE>
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------------------ --------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income (FTE) 7.09 % 6.92 % 6.77 % 6.68 % 6.68 %
Interest expense (4.31) (4.02) (3.70) (3.49) (3.36)
----------- ------------ ------------ ------------ ------------
Net interest income 2.78 2.90 3.07 3.19 3.32
Provision for loan and lease losses (0.15) (0.10) (0.18) (0.08) (0.09)
Net investment securities gains 0.02 -- (0.08) -- 0.01
Other income 3.95 3.93 3.91 3.95 3.85
Other expense (4.33) (4.37) (4.43) (4.61) (4.57)
----------- ------------ ------------ ------------ ------------
Income before taxes 2.27 2.36 2.29 2.45 2.52
Income tax provision (0.82) (0.88) (0.78) (0.89) (0.95)
----------- ------------ ------------ ------------ ------------
Return on average assets
based on operating income 1.45 % 1.48 % 1.51 % 1.56 % 1.57 %
=========== ============ ============ ============ ============
Return on tangible average assets
based on cash operating income 1.55 % 1.58 % 1.62 % 1.67 % 1.69 %
=========== ============ ============ ============ ============
</TABLE>
NET INTEREST INCOME
-------------------
Net interest income for the second quarter of 2000 amounted to $165.1 million
compared to $177.7 million reported for the second quarter of 1999. The
inability of bank issued deposit growth to keep pace with strong loan growth,
reduced spreads in loan and deposit products, the continued use of higher-cost
borrowings and wholesale deposits, in the recent rising interest rate
environment and the costs associated with treasury share buybacks and recent
acquisitions all contributed to the $12.6 million decline in net interest
income.
Average earning assets in the second quarter of 2000 increased $2.6 billion or
13.0% compared to the same period a year ago. Average loans, including
securitized adjustable rate mortgage loans (ARMs), accounted for $2.5 billion
or 94.1% of the growth in earning assets compared to the second quarter of last
year. Average investment securities, excluding securitized ARMs, were
relatively unchanged while other earning assets increased $101.3 million for
the three months ended June 30, 2000 compared with the same period in the prior
year.
Average interest bearing liabilities increased $2.7 billion or 15.8% in the
second quarter of 2000 compared to the same period in 1999. Since the second
quarter of 1999, average interest bearing deposits increased $1.5 billion.
Approximately 83% of the growth in interest bearing deposits was attributable
to higher-cost wholesale deposits. Average total borrowings increased $1.2
billion which reflects, in part, the effect of the Corporation's repurchase
program.
Average noninterest bearing deposits in the current quarter were relatively
unchanged compared to the same period last year.
<PAGE>
The growth and composition of the Corporation's quarterly average loan
portfolio for the current quarter and previous four quarters are reflected in
the following table. Securitized ARM loans which are classified in the
consolidated balance sheets as investment securities available for sale are
included to provide a more meaningful comparison ($ in millions):
Consolidated Average Loans, Leases and Securitized ARMs
-------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 Growth Pct.
----------------- -------------------------- ----------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
----------------- -------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 5,013 $ 4,897 $ 4,566 $ 4,424 $ 4,311 16.3 % 2.4 %
Real Estate
Construction
Commercial 407 407 365 344 304 33.7 0.0
Residential 112 106 98 95 101 10.8 4.7
-------- -------- -------- -------- -------- ------ ------
Total Construction 519 513 463 439 405 28.0 1.0
Commercial Mortgages 4,159 4,050 3,985 3,884 3,792 9.7 2.7
Residential
Residential mortgages 3,011 2,862 2,701 2,474 2,334 29.0 5.2
Home equity loans and lines 2,230 2,174 2,084 1,982 1,845 20.9 2.6
Securitized ARM loans 403 424 450 490 560 (28.0) (4.8)
-------- -------- -------- -------- -------- ------ ------
Total Residential 5,644 5,460 5,235 4,946 4,739 19.1 3.4
-------- -------- -------- -------- -------- ------ ------
Total Real Estate 10,322 10,023 9,683 9,269 8,936 15.5 3.0
Personal
Student 254 262 258 254 255 (0.6) (3.2)
Credit card 153 151 144 139 137 12.0 1.9
Other 944 901 872 828 777 21.5 4.7
-------- -------- -------- -------- -------- ------ ------
Total Personal 1,351 1,314 1,274 1,221 1,169 15.5 2.8
Lease financing
Commercial 341 335 335 337 333 2.4 1.8
Personal 536 490 444 397 345 55.4 9.2
-------- -------- -------- -------- -------- ------ ------
Total Lease Financing 877 825 779 734 678 29.3 6.2
-------- -------- -------- -------- -------- ------ ------
Total Consolidated Average
Loans, Leases and ARMs $ 17,563 $ 17,059 $ 16,302 $ 15,648 $ 15,094 16.4 % 3.0 %
======== ======== ======== ======== ======== ====== ======
Total Consolidated Average
Loans, Leases and ARMs
Commercial Banking $ 9,920 $ 9,689 $ 9,251 $ 8,989 $ 8,740 13.5 % 2.4 %
Retail Banking 7,643 7,370 7,051 6,659 6,354 20.3 3.7
-------- -------- -------- -------- -------- ------ ------
Total Consolidated Average
Loans, Leases and ARMs $ 17,563 $ 17,059 $ 16,302 $ 15,648 $ 15,094 16.4 % 3.0 %
======== ======== ======== ======== ======== ====== ======
Total Consolidated Average
Loans and Leases $ 17,160 $ 16,635 $ 15,852 $ 15,158 $ 14,534 18.1 % 3.2 %
======== ======== ======== ======== ======== ====== ======
</TABLE>
<PAGE>
Compared with the second quarter of 1999, total consolidated average loans,
leases and securitized ARMs increased $2.5 billion or 16.4%. Loan growth was
evenly distributed between commercial and retail banking. Total loan growth in
commercial banking amounted to $1.2 billion or 13.5% and was driven by
commercial loan growth of $702 million and commercial real estate loan growth
of $470 million of which, $103 million was attributable to commercial
construction loan growth. Retail banking loan growth amounted to $1.3 billion
or 20.3%. Residential real estate loans and ARMs increased $521 million, home
equity loans and lines increased $385 million and lease financing receivables
increased $191 million. During the first quarter of 2000, the Corporation
began selling a portion of ARM loan production in the secondary market in
addition to fixed rate residential mortgage loans. Total residential mortgage
loans sold in the second quarter of 2000 amounted to $143 million of which
approximately $21 million were ARM loans. By comparison, fixed rate loan sales
in the second quarter of 1999 amounted to $354 million. Also during the second
quarter of 2000, the Corporation's banking affiliates sold $150 million of
student loans.
The growth and composition of the Corporation's quarterly average deposits
for the current and prior year's quarters are as follows ($ in millions):
<TABLE>
<CAPTION>
2000 1999 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 $ 1,677 $ 1,668 $ 1,791 $ 1,732 $ 1,682 (0.3)% 0.5 %
Personal 591 576 564 555 567 4.4 2.6
Other 351 365 420 402 372 (5.6) (3.7)
-------- -------- -------- -------- -------- ------ ------
Total noninterest
bearing deposits 2,619 2,609 2,775 2,689 2,621 (0.1) 0.4
Interest bearing deposits
Savings & NOW 1,880 1,919 1,957 2,019 2,054 (8.5) (2.0)
Money market 5,092 5,065 5,021 4,837 4,762 6.9 0.5
Other CDs & time deposits 3,399 3,428 3,430 3,444 3,398 0.0 (0.8)
CDs greater than $100,000 852 909 887 841 780 9.3 (6.3)
Foreign Time 2,112 2,057 1,896 1,887 1,273 65.9 2.6
Brokered CDs 1,239 1,045 970 932 845 46.5 18.5
-------- -------- -------- -------- -------- ------ ------
Total interest
bearing deposits 14,574 14,423 14,161 13,960 13,112 11.1 1.0
======== ======== ======== ======== ======== ====== ======
Total consolidated
average deposits $ 17,193 $ 17,032 $ 16,936 $ 16,649 $ 15,733 9.3 % 0.9 %
======== ======== ======== ======== ======== ====== ======
Bank issued deposits $ 13,572 $ 13,688 $ 13,819 $ 13,582 $ 13,326 1.8 % (0.8)%
Wholesale deposits 3,621 3,344 3,117 3,067 2,407 50.5 8.3
-------- -------- -------- -------- -------- ------ ------
Total consolidated
average deposits $ 17,193 $ 17,032 $ 16,936 $ 16,649 $ 15,733 9.3 % 0.9 %
======== ======== ======== ======== ======== ====== ======
</TABLE>
Due to continued strong loan growth and slow core deposit growth, the
Corporation continued to rely on wholesale deposits for funding. Compared
with the second quarter of 1999, average wholesale deposit growth amounted
to $1.2 billion or 50.5%. Eurodollar term and overnight deposits, which are
included in foreign time increased $0.8 billion and Brokered CDs increased
$0.4 billion.
By comparison, average bank issued deposits increased $0.2 billion or 1.8 %
in the second quarter of 2000 compared to the second quarter of 1999. Money
market, primarily money market index accounts, accounted for approximately
$271 million of the growth while large CDs and eurodollar activity accounts
accounted for $149 million of the growth in average bank issued deposits.
As previously discussed noninterest bearing deposits were relatively
unchanged. Partially, offsetting this growth was a decline in less costly
Savings and NOW deposits of $174 million. Average bank issued deposits were
negatively impacted by the sale of two bank branches located in Illinois
during the second quarter of 2000. Total deposits sold amounted to
approximately $89.8 million.
<PAGE>
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current
quarter and prior year second quarter are presented in the following table.
Securitized ARM loans that are classified in the balance sheet as investment
securities available for sale are included with loans to provide a more
meaningful comparison ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
----------------------------- -----------------------------
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) $ 17,563.1 $ 352.9 8.08 % $ 15,094.1 $ 290.4 7.72 %
Investment securities:
Taxable 3,615.2 58.5 6.34 3,711.7 57.9 6.29
Tax Exempt (a) 1,333.3 23.9 7.23 1,183.3 20.7 7.13
Other short-term investments (a) 318.6 5.1 6.51 217.3 2.7 4.94
---------- -------- --------- ---------- -------- ---------
Total interest earning assets $ 22,830.2 $ 440.4 7.73 % $ 20,206.4 $ 371.7 7.40 %
========== ======== ========= ========== ======== =========
Money market savings $ 5,092.1 $ 66.0 5.21 % $ 4,762.6 $ 48.1 4.05 %
Regular savings & NOW 1,880.3 8.2 1.75 2,053.9 8.3 1.63
Other CDs & time deposits 5,510.8 79.4 5.79 4,670.7 58.9 5.05
CDs greater than$100 & Brokered CDs 2,090.6 32.0 6.17 1,625.4 21.6 5.33
---------- -------- --------- ---------- -------- ---------
Total interest bearing deposits 14,573.8 185.6 5.12 13,112.6 136.9 4.19
Short-term borrowings 3,806.7 60.6 6.40 2,886.9 34.6 4.80
Long-term borrowings 1,309.8 21.3 6.56 1,003.8 15.5 6.19
---------- -------- --------- ---------- -------- ---------
Total interest bearing liabilities $ 19,690.3 $ 267.5 5.46 % $ 17,003.3 $ 187.0 4.41 %
========== ======== ========= ========== ======== =========
Net interest margin (FTE) as a
percent of average earning assets $ 172.9 3.03 % $ 184.7 3.68 %
======== ========= ======== =========
Net interest spread (FTE) 2.27 % 2.99 %
========= =========
</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 increased 33 basis points since the second
quarter of 1999 which had a positive impact on interest income (FTE) of
approximately $16.8 million. The slowing of accelerated amortization of
purchase accounting premiums assigned to acquired loans and investment
securities due to prepayments increased interest income by approximately $1.5
million. The benefit of lower amortization was offset by a decline of
approximately $2.2 million in interest income from the use of derivatives. The
increase in the volume of earning assets, primarily loans and securitized ARMs,
increased interest income by approximately $52.0 million compared with the
second quarter of 1999. The cost of interest bearing deposits increased 93
basis points from the same quarter of the previous year. Short-term borrowing
costs increased 160 basis points and long-term borrowing costs increased 37
basis points, respectively, compared with the second quarter of 1999. The
overall increase in the cost of interest bearing liabilities of 105 basis
points increased interest expense by approximately $45.5 million while the
increase in the volume of interest bearing liabilities increased interest
expense by approximately $35.0 million. The decline in benefit from use of
derivatives increased interest expense by $0.4 million in the current quarter
compared to the same period last year. The Corporation estimates that
approximately $4.9 million of the increase in interest expense is attributable
to the treasury shares repurchased in 1999 and in the first and second quarters
of 2000.
<PAGE>
The Corporation's positions with respect to derivative financial instruments
consisted of the following at June 30, 2000, ($ in millions):
<TABLE>
<CAPTION>
<S> <C>
Interest Rate Swaps - Loans
Notional value $ 520
Weighted average receive rate 5.92 %
Weighted average pay rate 6.65 %
Weighted average remaining term (in years) 2.01
Estimated fair value $(13.50)
Interest Rate Swaps - Callable Deposits
Notional value $ 552
Weighted average receive rate 6.61 %
Weighted average pay rate 6.47 %
Weighted average remaining term (in years) 6.68
Estimated fair value $(19.45)
Interest Rate Swaps - Equity Indexed Deposits
Notional value $ 15
Receive - Index interest upon maturity or call
Weighted average pay rate 6.41 %
Weighted average remaining term (in years) 4.77
Estimated fair value $ (1.72)
Interest Rate Swaps - Short-term Borrowings
Notional value $ 200
Weighted average receive rate 5.77 %
Weighted average pay rate 7.27 %
Weighted average remaining term (in years) 6.42
Estimated fair value $ (1.08)
Interest Rate Swaps - Long-term Borrowings
Notional value $ 200
Weighted average receive rate 7.65 %
Weighted average pay rate 5.58 %
Weighted average remaining term (in years) 26.44
Estimated fair value $ 0.52
Interest Rate Floors - Loans
Notional value $ 275
Strike rate 6.39 %
Index 7.34 %
Weighted average remaining term (in years) 5.88
Estimated fair value $ 3.48
Unamortized premium $ 4.99
</TABLE>
For the three months ended June 30, 2000, there was a $0.2 million negative
effect on net interest income resulting from derivative financial instruments
compared with a positive effect of $2.4 million in the same period in 1999.
Throughout 1999 and the first six months of 2000, the Corporation has been
experiencing favorable loan growth and has had to rely on wholesale deposits
and borrowings to fund growth in excess of core deposit growth. As previously
discussed, the use of higher cost funding sources in lieu of core deposit
growth contributed to the decline in net interest income. Based on the
Corporation's existing balance sheet, the net interest margin will continue to
be adversely affected by rising interest rates in the near term. In addition
to continuing to seek less costly funding sources, the Corporation may, among
other things, continue divesting of lower yielding assets through sale or
securitization in the future. See Recent Developments for further discussion.
<PAGE>
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of June 30, 2000 and the prior four quarters.
NONPERFORMING ASSETS
--------------------
($000's)
<TABLE>
<CAPTION>
2000 1999
-------------------- --------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
-------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual $ 119,584 $ 111,642 $ 106,387 $ 121,091 $ 122,561
Renegotiated 421 688 708 725 746
Past due 90 days or more 10,069 9,334 9,975 7,630 6,525
Total nonperforming loans and leases 130,074 121,664 117,070 129,446 129,832
Other real estate owned 4,592 6,247 6,230 6,660 6,766
--------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 134,666 $ 127,911 $ 123,300 $ 136,106 $ 136,598
========= ========== ========== ========== ==========
Allowance for loan and lease losses $ 234,119 $ 232,471 $ 225,862 $ 226,461 $ 225,277
========= ========== ========== ========== ==========
</TABLE>
CONSOLIDATED STATISTICS
-----------------------
<TABLE>
<CAPTION>
2000 1999
-------------------- --------------------------------
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 0.19 % (0.02)% 0.29 % 0.09 % 0.25 %
Total nonperforming loans and leases
to total loans and leases 0.75 0.72 0.72 0.83 0.87
Total nonperforming assets to total
loans and leases and other
real estate owned 0.77 0.75 0.75 0.87 0.92
Allowance for loan and lease losses
to total loans and leases 1.35 1.37 1.38 1.45 1.51
Allowance for loan and lease losses
to nonperforming loans and leases 180 191 193 175 174
</TABLE>
<PAGE>
NONACCRUAL LOANS AND LEASES BY TYPE
-----------------------------------
($000's)
<TABLE>
<CAPTION>
2000 1999
-------------------- --------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
-------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
Commercial
Commercial, financial
& agricultural $ 51,505 $ 49,006 $ 52,563 $ 60,627 $ 57,524
Lease financing receivables 2,271 3,929 4,243 4,655 4,041
--------- ---------- ---------- ---------- ----------
Total commercial 53,776 52,935 56,806 65,282 61,565
Real estate
Construction & land development 2,915 5,284 2,609 2,463 3,004
Commercial mortgage 36,159 28,069 19,668 22,911 25,763
Residential mortgage 25,198 23,715 25,901 28,651 30,154
--------- ---------- ---------- ---------- ----------
Total real estate 64,272 57,068 48,178 54,025 58,921
Personal 1,536 1,639 1,403 1,784 2,075
--------- ---------- ---------- ---------- ----------
Total nonaccrual loans and leases $ 119,584 $ 111,642 $ 106,387 $ 121,091 $ 122,561
========= ========== ========== ========== ==========
</TABLE>
RECONCILIATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
-----------------------------------------------------
($000's)
<TABLE>
<CAPTION>
2000 1999
-------------------- --------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
-------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 232,471 $ 225,862 $ 226,461 $ 225,277 $ 229,669
Provision for loan and lease losses 9,616 5,819 10,938 4,797 4,811
Loans and leases charged-off
Commercial 2,711 449 7,949 1,653 7,117
Real estate 4,989 653 1,953 1,198 1,475
Personal 1,758 1,544 2,086 1,794 1,544
Leases 539 198 1,103 300 686
--------- ---------- ---------- ---------- ----------
Total charge-offs 9,997 2,844 13,091 4,945 10,822
Recoveries on loans and leases
Commercial 1,020 2,811 724 610 389
Real estate 373 206 258 195 405
Personal 539 525 457 472 611
Leases 97 92 115 55 214
--------- ---------- ---------- ---------- ----------
Total Recoveries 2,029 3,634 1,554 1,332 1,619
Net loans and leases
charge-offs (recoveries) 7,968 (790) 11,537 3,613 9,203
--------- ---------- ---------- ---------- ----------
Ending balance $ 234,119 $ 232,471 $ 225,862 $ 226,461 $ 225,277
========= ========== ========== ========== ==========
</TABLE>
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, 2000, OREO acquired in satisfaction of debts amounted to $3.4 million
and branch premises held for sale amounted to $1.2 million.
<PAGE>
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, 2000, nonperforming loans and leases amounted to $130.1 million or
0.75% of consolidated loans and leases of $17.4 billion, an increase of $8.4
million or 6.9% since March 31, 2000. Nonaccrual loans and leases, primarily
real estate loans, have shown the largest increases since the first quarter.
Nonaccrual loans secured by real estate, primarily commercial mortgages
increased $8.1 million since March 31, 2000. Approximately $7.0 million or
5.8% of nonaccrual loans at June 30, 2000 are attributable to farmland loans
associated with the cranberry industry.
Net charge-offs amounted to $8.0 million or 0.19% of average loans in the
second quarter of 2000 compared with net recoveries of $0.8 million or (0.02)%
of average loans in the first quarter of 2000 and net charge-offs of $9.2
million or 0.25% of average loans in the second quarter of 1999. Loans
associated with the cranberry industry accounted for $3.2 million and one
larger commercial loan accounted for $1.7 million of the net charge-offs in
the current quarter.
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.
<PAGE>
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.
Management's evaluation of the factors described above resulted in an allowance
for loan and lease losses of $234.1 million at June 30, 2000 compared to $232.5
million at March 31, 2000. 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 in the
current 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 $9.6 million for
the three months ended June 30, 2000.
OTHER INCOME
------------
Total other income in the second quarter of 2000 amounted to $247.0 million,
an increase of $32.6 million or 15.2%, compared to $214.4 million in the same
period last year.
Total data processing services revenue increased $15.4 million or 12.1% from
$126.4 million in the second quarter of 1999 to $141.8 million in the current
quarter. Processing revenue which includes processing, conversions, and
contract buyouts increased $6.4 million or 9.7% and amounted to $72.6 million.
Conversion revenue and buyout fees, which vary from period to period, increased
$1.6 million compared with the second quarter of the prior year. Software and
consulting revenue increased $2.4 million in the current quarter compared to
the same period last year. E-commerce revenue which includes electronic funds
transfer, electronic banking, cash management, home banking, internet banking,
electronic payment services and a mortgage solution joint venture, increased
$6.2 million or 16.8% from $37.0 million in the second quarter of 1999 to $43.2
million in the current quarter. Revenues associated with electronic funds
transfer, internet banking, and electronic payment services accounted for $4.6
million of the revenue growth. Other data processing services revenue which
consists of merchant credit card fees, credit card plastics sales and equipment
sales increased 6.4%.
Trust services revenue amounted to $30.0 million in the second quarter of 2000,
an increase of $4.9 million or 19.6% compared to $25.1 million in the second
quarter of 1999. Net new business growth in personal trust and commercial
trust and increased balances in proprietary mutual fund balances resulted in
favorable revenue growth in major product lines. Total assets under management
were approximately $1.2 billion or 11.5% greater in the current year compared
to the prior year.
For the three months ended June 30, 2000, service charges on deposits amounted
to $18.5 million, an increase of $1.5 million or 9.0% compared to $17.0 million
in the three months ended June 30, 1999. Service charges associated with
commercial demand accounts increased $0.8 million and service charges
associated with personal demand accounts increased $0.4 million.
Mortgage banking revenue amounted to $3.9 million in the second quarter of 2000
compared with $7.5 million in the second quarter of 1999. While all sources
of mortgage banking revenue decreased compared to the prior year, gains on the
sale of mortgages accounted for $3.2 million of the decline which reflects the
slowing of demand for fixed rate mortgages.
<PAGE>
During the second quarter of 2000, the Corporation's banking segment sold
equity securities and realized a gain of $1.3 million.
Life insurance revenue for the second quarter of 2000 includes death benefit
gains of $0.6 million.
Other income in the second quarter of 2000 amounted to $41.5 million compared
to $29.0 million in the second quarter of 1999, an increase of $12.5 million
or 42.9%. Gains from the sale of branches, as previously discussed, amounted
to $9.9 million in the second quarter of 2000 compared to gains of $4.2 million
during the second quarter of 1999. Gains realized from the sale of student
loans in the second quarter of 2000, also previously discussed, amounted to
$5.1 million.
OTHER EXPENSE
-------------
Total other expense in the second quarter of 2000 amounted to $269.4 million
compared with $253.8 million in the second quarter of 1999 an increase of $15.6
million or 6.1%.
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 all 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 recent acquisitions and costs associated with an
initial public offering ("IPO") as more fully discussed in Recent Developments.
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, 2000 and 1999 and the year ended December 31, 1999 are:
<TABLE>
<CAPTION>
Three Months Year Three Months
Ended Ended Ended
June 30, December 31, June 30,
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Consolidated Corporation 64.3 % 63.7 % 63.6 %
Consolidated Corporation Excluding Data Services
Including Intangible Amortization 52.2 % 52.1 % 53.0 %
Excluding Intangible Amortization 50.2 % 49.4 % 50.0 %
</TABLE>
Salaries and employee benefits expense amounted to $157.9 million in the second
quarter of 2000 compared to $149.7 million in the second quarter of 1999, an
increase of $8.2 million or 5.5%. Salaries and employee benefits expense of
Data Services increased $9.0 million. At June 30, 2000, Data Services had on
average approximately 345 more full time equivalent employees (FTEs) when
compared to June 30, 1999 which reflects increases in E-commerce (+112 FTEs)
and increases due to the Cardpro acquisition (+111 FTEs). Compared to the
second quarter of 1999, expense growth in the current quarter in salaries and
employee benefits was $1.9 million or 4.0% for the banking segment. All other
segments increased $1.6 million due to growth in the trust business and
mortgage internet development. Incentive compensation which includes incentive
compensation based on the Corporation's common stock performance decreased $4.0
million.
Data Services expense growth accounted for approximately $2.8 million or 77.3%
of the increase in net occupancy, equipment, software, supplies and printing,
processing and shipping and handling expenses in the second quarter of 2000
compared to the second quarter of 1999.
<PAGE>
Professional services expense amounted to $9.6 million in the current quarter
compared to $7.3 million in the second quarter of the prior year. Data
Services professional services expense accounted for $1.4 million of the
increase. Expense increases associated with banking initiatives and mortgage
internet development accounted for the remainder.
Amortization of intangibles decreased $1.3 million. Approximately $0.4 million
of the decrease is due to lower amortization of mortgage servicing rights due
to slower prepayments in the servicing portfolio and $0.8 million of the
decrease is due to lower core deposit premium amortization.
Other expense amounted to $24.1 million in the second quarter of 2000, an
increase of $2.8 million or 13.3% compared to the second quarter of 1999.
Other expense growth of Data Services which includes the effect of the
capitalization of costs, net of amortization associated with software
development and customer data processing conversions accounted for $2.6 million
of the increase.
INCOME TAXES
------------
The provision for income taxes for the three months ended June 30, 2000
amounted to $42.8 million or 32.2% of pre-tax income compared to $46.0 million
or 34.4% of pre-tax income for the three months ended June 30, 1999. The
decrease in the effective tax rate is attributable to increases in tax-exempt
income and state income tax benefits.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
---------------------------------------
Net income for the six months ended June 30, 2000 amounted to $180.9 million
compared to $173.0 million in the same period of 1999. Basic and diluted
earnings per share were $1.72 and $1.66, respectively for the six months
ended June 30, 2000 compared to $1.62 and $1.52, respectively for the same
period last year. The year to date return on average equity was 17.40% in
the current period and 15.79% for the six months ended June 30, 1999.
<PAGE>
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, 2000 and 1999,
respectively. "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>
Six Months Ended June 30,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
Interest income $ 847,214 $ 717,288
Interest expense (513,038) (366,729)
----------- ------------
Net interest income 334,176 350,559
Provision for loan and lease losses (15,435) (9,684)
Net investment securities gains (losses) 1,281 355
Other income 485,591 418,723
Other expense (536,036) (497,431)
----------- ------------
Income before taxes 269,577 262,522
Income tax provision (88,710) (89,473)
----------- ------------
Operating income $ 180,867 $ 173,049
=========== ============
Cash operating income $ 189,915 $ 186,847
=========== ============
Per Common Share
Operating income
Basic $ 1.72 $ 1.62
Diluted 1.66 1.52
Cash Operating income
Basic $ 1.80 $ 1.75
Diluted 1.74 1.64
Dividends 0.505 0.460
Return on Average Equity
Operating income 17.40 % 15.79 %
Cash Operating income 21.63 19.91
</TABLE>
<PAGE>
<PAGE>
Summary Consolidated Operating Income Statement Components
----------------------------------------------------------
as a Percent of Average Total Assets
------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Interest income (FTE) 7.00 % 6.71 %
Interest expense (4.16) (3.36)
----------- -----------
Net interest income 2.84 3.35
Provision for loan and lease losses (0.13) (0.09)
Net investment securities gains 0.01 0.00
Other income 3.94 3.84
Other expense (4.34) (4.56)
----------- -----------
Income before taxes 2.32 2.54
Income tax provision (0.85) (0.95)
----------- -----------
Return on average assets
based on operating income 1.47 % 1.59 %
=========== ===========
Return on tangible average assets
based on cash operating income 1.56 % 1.74 %
=========== ===========
</TABLE>
The increase in operating income is largely due to growth in noninterest
revenue of $67.8 million, including $34.9 million in data processing
services, $13.5 million in Capital Markets revenue and $8.8 million in Trust
services. Net interest income decreased $16.4 million and the provision for
loan and lease losses increased $5.8 million as previously discussed.
Growth in other expense, which is driven primarily by Data Services, was
$38.6 million.
<PAGE>
The Corporation's consolidated average interest earning assets and interest
bearing liabilities, interest earned and interest paid for the current six
months and prior year six months are presented in the following table.
Securitized ARM loans that are classified in the balance sheet as investment
securities available for sale are included with loans to provide a more
meaningful comparison ($ in millions):
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
----------------------------- -----------------------------
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) $ 17,311.0 $ 687.9 7.99 % $ 14,907.9 $ 574.8 7.78 %
Investment securities:
Taxable 3,662.0 118.4 6.34 3,578.2 110.2 6.27
Tax Exempt (a) 1,337.6 47.7 7.21 1,156.2 40.7 7.19
Other short-term investments (a) 297.3 9.0 6.07 220.0 5.3 4.86
---------- -------- --------- ---------- -------- ---------
Total interest earning assets $ 22,607.9 $ 863.0 7.65 % $ 19,862.3 $ 731.0 7.45 %
========== ======== ========= ========== ======== =========
Money market savings $ 5,078.7 $ 127.2 5.04 % $ 4,730.1 $ 95.8 4.08 %
Regular savings & NOW 1,899.3 16.6 1.76 2,067.8 17.0 1.66
Other CDs & time deposits 5,497.9 154.0 5.63 4,547.1 115.7 5.13
CDs greater than $100 & Brokered CDs 2,022.4 60.4 6.00 1,571.6 42.1 5.41
---------- -------- --------- ---------- -------- ---------
Total interest bearing deposits 14,498.3 358.2 4.97 12,916.6 270.6 4.22
Short-term borrowings 3,850.9 117.6 6.14 2,728.9 64.8 4.79
Long-term borrowings 1,160.1 37.2 6.45 1,016.2 31.3 6.22
---------- -------- --------- ---------- -------- ---------
Total interest bearing liabilities $ 19,509.3 $ 513.0 5.29 % $ 16,661.7 $ 366.7 4.44 %
========== ======== ========= ========== ======== =========
Net interest margin (FTE) as a
percent of average earning assets $ 350.0 3.10 % $ 364.3 3.71 %
======== ========= ======== =========
Net interest spread (FTE) 2.36 % 3.01 %
========= =========
</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.
CAPITAL RESOURCES
-----------------
Shareholders' equity was $2.13 billion at June 30, 2000 compared to $2.12
billion at December 31, 1999 and $2.14 billion at June 30, 1999.
The Corporation had net unrealized losses on securities available for sale at
June 30, 2000 of $50.2 million, a decrease in market value net of related
income tax effects of $17.5 million since December 31, 1999.
For the six months ended June 30, 2000, M&I repurchased 2.0 million shares of
its Common Stock, primarily in the first quarter, under the authorization by
the Board of Directors to repurchase up to 6.0 million common shares annually.
The aggregate cost of the shares repurchased was $98.2 million.
<PAGE>
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown in the
following tables.
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 2,041 10.75 % $ 1,993 11.11 %
Tier 1 Capital
Minimum Requirement 759 4.00 718 4.00
-------------------------------- --------------------------------
Excess $ 1,282 6.75 % $ 1,275 7.11 %
================================ ================================
Total Capital $ 2,335 12.30 % $ 2,277 12.69 %
Total Capital
Minimum Requirement 1,519 8.00 1,435 8.00
-------------------------------- --------------------------------
Excess $ 816 4.30 % $ 842 4.69 %
================================ ================================
Risk-Adjusted Assets $ 18,988 $ 17,937
================= =================
</TABLE>
LEVERAGE RATIOS
---------------
($ in millions)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Capital $ 2,041 8.26 % $ 1,993 8.49 %
Minimum Leverage
Requirement 742 - 1,236 3.00 - 5.00 705 - 1,174 3.00 - 5.00
-------------------------------- --------------------------------
Excess $ 1,299 - 805 5.26 - 3.26 % $ 1,288 - 819 5.49 - 3.49 %
================================ ================================
Adjusted Average
Total Assets $ 24,705 $ 23,481
================= =================
</TABLE>
<PAGE>
RECENT DEVELOPMENTS
-------------------
In conjunction with the release of earnings for the second quarter the
Corporation announced the following:
A registration statement has been filed with the Securities and Exchange
Commission for the IPO of a certain portion of its Data Services segment. The
registration statement relating to these securities has not yet become
effective. These securities may not be sold, nor may offers to buy be
accepted, prior to the time the registration statement becomes effective.
The name of the new company will be Metavante Corporation (Metavante). The
Corporation will own over 80% of the shares after completion of the offering.
It is anticipated these shares will be distributed to M&I's shareholders in the
form of a dividend within a year after the IPO.
The Corporation will continue to use Metavante's products and services and will
partner with the company in strategic alliances to serve its customer base.
In recent years, the Corporation has consolidated many operational activities
as part of a continuing process to strengthen its business lines, its products
and customer service. This fall, the Corporation will begin to reduce the
number of banking charters under which it operates. This process will increase
efficiencies and complement M&I business line management strategies and will
continue through the first half of 2001.
Costs associated with the proposed IPO of Metavante and charter consolidation
will approximate $19 million. It is anticipated these costs, along with
additional charges of up to $33 million related to asset sales and investment
portfolio realignment, will be taken in the third quarter of 2000 and
subsequent quarters, as the costs are incurred.
Refer to the press release dated July 13, 2000 for the complete text.
Certain information contained in this Form 10-Q contains forward-looking
statements concerning M&I's future financial results. Such statements are
subject to important factors which could cause M&I's actual results to differ
materially from those anticipated by the forward-looking statements. These
factors include those referenced in M&I's Annual Report on Form 10-K for the
year ended December 31, 1999 and as may be described from time to time in M&I's
subsequent Securities and Exchange Commission filings.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following updated information should be read in conjunction with the
Corporation's 1999 Annual Report on Form 10-K. Updated information regarding
the Corporation's use of derivative financial instruments is contained in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF
OPERATIONS."
Market risk arises from exposure to changes in interest rates, exchange rates,
commodity prices, and other relevant market rate or price risk. The
Corporation faces market risk through trading and other than trading
activities. While market risk that arises from trading activities in the form
of foreign exchange and interest rate risk is immaterial to the Corporation,
market risk from other than trading activities in the form of interest rate
risk is measured and managed through a number of methods.
Interest Rate Risk
-------------------
The Corporation uses financial modeling techniques to identify potential
changes in income under a variety of possible interest rate scenarios.
Financial institutions, by their nature, bear interest rate and liquidity risk
as a necessary part of the business of managing financial assets and
liabilities. The Corporation has designed strategies to confine these risks
within prudent parameters and identify appropriate risk/reward tradeoffs in the
financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing and
embedded option characteristics across the array of assets and liabilities held
by the Corporation. Policies are in place to assure that neither earnings nor
fair value at risk exceed appropriate limits. The use of a limited array of
derivative financial instruments has allowed the Corporation to achieve the
desired balance sheet repricing structure while simultaneously meeting the
desired objectives of both its borrowing and depositing customers.
The models used include measures of the expected repricing characteristics of
administered rate (NOW, savings and money market accounts) and non-rate related
products (demand deposit accounts, other assets and other liabilities). These
measures recognize the relative insensitivity of these accounts to changes in
market interest rates, as demonstrated through current and historical
experiences. In addition to information about contractual payment information
for most other assets and liabilities, the models also include estimates of
expected prepayment characteristics for those items that are likely to
materially change their payment structures in different rate environments,
including residential mortgage products, certain commercial and commercial real
estate loans and certain mortgage-related securities. Estimates for these
sensitivities are based on industry assessments and are substantially driven
by the differential between the contractual coupon of the item and current
market rates for similar products.
This information is incorporated into a model that allows the projection of
future income levels in several different interest rate environments. Earnings
at risk are calculated by modeling income in an environment where rates remain
constant, and comparing this result to income in a different rate environment,
and then dividing this result into the Corporation's budgeted / forecasted
pre-tax income for the ensuing twelve months. Since future interest rate
moves are difficult to predict, the following table presents two potential
scenarios - a gradual increase of 100bp across the entire yield curve over the
course of a year (+25bp per quarter), and a gradual decrease of 100bp across
the entire yield curve over the course of a year (-25bp per quarter) for the
balance sheet as of June 30,2000 and December 31, 1999:
<TABLE>
<CAPTION>
Impact to Annual Pretax Income as of
-----------------------------------------
June 30, March 31, December 31,
2000 2000 1999
-----------------------------------------
<S> <C> <C> <C>
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (7.3)% (7.8)% (8.6)%
Decline in rates 7.2 % 7.7 % 8.6 %
</TABLE>
<PAGE>
These results are based solely on the modeled parallel changes in market rates,
and do not reflect the earnings sensitivity that may arise from other factors
such as changes in the shape of the yield curve, the changes in spread between
key market rates, or accounting recognition for impairment of certain
intangibles. These results are also considered to be conservative estimates
due to the fact that they do not include any management action to mitigate
potential income variances within the simulation process. Such action could
potentially include, but would not be limited to, adjustments to the repricing
characteristics of any on- or off-balance sheet item with regard to short-term
rate projections and current market value assessments.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and
management strategies.
Another component of interest rate risk is measuring the fair value at risk for
a given change in market interest rates. The Corporation also uses computer
modeling techniques to determine the present value of all asset and liability
cash flows (both on- and off-balance sheet), adjusted for prepayment
expectations, using a market discount rate. The net change in the present
value of the assets and liability cash flows in different market rate
environments is the amount of fair value at risk from those rate movements.
As of June 30, 2000 the fair value of equity at risk for a gradual 100bp shift
in rates was less than 2.0% of the market value of the Corporation.
In addition to using derivatives to manage interest rate exposure, the
Corporation also uses derivatives to create synthetic financial instruments
that more closely match desired rate and liquidity characteristics than would
otherwise be available on cash instruments directly. A small amount of
derivatives are sold to customers where the Corporation acts as an
intermediary. These instruments are matched off by the Corporation through its
trading accounts in order to minimize exposure to market risks. Customer
interest rate derivatives held for trading amounted to $111 million of notional
value, consisting of $55.5 million in notional value of received fixed and
$55.5 million in notional value of pay fixed interest rate swaps as of June 30,
2000.
Equity Risk
-----------
In addition to interest rate risk, the Corporation incurs market risk in the
form of equity risk. M&I's Capital Markets Group invests in private, medium-
sized companies to help establish new businesses or recapitalize existing ones.
Exposure to the change in equity values for the companies that are held in
their portfolio exists, but due to the nature of the investments, cannot be
quantified within acceptable levels of precision.
M&I Trust Services administers more than $68 billion in assets and directly
manages a portfolio of more than $11 billion. Exposure exists to changes in
equity values due to the fact that fee income is partially based on equity
balances. While this exposure is present, quantification remains difficult due
to the number of other variables affecting fee income. Interest rate changes
can also have an effect on fee income for the above stated reasons.
<PAGE>
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
A. The Corporation held its Annual Meeting of Shareholders on April 25,
2000.
B. Votes cast for the election of seven directors to serve until the 2003
Annual Meeting of Shareholders are as follows:
Director For Against Abstentions Non-Vote
------------------- ---------- ---------- ----------- ----------
Richard A. Abdoo 78,489,640 1,373,525 - -
Wendell F. Bueche 78,697,261 1,165,904 - -
G.H. Gunnlaugsson 78,746,886 1,116,279 - -
Ted D. Kellner 78,758,790 1,104,375 - -
Katharine C. Lyall 78,726,004 1,137,161 - -
P.M. Platten, III 78,554,359 1,308,806 - -
J.B. Wigdale 78,729,329 1,133,836 - -
The continuing Directors of the Corporation are as follows:
Jon F. Chait Oscar C. Boldt
D.J. Kuester Timothy E. Hoeksema
Edward L. Meyer, Jr. Burleigh E Jacobs
Don R. O'Hare James F. Kress
San W. Orr, Jr. Robert A. Schaefer
Stuart W. Tisdale John S. Shiely
George E. Wardenberg Gus A. Zuehlke
Votes cast to amend the Restated Articles of Incorporation, to approve
the 2000 Employee Stock Purchase Plan and to approve the 2000 Executive
Stock Option and Restricted Stock Plan are as follows:
Proposals For Against Abstentions Non-Vote
------------------- ---------- ---------- ----------- ----------
To amend the
Restated Articles
of Incorporation 74,545,64 3,984,105 1,333,412 -
To approve the
2000 Employee Stock
Purchase Plan 60,383,750 5,056,908 968,630 13,453,877
To approve the
2000 Executive Stock
Option and Restricted
Stock Plan 56,395,161 8,456,239 1,557,883 13,453,882
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits:
Exhibit 11 - Statements - Computation of Earnings Per Share Incorporated
by Reference to NOTE 4 of Notes to Financial Statements
contained in Item 1 - Financial Statements (unaudited) of
Part 1-Financial Information herein.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K:
On May 31,2000, a Report on Form 8-K was filed with the Securities and
Exchange Commission in connection with the Registration Statement on Form
S-3 (File No. 333-33814) of the Corporation. relating to the offering of
up to an aggregate of $1,500,000,000 of Debt Securities. An exhibit in
the Form 8-K consists of a Distribution Agreement dated May 31, 2000
between M&I and the Agents named therein.
<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 14, 2000
