|
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
|
Form
10-Q
|
|
|
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the quarterly period
ended September 30, 2008
|
|
|
|
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 1-33488
|
|
MARSHALL
&
ILSLEY
CORPORATION
|
(Exact name of registrant as specified in its
charter)
|
|
|
|
(State or other jurisdiction of
|
|
incorporation or organization)
|
|
|
|
|
|
|
(Address of principal executive offices)
|
|
|
Registrant's
telephone
number
,
including area
code:
(414)
765-7801
|
|
|
(
Former
name, former
address
and former fiscal year, if changed since last
report
)
|
|
Indicate by check
mark whether
th
e registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
|
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer [X]
Accelerated
filer [ ]
Non-accelerated
filer [ ]
(Do
not check if a smaller reporting
company)
Small reporting company [ ]
|
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes [ ] No [X]
|
|
Indicate the number of shares outstanding of
each of the issuer's classes of common stock, as of the latest
practicable date.
|
|
|
|
|
|
Common Stock, $1.00 Par Value
|
|
|
PART
I - FINANCIAL INFORMATION
|
ITEM
1. FINANCIAL STATEMENTS
|
MARSHALL
& ILSLEY CORPORATION
|
|
CONSOLIDATED
BALANCE SHEETS (Unaudited)
|
|
($000's
except share data)
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
982,132
|
|
|
$
|
1,368,919
|
|
|
$
|
1,033,922
|
|
Federal
funds sold and security resale agreements
|
|
|
68,623
|
|
|
|
379,012
|
|
|
|
214,211
|
|
Money
market funds
|
|
|
59,938
|
|
|
|
74,581
|
|
|
|
121,954
|
|
Total
cash and cash equivalents
|
|
|
1,110,693
|
|
|
|
1,822,512
|
|
|
|
1,370,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits at other banks
|
|
|
8,727
|
|
|
|
8,309
|
|
|
|
380,647
|
|
Trading
assets, at fair value
|
|
|
162,767
|
|
|
|
124,607
|
|
|
|
48,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at fair value
|
|
|
7,131,346
|
|
|
|
7,442,889
|
|
|
|
6,784,174
|
|
Held
to maturity, fair value $256,463
($383,190 December 31, 2007 and
$402,630 September 30, 2007)
|
|
|
251,902
|
|
|
|
374,861
|
|
|
|
394,434
|
|
Total
investment securities
|
|
|
7,383,248
|
|
|
|
7,817,750
|
|
|
|
7,178,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
-
|
|
|
|
982,000
|
|
Loans
held for sale
|
|
|
152,740
|
|
|
|
131,873
|
|
|
|
134,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases, net of unearned income
|
|
|
50,264,502
|
|
|
|
46,164,385
|
|
|
|
44,834,395
|
|
Allowance
for loan and lease losses
|
|
|
(1,031,494
|
)
|
|
|
(496,191
|
)
|
|
|
(452,697
|
)
|
Net
loans and leases
|
|
|
49,233,008
|
|
|
|
45,668,194
|
|
|
|
44,381,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
541,799
|
|
|
|
469,879
|
|
|
|
469,599
|
|
Goodwill
and other intangibles
|
|
|
2,236,599
|
|
|
|
1,807,961
|
|
|
|
1,824,057
|
|
Accrued
interest and other assets
|
|
|
2,671,316
|
|
|
|
1,997,511
|
|
|
|
2,638,308
|
|
Assets
of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
1,360,299
|
|
Total
Assets
|
|
$
|
63,500,897
|
|
|
$
|
59,848,596
|
|
|
$
|
60,768,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
6,359,020
|
|
|
$
|
6,174,281
|
|
|
$
|
5,558,966
|
|
Interest
bearing
|
|
|
33,680,582
|
|
|
|
29,017,073
|
|
|
|
28,848,796
|
|
Total
deposits
|
|
|
40,039,602
|
|
|
|
35,191,354
|
|
|
|
34,407,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased and security repurchase agreements
|
|
|
2,230,421
|
|
|
|
2,262,355
|
|
|
|
4,078,163
|
|
Other
short-term borrowings
|
|
|
5,589,998
|
|
|
|
6,214,027
|
|
|
|
5,757,178
|
|
Accrued
expenses and other liabilities
|
|
|
987,468
|
|
|
|
940,725
|
|
|
|
1,409,580
|
|
Long-term
borrowings
|
|
|
8,161,466
|
|
|
|
8,207,406
|
|
|
|
8,142,418
|
|
Liabilities
of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(48,738
|
)
|
Total
liabilities
|
|
|
57,008,955
|
|
|
|
52,815,867
|
|
|
|
53,746,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $1.00 par value; 5,000,000 shares authorized
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $1.00 par value; 267,455,394 shares issued (267,455,394 shares
at December 31, 2007 and 276,051,274 shares at September 30,
2007)
|
|
|
267,455
|
|
|
|
267,455
|
|
|
|
276,051
|
|
Additional
paid-in capital
|
|
|
2,063,165
|
|
|
|
2,059,273
|
|
|
|
2,396,811
|
|
Retained
earnings
|
|
|
4,513,574
|
|
|
|
4,923,008
|
|
|
|
4,809,143
|
|
Accumulated
other comprehensive income, net of related taxes
|
|
|
(107,803
|
)
|
|
|
(53,707
|
)
|
|
|
(46,877
|
)
|
Treasury stock, at cost: 7,434,382 shares
(3,968,651
December 31, 2007 and 8,965,516 September 30,
2007)
|
|
|
(205,713
|
)
|
|
|
(117,941
|
)
|
|
|
(371,494
|
)
|
Deferred
compensation
|
|
|
(38,736
|
)
|
|
|
(45,359
|
)
|
|
|
(41,671
|
)
|
Total
shareholders' equity
|
|
|
6,491,942
|
|
|
|
7,032,729
|
|
|
|
7,021,963
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
63,500,897
|
|
|
$
|
59,848,596
|
|
|
$
|
60,768,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
MARSHALL
& ILSLEY CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)
|
|
($000's
except per share data)
|
|
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Interest
and fee income
|
|
|
|
|
|
|
Loans
and leases
|
|
$
|
714,099
|
|
|
$
|
830,106
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
68,959
|
|
|
|
78,015
|
|
Exempt
from federal income taxes
|
|
|
13,034
|
|
|
|
14,749
|
|
Trading
securities
|
|
|
368
|
|
|
|
213
|
|
Short-term
investments
|
|
|
2,191
|
|
|
|
5,260
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
10,790
|
|
Total
interest and fee income
|
|
|
798,651
|
|
|
|
939,133
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
213,858
|
|
|
|
324,711
|
|
Short-term
borrowings
|
|
|
34,645
|
|
|
|
58,507
|
|
Long-term
borrowings
|
|
|
109,499
|
|
|
|
152,743
|
|
Total
interest expense
|
|
|
358,002
|
|
|
|
535,961
|
|
Net
interest income
|
|
|
440,649
|
|
|
|
403,172
|
|
Provision
for loan and lease losses
|
|
|
154,962
|
|
|
|
41,526
|
|
Net
interest income after provision for loan and lease losses
|
|
|
285,687
|
|
|
|
361,646
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
Wealth
management
|
|
|
71,349
|
|
|
|
66,499
|
|
Service
charges on deposits
|
|
|
36,676
|
|
|
|
30,874
|
|
Gains
on sale of mortgage loans
|
|
|
4,537
|
|
|
|
5,103
|
|
Other
mortgage banking revenue
|
|
|
961
|
|
|
|
1,391
|
|
Net
investment securities gains
|
|
|
987
|
|
|
|
8,890
|
|
Life
insurance revenue
|
|
|
12,763
|
|
|
|
10,475
|
|
Other
real estate owned (OREO) income
|
|
|
3,965
|
|
|
|
317
|
|
Other
|
|
|
52,594
|
|
|
|
59,757
|
|
Total
other income
|
|
|
183,832
|
|
|
|
183,306
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
184,018
|
|
|
|
166,769
|
|
Net
occupancy
|
|
|
21,359
|
|
|
|
18,297
|
|
Equipment
|
|
|
10,296
|
|
|
|
9,380
|
|
Software
expenses
|
|
|
6,508
|
|
|
|
4,907
|
|
Processing
charges
|
|
|
33,202
|
|
|
|
33,857
|
|
Supplies
and printing
|
|
|
3,213
|
|
|
|
3,375
|
|
Professional
services
|
|
|
16,493
|
|
|
|
9,081
|
|
Shipping
and handling
|
|
|
6,076
|
|
|
|
7,134
|
|
Amortization
of intangibles
|
|
|
5,999
|
|
|
|
5,426
|
|
OREO
expenses
|
|
|
14,111
|
|
|
|
1,688
|
|
Other
|
|
|
58,728
|
|
|
|
33,561
|
|
Total
other expense
|
|
|
360,003
|
|
|
|
293,475
|
|
Income
before income taxes
|
|
|
109,516
|
|
|
|
251,477
|
|
Provision
for income taxes
|
|
|
26,378
|
|
|
|
77,751
|
|
Income
from continuing operations
|
|
|
83,138
|
|
|
|
173,726
|
|
Income
from discontinued operations, net of tax
|
|
|
-
|
|
|
|
46,213
|
|
Net
income
|
|
$
|
83,138
|
|
|
$
|
219,939
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.32
|
|
|
$
|
0.66
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
0.18
|
|
Net
income
|
|
$
|
0.32
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.32
|
|
|
$
|
0.65
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
0.18
|
|
Net
income
|
|
$
|
0.32
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid per common share
|
|
$
|
0.32
|
|
|
$
|
0.31
|
|
Weighted
average common shares outstanding (000's) :
|
|
|
|
|
|
|
|
|
Basic
|
|
|
258,877
|
|
|
|
261,491
|
|
Diluted
|
|
|
259,224
|
|
|
|
266,283
|
|
|
|
|
|
|
|
|
|
|
See
notes to financial statements.
|
|
|
|
|
|
|
|
|
MARSHALL
& ILSLEY CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)
|
|
($000's
except per share data)
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Interest
and fee income
|
|
|
|
|
|
|
Loans
and leases
|
|
$
|
2,224,248
|
|
|
$
|
2,417,016
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
218,212
|
|
|
|
233,749
|
|
Exempt
from federal income taxes
|
|
|
41,170
|
|
|
|
44,569
|
|
Trading
securities
|
|
|
1,361
|
|
|
|
682
|
|
Short-term
investments
|
|
|
7,278
|
|
|
|
12,222
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
32,372
|
|
Total
interest and fee income
|
|
|
2,492,269
|
|
|
|
2,740,610
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
705,837
|
|
|
|
927,049
|
|
Short-term
borrowings
|
|
|
126,207
|
|
|
|
169,408
|
|
Long-term
borrowings
|
|
|
341,554
|
|
|
|
446,762
|
|
Total
interest expense
|
|
|
1,173,598
|
|
|
|
1,543,219
|
|
Net
interest income
|
|
|
1,318,671
|
|
|
|
1,197,391
|
|
Provision
for loan and lease losses
|
|
|
1,187,264
|
|
|
|
84,700
|
|
Net
interest income after provision for loan and lease losses
|
|
|
131,407
|
|
|
|
1,112,691
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
Wealth
management
|
|
|
217,988
|
|
|
|
192,785
|
|
Service
charges on deposits
|
|
|
110,255
|
|
|
|
88,641
|
|
Gains
on sale of mortgage loans
|
|
|
18,603
|
|
|
|
24,263
|
|
Other
mortgage banking revenue
|
|
|
2,883
|
|
|
|
4,348
|
|
Net
investment securities gains
|
|
|
27,155
|
|
|
|
29,929
|
|
Life
insurance revenue
|
|
|
37,126
|
|
|
|
25,992
|
|
Other
real estate owned (OREO) income
|
|
|
6,788
|
|
|
|
1,327
|
|
Other
|
|
|
161,264
|
|
|
|
158,136
|
|
Total
other income
|
|
|
582,062
|
|
|
|
525,421
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
545,254
|
|
|
|
485,870
|
|
Net
occupancy
|
|
|
64,165
|
|
|
|
54,053
|
|
Equipment
|
|
|
29,945
|
|
|
|
29,139
|
|
Software
expenses
|
|
|
19,090
|
|
|
|
14,607
|
|
Processing
charges
|
|
|
98,992
|
|
|
|
98,935
|
|
Supplies
and printing
|
|
|
10,925
|
|
|
|
10,467
|
|
Professional
services
|
|
|
48,140
|
|
|
|
26,555
|
|
Shipping
and handling
|
|
|
21,684
|
|
|
|
21,463
|
|
Amortization
of intangibles
|
|
|
17,921
|
|
|
|
15,110
|
|
Loss
on termination of debt
|
|
|
-
|
|
|
|
9,478
|
|
OREO
expenses
|
|
|
49,323
|
|
|
|
4,788
|
|
Other
|
|
|
150,746
|
|
|
|
98,384
|
|
Total
other expense
|
|
|
1,056,185
|
|
|
|
868,849
|
|
(Loss)
income before income taxes
|
|
|
(342,716
|
)
|
|
|
769,263
|
|
(Benefit)
provision for income taxes
|
|
|
(178,272
|
)
|
|
|
247,879
|
|
(Loss)
income from continuing operations
|
|
|
(164,444
|
)
|
|
|
521,384
|
|
Income
from discontinued operations, net of tax
|
|
|
-
|
|
|
|
135,606
|
|
Net
(loss) income
|
|
$
|
(164,444
|
)
|
|
$
|
656,990
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.63
|
)
|
|
$
|
2.02
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
0.52
|
|
Net
(loss) income
|
|
$
|
(0.63
|
)
|
|
$
|
2.54
|
|
Diluted
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.63
|
)
|
|
$
|
1.97
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
0.52
|
|
Net
(loss) income
|
|
$
|
(0.63
|
)
|
|
$
|
2.49
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid per common share
|
|
$
|
0.95
|
|
|
$
|
0.89
|
|
Weighted
average common shares outstanding (000's) :
|
|
|
|
|
|
|
|
|
Basic
|
|
|
259,146
|
|
|
|
258,607
|
|
Diluted
|
|
|
259,146
|
|
|
|
264,162
|
|
See
notes to financial statements.
|
|
|
|
|
|
|
|
|
MARSHALL
& ILSLEY CORPORATION
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
($000's)
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Net
Cash Provided by Operating Activities
|
|
$
|
561,840
|
|
|
$
|
686,808
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Net
increase in other short-term investments
|
|
|
-
|
|
|
|
(365,439
|
)
|
Proceeds
from sales of securities available for sale
|
|
|
122,524
|
|
|
|
149,756
|
|
Proceeds
from sales of securities held to maturity
|
|
|
1,633
|
|
|
|
-
|
|
Proceeds
from maturities of securities available for sale
|
|
|
979,122
|
|
|
|
1,071,031
|
|
Proceeds
from maturities of securities held to maturity
|
|
|
122,735
|
|
|
|
101,945
|
|
Purchases
of securities available for sale
|
|
|
(632,765
|
)
|
|
|
(1,018,845
|
)
|
Net
increase in loans
|
|
|
(3,472,779
|
)
|
|
|
(2,246,145
|
)
|
Purchases
of assets to be leased
|
|
|
(159,284
|
)
|
|
|
(236,409
|
)
|
Principal
payments on lease receivables
|
|
|
188,476
|
|
|
|
264,724
|
|
Purchases
of premises and equipment, net
|
|
|
(71,106
|
)
|
|
|
(70,746
|
)
|
Acquisitions,
net of cash and cash equivalents paid
|
|
|
(476,625
|
)
|
|
|
(27,042
|
)
|
Purchase
of bank-owned life insurance
|
|
|
-
|
|
|
|
(243,329
|
)
|
Proceeds
from divestitures
|
|
|
2,460
|
|
|
|
-
|
|
Proceeds
from sale of OREO
|
|
|
67,204
|
|
|
|
17,291
|
|
Net
cash used in investing activities
|
|
|
(3,328,405
|
)
|
|
|
(2,603,208
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
3,255,764
|
|
|
|
(1,497,225
|
)
|
Proceeds
from issuance of commercial paper
|
|
|
33,580,132
|
|
|
|
6,506,403
|
|
Principal
payments on commercial paper
|
|
|
(34,282,022
|
)
|
|
|
(6,579,785
|
)
|
Net
increase in other short-term borrowings
|
|
|
53,116
|
|
|
|
2,334,240
|
|
Proceeds
from issuance of long-term borrowings
|
|
|
1,282,056
|
|
|
|
3,570,378
|
|
Payments
of long-term borrowings
|
|
|
(1,484,046
|
)
|
|
|
(2,436,442
|
)
|
Dividends
paid
|
|
|
(244,990
|
)
|
|
|
(231,489
|
)
|
Purchases
of common stock
|
|
|
(130,870
|
)
|
|
|
(301,095
|
)
|
Common
stock issued to settle stock purchase contract
|
|
|
-
|
|
|
|
399,989
|
|
Proceeds
from issuance of common stock
|
|
|
25,606
|
|
|
|
90,744
|
|
Other
|
|
|
-
|
|
|
|
(7,799
|
)
|
Net
cash provided by financing activities
|
|
|
2,054,746
|
|
|
|
1,847,919
|
|
Net
decrease in cash and cash equivalents
|
|
|
(711,819
|
)
|
|
|
(68,481
|
)
|
Cash
and cash equivalents, beginning of year
|
|
|
1,822,512
|
|
|
|
1,485,258
|
|
Cash
and cash equivalents, end of period
|
|
|
1,110,693
|
|
|
|
1,416,777
|
|
Cash
and cash equivalents of discontinued operations
|
|
|
-
|
|
|
|
(46,690
|
)
|
Cash
and cash equivalents from continuing operations, end of
period
|
|
$
|
1,110,693
|
|
|
$
|
1,370,087
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,240,144
|
|
|
$
|
1,528,980
|
|
Income
taxes
|
|
|
76,742
|
|
|
|
227,994
|
|
|
|
|
|
|
|
|
|
|
See
notes to financial statements.
|
|
|
|
|
|
|
|
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements
September
30, 2008 & 2007 (Unaudited)
|
The
accompanying unaudited consolidated financial statements should be read in
conjunction with Marshall & Ilsley Corporation’s Annual Report on Form
10-K for the year ended December 31, 2007. In management’s
opinion, the unaudited financial information included in this report
reflects all adjustments consisting of normal recurring accruals which are
necessary for a fair statement of the financial position and results of
operations as of and for the three and nine months ended September 30,
2008 and 2007. The results of operations for the three and nine
months ended September 30, 2008 and 2007 are not necessarily indicative of
results to be expected for the entire
year.
|
2. Discontinued
Operations
|
On
November 1, 2007, old Marshall & Ilsley Corporation, the Accounting
Predecessor to new Marshall & Ilsley Corporation (which is referred to
as “M&I” or the “Corporation”) and its wholly owned subsidiary,
Metavante Corporation, the Accounting Predecessor to Metavante
Technologies, Inc. (which is referred to as “Metavante”) became two
separate publicly traded companies in accordance with the plan the
Corporation announced in early April 2007. The Corporation
refers to this transaction as the
“Separation.”
|
|
As
a result of the Separation, the assets, liabilities and net income of
Metavante have been de-consolidated from the Corporation’s historical
consolidated financial statements and are now reported as discontinued
operations. For the three and nine months ended September 30,
2007, discontinued operations in the Consolidated Statements of Income
also includes the expenses attributable to the Separation
transaction. The assets and liabilities reported as
discontinued operations as of September 30, 2007 do not directly reconcile
to historical consolidated assets and liabilities reported by
Metavante. The amounts reported as assets or liabilities of
discontinued operations include adjustments for intercompany cash and
deposits, receivables and payables, intercompany debt and
reclassifications that were required to de-consolidate the financial
information of the two companies.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
The
components of the assets and liabilities of discontinued operations as of
September 30, 2007 were as follows
($000’s):
|
|
|
September
30, 2007
|
|
Assets
|
|
|
|
Cash
and cash equivalents
|
|
$
|
46,690
|
|
Interest
bearing deposits at other banks
|
|
|
1,064
|
|
Trading
assets, at fair value
|
|
|
4,800
|
|
Investment
securities
|
|
|
|
|
Available
for sale, at fair value
|
|
|
78,861
|
|
Loan
to Metavante
|
|
|
(982,000
|
)
|
Loans
and leases
|
|
|
2,239
|
|
Premises
and equipment, net
|
|
|
131,083
|
|
Goodwill
and other intangibles
|
|
|
1,665,850
|
|
Accrued
interest and other assets
|
|
|
411,712
|
|
Total
assets
|
|
$
|
1,360,299
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Deposits:
|
|
|
|
|
Noninterest
bearing
|
|
$
|
(25,126
|
)
|
Interest
bearing
|
|
|
(590,650
|
)
|
Total
deposits
|
|
|
(615,776
|
)
|
Short-term
borrowings
|
|
|
132
|
|
Accrued
expenses and other liabilities
|
|
|
566,884
|
|
Long-term
borrowings
|
|
|
22
|
|
Total
liabilities
|
|
$
|
(48,738
|
)
|
|
Prior
to November 1, 2007, intercompany transactions between Metavante and old
Marshall & Ilsley Corporation (which was re-named M&I LLC in
connection with the Separation) and its affiliates were eliminated in the
Corporation’s consolidated financial statements. The above
table reflects the reclassification of Metavante’s intercompany borrowing
from M&I LLC to “Loan to Metavante”. On November 1, 2007,
the Corporation received $982 million of cash from Metavante to retire
this indebtedness. The “Noninterest bearing” and “Interest
bearing deposits” in the above table reflects the reclassification of
Metavante’s cash and investments held as deposits at the Corporation’s
affiliate banks.
|
|
The
results of discontinued operations for the three and nine months ended
September 30, 2007 consisted of the following
($000’s):
|
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2007
|
|
Metavante
income before provision for income taxes
|
|
$
|
79,957
|
|
|
$
|
222,963
|
|
Separation
transaction expenses and other related costs
|
|
|
(3,948
|
)
|
|
|
(7,073
|
)
|
Income
before income taxes
|
|
|
76,009
|
|
|
|
215,890
|
|
Provision
for income taxes
|
|
|
29,796
|
|
|
|
80,284
|
|
Income
from discontinued operations, net of tax
|
|
$
|
46,213
|
|
|
$
|
135,606
|
|
|
As
permitted under U.S. generally accepted accounting principles, the
Corporation has elected not to adjust the Consolidated Statements of Cash
Flows for the nine months ended September 30, 2007 to exclude cash flows
attributable to discontinued
operations.
|
|
Included
in Acquisitions, net of cash and cash equivalents acquired in the
Corporation’s Consolidated Statements of Cash Flows for the nine months
ended September 30, 2007 is Metavante’s 2007 acquisition, which is now
part of discontinued operations. For the nine months ended
September 30, 2007, total cash consideration associated with Metavante’s
acquisition amounted to $41.0
million.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
3.
|
New
Accounting Pronouncements
|
|
In
October 2008, the Financial Accounting Standards Board (“FASB”) issued
FASB Staff Position (“FSP”) No. FAS 157-3 (“FSP 157-3”),
Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active
. FSP 157-3 clarifies, but does not change, the
application of existing principles in FASB Statement No. 157,
Fair Value
Measurements
, in a market that is not active and provides an
example to illustrate key considerations for determining the fair value of
a financial asset when either relevant observable inputs do not exist or
available observable inputs are in a market that is not
active. FSP 157-3 was effective for the Corporation on
September 30, 2008 and the effect of adoption was not
significant.
|
|
In
September 2008, the FASB ratified EITF Issue No. 08-5 (“EITF Issue 08-5”),
Issuer's
Accounting for Liabilities Measured at Fair Value with a Third-Party
Credit Enhancement
. Under EITF Issue 08-5 the
measurement or disclosure of the fair value of a liability, such as debt,
issued with an inseparable financial guarantee of payment from a
third-party should not include the effect of the credit enhancement. Thus,
the liability’s fair value is determined considering the issuer's credit
standing without regard to the effect of the third-party credit
enhancement. EITF Issue 08-5 does not apply to a credit enhancement
provided by the government or government agencies (for example, deposit
insurance or debt guaranteed under the FDIC's Temporary Liquidity
Guarantee Program) or a credit enhancement provided between a parent and
its subsidiary. EITF Issue 08-5 is effective on a prospective
basis on January 1, 2009. The effect of initially applying EITF Issue 08-5
will be included in the change in fair value in the year of adoption.
Earlier application is not permitted. As the Corporation has not issued
liabilities with inseparable financial guarantees within the scope of EITF
Issue 08-5, the Corporation does not expect adoption of EITF Issue 08-5
will have a significant impact on its financial statements and related
disclosures.
|
|
In
June 2008, the FASB issued FSP No. EITF 03-6-1 (“FSP EITF 03-6-1”),
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
. Under FSP EITF 03-6-1,
unvested share-based payment awards that provide nonforfeitable rights to
dividends are considered participating securities to be included in the
computation of earnings per share pursuant to the two-class method
described in FASB Statement No. 128,
Earnings
per Share
. FSP EITF 03-6-1 is effective for the
Corporation on January 1, 2009. Once effective, all prior
period earnings per share data presented must be adjusted retrospectively
to conform with the provisions of the FSP. Early application is not
permitted. The Corporation is currently evaluating the impact
of adopting FSP EITF 03-6-1, but does not expect it will have a
significant impact on its financial statements and related
disclosures.
|
|
In
May 2008, the FASB issued Statement of Financial Accounting Standards No.
162,
The
Hierarchy of Generally Accepted Accounting
Principles
(“SFAS 162”). SFAS 162 identifies
the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United
States. SFAS 162 will be effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board’s amendments to
AU Section 411,
The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting
Principles
. The Corporation does not expect that SFAS
162 will result in a change in current
practice.
|
|
In
April 2008, the FASB issued FSP No. FAS 142-3,
Determination
of the Useful Life of Intangible Assets
(“FSP FAS
142-3”). FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset and provides
for enhanced disclosures regarding intangible assets. The
intent of this FSP is to improve the consistency between the useful life
of a recognized intangible asset and the period of expected cash flows
used to measure the fair value of the asset. The disclosure
provisions are effective as of the adoption date and the guidance for
determining the useful life applies prospectively to all intangible assets
acquired after the effective date. Early adoption is
prohibited. The Corporation is evaluating this guidance but
does not expect it will have a significant impact on its financial
statements and related disclosures.
|
|
In
March 2008, FASB issued Statement of Financial Accounting Standard No.
161,
Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133
(“SFAS 161”). SFAS 161 applies to all
derivative instruments and related hedged items accounted for under FASB
Statement No. 133,
Accounting
for Derivative Instruments and Hedging Activities
(“SFAS
133”). SFAS 161 amends and expands the disclosures provided
under SFAS 133 regarding how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations, and how
derivative instruments and related hedged items affect an entity’s
financial position, results of operations, and cash flows. SFAS
161 is effective for the Corporation on January 1,
2009.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
4.
|
Fair
Value Measurement
|
|
On
January 1, 2008 the Corporation adopted, except as discussed below,
Statement of Financial Accounting Standard No. 157,
Fair Value
Measurements
(“SFAS 157”). SFAS 157 provides enhanced
guidance for using fair value to measure assets and
liabilities. The standard generally applies whenever other
standards require or permit assets or liabilities to be measured at fair
value. Under the standard, fair value refers to the price at
the measurement date that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
in which the reporting entity is engaged. The standard does not
expand the use of fair value in any new circumstances. As
permitted, adoption of SFAS 157 has been delayed for certain nonfinancial
assets and nonfinancial liabilities to January 1,
2009.
|
|
All
changes resulting from the application of SFAS 157 were applied
prospectively with the effect of adoption recognized in either earnings or
other comprehensive income depending on the applicable accounting
requirements for the particular asset or liability being
measured.
|
|
SFAS
157 establishes a three-tier hierarchy for fair value measurements based
upon the transparency of the inputs to the valuation of an asset or
liability and expands the disclosures about instruments measured at fair
value. A financial instrument is categorized in its entirety
and its categorization within the hierarchy is based upon the lowest level
of input that is significant to the fair value measurement. The
three levels are described below.
|
|
Level
1- Inputs to the valuation methodology are quoted prices (unadjusted) for
identical
assets
or liabilities in active markets.
|
|
Level
2- Inputs to the valuation methodology include quoted prices for
similar
assets and
liabilities in active markets and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full
term of the financial instrument. Fair values for these
instruments are estimated using pricing models, quoted prices of
securities with similar characteristics, or discounted cash
flows.
|
|
Level
3- Inputs to the valuation methodology are unobservable and significant to
the fair value measurement. Fair values are initially valued
based upon transaction price and are adjusted to reflect exit values as
evidenced by financing and sale transactions with third
parties.
|
|
Determination
of Fair Value
|
|
Following
is a description of the valuation methodologies used for instruments
measured at fair value on a recurring basis, as well as the general
classification of such instruments pursuant to the valuation
hierarchy.
|
|
Trading
Assets and Investment Securities
|
|
When
available, the Corporation uses quoted market prices to determine the fair
value of trading assets and investment securities; such items are
classified in Level 1 of the fair value
hierarchy.
|
|
For
the Corporation’s investments in government agencies, mortgage-backed
securities and obligations of states and political subdivisions where
quoted prices are not available for identical securities in an active
market, the Corporation generally determines fair value utilizing vendors
who apply matrix pricing for similar bonds where no price is observable or
may compile prices from various sources. These models are
primarily industry-standard models that consider various assumptions,
including time value, yield curve, volatility factors, prepayment speeds,
default rates, loss severity, current market and contractual prices for
the underlying financial instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable
in the marketplace, can be derived from observable data or are supported
by observable levels at which transactions are executed in the
marketplace. Fair values from these models are verified, where
possible, to quoted prices for recent trading activity of assets with
similar characteristics to the security being valued. Such
methods are generally classified as Level 2. However, when
prices from independent sources vary, cannot be obtained or cannot be
corroborated, a security is generally classified as Level
3.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
For
the Corporation’s Private Equity Group (formerly referred to as the
Corporation’s Capital Markets Group), investments generally take the form
of investments in private equity funds. The private equity
investments are valued using the valuations and financial statements
provided by the general partners on a quarterly basis. The
transaction price is used as the best estimate of fair value at
inception. When evidence supports a change to the carrying
value from the transaction price, adjustments are made to reflect expected
exit values. These nonpublic investments are included in Level
3 of the fair value hierarchy because they trade infrequently, and,
therefore, the fair value is
unobservable.
|
|
Estimated
fair values for residual interests in the form of interest only strips
from automobile loan securitizations are based on a discounted cash flow
analysis and are classified as a Level
3.
|
|
Derivative
Financial Instruments
|
|
Fair
values for exchange-traded contracts are based on quoted prices and are
classified as Level 1. Fair values for over-the-counter
interest rate contracts are provided either by third-party dealers in the
contracts or by quotes provided by the Corporation’s independent pricing
services. The significant inputs, including the LIBOR curve and
measures of volatility, used by these third-party dealers or independent
pricing services to determine fair values are considered Level 2,
observable market inputs.
|
|
Certain
derivative transactions are executed with counterparties who are large
financial institutions (“dealers”). These derivative transactions
primarily consist of interest rate swaps that were used for fair value
hedges, cash flow hedges and economic hedges of interest rate swaps
executed with the Corporation’s customers at September 30,
2008. The Corporation and its subsidiaries maintain risk
management policies and procedures to monitor and limit exposure to credit
risk to derivative transactions with dealers. Approved dealers
for these transactions must have and maintain an investment grade rating
on long-term senior debt from at least two nationally recognized
statistical rating organizations or have a guarantor with an acceptable
rating from such organizations. International Swaps and Derivative
Association Master Agreements (“ISDA”) and Credit Support Annexes (“CSA”)
are employed for all contracts with dealers. These agreements
contain bilateral collateral arrangements. Notwithstanding its policies
and procedures, the Corporation recognizes that unprecedented events could
result in counterparty failure. The Corporation also recognizes
that there could be additional credit exposure due to certain industry
conventions established for operational
efficiencies.
|
|
On
a quarterly basis, the Corporation performs an analysis using historical
and market implied default and recovery rates that also considers certain
industry conventions established for operational efficiencies to estimate
the potential impact on the reported fair values of these derivative
financial assets and liabilities due to counterparty credit risk and the
Corporation’s own credit risk. Based on this analysis, the
Corporation determined that the impact of these factors was insignificant
and did not make any additional credit risk adjustments for purposes of
determining the reported fair values of these derivative assets and
liabilities with dealers at September 30,
2008.
|
|
Certain
derivative transactions are executed with customers whose counterparty
credit risk is similar in nature to the credit risk associated with the
Corporation’s lending activities. As is the case with a loan,
the Corporation evaluates the credit risk of each of these customers on an
individual basis and, where deemed appropriate collateral is
obtained. The type of collateral varies and is often the same
collateral as the collateral obtained to secure a customer’s
loan. For purposes of assessing the potential impact of
counterparty credit risk on the fair values of derivative assets with
customers, the Corporation used a probability analysis to estimate the
amount of expected loss exposure due to customer default at some point in
the remaining term of the entire portfolio of customer derivative
contracts outstanding at September 30, 2008. While not
significant, the Corporation did factor in the estimated amount of
expected loss due to customer default into the reported fair value of its
customer derivative assets at September 30,
2008.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
Assets
and liabilities measured at fair value on a recurring basis are
categorized in the tables below based upon the lowest level of significant
input to the valuations as of September 30, 2008
($000’s):
|
|
|
Quoted
Prices in
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
Active
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Identical
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
(1)
|
|
|
|
|
|
|
|
|
|
Trading
assets:
|
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
$
|
-
|
|
|
$
|
69,532
|
|
|
$
|
-
|
|
Derivative
assets
|
|
|
214
|
|
|
|
93,021
|
|
|
|
-
|
|
Total
trading assets
|
|
$
|
214
|
|
|
$
|
162,553
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$
|
244
|
|
|
$
|
6,510,832
|
|
|
$
|
172,966
|
|
Private
equity investments
|
|
|
-
|
|
|
|
-
|
|
|
|
72,434
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
5,756
|
|
Total
investment securities available for sale
|
|
$
|
244
|
|
|
$
|
6,510,832
|
|
|
$
|
251,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
short-term borrowings
|
|
$
|
-
|
|
|
$
|
6,634
|
|
|
$
|
-
|
|
Accrued
expenses and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
(1,215
|
)
|
|
$
|
69,852
|
|
|
$
|
-
|
|
(1)
|
The
amounts presented exclude certain over-the-counter interest rate swaps
that are the designated hedging instruments in fair value and cash flow
hedges that are used by the Corporation to manage its interest rate
risk. These interest rate swaps are measured at fair value on a
recurring basis based on significant other observable inputs and are
categorized as Level 2. See Note 14 in Notes to Financial
Statements.
|
(2)
|
The
amounts presented are exclusive of $327.3 million of investments in
Federal Reserve Bank and FHLB stock, which are bought and sold at par and
are carried at cost and $41.8 million in affordable
housing partnerships, which are generally carried on the equity
method.
|
|
The
table presented below summarizes the change in balance sheet carrying
values associated with financial instruments measured using significant
unobservable inputs (Level 3) during the nine months ended September 30,
2008 ($000’s):
|
|
|
Investment
|
|
|
Private
equity
|
|
|
|
|
|
|
|
|
|
securities
(1)
|
|
|
investments
(2)
|
|
|
Other
|
|
|
Total
|
|
Balance
at January 1, 2008
|
|
$
|
2,066
|
|
|
$
|
54,121
|
|
|
$
|
9,030
|
|
|
$
|
65,217
|
|
Net
payments, purchases and sales
|
|
|
14,324
|
|
|
|
2,682
|
|
|
|
(768
|
)
|
|
|
16,238
|
|
Net
transfers in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
gains or losses (realized or unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
-
|
|
|
|
1,051
|
|
|
|
(2,020
|
)
|
|
|
(969
|
)
|
Included
in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
(29
|
)
|
Balance
at March 31, 2008
|
|
$
|
16,390
|
|
|
$
|
57,854
|
|
|
$
|
6,213
|
|
|
$
|
80,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
payments, purchases and sales
|
|
|
(6
|
)
|
|
|
3,092
|
|
|
|
(782
|
)
|
|
|
2,304
|
|
Net
transfers in and/or out of Level 3
|
|
|
56,007
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,007
|
|
Total
gains or losses (realized or unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
-
|
|
|
|
613
|
|
|
|
-
|
|
|
|
613
|
|
Included
in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
765
|
|
|
|
765
|
|
Balance
at June 30, 2008
|
|
$
|
72,391
|
|
|
$
|
61,559
|
|
|
$
|
6,196
|
|
|
$
|
140,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
payments, purchases and sales
|
|
|
10,778
|
|
|
|
9,834
|
|
|
|
(453
|
)
|
|
|
20,159
|
|
Net
transfers in and/or out of Level 3
|
|
|
129,691
|
|
|
|
-
|
|
|
|
-
|
|
|
|
129,691
|
|
Total
gains or losses (realized or unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
-
|
|
|
|
1,041
|
|
|
|
-
|
|
|
|
1,041
|
|
Included
in other comprehensive income
|
|
|
(39,894
|
)
|
|
|
-
|
|
|
|
13
|
|
|
|
(39,881
|
)
|
Balance
at September 30, 2008
|
|
$
|
172,966
|
|
|
$
|
72,434
|
|
|
$
|
5,756
|
|
|
$
|
251,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains or losses for the period included
in earnings attributable to
unrealized gains or losses
for assets still
held at September 30, 2008
|
|
$
|
-
|
|
|
$
|
165
|
|
|
$
|
(2,020
|
)
|
|
$
|
(1,855
|
)
|
(1)
|
Unrealized
changes in fair value for available-for-sale investments (debt securities)
are recorded in other comprehensive income, while gains and losses from
sales are recorded in Net investment securities gains in the Consolidated
Statements of
Income.
|
(2)
|
Private
equity investments are generally recorded at fair
value. Accordingly, both unrealized changes in fair value and
gains or losses from sales are included in Net investment securities gains
in the Consolidated Statements of
Income.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
The
increase in Level 3 investment securities at September 30, 2008 was
primarily due to the transfer of certain highly-rated asset backed
securities. During the third quarter of 2008, the Corporation
determined that it could not obtain a sufficient number of observable
inputs in the form of market or broker quotes to substantiate a Level 2
classification.
|
|
For
purposes of impairment testing, nonaccrual loans greater than an
established threshold are individually evaluated for
impairment. Substantially all of these loans are collateral
dependent. A valuation allowance is recorded for the excess of the loan’s
recorded investment over the fair value of the collateral less estimated
selling costs. This valuation allowance is a component of the
Allowance for loan and lease losses. The Corporation generally
obtains appraisals to support the fair value of collateral underlying
loans subject to this impairment review. Appraisals incorporate
measures such as recent sales prices for comparable properties and costs
of construction. The Corporation considers these fair values
Level 3. For those loans individually evaluated for impairment,
a valuation allowance of $67.7 million was recorded for loans with a
recorded investment of $507.5 million at September 30,
2008. See discussion of Allowance for Loan and Lease Losses in
Critical Accounting Policies.
|
|
On
January 1, 2008, the Corporation adopted Statement of Financial Accounting
Standard No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities, Including an
Amendment of FASB Statement No. 115
(“SFAS 159”). SFAS
159 permits entities to choose to measure many financial instruments and
certain other items generally on an instrument-by-instrument basis at fair
value that are not currently required to be measured at fair
value. SFAS 159 is intended to provide entities with the
opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 does not
change requirements for recognizing and measuring dividend income,
interest income, or interest expense. The Corporation did not
elect to measure any existing financial instruments at fair value at
January 1, 2008. However, the Corporation may elect to measure
newly acquired financial instruments at fair value in the
future.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
The
following tables present the Corporation’s comprehensive income
($000’s):
|
|
|
Three
Months Ended September 30, 2008
|
|
|
|
Before-Tax
|
|
|
Tax
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
83,138
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on available for sale investment
securities:
|
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
(56,128
|
)
|
|
$
|
19,630
|
|
|
$
|
(36,498
|
)
|
Reclassification
for securities
transactions included in net
income
|
|
|
(207
|
)
|
|
|
72
|
|
|
|
(135
|
)
|
Total
unrealized gains (losses) on available for sale investment
securities
|
|
$
|
(56,335
|
)
|
|
$
|
19,702
|
|
|
$
|
(36,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gains (losses) on derivatives hedging variability of cash
flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
(15,034
|
)
|
|
$
|
5,262
|
|
|
$
|
(9,772
|
)
|
Reclassification
adjustments for hedging activities included in net income
|
|
|
11,552
|
|
|
|
(4,043
|
)
|
|
|
7,509
|
|
Total
net gains (losses) on derivatives hedging variability of cash
flows
|
|
$
|
(3,482
|
)
|
|
$
|
1,219
|
|
|
$
|
(2,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on funded status of defined benefit postretirement
plan:
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Reclassification
for amortization of actuarial loss and prior service
credit
amortization included in net income
|
|
|
(497
|
)
|
|
|
184
|
|
|
|
(313
|
)
|
Total
unrealized gains (losses) on funded status of defined benefit
postretirement plan
|
|
$
|
(497
|
)
|
|
$
|
184
|
|
|
$
|
(313
|
)
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(39,209
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
$
|
43,929
|
|
|
|
Three
Months Ended September 30, 2007
|
|
|
|
Before-Tax
|
|
|
Tax
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
219,939
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on available for sale investment
securities:
|
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
87,780
|
|
|
$
|
(33,049
|
)
|
|
$
|
54,731
|
|
Reclassification
for securities
transactions included in net
income
|
|
|
(6,530
|
)
|
|
|
2,285
|
|
|
|
(4,245
|
)
|
Total
unrealized gains (losses) on available for sale investment
securities
|
|
$
|
81,250
|
|
|
$
|
(30,764
|
)
|
|
$
|
50,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gains (losses) on derivatives hedging variability of cash
flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
(47,259
|
)
|
|
$
|
16,541
|
|
|
$
|
(30,718
|
)
|
Reclassification
adjustments for
hedging activities included in net
income
|
|
|
(3,855
|
)
|
|
|
1,349
|
|
|
|
(2,506
|
)
|
Total
net gains (losses) on derivatives hedging variability of cash
flows
|
|
$
|
(51,114
|
)
|
|
$
|
17,890
|
|
|
$
|
(33,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on funded status of defined benefit postretirement
plan:
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Reclassification
for amortization of actuarial loss and prior service
credit
amortization included in net income
|
|
|
(560
|
)
|
|
|
208
|
|
|
|
(352
|
)
|
Total
unrealized gains (losses) on funded status of defined benefit
postretirement plan
|
|
$
|
(560
|
)
|
|
$
|
208
|
|
|
$
|
(352
|
)
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
16,910
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
$
|
236,849
|
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
Before-Tax
|
|
|
Tax
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Net
loss
|
|
|
|
|
|
|
|
$
|
(164,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on available for sale investment
securities:
|
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
(87,660
|
)
|
|
$
|
30,646
|
|
|
$
|
(57,014
|
)
|
Reclassification
for securities
transactions included in net
income
|
|
|
(340
|
)
|
|
|
119
|
|
|
|
(221
|
)
|
Total
unrealized gains (losses) on available for sale investment
securities
|
|
$
|
(88,000
|
)
|
|
$
|
30,765
|
|
|
$
|
(57,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gains (losses) on derivatives hedging variability of cash
flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
(23,197
|
)
|
|
$
|
8,119
|
|
|
$
|
(15,078
|
)
|
Reclassification
adjustments for
hedging activities included in net
income
|
|
|
29,529
|
|
|
|
(10,335
|
)
|
|
|
19,194
|
|
Total
net gains (losses) on derivatives hedging variability of cash
flows
|
|
$
|
6,332
|
|
|
$
|
(2,216
|
)
|
|
$
|
4,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on funded status of defined benefit postretirement
plan:
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Reclassification
for amortization of actuarial loss and prior service
credit
amortization included in net income
|
|
|
(1,553
|
)
|
|
|
576
|
|
|
|
(977
|
)
|
Total
unrealized gains (losses) on funded status of defined benefit
postretirement plan
|
|
$
|
(1,553
|
)
|
|
$
|
576
|
|
|
$
|
(977
|
)
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(54,096
|
)
|
Total
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
$
|
(218,540
|
)
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
Before-Tax
|
|
|
Tax
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
656,990
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on available for sale investment
securities:
|
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
(314
|
)
|
|
$
|
(2,241
|
)
|
|
$
|
(2,555
|
)
|
Reclassification
for securities
transactions included in net
income
|
|
|
(7,535
|
)
|
|
|
2,637
|
|
|
|
(4,898
|
)
|
Total
unrealized gains (losses) on available for sale investment
securities
|
|
$
|
(7,849
|
)
|
|
$
|
396
|
|
|
$
|
(7,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gains (losses) on derivatives hedging variability of cash
flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
(16,943
|
)
|
|
$
|
5,930
|
|
|
$
|
(11,013
|
)
|
Reclassification
adjustments for
hedging activities included in net
income
|
|
|
(15,091
|
)
|
|
|
5,282
|
|
|
|
(9,809
|
)
|
Total
net gains (losses) on derivatives hedging variability of cash
flows
|
|
$
|
(32,034
|
)
|
|
$
|
11,212
|
|
|
$
|
(20,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on funded status of defined benefit postretirement
plan:
|
|
|
|
|
|
|
|
|
|
Arising
during the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Reclassification
for amortization of actuarial loss and prior service
credit
amortization included in net income
|
|
|
(1,678
|
)
|
|
|
622
|
|
|
|
(1,056
|
)
|
Total
unrealized gains (losses) on funded status of defined benefit
postretirement plan
|
|
$
|
(1,678
|
)
|
|
$
|
622
|
|
|
$
|
(1,056
|
)
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(29,331
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
$
|
627,659
|
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
A
reconciliation of the numerators and denominators of the basic and diluted
per share computations are as follows (dollars and shares in thousands,
except per share data):
|
|
|
Three
Months Ended September 30, 2008
|
|
|
|
Income
|
|
|
Average
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
shareholders
|
|
$
|
83,138
|
|
|
|
|
|
$
|
0.32
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
|
|
|
|
-
|
|
Net
income available to common shareholders
|
|
$
|
83,138
|
|
|
|
258,877
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option, restricted stock and other plans
|
|
|
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
shareholders
|
|
$
|
83,138
|
|
|
|
|
|
|
$
|
0.32
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Net
income available to common shareholders
|
|
$
|
83,138
|
|
|
|
259,224
|
|
|
$
|
0.32
|
|
|
|
Three
Months Ended September 30, 2007
|
|
|
|
Income
|
|
|
Average
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
shareholders
|
|
$
|
173,726
|
|
|
|
|
|
$
|
0.66
|
|
Income
from discontinued operations
|
|
|
46,213
|
|
|
|
|
|
|
0.18
|
|
Net
income available to common shareholders
|
|
$
|
219,939
|
|
|
|
261,491
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option, restricted stock and other plans
|
|
|
|
|
|
|
4,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
shareholders
|
|
$
|
173,726
|
|
|
|
|
|
|
$
|
0.65
|
|
Income
from discontinued operations
|
|
|
46,213
|
|
|
|
|
|
|
|
0.18
|
|
Net
income available to common shareholders
|
|
$
|
219,939
|
|
|
|
266,283
|
|
|
$
|
0.83
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
Income
|
|
|
Average
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(164,444
|
)
|
|
|
|
|
$
|
(0.63
|
)
|
Income
from discontinued operations
|
|
|
-
|
|
|
|
|
|
|
-
|
|
Net
loss
|
|
$
|
(164,444
|
)
|
|
|
259,146
|
|
|
$
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option, restricted stock and other plans
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(164,444
|
)
|
|
|
|
|
|
$
|
(0.63
|
)
|
Income
from discontinued operations
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Net
loss
|
|
$
|
(164,444
|
)
|
|
|
259,146
|
|
|
$
|
(0.63
|
)
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
Income
|
|
|
Average
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
shareholders
|
|
$
|
521,384
|
|
|
|
|
|
$
|
2.02
|
|
Income
from discontinued operations
|
|
|
135,606
|
|
|
|
|
|
|
0.52
|
|
Net
income available to common shareholders
|
|
$
|
656,990
|
|
|
|
258,607
|
|
|
$
|
2.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option, restricted stock and other plans
|
|
|
|
|
|
|
5,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
shareholders
|
|
$
|
521,384
|
|
|
|
|
|
|
$
|
1.97
|
|
Income
from discontinued operations
|
|
|
135,606
|
|
|
|
|
|
|
|
0.52
|
|
Net
income available to common shareholders
|
|
$
|
656,990
|
|
|
|
264,162
|
|
|
$
|
2.49
|
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
The
table below presents the options to purchase shares of common stock not
included in the computation of diluted net income per share because the
stock options were antidilutive. The calculation of diluted net
income per share for the nine months ended September 30, 2008 excludes all
stock options outstanding as a result of the reported net
loss. (shares in
thousands)
|
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Shares
|
|
|
24
,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
Range
|
$15.36
|
-
|
$36.82
|
|
$33.13
|
-
|
$36.82
|
|
$8.55
|
-
|
$36.82
|
|
$34.98
|
-
|
$36.82
|
|
The
following acquisition, which was not considered to be a material business
combination, was completed during
2008:
|
|
On
January 2, 2008, the Corporation completed its acquisition of First
Indiana Corporation (“First Indiana”) based in Indianapolis,
Indiana. First Indiana, with $2.1 billion in consolidated
assets as of December 31, 2007, had 32 branches in central Indiana which
became branches of M&I Marshall & Ilsley Bank on February 2,
2008. Stockholders of First Indiana received $32.00 in cash for
each share of First Indiana common stock outstanding, or approximately
$530.2 million. Initial goodwill, subject to the completion of
appraisals and valuation of the assets acquired and liabilities assumed,
amounted to $408.7 million. The estimated identifiable
intangible asset to be amortized (core deposits) with a weighted average
life of 5.7 years amounted to $33.6 million. The goodwill and intangibles
resulting from this acquisition are not deductible for tax
purposes.
|
|
Recently
announced acquisition
|
|
On
October 13, 2008, the Corporation and Taplin, Canida & Habacht, Inc.
(“TCH”) announced the signing of a definitive agreement for the
Corporation to acquire a majority equity interest in TCH. TCH,
based in Miami, Florida, is an institutional fixed income money manager
with approximately $7.5 billion of assets under management as of September
30, 2008. The transaction is not expected to have a material impact on the
Corporation’s financial results. Substantially all of the
initial payment by the Corporation will be comprised of M&I common
stock. The transaction is expected to close in the fourth
quarter of 2008, subject to regulatory approvals and other customary
closing conditions.
|
|
Selected
investment securities, by type, held by the Corporation were as follows
($000's):
|
|
|
September
30,
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Investment
securities available for sale:
|
|
|
|
|
U.S.
treasury and government agencies
|
|
$
|
5,567,319
|
|
|
$
|
5,824,303
|
|
|
$
|
5,268,513
|
|
States
and political subdivisions
|
|
|
855,642
|
|
|
|
904,230
|
|
|
|
902,278
|
|
Mortgage
backed securities
|
|
|
99,536
|
|
|
|
118,477
|
|
|
|
121,754
|
|
Other
|
|
|
608,849
|
|
|
|
595,879
|
|
|
|
491,629
|
|
Total
|
|
$
|
7,131,346
|
|
|
$
|
7,442,889
|
|
|
$
|
6,784,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities held to maturity:
|
|
|
|
|
|
States
and political subdivisions
|
|
$
|
250,902
|
|
|
$
|
373,861
|
|
|
$
|
393,434
|
|
Other
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Total
|
|
$
|
251,902
|
|
|
$
|
374,861
|
|
|
$
|
394,434
|
|
|
During
the second quarter of 2008, $1.6 million of investment securities in the
Corporation’s held to maturity portfolio were downgraded. As a
result, the Corporation sold these securities, as permitted under
Statement of Financial Accounting Standards No. 115,
Accounting
for Certain Investments in Debt and Equity
Securities
. The gains associated with this sale were
immaterial.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
The
following table provides the gross unrealized losses and fair value,
aggregated by investment category and the length of time the individual
securities have been in a continuous unrealized loss position, at
September 30, 2008 ($000’s):
|
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U.S.
treasury and
government agencies
|
|
$
|
1,852,361
|
|
|
$
|
47,465
|
|
|
$
|
428,847
|
|
|
$
|
6,938
|
|
|
$
|
2,281,208
|
|
|
$
|
54,403
|
|
States
and political subdivisions
|
|
|
394,040
|
|
|
|
17,162
|
|
|
|
137,247
|
|
|
|
14,471
|
|
|
|
531,287
|
|
|
|
31,633
|
|
Mortgage
backed securities
|
|
|
35,411
|
|
|
|
2,390
|
|
|
|
53,142
|
|
|
|
1,655
|
|
|
|
88,553
|
|
|
|
4,045
|
|
Other
|
|
|
146,176
|
|
|
|
66,504
|
|
|
|
400
|
|
|
|
64
|
|
|
|
146,576
|
|
|
|
66,568
|
|
Total
|
|
$
|
2,427,988
|
|
|
$
|
133,521
|
|
|
$
|
619,636
|
|
|
$
|
23,128
|
|
|
$
|
3,047,624
|
|
|
$
|
156,649
|
|
|
The
investment securities in the above table were temporarily impaired at
September 30, 2008. This temporary impairment represents the
amount of loss that would have been realized if the investment securities
had been sold on September 30, 2008. The temporary impairment
in the investment securities portfolio is the result of increases in
market interest rates since the investment securities were acquired and
not from deterioration in the creditworthiness of the
issuer. At September 30, 2008, the Corporation had the ability
and intent to hold these temporarily impaired investment securities until
a recovery of fair value, which may be maturity. For further information,
see the “Liquidity and Capital Resources” section in Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
The
Corporation's loan and lease portfolio, including loans held for sale,
consisted of the following
($000's):
|
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Commercial,
financial and agricultural
|
|
$
|
15,185,457
|
|
|
$
|
13,793,951
|
|
|
$
|
13,053,313
|
|
Cash
flow hedge
|
|
|
-
|
|
|
|
(694
|
)
|
|
|
(1,301
|
)
|
Commercial,
financial and agricultural
|
|
|
15,185,457
|
|
|
|
13,793,257
|
|
|
|
13,052,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
6,612,526
|
|
|
|
6,691,716
|
|
|
|
6,735,879
|
|
Residential
mortgage
|
|
|
7,864,073
|
|
|
|
7,105,201
|
|
|
|
6,893,611
|
|
Home
equity loans and lines of credit
|
|
|
5,053,088
|
|
|
|
4,413,205
|
|
|
|
4,304,031
|
|
Commercial
mortgage
|
|
|
13,071,632
|
|
|
|
12,002,162
|
|
|
|
11,760,309
|
|
Total
real estate
|
|
|
32,601,319
|
|
|
|
30,212,284
|
|
|
|
29,693,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
|
|
|
1,902,123
|
|
|
|
1,560,573
|
|
|
|
1,515,177
|
|
Lease
financing
|
|
|
728,343
|
|
|
|
730,144
|
|
|
|
708,205
|
|
Total
loans and leases
|
|
$
|
50,417,242
|
|
|
$
|
46,296,258
|
|
|
$
|
44,969,224
|
|
11.
|
Financial
Asset Sales
|
|
During
2007 the Corporation opted to discontinue, on a recurring basis, the sale
and securitization of automobile loans into the secondary
market.
|
|
The
Corporation reviews the carrying values of the remaining retained
interests monthly to determine if there is a decline in value that is
other than temporary and periodically reviews the propriety of the
assumptions used based on current historical experience as well as the
sensitivities of the carrying value of the retained interests to adverse
changes in the key assumptions. The Corporation believes that
its estimates result in a reasonable carrying value of the retained
interests.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
Retained
interests and other assets consisted of the following
($000’s):
|
|
|
September
30, 2008
|
|
Interest-only
strips
|
|
$
|
5,757
|
|
Cash
collateral accounts
|
|
|
32,419
|
|
Servicing
advances
|
|
|
100
|
|
Total
retained interests
|
|
$
|
38,276
|
|
|
Impairment
losses associated with the remaining retained interests, held in the form
of interest-only strips and cash collateral accounts, amounted to $2.0
million for the nine months ended September 30, 2008. There
were no impairment losses in the third quarter of 2008. The
impairment in the nine months ended September 30, 2008 was primarily the
result of the differences between the actual credit losses experienced
compared to the expected credit losses used in measuring the retained
interests.
|
|
Net
trading gains associated with the auto securitization-related interest
rate swap were immaterial for the three months ended September 30,
2008. For the nine months ended September 30, 2008, net trading
gains associated with the auto securitization-related interest rate swap
amounted to $0.8 million.
|
|
At
September 30, 2008, securitized automobile loans and other automobile
loans managed together with them, along with delinquency and credit loss
information consisted of the following
($000’s):
|
|
|
|
|
|
|
|
|
Total
|
|
|
Securitized
|
|
Portfolio
|
|
Managed
|
Loan
balances
|
|
$
|
393,912
|
|
|
$
|
476,902
|
|
|
$
|
870,814
|
|
Principal
amounts of loans 60 days or more past due
|
|
|
2,947
|
|
|
|
1,049
|
|
|
|
3,996
|
|
Net
credit losses year to date
|
|
|
5,389
|
|
|
|
1,268
|
|
|
|
6,657
|
|
12.
|
Goodwill
and Other Intangibles
|
|
The
changes in the carrying amount of goodwill for the nine months ended
September 30, 2008 were as follows
($000’s):
|
|
|
Commercial
Banking
|
|
|
Community
Banking
|
|
|
Wealth
Management
|
|
|
Others
|
|
|
Total
|
|
Goodwill
balance as of December 31, 2007
|
|
$
|
922,264
|
|
|
$
|
560,332
|
|
|
$
|
114,572
|
|
|
$
|
87,777
|
|
|
$
|
1,684,945
|
|
Goodwill
acquired during the period
|
|
|
327,375
|
|
|
|
81,365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
408,740
|
|
Purchase
accounting adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
3,340
|
|
|
|
-
|
|
|
|
3,340
|
|
Reallocation
of goodwill
|
|
|
-
|
|
|
|
(33,000
|
)
|
|
|
-
|
|
|
|
33,000
|
|
|
|
-
|
|
Goodwill
balance as of September 30, 2008
|
|
$
|
1,249,639
|
|
|
$
|
608,697
|
|
|
$
|
117,912
|
|
|
$
|
120,777
|
|
|
$
|
2,097,025
|
|
|
Goodwill
acquired during 2008 included initial goodwill of $408.7 million for the
acquisition of First Indiana. Purchase accounting adjustments
for Wealth Management represent adjustments made to the initial estimates
of fair value associated with the acquisition of North Star Financial
Corporation and a reduction due to the divestiture of a component of North
Star Financial Corporation. During the second quarter of 2008,
management consolidated certain lending activities and transferred the
assets and the related goodwill from the Community Banking segment to the
National Consumer Lending Division reporting unit, which is a component of
Others.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
At
September 30, 2008, the Corporation’s other intangible assets consisted of
the following ($000’s):
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
Other
intangible assets:
|
|
|
|
|
|
|
|
|
|
Core
deposit intangible
|
|
$
|
254,228
|
|
|
$
|
(128,911
|
)
|
|
$
|
125,317
|
|
Trust
customers
|
|
|
11,384
|
|
|
|
(3,766
|
)
|
|
|
7,618
|
|
Tradename
|
|
|
1,335
|
|
|
|
(386
|
)
|
|
|
949
|
|
Other
intangibles
|
|
|
4,147
|
|
|
|
(1,027
|
)
|
|
|
3,120
|
|
|
|
$
|
271,094
|
|
|
$
|
(134,090
|
)
|
|
$
|
137,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loan servicing rights
|
|
|
|
|
|
|
|
|
|
$
|
2,570
|
|
|
Amortization
expense of other intangible assets for the three and nine months ended
September 30, 2008 amounted to $5.7 million and $17.0 million,
respectively. For the three and nine months ended September 30,
2007, amortization expense of other intangible assets amounted to $5.1
million and $14.2 million,
respectively.
|
|
Amortization
of mortgage loan servicing rights amounted to $0.3 million and $0.9
million in each of the three and nine months ended September 30, 2008 and
2007, respectively.
|
|
The
estimated amortization expense of other intangible assets and mortgage
loan servicing rights for the next five annual fiscal years are
($000’s):
|
2009
|
|
$
|
21,330
|
|
2010
|
|
|
18,054
|
|
2011
|
|
|
15,258
|
|
2012
|
|
|
13,014
|
|
2013
|
|
|
11,074
|
|
|
Statement
of Financial Accounting Standards No. 142,
Goodwill
and Other Intangible Assets
, (“SFAS 142”) adopts an aggregate view
of goodwill and bases the accounting for goodwill on the units of the
combined entity into which an acquired entity is integrated (those units
are referred to as Reporting Units). A Reporting Unit is an
operating segment as defined in Statement of Financial Accounting
Standards No. 131,
Disclosures
about Segments of an Enterprise and Related Information
, or one
level below an operating
segment.
|
|
SFAS
142 provides guidance for impairment testing of goodwill and intangible
assets that are not amortized. Goodwill is tested for
impairment using a two-step process that begins with an estimation of the
fair value of a Reporting Unit. The first step is a screen for
potential impairment and the second step measures the amount of
impairment, if any.
|
|
Consistent
with prior years, the Corporation elected to perform its annual test for
goodwill impairment as of June 30, 2008. Other than goodwill, the
Corporation does not have any other intangible assets that are not
amortized. The stock prices of many financial services companies,
including the Corporation, declined during the first half of 2008 as a
result of the stress and deterioration in the national residential real
estate markets. While the Corporation’s other reporting units did not have
indicators of potential goodwill impairment based on the first step, the
Commercial and Community Banking segments were subjected to the second
step of impairment testing of
goodwill.
|
|
The
second step of the goodwill impairment test compares the
implied fair value of the reporting unit goodwill with the carrying amount
of that goodwill. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a
business combination is determined. The fair value of a reporting unit is
allocated to all of the assets and liabilities of that unit (including any
unrecognized intangible assets) as if the reporting unit had been acquired
in a business combination and the fair value of the reporting unit was the
price paid to acquire the reporting unit. The excess of the
fair value of the reporting unit over the amounts assigned to its assets
and liabilities is the implied fair value of goodwill. The allocation
process is performed solely for purposes of testing goodwill for
impairment. Recognized assets and liabilities and previously
unrecognized intangible assets are not adjusted or recognized as a result
of that allocation process.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
During
the third quarter of 2008, the Corporation completed the second step of
the process for the Commercial and Community Banking segments and
determined that there was no goodwill
impairment.
|
|
The
Corporation's deposit liabilities consisted of the following
($000's):
|
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Noninterest
bearing demand
|
|
$
|
6,359,020
|
|
|
$
|
6,174,281
|
|
|
$
|
5,558,966
|
|
Savings
and NOW
|
|
|
13,790,628
|
|
|
|
13,903,479
|
|
|
|
14,346,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CD's
$100,000 and over
|
|
|
12,661,354
|
|
|
|
8,075,691
|
|
|
|
6,939,786
|
|
Cash
flow hedge-Institutional CDs
|
|
|
13,766
|
|
|
|
18,027
|
|
|
|
8,462
|
|
Total
CD's $100,000 and over
|
|
|
12,675,120
|
|
|
|
8,093,718
|
|
|
|
6,948,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
time deposits
|
|
|
5,283,277
|
|
|
|
4,412,933
|
|
|
|
4,543,836
|
|
Foreign
deposits
|
|
|
1,931,557
|
|
|
|
2,606,943
|
|
|
|
3,009,867
|
|
Total
deposits
|
|
$
|
40,039,602
|
|
|
$
|
35,191,354
|
|
|
$
|
34,407,762
|
|
14.
|
Derivative
Financial Instruments and Hedging
Activities
|
|
The
following is an update of the Corporation’s use of derivative financial
instruments and its hedging activities as described in its Annual Report
on Form 10-K for the year ended December 31, 2007. There were
no significant new hedging strategies employed during the nine months
ended September 30, 2008.
|
|
Trading
Instruments and Other Free Standing
Derivatives
|
|
Loan
commitments accounted for as derivatives are not material to the
Corporation and the Corporation does not employ any formal hedging
strategies for these commitments.
|
|
Trading
and free-standing derivative contracts are not linked to specific assets
and liabilities on the balance sheet or to forecasted transactions in an
accounting hedge relationship and, therefore, do not qualify for hedge
accounting under SFAS 133. They are carried at fair value with
changes in fair value recorded as a component of other noninterest
income.
|
|
At
September 30, 2008, free standing interest rate swaps consisted of $3.8
billion in notional amount of receive fixed / pay floating with an
aggregate positive fair value of $57.0 million and $3.5 billion in
notional amount of pay fixed / receive floating with an aggregate negative
fair value of $33.9 million.
|
|
At
September 30, 2008, interest rate caps purchased amounted to $166.5
million in notional amount with a negative fair value of $0.4 million and
interest rate caps sold amounted to $166.5 million in notional amount with
a positive fair value of $0.4
million.
|
|
At
September 30, 2008, the notional value of interest rate futures designated
as trading was $1.9 billion with a positive fair value of $1.2
million.
|
|
At
September 30, 2008, the notional value of equity derivatives bifurcated
from deposit liabilities and designated as trading amounted to $98.1
million in notional value with a negative fair value of $3.7
million. At September 30, 2008, the notional value of equity
derivative contracts designated as trading and used as economic hedges was
$98.2 million with a positive fair value of $3.9
million.
|
|
The
Corporation employs certain over-the-counter interest rate swaps that are
the designated hedging instruments in fair value and cash flow hedges that
are used by the Corporation to manage its interest rate
risk. These interest rate swaps are measured at fair value on a
recurring basis based on significant other observable inputs and are
categorized as Level 2. See Note 4 in Notes to Financial
Statements for a discussion of fair value
measurements.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
The
following table presents additional information with respect to fair value
hedges.
|
Fair
Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Average
|
|
Hedged
|
|
Hedging
|
|
Amount
|
|
|
Value
|
|
|
Remaining
|
|
Item
|
|
Instrument
|
|
($
in mil)
|
|
|
($
in mil)
|
|
|
Term
(Yrs)
|
|
Fair
Value Hedges that Qualify for Shortcut Accounting
|
|
|
|
|
|
|
|
Fixed
Rate Bank Notes
|
|
Receive
Fixed Swap
|
|
$
|
336.4
|
|
|
$
|
7.7
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate Bank Notes
|
|
Receive
Fixed Swap
|
|
$
|
100.0
|
|
|
$
|
(1.2
|
)
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional
CDs
|
|
Receive
Fixed Swap
|
|
|
25.0
|
|
|
|
0.9
|
|
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callable
CDs
|
|
Receive
Fixed Swap
|
|
|
5,954.4
|
|
|
|
(94.2
|
)
|
|
|
13.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered Bullet
CDs
|
|
Receive
Fixed Swap
|
|
|
210.1
|
|
|
|
(3.1
|
)
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium
Term Notes
|
|
Receive
Fixed Swap
|
|
|
7.0
|
|
|
|
(0.0
|
)
|
|
|
19.4
|
|
|
The
impact from fair value hedges to total net interest income for the three
and nine months ended September 30, 2008 was a positive $39.7 million and
a positive $68.4 million, respectively. The impact to net
interest income due to ineffectiveness was not
material.
|
|
The
following table summarizes the Corporation’s cash flow
hedges.
|
Cash
Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Average
|
|
Hedged
|
|
Hedging
|
|
Amount
|
|
|
Value
|
|
|
Remaining
|
|
Item
|
|
Instrument
|
|
($
in mil)
|
|
|
($
in mil)
|
|
|
Term
(Yrs)
|
|
Institutional
CDs
|
|
Pay
Fixed Swap
|
|
$
|
550.0
|
|
|
$
|
(13.8
|
)
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
Advances
|
|
Pay
Fixed Swap
|
|
|
1,060.0
|
|
|
|
(38.4
|
)
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating Rate
Bank Notes
|
|
Pay
Fixed Swap
|
|
|
500.0
|
|
|
|
(12.1
|
)
|
|
|
2.5
|
|
|
The
impact to total net interest income from cash flow hedges, including
amortization of terminated cash flow hedges for the three and nine months
ended September 30, 2008 was negative $11.5 million and negative $29.5
million, respectively. For the three and nine months ended
September 30, 2008, the impact due to ineffectiveness was not
material.
|
|
For
the three and nine months ended September 30, 2007, the total effect on
net interest income resulting from derivative financial instruments was a
positive $3.2 million and a positive $12.8 million, respectively,
including the amortization of terminated derivative financial
instruments. For the three and nine months ended September 30,
2007, the impact due to ineffectiveness was not
material.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
15.
|
Postretirement
Health Plan
|
|
The
Corporation sponsors a defined benefit health plan that provides health
care benefits to eligible current and retired
employees. Eligibility for retiree benefits is dependent upon
age, years of service, and participation in the health plan during active
service. The plan is contributory and in 1997 and 2002 the plan
was amended. Employees hired after September 1, 1997, including employees
hired following business combinations, will be granted access to the
Corporation’s plan upon becoming an eligible retiree; however, such
retirees must pay 100% of the cost of health care benefits. The
plan continues to contain other cost-sharing features such as deductibles
and coinsurance.
|
|
Net
periodic postretirement benefit cost for the three and nine months ended
September 30, 2008 and 2007 included the following components
($000’s):
|
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$
|
238
|
|
|
$
|
246
|
|
|
$
|
714
|
|
|
$
|
736
|
|
Interest
cost on APBO
|
|
|
983
|
|
|
|
815
|
|
|
|
2,951
|
|
|
|
2,447
|
|
Expected
return on plan assets
|
|
|
(435
|
)
|
|
|
(252
|
)
|
|
|
(1,305
|
)
|
|
|
(756
|
)
|
Prior
service amortization
|
|
|
(593
|
)
|
|
|
(524
|
)
|
|
|
(1,779
|
)
|
|
|
(1,572
|
)
|
Actuarial
loss amortization
|
|
|
76
|
|
|
|
115
|
|
|
|
226
|
|
|
|
347
|
|
Net
periodic postretirement benefit cost
|
|
$
|
269
|
|
|
$
|
400
|
|
|
$
|
807
|
|
|
$
|
1,202
|
|
|
Benefit
payments and expenses, net of participant contributions, for the three and
nine months ended September 30, 2008 amounted to $1.6 million and $3.5
million, respectively.
|
|
The
funded status, which is the accumulated postretirement benefit obligation
net of fair value of plan assets, as of September 30, 2008 is as follows
($000’s):
|
Total
funded status, December 31, 2007
|
|
$
|
(32,638
|
)
|
Service
cost
|
|
|
(714
|
)
|
Interest
cost on APBO
|
|
|
(2,951
|
)
|
Expected
return on plan assets
|
|
|
1,305
|
|
Employer
contributions/payments
|
|
|
4,544
|
|
Acquisition
|
|
|
(1,159
|
)
|
Subsidy
(Medicare Part D)
|
|
|
(209
|
)
|
Total
funded status, September 30, 2008
|
|
$
|
(31,822
|
)
|
|
The
Corporation’s operating segments are presented based on its management
structure and management accounting practices. The structure
and practices are specific to the Corporation; therefore, the financial
results of the Corporation’s business segments are not necessarily
comparable with similar information for other financial
institutions.
|
|
Based
on the way the Corporation organizes its segments, the Corporation has
determined that it has four reportable segments: Commercial
Banking, Community Banking, Wealth Management and
Treasury.
|
|
During
the second quarter of 2008, management consolidated certain lending
activities and transferred the assets and the related goodwill from the
Community Banking segment to the National Consumer Lending Division
reporting unit, which is a component of Others. Prior period
segment information has been adjusted to reflect the
transfer.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
Total
Revenues by type in Others consist of the following ($ in
millions):
|
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Investment
Division
|
|
$
|
9.6
|
|
|
$
|
10.0
|
|
|
$
|
36.0
|
|
|
$
|
27.0
|
|
National
Consumer Lending Division
|
|
|
36.7
|
|
|
|
26.3
|
|
|
|
97.4
|
|
|
|
89.6
|
|
Administrative
& Other
|
|
|
5.5
|
|
|
|
14.5
|
|
|
|
59.3
|
|
|
|
57.8
|
|
Other
|
|
|
65.3
|
|
|
|
63.3
|
|
|
|
202.5
|
|
|
|
185.9
|
|
Total
|
|
$
|
117.1
|
|
|
$
|
114.1
|
|
|
$
|
395.2
|
|
|
$
|
360.3
|
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
|
Three
Months Ended September 30, 2008 ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations,
|
|
|
|
|
|
Commercial
|
|
|
Community
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Reclassifications
&
|
|
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Treasury
|
|
|
Others
|
|
|
Overhead
|
|
|
Adjustments
|
|
|
Consolidated
|
|
Net
interest income
|
|
$
|
191.2
|
|
|
$
|
194.2
|
|
|
$
|
15.4
|
|
|
$
|
21.6
|
|
|
$
|
39.4
|
|
|
$
|
(14.4
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
440.7
|
|
Provision
for loan and lease losses
|
|
|
97.2
|
|
|
|
62.3
|
|
|
|
1.7
|
|
|
|
-
|
|
|
|
(6.2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
155.0
|
|
Net
interest income after
provision for loan and lease
losses
|
|
|
94.0
|
|
|
|
131.9
|
|
|
|
13.7
|
|
|
|
21.6
|
|
|
|
45.6
|
|
|
|
(14.4
|
)
|
|
|
(6.7
|
)
|
|
|
285.7
|
|
Other
income
|
|
|
28.2
|
|
|
|
47.4
|
|
|
|
73.2
|
|
|
|
12.0
|
|
|
|
77.7
|
|
|
|
29.3
|
|
|
|
(84.0
|
)
|
|
|
183.8
|
|
Other
expense
|
|
|
64.7
|
|
|
|
173.8
|
|
|
|
79.6
|
|
|
|
5.0
|
|
|
|
92.6
|
|
|
|
28.3
|
|
|
|
(84.0
|
)
|
|
|
360.0
|
|
Income
before income taxes
|
|
|
57.5
|
|
|
|
5.5
|
|
|
|
7.3
|
|
|
|
28.6
|
|
|
|
30.7
|
|
|
|
(13.4
|
)
|
|
|
(6.7
|
)
|
|
|
109.5
|
|
Provision
(benefit) for income taxes
|
|
|
23.0
|
|
|
|
2.2
|
|
|
|
2.9
|
|
|
|
11.4
|
|
|
|
(1.2
|
)
|
|
|
(5.2
|
)
|
|
|
(6.7
|
)
|
|
|
26.4
|
|
Segment
income
|
|
$
|
34.5
|
|
|
$
|
3.3
|
|
|
$
|
4.4
|
|
|
$
|
17.2
|
|
|
$
|
31.9
|
|
|
$
|
(8.2
|
)
|
|
$
|
-
|
|
|
$
|
83.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
$
|
25,948.9
|
|
|
$
|
18,826.5
|
|
|
$
|
1,544.2
|
|
|
$
|
8,476.2
|
|
|
$
|
8,892.4
|
|
|
$
|
1,418.7
|
|
|
$
|
(1,606.0
|
)
|
|
$
|
63,500.9
|
|
|
|
Three
Months Ended September 30, 2007 ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E
liminations,
|
|
|
|
|
|
Commercial
|
|
|
Community
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Reclassifications
&
|
|
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Treasury
|
|
|
Others
|
|
|
Overhead
|
|
|
Adjustments
|
|
|
Consolidated
|
|
Net
interest income
|
|
$
|
171.8
|
|
|
$
|
195.4
|
|
|
$
|
13.0
|
|
|
$
|
6.7
|
|
|
$
|
36.4
|
|
|
$
|
(13.2
|
)
|
|
$
|
(6.9
|
)
|
|
$
|
403.2
|
|
Provision
for loan and lease losses
|
|
|
10.6
|
|
|
|
7.4
|
|
|
|
0.8
|
|
|
|
-
|
|
|
|
22.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41.5
|
|
Net
interest income after
provision for loan and lease
losses
|
|
|
161.2
|
|
|
|
188.0
|
|
|
|
12.2
|
|
|
|
6.7
|
|
|
|
13.7
|
|
|
|
(13.2
|
)
|
|
|
(6.9
|
)
|
|
|
361.7
|
|
Other
income
|
|
|
22.2
|
|
|
|
37.7
|
|
|
|
68.1
|
|
|
|
19.8
|
|
|
|
77.7
|
|
|
|
35.1
|
|
|
|
(77.3
|
)
|
|
|
183.3
|
|
Other
expense
|
|
|
49.6
|
|
|
|
149.9
|
|
|
|
57.4
|
|
|
|
3.3
|
|
|
|
87.4
|
|
|
|
23.2
|
|
|
|
(77.3
|
)
|
|
|
293.5
|
|
Income
before income taxes
|
|
|
133.8
|
|
|
|
75.8
|
|
|
|
22.9
|
|
|
|
23.2
|
|
|
|
4.0
|
|
|
|
(1.3
|
)
|
|
|
(6.9
|
)
|
|
|
251.5
|
|
Provision
(benefit) for income taxes
|
|
|
53.5
|
|
|
|
30.3
|
|
|
|
6.1
|
|
|
|
9.3
|
|
|
|
(13.7
|
)
|
|
|
(0.8
|
)
|
|
|
(6.9
|
)
|
|
|
77.8
|
|
Segment
income
|
|
$
|
80.3
|
|
|
$
|
45.5
|
|
|
$
|
16.8
|
|
|
$
|
13.9
|
|
|
$
|
17.7
|
|
|
$
|
(0.5
|
)
|
|
$
|
-
|
|
|
$
|
173.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets (a)
|
|
$
|
23,841.1
|
|
|
$
|
17,653.7
|
|
|
$
|
1,313.9
|
|
|
$
|
9,042.3
|
|
|
$
|
6,913.2
|
|
|
$
|
1,612.9
|
|
|
$
|
(969.1
|
)
|
|
$
|
59,408.0
|
|
(a)
|
Excludes
assets of discontinued operations.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
|
Nine
Months Ended September 30, 2008 ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
,
|
|
|
|
|
|
Commercial
|
|
|
Community
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Reclassifications
&
|
|
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Treasury
|
|
|
Others
|
|
|
Overhead
|
|
|
Adjustments
|
|
|
Consolidated
|
|
Net
interest income
|
|
$
|
574.7
|
|
|
$
|
587.9
|
|
|
$
|
44.5
|
|
|
$
|
42.9
|
|
|
$
|
126.1
|
|
|
$
|
(36.9
|
)
|
|
$
|
(20.5
|
)
|
|
$
|
1,318.7
|
|
Provision
for loan and lease losses
|
|
|
987.0
|
|
|
|
196.0
|
|
|
|
7.2
|
|
|
|
-
|
|
|
|
(2.9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,187.3
|
|
Net
interest income after
provision for loan and lease
losses
|
|
|
(412.3
|
)
|
|
|
391.9
|
|
|
|
37.3
|
|
|
|
42.9
|
|
|
|
129.0
|
|
|
|
(36.9
|
)
|
|
|
(20.5
|
)
|
|
|
131.4
|
|
Other
income
|
|
|
79.1
|
|
|
|
139.2
|
|
|
|
225.3
|
|
|
|
34.1
|
|
|
|
269.1
|
|
|
|
88.5
|
|
|
|
(253.2
|
)
|
|
|
582.1
|
|
Other
expense
|
|
|
210.6
|
|
|
|
510.6
|
|
|
|
206.1
|
|
|
|
13.2
|
|
|
|
293.1
|
|
|
|
75.8
|
|
|
|
(253.2
|
)
|
|
|
1,056.2
|
|
Income
before income taxes
|
|
|
(543.8
|
)
|
|
|
20.5
|
|
|
|
56.5
|
|
|
|
63.8
|
|
|
|
105.0
|
|
|
|
(24.2
|
)
|
|
|
(20.5
|
)
|
|
|
(342.7
|
)
|
Provision
(benefit) for income taxes
|
|
|
(217.5
|
)
|
|
|
8.2
|
|
|
|
22.7
|
|
|
|
25.5
|
|
|
|
10.7
|
|
|
|
(7.4
|
)
|
|
|
(20.5
|
)
|
|
|
(178.3
|
)
|
Segment
income
|
|
$
|
(326.3
|
)
|
|
$
|
12.3
|
|
|
$
|
33.8
|
|
|
$
|
38.3
|
|
|
$
|
94.3
|
|
|
$
|
(16.8
|
)
|
|
$
|
-
|
|
|
$
|
(164.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
$
|
25,948.9
|
|
|
$
|
18,826.5
|
|
|
$
|
1,544.2
|
|
|
$
|
8,476.2
|
|
|
$
|
8,892.4
|
|
|
$
|
1,418.7
|
|
|
$
|
(1,606.0
|
)
|
|
$
|
63,500.9
|
|
|
|
Nine
Months Ended September 30, 2007 ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations,
|
|
|
|
|
|
|
Commercial
|
|
|
Community
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Reclassifications
&
|
|
|
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Treasury
|
|
|
Others
|
|
|
Overhead
|
|
|
Adjustments
|
|
|
Consolidated
|
|
Net
interest income
|
|
$
|
509.1
|
|
|
$
|
580.2
|
|
|
$
|
38.1
|
|
|
$
|
14.3
|
|
|
$
|
108.6
|
|
|
$
|
(32.3
|
)
|
|
$
|
(20.6
|
)
|
|
$
|
1,197.4
|
|
Provision
for loan and lease losses
|
|
|
30.0
|
|
|
|
21.3
|
|
|
|
2.5
|
|
|
|
-
|
|
|
|
30.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84.7
|
|
Net
interest income after
provision for loan and lease
losses
|
|
|
479.1
|
|
|
|
558.9
|
|
|
|
35.6
|
|
|
|
14.3
|
|
|
|
77.7
|
|
|
|
(32.3
|
)
|
|
|
(20.6
|
)
|
|
|
1,112.7
|
|
Other
income
|
|
|
64.2
|
|
|
|
109.5
|
|
|
|
198.7
|
|
|
|
35.5
|
|
|
|
251.7
|
|
|
|
97.0
|
|
|
|
(231.2
|
)
|
|
|
525.4
|
|
Other
expense
|
|
|
143.3
|
|
|
|
433.8
|
|
|
|
163.1
|
|
|
|
10.1
|
|
|
|
265.0
|
|
|
|
84.7
|
|
|
|
(231.2
|
)
|
|
|
868.8
|
|
Income
before income taxes
|
|
|
400.0
|
|
|
|
234.6
|
|
|
|
71.2
|
|
|
|
39.7
|
|
|
|
64.4
|
|
|
|
(20.0
|
)
|
|
|
(20.6
|
)
|
|
|
769.3
|
|
Provision
(benefit) for income taxes
|
|
|
160.0
|
|
|
|
93.8
|
|
|
|
25.5
|
|
|
|
15.9
|
|
|
|
(18.8
|
)
|
|
|
(7.9
|
)
|
|
|
(20.6
|
)
|
|
|
247.9
|
|
Segment
income
|
|
$
|
240.0
|
|
|
$
|
140.8
|
|
|
$
|
45.7
|
|
|
$
|
23.8
|
|
|
$
|
83.2
|
|
|
$
|
(12.1
|
)
|
|
$
|
-
|
|
|
$
|
521.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets (a)
|
|
$
|
23,841.1
|
|
|
$
|
17,653.7
|
|
|
$
|
1,313.9
|
|
|
$
|
9,042.3
|
|
|
$
|
6,913.2
|
|
|
$
|
1,612.9
|
|
|
$
|
(969.1
|
)
|
|
$
|
59,408.0
|
|
(a)
|
Excludes
assets of discontinued operations.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
|
As
described in Note 25 – Guarantees, in Notes to Consolidated Financial
Statements in Item 8 of the Corporation’s 2007 Annual Report on Form 10-K,
at December 31, 2007, as part of securities custody activities and at the
direction of trust clients, the Corporation’s wealth management segment
lends securities owned by trust clients to borrowers who have been
evaluated for credit risk in a manner similar to that employed in making
lending decisions. In connection with these activities,
Marshall & Ilsley Trust Company N.A. (“M&I Trust”) has issued
certain indemnifications against loss resulting from the default by a
borrower under the master securities loan agreement, such as the failure
of the borrower to return loaned securities when due or the borrower’s
bankruptcy or receivership. The borrowing party is required to
fully collateralize securities received with cash or marketable
securities. As securities are loaned, collateral is maintained
at a minimum of 100 percent of the fair value of the securities plus
accrued interest and the collateral is revalued on a daily
basis. The amount of securities loaned subject to
indemnification was $7.8 billion at September 30, 2008, $11.2 billion at
December 31, 2007 and $11.6 billion at September 30,
2007.
|
|
During
the third quarter of 2008, the Corporation’s wealth management segment
recognized a loss associated with its securities lending
activities. During the quarter, Lehman Brothers declared
bankruptcy and failed to return loaned securities when due. Due to
volatile market conditions, the cost of the replacement securities
exceeded the amount of collateral available to purchase the replacement
securities. The loss amounted to $8.4 million and is reported in the line
Other within Other Expense in the Consolidated Statements of
Income.
|
|
Certain
entities within the wealth management segment are the investment advisor
and trustee of the M&I Employee Benefit Stable Principal Fund
(“SPF”). The SPF periodically participates in securities
lending activities. Although not obligated to do so, during the third
quarter of 2008, M&I Trust entered into a capital support agreement
with SPF due to volatile market conditions. Under the terms of
the agreement, M&I Trust would be required to contribute capital,
under certain specific and defined circumstances and not to exceed $30.0
million in the aggregate. The agreement expires December 31, 2008 and
contains terms that provide for three month renewals with all of the
significant terms, including maximum contribution limits, remaining
unchanged. The estimated fair value of the contingent liability under the
agreement that is recorded within other liabilities in the consolidated
balance sheet and corresponding expense which is reported in the line
Other within Other Expense in the Consolidated Statements of Income
amounted to $6.6 million. As of November 7, 2008, no
contributions have been made under the
agreement.
|
|
As
described in Note 25 – Guarantees, in Notes to Consolidated Financial
Statements in Item 8 of the Corporation’s 2007 Annual Report on Form 10-K,
at December 31, 2007 the Corporation had $25.8 million accrued as its
estimate of the fair value of its indemnification obligation to Visa, Inc.
(“Visa”) for certain litigation matters. In conjunction with
the January 2, 2008 acquisition of First Indiana, the Corporation assumed
First Indiana’s indemnification obligation to Visa with an estimated fair
value of $0.5 million.
|
|
During
the first quarter of 2008, Visa completed an initial public offering
(“IPO”). In conjunction with the IPO, Visa established a $3.0
billion escrow for the litigation matters subject to the indemnification
from the proceeds of the IPO. As a result of the funded escrow,
the Corporation reversed $12.2 million of the litigation accruals that
were originally recorded and assumed based on the Corporation’s membership
interests in Visa and the funded
escrow.
|
|
During
the first quarter of 2008, Visa redeemed 38.7% of the Visa Class B common
stock owned by the Corporation for cash in the amount of $26.9
million. The Corporation’s remaining Visa Class B common stock
was placed in escrow for a period of three years, and it is expected that
any indemnification obligations in excess of the funded escrow will be
funded by the escrowed stock. The Corporation’s Visa Class B
common stock will be convertible to Visa Class A common stock based on a
conversion factor that is currently 0.71429. However, the
ultimate conversion factor is dependent on the resolution of the pending
litigation.
|
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
On
October 14, 2008, the Corporation was notified by Visa that they had reached an
agreement in principle to resolve the litigation brought against Visa in 2004 by
Discover Financial Services (“Discover”). As described in Note 25 – Guarantees,
in Notes to Consolidated Financial Statements in Item 8 of the Corporation’s
2007 Annual Report on Form 10-K, the Discover litigation is a “covered
litigation.” Under Visa’s retrospective responsibility plan, Visa is to be
indemnified by its members for any ultimate losses related to the covered
litigation.
On
October 27, 2008, Visa announced that it had agreed to settle the litigation
with Discover. Visa announced that $1.7425 billion of the settlement would be
funded from the escrow created under Visa’s retrospective responsibility plan.
Prior to the establishment of the $3.0 billion escrow from the proceeds of the
IPO for the litigation matters subject to the indemnification, Visa disclosed
that it had recorded a liability of $0.650 billion for the Discover
litigation. Visa has indicated that it would not be able to issue
escrowed stock until the fourth quarter of 2008 to offset any additional reserve
requirements. The Corporation has determined that its
share of the additional reserve requirements to settle the litigation with
Discover is not material with respect to its consolidated financial statements
as of and for the three and nine months ended September 30, 2008. The
Corporation continues to expect that the ultimate value of its remaining
investment in Visa will exceed its indemnification obligations.
Treasury
Department's Capital Purchase Program
On
October 28, 2008, the Corporation announced it had received preliminary approval
to participate in the U.S. Treasury Department's Capital Purchase Program
(“CPP”), a program designed to infuse capital into the nation's healthiest and
strongest banks. The Corporation has been approved for approximately $1.7
billion in capital which would take the form of non-voting preferred stock that
would pay cumulative dividends at the rate of 5% for the first five years and
then pay cumulative dividends at the rate of 9% thereafter. In addition, the
Corporation would be required to issue warrants to the U.S. Treasury Department
(the “UST”) to purchase a number of shares of the Corporation’s common stock
that would have an aggregate market price equal to 15% of the aggregate value of
the preferred stock sold to the UST. The exercise price for the
warrants, and the market price for determining the number of shares of common
stock subject to the warrants, would be calculated based on a 20-trading day
trailing average ending on October 24, 2008. The warrants would be
immediately exercisable, in whole or in part and over a term of ten
years.
Participation
in the CPP would require the Corporation to obtain consent from the U.S.
Treasury Department in order to increase its common dividend or repurchase
common shares under its Stock Repurchase Program.
The
Corporation estimates that the non-voting preferred stock would increase the
Corporation’s already well-capitalized Tier 1 and Total capital ratios at
September 30, 2008 to approximately 10.9% and 14.8%, respectively.
Participation
is specifically conditioned upon approval of the investment by the Corporation’s
board of directors and is subject to standard terms and conditions. The
Corporation is evaluating all of the terms and conditions associated with
participating in the CPP.
FDIC
Temporary Liquidity Guarantee Program
On
October 14, 2008, the FDIC established a Temporary Liquidity Guarantee Program
(“TLGP”). The FDIC issued an interim rule governing the Program on
October 23, 2008 (“Interim Rule”). The TLGP is intended to preserve
confidence and encourage liquidity in the banking system in order to ease
lending to creditworthy businesses and consumers. The TLGP is a
voluntary and time-limited program that will be funded through special fees
charged to participating bank and financial holding companies and FDIC-insured
depository institutions. The program consists of two
components: a temporary guarantee of newly-issued senior unsecured
debt (the Debt Guarantee Program or “DGP”) and a temporary unlimited guarantee
of funds in noninterest-bearing transaction accounts at FDIC-insured
institutions (the Transaction Account Guarantee Program or
“TAGP”). The Corporation and its FDIC-insured subsidiary banks are
eligible to participate in either or both components of the TLGP to the degree
specified in the Interim Rule. As more fully detailed in the Interim
Rule, the DGP specifies that the FDIC will temporarily guarantee (through June
30, 2012) all new senior unsecured debt up to prescribed limits issued by
participating holding companies and insured financial institutions from October
14, 2008 through June 30, 2009. Under the TAGP, the FDIC will provide
an unlimited guarantee for noninterest-bearing transaction accounts in excess of
the existing deposit insurance limit of $250,000 per account. This
coverage is effective on October 14, 2008, and will continue through December
31, 2009.
MARSHALL
& ILSLEY CORPORATION
Notes
to Financial Statements - Continued
September
30, 2008 & 2007 (Unaudited)
The TLGP
became effective on October 14, 2008. For the first 30 days of the
program, the guarantees provided by the program have been offered at no cost to
the Corporation and its FDIC-insured depository institutions. Unless the
Corporation opts out of either or both of the TLGP programs described in the
previous paragraph on or before December 5, 2008, the Corporation will be
assessed fees for its participation in either or both of the
programs. Beginning on November 13, 2008, FDIC-insured institutions
such as the Corporation’s subsidiary banks that have not opted out of the TAGP
will be assessed on a quarterly basis an annualized amount equal to 10 basis
point on balances in noninterest-bearing transaction accounts that exceed the
existing deposit insurance limit of $250,000. Although management has
not made a final decision relative to the continued participation in the TAGP,
management does not believe any assessments under the TAGP would be material to
future operating results.
Beginning
on November 13, 2008, any financial institution such as the Corporation that
have not chosen to opt out of the DGP generally will be assessed an annualized
fee equal to 75 basis points multiplied by the amount of new debt issued under
the program and the remaining term (in years) to maturity or June 30, 2012,
whichever is earlier. The FDIC’s Interim Rule has not yet been finalized and
therefore there is uncertainty about the final requirements, particularily under
the DGP. Management is evaluating continued participation in the
program and will make a final decision as requirements become more
clear.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
MARSHALL
& ILSLEY CORPORATION
|
|
CONSOLIDATED
AVERAGE BALANCE SHEETS (Unaudited)
|
|
($000's)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
892,191
|
|
|
$
|
1,021,536
|
|
|
|
|
|
|
|
|
|
|
Trading
assets
|
|
|
144,359
|
|
|
|
48,772
|
|
Short-term
investments
|
|
|
386,349
|
|
|
|
393,474
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,386,679
|
|
|
|
6,109,732
|
|
Tax-exempt
|
|
|
1,122,791
|
|
|
|
1,278,095
|
|
Total
investment securities
|
|
|
7,509,470
|
|
|
|
7,387,827
|
|
|
|
|
|
|
|
|
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
982,000
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases:
|
|
|
|
|
|
|
|
|
Loans
and leases, net of unearned income
|
|
|
50,032,072
|
|
|
|
44,109,797
|
|
Allowance
for loan and lease losses
|
|
|
(1,083,283
|
)
|
|
|
(444,170
|
)
|
Net
loans and leases
|
|
|
48,948,789
|
|
|
|
43,665,627
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
532,728
|
|
|
|
467,193
|
|
Accrued
interest and other assets
|
|
|
4,650,044
|
|
|
|
3,715,634
|
|
Assets
of discontinued operations
|
|
|
-
|
|
|
|
1,541,940
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
63,063,930
|
|
|
$
|
59,224,003
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
5,908,790
|
|
|
$
|
5,513,063
|
|
Interest
bearing
|
|
|
33,779,664
|
|
|
|
29,331,217
|
|
Total
deposits
|
|
|
39,688,454
|
|
|
|
34,844,280
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased and security repurchase agreements
|
|
|
3,156,595
|
|
|
|
3,058,298
|
|
Other
short-term borrowings
|
|
|
3,257,868
|
|
|
|
1,432,288
|
|
Long-term
borrowings
|
|
|
9,653,290
|
|
|
|
11,901,829
|
|
Accrued
expenses and other liabilities
|
|
|
783,252
|
|
|
|
1,048,080
|
|
Liabilities
of discontinued operations
|
|
|
-
|
|
|
|
177,737
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
56,539,459
|
|
|
|
52,462,512
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
6,524,471
|
|
|
|
6,761,491
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
63,063,930
|
|
|
$
|
59,224,003
|
|
|
|
|
|
|
|
|
|
|
MARSHALL
& ILSLEY CORPORATION
|
|
CONSOLIDATED
AVERAGE BALANCE SHEETS (Unaudited)
|
|
($000's)
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
908,065
|
|
|
$
|
1,007,115
|
|
|
|
|
|
|
|
|
|
|
Trading
assets
|
|
|
161,509
|
|
|
|
49,500
|
|
Short-term
investments
|
|
|
363,150
|
|
|
|
313,011
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,534,247
|
|
|
|
6,147,316
|
|
Tax-exempt
|
|
|
1,183,490
|
|
|
|
1,288,668
|
|
Total
investment securities
|
|
|
7,717,737
|
|
|
|
7,435,984
|
|
|
|
|
|
|
|
|
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
982,000
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases:
|
|
|
|
|
|
|
|
|
Loans
and leases, net of unearned income
|
|
|
49,526,053
|
|
|
|
43,046,109
|
|
Allowance
for loan and lease losses
|
|
|
(775,375
|
)
|
|
|
(433,507
|
)
|
Net
loans and leases
|
|
|
48,750,678
|
|
|
|
42,612,602
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
521,133
|
|
|
|
454,858
|
|
Accrued
interest and other assets
|
|
|
4,546,792
|
|
|
|
3,450,694
|
|
Assets
of discontinued operations
|
|
|
-
|
|
|
|
1,517,183
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
62,969,064
|
|
|
$
|
57,822,947
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
5,788,737
|
|
|
$
|
5,438,374
|
|
Interest
bearing
|
|
|
33,037,533
|
|
|
|
28,437,470
|
|
Total
deposits
|
|
|
38,826,270
|
|
|
|
33,875,844
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased and security repurchase agreements
|
|
|
3,238,550
|
|
|
|
3,192,148
|
|
Other
short-term borrowings
|
|
|
3,303,824
|
|
|
|
1,154,217
|
|
Long-term
borrowings
|
|
|
9,770,371
|
|
|
|
11,823,433
|
|
Accrued
expenses and other liabilities
|
|
|
991,773
|
|
|
|
1,061,269
|
|
Liabilities
of discontinued operations
|
|
|
-
|
|
|
|
199,702
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
56,130,788
|
|
|
|
51,306,613
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
6,838,276
|
|
|
|
6,516,334
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
62,969,064
|
|
|
$
|
57,822,947
|
|
|
|
|
|
|
|
|
|
|
OVERVIEW
The
Corporation returned to profitability in the third quarter of 2008. Compared to
the third quarter of 2007, the Corporation’s third quarter 2008 results
reflected continued loan growth and growth in net interest income and fee-based
income, particularly in its wealth management segment. In addition,
the Corporation generally contained its core operating expense growth. These
positive results were offset by the charges and increased provision for loan and
lease losses related to the Corporation’s real estate loans. Those
charges and increased provision reflect the impact of the continued
deterioration in the national residential real estate markets especially, in
Arizona and the correspondent business channel.
For the
three months ended September 30, 2008, the Corporation reported net income of
$83.1 million or $0.32 per diluted share compared to income from continuing
operations in the third quarter of 2007 of $173.7 million or $0.65 per diluted
share. For the nine months ended September 30, 2008, the Corporation reported a
net loss of $164.4 million or $0.63 per diluted share compared to income from
continuing operations of $521.4 million or $1.97 per diluted share for the nine
months ended September 30, 2007.
The
decrease in income from continuing operations in the third quarter of 2008
compared to the third quarter of 2007 and the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007 was primarily
attributable to the increases in the provision for loan and lease losses and
provision for losses associated with unfunded loan commitments.
The
ongoing deterioration in the national residential real estate markets continued
to adversely affect the Corporation’s loan and lease portfolio during the third
quarter. The Corporation’s construction and development real estate
loans, particularly in Arizona and certain correspondent banking loan
participations, continued to exhibit the largest levels of stress. In addition,
the amount of impairment during the third quarter of 2008 remained elevated due
to the continued depressed state of underlying real estate collateral
values. As a result, net charge-offs and the provision for loan and
lease losses were significantly higher in the third quarter and first nine
months of 2008 when compared to the third quarter and first nine months of
2007. For the three months ended September 30, 2008, the provision
for loan and lease losses and provision for losses associated with unfunded loan
commitments amounted to $155.4 million compared to $41.5 million for the three
months ended September 30, 2007, an increase of $113.9 million. On an
after-tax basis, this increase amounted to approximately $72.8 million or $0.28
per diluted share. For the nine months ended September 30, 2008, the
provision for loan and lease losses and provision for losses associated with
unfunded loan commitments amounted to $1,208.3 million compared to $84.7 million
for the nine months ended September 30, 2007, an increase of $1,123.6
million. On an after-tax basis, this increase amounted to
approximately $718.6 million or $2.77 per diluted share.
Organic
loan growth, disciplined deposit pricing, the ability to access reasonably
priced funding sources and banking acquisitions completed in 2008 and 2007
contributed to the growth in net interest income and other banking sources of
revenues. Despite the volatile markets, the Corporation’s wealth management
segment continued to report growth in fee income.
Throughout
2008, the Corporation has experienced elevated levels of operating expenses due
to the increase in expense associated with collection efforts and carrying
nonperforming assets. The Corporation estimates that the increase in expense
associated with collection efforts and carrying nonperforming assets, net of
related revenue, amounted to $12.7 million for the third quarter of 2008
compared to the third quarter of 2007, which on an after-tax basis was
approximately $0.03 per diluted share. For the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007 the increase in net
expense amounted to $49.7 million, which on an after-tax basis, was
approximately $0.12 per diluted share. In addition, the financial market
disruption in September 2008 resulted in unexpected losses and charges in the
Corporation’s wealth management segment that amounted to $0.04 per diluted share
for the three and nine months ended September 30, 2008.
With
regard to the outlook for the remainder of 2008, current interest rate
volatility occurring in the market together with the numerous other factors that
impact net interest income and the net interest margin have made it very
difficult to project the fourth quarter net interest margin with a reasonable
degree of certainty. Commercial and industrial loans contracted slightly in the
third quarter of 2008 compared to the second quarter of 2008. Commercial and
industrial loan growth is expected to be in the low single-digits in the fourth
quarter of 2008 compared to the fourth quarter of 2007. Commercial
real estate loan growth for the remainder of 2008 is expected to be relatively
modest and consistent with the 1.4% linked quarter loan growth the Corporation
experienced in the third quarter of 2008 compared to the second quarter of 2008.
Wealth management revenue, which is somewhat affected by market volatility and
direction, is expected to show high single-digit to low double-digit growth
rates in 2008 compared to 2007.
There are
indications that the Corporation’s nonperforming loans in Florida may be
stabilizing. However, management expects that the fourth quarter of 2008 will
continue to be a difficult quarter for residential real estate markets. A
weakening and unstable economy has resulted in increased stress in consumer
loans, particularly consumer mortgage loans, especially in Arizona. Management
expects the provision for loan and lease losses will continue to be higher than
its pre-2007 historical experience prior to the crisis in the national
residential real estate markets. The economy, credit environment and
underlying collateral values continue to be rapidly changing and as a result,
there are numerous unknown factors at this time that will ultimately affect the
timing and amount of nonperforming assets, net charge-offs and the provision for
loan and lease losses that will be recognized in the fourth quarter of
2008. In addition, the timing and amount of charge-offs will continue
to be influenced by the Corporation’s strategies for managing its nonperforming
loans and leases. If the economy and real estate markets deteriorate
more than management currently expects, the Corporation will experience
increased levels of nonperforming assets, increased net charge-offs, a higher
provision for loan and lease losses, lower net interest income and increased
operating costs due to the expense associated with collection efforts and the
operating expense of carrying nonperforming assets.
On
November 1, 2007, old Marshall & Ilsley Corporation, the Accounting
Predecessor to new Marshall & Ilsley Corporation (which is referred to as
“M&I” or the “Corporation”) and its wholly owned subsidiary, Metavante
Corporation, the Accounting Predecessor to Metavante Technologies, Inc., (which
is referred to as “Metavante”), became two separate publicly traded companies.
The Corporation refers to this transaction as the “Separation.”
As part
of the Separation, the Corporation received capital contributions of $1,665
million in cash from Metavante, which consisted of a contribution from Metavante
of $1,040 million and proceeds of $625 million from Metavante’s issuance of a
25% equity interest to WPM L.P., an affiliate of Warburg Pincus
LLC. In addition, the Corporation received $982 million in repayment
of indebtedness that was due from Metavante.
The
tangible capital generated from the Separation together with non-credit
operating trends have allowed the Corporation to prudently invest in the
franchise and maintain a strong capital base in the current credit environment.
On October 16, 2008, the Corporation’s Board of Directors declared a $0.32 per
share dividend which will be paid in the fourth quarter of 2008. The Corporation
does not currently expect it will be required to raise additional dilutive
capital in order to continue to maintain its strong capital base. However, the
Corporation has announced that it has received preliminary approval to
participate in the U.S. Treasury Department’s Capital Purchase Program. See Note
18 in Notes to Financial Statements and “Liquidity and Capital Resources” in
this section for a further discussion of the U.S. Treasury Department’s Capital
Purchase Program.
The
Corporation’s actual results for the remainder of 2008 could differ materially
from those expected by management. See “Forward-Looking Statements”
in Item 1A of this report for a discussion of the various risk
factors that could cause actual results to differ materially from expected
results.
ACQUISITION
ACTIVITIES
On
October 13, 2008, the Corporation and Taplin, Canida & Habacht, Inc. (“TCH”)
announced the signing of a definitive agreement for the Corporation to acquire a
majority equity interest in TCH. TCH, based in Miami, Florida is an
institutional fixed income money manager with approximately $7.5 billion of
assets under management as of September 30, 2008. The transaction is not
expected to have a material impact on the Corporation’s financial
results. Substantially all of the initial payment by the Corporation
will be comprised of M&I common stock. The transaction is
expected to close in the fourth quarter of 2008, subject to regulatory approvals
and other customary closing conditions.
On
January 2, 2008, the Corporation completed the acquisition of First Indiana
Corporation (“First Indiana”) based in Indianapolis, Indiana. First
Indiana, with $2.1 billion in consolidated assets as of December 31, 2007, had
32 offices in central Indiana that became branches of M&I Marshall &
Ilsley Bank (“M&I Bank”) on February 2, 2008. Stockholders of
First Indiana received $32.00 in cash for each share of First Indiana common
stock outstanding, or approximately $530.2 million.
See Note
8 – Business Combinations in Notes to Financial Statements for further
discussion of the Corporation’s acquisition activities.
OTHER NOTEWORTHY
TRANSACTIONS AND EVENTS
Some of
the other more noteworthy transactions and events that occurred in the nine
months ended September 30, 2008 and 2007, by quarter, consisted of
the following:
Third
quarter 2008
During
the third quarter of 2008, the Corporation’s wealth management segment
recognized a loss associated with its securities lending activities. As more
fully described in Note 17 in Notes to Financial Statements, Marshall &
Ilsley Trust Company N.A. (“M&I Trust”) provides indemnification against
loss resulting from the default of a borrower of securities. During the third
quarter of 2008, Lehman Brothers declared bankruptcy and failed to return loaned
securities when due. Due to volatile market conditions, the cost of the
replacement securities exceeded the amount of collateral available to purchase
the replacement securities. The loss amounted to $8.4 million and is reported in
the line Other within Other Expense in the Consolidated Statements of
Income.
Certain
entities within the wealth management segment are the investment advisor and
trustee of the M&I Employee Benefit Stable Principal Fund
(“SPF”). The SPF periodically participates in securities lending
activities. Although not obligated to do so, during the third quarter of 2008,
M&I Trust entered into a capital support agreement with SPF due to volatile
market conditions. Under the terms of the agreement, M&I Trust
would be required to contribute capital, under certain specific and defined
circumstances and not to exceed $30.0 million in the aggregate. The agreement
expires December 31, 2008 and contains terms that provide for three month
renewals with all of the significant terms, including maximum contribution
limits, remaining unchanged. The estimated fair value of the contingent
liability under the agreement that is recorded within other liabilities in the
consolidated balance sheet and corresponding expense which is reported in the
line Other within Other Expense in the Consolidated Statements of Income
amounted to $6.6 million. As of November 7, 2008, no contributions
have been made under the agreement.
On an
after-tax basis, these losses and charges in the aggregate amounted to $9.1
million or $0.04 per diluted share.
Second
quarter 2008
The
ongoing deterioration in the national residential real estate markets had a
significant adverse affect on the Corporation’s loan and lease portfolio during
the second quarter. The Corporation’s construction and development
real estate loans, particularly in Arizona, the west coast of Florida and
certain correspondent banking loan participations, exhibited the largest levels
of stress. In addition, the amount of impairment increased during the second
quarter of 2008 due to the decline in underlying real estate collateral
values. As a result, net charge-offs and the provision for loan and
lease losses were significantly higher in the second quarter when compared to
the second quarter of 2007. For the three months ended June 30, 2008,
the provision for loan and lease losses and provision for losses associated with
unfunded loan commitments amounted to $906.0 million compared to $26.0 million
for the three months ended June 30, 2007, an increase of $880.0
million. On an after-tax basis, this increase amounted to
approximately $561.7 million or $2.17 per diluted share. The
increased provision for loan and lease losses and provision for losses
associated with unfunded loan commitments resulted in the Corporation reporting
a net loss for the three months ended June 30, 2008 and is largely responsible
for the reported year to date net loss.
First
quarter 2008
On
January 2, 2008, the Corporation completed its acquisition of First
Indiana.
During
the first quarter of 2008 the Corporation recognized income of $39.1 million due
to the completion of the initial public offering (“IPO”) by Visa. As
a result of the IPO, Visa redeemed 38.7% of the Class B Visa common stock owned
by the Corporation. The gain from the redemption amounted to $26.9 million and
is reported in Net investment securities gains in the Consolidated Statements of
Income. In addition, Visa established an escrow for certain
litigation matters from the proceeds of the IPO. As a result of the
funded escrow, the Corporation reversed $12.2 million of the litigation accruals
that were originally recorded due to the Corporation’s membership interests in
Visa which is reported in Other expense in the Consolidated Statements of
Income. On an after-tax basis, these two Visa-related items increased
net income by approximately $25.4 million or $0.10 per diluted
share.
During
the first quarter of 2008 the Corporation recognized an additional income tax
benefit of approximately $20.0 million, or $0.08 per diluted share, related to
how the TEFRA (interest expense) disallowance should be calculated within a
consolidated group.
Third
quarter 2007
On July
1, 2007, the Corporation completed its acquisition of Excel Bank
Corporation.
During
the third quarter of 2007, the Corporation remarketed the 3.90% STACKS of
M&I Capital Trust B that were originally issued in 2004 as components of the
Corporation’s 6.50% Common SPACES. In connection with the
remarketing, the annual interest rate on the remarketed STACKS was reset at
5.626%, M&I Capital Trust B was liquidated and $400 million of 5.626% senior
notes that mature on August 17, 2009 were issued by the Corporation in exchange
for the outstanding STACKS. Each Common SPACES also included a stock purchase
contract requiring the holder to purchase, in accordance with a settlement rate
formula, shares of the Corporation’s common stock. The Corporation
issued 9,226,951 shares of its common stock in settlement of the stock purchase
contracts in exchange for $400.0 million in cash.
During
the third quarter of 2007, the Corporation purchased $243.3 million of
additional bank-owned life insurance. The net realizable value is
reported, along with the Corporation’s other bank-owned life insurance, in
Accrued interest and other assets in the Consolidated Balance
Sheets. The increase in net realizable value is reported in Life
insurance revenue in the Consolidated Statements of Income.
During
the third quarter of 2007, pre-tax gains resulting from capital markets
investments, sales of investment securities, and interest rate swap terminations
amounted to $14.2 million. Gains in the amount of $8.9 million are reported in
Net investment securities gains and the remainder of the gains are reported in
the Other line of Other Income in the Consolidated Statements of
Income.
Second
quarter 2007
On April
1, 2007, the Corporation completed its acquisition of United Heritage Bankshares
of Florida, Inc. (“United Heritage”) and on April 20, 2007, the Corporation
completed its acquisition of North Star Financial Corporation (“North
Star”).
During
the second quarter of 2007, the Corporation completed two accelerated share
repurchase transactions under its authorized Stock Repurchase
Program. In the aggregate, the Corporation acquired 6.1 million
shares of its common stock in these transactions. Total consideration
in these transactions amounted to $297.3 million and consisted of cash of $294.7
million and common treasury stock valued at $2.6 million. In
conjunction with the first accelerated share repurchase transaction executed
during the second quarter of 2007, the Corporation used 54,035 shares of its
treasury common stock to share-settle the final settlement
obligation.
During
the second quarter of 2007, the Corporation sold its investment in MasterCard
Class B common shares and realized a pre-tax gain of $19.0
million. That gain is reported in Net investment securities gains in
the Consolidated Statements of Income. The Corporation sold its
investment in order to monetize the significant appreciation in the market price
of the common stock of MasterCard since its initial public
offering.
First
quarter 2007
The
Corporation called $200 million 7.65% junior subordinated deferrable interest
debentures and the related M&I Capital Trust A 7.65% trust preferred
securities, which resulted in a loss of $9.5 million that is reported in Loss on
termination of debt in the Consolidated Statements of Income. On an
after-tax basis, the loss amounted to $6.2 million or $0.02 per diluted
share.
NET INTEREST
INCOME
Net
interest income is the difference between interest income on earning assets and
interest expense on interest bearing liabilities.
Net
interest income for the third quarter of 2008 amounted to $440.6 million
compared to $403.2 million reported for the third quarter of 2007, an increase
of $37.4 million or 9.3%. For the nine months ended September 30,
2008, net interest income amounted to $1,318.7 million compared to $1,197.4
million reported for the nine months ended September 30, 2007, an increase of
$121.3 million or 10.1%. Acquisition-related and organic loan growth
and the cash received in the Separation were the primary contributors to the
increase in net interest income. Factors negatively affecting net
interest income compared to the prior year included the impact of the financing
costs associated with the 2008 and 2007 banking acquisitions, the cost of common
stock repurchases, the cost of purchased bank-owned life insurance, the impact
on interest income associated with the increase in nonaccrual loans and leases,
tightening loan spreads, higher wholesale funding costs and a general shift in
the bank issued deposit mix from lower cost to higher cost deposit
products.
Average
earning assets increased $5.2 billion or 9.7% in the third quarter of 2008
compared to the third quarter of 2007. Average loans and leases
accounted for $5.9 billion of the growth in average earning assets in the three
months ended September 30, 2008 compared to the three months ended September 30,
2007. Average investment securities, short-term investments and
trading assets increased approximately $0.3 billion in the third quarter of 2008
over the prior year third quarter. Metavante’s repayment
of its indebtedness to the Corporation on November 1, 2007 resulted
in a $1.0 billion decrease in average earning assets in the third quarter of
2008 compared to the third quarter of 2007.
Average
interest bearing liabilities amounted to $49.8 billion in the third quarter of
2008 compared to $45.7 billion in the third quarter of 2007, an increase of $4.1
billion or 9.0%. Average interest bearing deposits increased $4.4
billion or 15.2% in the third quarter of 2008 compared to the third quarter of
2007. Average total borrowings decreased $0.3 billion or 2.0% in the
third quarter of 2008 compared to the same period in 2007.
Average
noninterest bearing deposits increased $0.4 billion or 7.2% in the three months
ended September 30, 2008 compared to the three months ended September 30,
2007.
For the
nine months ended September 30, 2008, average earning assets amounted to $57.8
billion compared to $51.8 billion for the nine months ended September 30, 2007,
an increase of $6.0 billion or 11.5%. Average loans and leases
accounted for $6.5 billion of the growth in average earning assets in the nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007. Average investment securities, short-term investments and
trading assets increased approximately $0.5 billion over the comparative nine
month periods. Metavante’s repayment of its indebtedness to the Corporation on
November 1, 2007 resulted in a decrease of $1.0 billion in average earning
assets in the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007.
Average
interest bearing liabilities increased $4.7 billion or 10.6% in the nine months
ended September 30, 2008 compared to the nine months ended September 30,
2007. Average interest bearing deposits increased $4.6 billion or
16.2% in the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007. Average total borrowings increased
approximately $0.1 billion or 0.9% over the comparative nine month
period.
For the
nine months ended September 30, 2008 compared to the nine months ended September
30, 2007, average noninterest bearing deposits increased $0.4 billion or
6.4%.
The
growth and composition of the Corporation’s quarterly average loan and lease
portfolio for the current quarter and previous four quarters are reflected in
the following table ($ in millions):
Consolidated Average Loans
and Leases
|
|
2008
|
|
|
2007
|
|
|
Growth
Pct.
|
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
|
|
|
Prior
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Annual
|
|
|
Quarter
|
|
Commercial
loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
15,002
|
|
|
$
|
15,086
|
|
|
$
|
14,389
|
|
|
$
|
13,264
|
|
|
$
|
12,755
|
|
|
|
17.6
|
%
|
|
|
(0.6
|
)
%
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages
|
|
|
12,928
|
|
|
|
12,695
|
|
|
|
12,480
|
|
|
|
11,817
|
|
|
|
11,592
|
|
|
|
11.5
|
|
|
|
1.8
|
|
Construction
|
|
|
4,433
|
|
|
|
4,431
|
|
|
|
4,463
|
|
|
|
4,044
|
|
|
|
3,816
|
|
|
|
16.2
|
|
|
|
0.0
|
|
Total
commercial real estate
|
|
|
17,361
|
|
|
|
17,126
|
|
|
|
16,943
|
|
|
|
15,861
|
|
|
|
15,408
|
|
|
|
12.7
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lease financing
|
|
|
511
|
|
|
|
517
|
|
|
|
522
|
|
|
|
528
|
|
|
|
510
|
|
|
|
0.2
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commercial loans and leases
|
|
|
32,874
|
|
|
|
32,729
|
|
|
|
31,854
|
|
|
|
29,653
|
|
|
|
28,673
|
|
|
|
14.7
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
|
7,885
|
|
|
|
7,944
|
|
|
|
7,693
|
|
|
|
6,966
|
|
|
|
6,774
|
|
|
|
16.4
|
|
|
|
(0.7
|
)
|
Construction
|
|
|
2,284
|
|
|
|
2,531
|
|
|
|
2,605
|
|
|
|
2,764
|
|
|
|
2,803
|
|
|
|
(18.5
|
)
|
|
|
(9.8
|
)
|
Total
residential real estate
|
|
|
10,169
|
|
|
|
10,475
|
|
|
|
10,298
|
|
|
|
9,730
|
|
|
|
9,577
|
|
|
|
6.2
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student
|
|
|
76
|
|
|
|
114
|
|
|
|
121
|
|
|
|
95
|
|
|
|
62
|
|
|
|
23.3
|
|
|
|
(33.0
|
)
|
Credit
card
|
|
|
265
|
|
|
|
257
|
|
|
|
258
|
|
|
|
255
|
|
|
|
248
|
|
|
|
6.9
|
|
|
|
3.1
|
|
Home
equity loans and lines
|
|
|
5,027
|
|
|
|
4,835
|
|
|
|
4,670
|
|
|
|
4,344
|
|
|
|
4,248
|
|
|
|
18.3
|
|
|
|
4.0
|
|
Other
|
|
|
1,425
|
|
|
|
1,322
|
|
|
|
1,211
|
|
|
|
1,170
|
|
|
|
1,116
|
|
|
|
27.7
|
|
|
|
7.8
|
|
Total
personal loans
|
|
|
6,793
|
|
|
|
6,528
|
|
|
|
6,260
|
|
|
|
5,864
|
|
|
|
5,674
|
|
|
|
19.7
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
lease financing
|
|
|
196
|
|
|
|
199
|
|
|
|
198
|
|
|
|
195
|
|
|
|
186
|
|
|
|
5.7
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
personal loans and leases
|
|
|
17,158
|
|
|
|
17,202
|
|
|
|
16,756
|
|
|
|
15,789
|
|
|
|
15,437
|
|
|
|
11.2
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated average
loans and
leases
|
|
$
|
50,032
|
|
|
$
|
49,931
|
|
|
$
|
48,610
|
|
|
$
|
45,442
|
|
|
$
|
44,110
|
|
|
|
13.4
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated average loans and leases increased $5.9 billion or 13.4% in the
third quarter of 2008 compared to the third quarter of 2007. Total
consolidated average loan and lease organic growth, excluding the effect of the
banking acquisitions, was 9.5% in the third quarter of 2008 compared to the
third quarter of 2007. Approximately $1.6 billion of the growth in
total consolidated average loans and leases was attributable to the banking
acquisitions and $4.3 billion of the growth was organic. Of the $1.6
billion of average growth attributable to the banking acquisitions, $0.4 billion
was attributable to average commercial loans and leases, $0.6 billion was
attributable to average commercial real estate loans and $0.4 billion was
attributable to average residential real estate loans. Of the $4.3
billion of average loan and lease organic growth, $1.9 billion was attributable
to average commercial loans and leases, $1.4 billion was attributable to average
commercial real estate loans, and $0.1 billion was attributable to average
residential real estate loans. Average home equity loans and lines
increased $0.8 billion or 18.3% in the third quarter of 2008 compared to the
third quarter of 2007. Home equity loan and line growth attributable
to the acquisitions was $0.2 billion in the third quarter of 2008 compared to
the third quarter of 2007. All other average personal loans and leases increased
approximately $0.3 billion in the third quarter of 2008 compared to the same
period the prior year.
For the
nine months ended September 30, 2008, total consolidated average loans and
leases increased $6.5 billion or 15.1% compared to the nine months ended
September 30, 2007. Total consolidated average loan and lease organic
growth, excluding the effect of the banking acquisitions, was 9.7% for the nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007. Approximately $2.1 billion of the growth in total consolidated
average loans and leases was attributable to the banking acquisitions and $4.4
billion of the growth was organic. Of the $2.1 billion of average
growth attributable to the banking acquisitions, $0.6 billion was attributable
to average commercial loans, $0.9 billion was attributable to average commercial
real estate loans and $0.4 billion was attributable to average residential real
estate loans. Of the $4.4 billion of average loan and lease organic growth, $1.8
billion was attributable to average commercial loans and leases, $1.4 billion
was attributable to average commercial real estate loans, and $0.5 billion was
attributable to average residential real estate loans. Average home
equity loans and lines increased $0.6 billion or 13.9% in the nine months ended
September 30, 2008 compared to the nine months ended September 30,
2007. All other average personal loans and leases increased $0.3
billion in the nine months ended September 30, 2008 compared to the same period
in 2007.
Total
average commercial loan and lease organic growth was 13.8% in the third quarter
of 2008 compared to the third quarter of 2007. For the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007,
total average commercial loan and lease organic growth was 13.2%. New
business and increased utilization of credit lines by existing customers across
the markets the Corporation serves resulted in the strong organic growth in
commercial loans and leases in the first nine months of
2008. Management believes that year-over-year organic commercial loan
growth (as a percentage) will be slower than the growth experienced in the nine
months ended September 30, 2008. Management expects organic commercial loan and
lease growth will be in the low single-digit percentage range in the fourth
quarter of 2008 compared to the fourth quarter of 2007.
Total
average commercial real estate loan organic growth was 8.6% in the third quarter
of 2008 compared to the third quarter of 2007. For the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007,
total average commercial real estate loan organic growth was
9.0%. The Corporation continues to experience slowing in construction
and development activity and to some extent throughout its commercial
real estate business. Commercial real estate loan growth for the remainder of
2008 is expected to be relatively modest and consistent with the 1.4% linked
quarter loan growth the Corporation experienced in the third quarter of 2008
compared to the second quarter of 2008.
From a
production standpoint, residential real estate loan closings in the third
quarter of 2008 were $0.5 billion compared to $0.9 billion in the second quarter
of 2008 and $1.2 billion in the third quarter of 2007. For the nine
months ended September 30, 2008, residential real estate closings were $2.8
billion compared to $3.8 billion in the nine months ended September 30,
2007. The Corporation sells some of its residential real estate
production (residential real estate and home equity loans) in the secondary
market. Selected residential real estate loans with rate and term
characteristics that are considered desirable are retained in the
portfolio. For the three months ended September 30, 2008 and 2007,
real estate loans sold to investors amounted to $0.3 billion,
respectively. For the nine months ended September 30, 2008 and 2007,
real estate loans sold to investors amounted to $1.2 billion and $1.5 billion,
respectively. At September 30, 2008 and 2007, the Corporation had
approximately $19.0 million and $46.4 million of residential mortgage loans and
home equity loans held for sale, respectively. Gains from the sale of mortgage
loans amounted to $4.5 million in the third quarter of 2008 compared to $5.1
million in the third quarter of 2007. For the nine months ended
September 30, 2008, gains from the sale of mortgage loans amounted to $18.6
million compared to $24.3 million in the nine months ended September 30,
2007.
Average
home equity loan and line organic growth amounted to $0.6 billion or 12.9% in
the third quarter of 2008 compared to the third quarter of 2007. For
the nine months ended September 30, 2008, average home equity loan and line
organic growth amounted to $0.4 billion or 8.2% compared to the nine months
ended September 30, 2007. This growth reflects, in part, the decline
in the national investor base and the shift of more production that meets the
Corporation’s underwriting criteria to portfolio. Management expects this trend
to continue in the near-term. Average home equity loan and line growth due to
the acquisitions amounted to $0.2 billion in each of the three and nine months
ended September 30, 2008 compared to the three and nine months ended September
30, 2007.
The
sub-prime mortgage banking environment has been experiencing considerable strain
from rising delinquencies and liquidity pressures and some sub-prime lenders
have failed. The Corporation considers sub-prime loans to be those loans with
high loan-to-value, temporary below market interest rates, which are sometimes
referred to as teaser rates, or interest deferral options at the time of
origination and credit scores that are less than 620. The Corporation
believes that loans with these characteristics have contributed to the high
levels of foreclosures and losses the industry is currently
experiencing. The Corporation does not originate sub-prime mortgages
or sub-prime home equity loans or lines for its own
portfolio. However, in the fourth quarter of 2007 and third quarter
of 2008 the Corporation experienced a loss and may continue to have loss
exposure from loans to entities that are associated with sub-prime mortgage
banking. The Corporation does not originate mortgage loans with
variable interest-only payment plans, commonly referred to as “option
ARMs.” Option ARMs may include low introductory interest plans with
significant escalation in the rate when the agreement calls for the rate to
reset. The borrower may also be able to fix the monthly payment
amount, potentially resulting in negative amortization of the
loan. The Corporation does not originate mortgage loans that permit
negative amortization. A negative amortization provision in a
mortgage allows the borrower to defer payment of a portion or all of the monthly
interest accrued on the mortgage and to add the deferred interest amount to the
mortgage’s principal balance subject to a stated maximum permitted amount of
negative amortization. Once the maximum permitted amount of negative
amortization is reached, the borrowers’ monthly payment is reset and is usually
significantly higher than the monthly payment made during periods of negative
amortization. The Corporation does participate in the Alt-A
market. The Corporation’s Alt-A products are offered to borrowers
with higher credit scores and lower loan-to-value ratios who choose the
convenience of less than full documentation in exchange for higher reserve
requirements and a higher mortgage rate. Subsequent changes to the Corporation’s
Alt-A products include full verification of the borrower’s income and ability to
service the debt. The Corporation’s adjustable rate mortgage loans
are underwritten to fully-indexed rates.
Average
automobile loans, which are included in other personal loans in the table above,
amounted to $527.2 million in the third quarter of 2008 compared to $375.5
million in the third quarter of 2007, an increase of $151.7 million or
40.4%. For the nine months ended September 30, 2008, average
automobile loans amounted to $498.2 million compared to $340.6 million in the
nine months ended September 30, 2007, an increase of $157.6 million or
46.3%. Since the second quarter of 2007, the Corporation discontinued
the sale and securitization of automobile loans into the secondary
market. Auto loans securitized and sold during the nine months ended
September 30, 2007 amounted to $0.2 billion. For the nine months ended September
30, 2007, net gains from the sale and securitization of auto loans amounted to
$1.1 million.
The
Corporation refers to certain types of loans that are secured by real estate as
construction and development loans. Certain construction and development loans
currently have a higher risk profile because the value of the underlying
collateral is dependent on the housing-related real estate markets and these
loans are somewhat concentrated in markets experiencing elevated levels of
stress. Construction and development loans consist of :
Commercial
Construction
- Loans primarily to mid-sized local and regional companies
to construct a variety of commercial projects.
Commercial Land
-
Loans primarily to mid-sized local and regional companies to acquire and develop
land for a variety of commercial projects.
Residential Construction by
Individuals
- Loans to individuals to construct 1-4 family
homes.
Residential Land
-
Loans primarily to individuals and mid-sized local and regional builders to
acquire and develop land for 1-4 family homes.
Residential Construction by
Developers
- Loans primarily to mid-sized local and regional builders to
construct 1-4 family homes in residential subdivisions.
The
growth and composition of the Corporation’s quarterly average construction and
development loans for the current quarter and previous four quarters are
reflected in the following table ($ in millions):
Consolidated
Average Construction and Development Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Growth
Pct.
|
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
|
|
|
Prior
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Annual
|
|
|
Quarter
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
4,433
|
|
|
$
|
4,431
|
|
|
$
|
4,463
|
|
|
$
|
4,044
|
|
|
$
|
3,816
|
|
|
|
16.2
|
%
|
|
|
0.0
|
%
|
Land
|
|
|
986
|
|
|
|
992
|
|
|
|
973
|
|
|
|
897
|
|
|
|
864
|
|
|
|
14.0
|
|
|
|
(0.7
|
)
|
Total
commercial
|
|
|
5,419
|
|
|
|
5,423
|
|
|
|
5,436
|
|
|
|
4,941
|
|
|
|
4,680
|
|
|
|
15.8
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
by individuals
|
|
|
1,009
|
|
|
|
1,013
|
|
|
|
1,010
|
|
|
|
1,055
|
|
|
|
1,012
|
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
Land
|
|
|
2,254
|
|
|
|
2,419
|
|
|
|
2,511
|
|
|
|
2,521
|
|
|
|
2,497
|
|
|
|
(9.7
|
)
|
|
|
(6.8
|
)
|
Construction
by developers
|
|
|
1,275
|
|
|
|
1,518
|
|
|
|
1,595
|
|
|
|
1,709
|
|
|
|
1,791
|
|
|
|
(28.8
|
)
|
|
|
(16.0
|
)
|
Total
residential
|
|
|
4,538
|
|
|
|
4,950
|
|
|
|
5,116
|
|
|
|
5,285
|
|
|
|
5,300
|
|
|
|
(14.4
|
)
|
|
|
(8.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated average construction
and development
loans
|
|
$
|
9,957
|
|
|
$
|
10,373
|
|
|
$
|
10,552
|
|
|
$
|
10,226
|
|
|
$
|
9,980
|
|
|
|
(0.2
|
)
%
|
|
|
(4.0
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated average construction and development loans decreased approximately
$0.02 billion or 0.2% in the third quarter of 2008 compared to the third quarter
of 2007. Total consolidated average construction and development loans in the
third quarter of 2008 include approximately $0.3 billion of average construction
and development loans that were attributable to the banking acquisitions. Total
consolidated average construction and development loans decreased $0.4 billion
or 4.0% in the third quarter of 2008 compared to the second quarter of
2008.
At
September 30, 2008, total consolidated construction and development loans
outstanding amounted to $9.8 billion. Approximately $3.8 billion or 38.7% of
these loans are loans associated with Arizona, the west coast of Florida and
correspondent banking business channels. Nonperforming construction and
development loans represent 60.6% of the Corporation’s total consolidated
nonperforming loans and leases at September 30, 2008. Nonperforming construction
and development loans associated with Arizona, the west coast of Florida and
correspondent banking business channels represent 42.0% of the Corporation’s
total consolidated nonperforming loans and leases at September 30,
2008.
The
growth and composition of the Corporation’s quarterly average deposits for the
current and previous four quarters are as follows ($ in millions):
Consolidated Average
Deposits
|
|
2008
|
|
|
2007
|
|
|
Growth
Pct.
|
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
|
|
|
Prior
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Annual
|
|
|
Quarter
|
|
Bank
issued deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,305
|
|
|
$
|
4,168
|
|
|
$
|
4,004
|
|
|
$
|
4,016
|
|
|
$
|
3,977
|
|
|
|
8.2
|
%
|
|
|
3.3
|
%
|
Personal
|
|
|
1,005
|
|
|
|
1,056
|
|
|
|
1,018
|
|
|
|
943
|
|
|
|
951
|
|
|
|
5.7
|
|
|
|
(4.8
|
)
|
Other
|
|
|
599
|
|
|
|
604
|
|
|
|
607
|
|
|
|
604
|
|
|
|
585
|
|
|
|
2.4
|
|
|
|
(0.8
|
)
|
Total
noninterest
bearing deposits
|
|
|
5,909
|
|
|
|
5,828
|
|
|
|
5,629
|
|
|
|
5,563
|
|
|
|
5,513
|
|
|
|
7.2
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing activity deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and NOW
|
|
|
3,293
|
|
|
|
3,273
|
|
|
|
3,202
|
|
|
|
2,842
|
|
|
|
2,899
|
|
|
|
13.6
|
|
|
|
0.6
|
|
Money
market
|
|
|
9,072
|
|
|
|
9,674
|
|
|
|
9,784
|
|
|
|
8,987
|
|
|
|
8,853
|
|
|
|
2.5
|
|
|
|
(6.2
|
)
|
Foreign
activity
|
|
|
1,813
|
|
|
|
1,834
|
|
|
|
1,965
|
|
|
|
2,050
|
|
|
|
2,067
|
|
|
|
(12.3
|
)
|
|
|
(1.1
|
)
|
Total
interest bearing
activity
deposits
|
|
|
14,178
|
|
|
|
14,781
|
|
|
|
14,951
|
|
|
|
13,879
|
|
|
|
13,819
|
|
|
|
2.6
|
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
CDs and time deposits
|
|
|
5,152
|
|
|
|
4,813
|
|
|
|
4,655
|
|
|
|
4,449
|
|
|
|
4,778
|
|
|
|
7.8
|
|
|
|
7.0
|
|
CDs
greater than $100,000
|
|
|
3,881
|
|
|
|
4,074
|
|
|
|
4,203
|
|
|
|
3,897
|
|
|
|
4,010
|
|
|
|
(3.2
|
)
|
|
|
(4.7
|
)
|
Total
time deposits
|
|
|
9,033
|
|
|
|
8,887
|
|
|
|
8,858
|
|
|
|
8,346
|
|
|
|
8,788
|
|
|
|
2.8
|
|
|
|
1.6
|
|
Total
bank issued deposits
|
|
|
29,120
|
|
|
|
29,496
|
|
|
|
29,438
|
|
|
|
27,788
|
|
|
|
28,120
|
|
|
|
3.6
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
|
1,473
|
|
|
|
1,525
|
|
|
|
1,903
|
|
|
|
1,823
|
|
|
|
2,621
|
|
|
|
(43.8
|
)
|
|
|
(3.5
|
)
|
Brokered
CDs
|
|
|
8,295
|
|
|
|
7,090
|
|
|
|
5,102
|
|
|
|
3,734
|
|
|
|
3,261
|
|
|
|
154.4
|
|
|
|
17.0
|
|
Foreign
time
|
|
|
800
|
|
|
|
942
|
|
|
|
1,285
|
|
|
|
1,297
|
|
|
|
842
|
|
|
|
(5.0
|
)
|
|
|
(15.1
|
)
|
Total
wholesale deposits
|
|
|
10,568
|
|
|
|
9,557
|
|
|
|
8,290
|
|
|
|
6,854
|
|
|
|
6,724
|
|
|
|
57.2
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated
average deposits
|
|
$
|
39,688
|
|
|
$
|
39,053
|
|
|
$
|
37,728
|
|
|
$
|
34,642
|
|
|
$
|
34,844
|
|
|
|
13.9
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
total bank issued deposits increased $1.0 billion or 3.6% in the third quarter
of 2008 compared to the third quarter of 2007. Excluding the effect
of the banking acquisitions, average total bank issued deposits decreased
approximately $0.6 billion or 2.0% in the third quarter of 2008 compared to the
third quarter of 2007. Approximately $1.6 billion of the growth in
average total bank issued deposits was attributable to the banking
acquisitions. Of the $1.6 billion of average growth attributable to
the banking acquisitions, $0.2 billion was attributable to average noninterest
bearing deposits, $1.0 billion was attributable to average interest bearing
activity deposits and $0.4 billion was attributable to average time
deposits. Of the $0.6 billion decrease in organic average bank issued
deposits, average interest bearing activity deposits decreased $0.6 billion,
average time deposits declined $0.2 billion and average noninterest bearing
deposits increased $0.2 billion in the third quarter of 2008 compared to the
third quarter of 2007.
For the
nine months ended September 30, 2008, average total bank issued deposits
increased $1.9 billion or 7.0% compared to the nine months ended September 30,
2007. Excluding the effect of the banking acquisitions, average total
bank issued deposits decreased approximately $0.1 billion or 0.3% in the nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007. Approximately $2.0 billion of the growth in average total bank
issued deposits was attributable to the banking acquisitions. Of the
$2.0 billion of average growth attributable to the banking acquisitions, $0.3
billion was attributable to average noninterest bearing deposits, $1.1 billion
was attributable to average interest bearing activity deposits and $0.6 billion
was attributable to average time deposits. Of the $0.1 billion
decrease in organic average bank issued deposits, average time deposits declined
$0.3 billion and average interest bearing activity deposits
increased $0.2 billion, while average noninterest bearing deposits were
relatively unchanged in the first nine months of 2008 compared to the first nine
months of 2007.
Noninterest
bearing deposit balances tend to exhibit some seasonality with a trend of
balances declining somewhat in the early part of the year followed by growth in
balances throughout the remainder of the year. A portion of the
noninterest balances, especially commercial balances, is sensitive to the
interest rate environment. Larger balances tend to be maintained when
overall interest rates are low and smaller balances tend to be maintained as
overall interest rates increase.
As a
result of the recent increased level of high-priced competition and the
Corporation’s decision to maintain its pricing discipline, organic growth in
average total bank issued interest bearing deposits was relatively unchanged in
the first nine months of 2008 compared to first nine months of
2007. The Corporation continued to experience shifts in the bank
issued deposit mix. In their search for higher yields, both new and
existing customers have been migrating their deposit balances to higher cost
deposit products. Management expects this behavior to
continue.
Wholesale
deposits are funds in the form of deposits generated through distribution
channels other than the Corporation’s own banking branches. The
Corporation continues to make use of longer-term wholesale funding alternatives,
especially brokered and institutional certificates of deposit. The weighted
average maturity of brokered and institutional certificates of deposit issued in
2008 was 12.4 years and the weighted average remaining term of outstanding
brokered and institutional certificates of deposit at September 30, 2008 was
10.7 years. These deposits allow the Corporation’s bank subsidiaries
to gather funds across a wider geographic base and at pricing levels considered
attractive, where the underlying depositor may be retail or
institutional. For the three months ended September 30, 2008, average
wholesale deposits increased $3.8 billion, or 57.2% compared to the three months
ended September 30, 2007. For the nine months ended September 30,
2008 average wholesale deposits increased $3.0 billion, or 46.9% compared to the
nine months ended September 30, 2007. Management currently believes that it has
adequate liquidity to ensure that funds are available to the Corporation and
each of its banks to satisfy their cash flow requirements. However,
if capital markets deteriorate more than management currently expects, the
Corporation could experience stress on its liquidity position.
Total
borrowings amounted to $16.0 billion at September 30, 2008 compared to $16.7
billion at December 31, 2007. During the second quarter of 2008, the
Corporation called $15 million in aggregate principal amount of its floating
rate junior subordinated deferrable interest debentures and the related $10
million EBC Statutory Trust I trust preferred securities and $5 million EBC
Statutory Trust II trust preferred securities. Also during the second
quarter of 2008, the Corporation called $12 million in principal amount of its
junior subordinated deferrable interest debentures and the related cumulative
preferred capital securities which were acquired in conjunction with the
acquisition of First Indiana in the first quarter of 2008. No gain or loss was
recognized as a result of these transactions.
During
the first quarter of 2007, the Corporation called its $200 million in principal
amount of 7.65% junior subordinated deferrable interest debentures and the
related M&I Capital Trust A 7.65% trust preferred securities. As previously
discussed, the loss realized on this transaction amounted to $9.5 million and is
reported as Loss on termination of debt in the Consolidated Statements of
Income.
The
Corporation’s consolidated average interest earning assets and interest bearing
liabilities, interest earned and interest paid for the three and nine months
ended September 30, 2008 and 2007, are presented in the following tables ($ in
millions):
Consolidated
Yield and Cost Analysis
|
|
T
hree
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Yield
or
|
|
|
Average
|
|
|
|
|
|
Yield
or
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
(b)
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
(b)
|
|
Loans
and leases: (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans and leases
|
|
$
|
15,513.1
|
|
|
$
|
206.1
|
|
|
|
5.29
|
%
|
|
$
|
13,264.4
|
|
|
$
|
254.5
|
|
|
|
7.61
|
%
|
Commercial
real estate loans
|
|
|
17,360.7
|
|
|
|
254.1
|
|
|
|
5.82
|
|
|
|
15,408.6
|
|
|
|
291.8
|
|
|
|
7.51
|
|
Residential
real estate loans
|
|
|
10,168.6
|
|
|
|
146.3
|
|
|
|
5.72
|
|
|
|
9,577.2
|
|
|
|
172.4
|
|
|
|
7.14
|
|
Home
equity loans and lines
|
|
|
5,027.0
|
|
|
|
77.8
|
|
|
|
6.16
|
|
|
|
4,247.8
|
|
|
|
80.5
|
|
|
|
7.51
|
|
Personal
loans and leases
|
|
|
1,962.7
|
|
|
|
30.4
|
|
|
|
6.16
|
|
|
|
1,611.8
|
|
|
|
31.3
|
|
|
|
7.71
|
|
Total
loans and leases
|
|
|
50,032.1
|
|
|
|
714.7
|
|
|
|
5.68
|
|
|
|
44,109.8
|
|
|
|
830.5
|
|
|
|
7.47
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
982.0
|
|
|
|
10.8
|
|
|
|
4.36
|
|
Investment
securities (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,386.7
|
|
|
|
68.9
|
|
|
|
4.25
|
|
|
|
6,109.7
|
|
|
|
78.0
|
|
|
|
4.99
|
|
Tax
Exempt (a)
|
|
|
1,122.8
|
|
|
|
19.1
|
|
|
|
6.78
|
|
|
|
1,278.1
|
|
|
|
21.3
|
|
|
|
6.62
|
|
Total
investment securities
|
|
|
7,509.5
|
|
|
|
88.0
|
|
|
|
4.62
|
|
|
|
7,387.8
|
|
|
|
99.3
|
|
|
|
5.27
|
|
Trading
assets (a)
|
|
|
144.4
|
|
|
|
0.5
|
|
|
|
1.26
|
|
|
|
48.8
|
|
|
|
0.3
|
|
|
|
1.98
|
|
Other
short-term investments
|
|
|
386.3
|
|
|
|
2.2
|
|
|
|
2.26
|
|
|
|
393.5
|
|
|
|
5.3
|
|
|
|
5.30
|
|
Total
interest earning assets
|
|
$
|
58,072.3
|
|
|
$
|
805.4
|
|
|
|
5.51
|
%
|
|
$
|
52,921.9
|
|
|
$
|
946.2
|
|
|
|
7.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
issued interest
bearing activity deposits
|
|
$
|
14,178.3
|
|
|
$
|
47.4
|
|
|
|
1.33
|
%
|
|
$
|
13,818.7
|
|
|
$
|
126.8
|
|
|
|
3.64
|
%
|
Bank
issued time deposits
|
|
|
9,033.0
|
|
|
|
85.4
|
|
|
|
3.76
|
|
|
|
8,788.1
|
|
|
|
110.4
|
|
|
|
4.98
|
|
Total
bank issued deposits
|
|
|
23,211.3
|
|
|
|
132.8
|
|
|
|
2.28
|
|
|
|
22,606.8
|
|
|
|
237.2
|
|
|
|
4.16
|
|
Wholesale
deposits
|
|
|
10,568.4
|
|
|
|
81.1
|
|
|
|
3.05
|
|
|
|
6,724.4
|
|
|
|
87.5
|
|
|
|
5.16
|
|
Total
interest bearing deposits
|
|
|
33,779.7
|
|
|
|
213.9
|
|
|
|
2.52
|
|
|
|
29,331.2
|
|
|
|
324.7
|
|
|
|
4.39
|
|
Short-term
borrowings
|
|
|
6,414.4
|
|
|
|
34.6
|
|
|
|
2.15
|
|
|
|
4,490.6
|
|
|
|
58.5
|
|
|
|
5.17
|
|
Long-term
borrowings
|
|
|
9,653.3
|
|
|
|
109.5
|
|
|
|
4.51
|
|
|
|
11,901.8
|
|
|
|
152.8
|
|
|
|
5.09
|
|
Total
interest bearing liabilities
|
|
$
|
49,847.4
|
|
|
$
|
358.0
|
|
|
|
2.86
|
%
|
|
$
|
45,723.6
|
|
|
$
|
536.0
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (FTE)
|
|
|
|
|
|
$
|
447.4
|
|
|
|
3.06
|
%
|
|
|
|
|
|
$
|
410.2
|
|
|
|
3.07
|
%
|
Net
interest spread (FTE)
|
|
|
|
|
|
|
|
|
|
|
2.65
|
%
|
|
|
|
|
|
|
|
|
|
|
2.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Fully
taxable equivalent (“FTE”) basis, 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.
|
Consolidated
Yield and Cost Analysis
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Yield
or
|
|
|
Average
|
|
|
|
|
|
Yield
or
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
(b)
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
(b)
|
|
Loans
and leases: (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans and leases
|
|
$
|
15,342.5
|
|
|
$
|
646.2
|
|
|
|
5.63
|
%
|
|
$
|
12,982.8
|
|
|
$
|
738.4
|
|
|
|
7.60
|
%
|
Commercial
real estate loans
|
|
|
17,144.3
|
|
|
|
787.4
|
|
|
|
6.13
|
|
|
|
14,872.5
|
|
|
|
841.2
|
|
|
|
7.56
|
|
Residential
real estate loans
|
|
|
10,313.1
|
|
|
|
467.7
|
|
|
|
6.06
|
|
|
|
9,377.4
|
|
|
|
508.3
|
|
|
|
7.25
|
|
Home
equity loans and lines
|
|
|
4,844.7
|
|
|
|
233.2
|
|
|
|
6.43
|
|
|
|
4,255.2
|
|
|
|
239.5
|
|
|
|
7.53
|
|
Personal
loans and leases
|
|
|
1,881.5
|
|
|
|
91.4
|
|
|
|
6.49
|
|
|
|
1,558.2
|
|
|
|
90.8
|
|
|
|
7.79
|
|
Total
loans and leases
|
|
|
49,526.1
|
|
|
|
2,225.9
|
|
|
|
6.00
|
|
|
|
43,046.1
|
|
|
|
2,418.2
|
|
|
|
7.51
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
982.0
|
|
|
|
32.4
|
|
|
|
4.41
|
|
Investment
securities (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,534.2
|
|
|
|
218.2
|
|
|
|
4.45
|
|
|
|
6,147.3
|
|
|
|
233.8
|
|
|
|
5.03
|
|
Tax
Exempt (a)
|
|
|
1,183.5
|
|
|
|
60.2
|
|
|
|
6.85
|
|
|
|
1,288.7
|
|
|
|
64.4
|
|
|
|
6.74
|
|
Total
investment securities
|
|
|
7,717.7
|
|
|
|
278.4
|
|
|
|
4.81
|
|
|
|
7,436.0
|
|
|
|
298.2
|
|
|
|
5.32
|
|
Trading
assets (a)
|
|
|
161.5
|
|
|
|
1.6
|
|
|
|
1.29
|
|
|
|
49.5
|
|
|
|
0.7
|
|
|
|
2.01
|
|
Other
short-term investments
|
|
|
363.1
|
|
|
|
7.3
|
|
|
|
2.68
|
|
|
|
313.0
|
|
|
|
12.2
|
|
|
|
5.22
|
|
Total
interest earning assets
|
|
$
|
57,768.4
|
|
|
$
|
2,513.2
|
|
|
|
5.81
|
%
|
|
$
|
51,826.6
|
|
|
$
|
2,761.7
|
|
|
|
7.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
issued interest
bearing activity deposits
|
|
$
|
14,635.1
|
|
|
$
|
190.7
|
|
|
|
1.74
|
%
|
|
$
|
13,359.0
|
|
|
$
|
362.2
|
|
|
|
3.62
|
%
|
Bank
issued time deposits
|
|
|
8,926.5
|
|
|
|
275.4
|
|
|
|
4.12
|
|
|
|
8,625.9
|
|
|
|
317.8
|
|
|
|
4.93
|
|
Total
bank issued deposits
|
|
|
23,561.6
|
|
|
|
466.1
|
|
|
|
2.64
|
|
|
|
21,984.9
|
|
|
|
680.0
|
|
|
|
4.14
|
|
Wholesale
deposits
|
|
|
9,475.9
|
|
|
|
239.7
|
|
|
|
3.38
|
|
|
|
6,452.6
|
|
|
|
247.0
|
|
|
|
5.12
|
|
Total
interest bearing deposits
|
|
|
33,037.5
|
|
|
|
705.8
|
|
|
|
2.85
|
|
|
|
28,437.5
|
|
|
|
927.0
|
|
|
|
4.36
|
|
Short-term
borrowings
|
|
|
6,542.4
|
|
|
|
126.2
|
|
|
|
2.58
|
|
|
|
4,346.4
|
|
|
|
169.4
|
|
|
|
5.21
|
|
Long-term
borrowings
|
|
|
9,770.4
|
|
|
|
341.6
|
|
|
|
4.67
|
|
|
|
11,823.4
|
|
|
|
446.8
|
|
|
|
5.05
|
|
Total
interest bearing liabilities
|
|
$
|
49,350.3
|
|
|
$
|
1,173.6
|
|
|
|
3.18
|
%
|
|
$
|
44,607.3
|
|
|
$
|
1,543.2
|
|
|
|
4.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (FTE)
|
|
|
|
|
|
$
|
1,339.6
|
|
|
|
3.10
|
%
|
|
|
|
|
|
$
|
1,218.5
|
|
|
|
3.14
|
%
|
Net
interest spread (FTE)
|
|
|
|
|
|
|
|
|
|
|
2.63
|
%
|
|
|
|
|
|
|
|
|
|
|
2.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Fully
taxable equivalent (“FTE”) basis, assuming a Federal income tax rate of
35%, and excluding disallowed interest expense.
|
(b)
|
Based
on average balances excluding fair value adjustments for available for
sale securities.
|
The net
interest margin FTE decreased one basis point from 3.07% in the third quarter of
2007 to 3.06% in the third quarter of 2008. For the nine months ended
September 30, 2008, the net interest margin FTE was 3.10% compared to 3.14% for
the nine months ended September 30, 2007, a decrease of four basis points. The
Corporation continued to experience loan growth that exceeded its generation
of lower cost bank-issued deposits and the movement of new and
existing deposits into higher cost products. In addition, the cash
acquisition of First Indiana, share repurchases and the increase in nonaccrual
loans reduced net interest income and were additional sources of contraction to
the net interest margin.
Net
interest income and the net interest margin percentage can vary and continue to
be influenced by loan and deposit growth, product spreads, pricing competition
in the Corporation’s markets, prepayment activity, future interest rate changes,
levels of nonaccrual loans and various other factors. The current interest rate
volatility occurring in the market together with the interrelationships between
the numerous other factors that impact net interest income and the net interest
margin have made it very difficult to project the fourth quarter of 2008 net
interest margin with a reasonable degree of certainty.
PROVISION FOR LOAN AND LEASE
LOSSES AND CREDIT QUALITY
The
following tables present comparative consolidated credit quality information as
of September 30, 2008 and the prior four quarters:
Nonperforming
Assets
($000’s)
|
|
2008
|
|
|
2007
|
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Nonaccrual
|
|
$
|
1,260,642
|
|
|
$
|
1,006,757
|
|
|
$
|
774,137
|
|
|
$
|
686,888
|
|
|
$
|
445,750
|
|
Renegotiated
|
|
|
89,486
|
|
|
|
16,523
|
|
|
|
97
|
|
|
|
224,398
|
|
|
|
107
|
|
Past
due 90 days or more
|
|
|
12,070
|
|
|
|
17,676
|
|
|
|
12,784
|
|
|
|
13,907
|
|
|
|
7,736
|
|
Total
nonperforming loans and leases
|
|
|
1,362,198
|
|
|
|
1,040,956
|
|
|
|
787,018
|
|
|
|
925,193
|
|
|
|
453,593
|
|
Other
real estate owned
|
|
|
267,224
|
|
|
|
207,102
|
|
|
|
177,806
|
|
|
|
115,074
|
|
|
|
77,350
|
|
Total
nonperforming assets
|
|
$
|
1,629,422
|
|
|
$
|
1,248,058
|
|
|
$
|
964,824
|
|
|
$
|
1,040,267
|
|
|
$
|
530,943
|
|
Allowance
for loan and lease losses
|
|
$
|
1,031,494
|
|
|
$
|
1,028,809
|
|
|
$
|
543,539
|
|
|
$
|
496,191
|
|
|
$
|
452,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statistics
|
|
2008
|
|
|
2007
|
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Net
charge-offs to average
loans and leases
annualized
|
|
|
1.21
|
%
|
|
|
3.23
|
%
|
|
|
1.08
|
%
|
|
|
1.67
|
%
|
|
|
0.23
|
%
|
Total
nonperforming loans and leases
to total loans and
leases
|
|
|
2.70
|
|
|
|
2.07
|
|
|
|
1.60
|
|
|
|
2.00
|
|
|
|
1.01
|
|
Total
nonperforming assets to total loans
and leases and other real
estate owned
|
|
|
3.21
|
|
|
|
2.47
|
|
|
|
1.95
|
|
|
|
2.24
|
|
|
|
1.18
|
|
Allowance
for loan and lease losses
to total loans and
leases
|
|
|
2.05
|
|
|
|
2.05
|
|
|
|
1.10
|
|
|
|
1.07
|
|
|
|
1.01
|
|
Allowance
for loan and lease losses
to total nonperforming loans and
leases
|
|
|
76
|
|
|
|
99
|
|
|
|
69
|
|
|
|
54
|
|
|
|
100
|
|
Nonperforming
assets consist of nonperforming loans and leases and other real estate owned
(“OREO”). Nonperforming loans and leases consist of nonaccrual,
troubled-debt restructured loans which the Corporation refers to as
renegotiated, and loans and leases that are delinquent 90 days or more and still
accruing interest. The balance of nonperforming loans and leases are
affected by acquisitions and may be subject to fluctuation based on the timing
of cash collections, renegotiations and renewals.
Generally,
loans that are 90 days or more past due as to interest or principal are placed
on nonaccrual. Exceptions to these rules are generally only for loans
fully collateralized by readily marketable securities or other relatively risk
free collateral and certain personal loans. In addition, a loan may
be placed on nonaccrual when management makes a determination that the facts and
circumstances warrant such classification irrespective of the current payment
status. At September 30, 2008, approximately $213.6 million or 15.7%
of the Corporation’s total nonperforming loans and leases were less than 30 days
past due. In addition, approximately $141.9 million or 10.4% of the
Corporation’s total nonperforming loans and leases were greater than 30 days
past due but less than 90 days past due at September 30, 2008. In
total, approximately $355.5 million or 26.1% of the Corporation’s total
nonperforming loans and leases were less than 90 days past due at September 30,
2008.
At
September 30, 2008, nonperforming loans and leases amounted to $1,362.2 million
or 2.70% of consolidated loans and leases compared to $1,041.0 million or 2.07%
of consolidated loans and leases at June 30, 2008 and $453.6 million or 1.01% of
consolidated loans and leases at September 30, 2007.
Nonperforming
loans and leases at September 30, 2008 increased by $321.2 million compared to
June 30, 2008. The Corporation sold $105.3 million of nonaccrual real estate
loans during the third quarter of 2008 and has sold approximately $291.9 million
of nonaccrual real estate loans during the first nine months of 2008.
Nonperforming loans associated with the January 2, 2008 acquisition of First
Indiana amounted to $32.9 million at September 30, 2008.
Troubled-debt
restructured loans, which the Corporation refers to as “renegotiated,” amounted
to $89.5 million at September 30, 2008 compared to $16.5 million at June 30,
2008. The Corporation recognizes that many consumers are currently far more
leveraged than prudent and in a very difficult financial position with a
weakening economy compounded by falling home values. In order to avoid
foreclosure in the future, the Corporation has begun to restructure loan terms
for certain qualified borrowers that have demonstrated the ability to
make the restructured payments for a specified period of time. The Corporation
expects the restructuring of loan terms will continue and the balance of
renegotiated loans will increase in future quarters. As previously
reported, during the first quarter of 2008, the renegotiated portion of the
Franklin Credit Management Corp. (“Franklin”) loan, which was $224.3 million at
December 31, 2007, was reclassified to performing status. While
Franklin continues to be in compliance with the restructured terms, declining
cash collections, rising delinquencies and higher than expected servicing
expenses indicated that there was additional impairment associated with Franklin
at September 30, 2008. As a result, during the third quarter of 2008
a charge-off of $16.5 million was taken with respect to the subordinated
tranches of Franklin and the remaining $1.9 million of the affected tranches was
placed on nonaccrual. At September 30, 2008 the Corporation’s exposure to the
accruing portion of Franklin amounted to $138.0 million.
The
following table shows the Corporation’s nonperforming loans and leases by type
of loan or lease at September 30, 2008 and June 30, 2008.
Major Categories of
Nonperforming Loans & Leases
($ in
millions)
|
|
September
30, 2008
|
|
|
June
30, 2008
|
|
|
|
|
|
|
Percent
|
|
|
Non-
|
|
|
%
Non-
|
|
|
|
|
|
|
|
|
Non-
|
|
|
%
Non-
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
|
|
|
Total
|
|
|
|
|
|
Perform
ing
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
&
|
|
|
to
Loan &
|
|
|
|
|
|
|
|
|
Loans
&
|
|
|
to
Loan &
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Lease
Type
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Lease
Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans & leases
|
|
$
|
15,711
|
|
|
|
31.2
|
%
|
|
$
|
117.2
|
|
|
|
0.75
|
%
|
|
$
|
15,842
|
|
|
|
31.5
|
%
|
|
$
|
77.7
|
|
|
|
0.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
land and
construction
|
|
|
5,405
|
|
|
|
10.7
|
|
|
|
211.7
|
|
|
|
3.92
|
|
|
|
5,355
|
|
|
|
10.7
|
|
|
|
190.9
|
|
|
|
3.56
|
|
Other
commercial real estate
|
|
|
12,114
|
|
|
|
24.0
|
|
|
|
145.2
|
|
|
|
1.20
|
|
|
|
11,891
|
|
|
|
23.7
|
|
|
|
109.1
|
|
|
|
0.92
|
|
Total
commercial real estate
|
|
|
17,519
|
|
|
|
34.7
|
|
|
|
356.9
|
|
|
|
2.04
|
|
|
|
17,246
|
|
|
|
34.4
|
|
|
|
300.0
|
|
|
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 -
4 family
|
|
|
5,675
|
|
|
|
11.3
|
|
|
|
195.9
|
|
|
|
3.45
|
|
|
|
5,632
|
|
|
|
11.2
|
|
|
|
120.6
|
|
|
|
2.14
|
|
Construction
by individuals
|
|
|
963
|
|
|
|
1.9
|
|
|
|
64.1
|
|
|
|
6.65
|
|
|
|
1,013
|
|
|
|
2.0
|
|
|
|
44.7
|
|
|
|
4.41
|
|
Residential
land and
construction by
developers
|
|
|
3,391
|
|
|
|
6.7
|
|
|
|
549.6
|
|
|
|
16.21
|
|
|
|
3,601
|
|
|
|
7.2
|
|
|
|
425.0
|
|
|
|
11.80
|
|
Total
residential real estate
|
|
|
10,029
|
|
|
|
19.9
|
|
|
|
809.6
|
|
|
|
8.07
|
|
|
|
10,246
|
|
|
|
20.4
|
|
|
|
590.3
|
|
|
|
5.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans & leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity loans and
lines of
credit
|
|
|
5,053
|
|
|
|
10.0
|
|
|
|
68.8
|
|
|
|
1.36
|
|
|
|
4,992
|
|
|
|
9.9
|
|
|
|
55.6
|
|
|
|
1.11
|
|
Other
consumer
loans and leases
|
|
|
2,105
|
|
|
|
4.2
|
|
|
|
9.7
|
|
|
|
0.46
|
|
|
|
1,907
|
|
|
|
3.8
|
|
|
|
17.4
|
|
|
|
0.91
|
|
Total
consumer loans & leases
|
|
|
7,158
|
|
|
|
14.2
|
|
|
|
78.5
|
|
|
|
1.10
|
|
|
|
6,899
|
|
|
|
13.7
|
|
|
|
73.0
|
|
|
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans & leases
|
|
$
|
50,417
|
|
|
|
100.0
|
%
|
|
$
|
1,362.2
|
|
|
|
2.70
|
%
|
|
$
|
50,233
|
|
|
|
100.0
|
%
|
|
$
|
1,041.0
|
|
|
|
2.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
commercial loans and leases amounted to $117.2 million at September 30, 2008
compared to $77.7 million at June 30, 2008, an increase of $39.5 million or
50.8%. Approximately $10.7 million or 27.1% of the increase in nonperforming
commercial loans and leases at September 30, 2008 compared to June 30, 2008 was
attributable to one large nonperforming commercial loan.
The
national residential real estate markets continued to show signs of stress and
deterioration during the third quarter and first nine months of
2008. Consistent with recent quarters, nonperforming real estate
loans were the primary source of the Corporation’s nonperforming loans and
leases and represented 85.6% of total nonperforming loans and leases at
September 30, 2008. Nonperforming real estate loans amounted to
$1,166.5 million at September 30, 2008 compared to $890.3 million at June 30,
2008, an increase of $276.2 million or 31.0%. Nonperforming loans associated
with construction and development loans, amounted to $825.4 million at September
30, 2008 compared to $660.6 million at June 30, 2008, an increase of $164.8
million or 24.9%, which is net of the nonaccrual construction and development
loans that were sold during the third quarter of 2008. Nonperforming
construction and development loans represented 70.8% of the Corporation’s
nonperforming real estate loans and 60.6% of the Corporation’s total
nonperforming loans and leases at September 30, 2008.
Nonperforming
1-4 family residential real estate loans increased $75.3 million or 62.4%
compared to June 30, 2008 and amounted to $195.9 million or 3.45% of total 1-4
family residential real estate loans at September 30, 2008. Increased economic
stress on consumers has resulted in further deterioration in these loans in all
of the Corporation’s markets and most notably in Arizona, which contributed
$54.5 million or 72.4% of the increase in nonperforming 1-4 family residential
real estate loans at September 30, 2008 compared to June 30, 2008.
Nonperforming
consumer loans and leases amounted to $78.5 million at September 30, 2008
compared to $73.0 million at June 30, 2008, an increase of $5.5 million or 7.5%.
The levels (percent of nonperforming loans and leases to loans and leases
outstanding) of nonperforming consumer loans and leases have remained relatively
stable since June 30, 2008.
The
following table presents a geographical summary of nonperforming loans and
leases at September 30, 2008 and June 30, 2008.
Geographical Summary of
Nonperforming Loans & Leases
($ in
millions)
|
|
September
30, 2008
|
|
|
June
30, 2008
|
|
|
|
|
|
|
Percent
|
|
|
Non-
|
|
|
%
Non-
|
|
|
|
|
|
Percent
|
|
|
Non-
|
|
|
|
|
|
|
Total
|
|
|
of
Total
|
|
|
Perform
ing
|
|
|
|
|
|
|
|
|
of
Total
|
|
|
Perform
ing
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
&
|
|
|
to
Loan &
|
|
|
|
|
|
|
|
|
Loans
&
|
|
|
to
Loan &
|
|
Geographical
Summary
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Lease
Type
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Lease
Type
|
|
Wisconsin
|
|
$
|
18,087
|
|
|
|
35.9
|
%
|
|
$
|
154.8
|
|
|
|
0.86
|
%
|
|
$
|
18,189
|
|
|
|
36.2
|
%
|
|
$
|
129.0
|
|
|
|
0.71
|
%
|
Arizona
|
|
|
7,770
|
|
|
|
15.4
|
|
|
|
611.9
|
|
|
|
7.87
|
|
|
|
7,867
|
|
|
|
15.7
|
|
|
|
383.2
|
|
|
|
4.87
|
|
Minnesota
|
|
|
5,342
|
|
|
|
10.6
|
|
|
|
120.2
|
|
|
|
2.25
|
|
|
|
5,299
|
|
|
|
10.5
|
|
|
|
92.5
|
|
|
|
1.75
|
|
Missouri
|
|
|
3,518
|
|
|
|
7.0
|
|
|
|
35.1
|
|
|
|
1.00
|
|
|
|
3,445
|
|
|
|
6.9
|
|
|
|
31.5
|
|
|
|
0.91
|
|
Florida
|
|
|
3,103
|
|
|
|
6.1
|
|
|
|
145.2
|
|
|
|
4.68
|
|
|
|
3,016
|
|
|
|
6.0
|
|
|
|
150.0
|
|
|
|
4.97
|
|
Kansas
& Oklahoma
|
|
|
1,255
|
|
|
|
2.5
|
|
|
|
26.6
|
|
|
|
2.12
|
|
|
|
1,328
|
|
|
|
2.6
|
|
|
|
33.7
|
|
|
|
2.54
|
|
Indiana
|
|
|
1,555
|
|
|
|
3.1
|
|
|
|
32.1
|
|
|
|
2.06
|
|
|
|
1,517
|
|
|
|
3.0
|
|
|
|
22.4
|
|
|
|
1.48
|
|
Others
|
|
|
9,787
|
|
|
|
19.4
|
|
|
|
236.3
|
|
|
|
2.41
|
|
|
|
9,572
|
|
|
|
19.1
|
|
|
|
198.7
|
|
|
|
2.08
|
|
Total
|
|
$
|
50,417
|
|
|
|
100.0
|
%
|
|
$
|
1,362.2
|
|
|
|
2.70
|
%
|
|
$
|
50,233
|
|
|
|
100.0
|
%
|
|
$
|
1,041.0
|
|
|
|
2.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
housing-related stress continues to exist in both core and acquired
loans. At September 30, 2008, nonperforming loans in Arizona amounted
to $611.9 million, which was 44.9% of total consolidated nonperforming loans and
leases at September 30, 2008. Approximately $447.7 million or 73.2%
of nonperforming loans in Arizona at September 30, 2008 were construction and
development loans. By comparison at June 30, 2008, nonperforming loans in
Arizona amounted to $383.2 million, which was 36.8% of total consolidated
nonperforming loans and leases at June 30, 2008. Approximately $300.2
million or 78.3% of nonperforming loans in Arizona at June 30, 2008 were
construction and development loans. Nonperforming loans in Florida amounted to
$145.2 million or 4.68% of total Florida loans at September 30, 2008
compared to nonperforming loans in Florida of $150.0 million or 4.97% of total
Florida loans at June 30, 2008. Approximately $92.9 million or 64.0% of
nonperforming loans in Florida at September 30, 2008 were construction and
development loans. While the level of nonperforming loans in relation to total
loans remains elevated in Florida, the Corporation believes that the amount of
its nonperforming loans in Florida may be showing signs of
stabilizing.
OREO is
principally comprised of commercial and residential properties acquired in
partial or total satisfaction of problem loans. OREO amounted to $267.2 million
at September 30, 2008, compared to $207.1 million at June 30, 2008. At September
30, 2008, properties acquired in partial or total satisfaction of problem loans
consisted of construction and development of $212.3 million, 1-4 family
residential real estate of $41.4 million and commercial real estate of $13.5
million. At June 30, 2008, properties acquired in partial or total
satisfaction of problem loans consisted of construction and development of
$165.9 million, 1-4 family residential real estate of $31.0 million and
commercial real estate of $10.2 million. Since June 30, 2008, OREO
construction and development properties increased $46.4 million, 1-4 family
residential real estate properties increased $10.4 million and commercial real
estate properties increased $3.3 million. As a result of the soft
real estate market and the increased possibility of foreclosures due to the
elevated levels of nonperforming loans, management expects that OREO will
continue to increase throughout the remainder of 2008.
The
following table presents the reconciliation of the allowance for loan and lease
losses for the current quarter and the prior four quarters:
Reconciliation of Allowance
for Loan and Lease Losses
($000’s)
|
|
2008
|
|
|
2007
|
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Beginning
balance
|
|
$
|
1,028,809
|
|
|
$
|
543,539
|
|
|
$
|
496,191
|
|
|
$
|
452,697
|
|
|
$
|
431,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
154,962
|
|
|
|
885,981
|
|
|
|
146,321
|
|
|
|
235,060
|
|
|
|
41,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
of banks and loans acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
32,110
|
|
|
|
-
|
|
|
|
6,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases charged-off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
32,850
|
|
|
|
39,892
|
|
|
|
4,464
|
|
|
|
58,535
|
|
|
|
4,612
|
|
Real
estate
|
|
|
123,990
|
|
|
|
362,625
|
|
|
|
123,815
|
|
|
|
130,384
|
|
|
|
19,143
|
|
Personal
|
|
|
6,263
|
|
|
|
5,643
|
|
|
|
6,872
|
|
|
|
4,859
|
|
|
|
6,102
|
|
Leases
|
|
|
192
|
|
|
|
659
|
|
|
|
678
|
|
|
|
889
|
|
|
|
361
|
|
Total
charge-offs
|
|
|
163,295
|
|
|
|
408,819
|
|
|
|
135,829
|
|
|
|
194,667
|
|
|
|
30,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
on loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,277
|
|
|
|
2,295
|
|
|
|
875
|
|
|
|
1,336
|
|
|
|
1,902
|
|
Real
estate
|
|
|
6,938
|
|
|
|
4,269
|
|
|
|
2,280
|
|
|
|
434
|
|
|
|
884
|
|
Personal
|
|
|
1,439
|
|
|
|
1,172
|
|
|
|
1,167
|
|
|
|
978
|
|
|
|
938
|
|
Leases
|
|
|
364
|
|
|
|
372
|
|
|
|
424
|
|
|
|
353
|
|
|
|
453
|
|
Total
recoveries
|
|
|
11,018
|
|
|
|
8,108
|
|
|
|
4,746
|
|
|
|
3,101
|
|
|
|
4,177
|
|
Net
loans and leases charged-off
|
|
|
152,277
|
|
|
|
400,711
|
|
|
|
131,083
|
|
|
|
191,566
|
|
|
|
26,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
1,031,494
|
|
|
$
|
1,028,809
|
|
|
$
|
543,539
|
|
|
$
|
496,191
|
|
|
$
|
452,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs amounted to $152.3 million or 1.21% of average loans and leases in
the third quarter of 2008 compared to $400.7 million or 3.23% of average loans
and leases in the second quarter of 2008 and $26.0 million or 0.23% of average
loans and leases in the third quarter of 2007. For the nine months
ended September 30, 2008, net charge-offs amounted to $684.1 million or 1.85% of
average loans and leases compared to $64.3 million or 0.20% of average loans and
leases for the nine months ended September 30, 2007.
Consistent
with the first and second quarters of 2008, net charge-offs in the third quarter
of 2008 were concentrated in three areas which the Corporation refers to as
business channels. Net charge-offs for the Arizona business channel
amounted to $70.2 million, net charge-offs for the west coast of Florida
business channel amounted to $15.6 million and net charge-offs for the
correspondent banking business channel amounted to $16.0 million. The aggregate
net charge-offs for these three business channels amounted to $489.7 million or
71.6 % of total net charge-offs for the nine months ended September 30, 2008.
Included in net charge-offs were the net charge-offs related to the loans that
were sold during the three and nine months ended September 30,
2008.
Net
charge-offs of real estate loans amounted to $117.1 million or 76.9% of total
net charge-offs in the third quarter of 2008. For the nine months
ended September 30, 2008, net charge-offs of real estate loans amounted to
$596.9 million or 87.3% of net charge-offs in the first nine months of
2008. For the three and nine months ended September 30, 2008,
approximately $89.1 million and $524.7 million, respectively, of the real estate
loan net charge-offs were construction and development loan net
charge-offs.
The
provision for loan and lease losses amounted to $155.0 million in the third
quarter of 2008. By comparison, the provision for loan and lease
losses amounted to $886.0 million in the second quarter of 2008 and $41.5
million in the third quarter of 2007. For the nine months ended
September 30, 2008, the provision for loan and lease losses amounted to $1,187.3
million compared to $84.7 million for the nine months ended September 30,
2007. The provisions for loan and lease losses are the amounts
required to establish the allowance for loan and lease losses at the required
level after considering charge-offs and recoveries. At September 30,
2008, the allowance for loan and lease losses amounted to $1,031.5 million
compared to $452.7 million at September 30, 2007, an increase of $578.8
million. The ratio of the allowance for loan and lease losses to
total loans and leases was 2.05% at September 30, 2008 compared to 1.01% at
September 30, 2007. The increase in the allowance for loan and leases at
September 30, 2008 reflects the increase in new nonperforming loans, elevated
net charge-offs and decline in collateral values underlying real estate
loans.
As
previously discussed, real estate-related loans and more particularly,
construction and development real estate loans that are primarily concentrated
on the west coast of Florida and in Arizona have been the primary contributors
to the increase in nonperforming loans and leases and net charge-offs in recent
quarters. Real estate related loans made up the majority of the
Corporation’s nonperforming loans and leases at September 30,
2008. Historically, the Corporation’s loss experience with real
estate loans has been relatively low due to the sufficiency of the underlying
real estate collateral. In a stressed real estate market such as
currently exists, the value of the collateral securing the loans has become one
of the most important factors in determining the amount of loss incurred and the
appropriate amount of allowance for loan and lease losses to record at the
measurement date. The likelihood of losses that are equal to the
entire recorded investment for a real estate loan is remote. However,
in many cases, declining real estate values have resulted in the determination
that the estimated value of the collateral was insufficient to cover all of the
recorded investment in the loan which has required significant additional
charge-offs. Declining collateral values have significantly contributed to the
elevated levels of net charge-offs and the increase in the provision for loan
and lease losses that the Corporation experienced in recent
quarters.
The
amount of cumulative charge-offs recorded on the Corporation’s nonperforming
loans was approximately $345.2 million or 20.2% of the unpaid principal balance
of its nonperforming loans outstanding at September 30, 2008. These
charge-offs have reduced the carrying value of these nonperforming loans and
leases to an amount that is estimated to be collectible with no further
allowance required at the measurement date.
The
Corporation re-assesses the timeliness and propriety of appraisals for
collateral dependent loans on an ongoing basis and has increased the frequency
of obtaining indications of collateral values in current higher risk segments
within its real estate portfolio such as the volatile real estate markets on the
west coast of Florida and in Arizona. In addition, the Corporation uses a
variety of sources such as recent sales of loans and sales of OREO to validate
the collateral values used to determine the amount of loss exposure at the
measurement date.
Management
expects the prevailing economic and national housing market condition will
continue through the fourth quarter of 2008 and well into 2009. The level of net
charge-offs and the recorded allowance for loan and lease losses are based on
management’s best estimate of the losses incurred at the measurement
date. Management recognizes there are significant estimates in the
process and the ultimate losses could be significantly different from those
currently estimated. Management expects the provision for loan and lease losses
will continue to be higher than its pre-2007 historical experience prior to the
crisis in the national residential real estate markets. Rapidly changing
collateral values, general economic conditions and numerous other factors
continue to create volatility in the housing markets and have increased the
possibility that additional losses may have to be recognized with respect to the
Corporation’s current nonperforming assets. In addition, further
deterioration in the economy and national housing markets beyond
management’s current expectations could result in an increase in the
amount of nonperforming assets, net charge-offs and provisions for loan and
lease losses reported in future quarters. Those amounts could be significantly
higher than the nonperforming assets, net charge-offs and provisions for loan
and lease losses reported in the third quarter of 2008.
The
Corporation will continue to proactively manage its problem loans and
nonperforming assets and be aggressive to isolate, identify and assess its
underlying loan and lease portfolio credit quality. The Corporation
has developed and continues to develop strategies, such as selective sales of
nonperforming loans and restructuring loans to qualified borrowers, to mitigate
its loss exposure. Construction and development loans tend to be more
complex and may take more time to attain a satisfactory
resolution. Depending on the facts and circumstances, acquiring real
estate collateral in partial or total satisfaction of problem loans may continue
to be the best course of action to take in order to mitigate the Corporation’s
exposure to loss.
OTHER
INCOME
Total
other income in the third quarter of 2008 amounted to $183.8 million compared to
$183.3 million in the same period last year. The increase in other income was
primarily due to growth in wealth management services revenue, service charges
on deposits, life insurance revenue and income from OREO. Total other income for
the third quarter of 2007 included gains resulting from private equity
investments, sales of investment securities and interest rate swap terminations
that amounted to $14.2 million. Gains in the amount of $8.9 million in 2007 are
reported in Net investment securities gains and the remainder of the gains are
reported in the Other line within Other Income in the Consolidated Statements of
Income. Excluding net investment securities gains in the third quarters of 2008
and 2007 and gains from interest rate swap terminations in the third quarter of
2007, total other income in the third quarter of 2008 amounted to $182.8 million
compared to $169.1 million in the third quarter of 2007, an increase
of $13.7 million or 8.1%.
For the
nine months ended September 30, 2008, total other income amounted to $582.1
million compared to $525.4 million in the same period last year, an increase of
$56.7 million or 10.8%. The increase in other income was primarily due to growth
in wealth management services revenue, service charges on deposits, life
insurance revenue and income from OREO. Total other income in the first nine
months of 2008 and 2007 was affected by net investment securities gains that
amounted to $27.2 million for the nine months ended September 30, 2008 compared
to $29.9 million for the nine months ended September 30, 2007. Excluding net
investment securities gains and gains from interest rate swap terminations,
total other income in the nine months ended September 30, 2008 amounted to
$554.9 million compared to $490.2 million in the nine months ended September 30,
2007, an increase of $64.7 million or 13.2%.
Wealth
management revenue amounted to $71.3 million in the third quarter of 2008
compared to $66.5 million in the third quarter of 2007, an increase of $4.8
million or 7.3%. For the nine months ended September 30, 2008, wealth
management revenue amounted to $218.0 million compared to $192.8 million for the
nine months ended September 30, 2007, an increase of $25.2 million or 13.1%.
Approximately $2.5 million of the wealth management revenue growth in the first
nine months of 2008 compared to the first nine months of 2007 was attributable
to the North Star acquisition. Assets under management (“AUM”) were $24.4
billion at September 30, 2008 compared to approximately $26.6 billion at
September 30, 2007. Average AUM in the third quarter of 2008 was relatively
unchanged compared to average AUM for the third quarter of 2007. Average AUM for
the nine months ended September 30, 2008 increased $1.2 billion or 4.9% compared
to average AUM for the nine months ended September 30, 2007. Assets
under administration (“AUA”) were $101.3 billion at September 30, 2008 compared
to $109.4 billion at September 30, 2007. Average AUA in the third quarter of
2008 was relatively unchanged compared to average AUA for the third quarter of
2007. Average AUA for the nine months ended September 30, 2008 increased $4.3
billion or 4.2% compared to average AUA for the nine months ended September 30,
2007. The contraction in period-end AUM and AUA reflects the effect of certain
expected balance drawdowns as well as the continued downturn in the equity
markets. The market environment resulted in slower revenue growth in personal
and institutional trust in the third quarter of 2008. However, sales and
pipelines have remained stable since the second quarter of 2008. Revenue from
operations outsourcing services and securities lending continued to grow during
the third quarter of 2008. Revenue from operations outsourcing is expected to
continue to expand as sales and pipeline opportunities remain strong. The
Corporation expects to continue to attract assets for management and
administration through increased sales and the pending acquisition of TCH.
Management expects wealth management revenue to show high single-digit to low
double-digit annual percentage growth rates in 2008. Wealth
management revenue is affected by market volatility and direction which could
cause wealth management revenue in 2008 to differ from the revenue expected by
management.
Service
charges on deposits amounted to $36.7 million in the third quarter of 2008
compared to $30.9 million in the third quarter of 2007, an increase of $5.8
million or 18.8%. For the nine months ended September 30, 2008,
service charges on deposits amounted to $110.3 million compared to $88.6 million
for the nine months ended September 30, 2007, an increase of $21.7 million or
24.4%. The banking acquisitions contributed $4.0 million and $13.0
million of the growth in service charges on deposits for the three and nine
months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007, respectively. A portion of this source of fee
income is sensitive to changes in interest rates. In a declining rate
environment, customers that pay for services by maintaining eligible deposit
balances receive a lower earnings credit that results in higher fee
income. Excluding the effect of the banking acquisitions, higher
service charges on deposits associated with commercial demand deposits accounted
for the majority of the increase in revenue in the third quarter and first nine
months of 2008 compared to the third quarter and first nine months of
2007.
Total
mortgage banking revenue was $5.5 million in the third quarter of 2008 compared
to $6.5 million in the third quarter of 2007, a decrease of $1.0
million. For the nine months ended September 30, 2008, total mortgage
banking revenue was $21.5 million compared to $28.6 million in the nine months
ended September 30, 2007, a decrease of $7.1 million. For the three
and nine months ended September 30, 2008, the Corporation sold $0.3 billion and
$1.2 billion, respectively, of residential mortgage and home equity loans in the
secondary market. For the three and nine months ended September 30,
2007, the Corporation sold $0.3 billion and $1.5 billion, respectively, of
residential mortgage and home equity loans in the secondary market.
Net
investment securities gains amounted to $1.0 million in the third quarter of
2008 compared to $8.9 million in the third quarter of 2007. For the
nine months ended September 30, 2008, net investment securities gains amounted
to $27.2 million compared to $29.9 million in the nine months ended September
30, 2007. Approximately $1.0 million and $2.7 million of the gains
recognized in the three and nine months ended September 30, 2008, respectively
were related to private equity investments. During the first
quarter of 2008, in conjunction with its IPO, Visa redeemed 38.7% of the Class B
Visa common stock owned by the Corporation. The gain from the
redemption amounted to $26.9 million. Approximately $4.0 million and $5.9
million of the gains recognized in the three and nine months ended September 30,
2007, respectively were related to private equity investments. During the third
quarter of 2007, $672.9 million of government agency investment securities
designated as available for sale were sold at a gain of $4.3 million. During the
second quarter of 2007, the Corporation sold its investment in MasterCard Class
B common shares and realized a gain of $19.0 million.
Life
insurance revenue amounted to $12.8 million for the three months ended September
30, 2008 compared to $10.5 million for the three months ended September 30,
2007, an increase of $2.3 million or 21.8%. For the nine months ended
September 30, 2008, life insurance revenue amounted to $37.1 million compared to
$26.0 million for the nine months ended September 30, 2007, an increase of $11.1
million or 42.8%. During the second half of 2007, the Corporation
purchased $286.6 million of additional bank-owned life
insurance. Those purchases along with bank-owned life insurance
acquired in the banking acquisitions and death benefit gains were the primary
contributors to the increase in life insurance revenue in the three and nine
months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007.
OREO
income primarily consists of gains from the sale of OREO and amounted to $4.0
million in the third quarter of 2008 compared to $0.3 million in the third
quarter of 2007, an increase of $3.7 million. For the nine months
ended September 30, 2008, OREO income amounted to $6.8 million compared to $1.3
million for the nine months ended September 30, 2007, an increase of $5.5
million.
Other
income in the third quarter of 2008 amounted to $52.6 million compared to $59.8
million in the third quarter of 2007, a decrease of $7.2 million or
12.0%. For the nine months ended September 30, 2008, other income
amounted to $161.3 million compared to $158.1 million for the nine months ended
September 30, 2007, an increase of $3.2 million or 2.0%. As previously
discussed, other income for the three and nine months ended September 30, 2007
include gains of $5.3 million from the extinguishment of $370.0 million of
Federal Home Loan Bank (“FHLB”) advances and termination of pay fixed / receive
floating interest rate swaps that were designated cash flow hedges on the FHLB
advances. Other income for the three and nine months ended September 30, 2007
also include gains resulting from a favorable lawsuit settlement that in total
amounted to $1.8 million. A final settlement for three branches in
Tulsa, Oklahoma that were sold in the fourth quarter of 2007 resulted in
additional gain of $2.4 million during the first quarter of
2008. Increased fees and income from the banking acquisitions as well
as organic growth in a variety of sources of fees and income, especially trading
income and card-related fees were offset by lower auto securitization revenues
and the loss of service fee revenue charged to Metavante in 2007.
OTHER
EXPENSE
Total
other expense for the three months ended September 30, 2008 amounted to $360.0
million compared to $293.5 million for the three months ended September 30,
2007, an increase of $66.5 million or 22.7%. For the nine months
ended September 30, 2008, total other expense amounted to $1,056.2 million
compared to $868.8 million for the nine months ended September 30, 2007, an
increase of $187.4 million or 21.6%.
Total
other expense for the three and nine months ended September 30, 2008 compared to
the three and nine months ended September 30, 2007 included increased credit and
collection-related expenses, increased expenses associated with the acquisition,
valuation and holding of OREO properties and increased provisions for loss
exposures associated with unfunded loan commitments and other credit-related
liabilities. Approximately $16.3 million of the operating expense growth in the
third quarter of 2008 compared to the third quarter of 2007 and $77.2 million of
the operating expense growth in the first nine months of 2008 compared to the
first nine months of 2007 were attributable to these items.
Total
other expense for the three and nine months ended September 30, 2008 included
the operating expenses associated with the banking acquisitions in 2008 and 2007
and the 2007 wealth management acquisition. The operating expenses of
the acquired entities have been included in the Corporation’s consolidated
operating expenses from the dates the transactions were completed. Approximately
$11.6 million of the operating expense growth in the third quarter of 2008
compared to the third quarter of 2007 and $44.7 million of the operating expense
growth in the first nine months of 2008 compared to the first nine months of
2007 were attributable to the acquisitions.
Total
other expense for the three and nine months ended September 30, 2008 include the
impact of the financial market disruption in September 2008. The market
disruption resulted in unexpected losses and charges in the Corporation’s wealth
management segment that amounted to $15.0 million.
Total
other expense for the nine months ended September 30, 2008 compared to the nine
months ended September 30, 2007 included residual write-downs of $4.8 million
associated with direct financial leases of pick-up trucks and sport utility
vehicles (“SUVs”).
During
the first quarter of 2008, Visa established an escrow for certain litigation
matters from the proceeds of its IPO. As a result, the Corporation
reversed part of its litigation accruals that were originally recorded due to
the Corporation’s membership interests in Visa in an amount equal to its pro
rata share of the funded escrow. Included in total other expense for
the nine months ended September 30, 2008 is the reversal of $12.2 million
related to the Visa litigation matters.
Total
other expense for the nine months ended September 30, 2007 included the loss of
$9.5 million related to the call of the Corporation’s 7.65% junior subordinated
deferrable interest debentures and the related M&I Capital Trust A 7.65%
trust preferred securities that occurred in the first quarter of
2007.
The
Corporation estimates that its expense growth in the three months ended
September 30, 2008 compared to the three months ended September 30, 2007,
excluding the items previously discussed, was approximately $23.6 million or
8.2%. The Corporation estimates that its expense growth in the nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007, excluding the items previously discussed, was approximately $67.3 million
or 8.1%. This expense growth reflects in part increased expenses
associated with updating certain internal systems and the continued expansion in
markets outside of Wisconsin.
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 divided by the sum of total other income (including
Private Equity revenue but excluding other 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
September 30, 2008 and prior four quarters were:
Efficiency
Ratios
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Consolidated
Corporation
|
|
|
57.0
|
%
|
|
|
59.3
|
%
|
|
|
50.6
|
%
|
|
|
71.2
|
%
|
|
|
49.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
efficiency ratio for the third quarter of 2008 was adversely affected by the
increase in credit and collection-related expenses, net expenses associated with
OREO properties and the unexpected losses and charges associated with the
financial market disruption in September 2008. The estimated net impact to the
Corporation’s efficiency ratio for the three months ended September 30, 2008
from these items was approximately 5.3%.
The
efficiency ratio for the second quarter of 2008 was adversely affected by the
increase in credit and collection- related expenses, net expenses associated
with OREO properties, provisions for loss exposures associated with unfunded
loan commitments and other credit-related liabilities and the residual value
write-downs on SUVs. The estimated net impact to the Corporation’s efficiency
ratio for the three months ended June 30, 2008 from these items was
approximately 8.3%.
The
efficiency ratio for the first quarter of 2008 was adversely affected by the
increase in credit and collection-related expenses and net expenses associated
with OREO properties. However, the efficiency ratio for the first
quarter of 2008 was positively impacted by the reversal of the liability related
to the Visa litigation matters. The estimated net impact to the Corporation’s
efficiency ratio for the three months ended March 31, 2008 from these items was
approximately 1.1%.
The
efficiency ratio for the fourth quarter of 2007 was adversely affected by
charitable contribution expenses, the original Visa litigation accrual and a
debt termination loss and was positively impacted by gain from the divestiture
of three bank branches. The estimated net impact to the Corporation’s efficiency
ratio for the three months ended December 31, 2007 from these items was
approximately 17.5%.
Salaries
and employee benefits expense amounted to $184.0 million in the third quarter of
2008 compared to $166.8 million in the third quarter of 2007, an increase of
$17.2 million or 10.3%. For the nine months ended September 30, 2008,
salaries and employee benefits expense amounted to $545.3 million compared to
$485.9 million for the nine months ended September 30, 2007, an increase of
$59.4 million or 12.2%. Salaries and employee benefits related to credit and
collection contributed approximately $2.1 million and $4.1 million to the
expense growth in the three and nine months ended September 30, 2008 compared to
the three and nine months ended September 30, 2007, respectively. Salaries and
employee benefits related to the acquisitions contributed approximately $5.7
million and $21.8 million to the expense growth in the three and nine months
ended September 30, 2008 compared to the three and nine months ended September
30, 2007, respectively.
Net
occupancy and equipment expense for three months ended September 30, 2008
amounted to $31.7 million, compared to $27.7 million for the three months ended
September 30, 2007, an increase of $4.0 million or 14.4%. For the
nine months ended September 30, 2008, net occupancy and equipment expense
amounted to $94.1 million compared to $83.2 million for the nine months ended
September 30, 2007, an increase of $10.9 million or 13.1%. Net
occupancy and equipment expense related to the acquisitions contributed
approximately $1.7 million and $6.8 million to the expense growth in the three
and nine months ended September 30, 2008 compared to the three and nine months
ended September 30, 2007, respectively.
Software
and processing expenses amounted to $39.7 million in the third quarter of 2008
compared to $38.8 million in the third quarter of 2007, an increase of $0.9
million or 2.4%. For the nine months ended September 30, 2008,
software and processing expenses amounted to $118.1 million compared to $113.5
million for the nine months ended September 30, 2007, an increase of $4.6
million or 4.0%. The acquisitions accounted for $0.5 million and $1.8
million of the expense growth for the three and nine months ended September 30,
2008 compared to the three and nine months ended September 30, 2007,
respectively.
Supplies
and printing expense and shipping and handling expense amounted to $9.3 million
in the third quarter of 2008 compared to $10.5 million in the third quarter of
2007, a decrease of $1.2 million or 11.6%. For the nine months ended
September 30, 2008, supplies and printing expense and shipping and handling
expense amounted to $32.6 million compared to $31.9 million in the first nine
months of 2007, an increase of $0.7 million or 2.1%. The acquisitions
accounted for $0.7 million of the expense growth for nine months ended September
30, 2008 compared to the nine months ended September 30, 2007.
Professional
services expense amounted to $16.5 million in the third quarter of 2008 compared
to $9.1 million in the third quarter of 2007, an increase of $7.4 million or
81.6%. For the nine months ended September 30, 2008, professional services
expense amounted to $48.1 million compared to $26.6 million for the nine months
ended September 30, 2007, an increase of $21.5 million or 81.3%. The
acquisitions accounted for $0.2 million and $1.1 million of the expense growth
for the three and nine months ended September 30, 2008 compared to the three and
nine months ended September 30, 2007, respectively. Increased legal
fees and other professional fees associated with problem loans contributed
approximately $1.8 million and $6.6 million to the increase in professional
services expense in the third quarter and first nine months of 2008 compared to
the third quarter and first nine months of 2007, respectively. Consulting fees
associated with updating certain internal systems also contributed to the
increase in professional services expense for the three and nine months ended
September 30, 2008 compared to the three and nine months ended September 30,
2007.
Amortization
of intangibles amounted to $6.0 million in the third quarter of 2008 compared to
$5.4 million in the third quarter of 2007, an increase of $0.6
million. For the nine months ended September 30, 2008, amortization
of intangibles amounted to $17.9 million compared to $15.1 million for the nine
months ended September 30, 2007, an increase of $2.8 million. The
increase in amortization associated with the acquisitions amounted to $1.4
million and $5.6 million for the three and nine months ended September 30, 2008
compared to the three and nine months ended September 30, 2007,
respectively. The increase was offset by lower amortization of core
deposit intangibles from previous acquisitions, which are based on a declining
balance method.
Statement
of Financial Accounting Standards No. 142,
Goodwill and
Other Intangible Assets
, (“SFAS 142”) adopts an aggregate view of
goodwill and bases the accounting for goodwill on the units of the combined
entity into which an acquired entity is integrated (those units are referred to
as Reporting Units). A Reporting Unit is an operating segment as
defined in Statement of Financial Accounting Standards No. 131,
Disclosures about
Segments of an Enterprise and Related Information
, or one level below an
operating segment.
SFAS 142
provides guidance for impairment testing of goodwill and intangible assets that
are not amortized. Goodwill is tested for impairment using a two-step
process that begins with an estimation of the fair value of a Reporting
Unit. The first step is a screen for potential impairment and the
second step measures the amount of impairment, if any.
Consistent
with prior years, the Corporation elected to perform its annual test for
goodwill impairment as of June 30, 2008. Other than goodwill, the Corporation
does not have any other intangible assets that are not amortized. The stock
prices of many financial services companies, including the Corporation, declined
during the first half of 2008 as a result of the stress and deterioration in the
national residential real estate markets. While the Corporation’s other
reporting units did not have indicators of potential goodwill impairment based
on the first step, the Commercial and Community Banking segments were subjected
to the second step of impairment testing of goodwill. During the
third quarter of 2008, the Corporation completed the second step of the process
for those segments and determined that there was no goodwill
impairment.
Losses on
termination of debt amounted to $9.5 million for the nine months ended September
30, 2007. During the first quarter of 2007, the Corporation called $200 million
7.65% junior subordinated deferrable interest debentures and the related M&I
Capital Trust A 7.65% trust preferred securities. The loss was primarily due to
the contractual call premium paid to extinguish the trust preferred
securities. During the second quarter of 2008, the Corporation called
three different issuances of higher-cost junior subordinated deferrable interest
debentures and the related trust preferred securities that had been assumed from
previous banking acquisitions. The aggregate amount called was $27.0 million and
no gain or loss was recognized from these transactions.
OREO
expenses amounted to $14.1 million in the third quarter of 2008 compared to $1.7
million in the third quarter of 2007, an increase of $12.4
million. For the nine months ended September 30, 2008, OREO expenses
amounted to $49.3 million compared to $4.8 million for the nine months ended
September 30, 2007, an increase of $44.5 million. Approximately $6.4 million and
$13.4 million of the increase for the three and nine months ended September 30,
2008 compared to the three and nine months ended September 30, 2007,
respectively reflects the costs of acquiring and holding the increased levels of
foreclosed properties. Approximately $6.0 million and $31.1 million of the
increase for the three and nine months ended September 30, 2008 compared to the
three and nine months ended September 30, 2007, respectively is due to valuation
write-downs and losses on disposition which reflects both the increased levels
of foreclosed properties and the rapid decline in real estate values during the
first nine months of 2008. The Corporation expects higher levels of expenses
associated with acquiring and holding foreclosed properties will continue in
future quarters. Valuation write-downs and losses on disposition will depend on
real estate market conditions.
Other
expense amounted to $58.7 million in the third quarter of 2008 compared to $33.6
million in the third quarter of 2007, an increase of $25.1 million or 75.0%. The
acquisitions accounted for $2.1 million of the growth in other expense for the
three months ended September 30, 2008 compared to the three months ended
September 30, 2007. Deposit insurance premiums increased $5.0 million in the
third quarter of 2008 compared to the third quarter of 2007. As previously
discussed, other expense for the three and nine months ended
September 30, 2008 include the impact of the financial market disruption in
September 2008. The market disruption resulted in unexpected losses and charges
in the Corporation’s wealth management segment that amounted to $15.0
million.
For the
nine months ended September 30, 2008, other expense amounted to $150.7 million
compared to $98.4 million for the nine months ended September 30, 2007, an
increase of $52.3 million or 53.2%. The acquisitions accounted for $6.8 million
of the growth in other expense for the nine months ended September 30, 2008
compared to the nine months ended September 30, 2007. Deposit insurance premiums
increased $7.0 million for the nine months ended September 30, 2008 compared to
the nine months ended September 30, 2007. Total other expense for the nine
months ended September 30, 2008 included residual write-downs of $4.8 million
associated with direct financial leases of SUVs and pick-up trucks. As
previously discussed, other expense for the nine months ended September 30, 2008
includes the reversal of $12.2 million related to the Visa litigation in the
first quarter of 2008. Total other expense for the nine months ended September
30, 2008 compared to the nine months ended September 30, 2007 increased $23.8
million due to increased provisions for losses associated with unfunded loan
commitments and other credit-related liabilities. Historically, the
Corporation’s loss exposure with respect to these items has been relatively low.
The credit evaluation of the customer, collateral requirements and the ability
to access collateral is generally similar to that for loans. Many customers have
been directly or indirectly affected by the stress and deterioration of the
national residential real estate markets. For many of the same reasons
previously discussed under the section entitled Provision for Loan and Lease
Losses and Credit Quality in this Form 10-Q, these loss exposures have also
increased, which is consistent with the Corporation’s recent experience with its
loan credit exposures.
INCOME
TAXES
The
provision for income taxes for the three months ended September 30, 2008
amounted to $26.4 million or 24.1% of the pre-tax income. The provision for
income taxes from continuing operations for the three months ended September 30,
2007 amounted to $77.8 million or 30.9% of pre-tax income from continuing
operations. The decline in the effective tax rate in the third quarter of 2008
compared to 2007 reflects the higher proportion of tax-exempt income relative to
reported pre-tax income for the respective three month periods. For
the nine months ended September 30, 2008, the benefit for income taxes amounted
to $178.3 million or 52.0% of the pre-tax loss. For the nine months ended
September 30, 2007, the provision for income taxes from continuing operations
amounted to $247.9 million or 32.2% of pre-tax income from continuing
operations. As a result of the Internal Revenue Service’s (“IRS”)
decision not to appeal a November 2007 US Tax Court ruling related to how the
TEFRA (interest expense) disallowance should be calculated within a consolidated
group and the position the IRS has taken in another related case, the
Corporation recognized an additional income tax benefit related to years
1996-2007 of approximately $20.0 million for its similar issue during the first
quarter of 2008.
LIQUIDITY AND CAPITAL
RESOURCES
Shareholders’
equity was $6.49 billion or 10.22% of total consolidated assets at September 30,
2008, compared to $7.03 billion or 11.75% of total consolidated assets at
December 31, 2007
,
and
$7.02 billion or 11.56% of total consolidated assets at September 30,
2007.
On
October 16, 2008, the Corporation’s Board of Directors declared a $0.32 per
share dividend which will be paid in the fourth quarter of 2008.
During
the third quarter of 2008, the Corporation issued 126,553 shares of its common
stock for $2.2 million to fund its obligation under its employee stock purchase
plan (the “ESPP”). For the nine months ended September 30, 2008, the Corporation
issued 397,483 shares of its common stock for $6.4 million to fund its
obligation under the ESPP.
At
September 30, 2008, shares of common stock reserved for the granting of stock
options and stock purchase rights were 9,829,882.
During
the third quarter of 2007, the Corporation settled the stock purchase contracts
included with Common SPACES. The stock purchase contracts required the holder to
purchase, in accordance with a settlement rate formula, shares of the
Corporation’s common stock. The Corporation issued 9,226,951 shares
of its common stock in settlement of the stock purchase contracts in exchange
for $400.0 million in cash.
During
the third quarter of 2007, the Corporation issued 106,622 shares of its common
stock for $4.0 million to fund its obligation under its ESPP. For the nine
months ended September 30, 2007, the Corporation issued 273,435 shares of its
common stock for $10.6 million to fund its obligation under the
ESPP.
During
the second quarter of 2007, the Corporation issued 441,252 shares of its common
stock valued at $21.0 million in conjunction with the Corporation’s acquisition
of North Star. Also during the second quarter of 2007, the
Corporation issued 4,410,647 shares of its common stock valued at $204.3 million
and exchanged vested stock options valued at approximately $15.3 million in
conjunction with the Corporation’s acquisition of United Heritage.
During
the first quarter of 2007, the Corporation issued 403,508 shares of its common
stock valued at $19.2 million to fund its 2006 obligations under its retirement
and employee stock ownership plans.
The
Corporation has a Stock Repurchase Program under which up to 12 million shares
of the Corporation’s common stock can be repurchased annually. The Corporation
did not acquire any shares of its common stock under the Stock Repurchase
Program during the second or third quarters of 2008. During the first
quarter of 2008, the Corporation acquired 4,782,400 shares of its common stock
in open market share repurchase transactions under the Stock Repurchase
Program. Total cash consideration amounted to $124.9
million. After these repurchases, approximately 7,217,600 shares
remain available under prior repurchase authorizations by the Corporation’s
Board of Directors. There were no significant share repurchases
during the third quarter of 2007. During the second quarter of 2007,
the Corporation completed two accelerated share repurchase transactions under
its authorized Stock Repurchase Program. In the aggregate, the
Corporation acquired 6,117,070 shares of its common stock in these
transactions. Total consideration in these transactions amounted to
$297.3 million and consisted of cash of $294.7 million and common treasury stock
valued at $2.6 million. In conjunction with the first accelerated
share repurchase transaction executed during the second quarter of 2007, the
Corporation used 54,035 shares of its treasury common stock to share-settle the
final settlement obligation. There were no purchases under the
program during the first quarter of 2007.
At
September 30, 2008, the net loss in accumulated other comprehensive income
amounted to $107.8 million, which represented a negative change in accumulated
other comprehensive income of $54.1 million since December 31, 2007
.
Net accumulated
other comprehensive income associated with available for sale investment
securities was a net loss of $67.6 million at September 30, 2008, compared to a
net loss of $10.4 million at December 31, 2007, resulting in a net loss of $57.2
million over the nine month period. The net unrealized loss
associated with the change in fair value of the Corporation’s derivative
financial instruments designated as cash flow hedges decreased $4.1 million
since December 31, 2007, resulting in a net increase to shareholders’ equity.
The amount required to adjust the Corporation’s postretirement health benefit
liability to its funded status included in accumulated other comprehensive
income amounted to an unrealized gain of $2.5 million as of September 30,
2008.
The
Corporation continues to have a strong capital base and its regulatory capital
ratios are significantly above the minimum requirements as shown in the
following tables.
RISK-BASED CAPITAL
RATIOS
($ in
millions)
|
|
September
30, 2008
|
|
|
December
31,
2007
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Tier
1 Capital
|
|
$
|
4,521
|
|
|
|
7.94
|
%
|
|
$
|
5,448
|
|
|
|
10.22
|
%
|
Tier
1 Capital Minimum Requirement
|
|
|
2,278
|
|
|
|
4.00
|
|
|
|
2,133
|
|
|
|
4.00
|
|
Excess
|
|
$
|
2,243
|
|
|
|
3.94
|
%
|
|
$
|
3,315
|
|
|
|
6.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
$
|
6,698
|
|
|
|
11.76
|
%
|
|
$
|
7,505
|
|
|
|
14.07
|
%
|
Total
Capital Minimum Requirement
|
|
|
4,555
|
|
|
|
8.00
|
|
|
|
4,266
|
|
|
|
8.00
|
|
Excess
|
|
$
|
2,143
|
|
|
|
3.76
|
%
|
|
$
|
3,239
|
|
|
|
6.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-Adjusted
Assets
|
|
$
|
56,940
|
|
|
|
|
|
|
$
|
53,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LEVERAGE
RATIOS
($ in
millions)
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Tier
1 Capital
|
|
|
|
|
|
|
|
$
|
4,521
|
|
|
|
|
|
|
|
|
|
7.42
|
%
|
|
|
|
|
|
|
|
$
|
5,448
|
|
|
|
|
|
|
|
|
|
9.46
|
%
|
Minimum
Leverage Requirement
|
|
|
1,828
|
|
|
|
-
|
|
|
|
3,047
|
|
|
|
3.00
|
|
|
|
-
|
|
|
|
5.00
|
|
|
|
1,728
|
|
|
|
-
|
|
|
|
2,880
|
|
|
|
3.00
|
|
|
|
-
|
|
|
|
5.00
|
|
Excess
|
|
$
|
2,693
|
|
|
|
-
|
|
|
$
|
1,474
|
|
|
|
4.42
|
|
|
|
-
|
|
|
|
2.42
|
%
|
|
$
|
3,720
|
|
|
|
-
|
|
|
$
|
2,568
|
|
|
|
6.46
|
|
|
|
-
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
Average Total Assets
|
|
|
|
|
|
|
|
|
|
$
|
60,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
previously discussed, the tangible capital generated from the Separation
together with non-credit operating trends have allowed the Corporation to
prudently invest in the franchise and maintain a strong capital base in the
current credit environment. The Corporation does not currently expect it will be
required to raise additional dilutive capital in order to continue to maintain
its strong capital base however, the Corporation may elect to participate in the
U.S. Treasury Department’s Capital Purchase Program (“CPP”).
On
October 28, 2008, the Corporation announced that it had received preliminary
approval to participate in the CPP, a program designed to infuse capital into
the nation’s healthiest and strongest banks. The Corporation has been
approved for approximately $1.7 billion in capital which would take the form of
non-voting preferred stock that would pay cumulative dividends at the rate of 5%
for the first five years and then pay cumulative dividends at the rate of 9%
thereafter. In addition, the Corporation would be required to issue warrants to
the U.S. Treasury Department (the “UST”) to purchase a number of shares of the
Corporation’s common stock that would have an aggregate market price equal to
15% of the aggregate value of the preferred stock sold to the
UST. The exercise price for the warrants, and the market price for
determining the number of shares of common stock subject to the warrants, would
be calculated based on a 20-trading day trailing average ending on October 24,
2008. The warrants would be immediately exercisable, in whole or in part and
over a term of ten years.
Participation
in the CPP would require the Corporation to obtain consent from the U.S.
Treasury Department in order to increase its common dividend or repurchase
common shares under its Stock Repurchase Program.
The
Corporation estimates that the non-voting preferred stock would increase the
Corporation’s already well-capitalized Tier 1 and Total capital ratios at
September 30, 2008 to approximately 10.9% and 14.8%, respectively.
Participation
is specifically conditioned upon approval of the investment by the Corporation’s
board of directors and is subject to standard terms and conditions. The
Corporation is evaluating all of the terms and conditions associated with
participating in the CPP.
The
Corporation manages its liquidity to ensure that funds are available to each of
its banks to satisfy the cash flow requirements of depositors and borrowers and
to ensure the Corporation’s own cash requirements are met. The
Corporation maintains liquidity by obtaining funds from several
sources.
The
Corporation’s most readily available source of liquidity is its investment
portfolio. Investment securities available for sale, which totaled
$7.1 billion at September 30, 2008, represent a highly accessible source of
liquidity. The Corporation’s portfolio of held-to-maturity investment
securities, which totaled $0.3 billion at September 30, 2008, provides liquidity
from maturities and amortization payments. The Corporation’s loans
held for sale provide additional liquidity. These loans represent
recently funded loans that are prepared for delivery to investors, which are
generally sold shortly after the loan has been funded.
Depositors
within the Corporation’s defined markets are another source of
liquidity. Core deposits (demand, savings, money market and consumer
time deposits) averaged $23.4 billion in the third quarter of
2008. The Corporation's banking affiliates may also access the
federal funds markets, the Federal Reserve’s Term Auction Facility or utilize
collateralized borrowings such as treasury demand notes, FHLB advances or other
forms of collateralized borrowings.
During
the third quarter of 2008, the Corporation’s lead bank, M&I Marshall &
Ilsley Bank (“M&I Bank”), issued $475 million of agricultural mortgage
backed notes due August 19, 2011. These notes carry an unconditional
guarantee of principal and interest and are secured by Federal Agricultural
Mortgage Corporation (“Farmer Mac”).
The
Corporation’s banking affiliates may use wholesale deposits, which include
foreign (Eurodollar) deposits. Wholesale deposits, which averaged
$10.6 billion in the third quarter of 2008, are funds in the form of deposits
generated through distribution channels other than the Corporation’s own banking
branches. These deposits allow the Corporation’s banking subsidiaries
to gather funds across a national geographic base and at pricing levels
considered attractive, where the underlying depositor may be retail or
institutional. Access to wholesale deposits also provides the
Corporation with the flexibility to not pursue single service time deposit
relationships in markets that have experienced some unprofitable pricing
levels.
The
Corporation may use certain financing arrangements to meet its balance sheet
management, funding, liquidity, and market or credit risk management
needs. The majority of these activities are basic term or revolving
securitization vehicles. These vehicles are generally funded through
term-amortizing debt structures or with short-term commercial paper designed to
be paid off based on the underlying cash flows of the assets
securitized. These facilities provide access to funding sources
substantially separate from the general credit risk of the Corporation and its
subsidiaries.
M&I
Bank has implemented a global bank note program that permits it to issue and
sell up to a maximum of US$13.0 billion aggregate principal amount (or the
equivalent thereof in other currencies) at any one time outstanding of its
senior global bank notes with maturities of seven days or more from their
respective date of issue and subordinated global bank notes with maturities more
than five years from their respective date of issue. The notes may be
fixed rate or floating rate and the exact terms will be specified in the
applicable Pricing Supplement or the applicable Program
Supplement. This program is intended to enhance liquidity by enabling
M&I Bank to sell its debt instruments in global markets in the future
without the delays that would otherwise be incurred. At September 30,
2008, approximately $8.7 billion of new debt could be issued under M&I
Bank’s global bank note program.
The
national capital markets represent a further source of liquidity to the
Corporation.
The
Corporation has filed a shelf registration statement with the Securities and
Exchange Commission enabling the Corporation to issue up to 6.0 million shares
of its common stock, which may be offered and issued from time to time in
connection with acquisitions by the Corporation and/or other consolidated
subsidiaries of the Corporation. The Corporation anticipates that a portion of
these shares will be issued in connection with the previously discussed
acquisition of TCH.
As a
result of the Separation, on November 1, 2007, old Marshall & Ilsley
Corporation (Accounting Predecessor to the Corporation) became M&I LLC and
amounts remaining under the existing shelf registration statements were
deregistered. There will be no further issuances of debt by M&I
LLC.
On
November 6, 2007, Marshall & Ilsley Corporation filed a shelf registration
statement pursuant to which the Corporation is authorized to raise up to $1.9
billion through sales of corporate debt and/or equity securities with a
relatively short lead time. During the first quarter of 2008, the
Corporation issued $17.5 million of medium-term MiNotes under the shelf
registration statement. The MiNotes, issued in minimum denominations
of one-thousand dollars or integral multiples of one-thousand dollars, may have
maturities ranging from nine months to 30 years and may bear interest at fixed
or floating rates.
The
Corporation has a commercial paper program. At September 30, 2008
commercial paper outstanding amounted to approximately $0.1
billion. At September 30, 2008 all of the commercial paper
obligations of M&I LLC, which were issued prior to the Separation, had
matured and there will be no further issuances of commercial paper by M&I
LLC.
The
Corporation and/or M&I Bank may repurchase or redeem its outstanding debt
securities from time to time, including, without limitation, senior and
subordinated global bank notes, medium-term corporate notes, MiNotes or junior
subordinated deferrable interest debentures and the related trust preferred
securities. Such repurchases or redemptions may be made in open market
purchases, in privately negotiated transactions or otherwise for cash or other
consideration. Any such repurchases or redemptions will be made on an
opportunistic basis as market conditions permit and are dependent on the
Corporation’s liquidity needs, compliance with any contractual or indenture
restrictions and regulatory requirements and other factors the Corporation deems
relevant.
The
market impact of the deterioration in the national residential real estate
markets which includes the sub-prime mortgage crisis has been
substantial. These events have resulted in a decline in market
confidence and a subsequent strain on liquidity. However, the
Separation provided the Corporation with over two billion dollars in cash and
significantly increased its regulatory and tangible capital
levels. Management expects that it will continue to make use of a
wide variety of funding sources, including those that have not shown the levels
of stress demonstrated in some of the national capital
markets. Notwithstanding the current national capital market impact
on the cost and availability of liquidity, management believes that it has
adequate liquidity to ensure that funds are available to the Corporation and
each of its banks to satisfy their cash flow requirements. If capital
markets deteriorate more than management currently expects, the Corporation
could experience further stress on its liquidity position and ability to
increase assets.
Short-term
borrowings represent contractual debt obligations with maturities of one year or
less and amounted to $6.3 billion at September 30, 2008. Long-term
borrowings amounted to $9.7 billion at September 30, 2008. The
scheduled maturities of long-term borrowings including estimated interest
payments at September 30, 2008 were as follows: $2.0 billion is due
in less than one year; $4.4 billion is due in one to three years; $2.6 billion
is due in three to five years; and $2.3 billion is due in more than five
years. On January 2, 2008, the Corporation completed the acquisition
of First Indiana. Stockholders of First Indiana received $32.00 in
cash for each share of First Indiana common stock outstanding, or approximately
$530.2 million. There have been no other substantive changes to the
Corporation’s contractual obligations as reported in the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2007.
OFF-BALANCE
SHEET ARRANGEMENTS
In
conjunction with the first quarter 2008 acquisition of First Indiana, M&I
LLC acquired all of the common interests in one trust that issued cumulative
preferred capital securities which are supported by junior subordinated
deferrable interest debentures in the principal amount of $12.0 million and a
full guarantee assumed by M&I LLC. The Corporation does not
consolidate this trust in accordance with United States generally accepted
accounting principles.
During
the second quarter of 2008, the Corporation called $15 million in aggregate
principal amount of its floating rate junior subordinated deferrable interest
debentures and the related $10 million EBC Statutory Trust I trust preferred
securities and $5 million EBC Statutory Trust II trust preferred
securities. Also during the second quarter of 2008, the Corporation
called $12 million in principal amount of its junior subordinated deferrable
interest debentures and the related cumulative preferred capital securities
which were acquired in conjunction with the acquisition of First Indiana as
previously discussed.
At
September 30, 2008, there have been no other substantive changes with respect to
the Corporation’s off-balance sheet activities as disclosed in the Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2007. The
Corporation continues to believe that based on the off-balance sheet
arrangements with which it is presently involved, such off-balance sheet
arrangements neither have, nor are reasonably likely to have, a material impact
to its current or future financial condition, results of operations, liquidity
or capital.
CRITICAL
ACCOUNTING POLICIES
The
Corporation has established various accounting policies which govern the
application of accounting principles generally accepted in the United States in
the preparation of the Corporation’s consolidated financial
statements. The significant accounting policies of the Corporation
are described in the footnotes to the consolidated financial statements
contained in the Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2007, and updated as necessary in its Quarterly Reports on Form
10-Q. Certain accounting policies involve significant judgments and
assumptions by management that may have a material impact on the carrying value
of certain assets and liabilities. Management considers such
accounting policies to be critical accounting policies. The judgments
and assumptions used by management are based on historical experience and other
factors, which are believed to be reasonable under the
circumstances. Because of the nature of judgments and assumptions
made by management, actual results could differ from these judgments and
estimates which could have a material impact on the carrying values of assets
and liabilities and the results of the operations of the
Corporation. Management continues to consider the following to be
those accounting policies that require significant judgments and
assumptions:
Allowance
for Loan and Lease Losses
The
allowance for loan and lease losses represents management’s estimate of probable
losses inherent in the Corporation’s loan and lease
portfolio. Management evaluates the allowance each quarter to
determine that it is adequate to absorb these inherent losses. This
evaluation is supported by a methodology that identifies estimated losses based
on assessments of individual problem loans and historical loss patterns of
homogeneous loan pools. In addition, environmental factors, including
economic conditions and regulatory guidance, unique to each measurement date are
also considered. This reserving methodology has the following
components:
Specific
Reserve.
The Corporation’s internal risk rating system is used
to identify loans and leases that meet the criteria as being “impaired” under
the definition in Statement of Financial Accounting Standards No. 114,
Accounting by
Creditors for Impairment of a Loan
. 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. For impaired loans, impairment is measured using one of
three alternatives: (1) the present value of expected future cash flows
discounted at the loan’s effective interest rate; (2) the loan’s observable
market price, if available; or (3) the fair value of the collateral for
collateral dependent loans and loans for which foreclosure is deemed to be
probable. In general, these loans have been internally identified as
credits requiring management’s attention due to underlying problems in the
borrower’s business or collateral concerns. For all troubled-debt restructured
loans which the Corporation refers to as renegotiated and other loans subject to
a minimum size, a quarterly review of these loans is performed to identify the
specific reserve necessary to be allocated to each of these
loans. This analysis considers expected future cash flows, the value
of collateral and also other factors that may impact the borrower’s ability to
make payments when due.
Collective Loan
Impairment.
This component of the allowance for loan and lease
losses is comprised of two elements. First, the Corporation makes a
significant number of loans and leases, which due to their underlying similar
characteristics, are assessed for loss as homogeneous pools. Included
in the homogeneous pools are loans and leases from the retail sector and
commercial loans under a certain size that have been excluded from the specific
reserve allocation previously discussed. The Corporation segments the
pools by type of loan or lease and, using historical loss information, estimates
a loss reserve for each pool.
The
second element reflects management’s recognition of the uncertainty and
imprecision underlying the process of estimating losses. The internal
risk rating system is used to identify those loans within certain industry
segments that based on financial, payment or collateral performance, warrant
closer ongoing monitoring by management. The specific loans mentioned
earlier are excluded from this analysis. Based on management’s
judgment, reserve ranges are allocated to industry segments due to environmental
conditions unique to the measurement period. Consideration is given
to both internal and external environmental factors such as economic conditions
in certain geographic or industry segments of the portfolio, economic trends,
risk profile, and portfolio composition. Reserve ranges are then
allocated using estimates of loss exposure that management has identified based
on these economic trends or conditions.
The
Corporation has not materially changed any aspect of its overall approach in the
determination of the allowance for loan and lease losses. However, on
an on-going basis the Corporation continues to refine the methods and update the
estimated loss factors used in determining management’s best estimate of the
allowance for loan and lease losses.
The
following factors were taken into consideration in determining the adequacy of
the allowance for loan and lease losses at September 30, 2008:
The
national residential real estate markets continued to show signs of stress and
deterioration during the third quarter and first nine months of
2008.
At
September 30, 2008, nonperforming loans and leases amounted to $1,362.2 million
or 2.70% of consolidated loans and leases compared to $1,041.0 million or 2.07%
of consolidated loans and leases at June 30, 2008, and $453.6 million or 1.01%
of consolidated loans and leases at September 30, 2007. Consistent
with recent quarters, nonperforming real estate loans were the primary source of
the Corporation’s nonperforming loans and leases and represented 85.6% of total
nonperforming loans and leases at September 30, 2008. Nonperforming
real estate loans amounted to $1,166.5 million at September 30, 2008 compared to
$890.3 million at June 30, 2008, an increase of $276.2 million or
31.0%. Nonperforming loans associated with residential-related
construction and development (commercial and residential), which the Corporation
collectively refers to as construction and development loans, amounted to $825.4
million at September 30, 2008 compared to $660.6 million at June 30, 2008, an
increase of $164.8 million or 24.9%, which is net of the nonaccrual real estate
loans that were sold during the third quarter of 2008. Nonperforming 1-4 family
residential real estate loans increased $75.3 million or 62.4% compared to June
30, 2008 and amounted to $195.9 million or 3.45% of total 1-4 family residential
real estate loans at September 30, 2008.
At
September 30, 2008, total consolidated construction and development loans
outstanding amounted to $9.8 billion. Approximately $3.8 billion or 38.7% of
these loans are loans associated with Arizona, the west coast of Florida and
correspondent banking business channels. Nonperforming construction and
development loans represented 70.8% of the Corporation’s nonperforming real
estate loans and 60.6% of the Corporation’s total nonperforming loans and leases
at September 30, 2008. Nonperforming construction and development
loans associated with Arizona, the west coast of Florida and correspondent
banking business channels represent 42.0% of the Corporation’s total
consolidated nonperforming loans and leases at September 30, 2008.
Nonperforming
loans in Florida amounted to $145.2 million or 4.68% of total Florida loans at
September 30, 2008 compared to nonperforming loans in Florida of $150.0 million
or 4.97% of total Florida loans at June 30, 2008. Approximately $92.9
million or 64.0% of nonperforming loans in Florida at September 30, 2008 were
construction and development loans. While the level of nonperforming loans in
relation to total loans remain elevated in Florida, the amount of the
Corporation’s nonperforming loans in Florida may be showing signs of
stabilizing.
Historically,
the Corporation’s loss experience with real estate loans has been relatively low
due to the sufficiency of the underlying real estate collateral. In a
stressed housing market such as currently exists, the value of the collateral
securing the loan has become one of the most important factors in determining
the amount of loss incurred and the appropriate amount of allowance for loan and
lease losses to record at the measurement date. The likelihood of
losses that are equal to the entire recorded investment for a real estate loan
is remote. However, in many cases, declining real estate values have
resulted in the determination that the estimated value of the collateral was
insufficient to cover all of the recorded investment in the loan which has
required additional charge-offs contributing to the increase in the provision
for loan and lease losses and the elevated levels of net charge-offs the
Corporation has experienced in recent quarters.
On an
ongoing basis, the Corporation re-assesses the timeliness and propriety of
appraisals for collateral dependent loans and has increased the frequency of
obtaining indications of collateral values in current higher risk segments
within its real estate portfolio, such as the volatile real estate markets on
the west coast of Florida and in Arizona. In addition, the Corporation uses a
variety of sources such as recent sales of loans and sales of OREO to validate
the collateral values used to determine the amount of loss exposure at the
measurement date.
The
amount of cumulative charge-offs recorded on its nonperforming loans was
approximately $345.2 million or 20.2% of the unpaid principal balance of its
nonperforming loans outstanding at September 30, 2008. These
charge-offs have reduced the carrying value of these nonperforming loans and
leases to an amount that is estimated to be collectible with no further
allowance required at the measurement date.
The
Corporation’s primary lending areas are Wisconsin, Arizona, Minnesota, Missouri,
Florida and Indiana. Recent acquisitions are in relatively new
markets for the Corporation. Included in these new markets is the
Kansas City metropolitan area and Tampa, Sarasota, Bradenton and Orlando,
Florida, and the Indianapolis and central Indiana market. Each of these regions
and markets has cultural and environmental factors that are unique to it.
Construction and development real estate loans that are primarily concentrated
in the west coast of Florida and Arizona, have been the primary contributor to
the increase in nonperforming loans and leases and net charge-offs in recent
quarters.
At
September 30, 2008, allowances for loan and lease losses continue to be carried
for exposures to manufacturing, healthcare, production agriculture (including
dairy and cropping operations), truck transportation, accommodation, general
contracting and motor vehicle and parts dealers. While most loans in
these categories are still performing, the Corporation continues to believe
these sectors present a higher than normal risk due to their financial and
external characteristics.
Net
charge-offs amounted to $152.3 million or 1.21% of average loans and leases in
the third quarter of 2008 compared to $400.7 million or 3.23% of average loans
and leases in the second quarter of 2008 and $26.0 million or 0.23% of average
loans and leases in the third quarter of 2007. For the nine months
ended September 30, 2008, net charge-offs amounted to $684.1 million or 1.85% of
average loans and leases compared to $64.3 million or 0.20% of average loans and
leases for the nine months ended September 30, 2007. Net charge-offs of real
estate loans amounted to $117.1 million or 76.9% of total net charge-offs in the
third quarter of 2008. For the nine months ended September 30, 2008,
net charge-offs of real estate loans amounted to $596.9 million or 87.3% of net
charge-offs in the first nine months of 2008. For the three and nine
months ended September 30, 2008, approximately $89.1 million and $524.7 million,
respectively, of the real estate loan net charge-offs were construction and
development loan net charge-offs. Included in net charge-offs were the net
charge-offs related to the loans that were sold during the third quarter and
first nine months of 2008.
Based on
the above loss estimates, management determined its best estimate of the
required allowance for loans and leases. Management’s evaluation of
the factors described above resulted in an allowance for loan and lease losses
of $1,031.5 million or 2.05% of loans and leases outstanding at September 30,
2008. The allowance for loan and lease losses was $452.7 million or
1.01% of loans and leases outstanding at September 30, 2007. Consistent with the
credit quality trends noted above, the provision for loan and lease losses was
$155.0 million for the three months ended September 30, 2008 and $1,187.3
million for the nine months ended September 30, 2008. By comparison,
the provision for loan and lease losses amounted to $41.5 million for the three
months ended September 30, 2007 and $84.7 million for the nine months ended
September 30, 2007. The resulting provisions for loan and lease
losses are the amounts required to establish the allowance for loan and lease
losses at the required level after considering charge-offs and
recoveries. Management recognizes there are significant estimates in
the process and the ultimate losses could be significantly different from those
currently estimated.
Income
Taxes
Income
taxes are accounted for using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on tax assets and liabilities of a change in tax rates is recognized in
the income statement in the period that includes the enactment
date.
The
determination of current and deferred income taxes is based on complex analyses
of many factors, including interpretation of Federal and state income tax laws,
the difference between tax and financial reporting basis of assets and
liabilities (temporary differences), estimates of amounts currently due or owed,
such as the timing of reversals of temporary differences and current accounting
standards. The Federal and state taxing authorities who make
assessments based on their determination of tax laws periodically review the
Corporation’s interpretation of Federal and state income tax
laws. Tax liabilities could differ significantly from the estimates
and interpretations used in determining the current and deferred income tax
liabilities based on the completion of taxing authority
examinations.
The
Corporation accounts for the uncertainty in income taxes recognized in financial
statements in accordance with the recognition threshold and measurement process
for a tax position taken or expected to be taken in a tax return in accordance
with Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN
48”),
Accounting for
Uncertainty in Income Taxes- an Interpretation of FASB Statement No. 109
.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosures. FIN 48 was
adopted by the Corporation on January 1, 2007.
As a
result of the Internal Revenue Service’s decision not to appeal a
November 2007 US Tax Court ruling related to how the TEFRA (interest expense)
disallowance should be calculated within a consolidated group and the position
the IRS has taken in another related case, the Corporation recognized an
additional income tax benefit related to years 1996-2007 of approximately $20.0
million for its similar issue during the first quarter of 2008.
The
Corporation anticipates it is reasonably possible that unrecognized tax benefits
up to approximately $20 million could be realized within 12 months of September
30, 2008. The realization would principally result from settlement
with taxing authorities over one issue relating to the tax benefits associated
with a 2002 stock issuance.
New
Accounting Pronouncements
A
discussion of new accounting pronouncements that are applicable to the
Corporation and have been or will be adopted by the Corporation is included in
Note 3 in Notes to Financial Statements contained in Item 1 herein.
FORWARD-LOOKING
STATEMENTS
Items 2
and 3 of this Form 10-Q, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Quantitative and Qualitative
Disclosures about Market Risk,” respectively, contain forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements
include, without limitation, statements regarding expected financial and
operating activities and results which are preceded by words such as “expects”,
“anticipates” or “believes”. Such statements are subject to important
factors that could cause the Corporation’s actual results to differ materially
from those anticipated by the forward-looking statements. These
factors include those referenced in Part II, Item 1A. Risk Factors, in this
Quarterly Report on Form 10-Q and as may be described from time to time in the
Corporation’s subsequent SEC filings.
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
following updated information should be read in conjunction with the
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2007. Updated information regarding the Corporation’s use of
derivative financial instruments is contained in Note 14 – Derivative Financial
Instruments and Hedging Activities in Notes to Financial Statements contained in
Item 1 herein.
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 non-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 and market value 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 limit 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 of the assets and liabilities held by the
Corporation. The net change in net interest income in different
market rate environments is the amount of earnings at risk. The net
change in the present value of the asset and liability cash flows in different
market rate environments is the amount of market value at
risk. Policies are in place to help assure that neither earnings nor
market 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 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 cash flows 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 difference by the
Corporation’s budgeted operating income before taxes for the calendar
year. 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 the year (+25bp per quarter),
and a gradual decrease of 100bp across the entire yield curve over the course of
the year (-25bp per quarter) for the balance sheet as of September 30,
2008:
Hypothetical Change in Interest
Rates
|
|
Impact to 2008
|
|
100
basis point gradual rise in
rates
|
|
|
0.5
|
%
|
100
basis point gradual decline in rates
|
|
|
(1.1
|
)
%
|
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 and changes in spread between key market
rates. These results also 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 the timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and
management strategies.
Equity
Risk
In
addition to interest rate risk, the Corporation incurs market risk in the form
of equity risk. The Corporation invests directly and indirectly
through investment funds, in private medium-sized companies to help establish
new businesses or recapitalize existing ones. These investments
expose the Corporation to the change in equity values for the portfolio
companies. However, fair values are difficult to determine until an
actual sale or liquidation transaction actually occurs. At September
30, 2008, the carrying value of total private equity investments amounted to
approximately $72.4 million.
At
September 30, 2008, M&I Wealth Management administered $101.3 billion in
assets and directly managed approximately $24.4 billion in
assets. Exposure exists to changes in equity values due to the fact
that fee income is partially based on equity balances. Quantification
of this exposure is 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.
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ITEM
4. CONTROLS AND
PROCEDURES
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The
Corporation maintains a set of disclosure controls and procedures that are
designed to ensure that information required to be disclosed by it in the
reports filed by it under the Securities Exchange Act of 1934, as amended, are
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and to ensure that information required to be
disclosed by the Corporation in such reports is accumulated and communicated to
the Corporation’s Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. The Corporation carried out an evaluation, under the
supervision and with the participation of its management, including its
President and Chief Executive Officer and its Senior Vice President and Chief
Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange
Act. Based on that evaluation, the President and Chief Executive
Officer and the Senior Vice President and Chief Financial Officer conclude that
the Corporation’s disclosure controls and procedures are effective as of the end
of the period covered by this report for the purposes for which they are
designed.
There
have been no changes in the Corporation’s internal control over financial
reporting identified in connection with the evaluation discussed above that
occurred during the Corporation’s last fiscal quarter that have materially
affected, or are reasonably likely to materially affect the Corporation’s
internal control over financial reporting.
PART
II - OTHER INFORMATION
|
The
Corporation has made material additions and revisions to the Risk Factors
set forth in Item 1A. Risk Factors of the Corporation’s Annual Report on
Form 10-K for the year ended December 31, 2007, as supplemented in the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2008. The amended and restated Risk Factors set forth below
replace and supersede in their entirety the Risk Factors provided in the
Corporation’s previous filings.
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Risk
Factors
|
The
Corporation’s earnings are significantly affected by general business and
economic conditions, including credit risk and interest rate
risk.
|
|
The
Corporation’s business and earnings are sensitive to general business and
economic conditions in the United States and, in particular, the states
where it has significant operations, including Wisconsin, Arizona,
Indiana, Minnesota, Missouri, Kansas, Nevada and Florida. These
conditions include short-term and long-term interest rates, inflation,
monetary supply, fluctuations in both debt and equity capital markets, the
strength of the U.S. and local economies, real estate values, consumer
spending, borrowing and saving habits, all of which are beyond the
Corporation’s control. For example, an economic downturn,
increase in unemployment or higher interest rates could decrease the
demand for loans and other products and services and/or result in a
deterioration in credit quality and/or loan performance and
collectability. Nonpayment of loans, if it occurs, could have
an adverse effect on the Corporation’s financial condition and results of
operations and cash flows. Higher interest rates also could
increase the Corporation’s cost to borrow funds and increase the rate the
Corporation pays on deposits.
|
|
The
Corporation’s real estate loans expose the Corporation to increased credit
risks.
|
|
A
substantial portion of the Corporation’s loan and lease portfolio consists
of real estate-related loans, including construction and residential and
commercial mortgage loans. As a result, deterioration in the
U.S. real estate markets has led to an increase in non-performing loans
and charge-offs, and the Corporation has had to increase its allowance for
loan and lease losses. Further deterioration in the commercial
or residential real estate markets or in the U.S. economy would increase
the Corporation’s exposure to real estate-related credit risk and cause
the Corporation to further increase its allowance for loan and lease
losses, all of which would have a material adverse effect on the
Corporation’s financial condition and results of
operations.
|
|
Various
factors may cause the Corporation’s allowance for loan and lease losses to
increase.
|
|
The
Corporation’s allowance for loan and lease losses represents management’s
estimate of probable losses inherent in the Corporation’s loan and lease
portfolio. Management evaluates the allowance each quarter to
determine that it is adequate to absorb these inherent
losses. This evaluation is supported by a methodology that
identifies estimated losses based on assessments of individual problem
loans and historical loss patterns of homogeneous loan
pools. In addition, environmental factors unique to each
measurement date are also considered, including economic conditions in
certain geographic or industry segments of the loan portfolio, economic
trends, risk profile and portfolio composition. The
determination of the appropriate level of the allowance for loan and lease
losses is highly subjective and requires management to make significant
estimates of current credit risks and future trends, all of which may
undergo material changes. Changes in economic conditions
affecting borrowers, new information regarding existing loans,
identification of additional problem loans and other factors, many of
which are outside of the Corporation’s control, may require an increase in
the allowance for loan and lease losses. Any increase in the
allowance for possible loan and lease losses will result in a decrease in
net income and capital, and would have a material adverse effect on the
Corporation’s financial condition and results of
operations.
|
|
There
can be no assurance that the Corporation’s shareholders will continue to
receive dividends at the current
rate.
|
|
Holders
of the Corporation’s common stock are only entitled to receive such
dividends as the Corporation’s Board of Directors may declare out of funds
available for such payments. Although the Corporation has
historically declared cash dividends on its common stock, there can be no
assurance that the Corporation will maintain dividends at the current
rate. The Corporation recently disclosed that the Board is
reviewing the Corporation’s dividend policy in light of the Corporation’s
projected financial results in an effort to make sure that the Corporation
maintains a strong capital base through the current economic down
cycle. Any reduction of, or the elimination of, the
Corporation’s common stock dividend could adversely affect the market
price of the Corporation’s common
stock.
|
|
A
failure by the Corporation to maintain required levels of capital could
have a material adverse effect on the
Corporation.
|
|
Banking
regulations require the Corporation to maintain adequate levels of
capital, in order to support its operations and fund outstanding
liabilities. Furthermore, each of the Corporation’s subsidiary
banks is required to maintain specific capital levels. If any
of the subsidiary banks fails to maintain the required capital levels, the
subsidiary banks could be subject to various sanctions by federal
regulators that could adversely impact the Corporation. Such
sanctions could potentially include, without limitation, the termination
of deposit insurance by the Federal Deposit Insurance Corporation,
limitations on the subsidiary banks’ ability to pay dividends to the
Corporation and the issuance of a capital directive by a federal
regulatory authority requiring an increase in
capital.
|
|
The
Corporation’s ability and the ability of its subsidiary banks to raise
additional capital, if needed, may be impaired by changes and trends in
the capital markets that are outside the Corporation’s
control. Accordingly, there can be no assurance that the
Corporation or its subsidiary banks will be able to raise additional
capital, if needed on terms acceptable to the Corporation or its
subsidiary banks.
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|
There
can be no assurance that recently enacted legislation will help stabilize
the U.S. financial system.
|
|
The
Emergency Economic Stabilization Act of 2008 (“EESA”) was recently signed
into law in response to the financial crises affecting the banking system
and financial markets and going concern threats to investment banks and
other financial institutions. Pursuant to EESA, the United
States Department of the Treasury (the “UST”) has the authority to, among
other things, purchase up to $700 billion of mortgages, mortgage-backed
securities and certain other financial instruments from financial
institutions for the purpose of stabilizing and providing liquidity to the
U.S. financial markets. The UST announced a Capital Purchase
Program (the “CPP”) under EESA pursuant to which it will purchase senior
preferred stock in participating financial institutions. The
Corporation recently announced that it has received preliminary approval
to participate in the CPP.
|
|
There
can be no assurance, however, as to the actual impact that EESA, including
the CPP and UST’s Troubled Asset Repurchase Program (TARP), will have on
the financial markets or on the Corporation. The failure of
these programs to help stabilize the financial markets and a continuation
or worsening of current financial market conditions could materially and
adversely affect the Corporation’s business, financial condition, results
of operations, access to credit or the trading price of the Corporation’s
common stock.
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|
The
failure of other financial institutions could adversely affect the
Corporation.
|
|
The
Corporation’s ability to engage in funding transactions could be adversely
affected by the actions and failure of other financial
institutions. Financial institutions are interrelated as a
result of trading, clearing, counterparty or other
relationships. The Corporation has exposure to many different
industries and counterparties, and routinely executes transactions with
counterparties in the financial industry, including brokers and dealers,
commercial banks, investment banks, insurers, mutual and hedge funds, and
other institutional clients. As a result, defaults by, or even
questions or rumors about, one or more financial services institutions, or
the financial services industry generally, have led to market-wide
liquidity problems and could lead to losses or defaults by the Corporation
or other institutions. Many of these transactions expose the
Corporation to credit risk in the event of default of its counterparty or
client. In addition, the Corporation’s credit risk may be
exacerbated when collateral it holds cannot be relied upon or is
liquidated at prices not sufficient to recover the full amount of exposure
of the Corporation. Any such losses could materially and
adversely affect the Corporation’s results of
operations.
|
|
Current
levels of market volatility are
unprecedented.
|
|
The
capital and credit markets have been experiencing volatility and
disruption for over a year. Recently, this volatility and
disruption has reached unprecedented levels, and in many cases has
produced downward pressure on stock prices and credit availability for
certain issuers without regard to the underlying financial strength of
those issuers. If current levels of market disruption and
volatility continue or worsen, there can be no assurance that such
conditions will not have a material adverse effect on the Corporation’s
business, financial condition and results of
operations.
|
|
The
Corporation’s stock price can be
volatile.
|
|
The
Corporation’s stock price can fluctuate widely in response to a variety of
factors, including the factors described elsewhere in these Risk Factors
and the following additional
factors:
|
•
|
actual
or anticipated variations in the Corporation’s quarterly
results;
|
•
|
changes
in government regulations;
|
•
|
unanticipated
losses or gains due to unexpected events, including losses or gains on
securities held for investment
purposes;
|
•
|
credit
quality ratings;
|
•
|
new
technology or services offered by the Corporation’s
competitors;
|
•
|
significant
acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving the Corporation or its
competitors;
|
•
|
changes
in accounting policies or practices;
or
|
•
|
failure
to successfully integrate the Corporation’s acquisitions or realize
anticipated benefits from the Corporation’s
acquisitions.
|
|
Changes
in the Corporation’s credit ratings could adversely affect the
Corporation’s liquidity and financial
condition.
|
|
The
credit ratings of the Corporation and its subsidiaries are important
factors in the Corporation’s ability to access certain types of
liquidity. A downgrade in the credit ratings of the Corporation
or any of its subsidiaries could potentially increase the cost of debt,
limit the Corporation’s access to capital markets, require the Corporation
to post collateral, or negatively impact the Corporation’s
profitability. Furthermore, a downgrade of the credit rating of
securities issued by the Corporation or its subsidiaries could adversely
affect the ability of the holders to sell those
securities.
|
|
Future
sales or other dilution of the Corporation’s equity may adversely affect
the market price of the Corporation’s common
stock.
|
|
In
connection with its proposed participation in the CPP the Corporation
would, or under other circumstances the Corporation may, issue additional
common stock or preferred securities, including securities convertible or
exchangeable for, or that represent the right to receive, common
stock. The market price of the Corporation’s common stock could
decline as a result of sales of a large number of shares of common stock,
preferred stock or similar securities in the market. The
issuance of additional common stock would dilute the ownership interest of
the Corporation’s existing
shareholders.
|
|
Terrorism,
acts of war, international conflicts and natural disasters could
negatively affect the Corporation’s business and financial
condition.
|
|
Acts
or threats of war or terrorism, international conflicts (including
conflict in the Middle East), natural disasters, and the actions taken by
the U.S. and other governments in response to such events, could disrupt
business operations and negatively impact general business and economic
conditions in the U.S. If terrorist activity, acts of war,
other international hostilities or natural disasters disrupt business
operations, trigger technology delays or failures, or damage physical
facilities of the Corporation, its customers or service providers, or
cause an overall economic decline, the financial condition and operating
results of the Corporation could be materially adversely
affected. The potential for future occurrences of these events
has created many economic and political uncertainties that could seriously
harm the Corporation’s business and results of operations in ways that
cannot presently be predicted.
|
|
The
Corporation’s earnings also are significantly affected by the fiscal and
monetary policies of the federal government and its agencies, which could
affect repayment of loans and thereby materially adversely affect the
Corporation.
|
|
The
policies of the Federal Reserve Board impact the Corporation
significantly. The Federal Reserve Board regulates the supply
of money and credit in the United States. Its policies directly
and indirectly influence the rate of interest earned on loans and paid on
borrowings and interest-bearing deposits and can also affect the value of
financial instruments the Corporation holds. Those policies
determine to a significant extent the Corporation’s cost of funds for
lending and investing. Changes in those policies are beyond the
Corporation’s control and are difficult to predict. Federal
Reserve Board policies can affect the Corporation’s borrowers, potentially
increasing the risk that they may fail to repay their
loans. For example, a tightening of the money supply by the
Federal Reserve Board could reduce the demand for a borrower’s products
and services. This could adversely affect the borrower’s
earnings and ability to repay its loan, which could materially adversely
affect the Corporation.
|
|
The
banking and financial services industry is highly competitive, which could
adversely affect the Corporation’s financial condition and results of
operations.
|
|
The
Corporation operates in a highly competitive environment in the products
and services the Corporation offers and the markets in which the
Corporation serves. The competition among financial services
providers to attract and retain customers is intense. Customer
loyalty can be easily influenced by a competitor’s new products,
especially offerings that provide cost savings to the
customer. Some of the Corporation’s competitors may be better
able to provide a wider range of products and services over a greater
geographic area.
|
|
The
Corporation believes the banking and financial services industry will
become even more competitive as a result of legislative, regulatory and
technological changes and the continued consolidation of the
industry. Technology has lowered barriers to entry and made it
possible for non-banks to offer products and services traditionally
provided by banks, such as automatic funds transfer and automatic payment
systems. Also, investment banks and insurance companies are
competing in more banking businesses such as syndicated lending and
consumer banking. Many of the Corporation’s competitors are
subject to fewer regulatory constraints and have lower cost
structures. The Corporation expects the consolidation of the
banking and financial services industry to result in larger,
better-capitalized companies offering a wide array of financial services
and products.
|
|
Federal
and state agency regulation could increase the Corporation’s cost
structures or have other negative effects on the
Corporation.
|
|
The
Corporation and M&I LLC, their subsidiary banks and many of their
non-bank subsidiaries are heavily regulated at the federal and state
levels. This regulation is designed primarily to protect
consumers, depositors and the banking system as a whole, not
shareholders. Congress and state legislatures and federal and
state regulatory agencies continually review banking laws, regulations and
policies for possible changes. Changes to statutes, regulations
or regulatory policies, including changes in interpretation or
implementation of statutes, regulations or policies, could affect the
Corporation in substantial and unpredictable ways including limiting the
types of financial services and products the Corporation may offer,
increasing the ability of non-banks to offer competing financial services
and products and/or increasing the Corporation’s cost
structures. Also, the Corporation’s failure to comply with
laws, regulations or policies could result in sanctions by regulatory
agencies and damage to its
reputation.
|
|
The
Corporation is subject to examinations and challenges by tax authorities,
which, if not resolved in the Corporation’s favor, could adversely affect
the Corporation’s financial condition and results of operations and cash
flows.
|
|
In
the normal course of business, the Corporation and its affiliates are
routinely subject to examinations and challenges from federal and state
tax authorities regarding the amount of taxes due in connection with
investments it has made and the businesses in which it is
engaged. Recently, federal and state taxing authorities have
become increasingly aggressive in challenging tax positions taken by
financial institutions. These tax positions may relate to tax
compliance, sales and use, franchise, gross receipts, payroll, property
and income tax issues, including tax base, apportionment and tax credit
planning. The challenges made by tax authorities may result in
adjustments to the timing or amount of taxable income or deductions or the
allocation of income among tax jurisdictions. If any such
challenges are made and are not resolved in the Corporation’s favor, they
could have an adverse effect on the Corporation’s financial condition and
results of operations and cash
flows.
|
|
Consumers
may decide not to use banks to complete their financial transactions,
which could result in a loss of income to the
Corporation.
|
|
Technology
and other changes are allowing parties to complete financial transactions
that historically have involved banks at one or both ends of the
transaction. For example, consumers can now pay bills and
transfer funds directly without banks. The process of
eliminating banks as intermediaries, known as disintermediation, could
result in the loss of fee income, as well as the loss of customer deposits
and income generated from those
deposits.
|
|
Maintaining
or increasing the Corporation’s market share depends on market acceptance
and regulatory approval of new products and services and other factors,
and the Corporation’s failure to achieve such acceptance and approval
could harm its market share.
|
|
The
Corporation’s success depends, in part, on its ability to adapt its
products and services to evolving industry standards and to control
expenses. There is increasing pressure on financial services
companies to provide products and services at lower
prices. This can reduce the Corporation’s net interest margin
and revenues from its fee-based products and services. In
addition, the Corporation’s success depends in part on its ability to
generate significant levels of new business in its existing markets and in
identifying and penetrating new markets. Growth rates for
card-based payment transactions and other product markets may not continue
at recent levels. Further, the widespread adoption of new
technologies, including Internet-based services, could require the
Corporation to make substantial expenditures to modify or adapt its
existing products and services or render the Corporation’s existing
products obsolete. The Corporation may not successfully
introduce new products and services, achieve market acceptance of its
products and services, develop and maintain loyal customers and/or break
into targeted markets.
|
|
The
Corporation and M&I LLC rely on dividends from their subsidiaries for
most of their revenue, and the banking subsidiaries hold a significant
portion of their assets indirectly.
|
|
The
Corporation and M&I LLC are separate and distinct legal entities from
their subsidiaries. They receive substantially all of their
revenue from dividends from their subsidiaries. These dividends
are the principal source of funds to pay dividends on the Corporation’s
common stock and interest on the Corporation’s and M&I LLC’s
debt. The payment of dividends by a subsidiary is subject to
federal law restrictions and to the laws of the subsidiary’s state of
incorporation. Furthermore, a parent company’s right to
participate in a distribution of assets upon a subsidiary’s liquidation or
reorganization is subject to the prior claims of the subsidiary’s
creditors. In addition, the Corporation’s bank and savings
association subsidiaries hold a significant portion of their mortgage loan
and investment portfolios indirectly through their ownership interests in
direct and indirect subsidiaries.
|
|
The
Corporation depends on the accuracy and completeness of information about
customers and counterparties, and inaccurate or incomplete information
could negatively impact the Corporation’s financial condition and results
of operations.
|
|
In
deciding whether to extend credit or enter into other transactions with
customers and counterparties, the Corporation may rely on information
provided to it by customers and counterparties, including financial
statements and other financial information. The Corporation may
also rely on representations of customers and counterparties as to the
accuracy and completeness of that information and, with respect to
financial statements, on reports of independent auditors. For
example, in deciding whether to extend credit to a business, the
Corporation may assume that the customer’s audited financial statements
conform to generally accepted accounting principles and present fairly, in
all material respects, the financial condition, results of operations and
cash flows of the customer. The Corporation may also rely on
the audit report covering those financial statements. The
Corporation’s financial condition and results of operations could be
negatively impacted to the extent it relies on financial statements that
do not comply with GAAP or that are materially
misleading.
|
|
An
interruption or breach in security of the Corporation’s or the
Corporation’s third party service providers’ communications and
information technologies could have a material adverse effect on the
Corporation’s business.
|
|
The
Corporation relies heavily on communications and information technology to
conduct its business. Any failure, interruption or breach in
security of these systems could result in failures or disruptions in the
Corporation’s customer relationship management, general ledger, deposit,
loan and other systems. Despite the Corporation’s policies and
procedures designed to prevent or limit the effect of such a failure,
interruption or security breach of its information systems, there can be
no assurance that any such events will not occur or, if they do occur,
that they will be adequately addressed. The occurrence of any
failures, interruptions or security breaches of the Corporation’s
information systems could damage the Corporation’s reputation, result in a
loss of customers or customer business, subject the Corporation to
additional regulatory scrutiny, or expose the Corporation to civil
litigation and possible financial liability, any of which could have a
material adverse effect on the Corporation’s financial condition and
results of operations.
|
|
In
addition, the Corporation relies on third-party service providers for a
substantial portion of its communications, information, operating and
financial control systems technology. If any of these
third-party service providers experiences financial, operational or
technological difficulties, or if there is any other disruption in the
Corporation’s relationships with them, the Corporation may be required to
locate alternative sources of these services. There can be no
assurance that the Corporation could negotiate terms as favorable to the
Corporation or obtain services with similar functionality as it currently
has without the expenditure of substantial resources, if at
all. Any of these circumstances could have a material adverse
effect the Corporation’s
business.
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|
The
Corporation’s accounting policies and methods are the basis of how the
Corporation reports its financial condition and results of operations, and
they may require management to make estimates about matters that are
inherently uncertain.
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|
The
Corporation’s accounting policies and methods are fundamental to how the
Corporation records and reports its financial condition and results of
operations. The Corporation’s management must exercise judgment
in selecting and applying many of these accounting policies and methods in
order to ensure that they comply with generally accepted accounting
principles and reflect management’s judgment as to the most appropriate
manner in which to record and report the Corporation’s financial condition
and results of operations. In some cases, management must
select the accounting policy or method to apply from two or more
alternatives, any of which might be reasonable under the circumstances yet
might result in the Corporation’s reporting materially different amounts
than would have been reported under a different
alternative.
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|
The
Corporation has identified two accounting policies as being “critical” to
the presentation of its financial condition and results of operations
because they require management to make particularly subjective and/or
complex judgments about matters that are inherently uncertain and because
of the likelihood that materially different amounts would be reported
under different conditions or using different
assumptions. These critical accounting policies relate
to: (1) the allowance for loan and lease losses and (2) income
taxes. Because of the inherent uncertainty of estimates about
these matters, no assurance can be given that the application of
alternative policies or methods might not result in the Corporation’s
reporting materially different
amounts.
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Changes
in accounting standards could adversely affect the Corporation’s reported
financial results.
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The
bodies that set accounting standards for public companies, including the
Financial Accounting Standards Board (“FASB”), the Securities and Exchange
Commission and others, periodically change or revise existing
interpretations of the accounting and reporting standards that govern the
way that the Corporation reports its financial condition and results of
operations. These changes can be difficult to predict and can
materially impact the Corporation’s reported financial
results. In some cases, the Corporation could be required to
apply a new or revised accounting standard, or a new or revised
interpretation of an accounting standard, retroactively, which could have
a negative impact on reported results or result in the restatement of the
Corporation’s financial statements for prior
periods.
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The
Corporation has an active acquisition program, which involves risks
related to integration of acquired companies or businesses and the
potential for the dilution of the value of the Corporation’s
stock.
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The
Corporation regularly explores opportunities to acquire banking
institutions and other financial services providers. The
Corporation cannot predict the number, size or timing of future
acquisitions. The Corporation typically does not publicly
comment on a possible acquisition or business combination until it has
signed a definitive agreement for the transaction. Once the
Corporation has signed a definitive agreement, transactions of this type
are generally subject to regulatory approvals and other customary
conditions. There can be no assurance the Corporation will
receive such regulatory approvals without unexpected delays or conditions
or that such conditions will be timely met to the Corporation’s
satisfaction, or at all.
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Difficulty
in integrating an acquired company or business may cause the Corporation
not to realize expected revenue increases, cost savings, increases in
geographic or product presence, and/or other projected benefits from the
acquisition. Specifically, the integration process could result
in higher than expected deposit attrition (run-off), loss of customers and
key employees, the disruption of the Corporation’s business or the
business of the acquired company, or otherwise adversely affect the
Corporation’s ability to maintain existing relationships with clients,
employees and suppliers or to enter into new business
relationships. The Corporation may not be able to successfully
leverage the combined product offerings to the combined customer
base. These factors could contribute to the Corporation not
achieving the anticipated benefits of the acquisition within the desired
time frames, if at all.
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Future
acquisitions could require the Corporation to issue stock, to use
substantial cash or liquid assets or to incur debt. In such
cases, the value of the Corporation stock could be diluted and the
Corporation could become more susceptible to economic downturns and
competitive pressures.
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The
Corporation is dependent on senior management, and the loss of the
services of any of the Corporation’s senior executive officers could cause
the Corporation’s business to
suffer.
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The
Corporation’s continued success depends to a significant extent upon the
continued services of its senior management. The loss of
services of any of the Corporation’s senior executive officers could cause
the Corporation’s business to suffer. In addition, the
Corporation’s success depends in part upon senior management’s ability to
implement the Corporation’s business
strategy.
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|
The
Corporation may be a defendant in a variety of litigation and other
actions, which may have a material adverse effect on its business,
operating results and financial
condition.
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|
The
Corporation and its subsidiaries may be involved from time to time in a
variety of litigation arising out of the Corporation’s
business. The Corporation’s insurance may not cover all claims
that may be asserted against it, and any claims asserted against the
Corporation, regardless of merit or eventual outcome, may harm the
Corporation’s reputation. Should the ultimate judgments or
settlements in any litigation exceed the Corporation’s insurance coverage,
they could have a material adverse effect on the Corporation’s business,
operating results and financial condition and cash flows. In
addition, the Corporation may not be able to obtain appropriate types or
levels of insurance in the future, nor may the Corporation be able to
obtain adequate replacement policies with acceptable terms, if at
all.
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|
The
Separation may present significant
challenges.
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|
There
is a significant degree of difficulty and management distraction inherent
in the process of separating the Corporation and
Metavante. Even though the transactions effecting the
Separation are complete, it is possible that unanticipated challenges
resulting from the Separation will arise in the foreseeable
future. These difficulties may include any or all of the
following:
|
•
|
difficulty
preserving customer, distribution, supplier and other important
relationships;
|
•
|
the
potential difficulty in retaining key officers and personnel;
and
|
•
|
difficulty
separating corporate infrastructure, including systems, insurance,
accounting, legal, finance, tax and human resources, for each of two new
public companies.
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|
If
the Corporation’s share distribution and transactions related to the
Separation do not qualify as tax-free distributions or reorganizations
under the Internal Revenue Code, then the Corporation and the
Corporation’s shareholders may be responsible for payment of significant
U.S. federal income taxes.
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|
In
transactions related to the Separation, old M&I distributed shares of
its common stock to effect the Separation. If the share
distribution does not qualify as a tax-free distribution under Section 355
of the Internal Revenue Code, Metavante would recognize a taxable gain
that would result in significant U.S. federal income tax liabilities to
Metavante. Metavante would be primarily liable for these taxes
and the Corporation would be secondarily liable. Under the
terms of a tax allocation agreement related to the Separation, the
Corporation will generally be required to indemnify Metavante against any
such taxes unless such taxes would not have been imposed but for an act of
Metavante or its affiliates, subject to specified
exceptions.
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|
Even
if the Corporation’s share distribution otherwise qualifies as a tax-free
distribution under Section 355 of the Internal Revenue Code, the
distribution would result in significant U.S. federal income tax
liabilities to Metavante if there is an acquisition of the Corporation’s
common stock or Metavante’s stock as part of a plan or series of related
transactions that includes the Corporation’s share distribution and that
results in an acquisition of 50% or more of the Corporation’s outstanding
common stock or Metavante stock. In this situation, the
Corporation may be required to indemnify Metavante under the terms of a
tax allocation agreement related to the Separation unless such taxes would
not have been imposed but for specified acts of Metavante or its
affiliates. In addition, mutual indemnity obligations in the
tax allocation agreement could discourage or prevent a third party from
making a proposal to acquire the
Corporation.
|
|
As
a result of the Separation, any financing the Corporation obtains in the
future could involve higher costs.
|
|
As
a result of the completion of the transactions relating to the Separation,
any financing that the Corporation obtains will be with the support of a
reduced pool of diversified assets, and therefore the Corporation may not
be able to secure adequate debt or equity financing on desirable
terms. The cost to the Corporation of financing without
Metavante may be materially higher than the cost of financing prior to the
Separation. If in the future the Corporation has a credit
rating lower than it currently has, it will be more expensive for it to
obtain debt financing than it was prior to the
Separation.
|
|
The
Corporation will be restricted in its ability to issue equity for at least
two years following completion of the Separation, which could limit its
ability to make acquisitions or to raise capital required to service its
debt and operate its business.
|
|
The
amount of equity that the Corporation can issue to make acquisitions
(excluding acquisitions with respect to which the Corporation can prove
the absence of “substantial negotiations” during applicable safe harbor
periods) or raise additional capital will be limited for at least two
years following completion of the Separation, except in limited
circumstances. These limitations may restrict the ability of
the Corporation to carry out its business objectives and to take advantage
of opportunities such as acquisitions that could supplement or grow the
Corporation’s business.
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
The
following table reflects the purchases of Marshall & Ilsley Corporation
stock for the specified period:
|
|
|
|
|
|
|
|
Total
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Purchased as
|
|
|
Maximum
Number of
|
|
|
|
|
|
|
Average
|
|
|
Part
of Publicly
|
|
|
Shares
that May Yet
|
|
|
|
Total
Number of
|
|
|
Price
Paid
|
|
|
Announced
Plans or
|
|
|
Be
Purchased Under
|
|
Period
|
|
Shares
Purchased (1)
|
|
|
per
Share
|
|
|
Programs
|
|
|
the
Plans or Programs
|
|
July
1 to
July
31, 2008
|
|
|
14,130
|
|
|
$
|
19.44
|
|
|
|
-
|
|
|
|
7,217,600
|
|
August
1 to
August
31, 2008
|
|
|
3,657
|
|
|
|
15.48
|
|
|
|
-
|
|
|
|
7,217,600
|
|
September
1 to
September
30, 2008
|
|
|
11,674
|
|
|
|
15.23
|
|
|
|
-
|
|
|
|
7,217,600
|
|
Total
|
|
|
29,461
|
|
|
$
|
17.28
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
shares purchased by rabbi trusts pursuant to nonqualified deferred
compensation plans.
|
The
Corporation’s Share Repurchase Program was publicly reconfirmed in April 2007
and again in April 2008. The Share Repurchase Program authorizes the
purchase of up to 12 million shares annually and renews each year at that level
unless changed or terminated by subsequent Board action.
Item
6. Exhibits.
Exhibit
11
|
-
|
Statement
Regarding Computation of Earnings Per Share, Incorporated by Reference
to
Note 7 of Notes to Financial Statements contained in Item 1 - Financial
Statements
(unaudited) of Part I - Financial Information
herein.
|
Exhibit
12
|
-
|
Statement
Regarding Computation of Ratio of Earnings to Fixed
Charges.
|
Exhibit
31(a)
|
-
|
Certification of
Chief Executive Officer pursuant to Rule 13a-14(a) under
the
Securities Exchange Act of 1934, as
amended.
|
Exhibit
31(b)
|
-
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) under
the
Securities Exchange Act of 1934, as amended.
|
Exhibit
32(a)
|
-
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
Exhibit
32(b)
|
-
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|
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/ Patricia R.
Justiliano
|
|
|
|
Patricia R.
Justiliano
|
|
Senior Vice
President and Corporate Controller
|
|
(Chief Accounting
Officer)
|
|
|
|
|
|
/s/ James E.
Sandy
|
|
|
|
James E.
Sandy
|
|
Vice
President
|
November
10, 2008
EXHIBIT
INDEX
Exhibit
Number
|
Description
of Exhibit
|
|
|
(11)
|
Statement Regarding
Computation of Earnings Per Share, Incorporated by
Reference
to Note 7 of Notes to Financial Statements contained in Item 1 -
Financial
Statements (unaudited) of Part I - Financial Information
herein.
|
|
|
(12)
|
Statement
Regarding Computation of Ratio of Earnings to Fixed
Charges.
|
|
|
(31)(a)
|
Certification of
Chief Executive Officer pursuant to Rule 13a-14(a)
under
the Securities Exchange Act of 1934, as
amended.
|
|
|
(31)(b)
|
Certification of
Chief Financial Officer pursuant to Rule 13a-14(a)
under
the Securities Exchange Act of 1934, as
amended.
|
|
|
(32)(a)
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
|
(32)(b)
|
Certification of
Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|
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