12.
|
Goodwill
and Other Intangibles
|
|
The
changes in the carrying amount of goodwill for the six months ended June
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
|
|
|
326,966
|
|
|
|
81,263
|
|
|
|
-
|
|
|
|
-
|
|
|
|
408,229
|
|
Purchase
accounting adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
3,340
|
|
|
|
-
|
|
|
|
3,340
|
|
Reallocation
of goodwill
|
|
|
-
|
|
|
|
(33,000
|
)
|
|
|
-
|
|
|
|
33,000
|
|
|
|
-
|
|
Goodwill
balance as of June 30, 2008
|
|
$
|
1,249,230
|
|
|
$
|
608,595
|
|
|
$
|
117,912
|
|
|
$
|
120,777
|
|
|
$
|
2,096,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
acquired during 2008 included initial goodwill of $408.2 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.
|
|
At
June 30, 2008, the Corporation’s other intangible assets consisted of the
following ($000’s):
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
|
|
|
Value
|
|
Other
intangible assets
|
|
|
|
|
|
|
|
|
|
Core
deposit intangible
|
|
$
|
254,228
|
|
|
$
|
(123,810
|
)
|
|
$
|
130,418
|
|
Trust
customers
|
|
|
11,384
|
|
|
|
(3,484
|
)
|
|
|
7,900
|
|
Tradename
|
|
|
1,335
|
|
|
|
(319
|
)
|
|
|
1,016
|
|
Other
intangibles
|
|
|
4,147
|
|
|
|
(820
|
)
|
|
|
3,327
|
|
|
|
$
|
271,094
|
|
|
$
|
(128,433
|
)
|
|
$
|
142,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loan servicing rights
|
|
|
|
|
|
|
|
|
|
$
|
2,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense of other intangible assets for the three and six months ended June
30, 2008 amounted to $5.7 million and $11.3 million,
respectively. For the three and six months ended June 30, 2007,
amortization expense of other intangible assets amounted to $4.9 million
and $9.1 million, respectively.
|
|
Amortization
of mortgage loan servicing rights amounted to $0.3 million and $0.6
million in each of the three and six months ended June 30, 2008 and 2007,
respectively.
|
MARSHALL & ILSLEY
CORPORATION
Notes to
Financial Statements - Continued
June 30,
2008 & 2007 (Unaudited)
|
The
estimated amortization expense of other intangible assets and mortgage
loan servicing rights for the next five annual fiscal years are
($000’s):
|
2009
|
|
$
|
22,138
|
|
2010
|
|
|
18,851
|
|
2011
|
|
|
15,786
|
|
2012
|
|
|
13,559
|
|
2013
|
|
|
11,472
|
|
|
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 has elected to perform its annual test
for goodwill impairment as of June 30th. Other than goodwill,
the Corporation did not have any other intangible assets that are not
amortized at June 30, 2008. 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. The Corporation is in the
process of completing the second step of the process for the Commercial
and Community Banking segments in order to determine if there is any
goodwill impairment.
|
|
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.
|
|
The
Corporation believes that the stress and deterioration in the national
residential real estate markets, liquidity stress and current economic
conditions have depressed prices buyers and sellers are paying and
receiving for bank-related assets. As a result, the Corporation
believes that the fair value allocated to assets, especially loans, will
be less than their reported carrying values and does not expect that it
will be required to recognize any goodwill impairment upon completion of
the second step of the goodwill impairment
test.
|
MARSHALL & ILSLEY
CORPORATION
Notes to
Financial Statements - Continued
June 30,
2008 & 2007 (Unaudited)
|
The
Corporation's deposit liabilities consisted of the following
($000's):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Noninterest
bearing demand
|
|
$
|
6,390,374
|
|
|
$
|
6,174,281
|
|
|
$
|
5,739,470
|
|
Savings
and NOW
|
|
|
14,026,510
|
|
|
|
13,903,479
|
|
|
|
13,717,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CD's
$100,000 and over
|
|
|
12,397,614
|
|
|
|
8,075,691
|
|
|
|
7,867,849
|
|
Cash
flow hedge-Institutional CDs
|
|
|
15,681
|
|
|
|
18,027
|
|
|
|
(2,293
|
)
|
Total
CD's $100,000 and over
|
|
|
12,413,295
|
|
|
|
8,093,718
|
|
|
|
7,865,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
time deposits
|
|
|
5,065,119
|
|
|
|
4,412,933
|
|
|
|
4,899,680
|
|
Foreign
deposits
|
|
|
3,278,195
|
|
|
|
2,606,943
|
|
|
|
3,317,054
|
|
Total
deposits
|
|
$
|
41,173,493
|
|
|
$
|
35,191,354
|
|
|
$
|
35,539,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six months ended
June 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
June 30, 2008, free standing interest rate swaps consisted of $3.5 billion
in notional amount of receive fixed / pay floating with an aggregate
positive fair value of $42.5 million and $3.2 billion in notional amount
of pay fixed / receive floating with an aggregate negative fair value of
$19.8 million.
|
|
At
June 30, 2008, interest rate caps purchased amounted to $119.4 million in
notional amount with a negative fair value of $0.7 million and interest
rate caps sold amounted to $119.4 million in notional amount with a
positive fair value of $0.7
million.
|
|
At
June 30, 2008, the notional value of interest rate futures designated as
trading was $2.2 billion with a negative fair value of $0.04
million.
|
|
At
June 30, 2008, the notional value of equity derivatives bifurcated from
deposit liabilities and designated as trading amounted to $55.1 million in
notional value with a negative fair value of $3.2 million. At
June 30, 2008, the notional value of equity derivative contracts
designated as trading and used as economic hedges was $55.1 million with a
positive fair value of $3.5
million.
|
|
The
Corporation employs certain over-the-counter interest rate swaps that are
the designated hedging instruments in fair value and cash flow hedges that
are used by the Corporation to manage its interest rate
risk. These interest rate swaps are measured at fair value on a
recurring basis based on significant other observable inputs and are
categorized as Level 2. See Note 4 in Notes to Financial
Statements for a discussion of fair value
measurements.
|
MARSHALL & ILSLEY
CORPORATION
Notes to
Financial Statements - Continued
June 30,
2008 & 2007 (Unaudited)
|
The
following table presents additional information with respect to fair value
hedges.
|
Fair
Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Average
|
|
Hedged
|
|
Hedging
|
|
Amount
|
|
|
Value
|
|
|
Remaining
|
|
Item
|
|
Instrument
|
|
($
in mil)
|
|
|
($
in mil)
|
|
|
Term
(Yrs)
|
|
Fair
Value Hedges that Qualify for Shortcut Accounting
|
|
|
|
|
|
|
|
Fixed
Rate Bank Notes
|
|
Receive
Fixed Swap
|
|
$
|
354.5
|
|
|
$
|
3.8
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate Bank Notes
|
|
Receive
Fixed Swap
|
|
$
|
100.0
|
|
|
$
|
(1.5
|
)
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional
CDs
|
|
Receive
Fixed Swap
|
|
|
25.0
|
|
|
|
0.2
|
|
|
|
27.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callable
CDs
|
|
Receive
Fixed Swap
|
|
|
4,810.2
|
|
|
|
(129.6
|
)
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered
Bullet CDs
|
|
Receive
Fixed Swap
|
|
|
210.7
|
|
|
|
(5.1
|
)
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium
Term Notes
|
|
Receive
Fixed Swap
|
|
|
7.0
|
|
|
|
(0.2
|
)
|
|
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
impact from fair value hedges to total net interest income for the three
and six months ended June 30, 2008 was a positive $23.6 million and a
positive $28.7 million, respectively. The impact to net
interest income due to ineffectiveness was not
material.
|
|
The
following table summarizes the Corporation’s cash flow
hedges.
|
Cash
Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Average
|
|
Hedged
|
|
Hedging
|
|
Amount
|
|
|
Value
|
|
|
Remaining
|
|
Item
|
|
Instrument
|
|
($
in mil)
|
|
|
($
in mil)
|
|
|
Term
(Yrs)
|
|
Variable
Rate Loans
|
|
Receive
Fixed Swap
|
|
$
|
100.0
|
|
|
$
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional
CDs
|
|
Pay
Fixed Swap
|
|
|
725.0
|
|
|
|
(15.7
|
)
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
Advances
|
|
Pay
Fixed Swap
|
|
|
1,060.0
|
|
|
|
(34.2
|
)
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
Rate Bank Notes
|
|
Pay
Fixed Swap
|
|
|
800.0
|
|
|
|
(10.8
|
)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
impact to total net interest income from cash flow hedges, including
amortization of terminated cash flow hedges for the three and six months
ended June 30, 2008 was negative $12.3 million and negative $18.0 million,
respectively. For the three and six months ended June 30, 2008,
the impact due to ineffectiveness was not
material.
|
|
For
the three and six months ended June 30, 2007, the total effect on net
interest income resulting from derivative financial instruments was a
positive $4.6 million and a positive $9.6 million, respectively, including
the amortization of terminated derivative financial
instruments. For the three and six months ended June 30, 2007,
the impact due to ineffectiveness was not
material.
|
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
retained from mergers, 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.
|
MARSHALL & ILSLEY
CORPORATION
Notes to
Financial Statements - Continued
June 30,
2008 & 2007 (Unaudited)
|
Net
periodic postretirement benefit cost for the three and six months ended
June 30, 2008 and 2007 included the following components
($000’s):
|
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Ended
June 30,
|
|
|
Ended
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$
|
238
|
|
|
$
|
245
|
|
|
$
|
476
|
|
|
$
|
490
|
|
Interest
cost on APBO
|
|
|
984
|
|
|
|
816
|
|
|
|
1,968
|
|
|
|
1,632
|
|
Expected
return on plan assets
|
|
|
(435
|
)
|
|
|
(252
|
)
|
|
|
(870
|
)
|
|
|
(504
|
)
|
Prior
service amortization
|
|
|
(593
|
)
|
|
|
(524
|
)
|
|
|
(1,186
|
)
|
|
|
(1,048
|
)
|
Actuarial
loss amortization
|
|
|
75
|
|
|
|
116
|
|
|
|
150
|
|
|
|
232
|
|
Net
periodic postretirement benefit cost
|
|
$
|
269
|
|
|
$
|
401
|
|
|
$
|
538
|
|
|
$
|
802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
payments and expenses, net of participant contributions, for the three and
six months ended June 30, 2008 amounted to $0.7 million and $1.9 million,
respectively.
|
|
The
funded status, which is the accumulated postretirement benefit obligation
net of fair value of plan assets, as of June 30, 2008 is as follows
($000’s):
|
Total
funded status, December 31, 2007
|
|
$
|
(32,638
|
)
|
Service
cost
|
|
|
(476
|
)
|
Interest
cost on APBO
|
|
|
(1,968
|
)
|
Expected
return on plan assets
|
|
|
870
|
|
Employer
contributions/payments
|
|
|
2,918
|
|
Acquisition
|
|
|
(1,098
|
)
|
Subsidy
(Medicare Part D)
|
|
|
(76
|
)
|
Total
funded status, June 30, 2008
|
|
$
|
(32,468
|
)
|
|
|
|
|
|
|
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.
|
|
Total
Revenues by type in Others consist of the following ($ in
millions):
|
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Ended
June 30,
|
|
|
Ended
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Investment
Division
|
|
$
|
11.9
|
|
|
$
|
8.4
|
|
|
$
|
26.4
|
|
|
$
|
17.0
|
|
National
Consumer Banking Division
|
|
|
33.2
|
|
|
|
29.7
|
|
|
|
60.7
|
|
|
|
63.3
|
|
Administrative
& Other
|
|
|
11.8
|
|
|
|
32.6
|
|
|
|
53.8
|
|
|
|
43.3
|
|
Other
|
|
|
64.9
|
|
|
|
63.6
|
|
|
|
137.2
|
|
|
|
122.5
|
|
Total
|
|
$
|
121.8
|
|
|
$
|
134.3
|
|
|
$
|
278.1
|
|
|
$
|
246.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARSHALL & ILSLEY
CORPORATION
Notes to
Financial Statements - Continued
June 30,
2008 & 2007 (Unaudited)
|
|
Three
Months Ended June 30, 2008 ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations,
|
|
|
|
|
|
|
Commercial
|
|
|
Community
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Reclassifications
|
|
|
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Treasury
|
|
|
Others
|
|
|
Overhead
|
|
|
&
Adjustments
|
|
|
Consolidated
|
|
Net
interest income
|
|
$
|
194.6
|
|
|
$
|
197.7
|
|
|
$
|
14.6
|
|
|
$
|
19.8
|
|
|
$
|
41.9
|
|
|
$
|
(14.1
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
447.6
|
|
Provision
for loan and lease losses
|
|
|
769.6
|
|
|
|
107.1
|
|
|
|
2.6
|
|
|
|
-
|
|
|
|
6.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
886.0
|
|
Net interest income
after provision for loan and lease losses
|
|
|
(575.0
|
)
|
|
|
90.6
|
|
|
|
12.0
|
|
|
|
19.8
|
|
|
|
35.0
|
|
|
|
(14.1
|
)
|
|
|
(6.8
|
)
|
|
|
(438.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
26.2
|
|
|
|
48.0
|
|
|
|
77.8
|
|
|
|
11.2
|
|
|
|
79.9
|
|
|
|
29.4
|
|
|
|
(85.4
|
)
|
|
|
187.0
|
|
Other
expense
|
|
|
81.6
|
|
|
|
177.6
|
|
|
|
65.8
|
|
|
|
4.4
|
|
|
|
103.7
|
|
|
|
32.7
|
|
|
|
(85.4
|
)
|
|
|
380.4
|
|
Income
before income taxes
|
|
|
(630.4
|
)
|
|
|
(39.0
|
)
|
|
|
24.0
|
|
|
|
26.6
|
|
|
|
11.2
|
|
|
|
(17.4
|
)
|
|
|
(6.8
|
)
|
|
|
(631.8
|
)
|
Provision
(benefit) for income taxes
|
|
|
(252.2
|
)
|
|
|
(15.6
|
)
|
|
|
9.7
|
|
|
|
10.6
|
|
|
|
19.9
|
|
|
|
(3.6
|
)
|
|
|
(6.8
|
)
|
|
|
(238.0
|
)
|
Segment
income
|
|
$
|
(378.2
|
)
|
|
$
|
(23.4
|
)
|
|
$
|
14.3
|
|
|
$
|
16.0
|
|
|
$
|
(8.7
|
)
|
|
$
|
(13.8
|
)
|
|
$
|
-
|
|
|
$
|
(393.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
$
|
27,537.6
|
|
|
$
|
19,373.0
|
|
|
$
|
1,526.3
|
|
|
$
|
8,802.2
|
|
|
$
|
7,182.9
|
|
|
$
|
2,464.9
|
|
|
$
|
(2,626.5
|
)
|
|
$
|
64,260.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2007 ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations,
|
|
|
|
|
|
|
|
Commercial
|
|
|
Community
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Reclassifications
|
|
|
|
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Treasury
|
|
|
Others
|
|
|
Overhead
|
|
|
&
Adjustments
|
|
|
Consolidated
|
|
Net
interest income
|
|
$
|
168.8
|
|
|
$
|
193.8
|
|
|
$
|
13.0
|
|
|
$
|
2.9
|
|
|
$
|
38.7
|
|
|
$
|
(10.8
|
)
|
|
$
|
(6.9
|
)
|
|
$
|
399.7
|
|
Provision
for loan and lease losses
|
|
|
9.6
|
|
|
|
7.3
|
|
|
|
1.1
|
|
|
|
-
|
|
|
|
7.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26.0
|
|
Net
interest income after
provision for loan and lease
losses
|
|
|
159.2
|
|
|
|
186.5
|
|
|
|
11.9
|
|
|
|
2.9
|
|
|
|
30.8
|
|
|
|
(10.8
|
)
|
|
|
(6.9
|
)
|
|
|
373.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
21.6
|
|
|
|
38.7
|
|
|
|
67.6
|
|
|
|
8.0
|
|
|
|
95.6
|
|
|
|
33.4
|
|
|
|
(78.3
|
)
|
|
|
186.6
|
|
Other
expense
|
|
|
48.0
|
|
|
|
144.5
|
|
|
|
54.7
|
|
|
|
3.4
|
|
|
|
88.2
|
|
|
|
33.8
|
|
|
|
(78.3
|
)
|
|
|
294.3
|
|
Income
before income taxes
|
|
|
132.8
|
|
|
|
80.7
|
|
|
|
24.8
|
|
|
|
7.5
|
|
|
|
38.2
|
|
|
|
(11.2
|
)
|
|
|
(6.9
|
)
|
|
|
266.0
|
|
Provision
(benefit) for income taxes
|
|
|
53.1
|
|
|
|
32.3
|
|
|
|
10.0
|
|
|
|
3.0
|
|
|
|
(0.1
|
)
|
|
|
(4.4
|
)
|
|
|
(6.9
|
)
|
|
|
87.1
|
|
Segment
income
|
|
$
|
79.7
|
|
|
$
|
48.4
|
|
|
$
|
14.8
|
|
|
$
|
4.5
|
|
|
$
|
38.3
|
|
|
$
|
(6.8
|
)
|
|
$
|
-
|
|
|
$
|
178.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets (a)
|
|
$
|
22,942.8
|
|
|
$
|
17,266.8
|
|
|
$
|
1,250.9
|
|
|
$
|
8,026.3
|
|
|
$
|
6,731.9
|
|
|
$
|
1,690.2
|
|
|
$
|
(991.5
|
)
|
|
$
|
56,917.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Excludes assets of discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARSHALL & ILSLEY
CORPORATION
Notes to
Financial Statements - Continued
June 30,
2008 & 2007 (Unaudited)
|
|
Six
Months Ended June 30, 2008 ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations,
|
|
|
|
|
|
|
Commercial
|
|
|
Community
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Reclassifications
|
|
|
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Treasury
|
|
|
Others
|
|
|
Overhead
|
|
|
&
Adjustments
|
|
|
Consolidated
|
|
Net
interest income
|
|
$
|
383.5
|
|
|
$
|
393.7
|
|
|
$
|
29.1
|
|
|
$
|
21.3
|
|
|
$
|
86.7
|
|
|
$
|
(22.5
|
)
|
|
$
|
(13.8
|
)
|
|
$
|
878.0
|
|
Provision
for loan and lease losses
|
|
|
889.8
|
|
|
|
133.7
|
|
|
|
5.4
|
|
|
|
-
|
|
|
|
3.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,032.3
|
|
Net
interest income after
provision for loan and lease
losses
|
|
|
(506.3
|
)
|
|
|
260.0
|
|
|
|
23.7
|
|
|
|
21.3
|
|
|
|
83.3
|
|
|
|
(22.5
|
)
|
|
|
(13.8
|
)
|
|
|
(154.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
50.9
|
|
|
|
91.8
|
|
|
|
152.0
|
|
|
|
22.2
|
|
|
|
191.4
|
|
|
|
59.1
|
|
|
|
(169.2
|
)
|
|
|
398.2
|
|
Other
expense
|
|
|
145.8
|
|
|
|
336.8
|
|
|
|
126.5
|
|
|
|
8.3
|
|
|
|
200.5
|
|
|
|
47.5
|
|
|
|
(169.2
|
)
|
|
|
696.2
|
|
Income
before income taxes
|
|
|
(601.2
|
)
|
|
|
15.0
|
|
|
|
49.2
|
|
|
|
35.2
|
|
|
|
74.2
|
|
|
|
(10.9
|
)
|
|
|
(13.8
|
)
|
|
|
(452.3
|
)
|
Provision
(benefit) for income taxes
|
|
|
(240.5
|
)
|
|
|
6.0
|
|
|
|
19.8
|
|
|
|
14.1
|
|
|
|
11.9
|
|
|
|
(2.2
|
)
|
|
|
(13.8
|
)
|
|
|
(204.7
|
)
|
Segment
income
|
|
$
|
(360.7
|
)
|
|
$
|
9.0
|
|
|
$
|
29.4
|
|
|
$
|
21.1
|
|
|
$
|
62.3
|
|
|
$
|
(8.7
|
)
|
|
$
|
-
|
|
|
$
|
(247.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
$
|
27,537.6
|
|
|
$
|
19,373.0
|
|
|
$
|
1,526.3
|
|
|
$
|
8,802.2
|
|
|
$
|
7,182.9
|
|
|
$
|
2,464.9
|
|
|
$
|
(2,626.5
|
)
|
|
$
|
64,260.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2007 ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations,
|
|
|
|
|
|
|
|
Commercial
|
|
|
Community
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Reclassifications
|
|
|
|
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Treasury
|
|
|
Others
|
|
|
Overhead
|
|
|
&
Adjustments
|
|
|
Consolidated
|
|
Net
interest income
|
|
$
|
337.2
|
|
|
$
|
384.8
|
|
|
$
|
25.2
|
|
|
$
|
7.6
|
|
|
$
|
72.2
|
|
|
$
|
(19.1
|
)
|
|
$
|
(13.7
|
)
|
|
$
|
794.2
|
|
Provision
for loan and lease losses
|
|
|
19.3
|
|
|
|
13.9
|
|
|
|
1.7
|
|
|
|
-
|
|
|
|
8.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43.2
|
|
Net
interest income after
provision for loan and lease
losses
|
|
|
317.9
|
|
|
|
370.9
|
|
|
|
23.5
|
|
|
|
7.6
|
|
|
|
63.9
|
|
|
|
(19.1
|
)
|
|
|
(13.7
|
)
|
|
|
751.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
42.0
|
|
|
|
71.9
|
|
|
|
130.6
|
|
|
|
15.7
|
|
|
|
173.9
|
|
|
|
61.9
|
|
|
|
(153.9
|
)
|
|
|
342.1
|
|
Other
expense
|
|
|
93.6
|
|
|
|
283.9
|
|
|
|
105.8
|
|
|
|
6.8
|
|
|
|
177.6
|
|
|
|
61.5
|
|
|
|
(153.9
|
)
|
|
|
575.3
|
|
Income
before income taxes
|
|
|
266.3
|
|
|
|
158.9
|
|
|
|
48.3
|
|
|
|
16.5
|
|
|
|
60.2
|
|
|
|
(18.7
|
)
|
|
|
(13.7
|
)
|
|
|
517.8
|
|
Provision
(benefit) for income taxes
|
|
|
106.5
|
|
|
|
63.6
|
|
|
|
19.5
|
|
|
|
6.6
|
|
|
|
(5.2
|
)
|
|
|
(7.2
|
)
|
|
|
(13.7
|
)
|
|
|
170.1
|
|
Segment
income
|
|
$
|
159.8
|
|
|
$
|
95.3
|
|
|
$
|
28.8
|
|
|
$
|
9.9
|
|
|
$
|
65.4
|
|
|
$
|
(11.5
|
)
|
|
$
|
-
|
|
|
$
|
347.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets (a)
|
|
$
|
22,942.8
|
|
|
$
|
17,266.8
|
|
|
$
|
1,250.9
|
|
|
$
|
8,026.3
|
|
|
$
|
6,731.9
|
|
|
$
|
1,690.2
|
|
|
$
|
(991.5
|
)
|
|
$
|
56,917.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Excludes assets of discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARSHALL & ILSLEY
CORPORATION
Notes to
Financial Statements - Continued
June 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 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.
|
|
The
Corporation continues to expect that the ultimate value of its remaining
investment in Visa will exceed its indemnification
obligations. However, additional accruals could be necessary
depending on the resolution of the pending Visa
litigation.
|
|
At
June 30, 2008, the estimated fair value of the Visa Class B common stock
owned by the Corporation assuming the conversion to Visa Class A common
stock based on a conversion factor that is currently 0.71429 was
approximately $58.0 million for which there is no investment or carrying
value recorded.
|
|
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 June 30,
|
|
|
|
2008
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
879,213
|
|
|
$
|
1,004,487
|
|
|
|
|
|
|
|
|
|
|
Trading
assets
|
|
|
162,048
|
|
|
|
58,346
|
|
Short-term
investments
|
|
|
370,650
|
|
|
|
270,268
|
|
|
|
Investment
securities:
|
|
Taxable
|
|
|
6,548,896
|
|
|
|
6,247,900
|
|
Tax-exempt
|
|
|
1,185,827
|
|
|
|
1,300,156
|
|
Total
investment securities
|
|
|
7,734,723
|
|
|
|
7,548,056
|
|
|
|
|
|
|
|
|
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
982,000
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases:
|
|
Loans
and leases, net of unearned income
|
|
|
49,930,536
|
|
|
|
42,903,689
|
|
Allowance
for loan and lease losses
|
|
|
(681,983
|
)
|
|
|
(432,424
|
)
|
Net
loans and leases
|
|
|
49,248,553
|
|
|
|
42,471,265
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
521,284
|
|
|
|
457,111
|
|
Accrued
interest and other assets
|
|
|
4,573,140
|
|
|
|
3,411,472
|
|
Assets
of discontinued operations
|
|
|
-
|
|
|
|
1,500,491
|
|
Total
Assets
|
|
$
|
63,489,611
|
|
|
$
|
57,703,496
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
Deposits:
|
|
Noninterest
bearing
|
|
$
|
5,827,732
|
|
|
$
|
5,459,560
|
|
Interest
bearing
|
|
|
33,225,352
|
|
|
|
28,216,630
|
|
Total
deposits
|
|
|
39,053,084
|
|
|
|
33,676,190
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased and security repurchase agreements
|
|
|
3,002,304
|
|
|
|
3,125,694
|
|
Other
short-term borrowings
|
|
|
3,796,189
|
|
|
|
1,171,770
|
|
Long-term
borrowings
|
|
|
9,638,628
|
|
|
|
11,941,829
|
|
Accrued
expenses and other liabilities
|
|
|
1,033,063
|
|
|
|
1,082,021
|
|
Liabilities
of discontinued operations
|
|
|
-
|
|
|
|
182,484
|
|
Total
liabilities
|
|
|
56,523,268
|
|
|
|
51,179,988
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
6,966,343
|
|
|
|
6,523,508
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
63,489,611
|
|
|
$
|
57,703,496
|
|
|
|
|
|
|
|
|
|
|
MARSHALL
& ILSLEY CORPORATION
|
|
CONSOLIDATED
AVERAGE BALANCE SHEETS (Unaudited)
|
|
($000's)
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
916,090
|
|
|
$
|
999,785
|
|
|
|
|
|
|
|
|
|
|
Trading
assets
|
|
|
170,178
|
|
|
|
49,871
|
|
Short-term
investments
|
|
|
351,423
|
|
|
|
272,111
|
|
|
|
Investment
securities:
|
|
Taxable
|
|
|
6,608,841
|
|
|
|
6,166,420
|
|
Tax-exempt
|
|
|
1,214,174
|
|
|
|
1,294,042
|
|
Total
investment securities
|
|
|
7,823,015
|
|
|
|
7,460,462
|
|
|
|
|
|
|
|
|
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
982,000
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases:
|
|
Loans
and leases, net of unearned income
|
|
|
49,270,264
|
|
|
|
42,505,449
|
|
Allowance
for loan and lease losses
|
|
|
(619,730
|
)
|
|
|
(428,087
|
)
|
Net
loans and leases
|
|
|
48,650,534
|
|
|
|
42,077,362
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
515,272
|
|
|
|
448,588
|
|
Accrued
interest and other assets
|
|
|
4,494,598
|
|
|
|
3,316,030
|
|
Assets
of discontinued operations
|
|
|
-
|
|
|
|
1,504,600
|
|
Total
Assets
|
|
$
|
62,921,110
|
|
|
$
|
57,110,809
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
Deposits:
|
|
Noninterest
bearing
|
|
$
|
5,728,051
|
|
|
$
|
5,400,410
|
|
Interest
bearing
|
|
|
32,662,390
|
|
|
|
27,983,190
|
|
Total
deposits
|
|
|
38,390,441
|
|
|
|
33,383,600
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased and security repurchase agreements
|
|
|
3,279,978
|
|
|
|
3,260,183
|
|
Other
short-term borrowings
|
|
|
3,327,055
|
|
|
|
1,012,876
|
|
Long-term
borrowings
|
|
|
9,829,554
|
|
|
|
11,783,585
|
|
Accrued
expenses and other liabilities
|
|
|
1,097,179
|
|
|
|
1,067,975
|
|
Liabilities
of discontinued operations
|
|
|
-
|
|
|
|
210,867
|
|
Total
liabilities
|
|
|
55,924,207
|
|
|
|
50,719,086
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
6,996,903
|
|
|
|
6,391,723
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
62,921,110
|
|
|
$
|
57,110,809
|
|
|
|
|
|
|
|
|
|
|
OVERVIEW
The
Corporation demonstrated growth in the second quarter in loans, 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 more than offset by the
charges and increased reserves related to the Corporation’s real estate
loans. Those charges and increased reserves reflect the impact of the
continued deterioration in the national residential real estate markets. As a
result, the Corporation reported a loss for the second
quarter and first half of 2008.
For the
three months ended June 30, 2008, the Corporation reported a net loss of $393.8
million or $1.52 per diluted share compared to income from continuing operations
in the second quarter of 2007 of $178.9 million or $0.68 per diluted share. For
the six months ended June 30, 2008, the net loss amounted to $247.6 million or
$0.95 per diluted share compared to income from continuing operations of $347.7
million or $1.32 per diluted share for the six months ended June 30,
2007.
The
decrease in income from continuing operations in the second quarter of 2008
compared to the second quarter of 2007 and the first six months of 2008 compared
to the first six months of 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 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, continued to exhibit the largest
levels of increased stress. In addition, the amount of impairment increased
during the second quarter of 2008 due to the continued 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 and first half of 2008 when compared to the second quarter and first
half 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. For the six months ended June 30, 2008, the
provision for loan and lease losses and provision for losses associated with
unfunded loan commitments amounted to $1,052.9 million compared to $43.2 million
for the six months ended June 30, 2007, an increase of $1,009.7
million. On an after-tax basis, this increase amounted to
approximately $644.5 million or $2.49 per diluted share.
Organic
loan and bank-issued deposit growth and banking acquisitions completed in 2008
and 2007 contributed to the growth in net interest income and other banking
sources of revenues. Continued growth in assets under management and
assets under administration and acquisitions resulted in solid growth in fee
income for the Corporation’s Wealth Management segment. The Corporation is
experiencing elevated levels of operating expenses due to the increase in
expense associated with collection efforts and carrying nonperforming
assets.
With
regard to the outlook for the remainder of 2008, management expects the
Corporation will return to profitability in the third and fourth quarters.
Continued pricing competition for loan products, increased funding costs and the
elevated levels of nonperforming loans make it more likely that the Corporation
will experience net interest margin compression. Commercial and
industrial loan growth is expected to be in the low single-digits for the
remainder of 2008. Commercial real estate loan growth for the
remainder of 2008 is expected to be relatively modest and consistent with the
1.1% linked quarter loan growth the Corporation experienced in the second
quarter of 2008 compared to the first quarter of 2008. Wealth management
revenue, which is somewhat dependent on market volatility and direction, is
expected to show high single-digit to low double-digit growth rates in 2008
compared to 2007.
With
respect to credit quality, management expects that the remainder of 2008 will
continue to be a difficult year for residential real estate
markets. For the remainder of 2008, management expects the provision
for loan and lease losses will be significantly less than the provision for loan
and lease losses reported for the three months ended June 30, 2008. However,
management also 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 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 remainder 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 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 (Accounting Predecessor to Metavante Technologies, Inc.), which is
referred to as “Metavante,” became two separate publicly traded
companies. The Corporation believes this transaction, which the
Corporation refers to as the “Separation,” will provide substantial benefits to
the shareholders of both companies. The Corporation’s enhanced capital position
is expected to enhance earnings per share growth by providing resources for
continued organic growth and fund strategic initiatives within its business
lines and has been and is expected to continue to be a source of strength in the
current credit environment.
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 (“Warburg
Pincus”). 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.
The Corporation does not currently expect it will be required to decrease its
dividend or raise additional dilutive capital in order to continue to maintain
its strong capital base.
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 six months ended June 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 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.
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 the Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2007 and in this report for a discussion of the various risk
factors that could cause actual results to differ materially from expected
results.
ACQUISITION
ACTIVITIES
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 six
months ended June 30, 2008 and 2007, by quarter, consisted of the
following:
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.
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 second quarter of 2008 amounted to $447.6 million
compared to $399.7 million reported for the second quarter of 2007, an increase
of $47.9 million or 12.0%. For the six months ended June 30, 2008,
net interest income amounted to $878.0 million compared to $794.2 million
reported for the six months ended June 30, 2007, an increase of $83.8 million or
10.6%. Acquisition-related and organic loan growth, the growth in
bank issued deposits 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 $6.4 billion or 12.4% in the second quarter of 2008
compared to the second quarter of 2007. Average loans and leases
accounted for $7.0 billion of the growth in average earning assets in the three
months ended June 30, 2008 compared to the three months ended June 30,
2007. Average investment securities, short-term investments and
trading assets increased $0.4 billion in the second quarter of 2008 over the
prior year second quarter. As previously discussed, Metavante repaid
its indebtedness to the Corporation on November 1, 2007 resulting in a $1.0
billion decrease in average earning assets in the second quarter of 2008
compared to the second quarter of 2007.
Average
interest bearing liabilities amounted to $49.7 billion in the second quarter of
2008 compared to $44.5 billion in the second quarter of 2007, an increase of
$5.2 billion or 11.7%. Average interest bearing deposits increased
$5.0 billion or 17.8% in the second quarter of 2008 compared to the second
quarter of 2007. Average total borrowings increased approximately
$0.2 billion or 1.2% in the second quarter of 2008 compared to the same period
in 2007.
Average
noninterest bearing deposits increased $0.4 billion or 6.7% in the three months
ended June 30, 2008 compared to the three months ended June 30,
2007.
For the
six months ended June 30, 2008, average earning assets amounted to $57.6 billion
compared to $51.3 billion for the six months ended June 30, 2007, an increase of
$6.3 billion or 12.4%. Average loans and leases accounted for $6.8
billion of the growth in average earning assets in the six months ended June 30,
2008 compared to the six months ended June 30, 2007. Average
investment securities, short-term investments and trading assets increased
approximately $0.5 billion over the comparative six month periods. As
previously discussed, Metavante repaid its indebtedness to the Corporation on
November 1, 2007 resulting in a decrease of $1.0 billion in average earning
assets in the first half of 2008 compared to the first half of
2007.
Average
interest bearing liabilities increased $5.1 billion or 11.5% in the six months
ended June 30, 2008 compared to the six months ended June 30,
2007. Average interest bearing deposits increased $4.7 billion or
16.7% in the six months ended June 30, 2008 compared to the six months ended
June 30, 2007. Average total borrowings increased approximately $0.4
billion or 2.4% over the comparative six month period.
For the
six months ended June 30, 2008 compared to the six months ended June 30, 2007,
average noninterest bearing deposits increased $0.3 billion or
6.1%.
The
growth and composition of the Corporation’s quarterly average loan and lease
portfolio for the current quarter and previous four quarters are reflected in
the following table ($ in millions):
Consolidated Average Loans
and Leases
|
|
2008
|
|
|
2007
|
|
|
Growth
Pct.
|
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
|
|
|
Prior
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Annual
|
|
|
Quarter
|
|
Commercial
loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
15,086
|
|
|
$
|
14,389
|
|
|
$
|
13,264
|
|
|
$
|
12,755
|
|
|
$
|
12,494
|
|
|
|
20.7
|
%
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages
|
|
|
12,695
|
|
|
|
12,480
|
|
|
|
11,817
|
|
|
|
11,592
|
|
|
|
11,175
|
|
|
|
13.6
|
|
|
|
1.7
|
|
Construction
|
|
|
4,431
|
|
|
|
4,463
|
|
|
|
4,044
|
|
|
|
3,816
|
|
|
|
3,607
|
|
|
|
22.9
|
|
|
|
(0.7
|
)
|
Total
commercial real estate
|
|
|
17,126
|
|
|
|
16,943
|
|
|
|
15,861
|
|
|
|
15,408
|
|
|
|
14,782
|
|
|
|
15.9
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lease financing
|
|
|
517
|
|
|
|
522
|
|
|
|
528
|
|
|
|
510
|
|
|
|
507
|
|
|
|
1.9
|
|
|
|
(0.9
|
)
|
Total
commercial loans and leases
|
|
|
32,729
|
|
|
|
31,854
|
|
|
|
29,653
|
|
|
|
28,673
|
|
|
|
27,783
|
|
|
|
17.8
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
|
7,944
|
|
|
|
7,693
|
|
|
|
6,966
|
|
|
|
6,774
|
|
|
|
6,562
|
|
|
|
21.1
|
|
|
|
3.3
|
|
Construction
|
|
|
2,531
|
|
|
|
2,605
|
|
|
|
2,764
|
|
|
|
2,803
|
|
|
|
2,827
|
|
|
|
(10.5
|
)
|
|
|
(2.8
|
)
|
Total
residential real estate
|
|
|
10,475
|
|
|
|
10,298
|
|
|
|
9,730
|
|
|
|
9,577
|
|
|
|
9,389
|
|
|
|
11.6
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student
|
|
|
114
|
|
|
|
121
|
|
|
|
95
|
|
|
|
62
|
|
|
|
70
|
|
|
|
62.4
|
|
|
|
(5.4
|
)
|
Credit
card
|
|
|
257
|
|
|
|
258
|
|
|
|
255
|
|
|
|
248
|
|
|
|
239
|
|
|
|
7.8
|
|
|
|
(0.5
|
)
|
Home
equity loans and lines
|
|
|
4,835
|
|
|
|
4,670
|
|
|
|
4,344
|
|
|
|
4,248
|
|
|
|
4,223
|
|
|
|
14.5
|
|
|
|
3.5
|
|
Other
|
|
|
1,322
|
|
|
|
1,211
|
|
|
|
1,170
|
|
|
|
1,116
|
|
|
|
1,024
|
|
|
|
29.1
|
|
|
|
9.2
|
|
Total
personal loans
|
|
|
6,528
|
|
|
|
6,260
|
|
|
|
5,864
|
|
|
|
5,674
|
|
|
|
5,556
|
|
|
|
17.5
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
lease financing
|
|
|
199
|
|
|
|
198
|
|
|
|
195
|
|
|
|
186
|
|
|
|
176
|
|
|
|
13.1
|
|
|
|
0.4
|
|
Total
personal loans and leases
|
|
|
17,202
|
|
|
|
16,756
|
|
|
|
15,789
|
|
|
|
15,437
|
|
|
|
15,121
|
|
|
|
13.8
|
|
|
|
2.7
|
|
Total
consolidated average
l
oans
and leases
|
|
$
|
49,931
|
|
|
$
|
48,610
|
|
|
$
|
45,442
|
|
|
$
|
44,110
|
|
|
$
|
42,904
|
|
|
|
16.4
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated average loans and leases increased $7.0 billion or 16.4% in the
second quarter of 2008 compared to the second quarter of 2007. Total
consolidated average loan and lease organic growth, excluding the effect of the
banking acquisitions, was 10.9% in the second quarter of 2008 compared to the
second quarter of 2007. Approximately $2.1 billion of the growth in
total consolidated average loans and leases was attributable to the banking
acquisitions and $4.9 billion of the growth was organic. Of the $2.1
billion of average growth attributable to the banking acquisitions, $0.7 billion
was attributable to average commercial loans and leases, $0.8 billion was
attributable to average commercial real estate loans and $0.4 billion was
attributable to average residential real estate loans. Of the $4.9
billion of average loan and lease organic growth, $2.0 billion was attributable
to average commercial loans and leases, $1.5 billion was attributable to average
commercial real estate loans, and $0.7 billion was attributable to average
residential real estate loans. Average home equity loans and lines
increased $0.6 billion or 14.5% in the second quarter of 2008 compared to the
second quarter of 2007. Home equity loan and line growth attributable
to the acquisitions was $0.2 billion in the second quarter of 2008 compared to
the second quarter of 2007. Average personal loans and leases increased
approximately $0.3 billion in the second quarter of 2008 compared to the same
period the prior year.
For the
six months ended June 30, 2008, total consolidated average loans and leases
increased $6.8 billion or 15.9% compared to the six months ended June 30,
2007. Total consolidated average loan and lease organic growth,
excluding the effect of the banking acquisitions, was 9.9% for the six months
ended June 30, 2008 compared to the six months ended June 30,
2007. Approximately $2.4 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 $2.4 billion of average
growth attributable to the banking acquisitions, $0.7 billion was attributable
to average commercial loans, $1.0 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, $1.7
billion was attributable to average commercial loans and leases, $1.4 billion
was attributable to average commercial real estate loans, and $0.7 billion was
attributable to average residential real estate loans. Average home
equity loans and lines increased $0.5 billion or 11.6% in the six months ended
June 30, 2008 compared to the six months ended June 30, 2007. Average
personal loans and leases increased $0.3 billion in the first half of 2008
compared to the same period in 2007.
Total
average commercial loan and lease organic growth was 14.3% in the second quarter
of 2008 compared to the second quarter of 2007. For the six months
ended June 30, 2008 compared to the six months ended June 30, 2007, total
average commercial loan and lease organic growth was 12.8%. 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 half of 2008. Management
believes that year-over-year organic commercial loan growth (as a percentage)
will be slower than the growth experienced in the first half of 2008. Management
expects organic commercial loan and lease growth will be in the low single-digit
percentage range in the second half of 2008 compared to the second half of
2007.
Total
average commercial real estate loan organic growth was 9.8% in the second
quarter of 2008 compared to the second quarter of 2007. For the six
months ended June 30, 2008 compared to the six months ended June 30, 2007, total
average commercial real estate loan organic growth was 9.3%. The
Corporation continues to experience slowing in the construction market for
mid-sized and smaller residential developers, and to some extent throughout the
commercial real estate business. Office and retail real estate have
also shown signs of softening. Loan opportunities continue to exist
in the multi-family and medical office segments. Commercial real estate loan
growth for the remainder of 2008 is expected to be relatively modest and
consistent with the 1.1% linked quarter loan growth the Corporation experienced
in the second quarter of 2008 compared to the first quarter of
2008.
From a
production standpoint, residential real estate loan closings in the second
quarter of 2008 were $0.9 billion compared to $1.4 billion in the first quarter
of 2008 and $1.5 billion in the second quarter of 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 June 30, 2008 and 2007, real estate loans sold to investors
amounted to $0.4 billion and $0.6 billion, respectively. For the six
months ended June 30, 2008 and 2007, real estate loans sold to investors
amounted to $0.9 billion and $1.2 billion, respectively. At June 30,
2008 and 2007, the Corporation had approximately $45.3 million and $50.3 million
of residential mortgage loans and home equity loans held for sale, respectively.
Gains from the sale of mortgage loans amounted to $5.6 million in the second
quarter of 2008 compared to $10.4 million in the second quarter of
2007. For the six months ended June 30, 2008, gains from the sale of
mortgage loans amounted to $14.1 million compared to $19.2 million in the six
months ended June 30, 2007.
Home
equity loans and lines, which includes the Corporation’s wholesale activity,
continue to be one of the Corporation’s primary consumer loan
products. Average home equity loan and line organic growth amounted
to $0.4 billion or 8.6% in the second quarter of 2008 compared to the second
quarter of 2007. For the six months ended June 30, 2008, average home
equity loan and line organic growth amounted to $0.3 billion or 5.8% compared to
the six months ended June 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
six months ended June 30, 2008 compared to the three and six months ended June
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 increased scrutiny of the sub-prime lending market
is one of the factors that has impacted general market conditions as well as
perceptions of the mortgage origination business. 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 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.
At June
30, 2008, the Corporation’s combined average loan-to-value ratios and credit
scores were 80.0% and 729, respectively for its residential real estate loan and
home equity loan and line of credit portfolios, excluding residential
construction loans to developers. The Corporation’s exposure to
residential real estate and home equity borrowers with credit scores that were
less than 620 was approximately $312.3 million at June 30, 2008. The
average loan-to-value ratio for residential real estate and home equity
borrowers with credit scores that were less than 620 was approximately 80.0% at
June 30, 2008. These loans were primarily obtained through banking
acquisitions or from previously sold loans put back to the
Corporation.
Average
automobile loans, which are included in other personal loans in the table above,
amounted to $504.6 million in the second quarter of 2008 compared to $312.1
million in the second quarter of 2007, an increase of $192.5 million or
61.7%. For the six months ended June 30, 2008, average automobile
loans amounted to $483.6 million compared to $322.9 million in the six months
ended June 30, 2007, an increase of $160.7 million or 49.7%. During
the second quarter of 2007, the Corporation opted to discontinue the sale and
securitization of automobile loans into the secondary market on a recurring
basis. Auto loans securitized and sold in the second quarter and
first half of 2007 amounted to $0.05 billion and $0.2 billion,
respectively. Net gains from the sale and securitization of auto
loans for the three and six months ended June 30, 2007 amounted to $1.3 million
and $1.1 million, respectively.
The
Corporation has identified certain types of loans that are secured by real
estate. The Corporation refers to these loans as construction and development
loans. Certain construction and development loans currently have a higher risk
profile because the value of the underlying collateral is dependent on the
housing-related real estate markets and these loans are somewhat concentrated in
markets experiencing elevated levels of stress. Construction and development
loans consist of :
Commercial
Construction
- Loans primarily to mid-sized local and regional companies
to construct a variety of commercial projects, including farmland, industrial,
multi-family, office, retail, single-family and condominiums.
Commercial Land
-
Loans primarily to mid-sized local and regional companies to acquire and develop
land for a variety of commercial projects, including farmland, industrial,
multi-family, office, retail, single-family and condominiums.
Residential Construction by
Individuals
- Loans to individuals to construct 1-4 family
homes.
Residential Land
-
Loans primarily to individuals and mid-sized local and regional builders to
acquire and develop land for 1-4 family homes.
Residential Construction by
Developers
- Loans primarily to mid-sized local and regional builders to
construct 1-4 family homes in residential subdivisions.
The
growth and composition of the Corporation’s quarterly average construction and
development loans for the current quarter and previous four quarters are
reflected in the following table ($ in millions):
Consolidated
Average Construction and Development Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Growth
Pct.
|
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
|
|
|
Prior
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Annual
|
|
|
Quarter
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
4,431
|
|
|
$
|
4,463
|
|
|
$
|
4,044
|
|
|
$
|
3,816
|
|
|
$
|
3,607
|
|
|
|
22.9
|
%
|
|
|
(0.7
|
)
%
|
Land
|
|
|
992
|
|
|
|
973
|
|
|
|
897
|
|
|
|
864
|
|
|
|
772
|
|
|
|
28.5
|
|
|
|
2.0
|
|
Total
commercial
|
|
|
5,423
|
|
|
|
5,436
|
|
|
|
4,941
|
|
|
|
4,680
|
|
|
|
4,379
|
|
|
|
23.8
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
by individuals
|
|
|
1,013
|
|
|
|
1,010
|
|
|
|
1,055
|
|
|
|
1,012
|
|
|
|
965
|
|
|
|
5.0
|
|
|
|
0.3
|
|
Land
|
|
|
2,419
|
|
|
|
2,511
|
|
|
|
2,521
|
|
|
|
2,497
|
|
|
|
2,431
|
|
|
|
(0.5
|
)
|
|
|
(3.7
|
)
|
Construction
by developers
|
|
|
1,518
|
|
|
|
1,595
|
|
|
|
1,709
|
|
|
|
1,791
|
|
|
|
1,862
|
|
|
|
(18.5
|
)
|
|
|
(4.8
|
)
|
Total
residential
|
|
|
4,950
|
|
|
|
5,116
|
|
|
|
5,285
|
|
|
|
5,300
|
|
|
|
5,258
|
|
|
|
(5.9
|
)
|
|
|
(3.2
|
)
|
Total
consolidated average construction
and
development loans
|
|
$
|
10,373
|
|
|
$
|
10,552
|
|
|
$
|
10,226
|
|
|
$
|
9,980
|
|
|
$
|
9,637
|
|
|
|
7.6
|
%
|
|
|
(1.7
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated average construction and development loans increased $0.7 billion
or 7.6% in the second quarter of 2008 compared to the second quarter of
2007. Approximately $0.2 billion of the growth in total consolidated
average construction and development loans was attributable to the banking
acquisitions and $0.5 billion of the growth was organic.
At June
30, 2008, total consolidated construction and development loans outstanding
amounted to $10.0 billion. Approximately $4.1 billion or 40.9% of these loans
are loans associated with Arizona, the west coast of Florida and correspondent
banking business channels. Nonperforming construction and development loans
represent 63.5% of the Corporation’s total consolidated nonperforming loans and
leases at June 30, 2008. Nonperforming construction and development loans
associated with Arizona, the west coast of Florida and correspondent banking
business channels represent 41.7% of the Corporation’s total consolidated
nonperforming loans and leases at June 30, 2008.
The
growth and composition of the Corporation’s quarterly average deposits for the
current and previous four quarters are as follows ($ in
millions):
Consolidated Average
Deposits
|
|
2008
|
|
|
2007
|
|
|
Growth
Pct.
|
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
|
|
|
Prior
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Annual
|
|
|
Quarter
|
|
Bank
issued deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,168
|
|
|
$
|
4,004
|
|
|
$
|
4,016
|
|
|
$
|
3,977
|
|
|
$
|
3,878
|
|
|
|
7.5
|
%
|
|
|
4.1
|
%
|
Personal
|
|
|
1,056
|
|
|
|
1,018
|
|
|
|
943
|
|
|
|
951
|
|
|
|
996
|
|
|
|
6.0
|
|
|
|
3.7
|
|
Other
|
|
|
604
|
|
|
|
607
|
|
|
|
604
|
|
|
|
585
|
|
|
|
586
|
|
|
|
2.9
|
|
|
|
(0.4
|
)
|
Total
noninterest
bearing deposits
|
|
|
5,828
|
|
|
|
5,629
|
|
|
|
5,563
|
|
|
|
5,513
|
|
|
|
5,460
|
|
|
|
6.7
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing activity deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and NOW
|
|
|
3,273
|
|
|
|
3,202
|
|
|
|
2,842
|
|
|
|
2,899
|
|
|
|
2,929
|
|
|
|
11.7
|
|
|
|
2.2
|
|
Money
market
|
|
|
9,674
|
|
|
|
9,784
|
|
|
|
8,987
|
|
|
|
8,853
|
|
|
|
8,587
|
|
|
|
12.7
|
|
|
|
(1.1
|
)
|
Foreign
activity
|
|
|
1,834
|
|
|
|
1,965
|
|
|
|
2,050
|
|
|
|
2,067
|
|
|
|
1,756
|
|
|
|
4.4
|
|
|
|
(6.7
|
)
|
Total
interest bearing
activity
deposits
|
|
|
14,781
|
|
|
|
14,951
|
|
|
|
13,879
|
|
|
|
13,819
|
|
|
|
13,272
|
|
|
|
11.4
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
CDs and time deposits
|
|
|
4,813
|
|
|
|
4,655
|
|
|
|
4,449
|
|
|
|
4,778
|
|
|
|
4,882
|
|
|
|
(1.4
|
)
|
|
|
3.4
|
|
CDs
greater than $100,000
|
|
|
4,074
|
|
|
|
4,203
|
|
|
|
3,897
|
|
|
|
4,010
|
|
|
|
3,803
|
|
|
|
7.1
|
|
|
|
(3.1
|
)
|
Total
time deposits
|
|
|
8,887
|
|
|
|
8,858
|
|
|
|
8,346
|
|
|
|
8,788
|
|
|
|
8,685
|
|
|
|
2.3
|
|
|
|
0.3
|
|
Total
bank issued deposits
|
|
|
29,496
|
|
|
|
29,438
|
|
|
|
27,788
|
|
|
|
28,120
|
|
|
|
27,417
|
|
|
|
7.6
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
|
1,525
|
|
|
|
1,903
|
|
|
|
1,823
|
|
|
|
2,621
|
|
|
|
1,795
|
|
|
|
(15.0
|
)
|
|
|
(19.8
|
)
|
Brokered
CDs
|
|
|
7,090
|
|
|
|
5,102
|
|
|
|
3,734
|
|
|
|
3,261
|
|
|
|
3,635
|
|
|
|
95.0
|
|
|
|
39.0
|
|
Foreign
time
|
|
|
942
|
|
|
|
1,285
|
|
|
|
1,297
|
|
|
|
842
|
|
|
|
829
|
|
|
|
13.6
|
|
|
|
(26.7
|
)
|
Total
wholesale deposits
|
|
|
9,557
|
|
|
|
8,290
|
|
|
|
6,854
|
|
|
|
6,724
|
|
|
|
6,259
|
|
|
|
52.7
|
|
|
|
15.3
|
|
Total
consolidated
average deposits
|
|
$
|
39,053
|
|
|
$
|
37,728
|
|
|
$
|
34,642
|
|
|
$
|
34,844
|
|
|
$
|
33,676
|
|
|
|
16.0
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
total bank issued deposits increased $2.1 billion or 7.6% in the second quarter
of 2008 compared to the second quarter of 2007. Excluding the effect
of the banking acquisitions, average total bank issued deposits were relatively
unchanged in the second quarter of 2008 compared to the second quarter of
2007. Approximately $1.9 billion of the growth in average total bank
issued deposits was attributable to the banking acquisitions and $0.2 billion of
the growth was organic. Of the $1.9 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 $0.5 billion was attributable to average
time deposits. Of the $0.2 billion of average bank issued deposit
organic growth, $0.4 billion was attributable to average interest bearing
deposits, while average time deposits declined $0.3
billion. Excluding the effect of the banking acquisitions, average
noninterest bearing deposits increased $0.1 billion in the second quarter of
2008 compared to the second quarter of 2007.
For the
six months ended June 30, 2008, average total bank issued deposits increased
$2.4 billion or 8.9% compared to the six months ended June 30,
2007. Excluding the effect of the banking acquisitions, average total
bank issued deposit organic growth was 0.5% in the six months ended June 30,
2008 compared to the six months ended June 30, 2007. Approximately
$2.2 billion of the growth in average total bank issued deposits was
attributable to the banking acquisitions and $0.2 billion of the growth was
organic. Of the $2.2 billion of average growth attributable to the
banking acquisitions, $0.3 billion was attributable to average noninterest
bearing deposits, $1.2 billion was attributable to average interest bearing
activity deposits and $0.7 billion was attributable to average time
deposits. Of the $0.2 billion of average bank issued deposit organic
growth, $0.5 billion was attributable to average interest bearing activity
deposits while average time deposits declined $0.3 billion. Excluding
the effect of the banking acquisitions, average noninterest bearing deposits
were relatively unchanged in the first half of 2008 compared to the first half
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 second quarter and first half of 2008 compared to the second quarter and
first half 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 wholesale funding alternatives, especially
brokered and institutional certificates of deposit. 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 June 30, 2008, average wholesale deposits increased $3.3 billion,
or 52.7% compared to the three months ended June 30, 2007. For the
six months ended June 30, 2008 average wholesale deposits increased $2.6
billion, or 41.3% compared to the six months ended June 30,
2007. Notwithstanding the increase in wholesale deposit balances,
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 $15.6 billion at June 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 $9.5 million and is
reported as Loss on termination of debt in the Consolidated Statements of
Income.
The
Corporation’s consolidated average interest earning assets and interest bearing
liabilities, interest earned and interest paid for the three and six months
ended June 30, 2008 and 2007, are presented in the following tables ($ in
millions):
Consolidated
Yield and Cost Analysis
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June
30, 2008
|
|
|
June
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
|
|
$
|
15,602.3
|
|
|
$
|
208.3
|
|
|
|
5.37
|
%
|
|
$
|
13,000.6
|
|
|
$
|
245.8
|
|
|
|
7.58
|
%
|
Commercial
real estate loans
|
|
|
17,126.4
|
|
|
|
256.8
|
|
|
|
6.03
|
|
|
|
14,781.7
|
|
|
|
279.3
|
|
|
|
7.58
|
|
Residential
real estate loans
|
|
|
10,474.7
|
|
|
|
156.7
|
|
|
|
6.02
|
|
|
|
9,388.7
|
|
|
|
170.5
|
|
|
|
7.28
|
|
Home
equity loans and lines
|
|
|
4,834.5
|
|
|
|
75.4
|
|
|
|
6.27
|
|
|
|
4,223.2
|
|
|
|
79.1
|
|
|
|
7.52
|
|
Personal
loans and leases
|
|
|
1,892.6
|
|
|
|
30.0
|
|
|
|
6.38
|
|
|
|
1,509.5
|
|
|
|
29.4
|
|
|
|
7.81
|
|
Total
loans and leases
|
|
|
49,930.5
|
|
|
|
727.2
|
|
|
|
5.86
|
|
|
|
42,903.7
|
|
|
|
804.1
|
|
|
|
7.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
982.0
|
|
|
|
10.8
|
|
|
|
4.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,548.9
|
|
|
|
71.7
|
|
|
|
4.39
|
|
|
|
6,247.9
|
|
|
|
78.7
|
|
|
|
5.00
|
|
Tax
Exempt (a)
|
|
|
1,185.8
|
|
|
|
20.1
|
|
|
|
6.92
|
|
|
|
1,300.2
|
|
|
|
21.6
|
|
|
|
6.73
|
|
Total
investment securities
|
|
|
7,734.7
|
|
|
|
91.8
|
|
|
|
4.77
|
|
|
|
7,548.1
|
|
|
|
100.3
|
|
|
|
5.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
securities (a)
|
|
|
162.1
|
|
|
|
0.4
|
|
|
|
1.05
|
|
|
|
58.3
|
|
|
|
0.4
|
|
|
|
2.47
|
|
Other
short-term investments
|
|
|
370.7
|
|
|
|
2.2
|
|
|
|
2.36
|
|
|
|
270.3
|
|
|
|
3.4
|
|
|
|
5.10
|
|
Total
interest earning assets
|
|
$
|
58,198.0
|
|
|
$
|
821.6
|
|
|
|
5.68
|
%
|
|
$
|
51,762.4
|
|
|
$
|
919.0
|
|
|
|
7.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
issued deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
issued interest
bearing activity deposits
|
|
$
|
14,780.8
|
|
|
$
|
53.1
|
|
|
|
1.44
|
%
|
|
$
|
13,272.6
|
|
|
$
|
119.4
|
|
|
|
3.61
|
%
|
Bank
issued time deposits
|
|
|
8,887.1
|
|
|
|
89.9
|
|
|
|
4.07
|
|
|
|
8,685.5
|
|
|
|
107.1
|
|
|
|
4.94
|
|
Total
bank issued deposits
|
|
|
23,667.9
|
|
|
|
143.0
|
|
|
|
2.43
|
|
|
|
21,958.1
|
|
|
|
226.5
|
|
|
|
4.14
|
|
Wholesale
deposits
|
|
|
9,557.5
|
|
|
|
76.2
|
|
|
|
3.21
|
|
|
|
6,258.5
|
|
|
|
79.4
|
|
|
|
5.09
|
|
Total
interest bearing deposits
|
|
|
33,225.4
|
|
|
|
219.2
|
|
|
|
2.65
|
|
|
|
28,216.6
|
|
|
|
305.9
|
|
|
|
4.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
6,798.5
|
|
|
|
38.0
|
|
|
|
2.25
|
|
|
|
4,297.5
|
|
|
|
56.0
|
|
|
|
5.23
|
|
Long-term
borrowings
|
|
|
9,638.6
|
|
|
|
109.8
|
|
|
|
4.58
|
|
|
|
11,941.8
|
|
|
|
150.3
|
|
|
|
5.05
|
|
Total
interest bearing liabilities
|
|
$
|
49,662.5
|
|
|
$
|
367.0
|
|
|
|
2.97
|
%
|
|
$
|
44,455.9
|
|
|
$
|
512.2
|
|
|
|
4.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (FTE)
|
|
|
|
|
|
$
|
454.6
|
|
|
|
3.14
|
%
|
|
|
|
|
|
$
|
406.8
|
|
|
|
3.15
|
%
|
Net
interest spread (FTE)
|
|
|
|
|
|
|
|
|
|
|
2.71
|
%
|
|
|
|
|
|
|
|
|
|
|
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.
|
Consolidated
Yield and Cost Analysis
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2008
|
|
|
June
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
|
|
$
|
15,256.2
|
|
|
$
|
440.0
|
|
|
|
5.80
|
%
|
|
$
|
12,839.6
|
|
|
$
|
483.9
|
|
|
|
7.60
|
%
|
Commercial
real estate loans
|
|
|
17,034.9
|
|
|
|
533.3
|
|
|
|
6.30
|
|
|
|
14,600.1
|
|
|
|
549.4
|
|
|
|
7.59
|
|
Residential
real estate loans
|
|
|
10,386.1
|
|
|
|
321.4
|
|
|
|
6.22
|
|
|
|
9,275.8
|
|
|
|
335.8
|
|
|
|
7.30
|
|
Home
equity loans and lines
|
|
|
4,752.6
|
|
|
|
155.4
|
|
|
|
6.58
|
|
|
|
4,258.9
|
|
|
|
159.1
|
|
|
|
7.53
|
|
Personal
loans and leases
|
|
|
1,840.5
|
|
|
|
61.1
|
|
|
|
6.67
|
|
|
|
1,531.0
|
|
|
|
59.5
|
|
|
|
7.83
|
|
Total
loans and leases
|
|
|
49,270.3
|
|
|
|
1,511.2
|
|
|
|
6.17
|
|
|
|
42,505.4
|
|
|
|
1,587.7
|
|
|
|
7.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
to Metavante
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
982.0
|
|
|
|
21.6
|
|
|
|
4.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,608.8
|
|
|
|
149.2
|
|
|
|
4.54
|
|
|
|
6,166.4
|
|
|
|
155.7
|
|
|
|
5.04
|
|
Tax
Exempt (a)
|
|
|
1,214.2
|
|
|
|
41.1
|
|
|
|
6.88
|
|
|
|
1,294.1
|
|
|
|
43.1
|
|
|
|
6.80
|
|
Total
investment securities
|
|
|
7,823.0
|
|
|
|
190.3
|
|
|
|
4.90
|
|
|
|
7,460.5
|
|
|
|
198.8
|
|
|
|
5.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
securities (a)
|
|
|
170.2
|
|
|
|
1.1
|
|
|
|
1.29
|
|
|
|
49.9
|
|
|
|
0.5
|
|
|
|
2.03
|
|
Other
short-term investments
|
|
|
351.4
|
|
|
|
5.1
|
|
|
|
2.91
|
|
|
|
272.1
|
|
|
|
7.0
|
|
|
|
5.16
|
|
Total
interest earning assets
|
|
$
|
57,614.9
|
|
|
$
|
1,707.7
|
|
|
|
5.96
|
%
|
|
$
|
51,269.9
|
|
|
$
|
1,815.6
|
|
|
|
7.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
issued deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
issued interest
bearing activity
deposits
|
|
$
|
14,866.0
|
|
|
$
|
143.4
|
|
|
|
1.94
|
%
|
|
$
|
13,125.3
|
|
|
$
|
235.3
|
|
|
|
3.62
|
%
|
Bank
issued time deposits
|
|
|
8,872.8
|
|
|
|
190.0
|
|
|
|
4.31
|
|
|
|
8,543.4
|
|
|
|
207.5
|
|
|
|
4.90
|
|
Total
bank issued deposits
|
|
|
23,738.8
|
|
|
|
333.4
|
|
|
|
2.82
|
|
|
|
21,668.7
|
|
|
|
442.8
|
|
|
|
4.12
|
|
Wholesale
deposits
|
|
|
8,923.6
|
|
|
|
158.6
|
|
|
|
3.57
|
|
|
|
6,314.5
|
|
|
|
159.5
|
|
|
|
5.09
|
|
Total
interest bearing deposits
|
|
|
32,662.4
|
|
|
|
492.0
|
|
|
|
3.03
|
|
|
|
27,983.2
|
|
|
|
602.3
|
|
|
|
4.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
6,607.0
|
|
|
|
91.6
|
|
|
|
2.79
|
|
|
|
4,273.0
|
|
|
|
110.9
|
|
|
|
5.23
|
|
Long-term
borrowings
|
|
|
9,829.6
|
|
|
|
232.0
|
|
|
|
4.75
|
|
|
|
11,783.6
|
|
|
|
294.1
|
|
|
|
5.03
|
|
Total
interest bearing liabilities
|
|
$
|
49,099.0
|
|
|
$
|
815.6
|
|
|
|
3.34
|
%
|
|
$
|
44,039.8
|
|
|
$
|
1,007.3
|
|
|
|
4.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (FTE)
|
|
|
|
|
|
$
|
892.1
|
|
|
|
3.11
|
%
|
|
|
|
|
|
$
|
808.3
|
|
|
|
3.18
|
%
|
Net
interest spread (FTE)
|
|
|
|
|
|
|
|
|
|
|
2.62
|
%
|
|
|
|
|
|
|
|
|
|
|
2.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 1 basis point from 3.15% in the second quarter of
2007 to 3.14% in the second quarter of 2008. For the six months ended
June 30, 2008, the net interest margin FTE was 3.11% compared to 3.18% for the
six months ended June 30, 2007, a decrease of 7 basis points. The Corporation
continued to experience loan growth that exceeded its ability to generate 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. Management continues to
believe that margin contraction is more likely than margin
expansion. As a result, the net interest margin FTE as a percent of
average earning assets could continue to exhibit downward pressure in the near
term.
PROVISION FOR LOAN AND LEASE
LOSSES AND CREDIT QUALITY
The
following tables present comparative consolidated credit quality information as
of June 30, 2008 and the prior four quarters:
Nonperforming
Assets
($000’s)
|
|
2008
|
|
|
2007
|
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Nonaccrual
|
|
$
|
1,006,757
|
|
|
$
|
774,137
|
|
|
$
|
686,888
|
|
|
$
|
445,750
|
|
|
$
|
373,387
|
|
Renegotiated
|
|
|
16,523
|
|
|
|
97
|
|
|
|
224,398
|
|
|
|
107
|
|
|
|
113
|
|
Past
due 90 days or more
|
|
|
17,676
|
|
|
|
12,784
|
|
|
|
13,907
|
|
|
|
7,736
|
|
|
|
10,463
|
|
Total
nonperforming loans and leases
|
|
|
1,040,956
|
|
|
|
787,018
|
|
|
|
925,193
|
|
|
|
453,593
|
|
|
|
383,963
|
|
Other
real estate owned
|
|
|
207,102
|
|
|
|
177,806
|
|
|
|
115,074
|
|
|
|
77,350
|
|
|
|
24,462
|
|
Total
nonperforming assets
|
|
$
|
1,248,058
|
|
|
$
|
964,824
|
|
|
$
|
1,040,267
|
|
|
$
|
530,943
|
|
|
$
|
408,425
|
|
Allowance
for loan and lease losses
|
|
$
|
1,028,809
|
|
|
$
|
543,539
|
|
|
$
|
496,191
|
|
|
$
|
452,697
|
|
|
$
|
431,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statistics
|
|
2008
|
|
|
2007
|
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Net
charge-offs to average
loans and leases
annualized
|
|
|
3.23
|
%
|
|
|
1.08
|
%
|
|
|
1.67
|
%
|
|
|
0.23
|
%
|
|
|
0.22
|
%
|
Total
nonperforming loans and leases
to total loans and
leases
|
|
|
2.07
|
|
|
|
1.60
|
|
|
|
2.00
|
|
|
|
1.01
|
|
|
|
0.89
|
|
Total
nonperforming assets to total loans
and leases and other real
estate owned
|
|
|
2.47
|
|
|
|
1.95
|
|
|
|
2.24
|
|
|
|
1.18
|
|
|
|
0.94
|
|
Allowance
for loan and lease losses
to total loans and
leases
|
|
|
2.05
|
|
|
|
1.10
|
|
|
|
1.07
|
|
|
|
1.01
|
|
|
|
1.00
|
|
Allowance
for loan and lease losses
to total nonperforming loans and
leases
|
|
|
99
|
|
|
|
69
|
|
|
|
54
|
|
|
|
100
|
|
|
|
112
|
|
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 June 30, 2008, approximately $207.6 million or 19.9% of
the Corporation’s total nonperforming loans and leases were less than 30 days
past due. In addition, approximately $138.3 million or 13.3% of the
Corporation’s total nonperforming loans and leases were greater than 30 days
past due but less than 90 days past due at June 30, 2008. In total,
approximately $345.9 million or 33.2% of the Corporation’s total nonperforming
loans and leases were less than 90 days past due at June 30, 2008.
At June
30, 2008, nonperforming loans and leases amounted to $1,041.0 million or 2.07%
of consolidated loans and leases compared to $787.0 million or 1.60% of
consolidated loans and leases at March 31, 2008 and $384.0 million or 0.89% of
consolidated loans and leases at June 30, 2007.
Nonperforming
loans and leases at June 30, 2008 increased by $254.0 million compared to March
31, 2008. The Corporation sold $78.1 million of nonaccrual real estate loans
during the second quarter of 2008 and sold $108.5 million of nonaccrual real
estate loans during the first quarter of 2008. Nonperforming loans
associated with the January 2, 2008 acquisition of First Indiana amounted to
$23.1 million at June 30, 2008 compared to $22.5 million at March 31,
2008.
Troubled-debt
restructured loans, which the Corporation refers to as “renegotiated,” amounted
to $16.5 million at June 30, 2008 compared to $0.1 million at March 31, 2008.
The Corporation recognizes that presently consumers are far more leveraged and
in a very difficult position with high fuel and food prices intersecting with
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. Franklin continues to be
in compliance with the restructured terms. Since December 31, 2007 the
Corporation’s exposure to Franklin has been reduced by $54.0 million as of June
30, 2008.
The
following table shows the Corporation’s nonperforming loans and leases by type
of loan or lease at June 30, 2008 and March 31, 2008.
Major Categories of
Nonperforming Loans & Leases
($ in
millions)
|
|
June
30, 2008
|
|
|
March
31, 2008
|
|
|
|
|
|
|
Percent
|
|
|
Non-
|
|
|
%
Non-
|
|
|
|
|
|
Percent
|
|
|
Non-
|
|
|
%
Non-
|
|
|
|
Total
|
|
|
of
Total
|
|
|
Perform-
|
|
|
Perform-
|
|
|
Total
|
|
|
of
Total
|
|
|
Perform-
|
|
|
Perform-
|
|
|
|
Loans
|
|
|
Loans
|
|
|
ing
Loans
|
|
|
ing
to
|
|
|
Loans
|
|
|
Loans
|
|
|
ing
Loans
|
|
|
ing
to
|
|
|
|
&
|
|
|
&
|
|
|
&
|
|
|
Loan
&
|
|
|
&
|
|
|
&
|
|
|
&
|
|
|
Loan
&
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Lease
Type
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Lease
Type
|
|
Commercial loans &
leases
|
|
$
|
15,842
|
|
|
|
31.5
|
%
|
|
$
|
77.7
|
|
|
|
0.49
|
%
|
|
$
|
15,414
|
|
|
|
31.3
|
%
|
|
$
|
54.2
|
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
land and
construction
|
|
|
5,355
|
|
|
|
10.7
|
|
|
|
190.9
|
|
|
|
3.56
|
|
|
|
5,384
|
|
|
|
10.8
|
|
|
|
164.0
|
|
|
|
3.05
|
|
Other
commercial real estate
|
|
|
11,891
|
|
|
|
23.7
|
|
|
|
109.1
|
|
|
|
0.92
|
|
|
|
11,573
|
|
|
|
23.5
|
|
|
|
94.6
|
|
|
|
0.82
|
|
Total
commercial real estate
|
|
|
17,246
|
|
|
|
34.4
|
|
|
|
300.0
|
|
|
|
1.74
|
|
|
|
16,957
|
|
|
|
34.3
|
|
|
|
258.6
|
|
|
|
1.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 -
4 family
|
|
|
5,632
|
|
|
|
11.2
|
|
|
|
120.6
|
|
|
|
2.14
|
|
|
|
5,358
|
|
|
|
10.9
|
|
|
|
83.1
|
|
|
|
1.55
|
|
Construction
by individuals
|
|
|
1,013
|
|
|
|
2.0
|
|
|
|
44.7
|
|
|
|
4.41
|
|
|
|
995
|
|
|
|
2.0
|
|
|
|
22.2
|
|
|
|
2.23
|
|
Residential
land and
construction by developers
|
|
|
3,601
|
|
|
|
7.2
|
|
|
|
425.0
|
|
|
|
11.80
|
|
|
|
3,989
|
|
|
|
8.1
|
|
|
|
306.1
|
|
|
|
7.67
|
|
Total
residential real estate
|
|
|
10,246
|
|
|
|
20.4
|
|
|
|
590.3
|
|
|
|
5.76
|
|
|
|
10,342
|
|
|
|
21.0
|
|
|
|
411.4
|
|
|
|
3.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans & leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity loans and
lines of credit
|
|
|
4,992
|
|
|
|
9.9
|
|
|
|
55.6
|
|
|
|
1.11
|
|
|
|
4,722
|
|
|
|
9.6
|
|
|
|
52.1
|
|
|
|
1.10
|
|
Other
consumer
loans and leases
|
|
|
1,907
|
|
|
|
3.8
|
|
|
|
17.4
|
|
|
|
0.91
|
|
|
|
1,865
|
|
|
|
3.8
|
|
|
|
10.7
|
|
|
|
0.57
|
|
Total
consumer loans & leases
|
|
|
6,899
|
|
|
|
13.7
|
|
|
|
73.0
|
|
|
|
1.06
|
|
|
|
6,587
|
|
|
|
13.4
|
|
|
|
62.8
|
|
|
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans & leases
|
|
$
|
50,233
|
|
|
|
100.0
|
%
|
|
$
|
1,041.0
|
|
|
|
2.07
|
%
|
|
$
|
49,300
|
|
|
|
100.0
|
%
|
|
$
|
787.0
|
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
commercial loans and leases amounted to $77.7 million at June 30, 2008 compared
to $54.2 million at March 31, 2008, an increase of $23.5 million. Despite the
increase, the levels of nonperforming commercial loans and leases have remained
relatively stable since December 31, 2007, excluding the Franklin loan. The
Corporation does not currently believe the increase is indicative of a
trend.
The
national residential real estate markets continued to show signs of stress and
deterioration during the second quarter and first half of
2008. Consistent with recent quarters, nonperforming real estate
loans were the primary source of the Corporation’s nonperforming loans and
leases and represented 85.5% of total nonperforming loans and leases at June 30,
2008. Nonperforming real estate loans amounted to $890.3 million at
June 30, 2008 compared to $670.0 million at March 31, 2008, an increase of
$220.3 million or 32.9%. Nonperforming loans associated with construction and
development loans, amounted to $660.6 million at June 30, 2008 compared to
$492.3 million at March 31, 2008, an increase of $168.3 million or 34.2%, which
is net of the nonaccrual construction and development loans that were sold
during the second quarter of 2008. Nonperforming construction and
development loans represented 74.2% of the Corporation’s nonperforming real
estate loans and 63.5% of the Corporation’s total nonperforming loans and leases
at June 30, 2008.
Nonperforming
1-4 family residential real estate loans increased $37.5 million or 45.1%
compared to March 31, 2008 and amounted to $120.6 million or 2.14% of total 1-4
family residential real estate loans at June 30, 2008. Increased economic stress
on consumers has resulted in further deterioration in these loans, especially in
Arizona and Florida, which contributed $33.1 million or 88.3% of the increase in
nonperforming 1-4 family residential real estate loans at June 30, 2008 compared
to March 31, 2008.
Nonperforming
consumer loans and leases amounted to $73.0 million at June 30, 2008 compared to
$62.8 million at March 31, 2008, an increase of $10.2 million or 16.2%. The
levels (percent of nonperforming loans and leases to loans and leases
outstanding) of nonperforming home equity loans and lines of credit which
represent the majority of consumer loans and leases have remained relatively
stable since December 31, 2007.
The
following table presents a geographical summary of nonperforming loans and
leases at June 30, 2008 and March 31, 2008.
Geographical Summary of
Nonperforming Loans & Leases
($ in
millions)
|
|
June
30, 2008
|
|
|
March
31, 2008
|
|
|
|
|
|
|
Percent
|
|
|
Non-
|
|
|
%
Non-
|
|
|
|
|
|
Percent
|
|
|
Non-
|
|
|
%
Non-
|
|
|
|
Total
|
|
|
of
Total
|
|
|
Perform-
|
|
|
Perform-
|
|
|
Total
|
|
|
of
Total
|
|
|
Perform-
|
|
|
Perform-
|
|
|
|
Loans
|
|
|
Loans
|
|
|
ing
Loans
|
|
|
ing
to
|
|
|
Loans
|
|
|
Loans
|
|
|
ing
Loans
|
|
|
ing
to
|
|
|
|
&
|
|
|
&
|
|
|
&
|
|
|
Loan
&
|
|
|
&
|
|
|
&
|
|
|
&
|
|
|
Loan
&
|
|
Geographical
Summary
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Lease
Type
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Lease
Type
|
|
Wisconsin
|
|
$
|
18,189
|
|
|
|
36.2
|
%
|
|
$
|
129.0
|
|
|
|
0.71
|
%
|
|
$
|
17,751
|
|
|
|
36.0
|
%
|
|
$
|
100.7
|
|
|
|
0.57
|
%
|
Arizona
|
|
|
7,867
|
|
|
|
15.7
|
|
|
|
383.2
|
|
|
|
4.87
|
|
|
|
7,881
|
|
|
|
16.0
|
|
|
|
266.6
|
|
|
|
3.38
|
|
Minnesota
|
|
|
5,299
|
|
|
|
10.5
|
|
|
|
92.5
|
|
|
|
1.75
|
|
|
|
5,172
|
|
|
|
10.5
|
|
|
|
56.2
|
|
|
|
1.09
|
|
Missouri
|
|
|
3,445
|
|
|
|
6.9
|
|
|
|
31.5
|
|
|
|
0.91
|
|
|
|
3,378
|
|
|
|
6.8
|
|
|
|
24.5
|
|
|
|
0.73
|
|
Florida
|
|
|
3,016
|
|
|
|
6.0
|
|
|
|
150.0
|
|
|
|
4.97
|
|
|
|
3,013
|
|
|
|
6.1
|
|
|
|
130.1
|
|
|
|
4.32
|
|
Kansas
& Oklahoma
|
|
|
1,328
|
|
|
|
2.6
|
|
|
|
33.7
|
|
|
|
2.54
|
|
|
|
1,330
|
|
|
|
2.7
|
|
|
|
22.9
|
|
|
|
1.72
|
|
Indiana
|
|
|
1,517
|
|
|
|
3.0
|
|
|
|
22.4
|
|
|
|
1.48
|
|
|
|
1,418
|
|
|
|
2.9
|
|
|
|
20.9
|
|
|
|
1.47
|
|
Others
|
|
|
9,572
|
|
|
|
19.1
|
|
|
|
198.7
|
|
|
|
2.08
|
|
|
|
9,357
|
|
|
|
19.0
|
|
|
|
165.1
|
|
|
|
1.77
|
|
Total
|
|
$
|
50,233
|
|
|
|
100.0
|
%
|
|
$
|
1,041.0
|
|
|
|
2.07
|
%
|
|
$
|
49,300
|
|
|
|
100.0
|
%
|
|
$
|
787.0
|
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
housing-related stress continues to exist in both core and acquired
loans. At June 30, 2008, nonperforming loans in Arizona and Florida
(predominantly the west coast of Florida) amounted to $533.2 million, which was
51.2 % of total consolidated nonperforming loans and leases at June 30,
2008. Approximately $408.2 million or 76.6% of nonperforming loans in
Arizona and Florida at June 30, 2008 were construction and development
loans.
OREO is
principally comprised of commercial and residential properties acquired in
partial or total satisfaction of problem loans and amounted to $207.1 million at
June 30, 2008, compared to $177.8 million at March 31, 2008. 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 March 31, 2008, construction and development
properties increased $30.9 million, commercial real estate properties decreased
$6.5 million and 1-4 family residential real estate properties increased $4.9
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.
Reconciliation of Allowance
for Loan and Lease Losses
($000’s)
|
|
2008
|
|
|
2007
|
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Beginning
balance
|
|
$
|
543,539
|
|
|
$
|
496,191
|
|
|
$
|
452,697
|
|
|
$
|
431,012
|
|
|
$
|
423,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
885,981
|
|
|
|
146,321
|
|
|
|
235,060
|
|
|
|
41,526
|
|
|
|
26,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
of banks and loans acquired
|
|
|
-
|
|
|
|
32,110
|
|
|
|
-
|
|
|
|
6,200
|
|
|
|
5,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases charged-off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
39,892
|
|
|
|
4,464
|
|
|
|
58,535
|
|
|
|
4,612
|
|
|
|
15,433
|
|
Real
estate
|
|
|
362,625
|
|
|
|
123,815
|
|
|
|
130,384
|
|
|
|
19,143
|
|
|
|
7,789
|
|
Personal
|
|
|
5,643
|
|
|
|
6,872
|
|
|
|
4,859
|
|
|
|
6,102
|
|
|
|
4,473
|
|
Leases
|
|
|
659
|
|
|
|
678
|
|
|
|
889
|
|
|
|
361
|
|
|
|
464
|
|
Total
charge-offs
|
|
|
408,819
|
|
|
|
135,829
|
|
|
|
194,667
|
|
|
|
30,218
|
|
|
|
28,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
on loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,295
|
|
|
|
875
|
|
|
|
1,336
|
|
|
|
1,902
|
|
|
|
1,764
|
|
Real
estate
|
|
|
4,269
|
|
|
|
2,280
|
|
|
|
434
|
|
|
|
884
|
|
|
|
1,070
|
|
Personal
|
|
|
1,172
|
|
|
|
1,167
|
|
|
|
978
|
|
|
|
938
|
|
|
|
1,095
|
|
Leases
|
|
|
372
|
|
|
|
424
|
|
|
|
353
|
|
|
|
453
|
|
|
|
619
|
|
Total
recoveries
|
|
|
8,108
|
|
|
|
4,746
|
|
|
|
3,101
|
|
|
|
4,177
|
|
|
|
4,548
|
|
Net
loans and leases charged-off
|
|
|
400,711
|
|
|
|
131,083
|
|
|
|
191,566
|
|
|
|
26,041
|
|
|
|
23,611
|
|
Ending
balance
|
|
$
|
1,028,809
|
|
|
$
|
543,539
|
|
|
$
|
496,191
|
|
|
$
|
452,697
|
|
|
$
|
431,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs amounted to $400.7 million or 3.23% of average loans and leases in
the second quarter of 2008 compared to $131.1 million or 1.08% of average loans
and leases in the first quarter of 2008 and $23.6 million or 0.22% of average
loans and leases in the second quarter of 2007. For the six months
ended June 30, 2008, net charge-offs amounted to $531.8 million or 2.17% of
average loans and leases compared to $38.3 million or 0.18% of average loans and
leases for the six months ended June 30, 2007.
Consistent
with the first quarter of 2008, net charge-offs in the second 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 $132.1 million, net charge-offs for the west coast of Florida business
channel amounted to $67.1 million and net charge-offs for the correspondent
banking business channel amounted to $85.5 million. Included in net
charge-offs were the net charge-offs related to the loans that were sold during
the second quarter of 2008.
Net
charge-offs of real estate loans amounted to $358.4 million or 89.4% of total
net charge-offs in the second quarter of 2008. For the six months
ended June 30, 2008, net charge-offs of real estate loans amounted to $479.9
million or 90.2% of net charge-offs in the first half of 2008. For
the three and six months ended June 30, 2008, approximately $330.8 million and
$435.7 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 $886.0 million in the second
quarter of 2008. By comparison, the provision for loan and lease
losses amounted to $146.3 million in the first quarter of 2008 and $26.0 million
in the second quarter of 2007. For the six months ended June 30,
2008, the provision for loan and lease losses amounted to $1,032.3 million
compared to $43.2 million for the six months ended June 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 June 30, 2008 the allowance for loan
and lease losses amounted to $1,028.8 million compared to $431.0 million at June
30, 2007, an increase of $597.8 million. The ratio of the allowance
for loan and lease losses to total loans and leases was 2.05% at June 30, 2008
compared to 1.10% at March 31, 2008 and 1.00% at June 30, 2007. The increase in
the allowance for loan and leases at June 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
in the west coast of Florida and 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 June 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 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 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 the second quarter of 2008
and has experienced to a lesser extent in recent quarters.
The
Corporation estimates that the amount of cumulative charge-offs recorded on its
nonperforming loans was approximately $386.0 million or 27.1% of the unpaid
principal balance of its nonperforming loans outstanding at June 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.
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 in the
west coast of Florida and 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 remainder 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. For the remainder of 2008, management expects the quarterly
provision for loan and lease losses will be significantly less than the
provision for loan and lease losses reported for the three months ended June 30,
2008. However, management also 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 national housing markets could result in an increase in the
amount of nonperforming assets and losses reported in future
quarters.
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
believes that its risk at the individual loan level remains manageable and 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 second quarter of 2008 amounted to $187.0 million compared
to $186.6 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 and life insurance revenue. That growth was offset by lower net
investment securities gains that amounted to $0.5 million in the second quarter
of 2008 compared to $19.5 million in the second quarter of 2007. Excluding net
investment securities gains, total other income in the second quarter of 2008
amounted to $186.5 million compared to $167.1 million in the second quarter of
2007, an increase of $19.4 million or 11.6%.
For the
six months ended June 30, 2008, total other income amounted to $398.2 million
compared to $342.1 million in the same period last year, an increase of $56.1
million or 16.4%. The increase in other income was primarily due to growth in
wealth management services revenue, service charges on deposits and life
insurance revenue. Total other income in the first six months of 2008
and 2007 was affected by net investment securities gains that amounted to $26.2
million for the six months ended June 30, 2008 compared to $21.0 million for the
six months ended June 30, 2007. Excluding net investment securities gains, total
other income in the six months ended June 30, 2008 amounted to $372.0 million
compared to $321.1 million in the six months ended June 30, 2007, an increase of
$50.9 million or 15.9%.
Wealth
management revenue amounted to $74.8 million in the second quarter of 2008
compared to $65.6 million in the second quarter of 2007, an increase of $9.2
million or 14.0%. For the six months ended June 30, 2008, wealth
management revenue amounted to $146.6 million compared to $126.3 million for the
six months ended June 30, 2007, an increase of $20.3 million or 16.1%.
Approximately $0.4 million of the wealth management revenue growth in the second
quarter of 2008 compared to the second quarter of 2007 and $2.0 million of the
wealth management revenue growth in the first half of 2008 compared to the first
half of 2007 was attributable to the acquisition. Assets under management were
approximately $25.4 billion at June 30, 2008 compared to $25.7 billion at
December 31, 2007, and approximately $24.6 billion at June 30,
2007. Assets under administration were approximately $106.4 billion
at June 30, 2008 compared to $105.7 billion at December 31, 2007, and
approximately $103.8 billion at June 30, 2007. Despite the downturn
in the equity markets, the Corporation continued to attract assets for
management and administration through increased sales in regional wealth
management offices and the institutional trust business. Revenue growth was also
experienced in securities lending and the operations outsourcing
services. 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 $37.9 million in the second quarter of 2008
compared to $30.1 million in the second quarter of 2007, an increase of $7.8
million or 25.9%. For the six months ended June 30, 2008, service
charges on deposits amounted to $73.6 million compared to $57.8 million for the
six months ended June 30, 2007, an increase of $15.8 million or
27.4%. The banking acquisitions contributed $4.3 million and $8.7
million of the growth in service charges on deposits for the three and six
months ended June 30, 2008 compared to the three and six months ended June 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 second quarter and first half
of 2008 compared to the second quarter and first half of 2007.
Total
mortgage banking revenue was $6.6 million in the second quarter of 2008 compared
to $12.0 million in the second quarter of 2007, a decrease of $5.4
million. For the six months ended June 30, 2008, total mortgage
banking revenue was $16.0 million compared to $22.1 million in the six months
ended June 30, 2007, a decrease of $6.1 million. For the three and
six months ended June 30, 2008, the Corporation sold $0.4 billion and $0.9
billion, respectively, of residential mortgage and home equity loans in the
secondary market. For the three and six months ended June 30, 2007,
the Corporation sold $0.6 billion and $1.2 billion, respectively, of residential
mortgage and home equity loans in the secondary market.
Net
investment securities gains amounted to $0.5 million in the second quarter of
2008 compared to $19.5 million in the second quarter of 2007. For the
six months ended June 30, 2008, net investment securities gains amounted to
$26.2 million compared to $21.0 million in the six months ended June 30,
2007. 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.
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. 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.
Life
insurance revenue amounted to $12.0 million for the three months ended June 30,
2008 compared to $8.0 million for the three months ended June 30, 2007, an
increase of $4.0 million or 49.7%. For the six months ended June 30,
2008, life insurance revenue amounted to $24.4 million compared to $15.5 million
for the six months ended June 30, 2007, an increase of $8.9 million or
57.0%. During the second half of 2007, the Corporation purchased
$286.6 million of additional bank-owned life insurance. That purchase
along with bank-owned life insurance acquired in the banking acquisitions were
the primary contributors to the increase in life insurance revenue in the second
quarter and first half of 2008 compared to the second quarter and first half of
2007.
Other
income in the second quarter of 2008 amounted to $55.3 million compared to $51.5
million in the second quarter of 2007, an increase of $3.8 million or
7.5%. For the six months ended June 30, 2008, other income amounted
to $111.5 million compared to $99.4 million for the six months ended June 30,
2007, an increase of $12.1 million or 12.2%. A final settlement for the 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 also contributed to the growth in other income in
the three and six months ended June 30, 2008 compared to the three and six
months ended June 30, 2007.
OTHER
EXPENSE
Total
other expense for the three months ended June 30, 2008 amounted to $380.4
million compared to $294.3 million for the three months ended June 30, 2007, an
increase of $86.1 million or 29.2%. For the six months ended June 30,
2008, total other expense amounted to $696.2 million compared to $575.4 million
for the six months ended June 30, 2007, an increase of $120.8 million or
21.0%.
Total
other expense for the three and six months ended June 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, which had an impact on
the period to period comparability of operating expenses in 2008 compared to
2007. Approximately $13.6 million of the operating expense growth in
the second quarter of 2008 compared to the second quarter of 2007 and $34.2
million of the operating expense growth in the first half of 2008 compared to
the first half of 2007 were attributable to the acquisitions.
Total
other expense for the three and six months ended June 30, 2008 compared to the
three and six months ended June 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 $43.7 million of the operating expense growth in the
second quarter of 2008 compared to the second quarter of 2007 and $59.7 million
of the operating expense growth in the first half of 2008 compared to the first
half of 2007 were attributable to these items.
Total
other expense for the three and six months ended June 30, 2008 compared to the
three and six months ended June 30, 2007 included residual write-downs of $4.8
million associated with direct financial leases of pick-up trucks and sport
utility vehicles (“SUV”). The decline in fair value of pick-up trucks and SUVs
reflects the impact of rising fuel costs.
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 six months ended June 30, 2008 is the reversal of $12.2 million related to
the Visa litigation matters.
Total
other expense for the six months ended June 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 June 30,
2008 compared to the three months ended June 30, 2007, excluding the items
previously discussed was approximately $24.0 million or 8.4%. The
Corporation estimates that its expense growth in the six months ended June 30,
2008 compared to the six months ended June 30, 2007, excluding the items
previously discussed was approximately $43.7 million or 7.9%. 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
Capital Markets revenue but excluding investment securities gains or losses) and
net interest income on a fully taxable equivalent basis. The
Corporation’s efficiency ratios for the three months ended June 30, 2008 and
prior four quarters were:
Efficiency
Ratios
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
Consolidated
Corporation
|
|
|
59.3
|
%
|
|
|
50.6
|
%
|
|
|
71.2
|
%
|
|
|
49.9
|
%
|
|
|
51.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Corporation estimates that the credit and collection related expenses, 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 adversely impacted the Corporation’s efficiency ratio
for the three months ended June 30, 2008 by 8.0%.
As
previously discussed, total other expense for the three months ended March 31,
2008 included the reversal of $12.2 million related to the Visa litigation
matters. That reversal improved the Corporation’s efficiency ratio
for the three months ended March 31, 2008 by 2.0%.
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. Those items adversely impacted the Corporation’s
efficiency ratio for the three months ended December 31, 2007 by
17.5%.
Salaries
and employee benefits expense amounted to $186.6 million in the second quarter
of 2008 compared to $168.9 million in the second quarter of 2007, an increase of
$17.7 million or 10.5%. For the six months ended June 30, 2008,
salaries and employee benefits expense amounted to $361.2 million compared to
$319.1 million for the six months ended June 30, 2007, an increase of $42.1
million or 13.2%. Salaries and employee benefits related to the
acquisitions previously discussed, contributed approximately $6.7 million and
$17.4 million to the expense growth in the three and six months ended June 30,
2008 compared to the three and six months ended June 30, 2007,
respectively.
Net
occupancy and equipment expense for three months ended June 30, 2008 amounted to
$31.3 million, compared to $28.1 million for the three months ended June 30,
2007, an increase of $3.2 million or 11.1%. For the six months ended
June 30, 2008, net occupancy and equipment expense amounted to $62.5 million
compared to $55.5 million for the six months ended June 30, 2007, an increase of
$7.0 million or 12.5%. Net occupancy and equipment expense related to
the acquisitions contributed approximately $2.2 million and $5.0 million to the
expense growth in the three and six months ended June 30, 2008 compared to the
three and six months ended June 30, 2007, respectively.
Software
and processing expenses amounted to $40.1 million in the second quarter of 2008
compared to $37.9 million in the second quarter of 2007, an increase of $2.2
million or 5.6%. For the six months ended June 30, 2008, software and
processing expenses amounted to $78.4 million compared to $74.8 million for the
six months ended June 30, 2007, an increase of $3.6 million or
4.8%. The acquisitions accounted for $0.5 million and $1.2 million of
the expense growth for the three and six months ended June 30, 2008 compared to
the three and six months ended June 30, 2007, respectively.
Supplies
and printing expense and shipping and handling expense amounted to $11.6 million
in the second quarter of 2008 compared to $10.9 million in the second quarter of
2007, an increase of $0.7 million or 6.1%. For the six months ended
June 30, 2008, supplies and printing expense and shipping and handling expense
amounted to $23.3 million compared to $21.4 million in the first half of 2007,
an increase of $1.9 million or 8.9%. The acquisitions accounted for
$0.2 million and $0.8 million of the expense growth for the three and six months
ended June 30, 2008 compared to the three and six months ended June 30, 2007,
respectively.
Professional
services expense amounted to $18.2 million in the second quarter of 2008
compared to $9.3 million in the second quarter of 2007, an increase of $8.9
million or 95.6%. For the six months ended June 30, 2008, professional services
expense amounted to $31.6 million compared to $17.5 million for the six months
ended June 30, 2007, an increase of $14.1 million or 81.1%. The
acquisitions accounted for $0.4 million and $1.0 million of the expense growth
for the three and six months ended June 30, 2008 compared to the three and six
months ended June 30, 2007, respectively. Increased legal fees and
other professional fees associated with problem loans contributed approximately
$3.2 million and $5.5 million to the increase in professional services expense
in the second quarter and first half of 2008 compared to the second quarter and
first half of 2007, respectively. Consulting fees associated with updating
certain internal systems also contributed to the increase in professional
services expense for the three and six months ended June 30, 2008 compared to
the three and six months ended June 30, 2007.
Amortization
of intangibles amounted to $6.0 million in the second quarter of 2008 compared
to $5.2 million in the second quarter of 2007, an increase of $0.8
million. For the six months ended June 30, 2008, amortization of
intangibles amounted to $11.9 million compared to $9.7 million for the six
months ended June 30, 2007, an increase of $2.2 million. The increase
in amortization associated with the acquisitions amounted to $1.8 million and
$4.0 million for the three and six months ended June 30, 2008 compared to the
three and six months ended June 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 has elected to perform its annual test for
goodwill impairment as of June 30
th
. Other
than goodwill, the Corporation did not have any other intangible assets that are
not amortized at June 30, 2008. 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. The Corporation is in the process of completing the second
step of the process for the Commercial and Community Banking segments in order
to determine if there is any goodwill impairment.
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.
The
Corporation believes that the stress and deterioration in the national
residential real estate markets, liquidity stress and current economic
conditions have depressed prices buyers and sellers are paying and receiving for
bank-related assets. As a result, the Corporation believes that the
fair value allocated to assets, especially loans, will be less than their
reported carrying values and does not expect that it will be required to
recognize any goodwill impairment upon completion of the second step of the
goodwill impairment test.
Losses on
termination of debt amounted to $9.5 million for the six months ended June 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 outstanding was $27.0
million and no gain or loss was recognized from these transactions.
OREO
expenses amounted to $20.3 million in the second quarter of 2008 compared to
$1.6 million in the second quarter of 2007, an increase of $18.7
million. For the six months ended June 30, 2008, OREO expenses
amounted to $35.2 million compared to $3.1 million for the six months ended June
30, 2007, an increase of $32.1 million. Approximately $4.3 million and $7.0
million of the increase for the three and six months ended June 30, 2008
compared to the three and six months ended June 30,
2007, respectively reflects the costs of acquiring and holding the
increased levels of foreclosed properties. Approximately $14.4 million and $25.1
million of the increase for the three and six months ended June 30, 2008
compared to the three and six months ended June 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 half
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 $66.6 million in the second quarter of 2008 compared to
$32.5 million in the second quarter of 2007, an increase of $34.1
million. For the six months ended June 30, 2008, other expense
amounted to $92.0 million compared to $64.8 million for the six months ended
June 30, 2007, an increase of $27.2 million. The acquisitions accounted for $1.8
million and $4.8 million of the growth in other expense for the three and six
months ended June 30, 2008 compared to the three and six months ended June 30,
2007, respectively. Total other expense for the three and six months ended June
30, 2008 compared to the three and six months ended June 30, 2007 included
residual write-downs of $4.8 million associated with direct financial leases of
SUVs and pick-up trucks. The decline in fair value of SUVs and pick-up trucks
reflects lower demand for these vehicles due to the impact of rising fuel costs.
As previously discussed, other expense for the six months ended June 30, 2008
includes the reversal of $12.2 million related to the Visa litigation in the
first quarter of 2008. Total other expense for each of the three and six months
ended June 30, 2008 compared to the three and six months ended June 30, 2007
increased $22.2 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
benefit for income taxes for the three months ended June 30, 2008 amounted to
$238.0 million or 37.7% of the pre-tax loss. The provision for income taxes from
continuing operations for the three months ended June 30, 2007 amounted to $87.1
million or 32.7% of pre-tax income from continuing operations. For the six
months ended June 30, 2008, the benefit for income taxes amounted to $204.7
million or 45.3% of the pre-tax loss. For the six months ended June 30, 2007,
the provision for income taxes from continuing operations amounted $170.1
million or 32.9% 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 $6.51 billion or 10.14% of total consolidated assets at June 30,
2008, compared to $7.03 billion or 11.75% of total consolidated assets at
December 31, 2007
,
and
$6.44 billion or 11.04% of total consolidated assets at June 30,
2007.
On April
22, 2008, the Corporation announced that its Board of Directors authorized an
increase in the quarterly cash dividend paid on the Corporation’s common stock,
from $0.31 per share to $0.32 per share, or 3.2%.
During
the second quarter of 2008, the Corporation issued 160,758 shares of its common
stock for $2.1 million to fund its obligation under its employee stock purchase
plan (the “ESPP”). During the first quarter of 2008, the Corporation issued
110,172 shares of its common stock for $2.2 million to fund its obligation under
the ESPP.
At June
30, 2008, common stock reserved for the granting of stock options and stock
purchase rights were 9,710,606.
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. Also during the first and second
quarters of 2007, the Corporation issued 85,777 shares of its common stock for
$3.4 million and 81,036 shares of its common stock for $3.3 million,
respectively, to fund its obligation under the ESPP.
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 quarter 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. 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 June
30, 2008, the net loss in accumulated other comprehensive income amounted to
$68.6 million, which represented a negative change in accumulated other
comprehensive income of $14.9 million since December 31, 2007
.
Net accumulated
other comprehensive income associated with available for sale investment
securities was a net loss of $31.0 million at June 30, 2008, compared to a net
loss of $10.4 million at December 31, 2007, resulting in a net loss of $20.6
million over the six 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 $6.4 million since December
31, 2007, resulting in a net increase to shareholders’ equity. The accumulated
other comprehensive income which represents the amount required to adjust the
Corporation’s postretirement health benefit liability to its funded status
amounted to an unrealized gain of $2.8 million as of June 30, 2008.
The
Corporation continues to have a strong capital base and its regulatory capital
ratios are significantly above the minimum requirements as shown in the
following tables.
RISK-BASED CAPITAL
RATIOS
($ in
millions)
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Tier
1 Capital
|
|
$
|
4,501
|
|
|
|
7.87
|
%
|
|
$
|
5,448
|
|
|
|
10.22
|
%
|
Tier
1 Capital Minimum Requirement
|
|
|
2,287
|
|
|
|
4.00
|
|
|
|
2,133
|
|
|
|
4.00
|
|
Excess
|
|
$
|
2,214
|
|
|
|
3.87
|
%
|
|
$
|
3,315
|
|
|
|
6.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
$
|
6,783
|
|
|
|
11.86
|
%
|
|
$
|
7,505
|
|
|
|
14.07
|
%
|
Total
Capital Minimum Requirement
|
|
|
4,575
|
|
|
|
8.00
|
|
|
|
4,266
|
|
|
|
8.00
|
|
Excess
|
|
$
|
2,208
|
|
|
|
3.86
|
%
|
|
$
|
3,239
|
|
|
|
6.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-Adjusted
Assets
|
|
$
|
57,185
|
|
|
|
|
|
|
$
|
53,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LEVERAGE
RATIOS
($ in
millions)
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
Ratio
|
|
Tier
1 Capital
|
|
$
|
4,501
|
|
|
|
7.34
|
%
|
|
$
|
5,448
|
|
|
|
9.46
|
%
|
Minimum
Leverage Requirement
|
|
|
1,839
-
3,066
|
|
|
|
3.00
- 5.00
|
|
|
|
1,728
- 2,880
|
|
|
|
3.00
- 5.00
|
|
Excess
|
|
$
|
2,662
-
1,435
|
|
|
|
4.34
- 2.34
|
%
|
|
$
|
3,720
- 2,568
|
|
|
|
6.46
- 4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
Average Total Assets
|
|
$
|
61,310
|
|
|
|
|
|
|
$
|
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 decrease its dividend or raise additional dilutive capital in order
to continue to maintain its strong capital base.
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
$7.4 billion at June 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 June 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 within thirty to ninety days 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 $23.6 billion in the second 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 or FHLB
advances.
The
Corporation’s banking affiliates may use wholesale deposits, which include
foreign (Eurodollar) deposits. Wholesale deposits, which averaged
$9.6 billion in the second 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.
The
Corporation’s lead bank, 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 June
30, 2008, approximately $10.3 billion of new debt could be issued under M&I
Bank’s global bank note program.
Total
bank notes outstanding at June 30, 2008, amounted to $4.6 billion of which $1.9
billion is subordinated. A portion of the subordinated bank notes
qualifies as supplementary capital for regulatory capital purposes.
The
national capital markets represent a further source of liquidity to the
Corporation.
During
the second quarter of 2008, the Corporation 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. At June 30, 2008, the
shelf registration statement had not yet been declared effective.
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 June 30, 2008
commercial paper outstanding amounted to $0.6 billion. At June 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 $6.0 billion at June 30, 2008. Long-term
borrowings amounted to $9.6 billion at June 30, 2008. The scheduled
maturities of long-term borrowings including estimated interest payments at June
30, 2008 were as follows: $1.0 billion is due in less than one year;
$4.5 billion is due in one to three years; $2.9 billion is due in three to five
years; and $2.8 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 June
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 June 30, 2008:
The
national residential real estate markets continued to show signs of stress and
deterioration during the second quarter and first half of 2008.
At June
30, 2008, nonperforming loans and leases amounted to $1,041.0 million or 2.07%
of consolidated loans and leases compared to $787.0 million or 1.60% of
consolidated loans and leases at March 31, 2008, and $384.0 million or 0.89% of
consolidated loans and leases at June 30, 2007. Consistent with
recent quarters, nonperforming real estate loans were the primary source of the
Corporation’s nonperforming loans and leases and represented 85.5% of total
nonperforming loans and leases at June 30, 2008. Nonperforming real
estate loans amounted to $890.3 million at June 30, 2008 compared to $670.0
million at March 31, 2008, an increase of $220.3 million or
32.9%. 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 $660.6
million at June 30, 2008 compared to $492.3 million at March 31, 2008, an
increase of $168.3 million or 34.2% which is net of the nonaccrual real estate
loans that were sold during the first quarter of 2008. Nonperforming 1-4 family
residential real estate loans increased $37.5 million or 45.1% compared to March
31, 2008 and amounted to $120.6 million at June 30, 2008.
At June
30, 2008 total consolidated construction and development loans outstanding
amounted to $10.0 billion. Approximately $4.1 billion or 40.9% of these loans
are loans associated with Arizona, the west coast of Florida and correspondent
banking business channels. Nonperforming construction and development loans
represented 74.2% of the Corporation’s nonperforming real estate loans and 63.5%
of the Corporation’s total nonperforming loans and leases at June 30,
2008. Nonperforming construction and development loans associated
with Arizona, the west coast of Florida and correspondent banking business
channels represent 41.7% of the Corporation’s total consolidated nonperforming
loans and leases at June 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 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 in the
west coast of Florida and 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
Corporation estimates that the amount of cumulative charge-offs recorded on its
nonperforming loans was approximately $386.0 million or 27.1% of the unpaid
principal balance of its nonperforming loans outstanding at June 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 June
30, 2008, allowances for loan and lease losses continue to be carried for
exposures to commercial construction loans, construction and development loans
secured by vacant land, 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 $400.7 million or 3.23% of average loans and leases in
the second quarter of 2008 compared to $131.1 million or 1.08% of average loans
and leases in the first quarter of 2008 and $23.6 million or 0.22% of average
loans and leases in the second quarter of 2007. For the six months
ended June 30, 2008, net charge-offs amounted to $531.8 million or 2.17% of
average loans and leases compared to $38.3 million or 0.18% of average loans and
leases for the six months ended June 30, 2007. Net charge-offs of real estate
loans amounted to $358.4 million or 89.4% of total net charge-offs in the second
quarter of 2008. For the six months ended June 30, 2008, net
charge-offs of real estate loans amounted to $479.9 million or 90.2% of net
charge-offs in the first half of 2008. For the three and six months
ended June 30, 2008, approximately $330.8 million and $435.7 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 first and second
quarters 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, which included without limitation the amount of
new nonperforming loans, elevated net charge-offs and the decline in collateral
values underlying real estate loans, resulted in an allowance for loan and lease
losses of $1,028.8 million or 2.05% of loans and leases outstanding at June 30,
2008. The allowance for loan and lease losses was $543.5 million or
1.10% of loans and leases outstanding at March 31, 2008 and $431.0 million or
1.00% of loans and leases outstanding at June 30, 2007. Consistent with the
credit quality trends noted above, the provision for loan and lease losses was
$886.0 million for the three months ended June 30, 2008 and $1,032.3 million for
the six months ended June 30, 2008. By comparison, the provision for
loan and lease losses amounted to $26.0 million for the three months ended June
30, 2007 and $43.2 million for the six months ended June 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 within 12 months of June 30,
2008, that unrecognized tax benefits up to approximately $20 million could be
realized. The realization would principally result from settlement
with taxing authorities over one issue. That issue relates 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 Item 1A. Risk Factors, in the Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2007 and this
Quarterly Report on Form 10-Q and as may be described from time to time in the
Corporation’s subsequent SEC filings, and such factors are incorporated herein
by reference.
|
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 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 June 30,
2008:
Hypothetical Change in Interest
Rates
|
|
Impact
to 2008
Pretax Income
|
|
100
basis point gradual rise in
rates
|
|
|
0.7
|
%
|
100
basis point gradual decline in rates
|
|
|
(1.2
|
)
%
|
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 June 30,
2008, the carrying value of total active capital markets investments amounted to
approximately $58.2 million.
At June
30, 2008, M&I Wealth Management administered $106.4 billion in assets and
directly managed $25.4 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.
|
ITEM
4. CONTROLS AND
PROCEDURES
|
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
risk factors set forth below represent material additions to the Risk
Factors set forth in Item 1A. to Part 1 of the Corporation’s Annual Report
on Form 10-K for the year ended December 31,
2007.
|
|
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.
|
|
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.
|
|
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
|
|
April
1 to
April 30, 2008
|
|
|
124,924
|
|
|
$
|
24.02
|
|
|
|
-
|
|
|
|
7,217,600
|
|
May
1 to
May 31, 2008
|
|
|
16,818
|
|
|
|
22.65
|
|
|
|
-
|
|
|
|
7,217,600
|
|
June
1 to
June 30, 2008
|
|
|
4,959
|
|
|
|
24.72
|
|
|
|
-
|
|
|
|
7,217,600
|
|
Total
|
|
|
146,701
|
|
|
$
|
23.89
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
4. Submission of Matters to a Vote of Security
Holders.
|
(a)
|
The
Corporation held its Annual Meeting of Shareholders on April 22,
2008.
|
(b)
|
Votes
cast for the election of 11 directors to serve until the 2009 Annual
Meeting of Shareholders are as
follows:
|
Director
|
|
For
|
|
|
Withheld
|
|
Andrew
N. Baur
|
|
|
203,529,036
|
|
|
|
11,883,551
|
|
Jon
F. Chait
|
|
|
205,175,892
|
|
|
|
10,236,695
|
|
John
W. Daniels, Jr.
|
|
|
150,965,885
|
|
|
|
64,446,702
|
|
Dennis
J. Kuester
|
|
|
204,854,616
|
|
|
|
10,557,971
|
|
David
J. Lubar
|
|
|
205,422,884
|
|
|
|
9,989,703
|
|
John
A. Mellowes
|
|
|
206,223,715
|
|
|
|
9,188,872
|
|
San
W. Orr, Jr.
|
|
|
205,584,387
|
|
|
|
9,828,200
|
|
Robert
J. O'Toole
|
|
|
206,446,858
|
|
|
|
8,965,729
|
|
John
S. Shiely
|
|
|
206,662,735
|
|
|
|
8,749,852
|
|
Debra
S. Waller
|
|
|
206,598,868
|
|
|
|
8,813,719
|
|
George
E. Wardeberg
|
|
|
206,311,306
|
|
|
|
9,101,281
|
|
The
continuing directors of the Corporation are as follows:
|
Mark
F. Furlong
|
|
Ted
D. Kellner
|
|
Katharine
C. Lyall
|
|
Peter
M. Platten, III
|
|
James
B. Wigdale
|
(c)
|
Votes
cast to approve the Corporation’s Amended and Restated 1994 Long-Term
Incentive Plan are as
follows:
|
|
|
For
|
|
Against
|
|
Abstentions
|
|
|
195,348,127
|
|
16,104,387
|
|
3,960,073
|
Votes
cast for the ratification of the appointment of Deloitte & Touche LLP to
audit the financial statements of the Corporation for the fiscal year ending
December 31, 2008 are as follows:
|
|
For
|
|
Against
|
|
Abstentions
|
Ratification
of Auditors
|
|
210,964,906
|
|
2,163,860
|
|
2,283,821
|
Votes
cast for the shareholder proposal to request the Corporation’s Board of
Directors to initiate a process to amend the Corporation’s articles of
incorporation to provide for majority election of directors in non-contested
elections are as follows:
|
|
For
|
|
Against
|
|
Abstentions
|
|
Not Voted
|
|
|
64,184,880
|
|
111,127,843
|
|
4,741,275
|
|
35,358,589
|