1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-15403
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
770 North Water Street
Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-7801
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in Rule 12b-
2 of the Exchange Act. (Check one): Large accelerated filer [X]
Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company
(as defined by Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class July 31, 2007
----- ----------------
Common Stock, $1.00 Par Value 257,315,755
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
June 30, December 31, June 30,
2007 2006 2006
-------------- -------------- -------------
Assets
------
Cash and cash equivalents:
--------------------------
Cash and due from banks $ 1,246,265 $ 1,248,007 $ 1,280,941
Federal funds sold and security resale agreements 488,847 192,061 221,497
Money market funds 34,305 45,190 40,831
------------- ------------- -------------
Total cash and cash equivalents 1,769,417 1,485,258 1,543,269
Interest bearing deposits at other banks 17,597 19,042 18,252
Investment securities:
----------------------
Trading securities, at market value 51,186 36,249 54,928
Available for sale, at market value 7,165,422 6,977,853 6,627,287
Held to maturity, market value $417,395
($507,909 December 31, 2006 and $559,869 June 30, 2006) 409,897 495,520 547,686
------------- ------------- -------------
Total investment securities 7,626,505 7,509,622 7,229,901
Loans held for sale 94,766 300,677 157,041
Loans and leases:
-----------------
Loans and leases, net of unearned income 43,190,838 41,634,340 40,281,478
Allowance for loan and lease losses (431,012) (420,610) (415,201)
------------- ------------- -------------
Net loans and leases 42,759,826 41,213,730 39,866,277
Premises and equipment, net 586,466 571,637 569,240
Goodwill and other intangibles 3,418,568 3,212,102 3,154,828
Accrued interest and other assets 2,024,584 1,918,189 1,915,296
------------- ------------- -------------
Total Assets $ 58,297,729 $ 56,230,257 $ 54,454,104
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 5,717,972 $ 6,112,362 $ 5,773,090
Interest bearing 29,270,312 27,972,020 27,190,336
------------- ------------- -------------
Total deposits 34,988,284 34,084,382 32,963,426
Federal funds purchased and security repurchase agreements 1,568,202 2,838,756 2,378,380
Other short-term borrowings 6,603,785 3,586,374 4,399,478
Accrued expenses and other liabilities 1,494,779 1,543,219 1,510,781
Long-term borrowings 7,204,415 8,026,155 7,476,087
------------- ------------- -------------
Total liabilities 51,859,465 50,078,886 48,728,152
Shareholders' equity:
---------------------
Series A convertible preferred stock, $1.00 par value;
2,000,000 shares authorized -- -- --
Common stock, $1.00 par value; 266,824,323 shares issued
(261,972,424 shares at December 31, 2006 and 261,972,933
shares at June 30, 2006) 266,824 261,972 261,973
Additional paid-in capital 2,006,226 1,770,540 1,747,576
Retained earnings 4,671,559 4,383,642 4,076,429
Accumulated other comprehensive income,
net of related taxes (63,787) (17,546) (71,647)
Treasury stock, at cost: 9,711,618 shares
(6,502,732 December 31, 2006 and
8,000,318 June 30, 2006) (401,672) (205,938) (253,201)
Deferred compensation (40,886) (41,299) (35,178)
------------- ------------- -------------
Total shareholders' equity 6,438,264 6,151,371 5,725,952
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 58,297,729 $ 56,230,257 $ 54,454,104
============= ============= =============
See notes to financial statements.
08/07/2007
3
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
Three Months Ended June 30,
-------------------------------
2007 2006
--------------- --------------
Interest and fee income
-----------------------
Loans and leases $ 803,757 $ 716,983
Investment securities:
Taxable 78,680 70,908
Exempt from federal income taxes 14,959 15,749
Trading securities 336 198
Short-term investments 3,681 5,011
-------------- -------------
Total interest and fee income 901,413 808,849
Interest expense
----------------
Deposits 299,186 271,513
Short-term borrowings 56,047 43,124
Long-term borrowings 150,283 117,427
-------------- -------------
Total interest expense 505,516 432,064
-------------- -------------
Net interest income 395,897 376,785
Provision for loan and lease losses 26,026 11,053
-------------- -------------
Net interest income after provision for loan and lease losses 369,871 365,732
Other income
------------
Data processing services 363,817 344,976
Wealth management 65,580 56,309
Service charges on deposits 28,054 25,005
Gains on sale of mortgage loans 10,367 11,750
Other mortgage banking revenue 1,610 1,197
Net investment securities gains 19,455 960
Losses related to Firstsource (982) --
Life insurance revenue 7,997 7,408
Net derivative losses - discontinued hedges -- (20,672)
Other 41,094 34,041
-------------- -------------
Total other income 536,992 460,974
Other expense
-------------
Salaries and employee benefits 317,787 307,060
Net occupancy 27,969 25,698
Equipment 34,320 38,113
Software expenses 18,826 17,348
Processing charges 37,511 29,586
Supplies and printing 8,028 6,473
Professional services 17,589 14,036
Shipping and handling 23,873 21,669
Amortization of intangibles 12,279 12,004
Metavante transaction costs 2,560 --
Other 75,794 72,269
-------------- -------------
Total other expense 576,536 544,256
-------------- -------------
Income before income taxes 330,327 282,450
Provision for income taxes 110,038 91,908
-------------- -------------
Net income $ 220,289 $ 190,542
============== =============
Net income per common share
---------------------------
Basic $ 0.85 $ 0.75
Diluted 0.83 0.74
Dividends paid per common share $ 0.310 $ 0.270
Weighted average common shares outstanding (000's):
---------------------------------------------------
Basic 258,772 252,764
Diluted 264,840 258,298
See notes to financial statements.
08/07/2007
4
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
Six Months Ended June 30,
-------------------------------
2007 2006
--------------- --------------
Interest and fee income
-----------------------
Loans and leases $ 1,586,910 $ 1,307,383
Investment securities:
Taxable 155,734 128,776
Exempt from federal income taxes 29,820 31,748
Trading securities 469 268
Short-term investments 7,489 8,576
-------------- -------------
Total interest and fee income 1,780,422 1,476,751
Interest expense
----------------
Deposits 589,211 470,292
Short-term borrowings 110,963 82,459
Long-term borrowings 294,041 222,082
-------------- -------------
Total interest expense 994,215 774,833
-------------- -------------
Net interest income 786,207 701,918
Provision for loan and lease losses 43,174 22,048
-------------- -------------
Net interest income after provision for loan and lease losses 743,033 679,870
Other income
------------
Data processing services 720,190 687,956
Wealth management 126,286 109,108
Service charges on deposits 53,931 47,555
Gains on sale of mortgage loans 19,160 23,736
Other mortgage banking revenue 2,957 2,146
Net investment securities gains 21,039 2,090
Net gains related to Firstsource 7,046 --
Life insurance revenue 15,517 14,374
Net derivative losses - discontinued hedges -- (42,017)
Other 78,012 66,898
-------------- -------------
Total other income 1,044,138 911,846
Other expense
-------------
Salaries and employee benefits 614,910 584,463
Net occupancy 54,950 50,579
Equipment 66,664 71,052
Software expenses 37,607 34,786
Processing charges 68,348 56,599
Supplies and printing 15,885 12,595
Professional services 32,588 25,485
Shipping and handling 49,298 45,571
Amortization of intangibles 23,560 20,879
Metavante transaction costs 4,025 --
Other 161,668 147,380
-------------- -------------
Total other expense 1,129,503 1,049,389
-------------- -------------
Income before income taxes 657,668 542,327
Provision for income taxes 220,617 178,713
-------------- -------------
Net income $ 437,051 $ 363,614
============== =============
Net income per common share
---------------------------
Basic $ 1.70 $ 1.49
Diluted 1.66 1.46
Dividends paid per common share $ 0.580 $ 0.510
Weighted average common shares outstanding (000's):
---------------------------------------------------
Basic 257,142 244,088
Diluted 263,066 249,379
See notes to financial statements.
4
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Six Months Ended June 30,
-------------------------------
2007 2006
--------------- --------------
Net Cash Provided by Operating Activities $ 513,335 $ 436,972
Cash Flows From Investing Activities:
-------------------------------------
Proceeds from sales of securities available for sale 134,789 558,720
Proceeds from maturities of securities available for sale 623,171 587,188
Proceeds from maturities of securities held to maturity 86,207 71,539
Purchases of securities available for sale (780,104) (1,366,562)
Net increase in loans 1,084,816) (2,609,407)
Purchases of assets to be leased (152,370) (101,711)
Principal payments on lease receivables 184,692 105,735
Purchases of premises and equipment, net (45,015) (56,977)
Acquisitions, net of cash and cash equivalents acquired (paid) 61,355 (66,911)
Other 12,582 (1,684)
-------------- -------------
Net cash used in investing activities (959,509) (2,880,070)
Cash Flows From Financing Activities:
-------------------------------------
Net increase in deposits 202,603 1,596,693
Proceeds from issuance of commercial paper 3,893,282 2,019,445
Principal payments on commercial paper (3,669,916) (1,972,059)
Net (decrease) increase in other short-term borrowings (595,969) 521,658
Proceeds from issuance of long-term borrowings 2,197,615 1,199,051
Payments of long-term borrowings (915,469) (670,666)
Dividends paid (149,133) (124,524)
Purchases of common stock (294,758) (41,790)
Proceeds from exercise of stock options 67,278 49,408
Other (5,200) (5,200)
-------------- -------------
Net cash provided by financing activities 730,333 2,572,016
-------------- -------------
Net increase in cash and cash equivalents 284,159 128,918
Cash and cash equivalents, beginning of year 1,485,258 1,414,351
-------------- -------------
Cash and cash equivalents, end of period $ 1,769,417 $ 1,543,269
============= =============
Supplemental cash flow information:
-----------------------------------
Cash paid during the period for:
Interest $ 966,281 $ 688,262
Income taxes 156,337 174,028
See notes to financial statements.
08/07/2007
6
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2007 & 2006 (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements should
be read in conjunction with Marshall & Ilsley Corporation's ("M&I"
or "Corporation") Annual Report on Form 10-K for the year ended
December 31, 2006. The unaudited financial information included in
this report reflects all adjustments consisting of normal recurring
accruals which are necessary for a fair statement of the financial
position and results of operations as of and for the three and six
months ended June 30, 2007 and 2006. The results of operations for
the three and six months ended June 30, 2007 and 2006 are not
necessarily indicative of results to be expected for the entire
year.
2. New Accounting Pronouncements
In June 2007, the Financial Accounting Standards Board ("FASB")
ratified Emerging Issues Task Force Issue No. 06-11, Accounting for
Income Tax Benefits of Dividends on Share-Based Payment Awards
("EITF 06-11"). EITF 06-11 specifies how entities should recognize
the income tax benefit received on dividends that are (a) paid to
employees holding equity-classified nonvested shares,
equity-classified nonvested share units, or equity-classified
outstanding stock options and (b) charged to retained earnings under
Statement of Financial Accounting Standards 123(R), Share-Based
Payment. EITF 06-11 is effective for the Corporation on January 1,
2008. The Corporation does not believe EITF 06-11 will have a
material effect on its financial statements and related disclosures.
In May 2007, FASB issued FASB Staff Position No. FIN 48-1,
Definition of Settlement in FASB Interpretation No. 48 ("FSP FIN
48-1"). FSP FIN 48-1 amends FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes ("FIN 48"). FIN 48, which was
adopted by the Corporation on January 1, 2007, clarifies the
accounting for uncertainty in income taxes recognized in financial
statements in accordance with FASB Statement 109, Accounting for
Income Taxes. FSP FIN 48-1 provides guidance on how an entity
should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. FSP
FIN 48-1 clarifies that a tax position can be effectively settled
upon the completion of an examination by a taxing authority without
being legally extinguished. FSP FIN 48-1 is effective upon the
initial adoption of FIN 48 and therefore was adopted by the
Corporation in the beginning of fiscal 2007. The adoption of FSP FIN
48-1 did not have an impact on the accompanying financial
statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standard No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No.
115 ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items generally on an
instrument-by-instrument basis at fair value that are not currently
required to be measured at fair value. SFAS 159 is intended to
provide entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. SFAS 159 does not change requirements for recognizing
and measuring dividend income, interest income, or interest expense.
SFAS 159 is effective for the Corporation on January 1, 2008. The
Corporation continues to assess the impact, if any, SFAS 159 will
have on the Corporation.
3. Equity Investment in Firstsource Solutions Limited ("Firstsource")
As of December 31, 2006, the Corporation's wholly-owned subsidiary,
Metavante, owned a 24% interest in Firstsource. Firstsource is an
India-based provider of business process outsourcing solutions. This
investment is accounted for using the equity method of accounting.
During February 2007, Firstsource offered 60,000,000 new shares of
common stock at $1.45 per share in a public offering that yielded
$86.9 million of cash proceeds to Firstsource. This issuance of new
shares of common stock diluted Metavante's ownership percentage to
approximately 21%. Under the provisions of Staff Accounting Bulletin
No. 51, Accounting for Sales of Stock by a Subsidiary ("SAB 51"),
when an investee issues shares of its common stock, the investor
should recognize a gain or loss in the same manner as if the
investor had sold a portion of its investment. Subject to certain
criteria of SAB 51, the resulting gain or loss can be recognized in
the consolidated financial statements or reflected as a capital
transaction, at the option of the Corporation, and the accounting
treatment selected is to be followed consistently for all future
gains or losses. The Corporation elected to recognize the initial
gain of $8.0 million in the consolidated statement of income in the
first quarter of 2007. All future SAB 51 gains or losses will be
recognized in the consolidated statement of income. As a result of
Firstsource's equity transactions in the second quarter of 2007, the
Corporation recognized a loss of $1.0 million for the three months
ended June 30, 2007. For the six months ended June 30, 2007, the
net gain related to Firstsource amounted to $7.0 million. Deferred
income taxes have been provided on the net gain.
7
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
4. Adoption of SAB 108
The Corporation elected early application of Staff Accounting
Bulletin No. 108 ("SAB 108") during the third quarter of 2006. In
accordance with SAB 108, the Corporation adjusted its opening
financial position for 2006 and the results of operations for the
first and second quarter of 2006 to reflect a change in its hedge
accounting under Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133").
The Corporation utilized interest rate swaps to hedge its risk in
connection with certain financial instruments. The Corporation had
applied hedge accounting under SFAS 133 to these transactions from
inception. Due to the recent expansion of certain highly technical
interpretations of SFAS 133, specifically hedge designation under
the "matched-term" method, interest rate swaps designated as fair
value hedges with an aggregate notional amount of $1,762.3 million
and negative fair value of $50.0 million and interest rate swaps
designated as cash flow hedges with an aggregate notional amount of
$1,300.0 million and negative fair value of $45.5 million at June
30, 2006 did not qualify for hedge accounting. As a result, any
fluctuation in the fair value of the derivatives should have been
recorded through the income statement with no corresponding offset
to the hedged items, or accumulated other comprehensive income.
The cumulative effect of adjusting the reported carrying amount of
the assets, liabilities and accumulated other comprehensive income
at January 1, 2006 resulted in a decrease to retained earnings of
$34.2 million and reduced the net loss in accumulated other
comprehensive income by $16.2 million. In aggregate total
Shareholders' Equity was reduced by $18.0 million. For the three
and six months ended June 30, 2006 net derivative losses -
discontinued hedges amounted to $20.7 million and $42.0 million,
respectively.
The aggregate impact of the adjustments is summarized below ($000's
except per share data):
Previously As
As of and for the Three Months ended June 30, 2006 Reported Adjustment Adjusted
-------------------------------------------------- -------------- ------------ --------------
Loans and leases, net of unearned income $ 40,230,299 $ 51,179 $ 40,281,478
Accrued interest and other assets 1,931,237 (15,941) 1,915,296
Total deposits 32,957,792 5,634 32,963,426
Accrued expenses and other liabilities 1,449,603 61,178 1,510,781
Retained earnings 4,137,607 (61,178) 4,076,429
Accumulated other comprehensive (loss)
income, net of related taxes (101,251) 29,604 (71,647)
Net interest income $ 374,057 $ 2,728 $ 376,785
Net derivative losses - discontinued hedges -- (20,672) (20,672)
Other income 36,768 (2,727) 34,041
Income before income taxes 303,121 (20,671) 282,450
Provision for income taxes 99,372 (7,464) 91,908
Net income 203,749 (13,207) 190,542
Net income per common share:
Basic $ 0.81 $ (0.06) $ 0.75
Diluted 0.79 (0.05) 0.74
8
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
Previously As
As of and for the Six Months ended June 30, 2006 Reported Adjustment Adjusted
------------------------------------------------ -------------- ------------ --------------
Net interest income $ 698,637 $ 3,281 $ 701,918
Net derivative losses - discontinued hedges -- (42,017) (42,017)
Other income 70,178 (3,280) 66,898
Income before income taxes 584,343 (42,016) 542,327
Provision for income taxes 193,826 (15,113) 178,713
Net income 390,517 (26,903) 363,614
Net income per common share:
Basic $ 1.60 $ (0.11) $ 1.49
Diluted 1.57 (0.11) 1.46
5. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
Three Months Ended June 30, 2007
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- ------------- -------------
Net income $ 220,289
Other comprehensive income:
Unrealized gains (losses) on available
for sale investment securities:
Arising during the period $ (105,746) $ 37,055 (68,691)
Reclassification for securities
transactions included in net income (390) 137 (253)
------------- ------------ ------------
Total unrealized gains (losses) on
available for sale investment securities $ (106,136) $ 37,192 $ (68,944)
------------- ------------ ------------
Net gains (losses) on derivatives hedging
variability of cash flows:
Arising during the period 36,498 (12,774) 23,724
Reclassification adjustments for
hedging activities included in net income (5,288) 1,851 (3,437)
------------- ------------ ------------
Total net gains (losses) on derivatives
hedging variability of cash flows $ 31,210 $ (10,923) $ 20,287
------------- ------------ ------------
Unrealized gains (losses) on funded status
of defined benefit postretirement plan:
Arising during the period -- -- --
Reclassification for amortization of
actuarial loss and prior service
credit amortization included in net income (559) 207 (352)
------------- ------------ ------------
Total unrealized gains (losses) on funded status
of defined benefit postretirement plan $ (559) $ 207 $ (352)
------------- ------------ ------------
Other comprehensive income (loss) (49,009)
------------
Total comprehensive income $ 171,280
============
Three Months Ended June 30, 2006
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- ------------- -------------
Net income $ 190,542
Other comprehensive income:
Unrealized gains (losses) on available
for sale investment securities:
Arising during the period $ (86,639) $ 30,269 (56,370)
Reclassification for securities
transactions included in net income (1,493) 522 (971)
------------- ------------ ------------
Total unrealized gains (losses) on available
for sale investment securities $ (88,132) $ 30,791 $ (57,341)
------------- ------------ ------------
Net gains (losses) on derivatives hedging
variability of cash flows:
Arising during the period 13,508 (4,728) 8,780
Reclassification adjustments for
hedging activities included in net income (5,479) 1,918 (3,561)
------------- ------------ ------------
Total net gains (losses) on derivatives hedging
variability of cash flows $ 8,029 $ (2,810) $ 5,219
------------- ------------ ------------
Other comprehensive income (loss) (52,122)
------------
Total comprehensive income $ 138,420
============
9
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
Six Months Ended June 30, 2007
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- ------------- -------------
Net income $ 437,051
Other comprehensive income:
Unrealized gains (losses) on available
for sale investment securities:
Arising during the period $ (88,094) $ 30,808 (57,286)
Reclassification for securities
transactions included in net income (1,005) 352 (653)
------------- ------------ ------------
Total unrealized gains (losses) on
available for sale investment securities $ (89,099) $ 31,160 $ (57,939)
------------- ------------ ------------
Net gains (losses) on derivatives hedging
variability of cash flows:
Arising during the period 30,316 (10,611) 19,705
Reclassification adjustments for
hedging activities included in net income (11,236) 3,933 (7,303)
------------- ------------ ------------
Total net gains (losses) on derivatives
hedging variability of cash flows $ 19,080 $ (6,678) $ 12,402
------------- ------------ ------------
Unrealized gains (losses) on funded status of
defined benefit postretirement plan:
Arising during the period -- -- --
Reclassification for amortization of
actuarial loss and prior service
credit amortization included in net income (1,118) 414 (704)
------------- ------------ ------------
Total unrealized gains (losses) on funded status
of defined benefit postretirement plan $ (1,118) $ 414 $ (704)
------------- ------------ ------------
Other comprehensive income (loss) (46,241)
------------
Total comprehensive income $ 390,810
============
Six Months Ended June 30, 2006
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- ------------- -------------
Net income $ 363,614
Other comprehensive income:
Unrealized gains (losses) on available
for sale investment securities:
Arising during the period $ (102,563) $ 35,865 (66,698)
Reclassification for securities
transactions included in net income (1,941) 679 (1,262)
------------- ------------ ------------
Total unrealized gains (losses) on
available for sale investment securities $ (104,504) $ 36,544 $ (67,960)
------------- ------------ ------------
Net gains (losses) on derivatives hedging
variability of cash flows:
Arising during the period 59,880 (20,958) 38,922
Reclassification adjustments for
hedging activities included in net income (8,181) 2,863 (5,318)
------------- ------------ ------------
Total net gains (losses) on derivatives
hedging variability of cash flows $ 51,699 $ (18,095) $ 33,604
------------- ------------ ------------
Other comprehensive income (loss) (34,356)
------------
Total comprehensive income $ 329,258
============
6. Earnings Per Share
A reconciliation of the numerators and denominators of the basic and
diluted per share computations are as follows (dollars and shares in
thousands, except per share data):
Three Months Ended June 30, 2007
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- ----------
Basic Earnings Per Share:
Income Available to Common Shareholders $ 220,289 258,772 $ 0.85
=========
Effect of Dilutive Securities:
Stock Options, Restricted Stock
and Other Plans -- 6,068
----------- -------------
Diluted Earnings Per Share:
Income Available to Common Shareholders $ 220,289 264,840 $ 0.83
=========
10
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
Three Months Ended June 30, 2006
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- ----------
Basic Earnings Per Share:
Income Available to Common Shareholders $ 190,542 252,764 $ 0.75
=========
Effect of Dilutive Securities:
Stock Options, Restricted Stock
and Other Plans -- 5,534
----------- -------------
Diluted Earnings Per Share:
Income Available to Common Shareholders $ 190,542 258,298 $ 0.74
=========
Six Months Ended June 30, 2007
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- ----------
Basic Earnings Per Share:
Income Available to Common Shareholders $ 437,051 257,142 $ 1.70
=========
Effect of Dilutive Securities:
Stock Options, Restricted Stock
and Other Plans -- 5,924
----------- -------------
Diluted Earnings Per Share:
Income Available to Common Shareholders $ 437,051 263,066 $ 1.66
=========
Six Months Ended June 30, 2006
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- ----------
Basic Earnings Per Share:
Income Available to Common Shareholders $ 363,614 244,088 $ 1.49
=========
Effect of Dilutive Securities:
Stock Options, Restricted Stock
and Other Plans -- 5,291
----------- -------------
Diluted Earnings Per Share:
Income Available to Common Shareholders $ 363,614 249,379 $ 1.46
=========
Options to purchase shares of common stock not included in the
computation of diluted net income per share because the stock
options were antidilutive are as follows (shares in thousands):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ----------------------------------
2007 2006 2007 2006
---------------- ---------------- ---------------- -----------------
Shares 18 47 3,610 131
Price Range $48.41 - $49.20 $45.11 - $47.02 $47.99 - $49.20 $44.20 - $47.02
11
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
7. Business Combinations
The following acquisitions, which are not considered to be material
business combinations, individually or in the aggregate, were
completed during 2007:
Second Quarter
--------------
On April 20, 2007, the Corporation completed its acquisition of
North Star Financial Corporation ("North Star") of Chicago,
Illinois. Total consideration in this transaction amounted to $21.0
million, consisting of 441,252 shares of the Corporation's common
stock valued at $47.55 per common share. North Star and its
subsidiaries provide a variety of wealth management services through
personal and other trusts. In addition, North Star offers a variety
of other products and services including land trusts, 1031 exchanges
for both real and personal property, and ESOP services, including
consultative services relating to the transfer of small-business
stock ownership. North Star's businesses were integrated with the
Corporation's Wealth Management unit. Initial goodwill, subject to
the completion of appraisals and valuation of the assets acquired
and liabilities assumed, amounted to $18.0 million. The preliminary
estimated identifiable intangible assets to be amortized (customer
relationships, tradename and non-compete agreements) amounted to
$6.6 million. This is considered a non-cash transaction for the
purposes of the Consolidated Statement of Cash Flows. The goodwill
and intangibles resulting from this acquisition are not deductible
for tax purposes.
On April 1, 2007, the Corporation completed its acquisition of
United Heritage Bankshares of Florida, Inc. ("United Heritage").
United Heritage Bank, a wholly-owned subsidiary of United Heritage,
with $791.3 million in assets as of March 31, 2007, has 13 branches
in the metropolitan Orlando area. Total consideration in this
transaction amounted to approximately $219.6 million, consisting of
4,410,647 shares of the Corporation's common stock valued at $204.3
million and the exchange of vested stock options valued at
approximately $15.3 million. The current United Heritage Bank
branches became M&I Bank branches in the second quarter of 2007.
Initial goodwill, subject to the completion of appraisals and
valuation of the assets acquired and liabilities assumed, amounted
to $147.8 million. The estimated identifiable intangible asset to
be amortized (core deposits) with a weighted average life of 7.7
years amounted to $11.6 million. This is considered a non-cash
transaction for the purposes of the Consolidated Statement of Cash
Flows. The goodwill and intangibles resulting from this acquisition
are not deductible for tax purposes.
First Quarter
-------------
On January 17, 2007, Metavante acquired all of the outstanding stock
of Valutec Card Solutions, Inc. ("Valutec") for $41.0 million in
cash. Valutec provides closed-loop, in-store gift and loyalty card
solutions for small and medium-sized businesses, including hosted
account management, reporting capabilities, plastic card design and
production and card program merchandising products. Initial
goodwill, subject to the completion of appraisals and valuation of
the assets acquired and liabilities assumed, amounted to $34.1
million. The estimated identifiable intangible asset to be
amortized (customer relationships) with an estimated useful life of
7.0 years amounted to $8.2 million. The goodwill and intangibles
resulting from this acquisition are not deductible for tax purposes.
Recent acquisition activity
---------------------------
On July 9, 2007, the Corporation announced the signing of a
definitive agreement to acquire First Indiana Corp. ("First
Indiana"). First Indiana, based in Indianapolis, Indiana had $2.2
billion in consolidated assets as of June 30, 2007, and has 32
offices in central Indiana. Under the terms of the definitive
agreement, stockholders of First Indiana will receive $32.00 in cash
for each share of First Indiana common stock outstanding, or
approximately $529.0 million in the aggregate. The transaction is
expected to close in the fourth quarter of 2007 or in the first
quarter of 2008, subject to the affirmative vote of First Indiana's
stockholders, regulatory approvals and other customary closing
conditions.
On July 1, 2007, the Corporation completed its acquisition of Excel
Bank Corporation ("Excel"). Pursuant to an Amended and Restated
Merger Agreement, shareholders of Excel received $13.97 per share in
cash for each issued and outstanding share of Excel common stock, or
approximately $105.0 million in the aggregate. Outstanding options
to acquire Excel common stock were converted into options to acquire
the Corporation's common stock. Excel, with $616.0 million in
consolidated assets as of June 30, 2007, has four branches in the
greater Minneapolis/St. Paul, Minnesota metropolitan area. The
current Excel branches became branches of M&I Bank on August 1,
2007.
12
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
8. Investment Securities
Selected investment securities, by type, held by the Corporation
were as follows ($000's):
June 30, December 31, June 30,
2007 2006 2006
--------------- --------------- ---------------
Investment securities available for sale:
U.S. treasury and government agencies $ 5,597,523 $ 5,466,369 $ 5,219,287
States and political subdivisions 888,816 824,015 748,967
Mortgage backed securities 100,471 114,467 101,945
Other 578,612 573,002 557,088
-------------- -------------- --------------
Total $ 7,165,422 $ 6,977,853 $ 6,627,287
============== ============== ==============
Investment securities held to maturity:
States and political subdivisions $ 408,897 $ 494,020 $ 546,186
Other 1,000 1,500 1,500
-------------- -------------- --------------
Total $ 409,897 $ 495,520 $ 547,686
============== ============== ==============
The following table provides the gross unrealized losses and fair
value, aggregated by investment category and the length of time the
individual securities have been in a continuous unrealized loss
position, at June 30, 2007 ($000's):
Less than 12 Months 12 Months or More Total
------------------------- ------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ----------- ------------ ----------- ------------ ------------
U.S. treasury and
government agencies $ 2,325,825 $ 28,439 $ 2,985,134 $ 95,804 $ 5,310,959 $ 124,243
States and political
subdivisions 473,991 9,825 74,640 3,080 548,631 12,905
Mortgage backed securities 28,908 142 71,561 2,026 100,469 2,168
Other 1,821 4 400 64 2,221 68
----------- ---------- ----------- ---------- ----------- -----------
Total $ 2,830,545 $ 38,410 $ 3,131,735 $ 100,974 $ 5,962,280 $ 139,384
============ ========== =========== ========== =========== ============
The investment securities in the above table were temporarily
impaired at June 30, 2007. This temporary impairment represents the
amount of loss that would have been realized if the investment
securities had been sold on June 30, 2007. The temporary impairment
in the investment securities portfolio is predominantly the result
of increases in market interest rates since the investment
securities were acquired and not from deterioration in the
creditworthiness of the issuer. At June 30, 2007, the Corporation
had the ability and intent to hold these temporarily impaired
investment securities until a recovery of fair value, which may be
maturity.
13
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
9. Loans and Leases
The Corporation's loan and lease portfolio, including loans held for
sale, consisted of the following ($000's):
June 30, December 31, June 30,
2007 2006 2006
--------------- --------------- ---------------
Commercial, financial and agricultural $ 12,520,763 $ 12,050,963 $ 11,763,501
Cash flow hedging instruments at fair value (2,073) (2,773) (4,362)
-------------- -------------- --------------
Commercial, financial and agricultural 12,518,690 12,048,190 11,759,139
Real estate:
Construction 6,502,403 6,088,206 5,401,568
Residential mortgage 6,685,530 6,328,478 5,816,886
Home equity loans and lines of credit 4,205,734 4,342,362 4,537,014
Commercial mortgage 11,282,679 10,965,607 10,861,445
-------------- -------------- --------------
Total real estate 28,676,346 27,724,653 26,616,913
Personal 1,397,219 1,458,594 1,408,973
Lease financing 693,349 703,580 653,494
-------------- -------------- --------------
Total loans and leases $ 43,285,604 $ 41,935,017 $ 40,438,519
============== ============== ==============
10. Financial Asset Sales
During the second quarter of 2007, the Corporation sold automobile
loans with principal balances of $52.2 million in securitization
transactions. For the three and six months ended June 30, 2007, the
Corporation recognized net gains of $1.3 million and $1.1 million,
respectively, from the sale and securitization of auto loans. Other
income associated with auto securitizations, primarily servicing
income, amounted to $1.2 million in the current quarter.
Key economic assumptions used in measuring the retained interests at
the date of securitization resulting from securitizations completed
during the quarter were as follows (rate per annum):
Prepayment speed (CPR) 15-41 %
Weighted average life (in months) 22.9
Expected credit losses
(based on original balance) 0.50-1.53 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one-month
LIBOR yield curve
At June 30, 2007, securitized automobile loans and other automobile
loans managed together with them, along with delinquency and credit
loss information consisted of the following ($000's):
Total
Securitized Portfolio Managed
Loan balances $ 787,445 $ 207,043 $ 994,488
Principal amounts of loans
60 days or more past due 2,539 445 2,984
Net credit losses (recoveries)
year to date 3,664 210 3,874
At the end of the second quarter of 2007, the Corporation elected to
discontinue the sale and securitization of automobile loans into the
secondary market. Loans previously classified as held for sale were
reclassified as portfolio loans at the lower of cost or market. The
difference between cost and market was insignificant.
14
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
11. Goodwill and Other Intangibles
The changes in the carrying amount of goodwill for the six months
ended June 30, 2007 were as follows ($000's):
Banking Metavante Others Total
------------- ------------- ------------- -------------
Goodwill balance as of January 1, 2007 $ 1,425,197 $ 1,330,276 $ 29,056 $ 2,784,529
Goodwill acquired during the period 147,796 34,125 17,964 199,885
Purchase accounting adjustments (2,971) 10,462 231 7,722
------------ ------------ ------------ ------------
Goodwill balance as of June 30, 2007 $ 1,570,022 $ 1,374,863 $ 47,251 $ 2,992,136
============ ============ ============ ============
Goodwill acquired during the second quarter of 2007 for the Banking
segment included initial goodwill of $147.8 million for the
acquisition of United Heritage. Goodwill acquired during the second
quarter of 2007 for the Others segment included initial goodwill of
$18.0 million related to the North Star acquisition. Goodwill
acquired during the first quarter of 2007 for the Metavante segment
included initial goodwill of $34.1 million for the acquisition of
Valutec.
Purchase accounting adjustments for the Metavante segment represent
adjustments made to the initial estimates of fair value associated
with the acquisition of VICOR, Inc. and Link2Gov Corp. In addition,
purchase accounting adjustments for the Metavante segment included
total earnout payments of $8.0 million related to the acquisitions
of Advanced Financial Solutions, Inc., Printing for Systems, Inc.
and AdminiSource Corporation. Purchase accounting adjustments for
the Banking segment and Others segment included adjustments
primarily related to the April 2006 acquisition of Gold Banc
Corporation, Inc.
At June 30, 2007, the Corporation's other intangible assets
consisted of the following ($000's):
June 30, 2007
-----------------------------------------------
Accum-
Gross ulated Net
Carrying Amort- Carrying
Amount ization Value
--------------- --------------- ---------------
Other intangible assets
Core deposit intangible $ 219,387 $ 104,476 $ 114,911
Data processing contract
rights/customer lists 363,151 72,015 291,136
Trust customers 9,580 2,419 7,161
Tradename 9,850 1,167 8,683
Other Intangibles 3,188 952 2,236
-------------- -------------- --------------
$ 605,156 $ 181,029 $ 424,127
============== ============== ==============
Mortgage loan servicing rights $ 2,305
==============
Amortization expense of other acquired intangible assets for the
three and six months ended June 30, 2007 amounted to $12.0 million
and $23.0 million, respectively. For the three and six months ended
June 30, 2006, amortization expense of other acquired intangible
assets amounted to $11.7 million and $20.2 million, respectively.
Amortization of mortgage servicing rights amounted to $0.3 million
and $0.6 million for the three and six months ended June 30, 2007,
respectively. For the three and six months ended June 30, 2006,
amortization of mortgage servicing rights amounted to $0.3 million
and $0.7 million, respectively.
15
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
The estimated amortization expense of other intangible assets and
mortgage loan servicing rights for the next five annual fiscal years
are ($000's):
2008 $ 46,620
2009 43,496
2010 40,728
2011 38,306
2012 36,479
12. Deposits
The Corporation's deposit liabilities consisted of the following
($000's):
June 30, December 31, June 30,
2007 2006 2006
--------------- --------------- ---------------
Noninterest bearing demand $ 5,717,972 $ 6,112,362 $ 5,773,090
Savings and NOW 13,717,333 12,081,260 11,549,046
CD's $100,000 and over 7,707,849 7,841,499 8,107,033
Cash flow hedge-Institutional CDs (2,293) (970) (17,419)
-------------- -------------- --------------
Total CD's $100,000 and over 7,705,556 7,840,529 8,089,614
Other time deposits 4,899,680 4,821,233 4,801,124
Foreign deposits 2,947,743 3,228,998 2,750,552
-------------- -------------- --------------
Total deposits $ 34,988,284 $ 34,084,382 $ 32,963,426
============== ============== ==============
13. Income Taxes
Effective January 1, 2007, the Corporation adopted the provisions of
FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109, and
there was no effect on the consolidated financial statements. FIN 48
clarifies the accounting for uncertainty in income taxes recognized
in financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to
be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
As of the date of adoption the total amount of unrecognized tax
benefits was $92.1 million, of which $71.8 million related to
benefits that, if recognized, would impact the annual effective tax
rate. Upon adoption of FIN 48, the Corporation changed its policy to
include interest and penalties related to income tax liabilities in
income tax expense. Prior to adoption of FIN 48, the Corporation
recorded interest and penalties related to income tax liabilities to
other expense, a component of Income Before Income Taxes. Included
in the total liability for unrecognized tax benefits as of the date
of adoption is $6.8 million of interest and no penalties.
The Corporation, along with its subsidiaries, files income tax
returns in the U.S. and various state jurisdictions. With limited
exceptions, the Corporation is no longer subject to examinations by
federal and state taxing authorities for taxable years before 2003.
The Corporation anticipates it is reasonably possible within 12
months of the adoption date that unrecognized tax benefits could be
reduced up to approximately $22 million. The reduction would
principally result from settlements with taxing authorities as it
relates to the tax benefits associated with a 2002 stock issuance.
16
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
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, 2006.
There were no significant new hedging strategies employed during the
six months ended June 30, 2007.
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, 2007, free standing interest rate swaps consisted of
$2.7 billion in notional amount of receive fixed / pay floating with
an aggregate negative fair value of $25.8 million and $1.8 billion
in notional amount of pay fixed / receive floating with an aggregate
positive fair value of $25.0 million.
At June 30, 2007, interest rate caps purchased amounted to $17.5
million in notional amount with an immaterial fair value and
interest rate caps sold amounted to $17.5 million in notional amount
with an immaterial fair value.
At June 30, 2007, the notional value of interest rate futures
designated as trading was $2.5 billion with a negative fair value of
$0.4 million.
The following table presents additional information with respect to
fair value hedges.
Fair Value Hedges
June 30, 2007 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil)($ in mil) Term (Yrs)
---------------------- ------------------- --------- --------- ----------
Fair Value Hedges that Qualify for Shortcut Accounting
------------------------------------------------------
Fixed Rate
Bank Notes Receive Fixed Swap $ 390.9 $ (21.8) 7.8
Other Fair Value Hedges
-----------------------
Fixed Rate
Bank Notes Receive Fixed Swap $ 125.0 $ (6.3) 9.0
Institutional CDs Receive Fixed Swap 50.0 (1.0) 29.0
Callable CDs Receive Fixed Swap 242.7 (3.6) 8.8
The impact from fair value hedges to total net interest income for
the three and six months ended June 30, 2007 was a negative $0.7
million and a negative $1.6 million, respectively. The impact to net
interest income due to ineffectiveness was not material.
17
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
The following table summarizes the Corporation's cash flow hedges.
Cash Flow Hedges
June 30, 2007 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil)($ in mil) Term (Yrs)
---------------------- ------------------- --------- --------- ----------
Variable Rate Loans Receive Fixed Swap $ 100.0 $ (2.1) 1.0
Institutional CDs Pay Fixed Swap 1,425.0 2.3 1.5
Federal Funds
Purchased Pay Fixed Swap 150.0 0.1 0.5
FHLB Advances Pay Fixed Swap 1,410.0 19.6 3.7
Floating Rate
Bank Notes Pay Fixed Swap 550.0 1.0 2.4
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, 2007 was a positive $5.3 million and a
positive $11.2 million, respectively. For the three and six months
ended June 30, 2007, respectively, the impact due to ineffectiveness
was not material.
For the three and six months ended June 30, 2006, the total effect
on net interest income resulting from derivative financial
instruments was a positive $5.5 million and a positive $9.6 million,
respectively, including the amortization of terminated derivative
financial instruments.
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 or retained from mergers after September 1, 1997
will be granted access to the Corporation's plan upon becoming an
eligible retiree; however, such retirees must pay 100% of the cost
of health care benefits. The plan continues to contain other
cost-sharing features such as deductibles and coinsurance.
Net periodic postretirement benefit cost for the three and six
months ended June 30, 2007 and 2006 included the following
components ($000's):
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ----------------------------
2007 2006 2007 2006
--------------- -------------- -------------- -------------
Service cost $ 434 $ 570 $ 868 $ 1,140
Interest cost
on APBO 1,062 1,022 2,123 2,044
Expected return on
plan assets (355) (232) (710) (464)
Prior service
amortization (680) (680) (1,360) (1,360)
Actuarial loss
amortization 121 378 242 757
------------- -------------- ------------- -------------
Net periodic postretirement
benefit cost $ 582 $ 1,058 $ 1,163 $ 2,117
============= ============== ============= =============
Benefit payments and expenses, net of participant contributions, for
the three and six months ended June 30, 2007 amounted to $1.2
million and $2.3 million, respectively.
18
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
The funded status, which is the accumulated postretirement benefit
obligation net of fair value of plan assets, as of June 30, 2007 is
as follows ($000's):
Total funded status, December 31, 2006 $ (50,309)
Service cost (868)
Interest cost on APBO (2,123)
Expected return on plan assets 710
Employer contributions/payments 9,282
Expected subsidy (Medicare Part D) (384)
-----------
Total funded status, June 30, 2007 $ (43,692)
===========
16. Segments
Generally, the Corporation organizes its segments based on legal
entities. Each entity offers a variety of products and services to
meet the needs of its customers and the particular market served.
Each entity has its own president and is separately managed subject
to adherence to corporate policies. Discrete financial information
is reviewed by senior management to assess performance on a monthly
basis. Certain segments are combined and consolidated for purposes
of assessing financial performance.
The following represents the Corporation's operating segments as of
and for the three and six months ended June 30, 2007 and 2006.
During 2006, the Corporation transferred the residential and
commercial mortgage banking reporting units, which were previously
included in other business operations, to the Banking segment.
Segment information for all periods presented has been adjusted for
these transfers. There have not been any other changes to the way
the Corporation organizes its segments.
Metavante transaction costs of $2.6 million and $4.0 million for the
three and six months ended June 30, 2007, respectively and Net
derivative losses of $20.7 million and $42.0 million for the three
and six months ended June 30, 2006, respectively are not included in
segment income, but are reported in Reclassifications, Eliminations
and Adjustments in the following tables. Management does not
include these items when assessing the financial results of the
segment operations.
19
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
Fees - intercompany represent intercompany revenue charged to other
segments for providing certain services. Expenses - intercompany
represent fees charged by other segments for certain services
received. For each segment, Expenses - intercompany are not the
costs of that segment's reported intercompany revenues. Intrasegment
revenues, expenses and assets have been eliminated ($ in millions):
Three Months Ended June 30, 2007
---------------------------------------------------------------------------------
Reclass-
ifications,
Corporate Eliminations Consol-
Banking Metavante Others Overhead & Adjustments idated
------------ ------------ ------------ ------------ ----------- ------------
Net interest income $ 406.1 $ (6.7) $ 4.3 $ (10.7) $ 2.9 $ 395.9
Other income
Fees - external 103.5 364.8 65.0 4.7 -- 538.0
Fees - internal
Fees - intercompany 18.6 28.0 1.9 28.3 (76.8) --
Float income -
intercompany -- 2.9 -- -- (2.9) --
----------- ----------- ----------- ----------- ---------- -----------
Total other income 122.1 395.7 66.9 33.0 (79.7) 538.0
Losses related to Firstsource -- (1.0) -- -- -- (1.0)
Other expense
Expenses - other 194.0 307.5 41.6 31.4 2.1 576.6
Expenses - intercompany 47.0 13.5 13.7 2.1 (76.3) --
----------- ----------- ----------- ----------- ---------- -----------
Total other expense 241.0 321.0 55.3 33.5 (74.2) 576.6
Provision for loan
and lease losses 25.7 -- 0.3 -- -- 26.0
----------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 261.5 67.0 15.6 (11.2) (2.6) 330.3
Income tax expense (benefit) 86.1 23.2 5.3 (4.3) (0.3) 110.0
----------- ----------- ----------- ----------- ---------- -----------
Segment income (loss) $ 175.4 $ 43.8 $ 10.3 $ (6.9) $ (2.3) $ 220.3
=========== =========== =========== =========== ========== ===========
Identifiable assets $ 55,304.8 $ 3,117.4 $ 873.2 $ 708.2 $ (1,705.9) $ 58,297.7
=========== =========== =========== =========== ========== ===========
Return on average equity 12.4% 13.2% 14.5% 13.5%
=========== =========== =========== ===========
Three Months Ended June 30, 2006
---------------------------------------------------------------------------------
Reclass-
ifications,
Corporate Eliminations Consol-
Banking Metavante Others Overhead & Adjustments idated
------------ ------------ ------------ ------------ ----------- ------------
Net interest income $ 386.5 $ (7.5) $ 3.5 $ (8.4) $ 2.7 $ 376.8
Other income
Fees - external 79.9 345.0 55.3 1.5 (20.7) 461.0
Fees - internal
Fees - intercompany 16.0 25.8 1.5 25.0 (68.3) --
Float income - intercompany -- 2.7 -- -- (2.7) --
----------- ----------- ----------- ----------- ---------- -----------
Total other income 95.9 373.5 56.8 26.5 (91.7) 461.0
Other expense
Expenses - other 184.8 294.6 36.0 28.4 0.5 544.3
Expenses - intercompany 43.2 13.0 11.4 1.2 (68.8) --
----------- ----------- ----------- ----------- ---------- -----------
Total other expense 228.0 307.6 47.4 29.6 (68.3) 544.3
Provision for loan
and lease losses 10.6 -- 0.5 -- -- 11.1
----------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 243.8 58.4 12.4 (11.5) (20.7) 282.4
Income tax expense (benefit) 81.0 18.0 4.5 (4.1) (7.5) 91.9
----------- ----------- ----------- ----------- ---------- -----------
Segment income (loss) $ 162.8 $ 40.4 $ 7.9 $ (7.4) $ (13.2) $ 190.5
=========== =========== =========== =========== ========== ===========
Identifiable assets $ 51,661.9 $ 2,790.5 $ 745.8 $ 684.9 $ (1,429.0) $ 54,454.1
=========== =========== =========== =========== ========== ===========
Return on average equity 13.2% 14.5% 14.1% 13.5%
=========== =========== =========== ===========
20
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2007 & 2006 (Unaudited)
Six Months Ended June 30, 2007
---------------------------------------------------------------------------------
Reclass-
ifications,
Corporate Eliminations Consol-
Banking Metavante Others Overhead & Adjustments idated
------------ ------------ ------------ ------------ ----------- ------------
Net interest income $ 803.5 $ (14.0) $ 9.7 $ (19.0) $ 6.0 $ 786.2
Other income
Fees - external 184.1 721.8 126.7 4.5 -- 1,037.1
Fees - internal
Fees - intercompany 36.7 55.2 3.6 56.9 (152.4) --
Float income - intercompany -- 6.0 -- -- (6.0) --
----------- ----------- ----------- ----------- ---------- -----------
Total other income 220.8 783.0 130.3 61.4 (158.4) 1,037.1
Gains related to Firstsource -- 7.0 -- -- -- 7.0
Other expense
Expenses - other 385.0 605.1 78.7 57.4 3.2 1,129.4
Expenses - intercompany 93.3 27.0 27.6 3.7 (151.6) --
----------- ----------- ----------- ----------- ---------- -----------
Total other expense 478.3 632.1 106.3 61.1 (148.4) 1,129.4
Provision for loan
and lease losses 42.6 -- 0.6 -- -- 43.2
----------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 503.4 143.9 33.1 (18.7) (4.0) 657.7
Income tax expense (benefit) 165.5 50.9 11.8 (7.2) (0.4) 220.6
----------- ----------- ----------- ----------- ---------- -----------
Segment income (loss) $ 337.9 $ 93.0 $ 21.3 $ (11.5) $ (3.6) $ 437.1
=========== =========== =========== =========== ========== ===========
Identifiable assets $ 55,304.8 $ 3,117.4 $ 873.2 $ 708.2 $ (1,705.9) $ 58,297.7
=========== =========== =========== =========== ========== ===========
Return on average equity 12.5% 14.3% 16.1% 13.8%
=========== =========== =========== ===========
Six Months Ended June 30, 2006
---------------------------------------------------------------------------------
Reclass-
ifications,
Corporate Eliminations Consol-
Banking Metavante Others Overhead & Adjustments idated
------------ ------------ ------------ ------------ ----------- ------------
Net interest income $ 717.2 $ (15.8) $ 7.1 $ (12.5) $ 5.9 $ 701.9
Other income
Fees - external 153.5 688.0 108.7 3.6 (42.0) 911.8
Fees - internal
Fees - intercompany 32.0 50.6 3.0 50.0 (135.6) --
Float income - intercompany -- 5.9 -- -- (5.9) --
----------- ----------- ----------- ----------- ---------- -----------
Total other income 185.5 744.5 111.7 53.6 (183.5) 911.8
Other expense
Expenses - other 348.6 590.7 70.3 40.5 (0.7) 1,049.4
Expenses - intercompany 83.5 25.6 22.5 3.3 (134.9) --
----------- ----------- ----------- ----------- ---------- -----------
Total other expense 432.1 616.3 92.8 43.8 (135.6) 1,049.4
Provision for loan
and lease losses 21.0 -- 1.0 --- -- 22.0
----------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 449.6 112.4 25.0 (2.7) (42.0) 542.3
Income tax expense (benefit) 148.8 37.5 9.1 (1.6) (15.1) 178.7
----------- ----------- ----------- ----------- ---------- -----------
Segment income (loss) $ 300.8 $ 74.9 $ 15.9 $ (1.1) $ (26.9) $ 363.6
=========== =========== =========== =========== ========== ===========
Identifiable assets $ 51,661.9 $ 2,790.5 $ 745.8 $ 684.9 $ (1,429.0) $ 54,454.1
=========== =========== =========== =========== ========== ===========
Return on average equity 13.8% 13.8% 15.0% 14.0%
=========== =========== =========== ===========
21
Total revenue, which consists of net interest income plus total
other income, by type in Others consisted of the following ($ in
millions):
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ----------------------------
2007 2006 2007 2006
--------------- -------------- -------------- -------------
Trust Services $ 56.7 $ 49.2 $ 108.9 $ 95.2
Capital Markets 0.5 (0.3) 2.3 0.3
Brokerage and Insurance 9.4 7.5 18.6 14.8
Commercial Leasing 3.3 2.8 7.9 5.8
Others 1.3 1.1 2.3 2.7
-------------- ------------- ------------- ------------
Total $ 71.2 $ 60.3 $ 140.0 $ 118.8
============== ============= ============= ============
17. Marshall & Ilsley Corporation and Metavante Corporation Separation
On April 3, 2007, the Corporation announced its plan to separate
Marshall & Ilsley Corporation and Metavante Corporation into two
separate publicly traded companies.
Under an investment agreement with WPM, L.P., a limited partnership
affiliated with Warburg Pincus Private Equity IX, L.P., a global
private equity investor ("Warburg Pincus"), Warburg Pincus has
agreed to invest $625 million to acquire an equity interest
representing 25 percent of the common stock of Metavante Holding
Company, a corporation formed for the purpose of completing this
separation that will, after the completion of the separation, own
all of the issued and outstanding common stock of Metavante
Corporation ("New Metavante"). Marshall & Ilsley Corporation
shareholders will own 75 percent of the shares of New Metavante
following completion of the transaction. This plan will be
implemented through the spin-off of Marshall & Ilsley Corporation
and is intended to be tax-free to Marshall & Ilsley Corporation and
its shareholders. In connection with the plan, approximately $1.75
billion of New Metavante debt will be arranged, which will be used
to repay certain intercompany indebtedness plus accrued and unpaid
interest owed to the Corporation by Metavante (the amount currently
owed is approximately $982 million). In addition, pursuant to the
investment agreement, New Metavante will contribute $1.665 billion
in cash to New M&I Corporation, a corporation formed for the purpose
of completing this separation that will, after the completion of the
separation, own directly and through its subsidiaries the
Corporation's banking business ("New Marshall & Ilsley").
Upon completion of the transaction, shareholders will receive three
shares of New Marshall & Ilsley common stock and one share of New
Metavante common stock for every three shares of Marshall & Ilsley
Corporation common stock held.
Marshall & Ilsley Corporation's board of directors has unanimously
adopted and approved the investment agreement and the transactions
contemplated by this investment agreement and has recommended that
Marshall & Ilsley Corporation's shareholders approve and adopt this
investment agreement and the transactions contemplated by this
investment agreement. Under the investment agreement with Warburg
Pincus, the closing of the transaction, which is currently expected
to occur in the fourth quarter of 2007, is contingent upon
satisfaction of various closing conditions. The conditions include
approval and adoption of Marshall & Ilsley Corporation's
shareholders, who will be asked to vote on the proposed transactions
at a special meeting that will be held on a date to be announced,
receipt of a favorable ruling from the Internal Revenue Service,
sufficiency of New Metavante's funds, other regulatory approvals and
other specified closing conditions.
17
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,
--------------------------------
2007 2006
--------------- ---------------
Assets
------
Cash and due from banks $ 1,052,715 $ 1,030,657
Investment securities:
Trading securities 58,346 50,268
Short-term investments 273,317 374,212
Other investment securities:
Taxable 6,325,650 5,818,278
Tax-exempt 1,300,156 1,316,122
-------------- --------------
Total investment securities 7,957,469 7,558,880
Loans and leases:
Loans and leases, net of unearned income 42,908,722 39,697,996
Allowance for loan and lease losses (432,424) (416,328)
-------------- --------------
Net loans and leases 42,476,298 39,281,668
Premises and equipment, net 588,712 565,369
Accrued interest and other assets 5,628,302 5,184,462
-------------- --------------
Total Assets $ 57,703,496 $ 53,621,036
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 5,431,158 $ 5,404,147
Interest bearing 27,686,843 27,337,123
-------------- --------------
Total deposits 33,118,001 32,741,270
Federal funds purchased and security repurchase agreements 3,125,694 2,332,734
Other short-term borrowings 1,171,983 1,085,859
Long-term borrowings 11,941,934 10,050,166
Accrued expenses and other liabilities 1,822,376 1,747,329
-------------- --------------
Total liabilities 51,179,988 47,957,358
Shareholders' equity 6,523,508 5,663,678
-------------- --------------
Total Liabilities and Shareholders' Equity $ 57,703,496 $ 53,621,036
============== ==============
23
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Six Months Ended June 30,
--------------------------------
2007 2006
--------------- ---------------
Assets
------
Cash and due from banks $ 1,047,286 $ 1,005,507
Investment securities:
Trading securities 49,871 42,267
Short-term investments 275,257 345,127
Other investment securities:
Taxable 6,240,037 5,401,133
Tax-exempt 1,294,042 1,328,293
-------------- --------------
Total investment securities 7,859,207 7,116,820
Loans and leases:
Loans and leases, net of unearned income 42,510,023 37,202,153
Allowance for loan and lease losses (428,087) (392,442)
-------------- --------------
Net loans and leases 42,081,936 36,809,711
Premises and equipment, net 581,600 530,820
Accrued interest and other assets 5,540,780 4,756,597
-------------- --------------
Total Assets $ 57,110,809 $ 50,219,455
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 5,375,550 $ 5,174,349
Interest bearing 27,463,804 24,950,246
-------------- --------------
Total deposits 32,839,354 30,124,595
Federal funds purchased and security repurchase agreements 3,260,183 2,386,379
Other short-term borrowings 1,013,133 1,008,475
Long-term borrowings 11,783,701 9,728,869
Accrued expenses and other liabilities 1,822,715 1,729,861
-------------- --------------
Total liabilities 50,719,086 44,978,179
Shareholders' equity 6,391,723 5,241,276
-------------- --------------
Total Liabilities and Shareholders' Equity $ 57,110,809 $ 50,219,455
============== ==============
24
OVERVIEW
--------
The Corporation's overall strategy is to drive earnings per share growth
by: (1) expanding banking operations not only in Wisconsin but also into
faster growing regions beyond Wisconsin; (2) increasing the number of
financial institutions to which the Corporation provides correspondent
banking services and products; (3) expanding trust services and other
wealth management product and service offerings; and (4) separating
Marshall & Ilsley Corporation and Metavante into two separate publicly
traded companies, as discussed below.
In early April 2007, the Corporation announced its plan to separate
Marshall & Ilsley Corporation and Metavante into two separate publicly
traded companies. The Corporation believes this transaction will create
two well-positioned companies and will provide substantial benefits to
the shareholders of both companies by creating additional opportunities
to focus on core businesses. Metavante expects to be able to drive
earnings per share growth by having access to financial resources to
continue to build new products, invest in new technologies, attract and
retain employees and acquire additional companies. Marshall & Ilsley
Corporation's enhanced capital position is expected to drive earnings
per share growth by enabling it to provide resources for continued
organic growth, fund strategic initiatives within wealth management and
its other business lines and pursue opportunities in new geographic
markets. This transaction, which is contingent upon satisfaction of
various closing conditions, is expected to close in the fourth quarter
of 2007. The closing conditions include approval and adoption of
Marshall & Ilsley Corporation shareholders, who will be asked to vote on
the proposed transactions at a special meeting that will be held on a
date to be announced, receipt of a favorable ruling from the Internal
Revenue Service, sufficiency of New Metavante's funds, other regulatory
approvals and other specified closing conditions.
The Corporation continues to focus on its key metrics of growing
revenues through balance sheet growth, fee-based income growth and
strong credit quality. Management believes that the Corporation's
fundamental performance in each of these key areas of its core
businesses will result in a strong growth profile over time.
Net income for the second quarter of 2007 amounted to $220.3 million
compared to $190.5 million for the same period in the prior year, an
increase of $29.8 million, or 15.6% . Diluted earnings per share were
$0.83 for the three months ended June 30, 2007 compared to $0.74 for the
three months ended June 30, 2006. The return on average assets and
average equity was 1.53% and 13.54%, respectively, for the quarter ended
June 30, 2007, and 1.43% and 13.49%, respectively, for the quarter ended
June 30, 2006.
Net income for the first half of 2007 amounted to $437.1 million
compared to $363.6 million for the same period in the prior year, an
increase of $73.5 million, or 20.2% . Diluted earnings per share were
$1.66 for the six months ended June 30, 2007 compared to $1.46 for the
six months ended June 30, 2006. The return on average assets and
average equity was 1.54% and 13.79%, respectively, for the six months
ended June 30, 2007, and 1.46% and 13.99%, respectively, for the six
months ended June 30, 2006.
For the three and six months ended June 30, 2007, costs associated with
the previously discussed Metavante transaction amounted to $2.6 million
and $4.0 million, respectively, and are included in a separate line
within Other expense in the Consolidated Statements of Income. Net
income and diluted earnings per share excluding the transaction costs
would have been $222.6 million and $0.84 per share for the three months
ended June 30, 2007, respectively and $440.7 million and $1.68 per share
for the six months ended June 30, 2007, respectively and the return on
average assets and return on average equity would have been 1.55% and
13.69% for the three months ended June 30, 2007, respectively and 1.56%
and 13.90% for the six months ended June 30, 2007, respectively. The
Corporation expects that transaction related costs will significantly
increase in future quarters until the transaction is completed.
For the three months ended June 30, 2006, the impact of the
mark-to-market adjustments associated with certain interest rate swaps
and reported as Net derivative losses-discontinued hedges within Other
income in the Consolidated Statements of Income, resulted in a decrease
to net income of $13.2 million and a decrease to diluted earnings per
share of $0.05 per share. Management believes the non-cash changes in
earnings based on market volatility are not reflective of the core
performance trends of the Corporation. Excluding the non-cash changes in
earnings based on market volatility, for the three months ended June 30,
2006, net income and diluted earnings per share would have been $203.7
million and $0.79 per share respectively, and the return on average
assets and return on average equity would have been 1.52% and 14.36%,
respectively.
For the six months ended June 30, 2006, the impact of the mark-to-market
adjustments reported as Net derivative losses-discontinued hedges within
Other income in the Consolidated Statements of Income, resulted in a
decrease to net income of $26.9 million and a decrease to diluted
earnings per share of $0.11 per share. Management believes the non-cash
changes in earnings based on market volatility are not reflective of the
core performance trends of the Corporation. Excluding the non-cash
changes in earnings based on market volatility, for the six months ended
June 30, 2006, net income and diluted earnings per share would have been
$390.5 million and $1.57 per share respectively, and the return on
average assets and return on average equity would have been 1.57% and
14.96%, respectively.
25
A reconciliation of these non-GAAP (Generally Accepted Accounting
Principles) operating results to GAAP results is provided later in this
section.
Earnings growth for the three and six months ended June 30, 2007
compared to the three and six months ended June 30, 2006 was
attributable to a number of factors. For the three months ended June
30, 2007, the increase in net interest income was due to the
contribution from the banking acquisition that was completed on April 1,
2007 and the two banking acquisitions completed in April 2006 as well as
continued organic loan and bank issued deposit growth. Net interest
income was negatively affected by the repurchase of 6.1 million shares
of the Corporation's common stock during the second quarter of 2007. The
increase in net charge-offs contributed to an increase in the provision
for loan and lease losses in the second quarter of 2007. Metavante
continued to exhibit growth in both revenue and earnings which was
attributable, in part, to the impact of its acquisition activities as
well as success in retaining and cross-selling products and services to
its core customer base. Metavante's acquisition activities included one
acquisition completed in the first quarter of 2007 and one acquisition
completed in the third quarter of 2006. Continued organic growth in
assets under management and assets under administration, an acquisition
completed in April 2007, and improved investment performance resulted in
solid growth in fee income for Wealth Management. Since its initial
public offering, the common stock of MasterCard has experienced
significant share-price appreciation. During the second quarter of 2007,
the Corporation sold its investment in MasterCard Class B common stock
and realized a pre-tax gain of $19.0 million. These factors along with
continued organic expense management resulted in the reported earnings
growth in the three and six months ended June 30, 2007 compared to the
three and six months ended June 30, 2006.
The transaction to separate Marshall & Ilsley Corporation and Metavante
into two separate publicly traded companies will significantly affect
the financial condition, results of operations and cash flows for both
the Corporation and Metavante. In connection with the proposed
transactions, a Registration Statement on Form S-4 was filed with the
Securities and Exchange Commission that provides, among other things,
financial information and pro forma financial information for both
Metavante and the Corporation.
ACQUISITION ACTIVITIES
----------------------
On July 9, 2007, the Corporation announced the signing of a definitive
agreement to acquire First Indiana Corp. ("First Indiana"). First
Indiana, based in Indianapolis, Indiana had $2.2 billion in consolidated
assets as of June 30, 2007, and has 32 offices in central Indiana. Under
the terms of the definitive agreement, stockholders of First Indiana
will receive $32.00 in cash for each share of First Indiana common stock
outstanding, or approximately $529.0 million in the aggregate. The
transaction is expected to close in the fourth quarter of 2007 or in the
first quarter of 2008, subject to the affirmative vote of First
Indiana's stockholders, regulatory approvals and other customary closing
conditions.
On July 1, 2007, the Corporation completed its acquisition of Excel Bank
Corporation ("Excel"). Pursuant to an Amended and Restated Merger
Agreement, shareholders of Excel received $13.97 per share in cash for
each issued and outstanding share of Excel common stock, or
approximately $105.0 million in the aggregate. Outstanding options to
acquire Excel common stock were converted into options to acquire the
Corporation's common stock. Excel, with $616.0 million in consolidated
assets as of June 30, 2007, has four branches in the greater
Minneapolis/St. Paul, Minnesota metropolitan area. The current Excel
branches became branches of M&I Bank on August 1, 2007.
On April 20, 2007, the Corporation completed its acquisition of North
Star Financial Corporation ("North Star") of Chicago, Illinois. Total
consideration in this transaction amounted to $21.0 million, consisting
of 441,252 shares of the Corporation's common stock valued at $47.55 per
common share. North Star and its subsidiaries provide a variety of
wealth management services through personal and other trusts. In
addition, North Star offers a variety of other products and services
including land trusts, 1031 exchanges for both real and personal
property, and ESOP services, including consultative services relating to
the transfer of small-business stock ownership. North Star's businesses
were integrated with the Corporation's Wealth Management unit.
On April 1, 2007, the Corporation completed its acquisition of United
Heritage Bankshares of Florida, Inc. ("United Heritage"). United
Heritage Bank, a wholly-owned subsidiary of United Heritage, with $791.3
million in assets as of March 31, 2007, has 13 branches in the
metropolitan Orlando area. Total consideration in this transaction
amounted to approximately $219.6 million, consisting of 4,410,647 shares
of the Corporation's common stock valued at $204.3 million and the
exchange of vested stock options valued at approximately $15.3 million.
The current United Heritage Bank branches became M&I Bank branches in
the second quarter of 2007.
26
On January 17, 2007, Metavante acquired all of the outstanding stock of
Valutec Card Solutions, Inc. ("Valutec") for $41.0 million in cash.
Valutec provides closed-loop, in-store gift and loyalty card solutions
for small and medium-sized businesses, including hosted account
management, reporting capabilities, plastic card design and production
and card program merchandising products.
See Note 7 -- Business Combinations in Notes to Financial Statements for
further discussion of the Corporation's acquisition activities.
NOTEWORTHY TRANSACTIONS AND EVENTS
----------------------------------
Some of the more noteworthy transactions and events that occurred in the
three and six months ended June 30, 2007 and 2006 consisted of the
following:
Second quarter 2007
-------------------
As previously discussed, on April 1, 2007, the Corporation completed its
acquisition of United Heritage and on April 20, 2007, the Corporation
completed its acquisition of 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.
During the second quarter and first half of 2007, the Corporation
realized a pre-tax loss of $1.0 million and a pre-tax gain of $7.0
million, respectively, related to Metavante's investment in Firstsource.
See Note 3 - Equity Investment in Firstsource Solutions Limited in Notes
to Financial Statements for further information. The Corporation expects
that additional gains and/or losses from Firstsource equity activities
could be recognized in future periods.
As previously discussed, costs associated with the transaction to
separate Marshall & Ilsley Corporation and Metavante Corporation into
two separate publicly traded companies amounted to a pre-tax expense of
$2.6 million ($2.3 million after-tax) for the three months ended June
30, 2007 and $4.0 million ($3.6 million after-tax) for the six months
ended June 30, 2007.
First quarter 2007
------------------
Costs associated with the transaction to separate Marshall & Ilsley
Corporation and Metavante Corporation into two separate publicly traded
companies amounted to a pre-tax expense of $1.5 million ($1.3 million
after-tax) for the three months ended March 31, 2007.
During the first quarter of 2007, the Corporation realized $8.0 million
in pre-tax gains related to Metavante's investment in Firstsource.
The impact of the previously discussed gains were in part offset by the
loss associated with 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. The loss amounted to $9.5
million and is included in Other expense in the Consolidated Statements
of Income.
Second quarter 2006
-------------------
The results of operations and financial position as of and for the three
months ended June 30, 2006 included the effect of the previously
announced acquisitions of Gold Banc Corporation, Inc. and Trustcorp
Financial, Inc. which were both completed on April 1, 2006. As of April
1, 2006, the combined assets of Gold Banc Corporation, Inc. and
Trustcorp Financial, Inc. amounted to approximately $4.9 billion. The
combined purchase price for these companies, which included
approximately $146.0 million of cash, amounted to $898.2 million. In the
aggregate, 16.74 million shares of the Corporation's common stock were
issued and fully vested stock options to purchase 0.5 million of the
Corporation's common stock were exchanged in these transactions.
27
As previously discussed, the Corporation determined during 2006 that
certain transactions did not qualify for hedge accounting. The impact of
the mark-to-market adjustments associated with certain interest rate
swaps and reported as Net derivative losses-discontinued hedges in the
Consolidated Statements of Income, resulted in a decrease to net income
of $13.2 million and a decrease to diluted earnings per share of $0.05
for the three months ended June 30, 2006. For the six months ended June
30, 2006, net derivative losses-discontinued hedges resulted in a
decrease to net income of $26.9 million and a decrease of $0.11 to
diluted earnings per share.
First quarter 2006
------------------
The impact of the mark-to-market adjustments associated with certain
interest rate swaps and reported as Net derivative losses-discontinued
hedges in the Consolidated Statements of Income, resulted in a decrease
to net income of $13.7 million and a decrease to diluted earnings per
share of $0.06 per share for the three months ended March 31, 2006.
NET INTEREST INCOME
-------------------
Net interest income is the difference between interest earned on earning
assets and interest owed on interest bearing liabilities. Net interest
income represented 42.4% of the Corporation's source of revenues for the
three months ended June 30, 2007 compared to 45.0% for the three months
ended June 30, 2006. For the six months ended June 30, 2007 net
interest income represented 43.0% of the Corporation's source of
revenues compared to 43.5% for the six months ended June 30, 2006.
Net interest income for the second quarter of 2007 amounted to $395.9
million compared to $376.8 million reported for the second quarter of
2006, an increase of $19.1 million or 5.1% . For the six months ended
June 30, 2007, net interest income amounted to $786.2 million compared
to $701.9 million reported for the six months ended June 30, 2006, an
increase of $84.3 million or 12.0%. Acquisition-related and organic
loan growth and the growth in bank issued deposits 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 2006 banking
acquisitions and Metavante's acquisitions, the cost of common stock
repurchases, tightening loan spreads and a general shift in the bank
issued deposit mix from lower cost to higher cost deposit products.
Average earning assets increased $3.6 billion or 7.6% in the second
quarter of 2007 compared to the second quarter of 2006. Average loans
and leases accounted for $3.2 billion of the growth in average earning
assets in the second quarter of 2007 compared to the second quarter of
2006. Average investment securities increased $0.4 billion in the second
quarter of 2007 over the prior year second quarter.
Average interest bearing liabilities amounted to $43.9 billion in the
second quarter of 2007 compared to $40.8 billion in the second quarter
of 2006, an increase of $3.1 billion or 7.6% . Average interest bearing
deposits increased $0.3 billion or 1.3% in the second quarter of 2007
compared to the second quarter of 2006. Average total borrowings
increased $2.8 billion or 20.6% in the second quarter of 2007 compared
to the same period in 2006.
Average noninterest bearing deposits were relatively unchanged in the
three months ended June 30, 2007 compared to the three months ended June
30, 2006.
For the six months ended June 30, 2007, average earning assets amounted
to $50.4 billion compared to $44.3 billion in the six months ended June
30, 2006, an increase of $6.1 billion or 13.7% . Average loans and
leases accounted for $5.3 billion of the growth in average earning
assets in the six months ended June 30, 2007 compared to the six months
ended June 30, 2006. Average investment securities increased
approximately $0.8 billion over the comparative six month periods.
Average interest bearing liabilities increased $5.4 billion or 14.3% in
the six months ended June 30, 2007 compared to the six months ended June
30, 2006. Average interest bearing deposits increased $2.5 billion or
10.1% in the six months ended June 30, 2007 compared to the six months
ended June 30, 2006. Average total borrowings increased $2.9 billion or
22.4% over the comparative six month periods.
For the six months ended June 30, 2007 compared to the six months ended
June 30, 2006, average noninterest bearing deposits increased $0.2
billion or 3.9%.
28
The growth and composition of the Corporation's quarterly average loan
and lease portfolio for the current quarter and previous four quarters
are reflected in the following table ($ in millions):
Consolidated Average Loans and Leases
-------------------------------------
2007 2006 Growth Pct.
-------------------- ----------------------------- ------------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
---------- --------- --------- --------- --------- -------- ---------
Commercial Loans and Leases
Commercial $ 12,494 $ 12,164 $ 11,800 $ 11,559 $ 11,441 9.2% 2.7%
Commercial real estate
Commercial mortgages 11,175 10,936 10,932 10,838 10,746 4.0 2.2
Construction 3,607 3,480 3,346 3,227 2,834 27.3 3.6
-------- -------- -------- -------- -------- ------- -------
Total commercial real estate 14,782 14,416 14,278 14,065 13,580 8.8 2.5
Commercial lease financing 507 513 538 529 504 0.7 (1.1)
-------- -------- -------- -------- -------- ------- -------
Total commercial loans
and leases 27,783 27,093 26,616 26,153 25,525 8.8 2.5
Personal loans and leases
Residential real estate
Residential mortgages 6,562 6,382 6,195 5,924 5,621 16.7 2.8
Construction 2,827 2,780 2,649 2,471 2,365 19.6 1.7
-------- -------- -------- -------- -------- ------- -------
Total residential real estate 9,389 9,162 8,844 8,395 7,986 17.6 2.5
Personal loans
Student 70 113 78 47 51 36.9 (37.7)
Credit card 249 245 250 246 237 4.8 1.4
Home equity loans and lines 4,223 4,295 4,387 4,474 4,596 (8.1) (1.7)
Other 1,019 1,031 1,101 1,143 1,167 (12.6) (1.1)
-------- -------- -------- -------- -------- ------- -------
Total personal loans 5,561 5,684 5,816 5,910 6,051 (8.1) (2.2)
Personal lease financing 176 168 162 150 136 29.3 4.9
-------- -------- -------- -------- -------- ------- -------
Total personal loans and leases 15,126 15,014 14,822 14,455 14,173 6.7 0.8
-------- -------- -------- -------- -------- ------- -------
Total consolidated average
loans and leases $ 42,909 $ 42,107 $ 41,438 $ 40,608 $ 39,698 8.1% 1.9%
======== ======== ======== ======== ======== ======= =======
Total consolidated average loans and leases increased $3.2 billion or
8.1% in the second quarter of 2007 compared to the second quarter of
2006. Excluding the effect of the banking acquisitions, total
consolidated average loan and lease organic growth was 6.9% in the
second quarter of 2007 compared to the second quarter of 2006.
Approximately $0.4 billion of the growth in total consolidated average
loans and leases was attributable to the banking acquisitions and $2.8
billion of the growth was organic. Of the average growth attributable
to the banking acquisitions, $0.4 billion was attributable to average
commercial real estate loans. Of the $2.8 billion of average loan and
lease organic growth, $1.0 billion was attributable to average
commercial loans and leases, $0.8 billion was attributable to average
commercial real estate loans, and $1.4 billion was attributable to
residential real estate loans. From a production standpoint,
residential real estate loan closings in the second quarter of 2007 were
$1.3 billion compared to $1.4 billion in the second quarter of 2006.
Average home equity loans and lines declined $0.4 billion in the second
quarter of 2007 compared to the second quarter of 2006.
For the six months ended June 30, 2007, total consolidated average loans
and leases increased $5.3 billion or 14.3% compared to the six months
ended June 30, 2006. Excluding the effect of the 2007 and 2006 banking
acquisitions, total consolidated average loan and lease organic growth
was 8.0% for the six months ended June 30, 2007 compared to the six
months ended June 30, 2006. Approximately $2.2 billion of the growth in
total consolidated average loans and leases was attributable to the
banking acquisitions and $3.1 billion of the growth was organic. Of the
$2.2 billion of average growth attributable to the banking acquisitions,
$1.6 billion was attributable to average commercial real estate loans,
approximately $0.5 billion was attributable to average commercial loans
and leases and $0.1 billion was attributable to average residential real
estate loans. Of the $3.1 billion of average loan and lease organic
growth, $1.2 billion was attributable to average commercial loans and
leases, $0.9 billion was attributable to average commercial real estate
loans, and $1.5 billion was attributable to residential real estate
loans. From a production standpoint, residential real estate loan
closings in the first half of 2007 and the first half of 2006 were $2.3
billion and $2.6 billion, respectively. Average home equity loans and
lines declined $0.4 billion in the six months ended June 30, 2007
compared to the six months ended June 30, 2006. Average personal loans
and leases decreased $0.1 billion in the first half of 2007 compared to
the same period in 2006.
29
Total average commercial loan and lease organic growth was 8.2% in the
second quarter of 2007 compared to the second quarter of 2006. For the
six months ended June 30, 2007 compared to the six months ended June 30,
2006 total average commercial loan and lease organic growth was 10.7% .
Commercial loan and lease organic growth continued to be positive in the
first half of 2007 although the Corporation has seen some slowing in
certain businesses. Management believes that year over year organic
commercial loan growth (as a percentage) will continue its slight
moderation and expects organic commercial loan growth will be in the
mid-to-high single digit percentage range in 2007. Total average
commercial real estate loan organic growth was 6.0% in the second
quarter of 2007 compared to the second quarter of 2006. For the six
months ended June 30, 2007 compared to the six months ended June 30,
2006 total average commercial real estate loan organic growth was 6.9%.
The Corporation continues to experience some slowing in the construction
market for both commercial and residential developers, and to some
extent throughout the commercial real estate business. The Corporation
expects organic commercial real estate loan growth in 2007 will be in
the mid single digit percentage range.
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 loans and lines declined in the second
quarter and first half of 2007 compared to the second quarter and first
half of 2006. This is consistent with what is occurring in many parts of
the country. It is expected that the softer home equity market, combined
with the Corporation's continued sales of certain loans at origination
will continue to impact balance sheet organic loan growth. Management
does not expect this trend to change in the near term.
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 periodically retained
in the portfolio. For each of the three months ended June 30, 2007 and
2006, real estate loans sold to investors amounted to $0.6 billion. For
each of the six months ended June 30, 2007 and 2006, real estate loans
sold to investors amounted to $1.2 billion. At June 30, 2007 and 2006,
the Corporation had approximately $50.3 million and $123.4 million of
mortgage loans held for sale, respectively. Gains from the sale of
mortgage loans amounted to $10.4 million in the second quarter of 2007
compared to $11.8 million in the second quarter of 2006. For the six
months ended June 30, 2007, gains from the sale of mortgage loans
amounted to $19.2 million compared to $23.7 million in the six months
ended June 30, 2006.
The Corporation maintains a conservative credit profile in its home
equity and mortgage portfolios. At June 30, 2007, the Corporation's
average loan-to-value ratios and credit scores were 78% and 725 for its
residential real estate loan portfolio and 80% and 729 for its home
equity portfolios, respectively. The Corporation does not originate for
portfolio, sub-prime mortgages or sub-prime home equity loans or lines.
The Corporation's exposure to residential real estate and home equity
borrowers with credit scores that were less than 620 was approximately
$285 million at June 30, 2007.
During the second quarter of 2007, the Corporation opted to discontinue
the sale and securitization of automobile loans into the secondary
market. The loans previously classified as held for sale, were
reclassified as portfolio loans at the lower of cost or market. Auto
loans securitized and sold in the second quarters of 2007 and 2006
amounted to $0.05 billion and $0.2 billion, respectively. For the six
months ended June 30, 2007, auto loans securitized and sold amounted to
$0.2 billion compared to $0.3 billion in the six months ended June 30,
2006. 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
$1.1 million, respectively. Net gains and losses from the sale and
securitization of auto loans were not significant in either the three or
six months ended June 30, 2006.
30
The growth and composition of the Corporation's quarterly average
deposits for the current and previous four quarters are as follows ($ in
millions):
Consolidated Average Deposits
-----------------------------
2007 2006 Growth Pct.
-------------------- ----------------------------- ------------------
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
---------- --------- --------- --------- --------- -------- ---------
Bank issued deposits
Noninterest bearing deposits
Commercial $ 3,849 $ 3,769 $ 4,000 $ 3,948 $ 3,873 (0.6)% 2.1%
Personal 996 964 951 953 998 (0.2) 3.3
Other 586 586 575 561 533 10.1 0.0
-------- -------- -------- -------- -------- ------- -------
Total noninterest
bearing deposits 5,431 5,319 5,526 5,462 5,404 0.5 2.1
Interest bearing activity deposits
Savings and NOW 2,929 2,951 2,961 3,081 3,251 (9.9) (0.7)
Money market 8,587 8,260 8,128 7,795 7,389 16.2 3.9
Foreign activity 1,394 1,424 1,427 1,151 1,000 39.3 (2.1)
-------- -------- -------- -------- -------- ------- -------
Total interest bearing
activity deposits 12,910 12,635 12,516 12,027 11,640 10.9 2.2
Time deposits
Other CDs and time deposits 4,882 4,832 4,847 4,843 4,769 2.4 1.0
CDs greater than $100,000 3,636 3,401 3,264 3,137 2,878 26.4 6.9
-------- -------- -------- -------- -------- ------- -------
Total time deposits 8,518 8,233 8,111 7,980 7,647 11.4 3.5
-------- -------- -------- -------- -------- ------- -------
Total bank issued deposits 26,859 26,187 26,153 25,469 24,691 8.8 2.6
Wholesale deposits
Money market 1,795 938 835 795 737 143.5 91.4
Brokered CDs 3,635 4,332 5,257 5,510 5,382 (32.5) (16.1)
Foreign time 829 1,101 892 1,147 1,931 (57.1) (24.7)
-------- -------- -------- -------- -------- ------- -------
Total wholesale deposits 6,259 6,371 6,984 7,452 8,050 (22.3) (1.8)
-------- -------- -------- -------- -------- ------- -------
Total consolidated
average deposits $ 33,118 $ 32,558 $ 33,137 $ 32,921 $ 32,741 1.2% 1.7%
======== ======== ======== ======== ======== ======= =======
Average total bank issued deposits increased $2.2 billion or 8.8% in the
second quarter of 2007 compared to the second quarter of 2006. Excluding
the effect of the banking acquisitions, average total bank issued
deposit organic growth was 5.8% in the second quarter of 2007 compared
to the second quarter of 2006. Approximately $0.7 billion of the growth
in average total bank issued deposits was attributable to the banking
acquisitions and $1.5 billion of the growth was organic. Of the $0.7
billion of average growth attributable to the banking acquisitions, $0.1
billion was attributable to average noninterest bearing deposits, $0.3
billion was attributable to average interest bearing deposits and $0.3
billion was attributable to average time deposits. Of the $1.5 billion
of average bank issued deposit organic growth, $1.0 billion was
attributable to average interest bearing deposits and $0.5 billion was
attributable to average time deposits. Excluding the effect of the
banking acquisitions, average noninterest bearing deposits were
relatively unchanged in the second quarter of 2007 compared to the
second quarter of 2006.
For the six months ended June 30, 2007, average total bank issued
deposits increased $3.7 billion or 16.2% compared to the six months
ended June 30, 2006. Excluding the effect of the 2007 and 2006 banking
acquisitions, average total bank issued deposit organic growth was 7.4%
in the six months ended June 30, 2007 compared to the six months ended
June 30, 2006. Approximately $1.9 billion of the growth in average total
bank issued deposits was attributable to the banking acquisitions and
$1.8 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, $0.6 billion was
attributable to average interest bearing deposits and $1.0 billion was
attributable to average time deposits. Of the $1.8 billion of average
bank issued deposit organic growth, $1.1 billion was attributable to
average interest bearing deposits and $0.7 billion was attributable to
average time deposits. Excluding the effect of the banking acquisitions,
average noninterest bearing deposits were relatively unchanged in the
first half of 2007 compared to the first half of 2006.
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.
31
For the three and six months ended June 30 2007 compared to the three
and six months ended June 30 2006, the Corporation has been able to
competitively price deposit products which has contributed to the growth
in average bank issued interest bearing activity deposits and average
bank issued time deposits. In addition, the Corporation continues 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 money market and time 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. Recently, the Corporation has placed less reliance on
wholesale deposits. For the three months ended June 30, 2007, average
wholesale deposits decreased $1.8 billion, or 22.3% compared to the
three months ended June 30, 2006. For the six months ended June 30, 2007
average wholesale deposits decreased $1.0 billion, or 13.4% compared to
the six months ended June 30, 2006. Average wholesale deposits for the
six months ended June 30, 2007 include approximately $0.2 billion of
wholesale deposits that were assumed in the 2006 banking acquisitions.
Total borrowings increased $0.9 billion to $15.4 billion at June 30,
2007, compared to $14.5 billion at December 31, 2006. During the second
quarter of 2007, the Corporation's lead bank, M&I Marshall & Ilsley Bank
("M&I Bank") issued $600 million of floating rate subordinated bank
notes indexed to the three month London Inter-Bank Offered Rate
("LIBOR") with a final maturity date of 2012 subject to the
Corporation's option to call the notes at par on December 4, 2007, March
4, 2008 and June 4, 2008. During the first quarter of 2007, the
Corporation issued floating rate long term borrowings in the amount of
$1.2 billion which are indexed to the one month LIBOR and mature at
various times from 2008 through 2013. In addition, a $0.3 billion fixed
rate borrowing with an interest rate of 5.15% and a maturity date of
2012 was issued in the first quarter of 2007. During the first quarter
of 2007, the Corporation called its $200 million in principal amount of
7.65% junior subordinated deferrable interest debentures and the related
M&I Capital Trust A 7.65% trust preferred securities.
32
The Corporation's consolidated average interest earning assets and
interest bearing liabilities, interest earned and interest paid for the
three and six months ended June 30, 2007 and 2006, are presented in the
following tables ($ in millions):
Consolidated Yield and Cost Analysis
------------------------------------
Three Months Ended Three Months Ended
June 30, 2007 June 30, 2006
---------------------------- ----------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
---------------------------- ----------------------------
Loans and leases: (a)
Commercial loans and leases $ 13,000.8 $ 245.8 7.58% $ 11,944.7 $ 218.1 7.32%
Commercial real estate loans 14,781.7 279.3 7.58 13,580.4 248.6 7.34
Residential real estate loans 9,388.7 170.5 7.28 7,985.7 139.7 7.01
Home equity loans and lines 4,223.2 79.1 7.52 4,595.7 82.6 7.21
Personal loans and leases 1,514.3 29.4 7.80 1,591.5 28.5 7.20
---------- ------- ------- ---------- ------- -------
Total loans and leases 42,908.7 804.1 7.52 39,698.0 717.5 7.25
Investment securities (b):
Taxable 6,325.7 78.7 4.94 5,818.3 70.9 4.79
Tax Exempt (a) 1,300.1 21.6 6.72 1,316.1 22.9 7.04
---------- ------- ------- ---------- ------- -------
Total investment securities 7,625.8 100.3 5.24 7,134.4 93.8 5.19
Trading securities (a) 58.4 0.3 2.47 50.3 0.2 1.70
Other short-term investments 273.3 3.7 5.40 374.2 5.0 5.37
---------- ------- ------- ---------- ------- -------
Total interest earning assets $ 50,866.2 $ 908.4 7.16% $ 47,256.9 $ 816.5 6.91%
========== ======= ======= ========== ======= =======
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 12,910.2 $ 114.9 3.57% $ 11,639.6 $ 94.5 3.26%
Bank issued time deposits 8,518.1 104.9 4.94 7,646.9 81.0 4.25
---------- ------- ------- ---------- ------- -------
Total bank issued deposits 21,428.3 219.8 4.11 19,286.5 175.5 3.65
Wholesale deposits 6,258.5 79.4 5.09 8,050.6 96.0 4.78
---------- ------- ------- ---------- ------- -------
Total interest bearing deposits 27,686.8 299.2 4.33 27,337.1 271.5 3.98
Short-term borrowings 4,297.7 56.0 5.23 3,418.6 43.1 5.06
Long-term borrowings 11,941.9 150.3 5.05 10,050.2 117.4 4.69
---------- ------- ------- ---------- ------- -------
Total interest bearing liabilities $ 43,926.4 $ 505.5 4.62% $ 40,805.9 $ 432.0 4.25%
========== ======= ======= ========== ======= =======
Net interest margin (FTE) $ 402.9 3.17% $ 384.5 3.26%
======= ======= ======= =======
Net interest spread (FTE) 2.54% 2.66%
======= =======
(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.
33
Consolidated Yield and Cost Analysis
------------------------------------
Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006
---------------------------- ----------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
---------------------------- ----------------------------
Loans and leases: (a)
Commercial loans and leases $ 12,839.8 $ 483.9 7.60% $ 11,161.7 $ 394.9 7.14%
Commercial real estate loans 14,600.0 549.4 7.59 12,088.7 429.7 7.17
Residential real estate loans 9,275.8 335.8 7.30 7,632.5 262.5 6.94
Home equity loans and lines 4,259.0 159.1 7.53 4,650.5 163.6 7.09
Personal loans and leases 1,535.4 59.5 7.82 1,668.8 57.7 6.97
---------- ------- ------- ---------- ------- -------
Total loans and leases 42,510.0 1,587.7 7.53 37,202.2 1,308.4 7.09
Investment securities (b):
Taxable 6,240.0 155.7 4.98 5,401.1 128.8 4.72
Tax Exempt (a) 1,294.1 43.1 6.79 1,328.3 46.3 7.12
---------- ------- ------- ---------- ------- -------
Total investment securities 7,534.1 198.8 5.29 6,729.4 175.1 5.18
Trading securities (a) 49.9 0.5 2.03 42.3 0.3 1.37
Other short-term investments 275.2 7.5 5.49 345.1 8.6 5.01
---------- ------- ------- ---------- ------- -------
Total interest earning assets $ 50,369.2$1,794.5 7.18% $ 44,319.0$1,492.4 6.78%
========== ======= ======= ========== ======= =======
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 12,773.0 $ 226.5 3.58% $ 11,055.2 $ 169.2 3.09%
Bank issued time deposits 8,376.3 203.2 4.89 6,601.4 134.3 4.10
---------- ------- ------- ---------- ------- -------
Total bank issued deposits 21,149.3 429.7 4.10 17,656.6 303.5 3.47
Wholesale deposits 6,314.5 159.5 5.09 7,293.6 166.8 4.61
---------- ------- ------- ---------- ------- -------
Total interest bearing deposits 27,463.8 589.2 4.33 24,950.2 470.3 3.80
Short-term borrowings 4,273.3 111.0 5.24 3,394.9 82.5 4.90
Long-term borrowings 11,783.7 294.0 5.03 9,728.9 222.1 4.60
---------- ------- ------- ---------- ------- -------
Total interest bearing liabilities $ 43,520.8 $ 994.2 4.61% $ 38,074.0 $ 774.9 4.10%
========== ======= ======= ========== ======= =======
Net interest margin (FTE) $ 800.3 3.20% $ 717.5 3.26%
======= ======= ======= =======
Net interest spread (FTE) 2.57% 2.68%
======= =======
(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 9 basis points from 3.26% in the
second quarter of 2006 to 3.17% in the second quarter of 2007. For the
six months ended June 30, 2007, the net interest margin FTE was 3.20%
compared to 3.26% for the six months ended June 30, 2006, a decrease of
6 basis points. Compared to the first quarter of 2007, the net interest
margin FTE decreased 6 basis points from 3.23% in the first quarter of
2007 to 3.17% in the second quarter of 2007. The net interest margin in
the second quarter of 2007 was negatively impacted by the effect of the
common stock repurchases that required $294.7 million in cash and
positively impacted by the lower interest rate on funds used for the
early retirement of the Corporation's $200 million in principal amount
of 7.65% junior subordinated deferrable interest debentures.
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 and various other factors. Similar to the
general trends being experienced throughout the industry, the
Corporation continues to be challenged by narrowing loan spreads,
slowing loan growth and the shift in the bank issued deposit mix by new
and existing depositors into higher yielding products. Management
expects these trends to continue and expects that there will be downward
pressure, particularly during periods of elevated levels of
nonperforming loans and leases, on the net interest margin FTE for the
remainder of 2007.
34
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of June 30, 2007 and the prior four quarters:
Nonperforming Assets
--------------------
($000's)
2007 2006
----------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Nonaccrual $ 373,387 $ 340,684 $ 264,890 $ 213,920 $ 193,028
Renegotiated 113 117 125 130 133
Past due 90 days or more 10,463 10,858 2,991 5,132 4,855
---------- ---------- ---------- ---------- ----------
Total nonperforming loans and leases 383,963 351,659 268,006 219,182 198,016
Other real estate owned 24,462 26,580 25,452 15,152 11,701
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 408,425 $ 378,239 $ 293,458 $ 234,334 $ 209,717
========== ========== ========== ========== ==========
Allowance for loan and lease losses $ 431,012 $ 423,084 $ 420,610 $ 417,375 $ 415,201
========== ========== ========== ========== ==========
Consolidated Statistics
-----------------------
2007 2006
----------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Net charge-offs to average
loans and leases annualized 0.22% 0.14% 0.14% 0.08% 0.10%
Total nonperforming loans and leases
to total loans and leases 0.89 0.83 0.64 0.53 0.49
Total nonperforming assets to total loans
and leases and other real estate owned 0.94 0.89 0.70 0.57 0.52
Allowance for loan and lease losses
to total loans and leases 1.00 1.00 1.00 1.01 1.03
Allowance for loan and lease losses
to total nonperforming loans and leases 112 120 157 190 210
Nonaccrual Loans and Leases By Type
-----------------------------------
($000's)
2007 2006
----------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Commercial
Commercial, financial and agricultural $ 48,525 $ 60,331 $ 50,855 $ 56,541 $ 59,558
Lease financing receivables 1,101 1,510 1,119 539 454
---------- ---------- ---------- ---------- ----------
Total commercial 49,626 61,841 51,974 57,080 60,012
Real estate
Construction and land development 152,554 129,061 71,298 47,265 32,602
Commercial mortgage 70,835 66,596 57,705 40,234 40,669
Residential mortgage 98,994 78,578 82,675 67,799 58,255
---------- ---------- ---------- ---------- ----------
Total real estate 322,383 274,235 211,678 155,298 131,526
Personal 1,378 4,608 1,238 1,542 1,490
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and leases $ 373,387 $ 340,684 $ 264,890 $ 213,920 $ 193,028
========== ========== ========== ========== ==========
Reconciliation of Allowance for Loan and Lease Losses
-----------------------------------------------------
($000's)
2007 2006
----------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Beginning balance $ 423,084 $ 420,610 $ 417,375 $ 415,201 $ 368,760
Provision for loan and lease losses 26,026 17,148 18,253 10,250 11,053
Allowance of banks and loans acquired 5,513 -- -- -- 45,258
Loans and leases charged-off
Commercial 15,433 7,222 2,213 4,073 6,125
Real estate 7,789 6,616 11,483 4,971 3,385
Personal 4,473 4,290 4,216 3,516 3,088
Leases 464 173 256 165 1,253
---------- ---------- ---------- ---------- ----------
Total charge-offs 28,159 18,301 18,168 12,725 13,851
Recoveries on loans and leases
Commercial 1,764 1,712 1,097 2,251 847
Real estate 1,070 488 415 783 1,224
Personal 1,095 935 1,096 1,031 1,149
Leases 619 492 542 584 761
---------- ---------- ---------- ---------- ----------
Total recoveries 4,548 3,627 3,150 4,649 3,981
---------- ---------- ---------- ---------- ----------
Net loans and leases charged-off 23,611 14,674 15,018 8,076 9,870
---------- ---------- ---------- ---------- ----------
Ending balance $ 431,012 $ 423,084 $ 420,610 $ 417,375 $ 415,201
========== ========== ========== ========== ==========
Nonperforming assets consist of nonperforming loans and leases and other
real estate owned ("OREO").
OREO is principally comprised of commercial and residential properties
acquired in partial or total satisfaction of problem loans and amounted
to $24.5 million at June 30, 2007, compared to $26.6 million at March
31, 2007 and $11.7 million at June 30, 2006. Construction and land
development and residential real estate properties acquired in partial
or total satisfaction of problem loans accounted for 27.3% and 58.6% of
OREO at June 30, 2007, respectively.
Nonperforming loans and leases consist of nonaccrual, renegotiated or
restructured loans, and loans and leases that are delinquent 90 days or
more and still accruing interest. The balance of nonperforming loans
and leases can fluctuate widely based on the timing of cash collections,
renegotiations and renewals.
At June 30, 2007, nonperforming loans and leases amounted to $384.0
million or 0.89% of consolidated loans and leases compared to $351.7
million or 0.83% of consolidated loans and leases at March 31, 2007, and
$198.0 million or 0.49% of consolidated loans and leases at June 30,
2006.
Nonaccrual loans and leases continue to be the primary source of
nonperforming loans and leases. Since March 31, 2007, nonaccrual
commercial and industrial loans decreased $11.8 million or 19.6%,
nonaccrual personal loans decreased $3.2 million or 70.1% and nonaccrual
lease financing receivables decreased $0.4 million or 27.1% . Since
March 31, 2007, nonaccrual construction and land development increased
$23.5 million or 18.2%, nonaccrual residential real estate loans,
including home equity loans and lines, increased $20.4 million or 26.0%
and nonaccrual commercial real estate increased $4.2 million or 6.4% .
At June 30, 2007, nonperforming loans and leases continue to be
concentrated in housing-related loans. The housing slowdown is impacting
the performance of some of the Corporation's construction and land
development and residential real estate loans. A re-balancing of supply
and demand within the national housing market has reduced both
absorption rates and valuations, causing stress for some borrowers
within these loan segments. These loans are geographically dispersed and
are in both the Corporation's originated and acquired loan portfolios.
Nonperforming loans and leases associated with the 2006 banking
acquisitions amounted to $75.2 million or 1.91% of the acquired loans
and leases and 19.6% of total consolidated nonperforming loans and
leases at June 30, 2007. Nonperforming loans and leases associated with
the 2007 banking acquisition were insignificant at June 30, 2007.
36
Throughout this credit cycle, the Corporation has maintained its
underwriting standards including its typical loan to value standards in
real estate lending. As stated in the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2006, the Corporation does not
hold loans with below market or so-called teaser interest rates and does
not hold option adjustable rate mortgages that may expose the borrowers
to future increase in repayments in excess of changes resulting solely
from increases in the market rate of interest (loans subject to negative
amortization). The Corporation's comprehensive approval process is
critical to ensuring that the risk of loss from nonperforming loans and
leases on a long-term basis is minimized within the overall framework of
acceptable levels of credit risk.
Managing nonperforming loans and leases is important to the ongoing
success of a financial services institution. In addition to the negative
impact on net interest income and credit losses, nonperforming assets
also increase operating costs due to the expense associated with
collection efforts. The Corporation's comprehensive credit review
process is critical to ensuring that potential nonperforming loans and
leases as well as nonperforming loans and leases are aggressively
identified and isolated in a timely manner so that strategies can be
developed to minimize the risk of loss to the Corporation. At June 30,
2007 approximately $52.3 million or 13.6% of the Corporation's
nonperforming loans and leases were 60 days or less past due.
Net charge-offs amounted to $23.6 million or 0.22% of average loans and
leases in the second quarter of 2007 compared to $14.7 million or 0.14%
of average loans and leases in the first quarter of 2007 and $9.9
million or 0.10% of average loans and leases in the second quarter of
2006. For the six months ended June 30, 2007, net charge-offs amounted
to $38.3 million or 0.18% of average loans and leases compared to $15.9
million or 0.09% of average loans for the six months ended June 30,
2006. The most recent five year historical average net charge-off ratio
was 0.15% . The ratio of recoveries to charge-offs was 16.2% for the
three months ended June 30, 2007 compared to 19.8% for the three months
ended March 31, 2007 and 28.7% in the second quarter of 2006. The ratio
of recoveries to charge-offs was 17.6% for the six months ended June 30,
2007. The most recent five year average ratio of recoveries to
charge-offs was 30.4%.
The provisions for loan and lease losses amounted to $26.0 million for
the three months ended June 30, 2007 compared to $11.1 million for the
three months ended June 30, 2006. For the six months ended June 30,
2007, the provisions for loan and lease losses amounted to $43.2 million
compared to approximately $22.1 million for the six months ended June
30, 2006. The allowance for loan and lease losses as a percent of
consolidated loans and leases outstanding was 1.00% at June 30, 2007,
1.00% at March 31, 2007 and 1.03% at June 30, 2006.
During the second quarter the Corporation experienced an increase in the
level of problem loan resolutions, decline in nonperforming commercial
and industrial loans and slowing in the rate of increase of
nonperforming real estate loans compared to the prior two quarters.
While these may be signs that nonperforming loan and lease trends are
beginning to stabilize, negative economic events, adverse developments
in industry segments within the loan and lease portfolios or
deterioration of a large loan or loans could continue to have an adverse
impact on the level of nonperforming loans and leases. Management
believes that in the near term the expected level of nonperforming loans
and leases may continue to increase from current levels. This
expectation is based in part on the fact that real estate related loans
such as construction and land development loans tend to be more complex
and may take additional time to satisfactorily resolve. At the present
time, the Corporation's nonperforming loans and leases continue to be
generally well-collateralized, geographically dispersed and the risk of
loss on a per loan basis remains manageable.
Management continues to expect that its annual historical net charge-off
range of 15 to 20 basis points of average loans and leases is
representative of the net charge-offs expected for the year ended
December 31, 2007.
OTHER INCOME
------------
Other income or noninterest sources of revenue represented 57.6% and
55.0% of the Corporation's total sources of revenues for the three
months ended June 30, 2007 and 2006, respectively. Total other income in
the second quarter of 2007 amounted to $537.0 million compared to $461.0
million in the same period last year, an increase of $76.0 million or
16.5% . As previously discussed, other income for the three months ended
June 30, 2007 included a pre-tax gain of $19.0 million from the sale of
MasterCard Class B shares. Other income for the three months ended June
30, 2006 included $20.7 million of mark-to-market losses for derivative
financial instruments that did not qualify for hedge accounting. The
remaining increase in other income was primarily due to growth in data
processing services and wealth management services revenue.
For the six months ended June 30, 2007 and 2006, noninterest sources of
revenue represented 57.0% and 56.5% of the Corporation's total sources
of revenues, respectively. Total other income in the six months ended
June 30, 2007 amounted to $1,044.1 million compared to $911.8 million in
the same period last year, an increase of $132.3 million or 14.5% . As
previously discussed, other income for the six months ended June 30,
2007 included a pre-tax gain of $19.0 million on the sale of MasterCard
Class B shares and $7.0 million in net gains related to Metavante's
investment in Firstsource. Other income for the six months ended June
30, 2006 included $42.0 million of mark-to-market losses for derivative
financial instruments that did not qualify for hedge accounting. The
remaining increase in other income was primarily due to growth in data
processing services and wealth management services revenue.
37
Data processing services external revenue (Metavante) amounted to $363.8
million in the second quarter of 2007 compared to $345.0 million in the
second quarter of 2006, an increase of $18.8 million or 5.5% . For the
six months ended June 30, 2007, Data processing services external
revenue amounted to $720.2 million compared to $688.0 million for the
six months ended June 30, 2006, an increase of $32.2 million or 4.7% .
Revenue growth continued throughout the segment due to revenue
associated with acquisitions and higher transaction volumes in core
processing and payment processing activities. Revenue associated with
Metavante's acquisition completed in the first quarter of 2007 and the
acquisition completed in the third quarter of 2006 contributed
approximately $7.5 million and $15.0 million of the revenue growth in
the three and six months ended June 30, 2007 compared to the three and
six months ended June 30, 2006, respectively. Metavante estimates that
total revenue growth (internal and external) for the three and six
months ended June 30, 2007 compared to the three and six months ended
June 30, 2006 excluding the acquisitions ("organic revenue growth"), was
approximately 2.8% and 2.4%, respectively. To determine the estimated
organic revenue growth rate, Metavante adjusts its prior year revenue
for the acquisitions as if they had been consummated on January 1 of the
prior year.
Management continues to expect that Metavante revenue (internal and
external) for the year ended December 31, 2007 will be within a range of
$1.60 billion to $1.64 billion and annual organic revenue growth in 2007
will be in the mid-single digits.
Wealth management revenue amounted to $65.6 million in the second
quarter of 2007 compared to $56.3 million in the second quarter of 2006,
an increase of $9.3 million or 16.5% . For the six months ended June 30,
2007, Wealth management revenue amounted to $126.3 million compared to
$109.1 million for the six months ended June 30, 2006, an increase of
$17.2 million or 15.7%. Wealth management revenue growth attributable
to the 2007 and 2006 acquisitions amounted to $1.3 million and $2.3
million for the three and six months ended June 30, 2007 compared to the
three and six months ended June 30, 2006, respectively. Continued
success in cross-selling and integrated delivery initiatives, improved
investment performance and improving results in institutional sales
efforts and outsourcing activities were the primary contributors to the
remaining revenue growth over the respective periods. Assets under
management were approximately $24.6 billion at June 30, 2007 compared to
$22.5 billion at December 31, 2006, and $20.4 billion at June 30, 2006.
Service charges on deposits amounted to $28.1 million in the second
quarter of 2007 compared to $25.0 million in the second quarter of 2006,
an increase of $3.1 million or 12.2% . For the six months ended June
30, 2007, service charges on deposits amounted to $53.9 million compared
to $47.6 million for the six months ended June 30, 2006, an increase of
$6.3 million or 13.4% . The banking acquisitions contributed $0.2
million and $2.3 million of the growth in service charges on deposits
for the three and six months ended June 30, 2007 compared to the three
and six months ended June 30, 2006, respectively. The remainder of the
growth was primarily attributable to fees associated with new products.
A portion of this source of fee income is sensitive to changes in
interest rates.
Total mortgage banking revenue was $12.0 million in the second quarter
of 2007 compared with $12.9 million in the second quarter of 2006, a
decrease of $0.9 million or 7.5% . For the six months ended June 30,
2007, total mortgage banking revenue amounted to $22.1 million compared
to $25.9 million for the six months ended June 30, 2006, a decrease of
$3.8 million or 14.5%. For each of the three months ended June 30, 2007
and 2006, the Corporation sold $0.6 billion of residential mortgage and
home equity loans to the secondary market. For each of the six months
ended June 30, 2007 and 2006, the Corporation sold $1.2 billion of
residential mortgage and home equity loans to the secondary market. The
Corporation continues to sell home equity loans at origination.
Net investment securities gains amounted to $19.5 million in the second
quarter of 2007 compared to $1.0 million in the second quarter of 2006,
an increase of $18.5 million. For the six months ended June 30, 2007 and
2006, Net investment securities gains amounted to $21.0 million and $2.1
million, respectively. As previously discussed, gains related to the
sale of MasterCard Class B shares for both the three and six month
periods ended June 30, 2007 amounted to $19.0 million, respectively.
As previously discussed, Net derivative losses-discontinued hedges that
amounted to $20.7 million and $42.0 million for the three and six months
ended June 30, 2006, respectively, represent the mark-to-market
adjustments associated with certain interest rate swaps. Based on
expanded interpretations of the accounting standard for derivatives and
hedge accounting, it was determined that certain transactions did not
qualify for hedge accounting. As a result, any fluctuation in the fair
value of the interest rate swaps was recorded in earnings with no
corresponding offset to the hedged items or accumulated other
comprehensive income. Management believes the changes in earnings based
on market volatility are not reflective of the core performance trends
of the Corporation.
38
Other income in the second quarter of 2007 amounted to $41.1 million
compared to $34.0 million in the second quarter of 2006, an increase of
$7.1 million or 20.7%. For the six months ended June 30, 2007, other
income amounted to $78.0 million compared to $66.9 million for the six
months ended June 30, 2006, an increase of $11.1 million or 16.6% . The
growth in other income in the three and six months ended June 30, 2007
compared to the three and six month ended June 30, 2006, respectively
was primarily attributable to an increase in a variety of sources of
fees and other income.
OTHER EXPENSE
-------------
Total other expense for the three months ended June 30, 2007 amounted to
$576.5 million compared to $544.3 million for the three months ended
June 30, 2006, an increase of $32.2 million or 5.9% . For the six months
ended June 30, 2007, total other expense amounted to $1,129.5 million
compared to $1,049.4 million, an increase of $80.1 million or 7.6%.
Total other expense for the three and six months ended June 30, 2007
includes the operating expenses associated with Metavante's 2007 and
2006 acquisitions, and the 2007 and 2006 banking and wealth management
acquisitions. 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 2007 compared to 2006.
Approximately $14.0 million of the operating expense growth in the
second quarter of 2007 compared to the second quarter of 2006 and $40.8
million of the operating expense growth in the six months ended June 30,
2007 compared to the six months ended June 30, 2006 was attributable to
the acquisitions. Total other expense for the three and six months ended
June 30, 2007 included transaction expenses of $2.6 million and $4.0
million, respectively, associated with the plan to separate Marshall &
Ilsley Corporation and Metavante into two separate publicly traded
companies. 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.
The Corporation estimates that its expense growth in the three months
ended June 30, 2007 compared to the three months ended June 30, 2006,
excluding the effects of the acquisitions and the Metavante transaction
costs, was approximately $15.7 million or 2.9% . For the six months
ended June 30, 2007 compared to the six months ended June 30, 2006, the
estimated expense growth excluding the acquisitions, the Metavante
transaction costs and the loss related to the call of the Corporation's
7.65% junior subordinated deferrable interest debentures, was
approximately $25.8 million or 2.5 %.
Expense control is sometimes measured in the financial services industry
by the efficiency ratio statistic. The efficiency ratio is calculated
by taking total other expense (excluding Metavante transaction costs)
divided by the sum of total other income (including Capital Markets
revenue but excluding investment securities gains or losses and net
derivative losses-discontinued hedges) and net interest income on a
fully taxable equivalent basis. The Corporation's efficiency ratios for
the three months ended June 30, 2007 and prior four quarters were:
Efficiency Ratios
-----------------
Three Months Ended
-------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
2007 2007 2006 2006 2006
-------------- -------------- -------------- -------------- -------------
Consolidated Corporation 62.3% 61.0% 62.2% 62.6% 62.9%
Consolidated Corporation
Excluding Metavante 51.3% 50.5% 50.6% 52.4% 51.2%
Salaries and employee benefits expense amounted to $317.8 million in the
second quarter of 2007 compared to $307.1 million in the second quarter
of 2006, an increase of $10.7 million or 3.5% . For the six months ended
June 30, 2007, salaries and employee benefits expense amounted to $614.9
million compared to $584.5 million for the six months ended June 30,
2006, an increase of $30.4 million or 5.2% . Salaries and benefits
expense associated with the acquisitions previously discussed accounted
for approximately $7.4 million and $21.4 million of the increase in the
three and six months ended June 30, 2007 compared to the three and six
months ended June 30, 2006, respectively.
For the second quarter of 2007, occupancy and equipment expense amounted
to $62.3 million compared to $63.8 million in the second quarter of
2006, a decrease of $1.5 million or 2.4% . For each of the six months
ended June 30, 2007 and 2006, occupancy and equipment expense amounted
to $121.6 million, respectively. The increase in occupancy and
equipment expense associated with the acquisitions and bank branch
expansion was offset by reduced occupancy and equipment expense by
Metavante in the three and six months ended June 30, 2007 compared to
the three and six months ended June 30, 2006, respectively.
39
Software expenses, processing charges, supplies and printing,
professional services and shipping and handling expenses totaled $105.8
million in the second quarter of 2007 compared to $89.1 million in the
second quarter of 2006, an increase of $16.7 million or 18.8% . For the
six months ended June 30, 2007, software expenses, processing charges,
supplies and printing, professional services and shipping and handling
expenses totaled $203.7 million compared to $175.0 million for the six
months ended June 30, 2006, an increase of $28.7 million or 16.4% . The
acquisitions accounted for $1.3 million and $3.2 million of the expense
growth for the three and six months ended June 30, 2007 compared to the
three and six months ended June 30, 2006, respectively. Metavante's
expense growth accounted for the majority of the remaining increase in
expense for these items in the three and six months ended June 30, 2007
compared to the three and six months ended June 30, 2006.
Amortization of intangibles amounted to $12.3 million in the second
quarter of 2007 compared to $12.0 million in the second quarter of 2006,
an increase of $0.3 million. For the six months ended June 30, 2007,
amortization of intangibles amounted to $23.6 million compared to $20.9
million for the six months ended June 30, 2006, an increase of $2.7
million. The increase in amortization associated with the acquisitions
amounted to $1.4 million and $4.0 million for the three and six months
ended June 30, 2007 compared to the three and six months ended June 30,
2006, respectively. Those increases were offset by lower amortization of
core deposit intangibles from previous acquisitions, which are based on
a declining balance method.
As previously discussed, the Corporation incurred certain transaction
costs associated with the announced plan to separate Marshall & Ilsley
Corporation and Metavante into two separate publicly held companies. For
the three and six months ended June 30, 2007, these costs amounted to
$2.6 million and $4.0 million, respectively and consisted primarily of
consulting and legal fees.
Other expense amounted to $75.8 million in the second quarter of 2007
compared to $72.3 million in the second quarter of 2006, an increase of
$3.5 million or 4.9% . For the six months ended June 30, 2007, other
expense amounted to $161.7 million compared to $147.4 million for the
six months ended June 30, 2006, an increase of $14.3 million or 9.7% .
The acquisitions accounted for $2.6 million and $7.9 million of the
growth in other expense for the three and six months ended June 30, 2007
compared to the three and six months ended June 30, 2006, respectively.
As previously discussed, other expense for the six months ended June 30,
2007 includes 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.
INCOME TAXES
------------
The provision for income taxes for the three months ended June 30, 2007
amounted to $110.0 million or 33.3% of pre-tax income compared to $91.9
million or 32.5% of pre-tax income for the three months ended June 30,
2006. For the six months ended June 30, 2007, the provision for income
taxes amounted to $220.6 million or 33.5% of pre-tax income compared to
$178.7 million or 33.0% of pre-tax income for the six months ended June
30, 2006. During the second quarter of 2006, an income tax benefit was
recognized for the integration and realignment of Metavante subsidiaries
that resulted in a lower provision for income taxes in the consolidated
statements of income for the three and six months ended June 30, 2006.
RECONCILIATION OF NON-GAAP TO GAAP RESULTS
------------------------------------------
The Corporation has provided non-GAAP ("Generally Accepted Accounting
Principles") operating results for the three and six months ended June
30, 2007 and 2006 as a supplement to its GAAP financial results. The
Corporation believes that these non-GAAP financial measures are useful
because they allow investors to assess, on a consistent basis, the
Corporation's core operating performance, exclusive of items management
believes are not reflective of the operations of the Corporation.
Management uses such non-GAAP financial measures to evaluate financial
results and to establish operational goals. These non-GAAP financial
measures should be considered a supplement to, and not as a substitute
for, financial measures prepared in accordance with GAAP.
Three Months Ended
-----------------------------------------------------------
June 30, 2007 June 30, 2006
---------------------------- ----------------------------
Per Per
Amount Diluted Amount Diluted
($ in millions) Share ($ in millions) Share
--------------- ---------- --------------- ----------
Net Income $ 220.3 $ 0.83 $ 190.5 $ 0.74
Metavante Transaction Costs, net of tax 2.3 0.01 -- --
Net Derivative Losses -
Discontinued Hedges, net of tax -- -- 13.2 0.05
-------------- --------- -------------- ---------
Net Income as Adjusted $ 222.6 $ 0.84 $ 203.7 $ 0.79
============== ========= ============== =========
Average Shareholders' Equity $ 5,664
Cumulative Net Derivative Losses - Discontinued Hedges, net of tax 27
--------------
Adjusted Average Shareholders' Equity $ 5,691
==============
Based on Net Income as Adjusted:
Return on Assets 1.55% 1.52%
Return on Equity 13.69 14.36
Six Months Ended
-----------------------------------------------------------
June 30, 2007 June 30, 2006
---------------------------- ----------------------------
Per Per
Amount Diluted Amount Diluted
($ in millions) Share ($ in millions) Share
--------------- ---------- --------------- ----------
Net Income $ 437.1 $ 1.66 $ 363.6 $ 1.46
Metavante Transaction Costs, net of tax 3.6 0.02 -- --
Net Derivative Losses -
Discontinued Hedges, net of tax -- -- 26.9 0.11
-------------- --------- -------------- ---------
Net Income as Adjusted $ 440.7 $ 1.68 $ 390.5 $ 1.57
============== ========= ============== =========
Average Shareholders' Equity $ 5,241
Cumulative Net Derivative Losses - Discontinued Hedges, net of tax 24
--------------
Adjusted Average Shareholders' Equity $ 5,265
==============
Based on Net Income as Adjusted:
Return on Assets 1.56% 1.57%
Return on Equity 13.90 14.96
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Shareholders' equity was $6.44 billion or 11.0% of total consolidated
assets at June 30, 2007, compared to $6.15 billion or 10.9% of total
consolidated assets at December 31, 2006, and $5.73 billion or 10.5% of
total consolidated assets at June 30, 2006.
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 its
employee stock purchase plan.
At June 30, 2007, the net loss in accumulated other comprehensive income
amounted to $63.8 million, which represented a negative change in
accumulated other comprehensive income of $46.2 million since December
31, 2006. Net accumulated other comprehensive income associated with
available for sale investment securities was a net loss of $79.9 million
at June 30, 2007, compared to a net loss of $22.0 million at December
31, 2006, resulting in a net loss of $57.9 million over the six month
period. The net unrealized gain associated with the change in fair value
of the Corporation's derivative financial instruments designated as cash
flow hedges was $12.4 million for the six months ended June 30, 2007.
The change in the postretirement benefit obligation plan funded status
at June 30, 2007 compared to December 31, 2006, declined $0.7 million
due to periodic amortization included in postretirement expense.
On April 24, 2007, the Corporation announced that its Board of Directors
increased the quarterly cash dividend on its common stock 14.8%, to
$0.31 per common share from $0.27 per common share.
The Corporation has a Stock Repurchase Program under which it may
repurchase up to 12 million shares of its common stock annually. 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. After these repurchases, approximately 5,882,930 shares
remain available under prior repurchase authorizations by the
Corporation's Board of Directors. There were no purchases under the
program during the first quarter of 2007. During the first quarter of
2006, the Corporation repurchased 1.0 million shares at an aggregate
cost of $41.8 million. There were no purchases under the program in the
second quarter of 2006.
The shares of common stock acquired during the second quarter of 2007
are expected to somewhat mitigate the impact of the common stock to be
issued to settle the common stock purchase contracts that are a
component of the 6.50% Common SPACES that were issued in 2004.
Each Common SPACES has a stated amount of $25 and consists of (i) a
stock purchase contract under which the holder agrees to purchase, and
the Company agrees to sell, for $25, shares of common stock on the stock
purchase date and (ii) a 1/40, or 2.5%, undivided beneficial interest in
a preferred security, also referred to as the STACKS, of M&I Capital
Trust B with an initial liquidation amount of $1,000. The Company has
guaranteed payments on the STACKS as described in the prospectus
supplement for the Common SPACES.
The stock purchase date is expected to be August 15, 2007, but could be
deferred for quarterly periods until August 15, 2008. The STACKS
underlying the Common SPACES are being remarketed, and the proceeds of
such remarketing will be used to settle the obligations of the holders
of Common SPACES under the stock purchase contract, unless a holder
elects not to participate in the remarketing, in which case, the holder
will be required to deliver cash, in the amount of $1,000 per STACKS, to
the collateral agent. The Common SPACES will only be suspended from
trading following a successful remarketing of the STACKS, or in the
event that there is a failure to remarket the STACKS for settlement on
or before August 15, 2008, in which case there will be a failed
remarketing.
42
The settlement rate of the stock purchase contracts will be as follows:
If the adjusted applicable market value of common stock is equal to or
greater than the "threshold appreciation price" of $46.28, the
settlement rate will be 0.5457 shares of common stock.
If the adjusted applicable market value of common stock is less than the
threshold appreciation price but greater than the "reference price" of
$37.32, the settlement rate will be a number of shares of common stock
equal to $25 divided by the applicable market value.
If the adjusted applicable market value of common stock is less than or
equal to the reference price, the settlement rate will be 0.6768 shares
of common stock.
The "applicable market value" means the average of the closing price per
share of common stock on each of the 20 consecutive trading days ending
on August 10, 2007. The "adjusted applicable market value" shall be
calculated by multiplying the closing price for each of the 20
consecutive trading days by an Adjustment Factor of 1.0103, and dividing
the sum of all such adjusted closing prices by 20.
The Corporation currently expects that the adjusted applicable market
value of common stock will be less than the threshold appreciation price
but greater than the reference price. Therefore, the settlement rate is
expected to be a number of shares of common stock equal to $25 divided
by the applicable market value. Assuming an applicable market value of
$43.7675, the average of the closing prices of the Corporation's common
stock for the period from July 16, 2007 through July 31, 2007, the
Corporation estimates that it would issue approximately 9.1 million
shares of its common stock to settle the common stock purchase contracts
that are a component of the 6.50% Common SPACES.
The 6.50% Common SPACES of the Corporation will be suspended from
trading before the opening of business on August 15, 2007 following, and
subject to, the consummation of the successful remarketing of the STACKS
issued as a component of the Common SPACES.
The Corporation continues to have a strong capital base and its
regulatory capital ratios are significantly above the minimum
requirements as shown in the following tables.
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
June 30, 2007 December 31, 2006
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 3,751 7.39 % $ 3,873 7.88 %
Tier 1 Capital
Minimum Requirement 2,031 4.00 1,965 4.00
----------------- ------------- ----------------- -------------
Excess $ 1,720 3.39 % $ 1,908 3.88 %
================= ============= ================= =============
Total Capital $ 5,947 11.71 % $ 5,489 11.17 %
Total Capital
Minimum Requirement 4,063 8.00 3,930 8.00
----------------- ------------- ----------------- -------------
Excess $ 1,884 3.71 % $ 1,559 3.17 %
================= ============= ================= =============
Risk-Adjusted Assets $ 50,785 $ 49,128
================= =================
LEVERAGE RATIOS
---------------
($ in millions)
June 30, 2007 December 31, 2006
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 3,751 6.88 % $ 3,873 7.38 %
Minimum Leverage
Requirement 1,634 - 2,724 3.00 - 5.00 1,575 - 2,625 3.00 - 5.00
----------------- ------------- ----------------- -------------
Excess $ 2,117 - 1,027 3.88 - 1.88 % $ 2,298 - 1,248 4.38 - 2.38 %
================= ============= ================= =============
Adjusted Average
Total Assets $ 54,489 $ 52,508
================= =================
43
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 $7.2 billion at June 30, 2007, represent a highly accessible
source of liquidity. The Corporation's portfolio of held-to-maturity
investment securities, which totaled $0.4 billion at June 30, 2007,
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 $21.8 billion in the second quarter of 2007. The
Corporation's banking affiliates may also access the federal funds
markets or utilize collateralized borrowings such as treasury demand
notes or FHLB advances.
The banking affiliates may use wholesale deposits, which include foreign
(Eurodollar) deposits. Wholesale deposits 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. Wholesale deposits
averaged $6.3 billion in the second quarter of 2007.
The Corporation has historically used 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 vehicles provide access to
funding sources substantially separate from the general credit risk of
the Corporation and its subsidiaries. See Note 10 to the Consolidated
Financial Statements for an update of the Corporation's securitization
activities in the second quarter of 2007.
M&I Bank, the Corporation's lead bank, has implemented a bank note
program. During the second quarter of 2006, the Bank amended the bank
note program into a global bank note program which 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 the Bank to sell its debt instruments in global
markets in the future without the delays which would otherwise be
incurred. Bank notes outstanding at June 30, 2007 amounted to $8.2
billion of which $1.9 billion is subordinated and qualifies as
supplementary capital for regulatory capital purposes.
The national capital markets represent a further source of liquidity to
the Corporation. The Corporation has filed a number of shelf
registration statements that are intended to permit the Corporation to
raise funds through sales of corporate debt and/or equity securities
with a relatively short lead time.
During the third quarter of 2005, the Corporation amended the shelf
registration statement originally filed with the Securities and Exchange
Commission during the third quarter of 2004 to include the equity
distribution agreement. The amended shelf registration statement enables
the Corporation to issue various securities, including debt securities,
common stock, preferred stock, depository shares, purchase contracts,
units, warrants, and trust preferred securities, up to an aggregate
amount of $3.0 billion. At June 30, 2007, approximately $1.3 billion was
available for future securities issuances.
During the fourth quarter of 2004, 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 M&I, Metavante and/or other consolidated
subsidiaries of the Corporation. At June 30, 2007, there were 3.1
million shares of common stock available for future issuances.
44
Under another shelf registration statement, the Corporation may issue up
to $0.6 billion of medium-term Series F notes with maturities ranging
from 9 months to 30 years and at fixed or floating rates. At June 30,
2007, Series F notes issued amounted to $250.0 million in aggregate
principal amount. The Corporation may issue up to $0.5 billion of
medium-term MiNotes with maturities ranging from 9 months to 30 years
and at fixed or floating rates. The MiNotes are issued in smaller
denominations to attract retail investors. At June 30, 2007, MiNotes
issued amounted to $0.2 billion in aggregate principal amount.
Additionally, the Corporation has a commercial paper program. At June
30, 2007, commercial paper outstanding amounted to $0.7 billion in
aggregate principal amount.
Short-term borrowings represent contractual debt obligations with
maturities of one year or less and amounted to $3.3 billion at June 30,
2007. Long-term borrowings amounted to $12.1 billion at June 30, 2007.
The scheduled maturities of long-term borrowings including estimated
interest payments at June 30, 2007 were as follows: $5.4 billion is due
in less than one year; $3.7 billion is due in one to three years; $2.6
billion is due in three to five years; and $3.3 billion is due in more
than five years. During the first quarter of 2007, the Corporation
issued shares of its common stock valued at $19.2 million to fund a
portion of its 2006 obligations under its retirement and employee stock
ownership plans. 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, 2006.
OFF-BALANCE SHEET ARRANGEMENTS
------------------------------
As previously discussed, the Corporation held all of the common interest
in M&I Capital Trust A, which issued cumulative preferred capital
securities which were supported by junior subordinated deferrable
interest debentures and a full guarantee issued by the Corporation.
During the first quarter of 2007, the Corporation exercised its call
option on its $200.0 million in principal amount of 7.65% junior
subordinated deferrable interest debentures and the related cumulative
preferred capital securities.
In conjunction with the 2006 banking acquisitions, the Corporation
acquired all of the common interests in four trusts that issued
cumulative preferred capital securities which are supported by junior
subordinated deferrable interest debentures in the principal amounts of
$16.0 million, $30.0 million, $38.0 million and $15.0 million,
respectively and full guarantees assumed by the Corporation. The
Corporation does not consolidate these trusts in accordance with United
States generally accepted accounting principles. At June 30, 2007,
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,
2006. See Note 10 to the Consolidated Financial Statements for an update
of the Corporation's securitization activities in the second quarter of
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, 2006, 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:
45
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 Standard 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. 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 following factors were taken into consideration in determining the
adequacy of the allowance for loan and lease losses at June 30, 2007:
The housing slowdown is impacting the performance of some of the
Corporation's construction and land development loans. A
re-balancing of supply and demand within the national housing market
has reduced both absorption rates and valuations causing stress for
some borrowers within this loan segment. These loans are
geographically dispersed and are in both the Corporation's core and
acquired loan portfolios.
At June 30, 2007, allowances for loan and lease losses continue to
be carried for exposures to construction and land development loans,
vacant residential land, manufacturing, healthcare, production
agriculture (including dairy and cropping operations), truck
transportation, accommodation, general contracting and motor vehicle
and parts dealers. The majority of the commercial charge-offs
incurred during the past three years were in these industry
segments. 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. Reduced revenues causing a declining
utilization of the industry's capacity levels can affect collateral
values and the amounts realized through sale or liquidation.
During the second quarter of 2007, the Corporation's commitments to
Shared National Credits were approximately $3.6 billion with usage
averaging around 47%. Over time, many of the Corporation's largest
charge-offs have come from the Shared National Credit portfolio. At
June 30, 2007, Shared National Credit nonperforming loans amounted
to $1.0 million after partial write-downs. The Corporation's
exposure to Shared National Credits is monitored closely given this
lending group's loss experience.
The Corporation's primary lending areas are Wisconsin, Arizona,
Minnesota, Missouri and Florida. The vast majority of the assets
acquired on April 1, 2006 from Gold Banc Corporation, Inc are in
entirely new markets for the Corporation. Included in these new
markets are the Kansas City metropolitan area, Tulsa, Oklahoma, and
Tampa, Sarasota and Bradenton, Florida. Each of these regions and
markets has cultural and environmental factors that are unique to
them. At June 30, 2007, the level of nonperforming loans for this
portfolio segment was higher than the Corporation's average level of
nonperforming loans. In addition with the acquisition of United
Heritage, the Orlando, Florida market is a new market for the
Corporation. Nonperforming loans and leases associated with the
acquisition of United Heritage were insignificant at June 30, 2007.
At June 30, 2007, nonperforming loans and leases amounted to $384.0
million or 0.89% of consolidated loans and leases compared to $351.7
million or 0.83% of consolidated loans and leases at March 31, 2007,
and $198.0 million or 0.49% of consolidated loans and leases at June
30, 2006. Nonaccrual loans and leases continue to be the primary
source of nonperforming loans and leases.
46
Net charge-offs amounted to $23.6 million or 0.22% of average loans
and leases in the second quarter of 2007 compared to $14.7 million
or 0.14% of average loans and leases in the first quarter of 2007
and $9.9 million or 0.10% of average loans and leases in the second
quarter of 2006. The ratio of recoveries to charge-offs was 16.2%
and 17.6% for the three and six months ended June 30, 2007,
respectively. The Corporation's most recent five year average ratio
of recoveries to charge-offs was 30.4%.
Based on the above loss estimates, management determined its best
estimate of the required allowance for loans and leases. Management's
evaluation of the factors described above resulted in an allowance for
loan and lease losses of $431.0 million or 1.00% of loans and leases
outstanding at June 30, 2007. The allowance for loan and lease losses
was $420.6 million or 1.00% of loans and leases outstanding at December
31, 2006 and $415.2 million or 1.03% of loans and leases outstanding at
June 30, 2006. Consistent with the credit quality trends noted above,
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. By comparison, the provision for loan and
lease losses amounted to $11.1 million for the three months ended June
30, 2006 and approximately $22.1 million for the six months ended June
30, 2006. 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.
The Corporation has not materially changed any aspect of its overall
approach in the determination of the allowance for loan and lease
losses. There have been no material changes in assumptions or estimation
techniques as compared to prior periods that impacted the determination
of the current period allowance. However, on an on-going basis the
Corporation continues to refine the methods used in determining
management's best estimate of the allowance for loan and lease losses.
Capitalized Software and Conversion Costs
-----------------------------------------
Direct costs associated with the production of computer software that
will be licensed externally or used in a service bureau environment are
capitalized. Capitalization of such costs is subject to strict
accounting policy criteria, although the appropriate time to initiate
capitalization requires management judgment. Once the specific
capitalized project is put into production, the software cost is
amortized over its estimated useful life, generally four years. Each
quarter, the Corporation performs net realizable value tests to ensure
the assets are recoverable. Such tests require management judgment as to
the future sales and profitability of a particular product which
involves, in some cases, multi-year projections. Technology changes and
changes in customer requirements can have a significant impact on the
recoverability of these assets and can be difficult to predict. Should
significant adverse changes occur, estimates of useful life may have to
be revised or write-offs would be required to recognize impairment. For
the three months ended June 30, 2007 and 2006, the amount of software
costs capitalized amounted to $12.6 million and $13.7 million,
respectively. Amortization expense of software costs amounted to $14.4
million for the three months ended June 30, 2007 compared to $13.4
million for the three months ended June 30, 2006. For the six months
ended June 30, 2007 and 2006, the amount of software costs capitalized
amounted to $26.7 million and $25.0 million, respectively. Amortization
expense of software costs amounted to $28.7 million for the six months
ended June 30, 2007 compared to $27.6 million for the six months ended
June 30, 2006.
Direct costs associated with customer system conversions to the data
processing operations are capitalized and amortized on a straight-line
basis over the terms, generally five to seven years, of the related
servicing contracts.
Capitalization only occurs when management is satisfied that such costs
are recoverable through future operations or penalties (buyout fees) in
case of early termination. For the three months ended June 30, 2007 and
2006, the amount of conversion costs capitalized amounted to $3.3
million and $3.1 million, respectively. Amortization expense of
conversion costs amounted to $2.3 million and $2.8 million for the three
months ended June 30, 2007 and the three months ended June 30, 2006,
respectively. For the six months ended June 30, 2007 and 2006, the
amount of conversion costs capitalized amounted to $6.0 million and $5.5
million, respectively. Amortization expense of conversion costs
amounted to $4.6 million for the six months ended June 30, 2007 and $5.0
million for the six months ended June 30, 2006.
47
Net unamortized costs were ($ in millions):
June 30,
----------------------------
2007 2006
------------ ------------
Software $ 157.8 $ 152.5
Conversions 30.8 27.7
----------- -----------
Total $ 188.6 $ 180.2
=========== ===========
The Corporation has not substantively changed any aspect of its overall
approach in the determination of the amount of costs that are
capitalized for software development or conversion activities. There
have been no material changes in assumptions or estimation techniques as
compared to prior periods that impacted the determination of the
periodic amortization of such costs.
Financial Asset Sales and Securitizations
-----------------------------------------
The Corporation has historically used 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 financing entities are
contractually limited to a narrow range of activities that facilitate
the transfer of or access to various types of assets or financial
instruments. In certain situations, the Corporation provides liquidity
and/or loss protection agreements. In determining whether the financing
entity should be consolidated, the Corporation considers whether the
entity is a qualifying special-purpose entity ("QSPE") as defined in
Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. For non-consolidation, a QSPE must be demonstrably
distinct, have significantly limited permitted activities, hold assets
that are restricted to transferred financial assets and related assets,
and can sell or dispose of non-cash financial assets only in response to
specified conditions.
In December 2003, the Corporation adopted Financial Accounting Standards
Board Interpretation No. 46 ("FIN 46R"), Consolidation of Variable
Interest Entities (revised December 2003). This interpretation
addresses consolidation by business enterprises of variable interest
entities. Transferors to QSPEs and "grandfathered" QSPEs subject to the
reporting requirements of SFAS 140 are outside the scope of FIN 46R and
do not consolidate those entities. With respect to the Corporation's
securitization activities, the adoption of FIN 46R did not have an
impact on its consolidated financial statements because its transfers
are generally to QSPEs.
The Corporation sells financial assets in a two-step process that
results in a surrender of control over the assets as evidenced by
true-sale opinions from legal counsel, to unconsolidated entities that
securitize the assets. The Corporation retains interests in the
securitized assets in the form of interest-only strips and a cash
reserve account. Gain or loss on sale of the assets depends in part on
the carrying amount assigned to the assets sold allocated between the
asset sold and retained interests based on their relative fair values at
the date of transfer. The value of the retained interests is based on
the present value of expected cash flows estimated using management's
best estimates of the key assumptions -- credit losses, prepayment
speeds, forward yield curves and discount rates commensurate with the
risks involved. Actual results can differ from expected results.
The Corporation reviews the carrying values of the retained interests
monthly to determine if there is a decline in value that is other than
temporary and periodically reviews the propriety of the assumptions used
based on current historical experience as well as the sensitivities of
the carrying value of the retained interests to adverse changes in the
key assumptions. The Corporation believes that its estimates result in a
reasonable carrying value of the retained interests.
For the three months ended June 30, 2007, net losses with the retained
interests, held in the form of interest-only strips amounted to $0.1
million and are included in Net investment securities gains in the
Consolidated Statements of Income. During the second quarter and first
half of 2007, the Corporation determined that there was a decline in the
value of certain retained interests that was other than temporary
because actual credit losses exceeded expected credit losses. Impairment
losses of $0.5 million were offset by realized gains of $0.4 million for
the three months ended June 30, 2007. For the six months ended June 30,
2007, impairment losses of $1.0 million were offset by realized gains of
$1.0 million.
The Corporation has historically sold automobile loans to an
unconsolidated multi-seller special purpose entity commercial paper
conduit in securitization transactions in which servicing
responsibilities and subordinated interests were retained. The
outstanding balances of automobile loans sold in these securitization
transactions were $787.4 million at June 30, 2007. At June 30, 2007, the
carrying amount of retained interests amounted to $33.2 million.
48
From time to time, the Corporation also purchases and immediately sells,
certain debt securities classified as available for sale that are highly
rated to an unconsolidated bankruptcy remote qualifying special purpose
entity ("QSPE") whose activities are limited to issuing highly rated
asset-backed commercial paper with maturities up to 180 days that is
used to finance the purchase of the debt securities. In order to be
sold, the debt securities must meet predetermined eligibility
requirements that are primarily based on their credit rating. For the
six months ended June 30, 2007, debt securities sold amounted to $93.9
million. No gain or loss was realized from the sale of debt securities
for the six months ended June 30, 2007. Highly rated investment
securities in the amount of $425.8 million were outstanding in the QSPE
to support the outstanding commercial paper at June 30, 2007.
The Corporation provides liquidity back-up in the form of liquidity
purchase agreements. In addition, a subsidiary of the Corporation has
entered into interest rate swaps with the QSPE designed to counteract
the interest rate risk associated with third party beneficial interests
and the debt securities. The beneficial interests in the form of
commercial paper have been issued to parties other than the Corporation
and its subsidiary or any other affiliates. The notional amounts do not
exceed the amount of beneficial interests. The swap agreements do not
provide the QSPE or its administrative agent any decision-making
authority other than those specified in the standard ISDA Master
Agreement. Generally, the interest rate risk associated with the
interest rate swaps is the basis risk resulting from differences between
commercial paper interest rates and LIBOR. Historically, that interest
rate risk has not been material to the Corporation and the Corporation
has chosen not to mitigate the risk of these swaps by entering into
offsetting swap contracts with independent third parties. At June 30,
2007, the aggregate fair value of the interest rate swaps was a negative
$1.3 million.
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.
Effective January 1, 2007, the Corporation adopted the provisions of
FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109, and there
was no effect on the consolidated financial statements. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.
As of the date of adoption the total amount of unrecognized tax benefits
was $92.1 million, of which $71.8 million related to benefits that, if
recognized, would impact the annual effective tax rate. Upon adoption
of FIN 48, the Corporation changed its policy to include interest and
penalties related to income tax liabilities in income tax expense. Prior
to adoption of FIN 48, the Corporation recorded interest and penalties
related to income tax liabilities to other expense, a component of
Income Before Income Taxes. Included in the total liability for
unrecognized tax benefits as of the date of adoption is $6.8 million of
interest and no penalties.
The Corporation, along with its subsidiaries, files income tax returns
in the U.S. and various state jurisdictions. With limited exceptions,
the Corporation is no longer subject to examinations by federal and
state taxing authorities for taxable years before 2003.
49
The Corporation anticipates it is reasonably possible within 12 months
of the adoption date that unrecognized tax benefits could be reduced up
to approximately $22 million. The reduction would principally result
from settlements with taxing authorities as it relates to the tax
benefits associated with a 2002 stock issuance.
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, of the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2006, in this Quarterly
Report on Form 10-Q and under the heading "Forward-Looking Statements,"
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,
2006. 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 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. Policies are in place to assure that neither
earnings nor fair value at risk exceed appropriate limits. The use of a
limited array of derivative financial instruments has allowed the
Corporation to achieve the desired balance sheet repricing structure
while simultaneously meeting the desired objectives of both its
borrowing and depositing customers.
The models used include measures of the expected repricing
characteristics of administered rate (NOW, savings and money market
accounts) and non-rate related products (demand deposit accounts, other
assets and other liabilities). These measures recognize the relative
insensitivity of these accounts to changes in market interest rates, as
demonstrated through current and historical experiences. In addition to
contractual payment information for most other assets and liabilities,
the models also include estimates of expected prepayment characteristics
for those items that are likely to materially change their payment
structures in different rate environments, including residential
mortgage products, certain commercial and commercial real estate loans
and certain mortgage-related securities. Estimates for these
sensitivities are based on industry assessments and are substantially
driven by the differential between the contractual coupon of the item
and current market rates for similar products.
50
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 the indicated dates:
Impact to Annual Pretax Income as of
----------------------------------------------------------------------------------
As
Historically
Pro Forma Reported
June 30, March 31, December 31, September 30, September 30, June 30,
2007 2007 2006 2006 2006 2006
------------- ------------- ------------- ------------- ------------- ------------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (0.5) % 0.0 % 0.5 % 0.7 % (3.2) % (0.3) %
Decline in rates 0.3 % (0.2) % (0.6) % (0.8) % 2.2 % 0.3 %
The results as of September 30, 2006 reflect the effect of
mark-to-market accounting (versus hedge accounting) for certain interest
rate swaps that the Corporation determined did not qualify for hedge
accounting as previously discussed. The interest rate swaps were
designed to hedge the change in fair value or cash flows of the
underlying assets or liabilities and have performed effectively as
economic hedges. Prior period results as shown and previously reported,
were based on the assumption that the affected interest rate swaps
qualified for hedge accounting. The Corporation terminated the affected
interest rate swaps early in the fourth quarter of 2006 in order to
eliminate the earnings volatility associated with fluctuations in
valuations under mark-to-market accounting. The pro forma results as of
September 30, 2006, assumes that the affected interest rate swaps were
terminated on September 30, 2006.
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.
Another component of interest rate risk is measuring the fair value at
risk for a given change in market interest rates. The Corporation also
uses computer modeling techniques to determine the present value of all
asset and liability cash flows (both on- and off-balance sheet),
adjusted for prepayment expectations, using a market discount rate. The
net change in the present value of the asset and liability cash flows in
different market rate environments is the amount of fair value at risk
from those rate movements. As of June 30, 2007, the fair value of equity
at risk for a gradual 100bp shift in rates changed less than 2.0%.
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, 2007, the carrying value of total active capital
markets investments amounted to approximately $51.9 million.
As of June 30, 2007, M&I Wealth Management administered $103.8 billion
in assets and directly managed a portfolio of $24.6 billion. The
Corporation is exposed 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
Marshall & Ilsley 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.
51
PART II - OTHER INFORMATION
Item 1A. Risk Factors.
----------------------
The risk factors set forth below represent material additions or changes
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, 2006. For
purposes of this Item, the Corporation's planned separation of Marshall
& Ilsley Corporation and Metavante into two separate public companies,
as described elsewhere in this Quarterly Report on Form 10-Q, is
referred to as the "Separation."
Risks Relating to the Separation
--------------------------------
The Corporation's historical consolidated financial information and
unaudited condensed pro forma consolidated financial information are not
representative of the Corporation's future financial position, future
results of operations or future cash flows nor do they reflect what the
Corporation's financial position, results of operations or cash flows
would have been as a stand-alone company during the periods presented.
Following the Separation, the Corporation will be considered the
divesting entity in the transactions and treated as the "accounting
successor" for financial reporting purposes in accordance with EITF No.
02-11. After the Separation occurs, the Corporation will report the
historical consolidated results of operations of Metavante as
discontinued operations in accordance with the provisions of SFAS No.
144. Pursuant to SFAS No. 144, this presentation is not permitted until
the closing date. Because the Corporation's historical consolidated
financial statements include the results of Metavante, they are not
representative of the Corporation's future financial position, future
results of operations or future cash flows, nor do they reflect what the
Corporation's financial position, results of operations or cash flows
would have been as a stand-alone company during the periods presented.
The unaudited condensed pro forma consolidated financial information
attached as an exhibit hereto includes adjustments to reflect the
divestiture of Metavante. The pro forma adjustments are based upon
available information and assumptions that the Corporation believes are
reasonable; however, the Corporation's assumptions may not prove to be
accurate. In addition, the Corporation's unaudited condensed pro forma
consolidated financial statements do not give effect to ongoing
additional costs that the Corporation expects to incur in connection
with being a stand-alone company. The unaudited condensed pro forma
consolidated statements of earnings also do not give effect to certain
initial separation costs. Accordingly, the Corporation's unaudited
condensed pro forma consolidated financial statements are not
representative of the Corporation's future financial position, future
results of operations or future cash flows nor do they reflect what the
Corporation's financial position, results of operations or cash flows
would have been as a stand-alone company during the periods presented.
The Corporation may not realize the anticipated benefits from the
Separation.
The success of the Separation will depend, in part, on the ability of
the Corporation to realize the anticipated benefits of the Separation.
These anticipated benefits include the availability of increased capital
for the Corporation to continue its internal growth and acquisition
strategies, the Corporation's ability to use its capital stock as a form
of currency in respect of certain acquisitions and equity-based
compensation arrangements and the better alignment of employee incentive
awards. There can be no assurance that these benefits will be realized.
The Separation may present significant challenges.
There is a significant degree of difficulty and management distraction
inherent in the process of separating the Corporation and Metavante.
These difficulties include:
the challenge of the Corporation's effecting the Separation while
carrying on its ongoing operations;
preserving customer, distribution, supplier and other important
relationships;
the potential difficulty in retaining key officers and personnel;
and
separating corporation infrastructure, including systems, insurance,
accounting, legal, finance, tax and human resources, for each of two
new public companies.
The Corporation and Metavante may not successfully or cost-effectively
separate the companies. The failure to do so could have an adverse
effect on the Corporation's business, financial condition and results of
operations.
52
The process of separating operations could cause an interruption of, or
loss of momentum in, the Corporation's business. Members of the
Corporation's senior management will be required to devote considerable
amounts of time to this separation process, which will decrease the time
they will have to manage their respective businesses, service existing
customers, attract new customers and develop new products or strategies.
If the Corporation's senior management is not able to manage effectively
the separation process, or if any significant business activities are
interrupted as a result of the separation process, the Corporation's
business could suffer.
As a separate entity, the Corporation will not enjoy all of the benefits
of scale that it achieves with the combined banking and Metavante
businesses.
Currently, the Corporation benefits from the scope and scale of the
banking and Metavante businesses in certain areas, including, among
other things, risk management, employee benefits, regulatory compliance,
administrative services, legal support and human resources. The
Corporation's loss of these benefits as a consequence of the Separation
could have an adverse effect on the Corporation's business, results of
operations and financial conditions following completion of the
Separation. In addition, it is possible that some costs will be greater
at the separate companies than they are for the combined company due to
the loss of volume discounts and the position of being a large customer
to service providers and vendors.
If the Corporation's share distribution and transactions related to the
Separation do not qualify as tax-free distributions or reorganizations
under the Internal Revenue Code, then the Corporation and the
Corporation's shareholders may be responsible for payment of significant
U.S. federal income taxes.
In transactions related to the Separation, the Corporation will
distribute shares of its common stock to effect the Separation. If the
share distribution does not qualify as a tax-free distribution under
Section 355 of the Internal Revenue Code, Metavante would recognize a
taxable gain that would result in significant U.S. federal income tax
liabilities to Metavante. Metavante would be primarily liable for these
taxes and the Corporation would be secondarily liable. Under the terms
of a tax allocation agreement related to the Separation, the Corporation
will generally be required to indemnify Metavante against any such taxes
unless such taxes would not have been imposed but for an act of
Metavante or its affiliates, subject to specified exceptions.
Even if the Corporation's share distribution otherwise qualifies as a
tax-free distribution under Section 355 of the Internal Revenue Code,
the distribution would result in significant U.S. federal income tax
liabilities to Metavante if there is an acquisition of the Corporation's
stock or Metavante stock as part of a plan or series of related
transactions that includes the Corporation's share distribution and that
results in an acquisition of 50% or more of the Corporation's
outstanding common stock or Metavante stock. In this situation, the
Corporation may be required to indemnify Metavante under the terms of a
tax allocation agreement related to the Separation unless such taxes
would not have been imposed but for specified acts of Metavante or its
affiliates. In addition, mutual indemnity obligations in the tax
allocation agreement could discourage or prevent a third party from
making a proposal to acquire either the Corporation or Metavante.
The Corporation's loss of the assets, revenue and cash flows resulting
from the Separation may adversely affect its financial position and
results of operations.
The assets, revenue, cash flows and results of operations of each of the
Corporation and Metavante are currently included in the Corporation's
consolidated financial statements. If the transactions are completed,
the Corporation's assets, revenue, cash flows and results of operations
will no longer be included in the Corporation's consolidated financial
statements, and the Corporation's financial position and results of
operations will therefore be significantly different than they were
prior to completion of the Separation and, following completion of the
Separation, the Corporation will have fewer assets and less revenue and
cash flows than it currently has on a consolidated basis.
The trading price and trading volume of the Corporation's common stock may
be more volatile following completion of the Separation.
The Corporation cannot predict how investors who hold shares of its
common stock prior to the completion of the Separation will behave after
completion of the Separation. The trading price for shares of the
Corporation's common stock following completion of the Separation may be
more volatile than before completion of the Separation. The trading
price of shares of the Corporation's common stock could fluctuate
significantly for many reasons, including the risks identified herein,
selling by existing holders of the Corporation's common stock who decide
that they do not want to hold some or all of their securities of the
Corporation after the completion of the transactions, or reasons
unrelated to the Corporation's performance. In addition, the
Corporation's common stock may not continue to be included in the S&P
500 Index, which could ultimately result in reduced trading volume
relative to the Corporation's historic trading volume. These factors
and other factors beyond either the Corporation's control may result in
reduced trading volume and/or increased volatility in the Corporation's
common stock and/or short- or long-term reductions in the value of the
Corporation's securities.
53
If the transactions are completed, any financing the Corporation obtains
in the future could involve higher costs.
Following completion of the transactions, any financing that the
Corporation obtains will be with the support of a reduced pool of
diversified assets and a significant amount of outstanding debt, and
therefore the Company may not be able to secure adequate debt or equity
financing on desirable terms. The cost to the Corporation of financing
without Metavante may be materially higher than the cost of financing
prior to the transactions. If the Corporation has a credit rating lower
than it currently has, it will be more expensive for it to obtain debt
financing than it has been prior to the Separation.
Failure to complete the Separation could adversely impact the market price
of the Corporation's common stock and its business and operating results.
If the Separation is not completed for any reason, the price of the
Corporation's common stock may decline to the extent that the market
price reflects positive assumptions that the transactions will be
completed and the related benefits will be realized. The Corporation
may also be subject to additional risks if the transactions are not
completed, including:
depending on the reasons for termination of the investment agreement
with Warburg Pincus, the requirement that the Corporation pay
Warburg Pincus a termination fee of $75 million;
substantial costs related to the Separation, such as legal,
accounting, registration, advisory and printing fees, must be paid
regardless of whether the Separation is completed; and
potential disruption to the Corporation's business and distraction
of its workforce and management team.
Risks Relating to the Corporation
---------------------------------
The Corporation will be restricted in its ability to issue equity for at
least two years following completion of the Separation, which could limit
its ability to make acquisitions or to raise capital required to service
its debt and operate its business.
The amount of equity that the Corporation can issue to make acquisitions
(excluding acquisitions with respect to which the Corporation can prove
the absence of "substantial negotiations" during applicable safe harbor
periods) or raise additional capital will be limited for at least two
years following completion of the Separation, except in limited
circumstances. These limitations may restrict the ability of the
Corporation to carry out its business objectives and to take advantage
of opportunities such as acquisitions that could supplement or grow the
Corporation's business.
Risks Relating to Metavante
---------------------------
Ongoing consolidation within the banking and financial services industry
could adversely affect Metavante's financial results.
Ongoing consolidation within the banking and financial services industry
could result in a smaller number of purchasers for Metavante's products
and services. As banks and other financial services providers
consolidate, they may experience a realignment of management
responsibilities and a reexamination of strategic and purchasing
decisions and Metavante may lose relationships with key constituencies
within its clients' organizations due to budget cuts, layoffs or other
disruptions. In addition, acquiring institutions may have their own
in-house systems or outsource to competitors. The loss of business due
to consolidation, in particular the loss of a large client due to
consolidation, such as the Corporation, could have a material adverse
effect on Metavante's business, operating results and financial
condition.
Effect of business cycles and other risks in the banking industry.
Metavante's revenues are heavily dependent on services it provides to
the banking industry and related financial service providers. To the
extent that the health and stability of the banking industry are
adversely affected by business cycles in general or business conditions
that affect the banking industry in particular, Metavante's revenues and
profits may also be adversely affected due to reduced expenditures for
Metavante's products and services by banks and related financial service
providers. In addition, Metavante's revenue and profits, including
organic growth, are dependent on its banking clients' ability to
acquire, activate and retain customers.
54
Metavante faces intense competition in all areas of its business.
The markets for Metavante's products and services are intensely
competitive and it expects to face increased competition in the future
as new companies enter the market and existing competitors expand their
product lines and services.
Competitors vary in size and in the scope and breadth of their products
and services. Some current and potential competitors have better name
recognition and significantly greater resources, and many competitors
are consolidating, creating larger competitors with even greater
resources and broader product lines. In addition, many of these
competitors have established, or may in the future establish,
cooperative relationships or strategic alliances among themselves or
with third parties to compete with Metavante's products and services. It
is possible that new competitors or alliances among competitors may
emerge and rapidly acquire market share to Metavante's detriment.
Metavante will also face competition from its clients and potential
clients who develop their own financial services offerings. Metavante's
inability to compete successfully in light of these competitive
pressures could result in a material adverse effect on its business,
operating results and financial condition.
Metavante faces intense pricing pressure in obtaining and retaining its
larger clients. Larger clients are often able to seek price reductions
from Metavante when they renew a contract, when a contract is extended,
when service or performance issues arise with the client, or when the
client's business has significant volume changes. On some occasions,
this pricing pressure results in lower revenue from a client than
Metavante had anticipated based on its previous agreement with that
client. This reduction in revenue can result in a material adverse
effect on Metavante's business, operating results and financial
condition.
Failures in outsourcing or transaction processing facilities could
adversely affect Metavante's business and reputation.
An operational failure in its outsourcing or transaction processing
facilities could cause Metavante to lose business. Damage or
destruction that interrupts Metavante's services to customers could
damage its relationship with customers and may require it to incur
substantial additional expense to repair or replace damaged equipment
and recover data loss caused by the interruption. Metavante has
installed back-up systems and procedures to prevent or reduce
disruption, but such steps may not be sufficient to prevent an
interruption of services. An interruption that lasts more than several
hours could cause Metavante to experience a reduction in revenues as a
result and could have a negative impact on its reputation and business.
A failure to comply with privacy regulations could adversely affect
relations with customers and have a negative impact on busines.
In the course of providing services to its customers, Metavante may
collect, process and retain sensitive and confidential information on
its customers and their clients. A failure of Metavante's security
facilities and systems due to security breaches, acts of vandalism,
computer viruses, misplaced or lost data, programming and/or human
errors, or other similar causes could result in the misappropriation,
loss or other unauthorized disclosure of confidential customer
information. Any such failure could result in damage to Metavante's
reputation with its customers, expose it to the risk of litigation and
liability, disrupt its operations, and negatively impact its business,
results of operations, and financial condition.
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 Maximum Number
Shares Purchased of Shares that
as Part of May Yet Be
Total Number Average of Publicly Purchased Under
of Shares Price Paid Announced Plans the Plans
Period Purchased(1) per Share or Programs or Programs
----------------- ------------- ----------- ------------------ -----------------
April 1 to
April 30, 2007 3,255,118 $ 48.84 3,250,000 8,750,000
May 1 to
May 31, 2007 915 50.61 -- 8,750,000
June 1 to
June 30, 2007 2,869,694 48.32 2,867,070 5,882,930
------------ ---------- ----------------
Total 6,125,727 $ 48.60 6,117,070
============ ========== ================
(1) Includes shares purchased by rabbi trusts pursuant to nonqualified
deferred compensation plans.
The Corporation's Share Repurchase Program was publicly reconfirmed in
April 2006 and again in April 2007. 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.
In connection with the Corporation's accelerated repurchase of 3,250,000
shares of its common stock on April 26, 2007, the Corporation was required
to pay a price adjustment based on an adjusted weighted average price
defined in its agreement with Merrill Lynch International, which
facilitated the accelerated share repurchase. On June 4, 2007, the
Corporation transferred 54,035 shares of its common stock to Merrill Lynch
International in settlement of this obligation. With respect to this
transfer, the Corporation relied on the exemption provided by Section 4(2)
of the Securities Act of 1933, as amended, relating to transactions by an
issuer not involving any public offering.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Corporation held its Annual Meeting of Shareholders on April
24, 2007.
(b) Votes cast for the election of six directors to serve as Class II
directors until the 2008 Annual Meeting of Shareholders are as
follows:
Director For Withheld
---------------------- ------------- -----------
Jon F. Chait 206,978,294 3,913,515
Dennis J. Kuester 205,644,598 5,247,211
David J. Lubar 207,033,211 3,858,598
San W. Orr, Jr. 206,987,179 3,904,630
Debra S. Waller 202,681,132 8,210,677
George E. Wardeberg 207,190,305 3,701,504
56
The continuing directors of the Corporation are as follows:
Malcolm M. Aslin John A. Mellowes
Andrew N. Baur Robert J. O'Toole
John W. Daniels, Jr. Peter M. Platten, III
Mark F. Furlong John S. Shiely
Ted D. Kellner James B. Wigdale
Katharine C. Lyall
(c) Votes cast for the ratification of the appointment of Deloitte &
Touche LLP to audit the statements of the Corporation for the
fiscal year ending December 31, 2007 are as follows:
For Against Abstentions
------------- ----------- -----------
Ratification of Auditors 207,265,859 1,524,196 2,101,754
Votes cast to approve the Corporation's 2007 Annual Executive
Equity Incentive Compensation Plan are as follows:
For Against Abstentions
------------- ----------- -----------
Ratification of Plan 192,586,212 13,030,220 5,275,377
Votes cast for the shareholder proposal to request the Board of
Directors of the Corporation to declassify the board are as
follows:
For Against Abstentions
------------- ----------- -----------
Request to declassify
the Board of Directors 204,284,909 3,368,600 3,238,300
57
ITEM 6. EXHIBITS
Exhibit 2(a) - Investment Agreement, dated as of April 3, 2007,
among Marshall & Ilsley Corporation, Metavante
Holding Company, Metavante Corporation, Montana
Merger Sub Inc. and WPM, L.P., incorporated by
reference to the Corporation's Current Report
on Form 8-K filed April 9, 2007.
Exhibit 2(b) - Separation Agreement, dated as of April 3, 2007,
among Marshall & Ilsley Corporation, Metavante
Holding Company, Metavante Corporation and
New Marshall & Ilsley Corporation, incorporated
by reference to the Corporation's Current Report
on Form 8-K filed April 9, 2007.
Exhibit 3(a) - Restated Articles of Incorporation of Marshall &
Ilsley Corportion, as amended.
Exhibit 3(b) - By-Laws of Marshall & Ilsley Corporation, as
amended.
Exhibit 10(a) - Tax Allocation Agreement, dated as of April 3,
2007, among Marshall & Ilsley Corporation,
Metavante Holding Company, Metavante Corporation
and New Marshall & Ilsley Corporation,incorporated
by reference to the Corporation's Current Report
on Form 8-K filed April 9, 2007.
Exhibit 10(b) - Employee Matters Agreement, dated as of April 3,
2007, among Marshall & Ilsley Corporation,
Metavante Holding Company, Metavante Corporation
and New Marshall & Ilsley Corporation,incorporated
by reference to the Corporation's Current Report
on Form 8-K filed April 9, 2007.
Exhibit 10(c) - Form of Shareholders Agreement, incorporated by
reference to the Corporation's Current Report
on Form 8-K filed April 9, 2007.
Exhibit 10(d) - Form of Stock Purchase Right Agreement,
incorporated by reference to the Corporation's
Current Report on Form 8-K filed April 9, 2007.
Exhibit 11 - Statement Regarding Computation of Earnings
Per Share, Incorporated by Reference to NOTE 6
of Notes to Financial Statements contained in
Item 1 - Financial Statements (unaudited) of
Part I - Financial Information herein.
Exhibit 12 - Statement Regarding Computation of Ratio of
Earnings to Fixed Charges
Exhibit 31(a) - Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
Exhibit 31(b) - Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
Exhibit 32(a) - Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
Exhibit 32(b) - Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
Exhibit 99(a)- Description of the Marshall & Ilsley Corporation
and Metavante Corporation Separation Transaction.
Exhibit 99(b)- Unaudited Condensed Pro Forma Consolidated
Financial Statements.
58
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
(Registrant)
/s/ Patricia R. Justiliano
__________________________________
Patricia R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ James E. Sandy
__________________________________
James E. Sandy
Vice President
August 8, 2007
42
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
______________ ____________________________________________
(2)(a) Investment Agreement, dated as of April 3, 2007,
among Marshall & Ilsley Corporation, Metavante
Holding Company, Metavante Corporation, Montana
Merger Sub Inc. and WPM, L.P., incorporated by
reference to the Corporation's Current Report
on Form 8-K filed April 9, 2007.
(2)(b) Separation Agreement, dated as of April 3, 2007,
among Marshall & Ilsley Corporation, Metavante
Holding Company, Metavante Corporation and
New Marshall & Ilsley Corporation, incorporated
by reference to the Corporation's Current Report
on Form 8-K filed April 9, 2007.
(3)(a) Restated Articles of Incorporation of Marshall &
Ilsley Corporation, as amended.
(3)(b) By-Laws of Marshall & Ilsley Corporation,
as amended.
(10)(a) Tax Allocation Agreement, dated as of April 3,
2007, among Marshall & Ilsley Corporation,
Metavante Holding Company, Metavante Corporation
and New Marshall & Ilsley Corporation,
incorporated by reference to the Corporation's
Current Report on Form 8-K filed April 9, 2007.
(10)(b) Employee Matters Agreement, dated as of
April 3, 2007, among Marshall & Ilsley
Corporation, Metavante Holding Company,
Metavante Corporation and New Marshall &
Ilsley Corporation, incorporated by reference
to the Corporation's Current Report on Form 8-K
filed April 9, 2007.
(10)(c) Form of Shareholders Agreement, incorporated
by reference to the Corporation's Current
Report on Form 8-K filed April 9, 2007.
(10)(d) Form of Stock Purchase Right Agreement,
incorporated by reference to the Corporation's
Current Report on Form 8-K filed April 9, 2007.
(11) Statement Regarding Computation of Earnings
Per Share, Incorporated by Reference to
NOTE 6 of Notes to Financial Statements
contained in Item 1 - Financial Statements
(unaudited) of Part I - Financial Information
herein.
(12) Statement Regarding Computation of Ratio
of Earnings to Fixed Charges.
(31)(a) Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
(31)(b) Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
(32)(a) Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
(32)(b) Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
(99)(a) Description of the Marshall & Ilsley Corporation
and Metavante Corporation Separation Transaction.
(99)(b) Unaudited Condensed Pro Forma Consolidated
Financial Statements.